North Africa, West Asia

Egypt's Military Inc.

Unless Egyptian capitalism evolves beyond the current stage of cronyism to competitive accumulation, no amount of loans or policy reforms will solve the problems of the economy.

Maged Mandour
12 October 2016
Amr Nabil/Press Association Images. All rights reserved.

Amr Nabil/Press Association Images. All rights reserved.The Egyptian economy is currently undergoing a severe crisis. The traditional sources of hard currency, such as the tourism industry, Suez Canal, worker’s remittances, and export of oil and gas have all been underperforming, triggering a currency crisis.

The Egyptian pound has significantly decreased in value; the difference between official exchange rates and the black market has reached a whapping 32%, which in turn has pushed the country into a spiraling cycle of inflation.

The immense sums of aid received from Gulf States have been squandered in huge infrastructure projects with dubious economic returns. The failed expansion of the Suez Canal as well as massive arms deals are the most prominent examples, placing Egypt - as of 2015 – in the position of the fourth largest arms importer in the world.

In response to the crisis, the Egyptian regime has resorted to a number of solutions that range from dangerous to absurd. For example, one absurd solution was the call made by President Sisi for donations via text messages. Another, was his recent request to collect “spare change” from banking transactions.

On the other hand, the government started to implement the system of value added tax (VAT), a regressive form of taxation, which will lead to higher levels of inflation, and primarily affect the middle and lower classes fueling inequality, as this type of tax is based on consumption rather than income.

The government has also negotiated a loan worth twelve billion USD from the IMF, pending other bilateral loans, which will involve a series of neo-liberal economic reforms, such as cutting subsides, floating the currency, and trimming what remains of the public sector.

Some might argue that the causes of these economic problems are based on the erroneous economic policies followed by the military regime. This is certainly the view of the IMF, which has advocated its orthodox set of neo-liberal reforms as conditions for the proposed loan.

the Egyptian economy will never be able to compete on a global scale or alleviate poverty unless there are deeper social and structural changes

However, a closer look reveals deeper structural reasons that pertain to class formation and the nature of the Egyptian bourgeoisie, which indicate that the Egyptian economy will never be able to compete on a global scale or alleviate poverty unless there are deeper social and structural changes that can alter the practices of capital accumulation.

The genesis of the current form of Egyptian capitalism can be traced back to the coup of 1952, which not only installed a military regime, but also initiated deep changes in the economy. Besides significantly reducing, not completely breaking, the power of the traditional landed elite, it also initiated a period of state capitalism under the guise of “Arab socialism”.

This involved the elimination of autonomous centres of economic power that could challenge the state, and was achieved through waves of nationalization that reached their apex in the early 1960s, making the government the largest capitalist in the country.

However, with the collapse of Nasserism, which became evident by 1967 and the crushing military defeat in Sinai, Egypt’s economic structure started to change. The regime started to develop a civilian elite that took on the public face of the military in an attempt at more covert control over both the state and economy, as overt military domination was no longer tenable.

This process was complex and multi-faceted, especially in the economic realm. First, the regime started a process of controlled political and economic liberalization in a polity that was previously dominated by a single actor. This was achieved through the provision of cheap credit, land at heavily subsidised prices, tax breaks, state subsidies, and most importantly through the privatization of the public sector, where a number of profitable public sector companies were sold to civilian businessmen at a fraction of their price.

The other side of the equation was the military’s direct engagement in for-profit and tax-free economic activities, starting in 1979. This allowed the military to expand, directly and dramatically into the realm of the economy. As of 2011, some experts estimate the military’s economic empire at 40 percent of the economy, creating what Robert Springboard has called, Military Inc.

Thus, by the end of the Mubarak era, the Egyptian bourgeoisie contained a civilian crony wing with close ties to the state who enjoyed both political advantages as well as large coercive capacities.  

a period of state capitalism degenerated into rent seeking crony capitalism that was neither interested in nor able to provide a basis for economic development

This set-up created incentives for the expansion of tertiary activities and speculation in sectors such as real-estate, at the expense of the development of Egypt’s industrial base and technical and competitive capacities. The basis of capital accumulation was no longer market competition, rather access to the state, its subsidies and a coercive apparatus to crush dissent as necessary. As such, a period of state capitalism degenerated into rent-seeking crony capitalism that was neither interested in nor able to provide a basis for economic development.

After the mass protests of 2011 and the return of overt control of military rule, the military wing of the capitalist class started to repeat the scenarios of the 1950s and 60s and started to “crowd out” the bourgeoisie civilian wing through a spectacular overt plunge into economic activity - into infrastructure projects more specifically.

The military, for example, played a key role in the extension of the Suez Canal; an eight billion USD project. The military also started to openly diversify its economic activity into areas where it previously had little presence – they recently opened their first school, Badr International School.

The military took advantage of its control over the state to further this economic penetration. The Egyptian government imposed heavy taxes on the import of air conditioning units, which has negatively affected a number of civilian-owned firms. This was followed by an announcement that the military would import Chinese-made units, for which it would not pay an import tax.  

A similar scenario took place in the market for baby formula where a sudden shortage occurred that was then covered by the military’s stock of baby formula. The reason the military would store large quantities of baby formula was not explained, raising notions of foul play. As such, the military has been steadily crowding out civilian private sector, creating a massive business empire that is tax-free and not under any form of civilian control.

The rise of “Military Inc.” is the main structural impediment to the development of Egyptian capitalism and the economy. The military’s ability not to pay taxes and extract resources from the state in the form of subsidies means that the Egyptian government will be in perpetual fiscal dire straits.

The proposed solution, based on neo-liberal orthodoxy of regressive taxation and a cut in subsidies, will shift the burden to the lower and middle classes fueling social unrest. Much like the billions received from the Gulf in the form of aid, the new loan from the IMF will most likely be used to expand the military’s economic reach, even though it is primarily intended to bring fiscal balance to the state budget.

the main issue that plagues the Egyptian economy is the structure of capitalism that is dominated by the military

As such, the main issue that plagues the Egyptian economy is not erroneous economic policies, even though there are a number of those, rather the structure of capitalism that is dominated by the military.

Unless Egyptian capitalism evolves beyond the current stage of cronyism to a form based on competitive accumulation, no amount of loans or policy reforms will solve the problems of the economy.

There are other ways to tackle the current crisis without resorting to a policy that fuels social unrest, however, this would negatively affect the ability of the military bourgeoisie to accumulate capital.

One solution could be the immediate implementation of tax on the military’s economic activities; the creation of a progressive taxation structure; establishing a program to combat corruption, which is estimated to have cost the country 75 billion dollars over the past four years; and finally, cutting the subsidies to large businesses, the most notable being fuel subsidies to energy intensive industries.

These kinds of policies, however, would only stem from a type of bourgeoisie that hopes to maintain the long term conditions for competitive capital accumulation, not a backward form of capitalism that relies on state support for survival.        

The primary issues lie in Egypt's class formation, and not in additional IMF loans or neo-liberal policy, which will only serve to exacerbate the problem.     

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