Adeel Malik: University of Oxford ERF Seminar on The Political Economy of the Private Sector in the Middle East Marrakech, Morocco, December 21-22, 2016 www.erf.org.eg

1. THE POLITICS OF PARTIAL LIBERALIZATION:
Cronyism and Non-Tariff Protection in Mubarak’s Egypt
ADEEL MALIK (OXFORD) – JOINT WORK WITH F. EIBL
MARRAKECH WORKSHOP, ERF, 21 DEC. 2016

2. THE PUZZLE: Selective liberalization
Egypt’s partial liberalisation:
Tariffs have come down (though
unevenly)
Coverage of NTMs has increased
 Are there underlying political drivers of
this process?
2

3. This Paper
Exploits variation in NTMS and cronies across sectors and over time
Asks whether:
Prior crony presence predicts..
 the introduction of NTMs?
 how many NTMs are introduced?
 density of NTMs?
Did sectors initially populated by cronies secure disproportionately higher non-tariff
protection after the major trade policy shift in mid-2000s?
3

4. OUTLINE
1. Non-tariff trade protection: what is it and why does it matter?
2. Embedding our research in the literature
3. Data and Method
4. Results
5. Concluding remarks
4

5. Non-tariff trade protection
“Non-tariff measures (NTMs) are policy measures, other than ordinary customs
tariffs, that can potentially have an economic effect on international trade in
goods, changing quantities traded, or prices or both”. (UNCTAD, 2010)
5

6. Classification of Non-tariff measures
Source: UNCTAD (2013, 4)
6

7. The growing significance of NTMs
• Tariff-based trade protection has
decreased considerably (Milner 2013)
• But: use of NTMs has increased in
proportion (Hoekman, Nicita 2011)
•NTMs contribute more than 70% to
world trade protection (Kee et al. 2006)
Source: UNCTAD (2013, 14)
7

8. The rise of non-tariff protection could be politically driven
Our argument:
Prior presence of politically
connected actors could predict
changes in NTM protection
8
Graph for electronics sector (ISIC 2610)

9. 9
Non-crony Crony

10. Contribution to the literature
POLITICAL ECONOMY OF TRADE
Political science literature has focused on aggregate, cross-country differences
(e.g., Hoekman, Nicita 2011; Martin 2005; Kubota, Milner 1999; Hiscox 2001)
 within-country variation neglected
Within-country studies have focused on advanced, industrialized democracies
(e.g., Ray 1981; Goldberg, Maggi 1999)
 sectoral variation in mid-low income autocracies neglected
Most studies have focused on TMs, not NTMs
 political economy of NTMs under-explored
10

11. BUSINESS AND POLITICS
Empirical research on cronyism has looked at the effect of cronyism on
(i) company value, performance, and access (e.g., Fisman 2001; Faccio 2006;
Ferguson, Voth 2008; Claessens et al. 2008; Diwan et al. 2015; Rijkers 2013)
(ii) sectoral performance, such as employment generation, company turn-over,
etc. (World Bank 2015)
 Effect of political connections on policies unclear
MENA literature has highlighted ‘networks of privilege’ (Heydemann 2004) but
relatively powerless (e.g., Springborg 2013; Haddad 2012; Luciani, Hertog 2010)
 Relatively little empirical evidence to substantiate this claim
11

12. POLITICAL ECONOMY OF REFORM
• Literature on politics of economic reform has highlighted the ‘partial
reform syndrome’ (Van de Walle 2001)
 paper provides illustration of this phenomenon in the area of trade
protection
12

13. Measuring cronyism in Egypt
• Pool of potential crony entrepreneurs taken from Roll (2010) (‘financial and economic
core elite’)
• Add (i) co-investors and (ii) board members on their companies (using Orbis)
• Check if actor is politically connected (using publicly available data)
• Three types of connections:
• Politicians
• Associates
• Confidants
• Cronies in narrow sense include only politicians; cronies in broader sense all three
groups
13

14. Data
Collect data on economic activity (ISIC4 level) and date of foundation
for crony companies (using Orbis) in manufacturing sectors
Two main explanatory variables (from 1997 until 2011):
• Crony presence: dummy for crony presence in given sector-year
• Crony entry: number of cronies entering in a sector in a given year
14

15. Novelty – Time varying database on cronies
Provides us sector-level information on:
 Whether a crony is present in a sector or not?
 How many of them?
 When do cronies enter?
 How long they have been around?
15

16. Data: A preview of political connections
Clan Type of connection Background
Abu El-Enein family Political Former MP; chairman of housing committee (2000-
5), industry and energy committee (2005-10)
Ezz family Associate; political MP (2000- 2011); Member of the NDP Policy
Committee
Gabr family Associate; political Member of the NDP Policy Committee; member of
Egyptian American Business Council
Kamel family Associate; confidant;
political
Friend of Alaa and Gamal Mubarak; co-investor with
Gamal; member of NDP General Secretariat
16

17. 17

18. Measuring NTMs
• Raw data with year of NTM introduction (or major change) taken from WITS
• Data aggregated from HS6 level to ISIC4 level (from 1997 until 2011)
• Resulting variables measure NTM presence and NTM density:
• NTM introduction: binary dummy for NTM introduction in given sector-year
• NTM presence: dummy = 1 if sector subject to an NTM
• NTM share: share of products in a sector subject to NTMs
• NTM2 share: share of products subject to at least two types of NTMs
• NTM chapter: average number of different NTM chapter applied in sector-year
18

19. Results
1. Does prior presence of cronies
predict the introduction of NTMs?
19

20. 20
Predicted probability of NTM
introduction by crony presence

21. Results
2. Does the prior presence of cronies
predict how many new NTMs are
introduced?
21

22. Results
3. Does lagged crony presence explain
the within-sector variation in NTM
density over time?
22

23. 23
2004 – a watershed moment in Egyptian trade policy
A BRIEF TIMELINE
 1995: Egypt becomes a member of WTO
 Late1990s: Trade liberalization gains momentum
 1999: Egypt signs trade agreement with the US (TIFA)
2004: CONFLUENCE of various economic and political developments
 Formation of Qualified Industrial Zones (QIZ)
 Signing of major trade agreement with EU
 Initiation of a major programme of harmonization of trade standards
 Nazif cabinet sworn in (which included many NDP cronies)

24. 24
Significance of Egypt’s trade policy shift for our study
EU is Egypt’s largest trading partner
Main source of FDI flows
Principal bilateral donor
In June 2004 Egypt implemented the most far-reaching revision of its MFN
tariff structure
Led to a compensatory upward shift in NTMs the following year

25. 25
The EU trade agreement was primarily driven by geo-political considerations after 9/11
As el-Khouri (2008: p.3) notes:
“Shortly after 9/11, the connection between trade policy initiatives and security strengthened as
the U.S. administration argued that global trade liberalization was a central plank of its national
security and antiterrorism efforts.”
The EU followed suit:
“The 9/11 attacks renewed EU interest in the MENA region and reinvigorated the Barcelona
Process” (el-Khouri: p.4).

26. 26
The upward shift in NTMs was fairly generalized:
About 75% of the sectors that faced a tariff reduction in 2004 witnessed an increase in NTMs in 2005

27. 27
We restrict our focus to sectors
that are initially exposed to
connected actors

28. 28
Sectors populated by cronies
prior to the EU agreement
disproportionately benefited
from the wave of NTM
introductions after 2004

29. Results
4. Difference-in-Difference (DID)
specifications
29

30. 30
Flexible Estimates of the
Relationship between
Cronyism and Non-tariff
Protection

31. Results
Robustness Tests (DID specifications):
NTM cumulative
31

32. Results
Combining DID specifications with IV
methods
32

33. 33
Why do NTMs matter?

34. 34

35. ILLUSTRATIVE EXAMPLE - Technical Barriers to Trade
35
B140: Authorization requirement: importer
must receive authorization, permits
or approval from a relevant government
agency for reasons such as national security,
environment protection, etc. Example:
Imports must be authorized for drugs, waste
and scrap, and firearms, etc.
B840 Inspection requirement: Requirement
for product inspection performed by public or
private entities. Example: Textile and clothing
imports must be inspected for size and
materials used before entry is allowed.
B859 Traceability of materials: Disclosure of
information that allows following a product
through the stages of production, processing
and distribution. Example: Manufactures of
automobiles must keep the record of the
origin of the original set of tyres for each
individual vehicle.
EGYPT
Nearly 60% of products are covered by at least one
NTM; one quarter of the products are subjected to
at least two NTMs.
TUNISA
Tunisia applies on average 11 different NTMs from
two different chapters on each of its 1,166
products.

36. Technical barriers are dominated by “Conformity Assessment” measures
36
05
101520253035
Percent
B11 B14 B89B15 B22 B31 B32 B33 B42 B60 B70 B81 B82 B83 B84 B853 B8590
TBT Categories

37. 37
NTMs can cause harmful trade frictions
Company perspectives on non-tariff measures in Arab states (ITC 2015):
(survey of four Arab countries) –
 Survey responses show that more than half of NTMs are dominated by SPS (sanitary
and phytosanitary measures) and TBTs (technical barriers to trade);
 Measures of conformity assessment and rules of origin are perceived as particularly
difficult to deal with.
 NTMs are more burdensome when they are combined with procedural obstacles
(difficulty in proving compliance)
“Intra-regional trade in the Arab world, in particular for manufacturing products, is
strongly affected by NTM-related trade obstacles”

38. BEYOND EGYPT AND NON-TARIFF MEASURES

39. 39

40. 40
In TUNISIA technical barriers are more pervasive in “Metal and Construction” sector

41. Another dimension of PARTIAL LIBERALIZATION
While tariffs fell, dispersion in thesetariffs across sectors eitherincreasedor decreasedby a smaller
amount
41

42. Conclusion
Political connections seem to be important driver of both NTM introduction and NTM
intensity
Selective trade liberalisation was used to tie an emergent and resourceful economic elite
to the regime
Strong influence of cronies on policies calls for revision of paradigm of subservient
private sector in MENA region
Selective privileges likely to persist in post-Mubarak period as
• Need to recompose authoritarian ruling coalition under new government
• Most cronies are still around and active
• NTMs themselves are very sticky
42

43. 43
Rents and Political Order
Political incentives appear to be an important driver of trade protection (both tariffs and
non-tariff barriers)
Rents have traditionally been linked with state
intervention in economy
(e.g., Krueger 1974; Bhagwati 1983; Sadowski
1991)
Selective reform can itself be an important source
of rents
Rents serve as important binding commitment for
elites (North et al. 2009)

44. 44
Greater reliance of labour-
abundant economies on
regulatory rents may reflect
larger distributional
commitments