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What is the military economy’s likely trajectory going forward, and what are the political implications? Its evolution has always, to a very considerable degree, tracked that of the wider political economy of Egypt, replicating the behavior of civilian institutional and social actors. But it is now poised for significant qualitative, even transformative, change paralleling its enhanced political and constitutional stature. The military economy has expanded significantly beyond its enclave since 2013 and, although this was not by design or even largely of its own making, at least initially, it will not return to its former size or status. This is partly because the political stage is set for the military to have a more central influence on governing arrangements. But the cumulative effects of Egypt’s chronic economic problems and increasing decrepitude of its state institutions also create both context and opportunity for greater intertwining of military and civilian economic actors and a more direct implication of the military in setting economic direction.

In the Introduction to this report, I argued that the core economic problem for Egypt lies in how the state functions, which reflects how political power is generated and used. Writing in 2018, Khalid Ikram, a former senior economist and director of the World Bank’s Egypt department concluded that since 1952, concerns about regime survival have always trumped considerations of economic vulnerability in the calculations of Egyptian policymakers. This is the defining feature of Egypt’s political economy, as successive regimes have sought to bolster their fragile legitimacy “by continually increasing public consumption expenditures . . . [and] minimiz[ing] resource mobilization from domestic sources.”1 The fundamental economic problems of Egypt have resulted, in his assessment, “not so much from a shortage of financial resources as from failures of governance,” allowing influential factions within the state and society to “benefit from economic rents created by inefficiencies in the economy.”

A former director of the World Bank’s Egypt department concluded that since 1952, concerns about regime survival have always trumped considerations of economic vulnerability in the calculations of Egyptian policymakers.

The failure of governance, Ikram added, has resulted in a political economy characterized by

unclear property rights, a sluggish bureaucracy, an overburdened judicial system, a weak and unbalanced taxation system, corruption, uneconomic pricing of scarce resources (such as electricity and water), an education system that does not deliver the skills and especially the quality demanded by an internationally competitive market economy, the prevalence of crony capitalism, oligopolies and reduced competition in many sectors of the economy, significant overstaffing in public enterprises, a perceived lack of accountability at many levels of government, and the list goes on. These impediments raise the cost of doing business and thereby discourage investment, and they also lower its productivity.

The macroeconomic consequences were neatly summarized by George Abed, a former director of the Middle East and Central Asia Department at the IMF. Egypt’s average growth rates over the past three decades have lagged behind those of other emerging markets countries. GDP per capita increased by 50 percent from 1988 to 2018, compared to 600 percent for the group of emerging markets monitored by the IMF’s Institute of International Finance—and to around 400, 600, and 700 percent in Turkey, Malaysia, and South Korea respectively.2 Total investment (public and private) since 1991 is one-third lower than the average for emerging markets generally, manufacturing value added per capita rose by only 105 percent compared to 273 percent for the emerging markets as a whole, and merchandise exports as a ratio of GDP virtually stagnated in contrast to increases of 36, 100, and 165 in South Korea, Thailand, and India respectively.3 Responding in February 2019 to enthusiastic rhetoric about an economic rebound from both Egyptian and Western officials, Abed observed that the economy still has to achieve “rates of increase in capital, savings, and in the quality of human resources” at “about double those sustained by Egypt in the last fifty years” if it is to meet the challenges facing it.

The military has never formally controlled key levers of economic or fiscal policy, such as setting taxes or interest rates, except briefly when it held government power in 1952–1956 and 2011–2012. But it contributed to the economic, social, and institutional outcomes summarized above by upholding the authoritarian bureaucratic alliance and its regime maintenance strategy for the best part of seven decades. The impact was not merely indirect. The military’s own claims—of a moral right to steer the ship of state, of making major contributions to the government’s national economic development plans, and of “we do it better, quicker, cheaper” management skills—confirm its self-image as directly implicated in the economic record of Egypt, which it naturally portrays positively. Predictably, the military replicated the regime maintenance logic within its own economic enclave, prioritizing military constituencies, especially the senior officer corps, both during service and after. More importantly, it helped reproduce that logic through the daily practices and influence of the thousands of active and retired senior officers embedded in the state’s civilian bureaucracy, economic agencies, public business sector, and local government.

The military economy has not resolved any of its own chronic problems and shortcomings, but the primacy it has achieved in a political arena . . . enables it to enter a new phase of expansion and deepening.

The military economy has not resolved any of its own chronic problems and shortcomings, but the primacy it has achieved in a political arena that has been systematically emptied of all serious contenders since 2013 enables it to enter a new phase of expansion and deepening. In theory, it could resume its pre-2013 profile as the megaprojects that most embody its expanded role wind down or if funding for launching new ones runs out. Improvement in the national economy could also reduce the incentive for military involvement in economic management, production, and supply. Similarly, the president could encourage meaningful administrative and budgetary decentralization and, in the face of inevitable resistance from entrenched officer networks, make local government genuinely participatory and responsive to citizen’s needs as a path to inclusive social development and to economic growth and diversification. But in practice, the opposite is likely to happen, as both Sisi and the military double down on privileging central interventions, command policy, and investment in megaprojects that trump social profitability.

The underlying economic and social problems that led to the 2011 revolution and the repositioning of the military since 2013 as a manager and producer of economic assets on an expanded scale have set the stage for a more profound shift in the military’s relationship to the national economy and to public finances. Its economic assets and opportunities have expanded to such an extent that it may become more assertive. Over several decades, the military has repeatedly refused to relinquish economic assets or access once it has acquired them; indeed, the scale of changes since 2013 moreover may see it double down on their stake. And in turn, the military must influence, if not control, policy levers if it is to preserve its economic interests and build them up. Self-promotion comes at a price, however: the military’s prominent role at a time of deepening poverty and inequality is starting to generate unease and dent its image among a public that has almost always held it in high regard.

Deepening and expansion are not inevitable. The military economy is in transition, and displays mixed signals and contradictory trends. The failure of acquisitions in the media sector could dampen military appetite, for example, as might the burden of investment in the cement and steel sectors once demand for military production declines and pushback from the domestic private sector and foreign companies mounts. There are also indications of a desire within the EAF to refocus on its own professional development and improve its operational capabilities. The revised constitution of April 2019, which empowered the armed forces to “protect the constitution and democracy” and “preserve the pillars of the civil state,” may represent a formula allowing the EAF to extricate itself from the complex politics and institutional turf battles of governing Egypt, while still claiming the right to intervene whenever it deems necessary.4

But the reasons for a deepening and expansion of the military economy are at least as powerful. One is inertia: both the desire to retain existing assets, best represented by the inefficient companies and factories of the MOMP, and the conservative tendency of the military to reproduce and reinforce past patterns and legacies. More importantly, the weakness or absence of other institutional or social actors that might concentrate public assets and funds in their own hands leaves the military as a leading player in the emerging economic field—in contrast to the privatization era, which preponderantly favored big businesses and Mubarak cronies and visibly sidelined the military.

The process in either direction will be gradual, with starts and stops, but the boundaries of the former military economic enclave may remain blurred, if not dissolve altogether. An expansionary trend could see the military emerge as a major economic actor in its own right, embedding more broadly and formally in the structure of national economic management and decisionmaking. Their interventions in determining price and supply in the cement and steel sectors and in importing commodities ranging from meat and poultry to baby formula to meet market shortages could presage a more routinized policy-setting role. The twinning of the EAF Engineering Authority with the AMA in managing public infrastructure projects offers a significant example of the kind of formal military-civilian partnership that could become normalized in other areas.

In theory, again, a positive economic growth path could generate conditions for a contraction of the military’s economic role from its current scope and scale. But Egypt lacks both the political legacy and the socioeconomic prerequisites to replicate the experience of Chile or Turkey, where sustained economic growth generated social change and empowered the business and labor sectors that pressed for the restoration of civilian rule and full return of the military to barracks. In Egypt, growth that is overwhelmingly state-led and comes in response to top-down initiatives is far more likely instead to confirm the military as an economic actor on an even larger scale, expand its reach beyond the scope of the post-2013 crash program of publicly funded construction and revenue-generation, and extend its economic role well into the long term.

Worsening social and economic conditions or deepening debt will neither discourage nor impede deeply entrenched military networks from sucking up the funding resources needed to generate sustained growth and domestic savings.

Conversely, worsening social and economic conditions or deepening debt will neither discourage nor impede deeply entrenched military networks from sucking up the funding resources needed to generate sustained growth and domestic savings. Authoritarian systems need to raise economic efficiency once they have exhausted their initial growth phases, especially if they are to appease key constituencies on whom their power rests. Egypt is clearly not geared to achieve this. To the contrary, tight economic straits are more likely to spur and accelerate militarization of the economy in the ways suggested above—in part, on the grounds that emergency conditions require abnormal measures and even greater investment in publicly funded works.5

Should it respond in this way, the Sisi administration and the military will open the door to massive free-riding and opportunity-seeking by military (and allied nonmilitary) interest groups. Behind his appearance of supremacy, Sisi is in fact heavily dependent on his partners within the governing coalition of state institutions—and even on divergent factions within senior EAF echelons—all of whom expect a return on their support. These political considerations are as important in some respects as his policy goals of generating growth, managing living costs for the public, and consolidating the domestic and international credibility and legitimacy of his administration. Military networks and interest groups are already entrenched enough to resist any other course of action, and may indeed be in a position to continue expanding the informal military economy and deepening predatory practices regardless of what Sisi or the leaders of the formal military economy decree. The extortion of equity in start-up companies is just the latest example of behavior that is not only predatory but also market savvy—and that could not be undertaken without aid and abetting by formal military authorities.

Yet both Sisi (like all his predecessors) and the military are fully wedded to top-down and capital-intensive activity—as are a great many senior civil servants and technocrats across government ministries—making it exceedingly unlikely that they will change tack. The military cannot, in fairness, be blamed for not being better at economics, but it is at fault for standing in the way of approaches that are more likely to raise total factor productivity—and for milking the state treasury in the meantime. Similarly, its economic forays increasingly reveal growing insensitivity to the political ramifications. Not least of these is the damage done to the administration’s relations with the private sector, which has to pay high interest rates on loans due to crowding out by the state, which is the largest borrower from banks, and then suffers from unfair competition by military companies entering new sectors or expanding their own market share.6 Further diversion of public funds into military-run projects and schemes will only encourage more favoring of cronies and elbowing aside of the rest of the private sector.

The Sisi administration faces the task of delivering sufficient economic goods to keep political challenges at bay in the medium term. On the one hand, this requires both preserving the membership of all coercive agencies—the military, the sprawling Ministry of Interior (police and internal security), and the General Intelligence Directorate—within the governing coalition, and expanding it. But on the other hand, preservation and expansion cannot take place to an extent that taxes the economy excessively.7 This is a tall order for an administration with a particularly crude grasp of economics and market dynamics, and which has narrowed its political base considerably in contrast to the Mubarak era by excluding all shades of Islamists, liberals, and old economic elites. Its attempts to elicit middle-class support through favoring small and medium-sized enterprises with public works contracts or establishing funding schemes to encourage new ones are impeded by inadequate investment and high political risk, including vulnerability to the predatory behavior of networks loyal to the regime itself. Consequently, private investment in the economy has remained exceedingly small.

The odds against maintaining a stable coalition while generating the capital needed to underpin it—in the absence of deep economic and administrative reforms, which would necessarily collide with military interests, both formal and informal—are considerably heavier than might seem from rosy assessments of Egypt’s macroeconomic indicators—GDP growth rates, foreign reserves, and foreign investment—issued by Egyptian officials and their counterparts in Western governments and international financial institutions.

Western officials who publicly endorse these assessments and court the Sisi administration—extolling his supposed commitment to the democratic path, despite his administration’s systematic repression of political and social freedoms and egregious human rights violations—appear in fact to cling privately to the hope that he can somehow build a successful developmental dictatorship that will produce economic growth that is both on a sufficient scale and sustained.8 Among international economic and financial practitioners, a similar outlook may result from recent thinking that recognizes the state’s role in solving coordination failures in industrial policy: this acknowledges that insiders will initially be privileged, but posits that ultimately all economic actors will enjoy universal access to opportunity and resources. In the case of Egypt, Western and international officials who seek refuge in this kind of reasoning are effectively pinning their hopes on the military to advance these outcomes. But more than reflect mere wishful thinking, this masks willful blindness to the underlying realities of Egypt’s economy.

Egypt is “too big fail” is the trite response in Western capitals when challenged. An implicit corollary is that the military is as good as it claims as an economic actor. This willfully overlooks its legacy.

Egypt is “too big to fail” is the trite response in Western capitals when challenged. An implicit corollary article of faith, despite denials, is that the military is as good as it claims as an economic actor and manager. This willfully overlooks the sixty-seven-year-old legacy of the military’s economic role, but may explain the public silence of the IMF and the World Bank, among others, on the military’s economic activities, of which Abed confirms they have “long been aware.”9 Indeed, the military footprint in the economy has grown significantly on the watch of the IMF program that has released $12 billion into Egypt since November 2016.

Faith in the ability of the Egyptian military to snatch economic success from the jaws of social meltdown rests on precious little substance. Egypt will instead remain critically dependent on the formula, nearly seven decades old, of securing injections of foreign capital to stave off its most severe crises.10 At present, only the armed forces could keep the country from painting itself into an economic and financial corner again. But this would require it to initiate a political dialogue and a reform process that could only end in dismantling both its formal economy and the automatic entitlement to bureaucratic and economic power that retired officer networks claim.

Notes

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