What are the main takeaways?
For decades, the Egyptian military has been allowed to engage in economic activities as a way of reducing the official defense budget; doing this allows them to shift some costs to other areas so they won’t appear in the defense budget.
The military economy is also a way of compensating senior officers for low pay and pensions by giving them the opportunity to acquire extra incomes and fringe benefits. The overall volume of this economic activity was relatively modest until 2011, when then Egyptian president Hosni Mubarak was forced out of power.
Since 2013, when the military took power, the military economy has transformed. This is because President Abdel Fattah el-Sisi, a former general who became president in 2014, has relied on the military to take over major management roles in the civilian economy. It has effectively replaced the government in awarding contracts and managing the crash program of civilian housing and public infrastructure that the government has been funding for the past four or five years.
The military also helps provide civilian markets with affordable goods, including food, and raises revenue for the state treasury. Yet by relying on the military to compensate for the failings of civilian agencies to manage the economy, public infrastructure, and markets, the government further weakens and marginalizes those same agencies. That racks up problems for the future.
Additionally, this approach overlooks the real structural problems of the Egyptian economy. These have to do with low productivity, low investment in all sectors except for energy and real estate, and low value added, especially in technology-dependent sectors.
How much power does the Egyptian military have over infrastructure?
The Egyptian military has been involved in infrastructure for decades, and it’s a good example of the nature and extent of its activity.
For a long while, this was relatively modest. The military started by working on land reclamation, that is, turning deserts into arable land. In the late 1970s, the army led the way in reconstructing cities and infrastructure along the Suez Canal that had been damaged severely during the war with Israel. But with that exception, its overall contribution to public infrastructure was fairly limited until 2011, when the revolution ousted Mubarak.
Since then, there’s been a major shift. The military now manages approximately one-quarter of total government spending in housing and public infrastructure. That’s about 370 billion Egyptian pounds, which is, at today’s rate, something like $24 billion—which might not seem like a lot compared to government budgets in the United States or Europe—but in Egypt, it’s a great deal of money.
This is partly why the Egyptian government is now severely indebted. It gives a sense of the scale of the military’s work compared to overall government expenditure on public infrastructure.
Why is the Egyptian military so involved in economic activities?
Until the military’s takeover in 2013, its economic activity functioned to keep the senior officer corps happy and loyal to the president, by allowing them perks.
Sisi, however, has a different calculation. He is looking to reinforce the political legitimacy of his regime domestically and to show Western governments and foreign investors that Egypt means business. He wants to demonstrate credibility. He’s shown his contempt openly for the civilian agencies of his own state. He feels he can only trust the military to do the job on time, within budget.
This doesn’t mean he actually has an economic vision. He doesn’t understand how the economy works, how to get it going, how to generate jobs and growth, how to increase revenue in a sustainable way. But the military is following orders. If he tells it to go build a new city in the sand somewhere, it builds a new city in the sand.
So the military sinks enormous amounts of capital into unproductive projects, often damaging relationships with the private sector because the military takes over management of and the income from these projects. In some cases it’s actually producing things like steel and cement. This crowds out private businesses, which dominate these sectors.
So the political consequences are proving to be negative as well as positive. The economic consequences are increasingly negative, because Egypt is borrowing heavily to fund these projects.
Can the military sidestep the problems other businesses have to deal with?
To a certain extent, yes. The military is exempt from taxes and customs duties; but then, so are a lot of civilian companies.
The military’s main advantage is political influence. It has officers placed throughout the state apparatus who help get contracts. These officers also dominate the government’s main audit agency, which is instructed to inspect civilians to prevent corruption. But this agency hasn’t been directed to audit the military, giving it a certain amount of legal cover. These are advantages they have that their civilian competitors don’t have.
In terms of technical expertise, I doubt that the senior officers engaged in most of these activities are actually any more capable than the highly competent ministers or civilians working in some of Egypt’s larger private companies. The military always turns to those companies, for instance, to undertake projects that it can’t implement.
So clearly, this isn’t really about technical expertise. It’s about political influence. And the problem here is that the military’s powerful political position means it doesn’t really have to account for genuine cost effectiveness, and the real problems are being kicked down the road.
In a nutshell, the military makes for good engineers, but bad economists.
Who gets the profits of the military economy?
It’s difficult to work that out exactly, because Egyptian military accounts are not shared with anyone at all—either outside of or even inside Egypt. This includes the official budget, in addition to the financial books of the various military agencies involved in economic and commercial activities.
And of course there’s a whole informal area where officers, both retired or sometimes in active service, get involved in other kinds of economic activities, some of which are illegal, frankly, and corrupt, where we just don’t know the figures until in a few cases people get prosecuted. But that’s rare.
What we do know, however, is that the military pays no taxes on any of its activities, and no customs duties on the goods it imports to conduct its various activities. There are minor exceptions in the case of civilian goods produced by some military factories, and these get reported to the Ministry of Finance, and some taxes and social insurance payments are paid. But otherwise, the vast bulk of military economic activities is untaxed and unreported.
What we also know is that all officers who perform any duties on behalf of military agencies undertaking economic activities get paid extra allowances and benefits for each task they undertake, and often will get paid an extra salary if they undertake to run a military factory or a military farm. And then there’s a share of profits—or of incomes before profits are calculated, because there’s not always a profit—a certain share of these are distributed to senior officers as well.
We don’t know the exact numbers, but we’ve got enough evidence from various sources to know that this is broadly how the profits are divided.
Most importantly, no income coming into the military goes back to civilian agencies. It all goes into army funds.
What would it take for the situation to change?
A president would have to come to office in Egypt who grasps the need to dismantle parts of the military economy, at least.
To do so, he would have to identify carefully exactly which parts of the economy can be rolled back while provoking the least resistance from the military. He would need military support for that.
At the same time, he’d have to identify ways of compensating the military for the benefits and advantages it stands to lose. That probably relates to pay and pensions, because those are what prompted military involvement in the economy in the first place.