Pyramid Capitalism: Political Connections, Regulation, and Firm Productivity in Egypt

41 Pages Posted: 20 Apr 2016

See all articles by Ishac Diwan

Ishac Diwan

World Bank - Ethiopia Office; National Bureau of Economic Research (NBER)

Philip Keefer

Inter-American Development Bank

Marc Schiffbauer

World Bank

Date Written: July 2, 2015

Abstract

This paper uses an original database of 469 politically connected firms under the Mubarak regime inEgypt to explore the economic effects of close state-business relations. Previous research has shown that political connections are lucrative. The paper addresses several questions raised by this research. Do connected firms receive favorable regulatory treatment? They do: connected firms are more likely to benefit from trade protection, energy subsidies, access to land, and regulatory enforcement. Does regulatory capture account for the high value of connected firms? In the sample, regulatory capture as revealed by energy subsidies and trade protection account for the higher profits of politically connected firms. Do politically connected firms hurt aggregate growth? The paper identifies the growth effects of the entry of politically connected firms by comparing detailed 4-digit sectors where they entered, between 1996 and 2006, and sectors that remained unconnected. The entry of connected firms into new, modern, and previously unconnected sectors slows aggregate employment growth and skews the distribution of employment toward less productive, smaller firms.

Keywords: Marketing, Employment and Shared Growth, Private Sector Development Law, Achieving Shared Growth, Pro-Poor Growth, Economics and Institutions, Private Sector Economics, International Trade and Trade Rules, Equity and Development, Non Governmental Organizations, Public Sector Management and Reform

Suggested Citation

Diwan, Ishac and Keefer, Philip and Schiffbauer, Marc, Pyramid Capitalism: Political Connections, Regulation, and Firm Productivity in Egypt (July 2, 2015). World Bank Policy Research Working Paper No. 7354, Available at SSRN: https://ssrn.com/abstract=2626263

Ishac Diwan (Contact Author)

World Bank - Ethiopia Office ( email )

United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Philip Keefer

Inter-American Development Bank ( email )

1300 New York Ave., NW
Washington, DC 20577
United States
202-623-1961 (Phone)

Marc Schiffbauer

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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