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

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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?

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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?

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OUTLINE

1. Non-tariff trade protection: what is it and why does it matter?

2. Embedding our research in the literature

3. Data and Method4. Results

5. Concluding remarks

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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)

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Classification of Non-tariff measures

Source: UNCTAD (2013, 4)

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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)

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The rise of non-tariff protection could be politically driven

Our argument:

Prior presence of politically connected actors could predict changes in NTM protection

Graph for electronics sector (ISIC 2610)

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Non-crony Crony

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Contribution to the literature

POLITICAL ECONOMY OF TRADEPolitical 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

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BUSINESS AND POLITICSEmpirical 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

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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

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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

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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

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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?

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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

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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

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Results1. Does prior presence of cronies predict the introduction of NTMs?

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Predicted probability of NTM

introduction by crony

presence

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Results2. Does the prior presence of cronies predict how many new NTMs are introduced?

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

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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)

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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

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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).

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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

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

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

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

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Flexible Estimates of the

Relationship between

Cronyism and Non-tariff

Protection

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ResultsRobustness Tests (DID specifications): NTM cumulative

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ResultsCombining DID specifications with IV methods

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Why do NTMs matter?

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ILLUSTRATIVE EXAMPLE - Technical Barriers to Trade

B140: Authorization requirement: importer must receive authorization, permitsor 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 eachindividual vehicle.

EGYPTNearly 60% of products are covered by at least

one NTM; one quarter of the products are subjected to at least two NTMs.

TUNISATunisia applies on average 11 different NTMs

from two different chapters on each of its 1,166 products.

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Technical barriers are dominated by “Conformity Assessment” measures0

510

1520

2530

35P

erce

nt

B11 B14 B89B15 B22 B31 B32 B33 B42 B60 B70 B81 B82 B83 B84 B853 B8590

TBT Categories

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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”

BEYOND EGYPT AND NON-TARIFF MEASURES

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

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Another dimension of PARTIAL LIBERALIZATIONWhile tariffs fell, dispersion in these tariffs across sectors either increased or decreased by a smaller amount

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ConclusionPolitical connections seem to be important driver of both NTM introduction and NTM intensitySelective trade liberalisation was used to tie an emergent and resourceful economic elite to the regimeStrong influence of cronies on policies calls for revision of paradigm of subservient private sector in MENA regionSelective 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

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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)

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Greater reliance of labour-abundant economies on

regulatory rents may reflect larger distributional

commitments