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Why Egypt’s Army Is Bad At Doing Business

Der Spiegel

General Abdel Fattah el-Sisi must be revelling in the image of an all-powerful oligarch created by the media.

Apparently he reigns over a sprawling economic empire that journalists describe (in now rather cliched terms) as so varied that it covers everything from the production of flat-screen televisions and pasta to refrigerators and cards.

It’s claimed that the army has control over as much as 40% of the Egyptian economy. It owns football grounds and restaurants and provides services such as managing petrol stations.

Some even estimate the military control as much as 80% of manufacturing alone. But then again, that estimate came from FOX News, not the most reliable of sources.

The truth is, the Egyptian military is far from being a well-oiled business machine. In fact, historically, the army have been very bad at making money and its own failures have led it to seek other forms of income. Why else would an army diversify its interests so considerably?

The pitfalls of the military’s weak economic strategy are laid bare in this detailed paper by Stephen H. Gotowicki, a lieutenant colonel in the U.S. Army who worked in the Army’s Foreign Military Studies Office:

In the coming years, Egypt’s military production sector will probably decline. Egypt suffers from low productivity, a lack of adequate funding and a dearth of external markets. Egypt’s largest customer during the 1980s, Iraq, has been removed from the market place as a result of UN sanctions imposed against Iraq for its invasion of Kuwait. Egyptian military products also face increased competition. The cash-strapped Russians are offering highly advanced weapons at bargain prices.

Egypt’s military industries have not promoted import substitution or sustained export earnings. The technological benefit of the armed forces’ military industrial endeavors have proven to be only marginal to Egypt’s economic developments. While Egypt does assemble sophisticated military weapons systems, the facilities to do so are provided by Western businesses on a “turn key” basis.

The Egyptians receive kits for assembly, but the technology involved is closely maintained by the Western partner. Hence, little technology that would allow independent Egyptian development of systems has been received. For Egypt, technology is a conundrum — high technology industrial efforts are a capital intensive endeavor; Egypt has a labor intensive economy with little capital. Finally, it would appear that Egypt’s military industries have done little to enhance its regional power.

In other words, Egypt’s army failed miserably at the one thing they should have been doing well – military production.

The piece goes onto explain how “self-sufficiency would permit a greater measure of Egyptian independence in security matters and should allow the Egyptian military to fight longer without foreign resupply.” Now the refrigerator production and petrol station management makes sense. The army, if anything, is simply trying to keep its head above water.

Contrary to popular belief, General Sisi and his partners do not have a powerful grip on the economy, nor are they savvy businessmen out to expand a flourishing empire. They are interested mostly in protecting the economic interests that allow them to be self-sufficient and not reliant on foreign partners. 

It’s a lazy approach to their business and part of the reason why we have seen the army interfere in the transition so much – to manoeuvre Egypt, as much as possible, out of economic decline and shield its factories and production lines.

But still, the military plays no significant role in any of the major Egyptian industries today – oil and gas, steel and cement. The businesses that the military does play a role in would certainly not give them control of over 40% of the economy.

That figure has never really been verified or proven, with only a few rare instances when the military did reveal how much money they make.

At one point just before the January 25th revolution, Businessweek ran an interview with the then minister of military production, Sayed Meshaal, saying the army made about $345 million in revenue from the private sector, a far cry from the billions of dollars they are claimed to generate.

What’s more, the army’s “economic strategy” is riddled with corrupt practices. Mr Meshaal, who served as the minister of military production till 2011, is now being investigated for awarding contracts “above cost”.

In another example of dodgy money management, millions of dollars of profits from military industry exports during the 1980s and 1990s were reportedly returned to the military coffers with no government accounting or taxes (i.e. “off-budget”).

The military are far from being shrewd businessmen. Instead, because of a track record of losing contracts, bad ties to regional powers and dodgy accountancy, the army are relying on selling bottled water and other domestic goods to survive.

Plus, the military’s role in the economy actually stifles free market reform by increasing direct government involvement in the markets.

General Sisi has said nothing about the army’s economic prerogative but we can already deduce what the military is interested in: remaining conservative, keeping policy simple without innovation or anything too radical (such as cutting those precious energy subsidies that the army rely on so much to run their factories at a cut price) and focusing on big, state-run projects (just like Mubarak).

With no real systemic changes being offered, the army has missed an opportunity to save the economy and much to their demise, protect their own economic interests.



10 Comments


  • Andrew
    Posted November 20, 2013 at 10:24 pm | Permalink

    As ever, a fascinating post.

    However – the Gotowicki paper you cite was scheduled to be published in 1997, based on interviews conducted in 1994-5.

    Can you say what you feel has changed / remained the same about the issue since the 1990s?

  • Farah Halime
    Posted November 20, 2013 at 10:29 pm | Permalink

    Hi Andrew,

    I actually meant to note that despite the fact this paper was written in the 1990s, it is still very accurate for describing the military’s situation today.

    The army is still very cautious about privatisation, subsidy reforms and letting go of the state as a tool to control the market.

    If anything, the army has shown it is willing to do anything (even crackdown on innocent protesters) to adhere to its conservative plan.

  • Posted November 20, 2013 at 11:25 pm | Permalink

    I agree with. The army never changed since then. They still even dress the same !

  • Posted November 21, 2013 at 9:42 am | Permalink

    Highly centralized and interventionist models of economic policy-making have proven a failure worldwide. Egypt is no exception to this, whether the market distortion is caused by the state or the military (assuming, that is, there is a distinction between the two in the Egyptian context).

    • Rami
      Posted November 22, 2013 at 11:30 am | Permalink

      I would disagree that highly centralized and interventionist economies have failed. Not only in the obvious example of China, but many of the East Asian “Miracle” countries followed successful industrial policy (eg. Japan). The free market ideals of the Washington Consensus did not lead to success guaranteed.

      • Posted November 22, 2013 at 5:48 pm | Permalink

        Rami, whatever the faults of the Washington Consensus and merits of the East Asian industrial policies, it is safe to say that the “Cairo Consensus” in place and continuing since 1952 has been an abject failure.

  • Christian Henderson
    Posted November 21, 2013 at 11:15 am | Permalink

    Nice article.

    Just one question. As a result of the falling profit of the army run businesses, don’t you think they will exploit there role as a the gatekeeper of the Egyptian economy and seek other forms of rent. For example, a lot of FDI and arms purchases are conditional on purchases from the AOI?

    • Farah Halime
      Posted November 25, 2013 at 3:31 pm | Permalink

      Hi Christian, that’s a very good point yet they’ve even struggled to exploit their position as gatekeepers at the moment. I suppose this article suggests that the army is in a position of power, but are not making the most of it, to the detriment of both their own success and the economic recovery of the country.

  • Adam
    Posted November 25, 2013 at 3:24 pm | Permalink

    A nice article that has elicited some questions for me.

    I was under the impression that army accounts are not publicly available. In this case, how do we know the degree to which non-military production is keeping the army afloat (in addition to those subsidies)? Also, is there a law that exempts them from taxation?

    Thanks.

    • Farah Halime
      Posted November 25, 2013 at 3:48 pm | Permalink

      Hi Adam,

      You’re right that the military’s finances are not publicly available however I intended to question this oft-quoted figure of “40%” precisely because the true number is so unclear. I also intended to question the extent at which the army controls the economy. We can deduce from the little that is publicly available, and historically, from the army’s economic strategy, that the military is not as much in control as we may have thought.

      Businesses owned solely by the military are exempt from taxes





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