The Dead Hand of Socialism: State Ownership in the Arab World

8/11/2019 The Dead Hand of Socialism: State Ownership in the Arab World

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PolicyAnalysisA 25, 2014 | N 753

EXECUTIVE SUMMARY

Dalibor Rohac is a policy analyst at the Center for Global Liberty and Prosperity at the Cato Institute.

The Dead Hand of SocialismState Ownership in the Arab WorldB D R

Extensive government ownership in the econ-omy is a source of inefficiency and a barrierto economic development. Although precisemeasures of government ownership acrossthe Middle East and North Africa (MENA)

are hard to come by, the governments of Algeria, Egypt,Libya, Syria, and Yemen all operate sizeable segments of

their economiesin some cases accounting for more thantwo-thirds of the GDP.

International experience suggests that private owner-ship tends to outperform public ownership. Yet MENAcountries have made only modest progress toward reduc-ing the share of government ownership in their econo-mies and are seen as unlikely candidates for wholesaleprivatization in the near future.

MENA countries need to implement privatization inorder to sustain their transitions toward more represen-tative political systems and inclusive economic institu-tions. Three main lessons emerge from the experience ofcountries that have undergone large privatization pro-grams in the past. First, the form of privatization mattersfor its economic outcomes and for popular acceptance

of the reform. Transparent privatization, using open andcompetitive bidding, produces significantly better resultsthan privatization by insiders, without public scrutiny.Second, private ownership and governance of the finan-cial sector is crucial to the success of restructuring. Thirdprivatization needs to be a part of a broader reform pack-age that would liberalize and open MENA economies tocompetition.


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Governmentownershipis a large

burden oneconomies inthe MiddleEast andNorth

Africa.

INTRODUCTION

The events of the Arab Spring were notfueled only by demands for more political ac-countability in countries that had been long

governed by autocratic regimes. They alsoarose from the failure of those regimes to pro-vide access to economic opportunity for theirpeople. The countries of the Middle East andNorth Africa (MENA) have long suffered fromlow rates of economic growth and high unem-ployment, especially among young people.

The lack of economic dynamism in theArab world has many competing explanations.The most prominent ones emphasize the roleplayed by bad policies and institutions, the

corrupting nature of unchecked oil and gasrevenue, and the legal and political heritageof Arab socialism. The resulting landscape isthus characterized by barriers to competition,protectionism, legal uncertainty, a high inci-dence of corruption, and a heavy-handed gov-ernment presence in the economy. One facetof the socialist legacy in the Middle East isthe strong component of government owner-ship in the economy. In various years over thecourse of the past two decades, government

investment accounted for up to 90 percentof the total investment in countries such asEgypt and Libya.1

Some of the MENA countries privatizedlarge parts of their economies in the 1990s and2000s. These include, most notably, Morocco,Tunisia, Jordan, and Egypt. Others, like Leba-non, have not had a significant legacy of large-scale government involvement in the economyat all. Yet at the present time, several Arab coun-tries, including Algeria, Libya, Egypt, Syria, and

Yemen, maintain a sizeable government pres-ence in their economies. Governments tend torun the oil and gas sectors, which are importantsources of public revenue, but they are also rep-resented across the board in utilities, financialservices, and manufacturing. Precise estimatesof the size of government ownership are sel-dom available, but indirect evidence suggeststhat government ownership is a large burdenon economies in the MENA region.

This paper reviews the available evidenceabout the size of government ownershipacross MENA countries, its concentration indifferent segments of their economies, as welas its evolution over time. It also discusses

the existing international evidence about thecomparative performance of state-ownedenterprises (SOEs). With some exceptionswhich are mostly of theoretical interest, private ownership systematically outperformspublic ownership. Economies that have scaledback public ownership, including the UnitedKingdom, countries of Latin America, andthe post-communist economies of Centraand Eastern Europe, have seen dramatic im-provements in the performance of privatized

companies, as well as lower prices and higherquality for consumers.

However, the devil is in the details. Dif-ferent forms of privatization lead to differentoutcomes. This makes a close reading of international evidence particularly relevant forcountries like Egypt, where privatization hasprovoked a popular backlash in which it hasbeen widely associated with corruption andcronyism. In Eastern Europe, privatization byinsiders typically produced worse outcomes

than other forms of privatization. It therefore seems important that privatization inMENA countries is done through a transparent process open to as many potential bidderas possible, including foreign companies. It isalso important that privatization is not jusan isolated policy step, transforming publiclyowned monopolies into private ones. Insteadit has to be a part of a broader liberalizationpackage that would also remove barriers tocompetition in the region, improve the busi-

ness environment, and reduce the regulatoryand tax burden facing entrepreneurs.

Given the ongoing political turmoil in theregion and the civil war in Syria, this may seemlike an awkward time to discuss privatizationand market reforms. In most countries of theregion, radical reforms do not seem politicallyrealistic at the moment. In Egypt, the priva-tization undertaken in the final years of therule of Hosni Mubarak was not received wel


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In Egypt,the share ofgovernmen

investmentfell fromaround85 percent ithe late 199to below40 percentin 2012.

because it allowed a small group of politicallywell-connected individuals to become ex-tremely rich. Because of an overregulated andopaque institutional environment, privatiza-tion generated only limited economic benefits

for the general public. Some may argue thatMENA countries have to address their politi-cal woes before pursuing economic reforms.That, however, may be a mistake, as a growingbody of literature suggests that there is a linkbetween political and economic institutionsand that it is difficult to conceive of inclusivepolitical institutions without inclusive eco-nomic ones as well, which empower the gen-eral population.2The success of political tran-sitions in the Middle East, therefore, is likely

to be conditioned by economic liberalizationand reforms that foster sustained economicgrowth. A far-reaching privatization agendawill be a necessary component of any such re-forms.

STATE OWNERSHIP IN

THE MIDDLE EAST AND

NORTH AFRICA

The study of state ownership in the Middle

East and North Africa faces two barriers. First,as a general rule, very little comparable dataexist on state ownership around the world.In the 1990s, the World Bank developed theBureaucrats in Business database, whichprovided comprehensive data for 88 coun-tries over the period of 19781991. The data-base contained information about the shareof state-run sectors in the economy and aboutthe performance of state-owned enterprises.However, the database has been discontinued,

and it cannot be used as a source of up-to-dateinformation about state ownership in the re-gion.3After the waves of mass privatization inCentral and Eastern Europe and Latin Amer-ica, the interest of economists in the subjecthas declined, resulting in a lack of systematicdata about state ownership.4

MENA governments only seldom publishreliable aggregate information about stateownership in the economy, making it difficult

to assess the size of state-run sectors overtime and across countries or industries. Thisis certainly related, in part, to the way thesecountries have been governedtypically byauthoritarian rule, without much regard for

government accountability or transparency.The magnitude of government investment

is a proxy for the size of the government-runsector in the economy. Obviously, the two arenot identicalthe share of public ownership isa stock, and government investment is a flow.Yet, other things being equal, the larger theshare of government investment over time,the larger the share of state-owned enterpris-es in the economy.5Figure 1 presents data onthe relative size of government investment

in different countries of the MENA region.The most significant feature of the graph isthe large variation in government investmentboth over time and across countries. In Egypt,for example, the share of government invest-ment fell from around 85 percent in the late1990s to below 40 percent in 2012. Over thesame period of time, the share of governmentinvestment in Algeria doubled, from around30 percent to above 60 percent. Throughoutmuch of the same period, the average for low-

er-middle-income countries hovered under30 percent and the average for upper-middle-income countries was just above 30 percent. InLibya, Egypt, Syria, and Algeria public invest-ment represents more than one-half of thetotal investment at different points in time.In contrast, in countries such as Tunisia, Mo-rocco, or Jordan, government investment iscomparatively small, accounting for less than20 percent of the total. Internationally, pub-lic investment in these countries exceeds the

world average for lower-middle and low-in-come countries, which hovers between 25 and30 percent.

A complementary source of informationabout the evolution of the size of state-ownedsectors of economies over time can be foundin the World Banks Privatization Database,which provides data on proceeds from priva-tization over the period of 19982008. Obvi-ously, these data need to be taken with a grain


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Algeria, Syria,Libya, Yemen,and Egypt

have thelargestgovernment-run sectors inthe region.

of salt, as they reflect not only the fundamen-tal value of assets that were being privatizedbut also the choice of different privatizationmethods, leading to a variation in prices ofassets that were transferred to private own-ers. Still, they provide a potentially valuablesource of information about the relativesize of the state-owned sector. Countrieswith large privatization proceeds relative to

the size of the economy can be expected tohave downsized their government-run hold-ings, whereas countries with low privatiza-tion proceeds can be expected to have eitherexpanded their state-owned sectors or leftthem unchanged. Among MENA countries,Morocco, Egypt, Tunisia, and Jordan had thelargest proceeds from privatization between1988 and 2008 (Figure 2). Incidentally, withthe exception of Morocco these also happen

to be the countries that recorded significantdecreases in the share of public investmentin the economy. (Relative to the region, Morocco never had a terribly high share of publicinvestment in the first place.)

Algeria, Syria, Libya, Yemen, and Egypthave the largest government-run sectors in theregion. Elsewhere in the regionmost notablyin Lebanon, Tunisia, Jordan, and Morocco

state ownership is much more limited. Thisis either because these countries never had adirect experience with Arab socialism in theform in which it was practiced in Egypt or Syria or because they have already undergonelike Morocco, Tunisia, or Jordanfar-reachingprivatization.

Many sectors in Morocco underwent successful restructuring, including telecommu-nications, agriculture, housing, ports, and

10

20

30

40

50

60

70

80

90

Algeria Egypt, Arab Republic Libya

Morocco Tunisia Yemen, Republic

Figure 1Proportion of Government Investment over Total Investment in Selected MENACountries

Source: World Bank World Development Indicators.

Percentageo

ftotalinvestment


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Tunisia hassucceededover time to

turn over thbulk of itsmanufacturing andservicesectors toprivateowners.

the postal services.6The largest privatizationdeals included Maroc Telecom, the tobaccocompany Rgie des Tabacs, and the SocitAnonyme Marocaine de lIndustrie du Raf-finage. According to a report by the EuropeanBank for Reconstruction and Development, in

Morocco, the privatization agenda, with theexception of utilities and natural resources,is by now almost complete.7That, however,sounds exaggerated, as the country still countsup to 241 state-owned companies.8

The situation in Tunisia is arguably morecomplicated, with state presence in telecoms(fixed-line sector dominated by a governmentincumbent), finance, electricity and gas distri-bution, oil and gas, and water; also, three majorbanks remain under majority state control.9

This is, in part, a result of the countrys history.In Tunisia, since 1959, practically all industrialsectors were financed by the government ei-ther through equity participation or throughbank lending. Perhaps unsurprisingly, the onearea in which the government was reluctantto investtourismhas recorded the mostsignificant economic gains since the 1970s on-wards. Starting in the late 1980s, Tunisia hassucceeded over time to turn over the bulk of

its manufacturing and service sectors to pri-vate owners. In the 1990s and the 2000s, thegovernment has partially privatized TunisieTlcom, the incumbent telecom operator;large parts of the banking sector; and its largecement companies, such as La Socit des Ci-

ments de Djebel Oust and La Socit des Ci-ments dEnfidha.

Jordan has a lingering state presence in its(small) upstream oil and gas sectors, refineries,mining industry, power generation, and finan-cial industry. The government has privatizedJordan Telecommunications Company as wellas state cement, phosphate mining, and potashcompanies. It has also divested its ownershipstakes in the national airliner, the Royal Jorda-nian; the Central Electricity Generation Com-

pany, the Electricity Distribution Company,and Irbid District Electricity Company.10

Where is government ownership concen-trated? Table 1 provides a tentative list of thelarge state-owned companies in selected coun-tries of the Middle East and North Africa, basedon publicly available information. The list fo-cuses on large, widely known examples in prom-inent sectors of the economy. Its extensivenessis naturally limited by the opaque nature of state

0

20

40

60

80

100

120

140

Morocco Egypt Tunisia Jordan Lebanon Algeria Yemen Libya Syria

Figure 2Privatization Proceeds in Selected MENA Countries as Percentage of GDP(19882008)

Percentageo

f2008GDP

Source: World Bank Privatization Database.


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Algeria Egypt Libya Syria Yemen

Oil and Gas/Mining

Sonatrach(80 percent ofall oil and gasproduction)

Naftal(principaldomestic sellerof petroleum-based fuels)

Egyptian GeneralPetroleum Corpo-ration (EGPC)

Egyptian NaturalGas Holding Co.(EGAS)

Egyptian MineralResources Author-ity (EMRA)

Ganoub El Wadi-Petroleum Holding

Co. (Ganope)Egyptian Petro-chemicals HoldingCo.(Echem)

National Oil Compa-ny with its subsidiaries

Zawia Oil Refining

RASCO

Brega

Agoco

Sirte Oil Co.

Jowef Oil Technology

National Drilling Co.

North Africa Geo-physical ExplorationCompany

National Oil Fieldsand CateringCompany

Waha Oil Co.

Tamoil (downstreamgroup based in theEU)

General PetroleumCompany(GPC, upstream)

Al Furat PetroleumCompany (AFPC)

Sytrol (selling Syriascrude oil exports on theinternational market)

Yemen Petro-leum Company(YPC)

Banking/ Financial ServicesCrdit PopulairedAlgerie

Banque du Caire

Banque Misr

MisrInsuranceHolding Company(controlling 60percent of theinsurance market)

Agricultural Bank ofLibya

Libyan Foreign Bank

Umma Bank

Jamahiriya Bank

Wahda Bank

Sahara Bank

National CommercialBank

Commercial Bank ofSyria

AgriculturalCooperative Bank

Real Estate Bank

Popular Credit Bank

Saving Bank

Industrial Bank

Yemen Bank forReconstructionand Develop-ment

Power

Sonelgaz (na-tional electricityand gas distribu-tion company)

Egyptian Elec-tricity HoldingCompany

General ElectricityCompany of Libya(GECOL)

Public Establishmentfor Electricity Genera-tion and Transmission(generation and trans-mission)

Public Establishmentfor Distribution andExploitation of Electri-cal Energy (sales anddistribution)

Public Electric-ity Corporation(PEC)

Table 1Selected State-Owned Companies in Algeria, Egypt, Libya, Syria, and Yemen


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ownership in the countries under consideration.The choice of countriesAlgeria, Egypt, Libya,Syria, and Yemenis informed by their signifi-cant legacies of socialism, economic planning,and import substitution.

The similarities among these countries arenot accidental but rather the direct result ofa political and ideological legacy common to

a large part of the MENA region. Arab social-ism established itself in the region in the 1950sand 1960s, typically in the form of one-partypolitical systems, like Nasserism in Egypt orBaathism in Syria. Arab socialism typicallycombined an emphasis on government con-trol of the economy with the ideology of Pan-Arabism. On the international front, Arab so-

Algeria Egypt Libya Syria Yemen

Telecom

Algrie Tlcom Telecom Egypt Libya Telecom andTechnology

General Posts andTelecommunicationsCompany

Libyana(mobile provider)

Syrian Telecom is theonly providerof fixed-linetelephony

YemenTelecommuni-cation Corpora-tion

Other Utilities

Holding Companyfor Water andWastewater

General Companyfor Water and Waste-water (GCWW)

Manufacturing

Misr Spinningand WeavingCompany

Arabian Cement Co.

Libyan CementCompany (ownedpartly by the state-runEconomic and SocialDevelopment Fund)

Libyan Iron and SteelCompany(Lisco)

General Organizationfor Textile Industries(running a large part oftextile manufacturingindustry)

Yemen Eco-nomic Corpora-tion(YEC)BajelFood Process-ing Complex(food manufac-turing)

Yemen DrugCompany forIndustry andCommerce(YEDCO);

Compute Me(IT services)

Transport

SocitNationale desTransports Fer-roviaires

Air Algerie

Egypt NationalRailways

EgyptAir

General NationalMaritime TransportCompany

Chemins de Fer Syriens Yemenia(nationalairliner)

Source: Authors research from various sources.

Table 1 Continued


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Egyptimplementeda sustained

privatizationprogram inthe final

years ofPresidentHosniMubaraksrule.

cialism was intimately linked with the idea ofinternational nonalignment, placing Egypt andother Arab countries close to Titos Yugoslaviaand Nehrus India on the international scene.Although it rejected Soviet communism, Arab

socialism placed a strong emphasis on indus-trial planning, centralized trade unions, andbarriers to trade, which were meant to fosterdomestic development through import substi-tution. In the affected countries, although to avarying degree, the rise of Arab socialism typi-cally had four features: (1) nationalization of in-dustry, (2) capture by government of large partsof the banking sector and financial services, (3)introduction of price controls and subsidies,and (4) the use of oil wealth as a source of funds

for patronage.As one would expect, governments in these

economies are operating large parts of the oiland gas industry, utilities and telecom, bank-ing, and even manufacturing. The appendixprovides detailed overviews of state ownershipand privatization attempts in each of thesecountries. Of these five countries, only Egyptimplemented a sustained privatization programin the final years of President Hosni Mubaraksrule, resulting in a marked decrease in the share

of state ownership in the economy. Companiesthat were being privatized, in whole or in part,included Telecom Egypt, Bank of Alexandrie,and Commercial International Bank, as well ascompanies providing transport infrastructure,communications, and energy. The process,spearheaded by Mubaraks son, Gamal, wasaccompanied by widespread allegations of cor-ruption and cronyism, and has been brought toa halt by the events of the Arab Spring. In con-trast, Algeria, Libya, and Syria undertook little

or no privatization. Yemen proceeded with adivestiture of shares in Yemen Mobile, a mobileoperator, in 2006.

ARE SOES HOLDING BACK

MIDDLE EASTERN ECONOMIES?

Before the Second World War, even manypro-market economists, such as Henry Simonsor Lionel Robbins, accepted that the govern-

ment ought to take over industries that couldnot be run effectively under conditions of opencompetition.11 Those included, most prominently, utilities or railways, in which competi-tion was seen as impracticable due to the na-

ture of network externalities. However, todaysuch situations are no longer seen as necessaryor sufficient conditions for the desirability ostate ownership. Even in cases when the gov-ernment does want to provide a specific goodor servicewhich may display positive exter-nalities or public-goods characteristicsthereare good reasons to contract its provision outo the private sector instead of relying on production by the government. In theory, stateownership and provision of goods and ser

vices directly by the public sector seem desirable only under very limited conditions, suchas when strong incentives to maximize profitor minimize costs could lead to undesirableoutcomes (e.g., national security). Otherwiseprivate ownership will tend to outperform government-run provision for two main reasons.

First, there is the problem of incentives cre-ated by public ownership. The separation ofownership and control in modern corporationcreates a problem of asymmetric information

and misaligned incentivesthe managementcan choose to shirk or maximize the perks ofthe office instead of corporate profits. In publicly traded companies, this problem is mitigated by the financial market. Bad economic per-formance by the firm will lead investors to exitSuch a mechanism is absent in the case of pub-lic ownership. At most, the government canthreaten to replace the current managementunless some pre-specified goals are met. How-ever, this does not create strong incentives to

reduce costs or innovate beyond the minimumrequired by the government. Furthermore, istate-owned companies are expected to meetdifferent, and sometimes conflicting, objectives, such as maximizing revenue, maximiz-ing output, providing employment, and so onthen monitoring their performance becomeseven more problematic.

Second, state ownership often goes hand inhand-in-hand with an absence of competition


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Stateownershipgoes hand-

in-hand witan absenceof competi-tion.

It is no coincidence that state-owned enter-prises typically operate in noncompetitive en-vironments. For example, governments haveoften invested a large amount in the fixed costsof establishing utility businesses in sectors

with large network externalities. The verticalintegration of such businesses makes competi-tive entry difficult, even in the absence of for-mal restrictions on competition. Worse yet,after starting such a business, the governmentfaces incentives to erect barriers to competi-tion that could threaten to drive the state-owned incumbent out of businessmuch inthe same way as private entrepreneurs wouldlike (if they could) to keep their competitorsout of the business through statutory barriers.

As a result, government ownership will tendto be associated with noncompetitive marketstructures, to the detriment of consumers.

The experience of many countries aroundthe world, particularly in the developingworld, vindicates the idea that private owner-ship outperforms public ownership. A studyof SOE performance in 12 West African coun-tries in the 1980s found that 62 percent of thecompanies under consideration reported netlosses and 36 percent were operating at nega-

tive net worth.12These results are not specific to Africa. For

example, a 1994 study of 61 companies from 18countries and 32 industries between 1961 and1990 showed that SOEs that were transferredinto private hands increase[d] real sales, [be-came] more profitable, increase[d] their capi-tal investment spending, improve[d] their op-erating efficiency, and increase[d] their workforces.13Moreover, the effect of privatizationon firm performance is remarkably consistent

providing strong evidence for the superiority ofprivate ownership. This consistency is perhapsthe most telling result we reportprivatizationappears to improve performance measured inmany different ways, in many different coun-tries, wrote economists William L. Megginsonand Jeffry M. Netter in their survey of empiricalstudies on privatization around the world.14

Countries that have had extensive experi-ence with state and private ownership include

the formerly planned economies of EasternEurope, but also many countries of the West.The United Kingdom, for instance, underwenta far-reaching privatization program duringthe Thatcher era, and was followed by Ger-

many, Italy, and Spainand Latin America. Inall these regions of the world, the basic resultswere the sameprivate ownership generatedsubstantial efficiency gains and resulted in bet-ter-functioning industries.

Experience From Transitional Economies

Focusing on transitional countries of Cen-tral and Eastern Europe, numerous studieshave found that, broadly speaking, privati-zation improved the performance of enter-

prises.15 According to Megginson and Netter,private ownership is associated with betterfirm-level performance than is continued stateownership.

In turbulent transitional environments, amere formal transfer of property did not guar-antee the creation of a vibrant private sector,especially if the newly created property rightscould be challenged or if governments couldrenege on the decision to privatize. The econo-mists Clifford Zinnes, Yair Eilat, and Jeffrey

Sachs found that when privatization occurredin good institutional environments, it had anunambiguously positive effect on corporateperformance.16 The examples from Centraland Eastern Europe were numerous. Someprivatized companies developed global brandsfollowing their privatization, including kodaAuto in the Czech Republic or the ywiecBrewery in Poland. The privatization of others,like the oil and gas company MOL in Hungary,gave an impetus to the development of local fi-

nancial markets.However, such strong positive effects were

missing when privatization occurred in bad ordysfunctional institutional environments. Insome countries, including Russia and the post-Soviet republics, privatization was followedby stagnation and decapitalization of compa-nies, instead of better financial results and in-creased efficiency. But even under bad institu-tions, privatization did not produce outcomes


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Privatizationin the UK wasassociated

with higherrates of profit-ability, higherproductivitygrowth, andoverallefficiency.

that were measurably worse than the statusquo of public ownership. As the economistJohn Nellis put it, [g]overnments that botchprivatization are equally likely to botch themanagement of state-owned firms.17

Privatization in the UK

The United Kingdom is the most promi-nent example of a large-scale privatization un-dertaken in an advanced industrial economy.Following the election of Margaret Thatcher,the government first privatized British Aero-space and Cable and Wireless in 1981, Am-ersham (a pharmaceutical company) in 1982,followed by British Shipbuilders, the NationalFreight Corporation, British Telecom, and

British Gas, among other enterprises. Later, inthe 1990s, British Railways and the NationalExpressthe inter-urban coach transport pro-viderwere privatized as well.

Overall, privatization in the UK was associ-ated with higher rates of profitability,18higherproductivity growth,19and overall efficiency.20Obviously, there were exceptionsespeciallyin sectors with little competition, such as tele-communications or utilities, where privatiza-tion did not always lead to unambiguous and

clearly measurable improvements. Its successwas thus related to the presence of genuinemarket competition. As David Parker, the UKGovernments Official Historian of Privatiza-tion, noted [m]anagement in monopolies mayseek an easy life whether in the private or pub-lic sectors; while in private-sector monopoliesmanagement can meet investors expectationsof profits by simply raising prices.21Obviouslyin some industries the creation of competitivemarkets represented a bigger challenge than in

others, in part because it involved dismantlinglarger and more complex sets of regulatory bar-riers to competition.

Evidence From Latin America

Latin America is another region whereprivatization was undertaken on a large scale.In the 1990s alone, privatization revenues in 18Latin American countries totaled 6 percent ofGDP.22There is a widespread consensus that

privatization generated important fiscal revenues; reduced government debt; contributedto the rise in the quantity of output and quality of goods and services produced by formerlystate-owned companies;23 there was better

economic performance of privatized companies and, in cases of transparent and speedyprivatization, reduced corruption.24

Privatization in Latin America has beencontroversial in part because of corruption allegations surrounding large privatization tenderssuch as the sale of Aerolneas Argentinas, orthe Argentinian national telephone companyENTel.25In contrast to some of the criticismraised against privatization, very little evidenceexists that would indicate market-power abus

es, exploitation of workers, or an erosion of fiscal revenue. In their review of evidence on Latin American privatizations, economists JohnNellis, Rachel Menezes, and Sarah Lucas arguethat even in countries where the unemployment rate rose in the aftermath of large priva-tization programs, those were caused by exter-nal shocks, labor market rigidities, and financiaindisciplinenot just privatization. It has evenbeen argued that privatization may have miti-gated unemploymentthat, absent privatiza

tion, unemployment levels would be higher.26Privatization in Latin America received a lot oflak because of its often ambitious nature, covering areas that had traditionally been undergovernment control, such as public utilitiesBut even in those areas, compelling evidencesuggests that privatization produced good outcomes. A famous study of water privatizationin Argentina, for example, shows that it led toa dramatic reduction of infectious and parasiticdiseases among children, and to a fall of 57

percent in child mortality in municipalities thatprivatized their water provision.27

Effects of State Ownership in MENA

True, in contrast to the transitional coun-tries of Central and Eastern Europe, WesternEurope, or Latin America, systematic evidence about the comparative performance ostate-owned enterprises in the Middle Eastand North Africa is still lacking. But one area


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The MiddleEast andNorth Afric

have fewernon-oilexports thaFinland orHungary, bumore than20 times thepopulationof both thoscountriescombined.

has attracted significant attention: the bank-ing sector. Particularly in Egypt, banking wasin large part privatized and opened to foreigncompetition. Even at the early stages of theprivatization process, banking privatization

prompted an inflow of capital and stimulatedstock market activity.28Moreover, state-ownedbanks lagged behind their private competi-tors29not just in terms of profitability orcompetitiveness,30 but also in terms of theircapital adequacy, asset quality, earnings, andprofitability,31 which can be partly explainedby their heavy holdings of government securi-ties.32State banks also had higher costs due toinefficiently large staffing.33

It may be difficult to disentangle the effect

of state ownership from the broader contextof heavy-handed industrial policies, whichhave been part of the economic landscape ofMENA countries for decades. It is safe to saythat the economic outcomes in these countriesdo not easily lend support to the view that gov-ernments are well equipped to pick economicwinners and foster their success. Instead, asa study published by the Egyptian Center forEconomic Studies finds, [t]he continued strat-egies of import protection and inward orienta-

tion in MENA have resulted in significantlyweakened trade, with trade-to-GDP growth atabout half of the worlds pace since the 1980s.The regions exports are dominated by oil, withonly the small number of resource-poor andlabor-abundant economies developing fairlywell-established non-oil export sectors. Theentire MENA, with a population close to 320million, has fewer non-oil exports than Finlandor Hungary, countries with populations of 5and 10 million, respectively.34

Why do state ownership and industrial pol-icy exist, and why do they seem so entrenchedin some parts of the MENA region? Clearly, thepursuit of economic efficiency by governmentscannot provide us with an adequate under-standing of the persistence of these institution-al arrangements. Instead, it is sensible to thinkthat state ownership is one of the tools used bypolitical elites for the pursuit of other, poten-tially self-seeking, ends. Policymakers can use

state-owned enterprises to create networks ofpatronage and to create excessive employmentand investment in areas that generate politicalpayoffs. Obviously, such payoffs are not alignedwith the long-term interests of the enterprises

and are shielded from the feedback mecha-nisms of the marketplace because state-ownedenterprises face only soft budget constraintsand their shares are typically not publicly trad-ed.35A study of Algeria found four factors thatimpeded the privatization process: (1) the con-stant struggles over rents between different in-terest groups, which prevent the emergence ofcoherent reform strategies; (2) interest groupsin the form of military and bureaucratic clans,which derive rents from the status quo; (3) the

role of SOEs in providing clientelist social as-sistance and patronage to specific parts of thepopulation; and (4) the prevalence of national-ist, tatist, socialist, and collectivist ideology.36It is evident that all of these factors are at playthroughout the MENA region.

TOWARD SUCCESSFUL

PRIVATIZATION

There appears to be only one lasting so-

lution to the problem of large state-ownedsectors: privatization. The existing efforts toimprove the corporate governance of state-owned enterprisesspearheaded in part bythe Organization for Economic Co-operationand Development (OECD)37are unlikely toproduce anything but minimal improvements.Plausibly, they will have no effect on the oper-ation of SOEs in the region. These initiativesfocus on a clearer control and streamlining ofgovernance in SOEs. They stress coordination

among different bodies of government as wellas transparency. The ultimate aim is to create alevel legal playing field in which SOEs will betreated by the law in the same way as privateenterprisessomething that cannot be con-sidered the norm in the region.

It would be farfetched to think that theperverse effects of state ownership on eco-nomic efficiency could be mitigated by a newset of rules about how the SOEs are managed.


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Privatizationby insidersled to worse

economicoutcomesthan otherforms ofprivatiza-tion.

If that were the case, it would be difficult toexplain why state ownership produced badoutcomes in advanced Western economieslike the United Kingdom or Sweden that de-cided to pursue radical privatization agendas.

If corporate governance reforms were notenough in countries with a high quality of gov-ernance and low rates of corruption, how canone expect them to address the problems ofSOEs in countries that are plagued by govern-ment mismanagement, corruption, and weaklegal norms?

If better guidelines on corporate gover-nance were implemented as intended, the cor-porate governance guidelines might limit theextent of outright corruption, embezzlement,

or patronage, which without any doubt affectthe SOEs. However, for their proper func-tioning, companies need more than a tightergovernance structure. The managers need toface correct incentives to react to market de-mand and even to restructure the companywhen necessary. That is difficult without realaccountability to private shareholders, andwithout hard budget constraints. It is equallyunclear how managers of SOEs can gather theknowledge needed to restructure the compa-

nies in the appropriate way unless subjected tothe feedback mechanism of profit and loss. Tobe sure, stronger monitoring from the centeris often advocated as a solution to this prob-lem. But unless the government can crediblythreaten to close down the business in ques-tionwhich is easier said than donesuchmonitoring remains more a wish than a realpolicy option. This is not to speak of the factthat the government will not know any betterthan company managers what the desirable

forms of restructuring are, or how to react toshifts in consumer demand, underlying tech-nology, and so forth. As a result, SOEs can beexpected to be less responsive to shifts in con-sumer demand and technology. Because theirexistence depends on government fiat insteadof passing the market test, they are shieldedfrom the creative destruction that character-izes competitive markets and, over time, canbecome a large liability for the whole economy.

It is true that governments can botch theprocess of privatization, but at the very leastunder security of private property, the irre-versible transfer of control to private handprevents further government intrusion into

the management of the former SOEs. Threemain lessons emerge from the experience olarge-scale privatizations around the world.

How to Privatize

Not all forms of privatization produceequally good outcomes. In theory, if the costof transacting are low, then the initial assign-ment of private property rights does not matter very much.38 Through the functioning ofinancial markets, the resources of privatized

SOEs will be quickly directed toward the mosvaluable uses. Inefficient plants will quickly beclosed, promising operations will be expanded, and capital will quickly be deployed to itsmost valued uses.

In reality, however, there are importanttransaction costs, particularly in environmentswith imperfect capital markets and imperfectlegal norms. In such cases, it does matter whois assigned the initial property title and howThat explains the one regularity about privati

zation in post-communist countriesnamelythat privatization by insiders led to worse economic outcomes than other forms of privatization. Studying the performance data ofcompanies in Moldova and Georgia, economist Simeon Djankov finds that the degree orestructuring in state-owned companies andin companies that were privatized by theirmanagers were similarand lower than incases when the company was purchased by anoutside investor.39Similarly, a literature review

by Megginson and Netter singles out privati-zation by insiders as problematic. For a num-ber of reasons, insiders, such as entrenchedfactory managers, can be tempted to use theirposition to strip the company of its assets. Unlike outside investors, insiders might also lackthe knowledge and acumen necessary for theneeded restructuring, particularly if they onlybecame insiders in the first place thanks totheir political connections.


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It is harderelectorally tgo against th

interests ofmany citizeshareholderthan to goagainst thosof a fewcapitalists,particularlythey areforeign.

Most studies of privatization in transitionaleconomies suggest that investors who are out-siders and have experience with the relevantmarket are instrumental to the restructuringof formerly state-owned companies and to

helping them become financially viable.In spite of its apparent virtues, there are

limitations to the extent to which privatizationby strategic investors can be implemented, es-pecially if the government is seeking to priva-tize on a large scale. This is because finding theright strategic investor takes time, and it is notobvious that there is always a good match forany given state-owned company. Furthermore,sales of public property to foreign corporationscan become a contentious political issue. Such

privatizations can potentially lead to reversals,especially if they are perceived as unfair or ifthey involve large losses of employment.

More importantly, Arab governments shouldavoid turning privatization into a gradual pro-cess of picking politically desirable prospectiveowners. Because governments do change afterelections and because privatization is often acontentious matter, prolonging the privatizationprocess creates a risk that it will be left unfinishedor reversed.

One of the methods used in some transi-tion economies to quickly privatize at massivescale in a way that was perceived as fair wasvoucher privatization. It was implementedwith varying degrees of success in the formerCzechoslovakia (and the Czech Republic) andin Poland, andto a smaller extentin Russia.As Box 1 explains, voucher privatization cameunder a lot of criticism, yet it proved to be avery effective tool for large-scale privatization.

The large scale of the newly created private

sector and the mass character of privatizationin those countries, which often involved thepopulation at large as potential shareholders,were seen as a greater constraint for poten-tial renationalization. It is most likely harderelectorally to go against the interests of manycitizen-shareholders than to go against thoseof a few capitalists, particularly if they are for-eign. A feared side effect of mass privatizationthrough vouchers was that it would result in a

dispersed structure of ownershipa fear thatdid not materialize.40

The lesson of the Eastern European experi-ence for the Arab countries is not to slavishlycopy the example of voucher privatization.

However, in countries where a large stock ofgovernment property is to be transferred intoprivate hands in a short period, governmentswould be well advised to follow some methodof mass privatization, potentially includingvouchers. More important than the somewhattechnical choice of the specific privatizationmethod is the transparency of rules guidingprivatization and the openness of the sale pro-cess to a wide section of potential buyers, thusmitigating the danger of allowing incumbent

managers or government cronies to simplygain control of privatized firms.

The Role of Banks and the Financial Sector

The financial sector is important becausefinancial intermediation is a crucial factoraffecting corporate restructuring and firmgrowth. A widely recognized pitfall of theprivatization in Czechoslovakiaand laterin the Czech Republicwas the emergenceof the so-called banking socialism. During

the mass voucher privatization, state-ownedbanks became major owners throughout thenewly privatized Czech companies. This hap-pened because banks mutual funds boughtvouchers from the general population andquickly established large ownership sharesthroughout the economy. Simultaneously,banks remained practically the only sourceof capital to privatized enterprises. Howev-er, the banking sector remained dominatedby large state-owned banks. This hampered

the much-needed restructuring of privatizedcompanies. As the Czech economist EvaKreuzbergov noted, the overall dependenceof the economy on banks coupled with theirimprudent credit practices led in particular tothe prevalence of soft budget constraints andincidence of various forms of moral hazard.These iniquities emerged above all due to theomnipresence of the state (specific encourage-ment to extend credit or general expectations


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In the CzechRepublic thevoucher

programaccomplishedits role oftransferringproperty intoprivate handsin a durable

way and overa shortperiod.

Box 1Voucher Privatization

Voucher Privatization was a method of mass privatization deployed in transitionaleconomies including Czechoslovakia, Poland, and Russia in the 1990s. It relied on a dis-

tribution of vouchers to the general population, available for a small fee. These could beexchanged for shares in state-owned enterprises. These exchanges occurred in the formof simple auctions that only used vouchers, typically denominated in points, for thebidding. The Czech privatization scheme used a centralized bidding process to set theprices for the shares on the basis of the difference between existing demand and theavailable number of shares. In Russia, such a process proved to be too complex, given theamount of state-owned property that was being privatized, and instead decentralized auc-tions were used to sell of government-owned assets.

The governments in Czechoslovakia and Poland decided to only include larger enter-prises in the voucher programs, while selling small business like shops or restaurants di-rectly for cash. There were two main reasons for using vouchers instead of direct sales for

cash for larger companies, and both of them were political in nature. First, in the formerlycentrally planned economies the distribution of wealth typically reflected individualsstatus within the former regime. It was thus feared that direct sales would lead to a con-centration of assets in the hands of former communist elite and/or individuals involved inorganized crime, making privatization even more contentious. Second, it was expectedthat mass participation in privatization would create a strong constituency that wouldprevent reform reversals in the future.

The voucher privatization was surrounded by controversy. A 1998 OECD country re-port, for example, claimed that the rapid voucher privatization impeded efficient corpo-rate governance and restructuring. However, there is evidence that in spite of its possiblepitfalls, Czech privatization did result in superior performance of privatized firms relative

to those that remained in the hands of the government.However that may be, in the Czech Republic the voucher program accomplished its

role of transferring property into private hands in a durable way and over a short period.By the end of 1994, the Czech Republic had advanced the furthest in terms of the share ofits private sector, with some 75 to 80 percent of its enterprises privatized. This comparesto roughly 55 percent in other Central European countries, and much less in countries ofthe former USSR.

Sources: Gerhard Pohl, Robert E. Anderson , Stijn Claessens, and Simeon Djankov, Privatiza-tion and Restructuring in Central and Eastern Europe: Evidence and Policy Options, Techni-cal Papers 368 (Washington: World Bank, 1997); Roman Frydman, Cheryl Gray, Marek Hessel,and Andrzej Rapaczynski,When Does Privatization Work? The Impact of Private Owner-ship on Corporate Performance in the Transition Economies, Quarterly Journal of Economics114, no. 4 (1999): 1153 91; Josef C. Brada, Privatization Is TransitionOr Is It?Journal of Eco-nomic Perspectives10, no. 2 (1996): 6786; William L. Megginson and Jeffry M. Netter, FromState to Market: A Survey of Empirical Studies on Privatization,Journal of Economic Literature39, no. 2 (2001): 32189; and OECD, The Czech Republic (Paris: OECD, 1998).


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In 2004,Hernando dSoto found

that Egyptsbiggestemployer

was itsundergrouneconomy.

that the state would bail out the banks in caseof trouble), mixing of ownership and creditrelationships within the banks also due to thedeficient legal and institutional framework.41

State ownership of the banking sector and

a lack of properly functioning capital marketswere a barrier to restructuring in other tran-sitional economiesmost notably in Slova-kiaalthough the methods of privatizationused there were different. In contrast, simi-lar troubles were largely avoided in Hungary,Poland, and Slovenia, which privatized theirbanking sectors early on. This suggests thatunhampered capital markets are an impor-tant prerequisite for successful restructuringafter privatization. State ownership of the

banks, particularly in countries with weak in-stitutions, can easily damage the privatizationprocess, particularly in cases when the electedpoliticians have an interest in postponingunpopular restructuring. Bank privatizationshould therefore be high on the agenda for thecountries under considerationparticularlybecause they all have a sizeable governmentpresence in the banking sector.

Privatization as Part of a Broader Reform

PackageIn Eastern Europe, privatization was one

of the most contentious aspects of economictransition. Some critics argued that rapidmass privatisation [] was a crucial determi-nant of differences in adult mortality trends inpost-communist countries.42 Although thatclaim is difficult to sustain, the experience oftransitional economies and also Western Eu-rope suggests that, in and of itself, privatiza-tion is not a guarantee of the emergence of

competitive private markets and the sociallybeneficial outcomes they produce.43

An obvious risk in privatization involvesturning a public monopoly into a private one.This risk is particularly salient in the case ofutilities with high fixed costs of entry or in-dustries that enjoy legal barriers to compe-tition in the form of licensing or regulationmeant to protect state-owned incumbents.In the MENA region, the barriers to business

activity and competition are considerable,as is their potential for capture by special in-terests. In the World Banks Doing Businessreport, measuring the administrative ease ofconducting business activities, Egypt ranks

109th in the world, Yemen 118th, Syria 144th,and Algeria 152nd. These are indicative of thebarriers to competitive entry, which take theform of cumbersome legal rules surroundingregistration of new business, obtaining variouspermits, paying taxes, and so on. In Yemen, forexample, it takes 6 procedures, 40 days, andcosts 66 percent of annual per capita incometo register a new company.44 In Algeria, theprocess takes less time and is less expensive butit requires going through 14 different steps.45

In MENA, obtaining a construction permittakes, on average, 146 days and costs 283 per-cent of annual income per capita. The effectsof such an unfavorable environment for busi-ness are obviousit stifles economic activityand drives it underground, instead of promot-ing competitive markets and employment inthe legal economy. The Peruvian economistHernando de Soto, an expert on the econom-ics of property rights, found that back in 2004Egypts underground economy was the na-

tions biggest employer. The legal private sec-tor employed 6.8 million people and the publicsector employed 5.9 million, while 9.6 millionpeople worked in the extralegal sector.46

Existing consumer subsidies to fuels, food,and other consumer products are also a prob-lem as the disbursement of price subsidies re-quires government control of the supply chainto curb the emergence of black markets. Infood and energy markets, subsidies have thusfavored incumbent firms. They have come

hand-in-hand with other distortions, includingprotectionist measures. Although Egypt facessevere resource limitations, especially when itcomes to land and water, the government is en-couraging the production of cereal crops, withper hectare yields that are a fraction of the av-erage of those in developing countries.47Suchpolicies are counterproductive, given the coun-trys natural resource constraints, which makeEgypt unlikely to become self-sufficient in


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Privatizationin the MiddleEast and

North Africashould not beconsideredin isolationbut ratheras a part ofa broaderpackage ofliberalizingreforms.

food production. Because robust private mar-kets and international trade are effective curesfor food insecurity, the government should al-low the agricultural and industrial sectors toexpand their exports by simply removing bar-

riers to competition and trade.48The energy sector in Egyptwhere the bulk

of the subsidy spending is directedhas beenmarked by heavy-handed government involve-ment as well. The combination of subsidizedprices and government-controlled refiningand distribution of petroleum products detersentry and leads to persistent shortages. Thegovernment-operated Egyptian General Pe-troleum Corporation controls a large part of oilproduction and upstream activities, including

imports of crude oil and refining. Similarly, theEgyptian Natural Gas Holding Company, runby the government, manages not only the ex-ploration of natural gas, but also other aspectsof the natural gas industry, including the useof liquefied natural gas. The government is in-volved heavily in downstream activities as well.In terms of sales of gasoline, the government-run Misr Petroleum controls 33.5 percent ofthe Egyptian market, and another 30 percentis controlled by Petroleum Cooperative Soci-

ety, an arm of the Egyptian General PetroleumCorporation.49

Although some progress has been made inreducing trade barriers in the region, fully inte-grated markets do not yet exist in the MiddleEast and North Africa. On its own, the Egyp-tian government can nonetheless facilitatetrade integration by removing the most directbarriers. For instance, because of its compli-cated border clearance procedures, the countryranks poorly on the World Banks Logistics Per-

formance Index (92nd in the world), a survey-based assessment of trade logistics around theworld. On the same survey, Algeria ranks 130th,Libya 132nd, Syria 80th, and Yemen 101st.

These examples are mere illustrations of theinstitutional and regulatory features that ham-per competition, thus favoring government-owned incumbent companies over new entrants.As a result, privatization in the Middle East andNorth Africa should not be considered in isola-

tion but rather as a part of a broader package oliberalizing reforms that will enhance competi-tion by cutting red tape and unnecessary regula-tion and opening the economies to foreign tradeand investment.

CONCLUSION

It is a mistake to think that economic re-forms can wait until Middle Eastern countriesaddress their internal political and economicproblems. There are not many examples ocountries that have transitioned successfullyto a representative constitutional governmentwhile maintaining economic rules that denyopportunity to large segments of the popula

tion. State ownership, accompanied by regulations that favor existing state-owned incumbents, are a critical part of the problem facingcountries in the MENA region, most notablyEgypt, Libya, Algeria, Syria, and Yemen.

In order to address this problem, privatization has to cease being a dirty word, and policymakers in the region have to start envisagingways in which the ownership of the public sector could be transferred to private hands. Thechoice of privatization methods will be crucia

not only for the economic success of privatization in producing superior economic outcomesbut also for its popularity among the generapopulation. In order to avoid the backlash seenin Egypt, privatization needs to beand beperceived asfair, transparent, and open to alarge spectrum of potential bidders, and not as aprocess that enables government cronies to become rich. The privatization process also oughto be open to foreign investors, in part becauseof the large potential gains in terms of transfers

of know-how, technology, and access to overseamarkets. In countries with very large public sectors facing potential reform reversals, policy-makers ought also to consider options for massprivatization, which emulate and improve uponthe best practice by Central and Eastern Euro-pean countries in the 1990s. If governments inthe region are serious about creating mass prosperity, reducing the role of public ownershipshould be one of their priorities.


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The Egyptimilitarycontrols a

large netwoof manufac-turing andservice companies.

APPENDIX: STATE OWNERSHIP

IN SELECTED COUNTRIES OF

MIDDLE EAST AND NORTH AFRICA

Algeria

According to some estimates, roughlytwo-thirds of the Algerian economy is state-owned.50 The countrys sizeable oil and gassector is dominated by the state-run, verticallyintegrated oil and gas company Sonatrach,which controls a dominant part of oil and gasproduction. Sonatrach owns the leading distri-bution company, Naftal, with some 10,000 gasstations in the country.51Algerias financial sec-tor, telecom, and air transport are dominatedby the state, and prospects for privatization

seem uncertain. Throughout the 1990s and the2000s, Algeria undertook only very minimalprivatization efforts.52

Egypt

Similarly, Egypt has a long tradition ofgovernment ownership. Between 1952 and1956, most of Egypts industry, manufactur-ing, trade, and services was nationalized. Statecontrol of foreign trade and progressive taxa-tion were introduced and the property of the

six hundred wealthiest families was seized. In1952, a land reform was introduced, which ex-propriated large land owners and introducedcollectivized organization of agriculture. Gov-ernment ownership of the industry and ac-tive industrial policy persisted until the early1990s, when a series of liberalizing reformswere undertakenalthough many of the fea-tures of the traditional, state-heavy modelhave persisted until the present.

In the oil and gas sector, the Egyptian Gen-

eral Petroleum Corporation (EGPC) controlsupstream oil exploration and production,which accounts for 20 percent of Egypts oiloutput and 86 percent of refining capacityaswell as a large part of the downstream oil sec-tor, dominated by EGPCs subsidiaries.53Simi-larly, the state-run Egyptian Electricity Hold-ing Company (EEHC) controls the electricitymarket and the largely state-owned TelecomEgypt the fixed-line telephony market. Fi-

nancial services are dominated by large state-owned banks: BNE, Banque Misr, Banque duCaire, and by two state-run insurance compa-nies. Besides utilities, such as water manage-ment, the government is also involved in trans-

portation, owning both the national railwaycompany and the national airliner, Egypt Air.

Furthermore, the government is also in-volved in manufacturingprominent examplesinclude the Misr Spinning and Weaving Com-pany, established in 1927 as the first mechanizedtextile company owned by Muslim Egyptians.54Anecdotal evidence suggests that the Egyptianmilitary controls a large network of manufac-turing and service companies, but specific esti-mates of the magnitude of military ownership

in the economy are wildly divergent, rangingfrom 5 to 40 percent of the countrys GDP.55

Although a large part of the Egyptianeconomy is state-run, the government in the1990s and 2000s pursued a substantial priva-tization agenda. The initial privatization pro-cess in the second half of the 1990s pertainedmostly to smaller manufacturing enterprises.In the 2000s, several large privatization dealswere made, including the privatization of largecement companies, 20 percent of the shares

of Telecom Egypt, a partial privatization ofBank of Alexandria and of Commercial In-ternational Bank, as well as numerous manu-facturing enterprises. Orascom, the largestprivate company in Egypt, controlled by theentrepreneur Naguib Sawiris, gained controlof parts of Egypts transportation infrastruc-ture, communications, and energy. The com-pany, started as a family business, has beencalled undoubtedly the largest and most im-pressive of MENAs success stories, with a

presence across the region and with stocks ofits communications subsidiary traded on theLondon Stock Exchange.56The privatizationprocess in the late 2000s, promoted by Presi-dent Hosni Mubaraks son, Gamal, proved tobe unpopular, particularly due to allegationsof corruption and cronyism, through whichpeople close to the regime gained controlof assets worth much more than their salesprices. According to Magda Kandil, the head


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Libyas privateeconomy isdwarfed by

its enormousoil and gassector, whichaccounts forroughly80 percent ofthe countrysGDP.

of the Egyptian Center for Economic Studies,the sale prices might have amounted to only 10percent of the underlying value of privatizedassets.57

LibyaLibyas private economy is dwarfed by its

enormous oil and gas sector, which is run bythe government and accounts for roughly 80percent of the countrys GDP and 95 percentof its export earnings.58Other than oil and gas,Libya has an extremely underdeveloped pri-vate sector, with most of the investment in theeconomy coming from the government andheavily dependent on oil revenue. The manu-facturing industry and services have seen

negative rates of productivity growth since the1990s.59Unsurprisingly, the countrys bankingsector is dominated by state banks,60in spiteof dilutions of state ownership in some of thestate-owned banks in the final years of Qad-dafis rule.61

Syria

Since the ascent of the Baath Party and thewave of nationalization in the 1960s, Syria hashad a long-standing tradition of government in-

volvement in the economy. Syria has long beena planned economy that followed the strategyof import substitution. For practical purposes,that meant industrial planning and tariff andregulatory protection against foreign compe-tition. According to some estimates, prior tothe civil war the public sector accounted for 30percent of Syrian GDP but employed 75 per-cent of the labor force.62 State-run companiesinclude those in Syrias oil and gas sector, whichhas been state-run since 1964 and remains an

important source of government revenue. Thisis dominated by the General Petroleum Com-pany (GPC) and the Al Furat Petroleum Com-pany (AFPC) in the upstream sector; GPCowns 50 percent of AFPC, with the remaindercontrolled by foreign investors, including RoyalDutch Shell. Also, Sytrol, another government-run company, is responsible for selling Syriascrude oil exports on the international market.63The Public Establishment for Electricity Gen-

eration and Transmission (PEEGT) is a verti-cally integrated electricity supplier, whereasPublic Establishment for Distribution andExploitation of Electrical Energy (PEDEEEdirects the sales and distribution. The banking

sector is dominated by state-owned institutions, most prominently the Commercial Bankof Syria, the Agricultural Cooperative BankReal Estate Bank, Popular Credit Bank, Savings Bank, and Industrial Bank.64Although thecountry does have private providers of mobiletelecommunications, the fixed-line telephonyis run by Syrian Telecom, a government monopoly.

Yemen

Yemen, too, has a sizeable state-run sectorwith government-operated monopolies in electricity (PEC), water supply, oil and gas (YPC)and telecommunications (YTC). Although thethrust of government revenue (up to 60 percent, according to some estimates65) comefrom oil and gas, the government also has astrong presence in manufacturing and retailThe Yemen Economic Corporation (YEC) isactive in construction, food processing, transportation, logistics, IT, pharmaceuticals, tour

ism, and other areas. Some of the companieswith state presence also have private partners(e.g., Yemen Bank for Reconstruction and Development or the Yemen Drug Company).66

The only large privatization was the partiadivestiture of the government share in YemenMobile, a mobile phone operator, in 2006.

NOTES

1. The absolute size of government investment

is obtained by subtracting Gross Fixed CapitaFormation by Private Sector from Gross CapitaFormation. These indicators are available fromthe World Bank, World Bank Development Indica-tors(Washington: World Bank, 2014), http://data

worldbank.org/data-catalog/world-developmentindicators.

2. As an example, see Daron Acemoglu and JameA. Robinson, Why Nations Fail: The Origins of Pow


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er, Prosperity, and Poverty(New York: Crown Pub-lishers, 2012).

3. For more information about the database, seeLuke Haggarty and Mary M. Shirley, A New Data

Base on State-Owned Enterprises, World BankEconomic Review11, no. 3 (1997): 491513.

4. Economists Aldo Musacchio and Sergio Lazza-rini note a broader problem, namely that whether

we regard them as benign or pernicious, we knowvery little about those new forms of governmentintervention: the various institutional mecha-nisms by which states exercise control, why statecapitalism reemerged and in which form, and itseffects on both firm performance and state gov-

ernance. See Aldo Musacchio and Sergio G. La-zzarini, Leviathan in Business: Varieties of StateCapitalism and their Implications for EconomicPerformance, Harvard Business School WorkingPaper 12-108 (June 2012), http://www.hbs.edu/faculty/Publication%20Files/12-108.pdf.

5. The causal relationship goes both ways: largergovernment-owned capital stocks will also re-quire more government investment in order to besustained.

6. Abderrahmane Semmar, Corporate Gover-nance of State-Owned Enterprises in Morocco:Evolution and Perspectives, in Towards New Ar-rangements for State Ownership in the Middle East and

North Africa (Paris: OECD Publishing, 2012), p.159, http://www.oecd.org/corporate/ca/corporate

governanceofstate-ownedenterprises/50087769.pdf.

7. European Bank for Reconstruction and Devel-

opment, Country Assessment: Morocco (September12, 2012), p. 14, http://www.ebrd.com/downloads/country/technical_assessments/morocco-assess.pdf.

8. Semmar, Corporate Governance of State-Owned Enterprises in Morocco, p. 152.

9. European Bank for Reconstruction and Devel-opment, Country Assessment: Tunisia (September

12, 2012), http://www.ebrd.com/downloads/country/technical_assessments/tunisia-assess.pdf.

10. See also European Bank for Reconstructionand Development, Jordans Request for Country of

Operations Status Technical Assessment (September17, 2011), http://www.ebrd.com/downloads/country/technical_assessments/2012-02-13_Jordan_TA.pdf.

11. For a review of 20th-century economistschanging perspectives on state and private own-ership, see Andrei Shleifer, State versus PrivateOwnership,Journal of Economic Perspectives12, no.4 (1998): 13350.

12. John R. Nellis, Public Enterprises in Sub-Saharan Africa, in World Bank Discussion Paperno.1 (Washington: World Bank, 1986), p. 17.

13. William L. Megginson, Robert C. Nash, andMatthias van Randenborgh, The Financial andOperating Performance of Newly PrivatizedFirms: An International Empirical Analysis,Jour-nal of Finance49, no. 2 (1994): 40352.

14. William L. Megginson and Jeffry M. Net-

ter, From State to Market: A Survey of EmpiricalStudies on Privatization,Journal of Economic Lit-erature 39, no. 2 (2001): 32189.

15. See Oleh Havrylyshyn and Donal McGetti-gan, Privatization in Transition Countries,Post-Soviet Affairs 16, no. 3 (2000): 25786; and SimeonDjankov and Peter Murrell, Enterprise Restruc-turing in Transition: A Quantitative Survey,Jour-nal of Economic Literature40, no. 3 (2002): 73992.

16. Clifford Zinnes, Yair Eilat, and Jeffrey Sachs,The Gains from Privatization in TransitionEconomies: Is Change of Ownership Enough?IMF Staff Papers48, special issue (2001).

17. John Nellis, Time To Rethink Privatization inTransition Economies? (Washington: World Bank,1999), p. ix.

18. Gladstone Hutchinson, Efficiency Gains


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through Privatization of UK Industries, inPrivatization and Economic Efficiency: A Compara-

tive Analysis of Developed and Developing Countries,Keith Hartley and Attiat F. Ott, eds. (Aldershot,UK: Edward Elgar, 1991).

19. Matthew Bishop and David Thompson, Reg-ulatory Reform and Productivity Growth in theUKs Public Utilities, Applied Economics 24, no.11 (1992): 118190; Jonathan Haskel and StefanSzymanski, Privatization, Liberalization, Wagesand Employment: Theory and Evidence fromthe UKEconomica60, no. 238 (1993): 16181; andDavid Parker and Stephen Martin, The Impactof UK Privatisation on Labour and Total FactorProductivity, Scottish Journal of Political Economy

42, no. 2 (1995): 20120.

20. David Parker and Hsueh-liang Wu, Privati-sation and Performance: A Study of British SteelIndustry under Public and Private Ownership,Economic Issues3, no. 2 (1998): 3150.

21. David Parker, The UKs Privatisation Experi-ment: The Passage of Time Permits a Sober Assessment,CESifo Working Paper 1126, p. 21, http://www.cesifo-group.de/portal/pls/portal/docs/1/1189348.

PDF.

22. John Nellis, Rachel Menezes, and Sarah Lu-cas,Privatization in Latin America: The Rapid Rise,Recent Fall and Continuing Puzzle of a Contentious

Economic Policy (Washington: Center for GlobalDevelopment,2004), http://www.cgdev.org/publication/privatization-latin-america-rapid-rise-recent-fall-and-continuing-puzzle-contentious.

23. Ibid.

24. Alberto Chong and Florencio Lopez de Si-lanes, The Truth about Privatization in Latin Amer-ica (Washington: Inter-American DevelopmentBank, 2003), http://www.iadb.org/res/publications/pubfiles/pubr-486.pdf.

25. Luigi Manzetti, Market Reforms WithoutTransparency, in Combating Corruption in LatinAmerica, Joseph S. Tulchin and Ralph H. Espach,

eds. (Washington: Wodrow Wilson Center Press2000), p. 54.

26. Nellis, Menezes, and Lucas, p. 4.

27. See Sebastian Galiani, Paul Gertler, and Er-nesto Schargrodsky, Water for Life: The Impactof the Privatization of Water Services on ChildMortality, Journal of Political Economy 113, no. 1(2005): 83120.

28. Alan R. Roe, The Egyptian Banking System: Liberalization, Competition, and Privatization, WorkingPaper 28 (Cairo: Egyptian Center for EconomicStudies, 1998).

29. Nada Kobeissi, Ownership Structure and BankPerformance: Evidence from the Middle East and

North Africa, Working Paper 0413 (Cairo: Eco-nomic Research Forum, 2004).

30. Sunil S. Poshakwale and Binsheng QianCompetitiveness and Efficiency of the BankingSector and Economic Growth in Egypt, AfricanDevelopment Review23, no. 1 (2011): 99120.

31. Mahmoud Mohieldin and Sahar Nasr, On

Bank Privatization: The Case of Egypt, Quarterly Review of Economics and Finance 46 (2007)70725.

32. Subika Farazi, Erik Feyen, and Roberto RochaBank Ownership and Performance in the MiddleEast and North Africa Region, Policy ResearchWorking Paper 5620 (Washington: World Bank2011).

33. Ibid.

34. Mustapha K. Nabli, Jennifer Keller, Claudia Nassif, and Carlos Silva-Juregui, The Political Economy of Industrial Policy in the Middle East

and North Africa, Working Paper No. 110 (CairoEgyptian Center for Economic Studies, 2006).

35. Andrei Shleifer and Robert W. Vishny, Poli-ticians and Firms, Quarterly Journal of Economics109, no. 4 (1994): 995102.


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36. Isabelle Werenfels, Obstacles to Privatisa-tion of State-Owned Industries in Algeria: thePolitical Economy of a Distributive Conflict,Journal of North African Studies7, no. 1 (2002): 128.

37. See Towards New Arrangements for State Own-ership in the Middle East and North Africa (Paris:OECD, 2012), http://www.oecd-ilibrary.org/docserver/download/2612021e.pdf?expires=1383936948&id=id&accname=guest&checksum=A3C11FC1101D43323FD11AD960EB7509.

38. This general result is known as the CoaseTheorem, after Nobel Prizewinning economistRonald Coase. See Ronald H. Coase, The Prob-lem of Social Cost,Journal of Law and Economics

3, no. 1 (1960): 144.

39. Simeon Djankov, The Restructuring of In-sider-Dominated firms: A Comparative Analy-sis,Economics of Transition7, no. 2 (1999): 46779.

40. Josef Kotrba and Jan Svejnar,Rapid and Multi-faceted Privatization. Experience of Czech and Slovak

Republics(Prague: CERGE-EI, 1993).

41. Eva Kreuzbergov, Dismantling Banking So-

cialism in the Czech Republic, Public Policy andForward Studies006 (Prague: Charles University,2006), p. 7.

42. David Stuckler, Lawrence King, and MartinMcKee, Mass Privatisation and the Post-Com-munist Mortality Crisis: a Cross-National Analy-sis,Lancet373, no. 9661 (2009): 399407.

43. John S. Earle and Scott Gehlbach, Did MassPrivatisation Really Increase Post-Communist

Mortality? Lancet 375, no. 9712 (2010): 372; andChristopher Gerry, Tomasz M. Mickiewicz andZlatko Nikoloski, Did Mass Privatisation ReallyIncrease Post-Communist Male Mortality?Lan-cet375, no. 9712 (2010): 371.

44. International Finance Corporation, Easeof Doing Business in Yemen, Rep., http://www.doingbusiness.org/data/exploreeconomies/

yemen/#starting-a-business.

45. International Finance Corporation, Ease ofDoing Business in Algeria, http://www.doingbusiness.org/data/exploreeconomies/algeria/#starting-a-business.

46. Hernando de Soto, Egypts Economic Apart-heid, Wall Street Journal, February 3, 2011, http://online.wsj.com/news/articles/SB10001424052748704358704576118683913032882.

47. Worse yet, there has been an informal discus-sion of self-sufficiency in cereal production. SeeMarwa Hussein, From Liberalisation to Self-Suf-ficiency: Egypt Charts a New Agricultural Policy,Ahram Online, April 28, 2011, http://english.ahram.org.eg/NewsContent/3/12/10957/Business/Econo

my/From-liberalisation-to-selfsufficiency-Egypt-chart.aspx.

48. See a recent report by the UK government,Does Trade Improve Food Security? Trade and In-vestment Analytical Paper Series, Department forBusiness Innovation and Skills and Departmentfor International Development (2013), http://

www.gov.uk/gover nment/up loads/ system/uploads/attachment_data/file/69975/bis-13-593-can-trade-improve-food-security.pdf.

49. Market Survey Egypt: Oil and Gas (Hague:Dutch Ministry of Economic Affairs, 2009),http://www.agentschapnl.nl/sites/default/files/bijlagen/Marktverkenning%20Olie%20&%20Gas%20Egypte.pdf.

50. U.S. Department of State, Investment ClimateStatementAlgeria (Washington: Bureau of Eco-nomic and Business Affairs, 2013), http://www.state.gov/e/eb/rls/othr/ics/2013/204588.htm.

51. U.S. Energy Information Administration,Alge-ria: Country Analysis(May 20, 2013), http://www.eia.gov/countries/country-data.cfm?fips=AG&trk=m.

52. U.S. Department of State, Investment ClimateStatementAlgeria.

53. European Bank for Reconstruction and De-velopment,Egypts Request for Country of Operations


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22

Status Technical Assessment (September, 27, 2011),http://www.ebrd.com/downloads/country/technical_assessments/2012-02-13_Egypt_TA.pdf.

54. Joel Beinin, Workers and Peasants in the Modern

Middle East (Cambridge: Cambridge UniversityPress, 2001), p. 103.

55. Shana Marshall and Joshua Stacher, EgyptsGenerals and Transnational Capital, Middle EastReport 42, no. 262 (2012), http://www.merip.org/mer/mer262/egypts-generals-transnational-capital.

56. World Bank, From Privilege to Competition:Unlocking Private-Led Growth in the Middle East

and North Africa, MENA Development Report

(Washington: World Bank, 2009), pp. 2728.

57. Quoted in James V. Grimaldi and RobertOHarrow Jr., In Egypt, Corruption Cases Hadan American Root, Washington Post, October 21,2011.

58. Central Intelligence Agency, The WorldFactbook: Libya https://www.cia.gov/library/publications/the-world-factbook/geos/ly.html.

59. World Bank, Socialist Peoples Libyan Arab Ja-mahiriya Country Economic Report, Report No.30295-LY (Washington: World Bank, 2006), p. ii,http://siteresources.worldbank.org/INTLIBYA/Resources/libyacountryeconomicreport.pdf.

60. Isaac Mireles, Shelly Ogilvie, and Rona Shed-id,Libya, Financial Institutions Center, WhartonBusiness School, University of Pennsylvania, 2008,

http://fic.wharton.upenn.edu/fic/africa/Libya%20Final.pdf.

61. Wikileaks, 110 Libyan Companies PrivatizedHead of Libyan Privatization Authority Reports

on Continued Progress, U.S. Embassy, Tripol(November 19, 2009), http://www.wikileaks.orgplusd/cables/09TRIPOLI925_a.html.

62. Anna Galdo,Policies for Business in the Mediterranean Countries: The Syrian Arab Republic, Centrefor Administrative Innovation in the Euro-Med-iterranean Region (2005), http://unpan1.un.orgintradoc/groups/public/documents/caimed/unpan018700.pdf.

63. Foundation for Defense of Democracies, Syrias Energy Sector: Its Importance in Sanctioning the

Assad Regime and Supporting Pro-DemocracyReformers (Washington: FDD Press, 2011), http://wwwdefenddemocracy.org/stuff/uploads/documentsInitial_Findings_Syrias_Energy_Sector.pdf.

64. Andrew Cunningham, Deconstructing theSyrian Banking System, Middle East EconomicSurvey (August 19, 2013), http://www.mees.comen/articles/8268-deconstructing-the-syrian-

banking-system.

65. U.S. Energy Information Administration, Yemen: Country Analysis(September 19), 2013, http:/www.eia.gov/countries/cab.cfm?fips=YM.

66. U.S. Department of State, Investment ClimateYemen (June 2012), http://www.state.gov/eeb/rls/othr/ics/2012/191265.htm.


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