M o h a m e d Yo u s s e f Policy and Coordination Specialist The Social Fund for Development, Egypt. [email protected] P O L I C Y A N A LY S I S A N D T H E R O L E O F T H E S TAT E I N PROMOTING ENTREPRENEURSHIP IN POST REVOLUTION EGYPT

Summary: After the January 25, 2011 Revolution in Egypt and despite the success of ousting a corrupt regime, the prolongation of the political transitional period has affected negatively the economic reform agenda. It was more of a response to public demands than having an economic vision that the current government now is trying to focus on entrepreneurship as way to induce economic growth. However, entrepreneurship cannot be, on the abstract, be taken as the answer to economic growth. Literature suggests that this could only take place provided the presence of conducive institutional, political and business environment that could direct private sector activities toward innovative, formal and “productive entrepreneurship”. Using Egypt as a case, the paper validates the hypothesis suggested by literature that the changing role of public policy is integral in determining the productivity path of entrepreneurship through its effect on institutions that shape the business climate.

Keywords: Egypt, Entrepreneurship, SMEs, Policy. Institutions.

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INTRODUCTION The 1990s marked the ascendance of entrepreneurship to the fore of the economic policy agenda. Entrepreneurship has grown to be an important focus for public policy worldwide due to its linkage to employment and economic growth. “The view that entrepreneurship is increasingly viewed to be the engine of economic growth and employment creation spans a broad spectrum of national but also regional and local contexts” (Audretsch, et al. 2007, p. 1). Despite the recognized importance of entrepreneurship, there has been relatively little empirical analysis of the role played by the government-policy environment (Georgellis and Wall 2006). Furthermore, “A premise underlying many studies (usually implicitly) is that more entrepreneurship is always better. This is not necessarily true, according to most definitions of entrepreneurship” (Henrekson 2007, p. 719). The determinants of whether entrepreneurship could contribute to GDP growth rates, relies heavily on the well functioning of the institutional and policy set-up (political-economy), and on how conducive it is. “…entrepreneurship can only be meaningfully analysed within a well-defined institutional context” (Henrekson 2007, p. 719). Related to this, is the effect that the overall economic reform measures could have on moving entrepreneurship activities to high total factor productivity, and high-value added. “Productivity is an important element. Only a highproductivity economy can promise all or most working-age persons a range of careers at high wage rates” (Phelps, 2003, p. 1). Within that context that Egypt presents itself as a worthy case study. Egypt failed to address unemployment and poverty challenges through its adoption of small business strategies before the revolution of January 25, 2011, despite the impressive macro-economic performance from 2004 to 2008. With the high expectations of the public following the revolution, it is imperative to conduct a rigorous analysis of the possible binding constraints to entrepreneurship promotion, in order to identify the needed corrective policy actions.

Most analysts agree that the direct reasons for the spark of the revolution are political in nature, but the economic situation under the corrupted Mubarak regime had a big influence as well. The persisting high unemployment and poverty rates, the deterioration of health services, and education system were all contributing reasons for the uprising. Despite the removal of a corrupt regime, the prolongation of the political transitional period has affected negatively the economic reform agenda, bringing it to halt. Coupled with the populist demands, the several governments following the outset of Mubarak’s government have failed to deliver a sound direction in terms of economic growth policies. Despite the massive 2

political changes, it seems that the economy was forgotten. It was more of a response to public demands than having an economic vision that the current government now is seeking to create employment through developing the SME sector, and promoting entrepreneurship. However, “Entrepreneurship cannot uncritically be taken as the answer to the quest for economic growth” (Douhan and Henrekson 2007, 21). Literature suggests that this could only take place provided the presence of conducive institutional, political and business environment that could direct private sector activities toward innovative, formal and “productive entrepreneurship” (W. J. Baumol 1983). Thus, for Egypt to realize the benefits of entrepreneurship in offsetting the negative effects of the current high unemployment rate of 12.4% (Ministry of Finance 2012), there has to be an analysis of entrepreneurship within the context of the overall the institutional and political set-ups. The situation in Egypt is similar to what is described by Douhan and Herekson (2007) that “Democratic institutions may have prevailed on the surface of things but underneath, a former elite can still continue to influence the de facto institutions” (Douhan and Henrekson 2007, 9). This kind of complex interlinkage between social, political and economical factors in shaping the institutional setup is existent in the Egypt case and has direct effects on the business environment, and thus entrepreneurship (Moustafa 2007, Alissa 2007). In that respect, analysing Egyptian entrepreneurship should encompass a deeper approach through utilizing “knowledge of and in the decision processes of the public and civic order” rather than just suggesting entrepreneurship policy measures and programmes (Lasswell, 1971; Audretsch et al., 2007). “…a political-economy approach is important in order to understand how the political system shapes the institutional setup” (Douhan and Henrekson 2007, 21). It is against this backdrop of political-economy analysis that this paper is based on. The paper validates the hypothesis suggested by literature that the changing role of public policy is integral in determining the productivity path of entrepreneurship through its effect on institutions that shape the business climate.

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METHODOLOGY AND MOTIVATION The methodology used, relies mainly on secondary data obtained from the literature review of entrepreneurship policies frameworks, role of institutions in promoting ‘productive’ entrepreneurship, and policy processes models. Where appropriate, the Growth Diagnostic Tree framework developed by Hausmann, Pritchett and Rodrik (2004) is used in identifying the binding constraints to growth. In validation, The Global Competitiveness Report is used to validate Egypt’s institutional features, namely; property rights (rule of law), size of state sector and corruption (Schwab 2010). Also, the World Bank’s “Doing Business Report” is used to identify the legal and regulatory barriers for business entry (World Bank 2007, World Bank 2009, World Bank 2012). The entrepreneurial behaviour of Egyptians and the assessment of the entrepreneurial framework conditions are taken from the Global Entrepreneurship Monitor-Egypt (GEM) report for the year 2008 (Hattab, 2008; Bosma et al., 2009). As it was the first donor project in Egypt utilizing evidence based research in formulating and implementing policies targeting the SME sector, the evaluations of the Small and Medium Enterprises Policy Project (SMEPol) and the contextual lessons learned from it are utilized in several sections (Court and Osborne 2006). Finally, the main parts of the overall context of the political, economical and institutional set-ups in Egypt are excerpted from various literatures, but relies heavily on the comprehensive report published by the Carnegie Middle East Center titled “The political economy of reform in Egypt: Understanding the role of institutions” (Alissa 2007).

The motivation for writing the paper stems from several factors. First, the economic situation in Egypt and despite the revolution, faces severe socio-economic challenges arising from the chronic high unemployment and poverty rates. In order to address these challenges through entrepreneurship promotion a rigorous assessment of the institutional situation is imperative. Second, the role of policy analysis in changing the institutional set-up is an area of study that is deficient in the Egyptian context and through my years of experience and as an observer, believes that this holds the answer to most socio-economic problems faced by Egypt. Particularly in private sector development, the remedies that were proposed through years of observation proved to be short termed unsustainable solutions. This study comes in a critical timing, with a transition to democracy. Most policies now, if existed, are put with the complete disregard of the negative externalities this might cause for the private sector, especially nascent entrepreneurs. On the other hand, donors and international organizations working in Egypt concentrate on entrepreneurship programs, without focusing on the deep4

rooted institutional problems affecting the business climate. Policies could be described in Egypt to be experimental in nature, and emerging from needs or pressures rather than being based on theoretical design. “Entrepreneurship is an economic phenomenon worthy of attention from those who worry about economic growth and particularly from those charged with sustaining that growth” (Hart 2002, 3-4). In Addition, “Entrepreneurship ought to be an explicit focus of policy design, choice, and implementation. Analysts can and should do a much better job of assisting policy-makers in making it so” (Hart 2002, 4) LITERATURE REVIEW Entrepreneurship Policy Post WWII period, private sector public policy took different formats influenced by the shifts of world dominating economic policy debates (Audretsch and Beckmann 2007, 37). Though entrepreneurship policy is a subset of private sector development policies, it only began to gain importance in the 1990s (Audretsch and Beckmann 2007, 40, Hoffmann 2007, Stevenson and Lundstrom 2007). Its emergence was a response to the low economic growth and high unemployment rates that hit Europe during the period (Audretsch and Beckmann 2007). Indeed, entrepreneurship policy as a term appeared after the failure of the development schemes of the “capital-driven Solow economy” and the “Romer model”, pushing for investment into knowledge capital, in facing the challenges caused by globalization, namely; economic growth and employment (Audretsch and Beckmann 2007, 40-41, Romer 1986, Solow 1970). On research level, the interest in policies directed toward promoting entrepreneurship could be traced to the early 1980s, Thus as Hoffmann (2007) describes it and all scholars agree in many instances (Audretsch et al., 2007; Stevenson & Lundstrom, 2007), “The field of linking policies to entrepreneurship is new and no agreed methodology exists” (Hoffmann 2007, 140). David Birch (1979, 1987) was among early scholars who proved empirically that the majority of jobs in the United States are created through fast growing small businesses (Birch 1979, Birch 1989). Birch’s (1979) data and analysis for the period 1969-1976 in the United States showed that 82% of the net new jobs, were created in the small firms’ sector (Birch 1979). This ran in contradiction to the prevailing economic thinking of governments at the time, making his research most influential in “policy thinking” (Stevenson and Lundstrom 2007, 103). Storey (1994) took these further and investigated programs that aimed to push the

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unemployed to start their own businesses, making clear a distinction between pull and push factors when designing policies aimed at increasing levels of entrepreneurship. In Storey and Tether (1998) they examined five policy measures and programmes between the periods 1980-early 1990 that took place in European Union countries and where directed toward New Technology-Based Firms (NTBFs) (Storey and Tether 1998). In conclusion, as he stressed in later studies, the difficulty to evaluate such programmes implemented by governments, is the “…opaque nature of targets and the difficulty of translating these [programmes] into identifiable measures” (D. Storey 2003, Greene and Storey 2007, 231). As an implication to this, Storey (2002) recommended that policies should be within context and aiming for macroeconomic policy objectives in order to have an effect (D. Storey 2002). This wide acceptance that emerged in the 1990s of the positive link between entrepreneurship and economic growth, based on classic theoretical and new empirical evidences (Schumpeter 1934, Schumpeter 1950, I. Kirzner 1973, W. Baumol 1968, Carree and Thurik 1999, Carree and Thurik 2003), had spurred a diffused global interest in entrepreneurship rendering it the new “buzz word”. Strands of literature ranging from constructing “theoretical frameworks”, to focusing on specific policy issues came forward as a result of this renewed significance of entrepreneurship in the late 90s and early 2000, despite the existence of mixed views on its link to economic growth (Hoffmann 2007, 140). This was made possible after “A series of significant breakthroughs and recent developments has accelerated the knowledge base on entrepreneurship, making policymaking in the area more possible” (Lundstrom and Stevenson 2005, 14). These were identified by Lundstrom and Stevenson (2005) to be; the improvement in SME statistical data, ability to measure levels of entrepreneurship across countries and the behaviour of “nascent entrepreneurs”, having best practices studies on entrepreneurship policies and programmes, and finally the increase in knowledge sharing venues (Lundstrom and Stevenson 2005). These breakthroughs are manifested in the pioneering Global Entrepreneurship Monitor (Reynolds et al., 1999), published annually since 1999, making it one of the most relied upon reports by researchers in determining the Total Entrepreneurial Activity (TEA), including relationship with GDP growth of countries, and policy implications (Lundstrom and Stevenson 2005). These developments could explain the multitude of research studies and entrepreneurship policy “handbooks” that sprung beginning of the year 2000. Most influential of these studies are the individual theoretical and empirical works of Audretsch (2007), Thurik (2007), Wennekers (1997), and van Stel (2005), 6

as well as their joint work together and with other significant authors, either as writers in their co-authored “handbooks” or separate (Audretsch 2007, Thurik 2007, A. Wennekers 1997, van Stel 2005). In linking policies to entrepreneurship, Audretsch et al. (2007) had comprehensively constructed a theoretical framework that “…explains the level of entrepreneurship by making a distinction between the supply side of entrepreneurship (labor market perspective, where the capabilities are the outcome) and the demand side of entrepreneurship (product market perspective, where the carrying capacity of the market in terms of business opportunities is the outcome)” (Audretsch et al. 2007, p. 3). The framework was a result of relying on previous works of Verheul et al. (2002), where the role of government was examined and how policy influences levels of entrepreneurship using an “eclectic” approach (Verheul et al., 2002). Findings from Wennekers et al. (2002), in which the variation in rate of entrepreneurship across countries was analyzed, were used in constructing the framework (Wennekers and Thurik 2002). Conclusions based on these research in addition to that of Audretsch

and

Thurik

(2001)

stresses

the

multi-dimensional

characteristic

of

entrepreneurship policy, as it embraces a “…broad spectrum of institutions, agencies and different constituency groups” (Audretsch et al., 2007). Lundstrom and Stevenson (2005) base their constructed conceptual model for entrepreneurship on the same premise (Figure 1), the multitude of variables that can affect the levels of entrepreneurship, and the challenge this causes in identifying effective policy measures (Lundstrom and Stevenson 2005). In that respect, Lundstrom and Stevenson (2005) suggest to start by “isolating the problems to be solved”, “define policy objectives”, “make selection of measures”, and “evaluation” (see Figure 1) (Lundstrom and Stevenson 2005). In the selection of measures step, Lundstrom and Stevenson (2005) short listed set of possible measures based on the types of problems. However, the steps suggested resembles in essence the linear policy process model, first introduced by (Lerner and Lasswel 1951), which was argued to be oversimplified, and not applicable to developing countries (Grindle and Thomas 1989).

Concurring to this,

(Audretsch and Thurik 2001) point out that “…the term ‘entrepreneurship policy’ is misleading in that it suggests a specific set of instruments are implemented by a restricted set of agencies affecting only a few enterprises or a particular industrial sector” (Audretsch et al., 2007). It follows from this, that entrepreneurship policy is about “how traditional policies and agencies need to be redirected from their traditional role” rather than about “specific new instruments or agencies” (Audretsch et al., 2007, p. 3). “Thus rather than focus on the 7

addition of entrepreneurship policies to the arsenal of public policy instruments, the debate should perhaps focus instead on the changing role of public policy in the entrepreneurial economy” (Audretsch et al. 2007, p. 3).

Source: Lundstrom and Stevenson (2005) The change in the role played by public policies in creating conducive environment for entrepreneurship, along with institutions and politics are proved to be vital for the overall economic dynamism. Phelps (2003) makes the argument that “the degree of dynamism in a nation's economy hinges on its development of some key economic institutions - company law and corporate governance, the population's preparation for business life, the development of financial instruments such as the stock market and so forth” (Phelps, 2003, p. 2). When applied to entrepreneurship policies, Hart (2002) makes the argument that “Public policy and governance can shape virtually all of the contextual determinants of the demand for entrepreneurship and, over a longer time scale, the supply of entrepreneurs as well” (Hart 2002, 8). Public policy and governance in Hart’s (2002) explanation respond to the role of government and role of support groups respectively. Furthermore, Hart (2002) makes the conclusion that “The knowledge and power linkages between policy process and policy content are likely to be particularly strong in the making of entrepreneurship policy” (Hart 2002, 289). This is due to the complex nature of entrepreneurship policy, which ultimately 8

requires knowledgeable policy-makers (Hart 2002). In such a set-up Hart (2002) suggests that the role of entrepreneurs is essential to transfer the required knowledge, as well as posing strong political power to influence policies, though the latter is less required by policymakers (Hart 2002). Within that context, Douhan and Henrekson (2007), and Henrekson (2007) propose a framework for entrepreneurship policy that is based on a political-economy analysis. In the framework proposed, institutions take a central role for success of policies. Institutions are where policies are implemented, thus ultimately create a business friendly environment, which corresponds to Baumol (1968, 1983, 1990, 1993) definition of productive entrepreneurship and his suggested operational model for entrepreneurship (Douhan and Henrekson 2007, Henrekson 2007, W. Baumol 1968, W. J. Baumol 1983, W. J. Baumol 1990, W. J. Baumol 1993).

Douhan and Henrekson (2007) have adopted a

framework for ‘analyzing the political economy of entrepreneurship’ including the role of institutions in shaping the entrepreneurs’ behavior and role of the “political entrepreneur”, which could be seen in Figure 2.

Following the definitions of the entrepreneur suggested by both Shumpeter (Schumpeter 1950)and Kirzner (I. M. Kirzner 1985), the entrepreneur ‘adapt to changing circumstances and renew itself through innovations’ (Douhan and Henrekson 2007, 2). This is done through making use of human capital (H), physical capital (K), and labour (L) resources (Douhan and Henrekson 2007, 2). The link represented by the number (1) is that of the entrepreneur using resources to create innovativeness. Without the inclusion of the entrepreneur the economy is deemed to be static (Douhan and Henrekson

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2007, 3). Link (2) and (4) represent an indirect link (4) of economic power influencing the political system, and a direct one from the entrepreneur (2) to the political system. Link (3) denotes how the political system ‘determines the formal institutions’, which in turn influences resources as represented by the dotted line (Douhan and Henrekson 2007, 3) Source: Douhan and Henrekson (2007)

It could be noticed that scholars have started recently to direct their interest to the “legal and political conditions that support entrepreneurial behaviour, and the wider ecosystem that serves to deter or reinforce risk-taking behaviour” (Hwang and Powell 2005, 180). This shift in analysing the institutional aspect of supporting entrepreneurship was influenced greatly by Douglas North’s (1990) institutional theory (D. North 1990). North (1990, 1997) where he differentiated between the effects of formal and informal institutions, maintaining that formal institutions are “…the underlying determinant of the long-run performance of economies” (D. North 1990, 107, D. North 1997). Making the same distinction between institutions, Baumol 1990, affirmed the formal institutional function in rendering higher-value-added types of entrepreneurial activity (W. J. Baumol 1990). Conforming to that premise, empirical research of Aidis et al. (2007a, 2007b, 2008) and Estrin et al. (2008) showed that weak ‘higher order institutions’ in addition to widespread corruption and weak property rights “drove entrepreneurship towards unproductive activities” (Aidis, et al. 2007a; Aidis et al., 2007b; Aidis et al., 2008; Estrin et al., 2008). That results in low level of market-based and high aspiration- entrepreneurship, and low public support for entrepreneurship, and that could be deterred by what Baumol (1990) suggests; “policy can influence the allocation of entrepreneurship more effectively that it can influence its supply” (W. J. Baumol 1990, 893). From the most important institutional features that affect entrepreneurship supply are; “rules, regulations, property rights and the legal environment” (Fogel, et al. 2008, Henrekson 2007, Douhan and Henrekson 2007, Hart 2002). Fogel et al. (2008) backed by the research of Acemoglu et al. (2005), and Morck et al. (2005) comes to the conclusion that though institutions are regarded as exogenous factor to entrepreneurship, government officials are “endogenous decision-makers, who alter the institutional environment based on political issues and self-interest” (Fogel et al., 2008, p. 572; Morck et al., 2005). That is why, as argued by Acemoglu et al. (2005) “…it is important to understand the role of policy and interventions in changing the institutional equilibrium” (Acemoglu et al., 2005). Policy analysis, in that respect, is imperatively necessary in analysing the political dynamics behind entrepreneurship policy and institutions affecting it. “The goals justifying policy intervention 10

(from poverty eradication in developing countries to comparative advantage creation and technological frontier advances in developed countries) are crucial in defining the most relevant dimensions of the variable here summarily called ‘entrepreneurship’” (Audretsch et al., 2007, p. 3). Policy Analysis Worldwide experience in social and economic development has provided concrete evidence that no solid progress can be achieved in these areas without the existence of an organized framework of policies and institutions (Thomas and Grindle 1990, 1163). A direct implication to that premise makes policy and institutional change a core requirement for long run economic growth and development. Douglass North (1990) asserts that the causes of development rely on the existence of incentive structure that allows individuals to invest, the very same structure which is determined by the institutional setup (D. North 1990). This led to wide research on institutions and the role of public policy analysis in reaching social and economic development, to the extent that policy analysis became one of the “…most rapidly developing fields in the social sciences over the past several decades” (Fischer et al., 2007, p. xix). The emergence of policy analysis as a discipline came to “understand the policy making process”, and aid policy-makers with “reliable policy-relevant knowledge about pressing economic and social problems” (Fischer et al., 2007, p. xix). However, the multitude of variables influencing the policy process makes it one of the most complicated fields of study (Sabatier P. A., 1999, p. 1; Bobrow & Dryzek, 1987; Torgerson, 1986; Fischer et al., 2007). In an attempt to untangle the complexity and systemically analyse the variables to reach a successful model to follow, several theories and models in the literature tried to explain and understand the dynamics of the policy process, its influences, and effects. “Designing ‘correct’ policies has been a focus point of national governments and international organizations over the past decade. This focus has culminated in an extensive literature on, and a theorizing of, the policy process” (Schouwstra and Ellman 2006, 1)

The shaping of policy analysis as an acknowledged field of study can be traced to Harold Lasswell’s early writings on the policy sciences in the 50s, especially his book with Lerner titled “The Policy Sciences”. (Deleon 1999, 18, Hajer and Wagenaar 2003, 6, Torgerson 2003, 101, Lerner and Lasswel 1951). Lasswell (1971) defines policy sciences as the “…knowledge of and in the decision processes of the public and civic order” (Lasswell 1971). In general terms, the approach is used to understand and solve problems using a 11

scientific rationality process, particularly to developmental problems faced by governments (Hoppe 1999, 201-202, Policy Sciences Center 2007). Lasswell’s attempt was to “gear the applied social sciences systematically and methodically to the needs of strategic public policy-making” (Hoppe 1999, 203). To fulfil that scope, Lasswell’s and policy sciences’ proponents regard the approach as characterized by “being problem-oriented”, “multidisciplinary”, and “deliberately normative or value oriented” (DeLeon and Vogenbeck 2007, 4-5). This is a result of the interdependence between science and politics in such an approach to problem solving. Lasswell’s writings, unlike his immediate successors, have emphasized the importance of contextuality in applying the social and decision processes in the policy making process, as well as regarding the policy sciences as means for democratization (Lasswell 1971). Accordingly, most of the research in the field of policy analysis is conceptualized from Lasswell’s pioneering writings.

Following Lasswell, the distinctive logical and methodological approach of policy analysis took a stronger stance in the late 50s and early 60s influenced by the positivist movement that dominated the period prior to World War II and after. “The most immediate influence on policy analysis, however, has perhaps been the impact on its methodological orientation of logical positivism” (Torgerson 1986, 35). This ran in opposition and limited the democratic orientation of the policy sciences that Laswell identified, to what could be referred to as a reductionist

approach

(DeLeon

and

Vogenbeck

2007).

“Discussions

of

policy

professionalism and democracy have since Lasswell’s time taken on a different tenor, rendering dubious his confidence in advancing the “policy sciences of democracy”” (Torgerson 2007, 15). Relying only on the sciences in rationalizing the policy making process was what defined the literature during the period. From the scholars who took that direction was Simon (1957) who saw that decisions, including policy decisions, are made through intended and bounded rationality caused by incomplete knowledge and the inflexibility of organizations where decisions are made (James and Lodge 2003, Simon 1957). Easton (1965) applied systems thinking and theory to political analysis, maintaining that political systems have to adapt to the surrounding environment to maintain stability (Easton 1965, Shafritz, Layne and Borick 2005). Lindblom (1959, 1979) scholarly work asserts that change in policies happen incrementally. In that regard, “Incremental policy-making is essentially remedial, it focuses on small changes to existing policies rather than fundamental changes” (Sutton 1999, 10). The policy analysis reductionist approach, of depending only on science in

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policy analysis, was soon to become under attack after its failure to achieve progress, which opened up new thinking in the 1970s and 1980s. “In the late 1970s and early 1980s, studies showed that empiricist policy research was used far less than anticipated” (Fischer et al., 2007, p. xx). This led to a counter stream of thought, which focused on the politics over knowledge in policy analysis, influenced by a neopositivist approach (Dryzek 1993). “In the first face of policy analysis, knowledge replaced politics; in the second, politics overwhelmed knowledge” (Torgerson 1986). The trend could be seen from the works of Meltsner (1972, p. 859, 1976) who was concerned with “political feasibility” of public policy in order to close the gap between what is desirable and what is possible. In reaching this, his scholarly works stressed the importance of mapping the “politics of policy” alternatives through “…identification of actors, their beliefs and motivations, resources, and the sites of their interactions” including those in the bureaucracy (Meltsner 1972, 859, Meltsner 1976). Relevant to that direction of the influences on policies through policy actors is Wildavsky’s book “Speaking Truth to Power: The Art and Craft of Policy Analysis”, where he argues that the use of knowledge and scientific methods in policy analysis is a deficient approach (Wildavsky 1979). Instead he stressed the importance of collective action and the role played by citizens in shaping policies (Wildavsky 1979). In Jenkins-Smith (1982) individual scholarly works and his joint works with Sabatier (1988) show an apparent emphasis on the need to separate facts from values in policy analysis (Sabatier and Jenkins-Smith 1993, Jenkins-Smith 1982, P. Sabatier 1988). Sabatier (1988) asserts that the role of policy analysis in decision-making can not be understood without focusing on “…the belief systems of advocacy coalitions within policy subsystems” (P. Sabatier 1988, 129). The analysis of the politics and actors in the policy process, the knowledge “of policy” or the causal links, was the main focus of the scholarly works of the 70s and 80s influenced by a neo-postivist approach in the social sciences (Hoppe 1999). However, the “Interaction and mutual understanding of action motives and meanings is a second knowledge interest”, which still yielded a shortage of knowledge in addressing social and economic problems (Hoppe 1999, 203, Torgerson 1986, Fischer, Miller and Sidney 2007). A convergence of approaches between technocratic and participatory where practicality and implementation takes precedence, emerged as the new “face” of the field (Torgerson 1986)

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The literature in the late 20th and early 21st centuries focused on a hybrid of theories, and saw conciliation between the usages of knowledge in policy analysis. Torgerson (1986) refers to it as the “third face”, and explained in Hoppe (1999) and Dryzek (1993) as “critical rationalism” and post-postivisim in the policy analysis (Hoppe 1999, Torgerson 1986, Dryzek 1993). The practical challenges to the field gave emergence to a “…normative emphasis that brings empirical and normative inquiry together” (Fischer et al., 2007, p. xx). From the main authors who adopted that direction are Frank Fischer and John Forester (1993) who argued that the field is moving toward a deliberative and argumentive turn (Fischer and Forester 1993). As Fischer (2003) puts it “Rather than altogether rejecting the empirical methods of the social sciences”, He argues that the issue is “…how to situate them within the context of normative concerns that give their findings meaning” (Fischer 2003, 210). Torgerson (2003) extends the argument asserting that such a hybrid is “…a potential means of democratization” following Lasswell’s (1971) premise (Torgerson 1986, Torgerson 2003, Torgerson 2007). Furthermore, Dryzek (1989) attempted, through using practical examples, to show that democratic politics and rational policymaking could be combined through “A policy science of strong participatory democracy” (Dryzek 1989, 97, Dryzek 1993). DeLeon (1992) called also for a ‘participatory policy analysis’ where there is an open discussion between citizens and policy-makers (DeLeon 1992). DeLeon (1999) evaluated the stages model in the policy process, first introduced by Lasswell (1951) and used extensively afterwards, to come to the conclusion that it might not been successful, but had helped moving the field forward (Deleon 1999). From that premise authors like Kingdon (1984) had enriched the stages model by analysing the influences on the agenda setting in the model (Kingdon 1984). On the implementation stage that was neglected during the 60s and 70s, Brinkerhoff (1996) was one of the scholars who directed the attention to its importance to gain governmental credibility (Brinkerhoff 1996). Recently the empirical works of Grindle (1999, 2002), and Grindle and Thomas (1989, 1991) in developing countries follow the same line of thought of the “…importance of problem formulation and practical judgment in understanding policy problems and finding policy solutions” and focusing on implementation (Hajer and Wagenaar 2003, 7, Grindle 2002, Grindle 1999, Grindle and Thomas 1989, Grindle and Thomas 1991). Grindle and Thomas (1989) introduced an analytic model “for understanding the role of decision makers in bringing about significant policy and institutional changes” (Grindle and Thomas 1989, 213). What makes their work unique is that they based their work on cases that are “developed by participants” in a variety of developing countries (Grindle and Thomas 14

1989, 213). They criticize the stages model on being linear and that international donors tend to pay more attention to policy analysis than to policy implementation (Grindle and Thomas 1989). Furthermore, Grindle and Thomas (1989) argue that “…the outcomes of policy reform initiatives are not adequately explained by dominant theories in political science and political economy because such approaches do not systematically address the role of decision makers and managers in the policy process” (Grindle and Thomas 1989, 214-215). In that regard, lacking this support, many policy reforms are not implemented at all, or if they are implemented, lead to quite unintended and often unsatisfactory outcomes. On the other hand, Grindle and Thomas’s (1989) “approach, which builds on state-centred theories about policy choice, is able to go beyond current theory because it also builds on the unique experiences and insights of participants in reform efforts” (Grindle and Thomas 1989, 216). The model is summarized in Figure 3, adopted from (Porter and Hicks 1995). Their main argument is that "a policy reform initiative may be altered or reversed at any stage ... by the pressures and reactions of those who oppose it" (Grindle and Thomas 1991, 126). The implication here is that policies may never translate into programs, if they get opposed by actors in the policy process, especially those responsible for implementation, who are the technocrats. “The lesson here is that those involved in problem definition and the search for policy solutions need to pay more attention to the midlevel technocrats and bureaucrats responsible for translating polices into programs. Efforts should be made to involve them in the policy process earlier rather than later” (Porter and Hicks 1995).

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Figure 3: An interactive model of policy formation

Source: Porter and Hicks, 1995

16

ENTREPRENEURSHIP WITHIN A POLITICAL ECONOMY CONTEXT Identifying the binding constraints for unleashing the full potential of entrepreneurship in Egypt, and deciding on appropriate actions, requires a closer look to the country’s context in terms of politics, economy,, social, and institutional capacities. Under the current democratic transitional phase, many variables are still at play, and political and economic developments happen by the day. Any attempt to precisely predict the outcome of the conflict between the different political factions at the moment would be futile. On the economic front, the analysis suggests the best path is to keep the economy running and growing, but that depends on the politics as well. The ideological political shifts in the Egyptian context had always affected the economy, and thus the social, cultural, and institutional outcomes, and this period after the revolution will be no different in that sense. The political, and business environment that the private sector operates in, determines the setting that would either enable entrepreneurship to respond to the social challenges of economic growth, employment generation, and poverty reduction, or not. The Political Context Examining the political history of Egypt post 1952 revolution, till the outset of Mubarak regime, one important feature that is evident is the continuation of authoritarian regime characteristics (Kassem 2006, Chung and Lau 2012, Hassan 2010, Shakry 2011). The authoritarianism dynamics took different forms during the presidencies of Gamal Abdul Nasser (1952-1970), Anwar Sadat (1970- 1981) and Hosni Mubarak (1981-2011) (Hassan 2010). The authoritarian rule following the declaration of Egypt as a “Republic” in 1953 manifested itself by bringing the country under the rule by emergency rule (Chung and Lau 2012, Hassan 2010). “Socio-economically, the country showed both subtle and apparent changes. Economically, it has changed from Nasser’s “Arab Socialism” (notably its attempt to nationalize Suez Canal) to a capitalist infetah (open-door policy) in early 1970s” (Chung and Lau 2012). During the “Nasserism” period the ideology of the regime was influenced by the global independence movements, and associating the regime to nationalism. This resulted in “…the formation of a state capitalist class, the liquidation of its main ideological rivals, and the suppression of popular mobilization from below even as it was coupled with a powerful social welfare ideology and a charismatic anti-imperialist rhetoric” (Shakry 2011). “Following Nasser's death in 1970, his successor, President Anwar Sadat tried to legitimize his rule using three slogans: The rule by law; government by institutions; and; political 17

freedom” (Hassan 2010). “One can describe the Sadat years in power as tumultuous punctuated by the war with Israel in 1973, prolonged military tension with Israel 1970-1973, 1974- 1978, economic upheavals, including bread riots in 1977, and the isolation from Egypt’s Arab allies 1978-1980” (Hassan 2010). Most notable ideological shift during Sadat’s rule, was the shift in economic policy from nationalism to a neo-liberal ideology “infitah”, that affected the social structure of the country with the rise of new form of elites. “The predominant agents and architects of Infitah were a combination of members of the old industrial bourgeoisie who had managed to insinuate themselves into the state apparatus after the 1952 revolution; members of the state technocratic bourgeoisie that emerged under Nasser (the upper stratum of the bureaucratic and managerial elite, high-ranking civil servants, army officers and directors, managers of public-sector companies, etc.); and the emerging commercial bourgeoisie whose financial activities were opened up by Infitah— wholesale traders, contractors, importer-exporters, etc. This, in part, explains the complexity of the military apparatus divided between the elite echelon of the military (given their involvement in capital accumulation during Infitah) and rank and file soldiers, and the economic gap between them” (Shakry 2011). In first years of Mubarak’s rule, signs of political pluralism were present, but soon to fade with the emergence of a dominating one party system by the National Democratic Party (NDP). This system, and despite the positive economic performance in aggregate terms, has failed “to improve the regime's performance and efficiency in solving Egypt’s development problems” (Hassan 2010). Mubarak’s political era was characterized by distinctive features that although was inherited from previous regimes, it became more intrinsic; namely, the increasing role of security establishments, political and administrative corruption, relationship with the international system, and relationship with Islamic movements (Hassan 2010). The lack of public support that Mubarak’s regime faced, has decreased its legitimacy leading to depending on both the military and police to sustain his ruling. Police and security forces ensured the continuity of Egypt’s political system, thus the close association to presidency (ibid). Different forms of corruption existed through out the entire Egyptian history, but during Mubark’s rule it was widespread to the extent that it became the norm rather than the exception. “…corruption has become a general trend that is not restricted to central institutions, but extends to local authorities as well. It is also not limited to governmental institutions, but its tentacles have reached non governmental entities such as parties, syndicates and voluntary organizations” (ibid). Due to various pressures, 18

globalization being one important factor, the relationship with international institutions made Egypt interdependent and forced to adopt the set of economic reforms created by the Washington Consensus institutions. The outcome of reforms, as in other international experiences, had its toll on vulnerable groups, and made rise to new form of elites who were closely associated to the presidency and the NDP (Alissa 2007). Internally, the Muslim Brotherhood and its relationship with Mubarak took different approaches. In the early years of Mubarak’s rule there was a differentiation between the MB, who were considered moderate, and other Islamic militant groups, that a strong hand policy during the 80s had eliminated them. In the 90s “the ruling regime has deviated from its earlier approach towards the Brotherhood, under the pretext that Brotherhood is maintaining relations with the militant groups. Thus, the regime embarked on the dissolution of the Brotherhood’s influence in all professional syndicates, and outlawed its participation in the parliamentary elections of 1995” (Hassan 2010). The authoritarian dynamics of Mubarak’s rule, among other direct and indirect influences created public and political resentment which sparked the January 25, 2011 revolution leading to the toppling Mubarak in February 11, 2011.

Though most analysts agree that the direct reasons for the spark of the revolution are political in nature, the economic situation under the corrupted Mubarak regime had a big influence as well. “The rigged parliamentary elections of 2010, the ‘emergency’ repressive measures that lasted for decades, and the absence of freedom to speak and assemble robbed Egyptians of their sense of dignity. At the same time, Egyptians blamed their government for high rates of poverty, youth unemployment, corruption, illiteracy, and deep divisions between rich and poor” (Carnegie Endowment for International Peace 2011). The revolution erupted after a peaceful demonstration on the 25th ended by clashes with the police (Chung and Lau 2012). “With the utilization of social media such as Facebook and Twitter, the demonstrations soon evolve into a large-scale anti-Mubarak movement” (ibid). “From this day onwards, social medias such as Facebook, Twitter and Blackberry Messenger Services were constantly disrupted. The army was later deployed on 28th January to the Tahrir Square” (ibid). In a televised broadcast on the 1st of February, Mubarak appeared for the first time in front of the public announcing that he will undergo political changes, and refused to step down (ibid). With the widespread refusal among citizens to Mubarak’s speech, and the failure of the new government he appointed, especially after the use of violence with demonstrators in Tahrir square of what is known as the “camel battle” as a reaction to the sentimental speech that Mubarak gave a day earlier, stepping down was the final option. On February 11th “Hosni 19

Mubarak stepped down from presidency and his power were handed over to the military” (ibid). The Supreme Council of the Armed Forces (SCAF) headed the country after Mubarak’s topple. Almost 2 years after the revolution, and despite the political changes/developments that were introduced; liquidation of the NDP, allowing political parties to form, the temporary constitutional referendum, the parliamentary elections, and the planned presidential elections in summer of 2012, there is a rising scepticism that SCAF will let go of power easily. “There is growing scepticism concerning the commitment of the Supreme Council of the Armed Forces (SCAF) to incisive democratic reform and current cabinet members are reluctant to take decisions with lasting implications, aware of a public perceptions that they lack a democratic mandate” (The Social Fund for Development: An Independent, Forward Looking Review November 2011). “With each day that passes, there are signs that public cynicism of the process in place and SCAF’s intentions are growing, and with it the continued potential for instability. No appointed civilian government, as indicated to the Review Team by one senior official in a ministry, will be willing to take difficult political decisions pending the advent of an elected government” (Pillay, Elmagd and Oraby November 2011). Until today, the transition cannot be described as being smooth. “Popular protests, sectarian violence, and clashes between police and demonstrators have all at one time or another threatened to derail the process. Since the resignation of former Egyptian President Hosni Mubarak last year, nearly 800 people have died as a result of constant political unrest. Many indicators suggest that Egypt is far worse off economically now than a year ago. In this tense political atmosphere, minor disputes can trigger major unrest, and many analysts are cautiously watching Egypt’s domestic politics for signs of potential instability” (Sharp 2012). There is no surprise that a political system like Egypt, where the rulers had domination over policy-making for over fifty years, would take time towards democratization (Alterman 2011, Chung and Lau 2012). “What is more surprising is that the emerging issues of Egyptian politics, the economy and nationalism, would run so much at cross-purposes. Egyptians’ ability to reconcile the two will be a vital test of their ability to thrive in the coming era” (Alterman 2011). Any new government that will take place after the presidential elections, if it happens, will face considerable economic challenges. “Besides bringing the high and soaring public debt under control, Egypt’s new rulers must ensure that investment, economic growth, and job creation keep pace with demographic trends. This will require the creation of 700,000 new, productive, and sustainable jobs every year in the private sector to 20

accommodate the growth of the labour force” (Carnegie Endowment for International Peace 2011). The Economy The Egyptian economy went through three phases of ideological policy shifts since 1952 (Ikram 2006). These economic “paradigm shifts” where accompanied by social and political ramifications that all worked together as determining factors to the current institutional environment supporting the private sector and entrepreneurship in the country (Alissa 2007, 1, Ikram 2006, Moustafa 2007). Since the 1952 revolution until 1973, under President Gamal Abdel Nasser’s rule, the economy shifted to a “state-led industrialization model” (Alissa 2007, 3, Dobronogov and Iqbal 2005). This was manifested in a low share of private sector in the economy, giving way to public sector domination to the economy in an attempt to fulfil the import substitution strategy ravishing the developing world at the time (Dobronogov and Iqbal 2005, Ikram 2006). As a result, the “Business efficiency and labour productivity stagnated, as the country’s development plans aimed at physical output targets, and its industrial exports were oriented mostly towards communist countries with low quality requirements” (Dobronogov and Iqbal 2005, 2). In what is considered “the second paradigm shift”, the 1973 Open Door Policy adopted by the Egyptian President of the time, Mohammed Anwar El-Sadat, opened up the Egyptian economy to foreign investment that concentrated mainly on the money coming from the rich Gulf region (Alissa 2007, 3, H. Handoussa 2002, Ikram 2006). Though this policy had promoted the role of the private sector and had partially liberated trade, the high growth in GDP experienced during the period is attributed to large extent to the increase in the national income caused by surge from price volatile revenues, namely; the Suez Canal, oil exports, tourism and remittances (Dobronogov and Iqbal 2005, Ikram 2006, Alissa 2007). These fundamental structural weaknesses caused Dutch Disease symptoms in the economy, driving it to collapse in the mid 1980s, after the fall down in world oil prices (H. Handoussa 2002, Ikram 2006, Dobronogov and Iqbal 2005, El-Ghonemy 2003).

By the end of this boom in 1986, the Egyptian government, under President

Mohammed Housni Mubarak, sped the transformation to a market economy led by the private sector, which marks the “third paradigm shift” (Alissa 2007, 4). “Egypt accelerated its on-going transition from a public sector dominated economy to a private sector led and market oriented economy after the collapse of oil prices in the mid-1980s” (Dobronogov and Iqbal 2005). The Egyptian economy’s crash due to its volatile structure and large fiscal deficit, led to“…the arrival of the IMF and World Bank in Egypt and thus to the country’s 21

adopting their stabilization and structural adjustment policies” (Alissa 2007, 4, Enders 2007). The stabilization program was accompanied by major restructuring and reduction in external debt, which in total triggered economic growth starting 1996 (Enders 2007). The reform process starting from 1991 until 2007 went through distinctive three stages or “generations” (Alissa 2007, 4, El-Ghonemy 2003, El-Mahdi 2003).

The first set of reform measures took place from 1991-1998, focusing on stabilizing the economy and going into “serious privatization” to State Owned Enterprises (Alissa 2007, 4, El-Ghonemy 2003, H. Handoussa 2002). “The program aimed at both the external accounts and the budgetary deficit, focusing especially on the links between the two. It sought to stabilize the external accounts by correcting and unifying the exchange rate” (Ikram 2006, 63). Stabilization of the economy was achieved, with about “…one-third of all SOEs’ assets being privatized between 1991 and 1998” (Alissa 2007, 4). The privatization also worked as a signal for the private sector to enter the market. “According to the Ministry of Planning’s figures, the contribution of the public sector to GDP dropped from about 39 percent in 1992 to a little over 28 percent in 2000. The share of the private sector rose correspondingly” (Ikram 2006, 84). From 1998 to 2004, a second set of structural reforms were taken and focused on trade and institutional measures (El-Ghonemy 2003). These were manifested in the enactment of a Real Estate Mortgage Law in 2001 (Alissa 2007, 5). Furthermore, “The year 2002 witnessed extensive economic reform measures on the legal level. Laws were promulgated pertinent to Special Economic Zones, export promotion, intellectual property rights, chambers of commerce, and money laundering. These were followed by a unified banking and Central Bank Law in 2003” (Alissa 2007, 5). Though in 2001, the private sector share in the economy increased in economic activities to “67 percent of total investment”, it did not offset the unemployment levels resulting from the ERSAP” (El-Ghonemy 2003, 81). “…the rate of unemployment increased from 8 per cent in 2000 to 9.1 per cent in 2002 and the numbers of unemployed, males and females, rose from 1.5 million to 1.8 million, respectively” (El-Ghonemy 2003, 82). Starting 2004 till 2011, all scholars and international organizations reports agree that this period witnessed the most intensive economic reforms in Egypt (Enders 2007, Alissa 2007, El-Mahdi 2003, Ikram 2006, International Monetary Fund 2009, Ministry of Finance 2012).

The changing of the cabinet of Ministers in 2004, headed by Prime Minister Ahmed Nazif, brought with it major reforms in what is referred to as the “third generation” of structural 22

reforms (Alissa 2007, 6). Reforms were directed toward the exchange rate system, the trade regime, public sector, financial sector, privatization, and transparency (Enders 2007). Specifically, “between 2004 and 2005, many laws were introduced, including laws on esignatures, new investments, customs, antitrust and competition, a unified corporate tax, and antidumping; in addition, export import regulations were amended. A new Consumer Protection Law was passed in 2006” (Alissa 2007, 6). Most importantly, the government had enacted a new income tax law that cut the rate by half, from 40% to 20%, merged income and sales tax departments, and moving toward a VAT system (Enders 2007, USAID 2008, Alissa 2007). “As a result, the share of revenue from income, profits, and capital gains has risen from 19.7 percent in 2002/03 to 29.6 percent in 2006/07” (USAID 2008, 17). This step was influential in “lightening of the tax burden on businesses, particularly SMEs” (USAID 2008, 19). These latest set of economic reforms where described by the 2009 IMF’s Article IV consultations as “impressive”, especially that the “Annual GDP growth in the post-reform period was more than double the average of the previous decade, driven by large-scale foreign and domestic investment” (International Monetary Fund 2009, 4). The real GDP growth averaged 7 percent in 2005/06-2007/08 and “was relatively broad based across manufacturing, hydrocarbons, construction, services, tourism, and agriculture” (International Monetary Fund 2009, 4). Despite the economic crisis in 2008, the Egyptian economy proved resilient (International Monetary Fund 2010, 3).

The slowdown in the economy that was expected following the crises was cushioned by a blend of intrinsic characteristics of the Egyptian economy accompanied by set of reactive policies. “Crisis-related spillovers appear relatively smaller for Egypt than other countries with similar income levels, partly reflecting lower global economic integration and financial sector resilience” (International Monetary Fund 2010, 7). Annual GDP Growth was further sustained at 4.7 percent in fiscal year 2008/2009 by the continuing high domestic demand, and production in the construction, communications, and trade sectors. (International Monetary Fund 2010, Ministry of Finance 2012, The Egyptian Center for Economic Studies 2011). The government had implemented a stimulus package that contributed positively in countering the effect of the economic slowdown. “The stimulus focused mainly on accelerating investment projects (about 1 percent of GDP) and public-private partnership (PPP) investments (1 percent of GDP)” (International Monetary Fund 2010, 9). As a result of these measures, the economy showed signs of recovery through an increase in real GDP growth from 4.7 percent in 2008/2009 to 5.1 percent in 2009/2010. In the first two quarters of 23

2010/2011 the average growth rate was 5.6 percent, which was derived largely by domestic consumption (85.9 percent of GDP), thus sectors that are linked to domestic demand had witnessed growth, namely; tourism, construction, ICT, and manufacturing (The Egyptian Center for Economic Studies 2011). The contribution of investment expenditure in GDP growth had shown improvement following the crisis in FY 2009/2010, which is attributed to the government stimulus (Ministry of Finance 2012). Despite the positive signs of recovery, the way the economy crashed following the revolution, raise many questions on the viability of the economic reforms implemented since 2004, and suggest a failure from the government part in addressing the social, political, and institutional binding constraints.

Figure 4: Annual GDP Growth

Source (Ministry of Finance Monthly Report March 2012)

The political instability following the revolution had its shadows on the performance of the economy in general, making it fail to satisfy the high aspirations Egyptians had after throwing the old regime. Following the revolution the economy contracted by 3.2 percent, with Real GDP Annual Growth falling from 5.1 percent in FY 2009/2010 to 1.9 percent in FY 2010/2011 (Ministry of Finance 2012). According to national records, the real GDP Growth is about 0.2 percent in the first quarter of 2011/2012 compared to 0.4 percent in FY 2010/2011 (Ministry of Finance 2012). Tourism was the first sector to get hit after the revolution, affecting negatively the balance of payments and thus foreign reserves. Foreign reserves witnessed a decline in the second quarter of 2011 from a high of $US 36 billion, reaching $US 28 billion (The Economist 2011) (Saif 2011, 3). By the end of March 2012, the reserves have fallen to $US 15.1 billion (Fam and Shahine 2012). In FY 2011/2012, “Net FDI in Egypt fell by 72.4%, standing at US$ 440.1 million (against US$ 1.6 billion), partly because of the decline in net investments in the oil sector which recorded net outflows of US$ 24

412.4 million (against net inflows of US$ 575.7 million)” (Central Bank of Egypt 2011). “Despite the deceleration in total economic growth, private and public consumption growthwhich comprise 92.8 percent of total GDP figure and contribute 4.2 percent to total growthwere the main drivers of real GDP growth (market prices) in the first quarter of 2011/2012. Private and public consumption grew by 5 percent and 2.8 percent respectively, which offset the decline in investment spending by 11.4 percent” (Ministry of Finance 2012). Despite the resilience of consumption demand, the inflationary pressure, due to rising food and fuel prices, could threaten such a trend. Table 1: Selected Economic Indicators

Source: (IMF 2011)

The situation has gotten worse with the complete halt of the economic structural reforms after the revolution. Furthermore, the populist demands has exacerbated the pressure on the government, which in turn took corrective actions without calculating the consequences. “Two recent measures implemented by the transitional government demonstrate that it is merely reacting to populist demands. First, it tolerated allegations of corruption and exaggerated figures to be circulated in the media without response. With such allegations, many businesspeople fear the risk of expropriation because economic liberalization is being equated with corruption. Second, the transitional government is inflating the budget to appease the demands of the protesters. It has offered fixed-term contracts to 450,000 temporary employees and approved a 15 percent public-sector wage increase that will raise the total pension expenditure. Together, these actions will increase the state’s total wage and pension bill by 25 percent” (Saif 2011). There was immediate financing problems faced by 25

the government, and with the nationalistic sentiment erupting after the revolution, foreign borrowing from international institution was rejected by SCAF (The Economist 2011, Sharp 2012). Having difficulty in borrowing money from the gulf states, coupled with fear of disrupting the local financial system, high interest rates of local banks, the inflated budget, and the need to have at least US$ 11 billion to finance public spending (mainly subsidies and civil servants wages), where all reasons to resort back to negotiations with the IMF (Sharp 2012, Saif 2011, Alterman 2011). “Egypt is now testing the merits of informality. The old corrupt rules are discredited. The government is running the economy from hand to mouth. It has no real mandate and lacks the confidence to tackle Egypt’s deep-seated problems. It is getting by, more or less. But nobody knows if muddling through will work” (The Economist 2011). Although it is recognised that the economy and jobs are critical for a return to stability and attention is being paid to the political crisis and governance reforms of a political nature, it is unlikely that any Government – at least in the near future -- will have the political will to introduce significant economic reforms of a structural nature (The Social Fund for Development: An Independent, Forward Looking Review November 2011, Alterman 2011). Socio-economic Challenges

Despite the intensive reform measures that took place starting 2004, and the impressive GDP growth

rates

from

2004-2007,

the

socioeconomic

outcome

was

disappointing.

Unemployment and poverty rates are anything but decreasing, which posed questions on the viability of having impressive reforms that do not trickle down to the most vulnerable groups, and the real reasons to such unfair distribution of income. Radwan (2003) articulates this stressing that “…this progress at the macro-level has not been matched in two crucial areas: employment creation and poverty reduction” (Radwan 2003, 111). This failure in responding to deep-rooted problems of Egypt was one important factor contributing to the January 25 revolution, which on the short term, ironically, had caused instability that exacerbated these problems. Official statistics show that unemployment increased from 8.9 percent in Q2 of FY 2010/2011 to 12.4 percent in Q2 of FY 20011/2012, and with the an annual rate of growth of the labour force of 2.8% the pressure on the private sector is enormous, given also an estimated 600,000 losing their jobs in the tourism sector, and around 200,000 returning from Libya (Ministry of Finance 2012). With these rates persisting, it is evident that from 700,000 to 800,000 jobs have to be created annually for the next 10 years to absorb the new entrants of to the labour markets, who are predominantly young (Radwan 2003, 111, El-Mahdi 2003, 26

6, Social Fund for Development 2007, Saif 2011). Based on World Bank estimates that even dates back to 2003, Radwan (2003) argues that “Assuming that the domestic economy generates 435,000 jobs and 90,000 migrate annually, this suggests that the total labour absorption amounts to only 58.6 per cent of the total supply, or a deficit of 371,000 jobs a year” (Radwan, 2003, p. 112). This number, because of the political instability and its effect on the economy and private investment, could be doubled. Another alarming feature about unemployment is that it is concentrated between the youth bracket from 15-29 years old, and women (El-Mahdi 2003, 5), “…with university graduates being the only education group that witnessed an increase in unemployment during the period” (Alissa 2007, 13). Furthermore, the jobs created during the reform period were in low productivity sectors, which raise questions on the sustainability of these jobs, and threatening of worsening the poverty indices. Figure 5: Human Development Index: Trends 1980 - present

Source: (UNDP 2011)

Poverty rates remain high, as indicated by the Central Agency for Public Mobilization and Statistics (CAPMAS) “Egypt's poverty increased to encompass 25.2 percent of the population in 2010-2011 as compared to 21.6 percent in 2008-2009” (Egypt Independent 2012). However, “extreme” poverty had decreased to 4.8 percent of the population in 2010-2011 27

from 6.1 percent in 2008-2009 (ibid). “The poverty line in Egypt was at LE 256 [US$ 42] per person per month, or LE 8.5 [US$ 1.4] per day, while the "extreme" poverty line is calculated at LE 171.5 [US$ 28.5] per person per month or LE 5.7 [less than 1 dollar] per day” (ibid). What is even a more worrying trend is that poverty rate among university graduates rose to 6.5 percent as compared to 4.7 percent in 2008-2009, while it increased to 36.4 percent in the illiterate from 31.8 percent in 2008-2009. (ibid). “A fifth of the population lives on $2 a day or less, and another fifth lives just above that level. Almost everyone thinks the number of poor is growing. Neither they, nor the entrepreneurial middle classes, have benefited from what growth has taken place. Moreover, the cost of failing to produce new jobs is rising, as the babies born a generation ago (when fertility rates were higher) are entering the job market. The cohort of 15-20-year-olds is the largest among the population. If this demographic dividend is to be cashed, and if democracy is to take root, then living standards will have to improve” (The Economist 2011). Table 1: HDI-Education

Indicator Public expenditure on education (% of GDP) (%) Expected Years of Schooling (of children) (years) Adult literacy rate, both sexes (% aged 15 and above)

Value 3.8 11 66.4

Mean years of schooling (of adults) (years) Education index Combined gross enrolment in education (both sexes) (%)

6.4 0.56 35.5

Source: (UNDP 2011) Education comes as a significant component of the persistence of unemployment and poverty levels. “Despite significant investments in education, the education system is not delivering a workforce that fulfils the market demand, and graduate skills and knowledge are at variance with the demands of the labour market. (IFAD 2011). The private sector in Egypt ranks education and workers skills in the top five constraints facing private investment in the country (ibid). “Once a centre of Arab learning and an exporter of teachers to the Arab world, Egypt has seen its education standards decline alarmingly. This is partly for lack of money— the country spends a smaller proportion of GDP on education than most Arab states—but is also a result of bad organisation. The quality of everything, from schools and equipment to teachers, is appalling. The ministry of education employs as many bureaucrats as teachers, and there is no national teaching accreditation system. Educational failures cast a shadow

28

over the quality of the workforce” (The Economist 2011). Because of this situation, creating an internationally competitive private sector that absorbs the unemployed, and new graduates will be a difficult task. It is against this backdrop of persisting unemployment and poverty that a major shift in development policies, with a central role of private sector, and entrepreneurship is a must rather than an option. The Political economy and the Private Sector The economy suffers from several forces, one related to Egypt long-standing institutional problems, effect of structural reforms, and recently the downturn following the revolution. Starting in the 1970s, Egypt had witnessed phases of economic liberalization, but with no comparable reforms politically (Heineman Jr. 2011). These phases were accompanied with changes in the social cohesion of the country, opening up the rise of different types of elites, reaching its peak during Mubarak’s regime. The “infitah” policy of Sadat, followed by the privatization period in the 90s, where all reasons for “the rise of a "liberal capitalist elite" during this decade which promoted private sector activity through fiscal and monetary policy and through sectoral reforms in such areas as banking, finance, real estate, transportation, telecoms, and health care.” (Heineman Jr. 2011). However, the failing of structural reforms in trickling down to vulnerable groups, made Egyptians perceive the whole economic system as “illegitimate”, which in turn explains the populist demands following the revolution, and the rise of nationalistic sentiments. “Many Egyptians viewed the economic system as illegitimate, imposed upon them by corrupt and profligate elites for their own benefit and not affirmed through transparent processes secured by societal consensus” (Heineman Jr. 2011). The appeasement of the public by the SCAF and governments succeeding the Mubarak’s government had its toll on the private sector. The private sector is a part of the economy that Egypt cannot do without, if to address the deep-rooted problems of poverty, and unemployment. “Egypt cannot be successful without a vibrant economy, and it cannot have a vibrant economy without investment from within and without. Yet, Egyptians seem to distrust most investors, either because they are tied to the ancient regime or because they see them as foreigners intent on capturing the country’s resources. Egypt’s emerging politics are populist pure and simple, but the populism does little to solve the country’s problems” (Alterman 2011).

If to identify the binding constraints for the development of the private sector in general, and entrepreneurship in particular, a political economy, and institutional analysis is required. 29

“Whether these binding constraints can be effectively identified is a practical and empirical matter” (Rodrik 2007). In identifying the binding constraints, defined as the constraints that if removed will make the largest impact on the economy, a special focus should be given to “metainstitutions” (ibid). “In this connection, one may want to place a special emphasis on democratic institutions and civil liberties, not only because they are important in and of themselves, but also because they can be viewed as metainstitutions that help society make appropriate selections from available menu of economic institutions” (ibid). In Egypt, the constitution and the way the political system will develop, will directly affect the role of the private sector. “Throughout this forty-year period of start-stop economic reform, there was, however, no meaningful reform of the constitutional structure and the political system” (Heineman Jr. 2011). “Considerations of how rules affect the distribution of income in general, and which parties or groups stand to gain or lose in particular, are always important as fundamental matter of political economy” (The Kauffman Task Force on Law 2011, 8). After the revolution, the link between politics and economics had never been more vivid to the general public. For democracy to be institutionalized, the role of economic growth, and thus entrepreneurship will be in the forefront. “If the economy improves, that should help consolidate democracy; if it falters, so will political reform” (The Economist 2011). “As Egypt rebuilds, the country must find the right balance of political legitimacy, a social safety net, economic growth, and a right-sized role for government” (Heineman Jr. 2011).

Striking the balance between politics and economics would require addressing the conflicts that have risen as result of 50 years of an authoritarian regime. As Heineman articulates it, the conflicts existent in the Egyptian society are; the conflict between the liberal elite capitalists, and the military elite, the companion conflict between ideas of "free market or neoliberal capitalism" and a command economy, the conflict between the public sector "middle class" that is paid far less than the "private-sector", the conflict between the poor/unemployed and the rich who have a disproportionate share of Egypt's, the conflict between the "young" -- 45 million Egyptians under 35 years of age (whether poor or professional) -- and those who control the economy through what the young regard as corrupt and non-meritocratic means, and finally between the socialist/social justice orientation of some Islamists, wary of the West, and Egyptian capitalism in its various forms (Heineman Jr. 2011). Whichever faction will win, they will come around the fact that solving Egypt’s problems necessitates privatesector investment (Alterman 2011). What matters is the mechanism (institutions) by which the voice of the different parts of the society will be able to express their concerns. The 30

current government though lacks legitimacy in the eyes of both the public and parliament, have came to the realization that no development is going to happen without addressing the role of the private sector, and any subsequent government will have to also consider the role the sector plays in the well functioning of the economy. Even with the rising nationalistic sentiments arising after the revolution, the general public are now more open to supporting the private sector. This support to entrepreneurship is further evident from the economic programs of the both the major political parties, and presidential candidates (Egypt Independent 2012). “Many Egyptians are optimistic, arguing that the removal of Mr Mubarak and plans for elections and a new constitution remove the biggest source of political doubt: what happens after the pharaoh. They also argue that there is a broad consensus supporting private-sector-led growth” (The Economist 2011). If there is stability on the political front, the economy should follow suit, and eventually consolidate democracy (ibid). Within the political-economy context of the country, there is a form of consensus on the importance of SMEs and entrepreneurship to Egypt’s socio-economic growth, however, any attempt to address the problems of this sector, if not associated with institutional reforms, will not work. “If Egypt is to catch up, it will have to do what Turkey did: reduce the overweening power of the state and provide an environment in which private firms, especially long-suffering small and medium ones, can thrive” (The Economist 2011). SMALL BUSINESSES, AND ENTREPRENEURSHIP

Several literatures assert that economic growth is directly linked to the creation a vibrant entrepreneurial base that is involved in high value added start-ups “The most important question in the short run for an economy stuck in low-activity equilibrium is how to get entrepreneurs excited about investing in the economy” (Rodrik 2007, 44). Unleashing the potential of entrepreneurs in the Egyptian economy requires more than direct programs or policies. The deep-rooted institutional deficiencies in the Egyptian economy constrain the private sector in general, and SMEs in particular. Identifying and addressing from the long list of constraints, the ones are most binding, would assist the government in using their resources efficiently in creating economic growth (ibid). Thus, analysing the characteristics of the SME sector, and entrepreneurship in general within a political economy perspective is imperative in identifying the right tools to tackle the binding constraints.

31

MSMEs and Entrepreneurship in Numbers Lack of updated data on the MSME sector and entrepreneurship is restrictive in estimating the effect of the sector in the economy. Despite the many studies conducted on the sector, the data used depends largely on CAPMAS census that is conducted every 10 years, last one being the 2006 census. However, several sources use projections, and surveys to arrive at aggregate results. The effect of the revolution on the sector, though still to be extensively assessed, some indicators based on perceptions of professionals and business owners provide indexes on perceived constraints facing entrepreneurship.

Figure 6: Size Composition of the Private Sector According to the 2006 CAPMAS

Size Composition of the Private Sector (CAPMAS 2006)

census, the micro and small 6%

1%

enterprises 0% 38%

21%

than

50

workers) comprise almost 99% 1 worker 2 workers 3-4 workers 5-9 workers 10 to 49 50 +

34%

(less

of total private enterprises. What is considered to be medium size companies

(from

employees) existent

is in

50-100

almost the

non-

Egyptian

economy (Pillay, Elmagd and Oraby November 2011, Social Fund for Development 2007, H. Handoussa 2010). The Micro and Small enterprises thus account for 85% of non-agriculture private sector employment, and 40% of total employment. In the ten years between the two censuses, micro and small enterprises has grown at an average annual rate of over 4% during the past ten years, and micro and small enterprise employment has increased at an annual rate of over 5%. This growth is attributed to the high rates of unemployment among the youth bracket, who revert to creating their own businesses, mostly in the informal sector (over 80% of MSEs are informal), and in the retail and trade activities (Pillay, Elmagd and Oraby November 2011, Social Fund for Development 2007, H. Handoussa 2010). This pattern is also evident from the Egypt GEM report of 2008, as the early-stage entrepreneurial activity rate by per capita GDP is almost 14%, indicating a high rate of establishment in low-value enterprises (necessity entrepreneurs) (Hattab 2008). Such trait, is accompanied by a low propensity to grow, which is evident from the fact that the average Egyptian micro and small enterprise has only 2.3 workers, and almost three32

quarters of all private enterprises have fewer than three employees (Pillay, Elmagd and Oraby November 2011, Social Fund for Development 2007, H. Handoussa 2010). Another constraint to growth is the level of capitalization of these enterprises, as 75% of the MSE sector is capitalized below EGP 10,000 (USD$ 1,666) (ibid). Overall, by comparing 1996 with 2006 data, the total number of establishments has been growing, but they have been getting smaller in size. Figure 7: Sectoral Distribution of MSEs

Sectoral Distribution of MSEs (CAPMAS 2006)

15%

27%

Manufacture Trade Others

58%

Source: (Social Fund for Development 2007)

The distribution of businesses in Egypt is skewed towards microenterprises (Social Fund for Development 2007). “Average establishment size also varies greatly by geographic location, with the average size in Upper Egypt being 2.3 workers (2.1 in the case of MSEs), compared to 3.5 workers in metropolitan governorates (2.8 in the case of MSEs). A feature of this “smallness” is the “missing middle”” (ibid). “Only about 1.5 percent of private sector enterprises have more than 10 employees” (ibid). These structural features of enterprises in Egypt will have to be altered if to ensure growth. The support needed will have to be directed toward high growth enterprises, innovative start-ups, and providing assistance to existing enterprises to expand, in order to fill the middle size gap that is the real driving force behind job creation. “Another distinctive characteristic of the enterprise structure in Egypt is its concentration in few sub-sectors of economic activity. MSEs are predominantly concentrated in the trade sector, owing to the low entry barriers in terms of capital, skill and technology that are characteristic of this sector. Almost 60 percent of MSEs operate in trade related 33

activities, with 15 percent in manufacturing activities and 27 percent in services” (Social Fund for Development 2007). The informality of the sector is another featured that inhibits growth. “Excessive regulation is largely fuelling the level of informal activity in Egypt. It is estimated that 40 to 60 percent of the costs of doing business arise from regulatory burden” (ibid). “One result is that private firms are knotted in red tape. Egypt comes 94th in the World Bank’s “Doing Business” measure of regulations. Small and medium-sized companies cannot get credit from state banks. Many small firms do not even have bank accounts” (The Economist 2011). Compared internationally, Egypt’s framework conditions are perceived by national experts as being weak on entrepreneurship education and training, and R&D and technology transfer to new and growing firms. Areas of comparative strength are the dynamic market for products and services and access to physical infrastructure (Hattab 2008). The top constraints perceived by experts were lack of support in the education system, lack of entrepreneurial training, culture and social traditions, and the inadequate access to finance (Hattab 2008). Overall, in assessing the dynamics of entrepreneurship in Egypt, it could be evident that their contribution to employment and their potential to sustain the country’s economic growth is substantial. On that premise, government intervention to create a business friendly environment is imperative. However, on the policy level, and especially after the revolution, the evidence based research and knowledge is not transferred to policy makers, the priority areas (agenda setting) are not clear, decisions are not taken, laws are not enacted, and the implementation phase from the policy process remains inactive. In order to create conducive environment for entrepreneurship, the Egyptian government has to address more fundamental long-run institutional, structural, economical and political binding constraints other than running or promoting un-sustainable programmes that would be only targeting individual entrepreneurs (Farid 2007). “….one other broad driving force behind growth- the types and quality of the ‘institutions’ (the formal and informal rules societies set or establish over time)that either foster or discourage people’s engagement in growth enhancing activities” (The Kauffman Task Force on Law 2011, 5) MSMEs, Entrepreneurship-A political Economy perspective In the last period of reform (2004-2010) the government of Egypt realizing the challenges faced by the reform, worked on minimizing its negative effects by concentrating on the Micro, Small and Medium Enterprises (MSME) sectors, given its nature of creating jobs. 34

This was articulated clearly in several government official reports stating that “Reforms aimed at fostering entrepreneurship (i.e., encouraging a growing supply of new entrepreneurs and the starting of new businesses, particularly those with higher-growth potential) and the development of existing MSEs are particularly desirable because they will produce clear winners from reform as well as broad social coalitions in support of change” (Social Fund for Development 2007, 8). Until 2008 and before the publishing of the Global Entrepreneurship Monitor Report-Egypt 2008, entrepreneurship within the context of the government and stakeholders’ efforts has been synonymous with MSMEs. Furthermore, the astounding 97% share of MSMEs in private sector activities (The Ministry of Economy 1998) had strengthened the premise that “A growing base of MSEs will expand economic opportunities, create jobs and promote higher living standards” (Social Fund for Development 2007, 8). Indeed, the Egyptian Government since 1998 had laid out plans and policies aimed at supporting the MSME sector as a socioeconomic solution, starting from a “Draft National Policy” document in 1998, the “Enhancing Competitiveness for SMEs in Egypt” document, the 2004 SME Law number 141, and lastly the Micro and Small Enterprises (MSE) national strategy titled “Mobilizing Egyptian Micro and Small Enterprises 2008 - 2012” (The Ministry of Economy 1998, El Meehy 2004, Social Fund for Development 2007).

Most of these plans, law, and reports had never transcended into an implementation phase, and even from those implemented, no evaluation been conducted to assess their social and economic effect. Even with law 141, the widely accepted view is that it had contributed to the “‘ghettoisation’ of MSME development, as a tool for poverty and unemployment reduction and therefore requiring government support, rather than as an issue that requires a positive enabling environment and thus a range of measures across government (and almost certainly the reduction of government involvement in many areas)” (Court and Osborne 2006, 38). From 1998 till now, entrepreneurs been targeted in Egypt under the framework of MSME development through a minimum of 180 different entities, that range from governmental, non-governmental, donors, and international organization (El Meehy 2004). Despite the success of some of these initiatives, “…these efforts have largely been scattered, uncoordinated – if not conflicting - and isolated” (El Meehy 2004, 8). This in turn, as argued by El Meehy (2004), contributed in minimizing the positive effect of this sector on the economy, in addition to allowing for “market distortions”, loss of faith from entrepreneurs in similar efforts, and most importantly the creation of “a schism between these efforts on the one hand and the general economic policy orientation of the government” (El Meehy 2004, 35

8). “Like most developing countries, Egypt does not have a systematic strategy for job creation. Policies often focus on investment, with the assumption that employment will automatically follow. A major challenge is designing a coherent strategy with the explicit objective of maximizing the employment content (elasticity) of growth and ensuring access to productive employment opportunities for the poor” (Radwan 2003, 127). As a result of Enders’ (Enders 2007) growth diagnostic of what are the binding constraints to growth in Egypt, he affirms on the fact that “There is considerable evidence, including surveys and comparative rankings, as well as Egypt’s difficulty in moving toward new higher value-added products, pointing to appropriability of returns as a critical constraint” (Enders 2007). The reduction on private returns is attributed mainly to “the high cost imposed by complex regulations and inefficient government services” (Enders 2007). In what Enders included as complementary factors affecting growth where infrastructure and education. On these two areas, his research shows that complementary factors are not the most binding constraints to growth, however he acknowledges that human capital has to be developed in the long run. “By contrast, a dearth of complementary factors does not appear among the prime suspects of having held up growth—though, again, there is little doubt that over the longer run, and as sophistication in the economy increases, Egypt will need to bolster its human capital if it wants to continue growing” (Enders 2007). It becomes imperative in that sense, that since these changes in education and human capital policies take time in order to build consensus on them, that the policy process should start tackling these issues. “Increasingly, however, reforms with different political economy characteristics, such as revamping education or reigning in the fiscal deficit, will become the critical challenge. Since these steps take more time (for design, political consensus building, implementation, and payoff) the authorities are well advised to use the tailwinds generated by the recent reforms to start tackling these more distant constraints. This would reduce the risk that the recent growth episode will become another tale of a growth spurt that fizzled out because some deeper constraints were not addressed” (Enders 2007). The growth spurt that happened in 20042007, had exactly the outcome that Enders predicted when doing his diagnostics. That is another reason indicating the importance of causing growth, and ensures, by creating institutions in the long term, that this growth will be maintained. “…there may be no escaping the fact that, while a few simple bold measures can work wonders for a while, sustaining growth will require reforms along many dimensions and paying attention to the complex interaction among them” (ibid). From that perspective, and according to various 36

literatures on institutions, there is widespread acceptance to the importance of government regulations, property rights, and rule of law as key ingredients to private sector investment, and entrepreneurship promotion.

Institutional Constrains Legal and Regulatory Burden, Property Rights, and Rule of Law The ease of doing business report developed by the World Bank measures the perspective of professionals on key impediments to establishing business in a given economy, and also provides a ranking with other countries. In that sense, the measure does not give the whole picture, but it tells much about the business environment in an economy (World Bank 2012, 5). It should be noted that the index , and other indexes, is used in the context of this paper to validate the argument, rather than building it. The overall ranking of Egypt fell from 108 in 2011 to 110 in 2012, from a total of 183 countries (World Bank 2012). The categories of measurement are shown in Table 2, showing that the only minor improvements were in dealing with construction permits, and registering property. This could be due to the decrease in corruption in localities after the revolution, rather than a change in regulation. The most significant decreases in ranking were paying taxes, and protecting investors. This is attributed to the failure of enforcing the law after the revolution. Though institutionally, the laws are there, the honoring of contracts, and law enforcement remain as institutional deficiencies. This is further validated through other indexes, namely; the Index for Economic Freedom, and The Global Competitiveness Index. Table 2: Ease of Doing Business Topic Rankings

DB 2012 Rank DB 2011 Rank Change in Rank

Starting a Business

21

18

-3

Dealing with Construction Permits

154

155

1

Getting Electricity

101

99

-2

Registering Property

93

94

1

Getting Credit

78

75

-3

Protecting Investors

79

74

-5

Paying Taxes

145

139

-6

Trading Across Borders

64

64

No change

37

Topic Rankings

DB 2012 Rank DB 2011 Rank Change in Rank

Enforcing Contracts

147

144

-3

Resolving Insolvency

137

136

-1

Source: World Bank, 2012. In measuring the economic freedom, the “Index for Economic Freedom” builds the analysis “on 10 specific components of economic freedom, some of which are themselves composites of additional quantifiable measures. The 10 component scores are equally weighted and averaged to get an overall economic freedom score for each country” (Miller and Holmes 2009, 441). The data of each component are obtained from different sources, as an example the component on business freedom comes from the World Bank “Doing Business Report”, which in itself is another index composed of multiple data (Miller and Holmes 2009, 441). “Egypt’s economic freedom score is 57.9, making its economy the 100th freest in the 2012 Index. Its overall score is 1.2 points lower than last year, reflecting declines in property rights, business freedom, and financial freedom. Egypt is ranked 12th out of 17 countries in the Middle East/North Africa region, and its overall score is just below world and regional averages” (Miller, Holmes and Feuln 2012). On property rights, which is considered an indicator for the rule of law, remains one area lacking institutional support. “The rule of law has been unstable across the country, and the independence of the judicial system is poorly institutionalized. Judicial procedures tend to be protracted, costly, and subject to political pressure. Property rights are not protected effectively, and the enforcement of intellectual property rights is seriously deficient. Corruption continues to erode the foundations of economic freedom” (Miller, Holmes and Feuln 2012). Table 3: Economic Freedom Index Topic Rankings Property Rights Freedom from Corruption Fiscal Freedom Government Spending Business Freedom Labor Freedom Monetary Freedom Trade Freedom Investment Freedom Financial Freedom Source: (Miller, Holmes and Feuln 2012)

2012 35 31 89.7 64.1 63.8 53.7 62.3 74 75 40

2011 Change 40 28 89.6 65.3 64.5 53.6 60.8 74 75 50

-5 3 0.1 -1.2 -0.7 0.1 1.5 0 0 -10

38

Given also the rankings of the Global Competitiveness Index for Egypt in 2010-2011, with institutions given a score of 4 out of seven, and ranked 57 from 139 countries, it could be noted that institutional problems are pertinent in the rule of law, corruption, and political stability (Schwab 2010). These factors could be considered as binding constraints to the private sector growth as they limit the most basic freedom needed to grow as a business, and inhibits new entrants to the market. “The present legal system, comprising both the laws and their administration is dominated by GOE and not well suited to rapid expansion of efficient, private economic activity. The system’s main problems are that it is very time-consuming and costly to use. Furthermore this time-cost element, or interest forgone, is not recognized in legal settlements. It can be used to intrude capriciously into legitimate economic activity and is seen as lacking transparency. It can be a hindrance to expansion of private commercial activity” (Myers 2002, 23) Furthermore, this institutional deficiency drives the economy into “unproductive” informal sector, which in turn believed to be costing developing countries between one and two percentage points in annual GDP growth (Vincent 2005, 25). “Perhaps a most significant oversight of reform advocates is ignoring the implications for legal system reform of the huge “illegal” informal economy in Egypt. Independent measurements find it to be approximately equal in size to that of the formal economy” (Myers 2002, 23). Specifically on the rule of law, it is debated that in Egypt it is “abridged by executive authorities who will not permit their actions to be subjected to legally prescribed methods of accountability, nor allow them to be circumscribed by constitutional guarantees of individual rights. Egypt, in other words, confronts both political and administrative challenges in developing the rule of law to the point where it is supportive of participatory, accountable governance” (Springborg, 2003, p. 188). The link between legal institutions and the well functioning of the economy, including its economic growth was argued in the work of North (1990) to be responsible for lowering the risk in the market enabling firms to an increasing division of labor (D. North 1990, Moustafa 2007).

“They [institutionalists] argued that where these institutions remain

underdeveloped and property rights remain weak, firms will invest their resources in avenues that produce short-term returns but do little to facilitate sustained economic growth in the long run” (Moustafa 2007, 222). This is the case in Egypt, with the high informality rates that in turn inhibits the gains from economic reforms.

39

Policy Process and Institutions The other side of the story, is concerned with the viability of having a policy process, where the technocrats, business owners, and different stakeholders are not part of it. “Egypt has too much government, in terms of the size and scope of the public administration, and too little accountable, transparent, efficient governance” (Springborg 2003, 195). This has significant implications on the path of economic reforms due to the fact that these public sector employees are the technocrats who implement these changes, and they will always oppose laws or regulations that would threaten their source of income (Makary 2002). The solution for this is suggested to be dealt with directly through reforming the salary schedules; to institute “incentives” and “penalties” (Myers 2002, 38). Bureaucrats are key players in the most important phase of any policy design, in that case entrepreneurship policy, which is policy implementation, and disregarding that role would render any policy futile. That is why it is stressed that any policy reform efforts, “needs to consider those that will actually have to implement policy. In this case, it is the many bureaucrats from different Ministries who have to process applications, enforce regulations (health, safety, tax, etc). Not giving consideration to such issues is likely to mean that policy design is going to be detached from reality. When they consider policy changes, ministry officials are also likely to consider what reforms will mean for them – eg loss of jobs, status or opportunities for corruption – as they respond” (Court and Osborne 2006, 25-26, Grindle and Thomas 1989).

The institutional environment supporting the private sector, in addition to the political instability and the lack of an economic vision, posses serious questions to Egypt’s ability to induce economic growth and sustain it. These institutional deficiencies are the outcome of a history of long neglect to political reforms that should have accompanied the economic (Moustafa 2007). “The Egyptian case suggests a far more complicated relationship between economic liberalization and political/legal reform than is commonly articulated both in the academic literature and by development practitioners” (Moustafa 2007, 234). The economic reforms in Egypt failed to provoke and promote democratization, but on the contrary they worked against it by elevating new private sector elites who control the political scene and shifting the direction of reforms to cater for their interests creating a form of illegitimacy to these reforms (Moustafa 2007, Alissa 2007). This situation is further facilitated by an institutional deficiency in having a formal representation to small entrepreneurs, due to their “lack of participation” in decision making, and “lack of representation” in parliament, which requires spending substantial amounts of money (Alissa 2007). 40

All these features are evidence to the lack of institutional structure that promotes accountability, and participation to the policy process (Moustafa 2007). Specifically, the reform was limited and did not affect the constraints faced by entrepreneurs because the “reform policies implemented in Egypt have not been synchronized with all economic sectors and have shown little sensitivity to the specific features of the Egyptian economy” (Alissa 2007, 17). Secondly, the failure in creating a “…healthy and enabling environment for conducting business and to build an economy that can compete in the global economy” (Alissa 2007, 17). “The third interlinked constraint is that reform efforts in Egypt suffer from a lack of a consensus about issues of timing, means, and goals” (Alissa 2007, 18). This is particularly due to the lack of participation from stakeholders in the policy making process. These constraints are connected to absence of an interactive policy formulation model that is needed to change the current deficient institutional and policy setting. “The development and implementation of any policy framework takes place through an institutional set-up encompassing a multiplicity of actors with designated mandates, capabilities, political weights, functions, and so on” (Social Fund for Development 2007). Though the works of Grindle and Thomas provide great insight on involving the different groups in the policy formulation process, in Egypt’s case, and especially after the revolution, developing that process will have to be started by the entrepreneurs.

Douhan and Henrekson (2007)

“political entrepreneur” will be the most relevant in shaping Egypt’s policy direction. "Government structures are heavily influenced by local history, by the manner in which small businesses are organized, and by the specific roles seen for SMEs in the economy....It seems more important to have good communications between government bodies, at the state and local levels, responsible for SME interests, and a means to bring SME concerns to the highest levels of policy debate. A ministry or bureau for SMEs, while it might help to focus attention on SME matters, does not, by itself, ensure sound, well-coordinated SME policy" (Gray and Gamser 1994). The institutional environment in Egypt is undergoing changes, and as democracy develops, advocacy and ongoing consultation amongst stakeholders are going to be the pillars of any successful institutional environments. Two important ingredients are important for the institutional setup for entrepreneurship policy making. “The first is the existence of effective representative bodies for MSMEs that actively advocate their interests and participate in policymaking. The second is ongoing consultation and active collaboration among stakeholders to ensure successful policy development and implementation. These

41

ingredients need to be strengthened in the Egyptian institutional set-up” (Social Fund for Development 2007).

CONCLUSION With the continuous government efforts to create an enabling environment for the private sector since the early 1990s, “the Egyptian state has yet to be made ‘lean and mean’, although the belief that it is too large and flabby is widespread” (Springborg 2003, 196). There are no conflicting visions on the need to reform the country’s institutional set-up to strengthen the overall business environment and induce economic growth; however, the question and the challenge is how to bring this about. “The lesson of the 1990s turns out to be that policy change without institutional reform results in only modest economic performance. Although the lesson is clear, few observers know where reform of the institutional environment should start” (El-Mikawy, 2002). Moving to a market economy and reforming the institutional set-up requires the engagement of “government, communities, bureaucrats, and the market; and it is usually supported by a number of international and intergovernmental and international NGOs as agencies for change” (Farid 2007, 429). Henrekson (2007), Douhan and Henrekson (2007), and Alissa (2007) put greater emphasis on the role of entrepreneurs in influencing and directing that change through their direct engagement in the policy process, participation in the political scene, and most importantly through their economic outcome. (Henrekson 2007, Douhan and Henrekson 2007, Alissa 2007).

The engagement of stakeholders in the policy process is a recurrent theme whenever talking about reforming institutions. “Good intentions are not sufficient to deal with corruption and bureaucracy. What is needed is institutional arrangements and a sound incentive system that contribute to a pro-growth environment. The best way to achieve this is to ensure the engagement of the stakeholders in the process of policy choice; policy-makers, consumers and investors. A full employment strategy can only succeed if it is owned by a broad spectrum of the population” (Radwan 2003, 135). Policy analysis, and policy processes literature, though focused on developed countries’ experience, had recently been directed to investigate the same issues faced by Egypt through empirical research findings from several developing countries. The interactive model of policy formulation by Grindle and Thomas (1991) and Grindle (1999), implies not only the need to involve entrepreneurs in the process,

42

but also the technocrats and the bureaucracy to decrease the opposition threat posed by them at any policy stage, and increase their acceptance to reforms. (Grindle and Thomas 1991, Grindle 1999). Efforts to include them in the policy process in earlier stages of agenda setting is imperative to the success of any institutional or policy reform.

In conclusion, the economic reforms in Egypt did not promote democratization, and as an effect the economic growth gains did not accrue for the vulnerable groups leading to the January 25 revolution. The high unemployment and poverty rates are still persistent in Egypt. The role of entrepreneurship in this regard, is beginning to be over used from the part of the government to be synonymous to economic growth, creating jobs, and alleviating poverty. However, all the policy measures taken by government and stakeholder, even if transcended to implementation phase, have focused on short-term programmes that neglect the longerterm more grave deficiencies in the institutional and policy formulation spheres. The weak business environment, property rights and rule of law, corruption and the state size are all institutional shortcomings that negatively affect the private sector, entrepreneurship, and economic growth. “In addition to the primary responsibility of designing and implementing coherent macro-economic policies, the government must create an enabling environment in at least three areas: investing in human capital, deepening institutional reform, and creating complementarity between public and private investment” (Radwan, 2003, p. 134). Furthermore, “Egypt needs to make a greater investment in building efficient, transparent, and dynamic institutions in both the public and private sectors, as well as in civil society, to more effectively coordinate economic reform with a wider scope of ownership and stronger ties to social policies” (Alissa 2007, 1). In reaching that end, “three types of state institutions need to be developed: institutions that influence the work of the bureaucracy, institutions that shape politicians’ behaviour …, and institutions that widen political space and participation for Egyptian citizens” (Alissa 2007, 21). Knowing where to start and how to start are questions that necessitate further research “in and of policy processes” in Egypt.

43

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