Friends in high places

THE Arab Spring has not delivered all that was hoped for it, but it did call time on two egregious examples of crony capitalism. After the revolution in Tunisia in 2011, 214 businesses, and assets worth $13 billion, including 550 properties and 48 boats and yachts, were confiscated from Zine el-Abidine Ben Ali, the deposed president, and his relatives and associates. In Egypt at least 469 businesses were linked to Hosni Mubarak, ousted as its president soon after Mr Ben Ali, some of which were seized.

Using data that have only come to light since the Arab Spring, World Bank economists have conducted a uniquely detailed study of the damage that crony capitalism does to an economy. Its findings suggest that, among Egypt's medium-sized and large firms, the politically connected ones made 60% of all the profits in 2010. Yet their share of the economy was far smaller and they provided only 11% of private-sector employment.

Politically connected firms seemed remarkably lucky in having non-tariff trade barriers to protect them. Some 71% of politically connected firms operated in markets protected by at least three such import barriers; only 4% of unconnected firms were as well cushioned. Generous energy subsidies were a favourite way for the government to help its friends: 45% of politically connected firms operated in energy-intensive industries, compared with only 8% of firms as a whole.

In Tunisia the Ben Ali empire dominated the telecoms and air-transport industries, to which entry was highly regulated. They accounted for 21% of total profits in Tunisia in 2010 but only 3% of private-sector output and 1% of jobs. They had far higher profits and market share than non-crony firms in industries in which operating rights and foreign direct investment were heavily regulated. But in lightly regulated sectors they were far less profitable than non-crony rivals.

Although Messrs Mubarak and Ben Ali were swept away along with many of their cronies, the study warns that there is a risk of old habits returning. Egypt’s powerful army, in particular, has cronyish tendencies. Moreover, many of the policies that were conduits of favours to firms with powerful friends, such as energy subsidies and heavy, discretionary regulation of competition and foreign direct investment, remain in place.