Amr Adly Explains the Clefts in Egypt's Economy

Amr Adly is associate professor in the department of political science at The American University in Cairo (AUC). He has written extensively about politics and economics in the Middle East and North Africa, especially Egypt, including his book Cleft Capitalism: The Social Origins of Failed Market Making in Egypt.

Capitalism isn’t just one thing. At its core, it’s a system of markets and private ownership, but that can be done in many ways. The institutions underlying this system will look different everywhere capitalism appears. Every capitalist country has its own experience with capitalism.

Adly studies Egypt’s experience with capitalism with a special focus on its institutions. His main takeaway is that Egypt has a “cleft” capitalism: a divide between subsystems that have their own sets of rules. They differ in a lot of ways, including economic formality, access to capital, and the divide between social and economic worlds. Thus, capitalism in Egypt isn’t just one system — it’s multiple subsystems that exist alongside each other.

Adly digs into history, sociology, politics, and economics to explain how the cleft came about and why it persists. The exact experience is unique to Egypt, but it has lessons about capitalism more generally and how it can be changed to create more widespread prosperity.

Understanding institutions

Adly is an institutionalist, but what is an institution? For his book, he adopts a definition from economist Avner Greif: “an institution is a system of rules, beliefs, norms and organizations that together generate a regularity of social behavior.” For example, think of all the beliefs, norms, and organizations which create property rights: “politically determined rules define the relevant properties, assign property rights, identify property owners, define offenses, and specify corresponding (legal) penalties.”

Which institutions are needed to create a working economic system? The neoliberal answer is a particular set of rights: private property rights, rule of law, and contract enforcement. These are supposed to be sufficient for production and exchange: the basis of markets. The government’s role, then, is to act in service of markets by simply protecting these rights.

But Adly says this answer misunderstands history and the diversity of social arrangements in countries outside the capitalist core. In our conversation, he compared China and Indonesia. Indonesia has more closely followed the neoliberal advice (from the IMF and the World Bank), but its economic development has been weak. China, by contrast, has created its own system with very different rules which has seen incredible growth in recent decades. In his book, Adly argues that Egypt has done reasonably well (with some notable exceptions) at protecting the “standard” set of rights, but its economy remains cleft, slowly developing, and not very integrated with the rest of the world.

Moreover, the ways in which Egypt has breached the neoliberal rights are not unique. Political favoritism, state predation, and detrimental regulations are common both now and historically — even in the most “advanced” capitalist economies.

Adly’s conclusion is that many other institutions matter. Neoliberal institutionalism downplays the role of “labor or industrial relations, education and vocational training, skill formation, taxation and subsidy policies, or administration and public investment.” Each of these is crucial to understand the past and present of Egypt’s economy, and, in fact, play important roles in all capitalist systems. Adly especially emphasizes institutions which manage the factors of production: land, labor, and capital. Institutions in the government and banks control access to these factors, and a lack of access creates the cleft in Egypt’s economy.

The clefts and their consequences

Adly identifies three economic subsystems within the Egyptian economy.

• Baladi Capitalism: The name comes from the Egyptian word for “folksy” or “of the common people.” Most Egyptians operate primarily in this system. It includes hundreds of thousands of formal and informal small and micro establishments with fewer than 10 employees. Social and economic life in this subsystem are largely indistinct, and there is limited connection to the political world.
• Dandy Capitalism: In contrast to “folksy” baladi capitalism, the dandy capitalist system clearly differentiates social and economic life. Economic interactions are based on business, rather than social or political, relations. This system comprises a few thousand mostly large businesses.
• Crony Capitalism: Economic and political life in this system are intertwined. Business leaders have close connections to political leaders and make use of the state’s power and resources — creating favorable rules and accessing capital.

Neoliberal institutionalists would decry crony capitalism, but the biggest divide is between baladi capitalism and the rest. That divide has less to do with private property rights, rule of law, and contract enforcement and more to do with the other institutions like education and especially access to capital. It’s relatively easy for Egyptians to start businesses, but it’s difficult for them to grow because business banking is inaccessible to most people. Many Egyptians are stuck in the baladi system not because they lack their neoliberal rights and not because they lack the will, but because they lack access to financial (bank credit) and physical capital (land).

The cleft systems have a huge impact on individual lives. Since the systems are all in one country, most Egyptians will interact with all three, but the subsystem in which they primarily operate influences their economic, social, and political lives. Those living in baladi capitalism are mostly limited to survival rather than growth.

In addition to the individual effects, there are broader economy-wide effects, most notably the “missing middle”: a lack of medium-sized businesses (hiring 10 to 50 employees). There are large businesses in the dandy and crony systems, and there many small businesses in the baladi system, but these small businesses can’t grow into medium-sized businesses due to lack of capital. Medium-sized businesses form the basis of stable, widespread growth including formality and integration into world markets. Without these businesses, most of Egypt’s economy remains stagnant.

General lessons

Although many aspects of Egypt’s economy are unique, its experience is informative about capitalism around the world, especially in the global South. The cleft in productivity between the baladi and dandy subsystems mirrors the productive dualism occurring in developed countries where labor is polarizing into a few highly productive jobs and many less productive jobs. And productive dualism has its own “missing middle”: a shrinking middle class. So, like Adly, developed economies are looking beyond the old neoliberal paradigm and embracing a wider understanding of what it takes for an economy to work for everyone: not just a few rights, but a host of institutions working together.

From a policy perspective, Adly’s main advice is to understand and work with existing institutions. Even well-intentioned policies can fail if they don’t account for the reality on the ground. Domestic and foreign investors, sponsors and donors have tried to pour money into Egypt’s economy, but it has failed to create systematic change because the money didn’t reach the broad base. Contrary to neoliberal opinion, the main problem wasn’t corruption. The problem was rampant informality and mistrust of the government. So, the solution isn’t cracking down on corruption; it’s learning how to connect with the majority of people and build trust.

The general point is that clefts are not inevitable. Although they show up often in capitalism (urban vs. rural or bourgeois vs. proletariat), Adly believes there is no “iron law” of capitalism which dictates division or exclusion. Instead, he says, we live in a world of actions and agency. Economic divisions aren’t the inevitable result of technology or forces beyond our control; they are the result of choices, and choices can change.