MIDDLE EAST PROGRAM OCCASIONAL PAPER SERIES SUMMER 2015

MIDDLE EAST

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2015

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Al-Sisis Egypt:
The Military Moves on the Economy
Marina Ottaway,

Middle East Fellow,

Woodrow Wilson International
Center for Scholars

E g y p t i a n
President Abdel
Fattah al-Sisi has
explicitly chosen
an authoritarian
political model
for Egypt, arguing that democracy is a luxury the
country cannot yet afford and that the constitution, while good, cannot be implemented
immediately. Al-Sisi has emphasized the priority at present must be to restore security and
rebuild a strong Egyptian state, and citizens
must sacrifice their own interests to those of
the state. Military support is key to the imposition of this authoritarian model, freeing the

regime of the necessity to court the support

of political parties, civil society organizations,
and voters.
Al-Sisis economic model for Egypt, while
still not fully developed, is also relying heavily on the military. Two elements of this
model to have clearly emerged so far: al-Sisi
wants rapid economic growth in order to
restore Egypt to its former position as a
regional power; and he believes that rapid
economic growth can best be brought about
by the implementation of large projects under
military supervision. Although al-Sisi does not
dismiss the importance of the private sector in
his speeches, the policies he has put in place
so far favor the military economy. Whether
or not this approach can generate rapid eco-

MIDDLE EAST PROGRAM OCCASIONAL PAPER SERIES SUMMER 2015

About the Middle East Program

Director
Henri J. Barkey
Associate
Kendra Heideman
Assistant
Julia Craig Romano
Special thanks
Special thanks to Kendra
Heideman for coordinating
and editing this publication;
Julia Craig Romano and
Nathan Odendahl for editing
this publication; the Design
staff for designing the
Occasional Paper Series;
and Michael Darden for
taking the photograph.

The Middle East Program was launched in February 1998 in light of

increased U.S. engagement in the region and the profound changes sweeping across many Middle Eastern states. In addition to spotlighting day-to-day
issues, the Program concentrates on long-term economic, social, and political
developments, as well as relations with the United States.
The Middle East Program draws on domestic and foreign regional experts
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Current Affairs: The Middle East Program emphasizes analysis of current
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society at large. The Program examines employment patterns, education, legal
rights, and political participation of women in the region. The Program also
has a keen interest in exploring womens increasing roles in conflict prevention
and post-conflict reconstruction activities.
Islam, Democracy and Civil Society: The Middle East Program monitors the
growing demand of people in the region for the transition to democratization,
political participation, accountable government, the rule of law, and adherence by their governments to international conventions, human rights, and
womens rights. It continues to examine the role of Islamic movements and the
role of Islamic parties in shaping political and social developments and the
variety of factors that favor or obstruct the expansion of civil society.

The opinions expressed herein are those of the author and do not reflect
those of the Woodrow Wilson Center.

nomic growth, it will undoubtedly strengthen the

position of the military.
Any economic policy in Egypt today is bound to
affect the balance of power among the three major
components of the economy: the state, private, and
military sectors. The state sector, though diminished by a wave of privatizations in the 1990s and
early 2000s, remains a source of employment for
Egyptians and of power for bureaucrats who oversee
it. The private sector, which is comprised of 91 percent of microenterprises with one to four workers
and one percent of enterprises with over 100 workers, has not established itself yet as the major driver
of economic progress. Finally the military economy,
which ranges all the way from bakeries, butcheries,
and service stations to major engineering projects
such as the enlargement of the Suez Canal, is a
steadily growing force likely to expand to an unprecedented extent and in unprecedented sectors as a
result of the policies favored by the al-Sisi regime.

Shifting Balance among the State,

Private, and Military Economies
A brief overview of how the state, private, and military economies developed in Egypt from the days
of President Gamal Abdel Nasser in the 1950s and
1960s to the present shows how the importance of
these three components has shifted over time.
Nasser wanted Egypt to grow economically, rapidly becoming a modern industrialized country. Like
many developing country leaders of the day, he saw
the state as the main agent of development, making
up for a sluggish and, in his view, exploitative private
sector that was not delivering. Under his leadership, large landholdings were broken up; by 1969
the upper limit on private farms had been set at 50
feddan (about 50 acres), and all farmers were subjected to state directives concerning crops and crop
rotation. The state also invested in heavy industry
and infrastructure projects, first and foremost the
building of the Aswan Dam. The policies created a
large state sector and a government bureaucracy with
a vested interest in the perpetuation of that sector,

which created jobs and patronage and was a source

of power for its top officials. Under Nasser, the
private sector continued to account for about twothirds of the economy, actually growing as a result
of the opportunities provided by the governments
investment in heavy industry and infrastructure.
It was not, however, the driver of change nor did
it exercise much influence in the system. In this
period many military officers went on to become
managers in the new state sector. Even more importantly, the military economy (which had developed
historically to provide the armed forces with goods
it needed) started expanding by taking a leading
role in infrastructure and land reclamation projects
requiring heavy engineering and by investing in the
production of consumer products such as domestic
appliances.
The balance between public and private sector underwent a change under President Anwar
al-Sadat, once again for reasons that were as much
political as economic. Following in the wake of the
immensely popular Nasser, Sadat faced the challenge
of asserting himself as a leader in his own right,
coming out from under the large shadow cast by his
predecessor. He established his own political identity
by launching the October 1973 attack across the
Suez Canal into Israeli-occupied Sinai, becoming
the Hero of the Crossing, and eventually negotiating the return of the entire Sinai to Egypt. He also
sought to fight the influence of the Nasserites by
allowing the revival of the Muslim Brotherhood and
more broadly of Islamist organizationsironically,
he was assassinated by Islamist radicals in 1981.
In the economic realm, Sadat established his
identity by launching the open door policy, or
infitah, which started a shift in the balance between
public and private sector. He had been considering
a new economic policy to open up the economy
since he had come to powerthe state-led policies
had proven unsustainable in the long run, and the
economy had been in a slump since the 1967 SixDay War with Israel. However, he only unveiled
a new policy in 1974, after the war with Israel had
increased his political stature.

MIDDLE EAST PROGRAM OCCASIONAL PAPER SERIES SUMMER 2015

Like Nassers state-centric approach, the open
door policy developed and evolved over time. Sadat
did not subject Egypt to the shock therapy of massive
privatization, as many formerly socialist countries
would do in the 1990s. Rather, he started removing
the controls that had hemmed in the private sector
without dismantling the public sector. For example,
private banks nationalized by Nasser reopened,
competing with public sector banks for deposits
and remittances from abroad. But the government
maintained strict control on the value of the currency, rather than allowing the Egyptian pound to
float. Nevertheless, opportunities for small and large
entrepreneurs expanded rapidly. Remittances from
the growing number of Egyptians working in Gulf
countries after the rise in oil prices were invested
in small family businesses; and travelers returned
to Egypt with large amounts of merchandise of all
types to be resoldthe gigantic size of Cairo airport
baggage carts in this period was a visible reminder of
the importance of this activity. At the other end of
the spectrum, large fortunes were made in construction and trade, though initially not in industrial
development.
The growth of the private sector triggered tensions between the new entrepreneurs, who wanted
more space and opportunities, and bureaucrats,
who controlled the public sector economy and
saw the changes brought about by the infitah as a
threat to their power. Much of the bureaucracy had
little incentive to design and implement economic
reforms that would benefit private entrepreneurs
and diminish its own control.
The military economy also benefited from the
open door policy, although the full extent of the
change only became clear during the 30-year presidency of Sadats successor, Hosni Mubarak. Sadat
himself had played down the military economy,
focusing efforts on the production of arms and commodities the military itself consumed. But Law 43
of 1974, which launched the infitah, and Law 32 of
1977, which amended it, provided opportunities for
the military to enter into partnerships with domestic
and foreign investors and to expand the scope of its
activities.

Mubarak, as cautious in his economic policies

as he was in everything else, was slow to introduce
further measures to facilitate the expansion of the
private sector, despite pressure from domestic businesses as well as international donors and financial
institutions. Only in the early 1990s did the government introduce more reforms and start privatizing state-owned enterprises, which at the time
accounted for about 70 percent of invested capital.
In 1994 the government announced a privatization campaign targeting some 300 enterprises, but
the campaign proceeded slowly. By the time of the
uprising in January 2011, about half the targeted
enterprises were still in government hands, and the
process had ground to a halt. By then, the companies
most attractive to investors had already been privatized and resistance to privatization was mounting
because the process was perceived to be corrupt,
favoring individuals with ties to the government,
and because the newly privatized companies inevitably fired workers in order to reduce the bloated
payroll.
Despite the problems, privatization shifted the
balance between private and public sector, with
mixed consequences: GDP growth rates increased,
reaching over 7 percent between 2006 and 2008,
but so did income inequality. By the time the 2011
uprising put an end to Mubaraks rule, Egypt had
become a country of stark contrasts. At least a quarter of the population was mired below the official
poverty line, with many more hovering just above
it. At the other extreme, a wealthy and ostentatious
elite had emerged. In Cairo, the differences were
represented graphically by the contrast between the
decaying slums and the new gated communities.
Like the private sector, the military economy
was also booming. As in Nassers days, the military
was a contractor on many infrastructure projects,
but most importantly it entered into partnerships
with foreign and domestic investors without becoming any more transparent about what it was doing.
Lack of transparency is the reason why there are no
reliable studies of the size and functioning of the
military economy. Estimates vary wildly, from a low
of 5 percent to a high of 40-50 percent. Low-end

estimates, which the military supports, appear to

be based on the businesses that the military openly
controlsfrom arms manufacturing to bakeries and
service stations, many of which employ conscripts as
free labor. The high-end estimates appear to include
a much wider array of undertakings in which the
military has an interest, from Red Sea resorts to land
deals that transfer to commercial development land,
over which the military was given control decades
ago for security reasons. Scholars have so far been
unable to produce good data on these deals and are
unlikely to succeed as long as the military is free
of civilian oversight and treats such information
as a military secret. Nevertheless, the conclusion
is warranted that the military economy at the end
of the Mubarak period had two components: one
functioning along the lines of the old state-owned
enterprises and one functioning more like the freewheeling and often corrupt private sector.

Al-Sisis Vision: Big Projects and Military

Entrepreneurship
Al-Sisi inherited the economy of the late Mubarak
period, only in worse conditions. Neither the
Supreme Council of the Armed Forces (SCAF),
which ruled the country from the fall of Mubarak
to the end of June 2012, nor President Mohammed
Morsi, in the following 12 months, introduced
measures that changed the character of the economy. But the overall economic situation worsened
because the prolonged instability dried up foreign
and domestic investments and reduced the flow of
tourists and of the foreign currency they brought
into the country to a trickle, slowing down the GDP
growth rate. Structurally, however, Egypt remained
a country with an important but shrinking state sector, a private sector with strong ties to the political
establishment, and a significant military economy
with growing ties to domestic and foreign entrepreneurs. The economy was also burdened by the policy
of subsidizing energy and basic foods as a form of
welfare. By 2013, subsidies introduced by Nasser
were consuming 26 percent of total public spend-

ing, or 11-12 percent of GDP, according to IMF

estimates. Energy subsidieson electricity, bottled
gas, and gasoline for carsaccounted for most of the
expenditure. High rates of absolute poverty as well as
growing income inequality created discontent manifested in a large number of strikes and protests that
the government could not control either before the
uprising or during the turbulent years of the SCAF
and Morsi, and not even after the 2013 coup dtat.
President al-Sisis emerging, ambitious vision
for Egypt appears detached from the reality on the
ground. Egypt is essentially bankrupt and kept afloat
by financial support from Saudi Arabia, the United
Arab Emirates, and Kuwait, which have infused
some $20 billion into Egypts economy since 2013.
Yet the presidents plans include multibillion dollar
investments in undertakings of dubious financial
viability. As explained in Egypt Profile April 2015,
a document produced by the American Chamber of
Commerce in Egypt, al-Sisi believes the future of
Egypt rests on 12 pillars, 4 of which are predominantly economic. The economic pillar calls for an
average growth rate of 7 percent per year between
2013 and 2030, reaching 12 percent by 2030. By
that year, it is expected that investment will reach
30 percent of GDP and the unemployment rate will
be reduced to 5 percent. The urban development
pillar calls for building 7.5 million homes by 2030
and resolving the slum problems. The energy pillar
and the environmental pillar set equally ambitious
targets for energy efficiency, air pollution, and garbage collection and disposal. There are no promises
of immediate relief for Egypts hard-pressed citizens.
It is a vision for the greatness of the state, and al-Sisi
has warned his countrymen that they need to be
ready to sacrifice their interests to those of the state.
And although the president has repeatedly declared
that the private sector is key to Egypts greatness, the
specific projects he has announced so far cannot be
carried out by the private sector alone.
The projects al-Sisi has announced so far are
nothing short of grandiose. First among them is the
broadening of the Suez Canal to allow ships to travel
simultaneously in both directions, thus shortening
waiting and transit time and allowing more ships to

MIDDLE EAST PROGRAM OCCASIONAL PAPER SERIES SUMMER 2015

use the waterway. Government projections forecast
a doubling of the canal revenue as a result of the
improvement, but provide no evidence that there
is enough pent-up demand to make the predictions
come true. Independent estimates of increased traffic
are far less sanguine than official projections, even
raising doubts about the economic viability of the
project.
The Suez Canal project started a year ago and
the first phase was unveiled during an official opening ceremony on August 6. The project was carried
out under military management and with heavy
reliance on foreign contractors to undertake the
dredging work because neither the military nor the
Egyptian private sector had the capacity to move as
quickly. The financing so far has come mostly from
the Egyptian private sector: in September 2014 the
government issued investment certificates yielding a
12 percent interest rate, far above market, to finance
the project, reportedly attracting two-thirds of the
$8.4 billion needed for the project in just one week.
The improvement to the canal is seen as the first
phase of a project which will also entail the development of a new industrial zone along the waterway
and of facilities to make Egypt into a Dubai-like
transshipment point for international trade. The
latter would involve merchandise being transferred
from larger to smaller ships for distribution to different countries or, conversely, collected from various
points of origin and consolidated onto larger vessels.
Both projects were announced with great fanfare at
an international investors conference held in Sharm
el-Sheikh in March 2015, accompanied by slick
brochures but not, as far as this author can uncover,
by serious studies of their economic viability. Serious
doubts about the viability of the Suez Canal enlargement have already risen, as mentioned earlier. And it
remains to be seen whether Egypt can establish itself
as a transshipment hub in a competitive environment in which Dubai and Singapore are already well
established and enjoy a strong record of efficiency.
Another grandiose project al-Sisi has announced
is the building of a new administrative capital for
Egypt between Cairo and the Suez Canal at a cost
of some $300 billion. The prospectus for the project

unveiled at the Sharm el-Sheikh investors conference depicts an ultramodern town of skyscrapers and
green parks. How the challenge of providing water,
transportation, and housing for those working there
will be addressed is not discussed anywhere in the
prospectus, while statements by some officials that
the new city will be inhabited only by highly educated people raise even more questions about whether
such a city could ever function. A Memorandum of
Understanding signed at Sharm el-Sheikh between
the Egyptian government and the Emirati businessman Mohamed Alabbar for the construction of the
first, $5 billion phase of the project was already
threatened in June by disputes over financing and
the failure of the military, which controls the land in
the area, to make it available for free. Apparently, the
militarys interest in maximizing returns from the
land it controlled trumped al-Sisis interest in seeing
the new capital built, suggesting al-Sisi does not have
total control over the militarys affairs.
A $40 billion project to build low and moderate
cost housing announced in March 2014 by then
Minister of Defense al-Sisi, was also in trouble
before starting. The project, to be managed by the
military, calls for the construction of one million
housing units over a five-year period by the Emirati
company Arabtec on land provided for free by the
Egyptian government and with financing provided
by Egyptian and foreign banks. In April 2015, the
Chief of Staff of the Armed Forces Engineering
Authority announced that the agreement had been
suspended, with Arabtec complaining that the government was not making the land available for free
but was trying to sell it, and that it expected Arabtec
to raise all financing from outside Egypt.
The early difficulties encountered by these projects, touted by the al-Sisi regime as the backbone of
the effort to rebuild Egypt into a modern, dynamic
country, suggest that the big project approach will
probably not work better under al-Sisi than it did
under his predecessors. Although Nasser did succeed
in building the Aswan Dam, a project that brought
permanent change to Egypt, most big projects in
Egypt have been a failure. In recent years, Mubaraks
New Valley or Toshka project, which aimed at

developing some 600,000 acres of new irrigated land

in the Western desert and relocating 20 percent of
Egypts population there was such an abject failure
that it is rarely mentioned by the Egyptian government. More recently, a low-cost housing project
launched by the SCAF in 2011, which was supposed
to deliver 50,000 housing units by June 24, 2014,
only managed to produce 57 units by October 2014.
Projects such as those unveiled so far would require
some form of state participation in any developing country. What is notable in Egypt at present is
that state participation appears to mean exclusively
participation by the military. This suggests a further
shift in the balance of power between the old, stagnant state sector controlled by the bureaucracy and
the new sector controlled by the military, through
which new projects are channeled.
The shift is likely to be long-lasting, even if the
current projects fail, as they are likely to do. A presidential decree issued on May 18, 2015 has created
a new military company called Military Production
Company for Engineering Projects, Consultancies
and General Supplies. The decree authorized the
company to engage in a wide range of activities
including development, contracting, and construction for housing, sports facilities, schools, hotels,
tourist resorts, hospitals, factories, and roads, as
well as urbanization and urban development activities, public relations and advertisement, real estate
development, and tourismvery little seems to be
omitted from the scope of the new military company. The military is thus poised to become the
new, dynamic face of state intervention, but like
everything that involves the military it will remained
shrouded in secrecy.
The economic consequences of favoring the military-run sector over the state-run one are unclear,
and may not be significant: there is no data showing
one is more efficient, better managed, or less corrupt
than the other. But the political consequences are
clear. By putting the military economy at the center
of its strategy, with control over the most important projects, the al-Sisi regime is strengthening the
power of the military and its reach, and pushing the

possibility of a return to civilian rule further into

the future.
By channeling big projects through the military
and empowering the military economy to expand
into all sectors, the al-Sisi regime is also reducing the
space for the private sector. The business community
is worried about this development although few dare
to voice their concern openly. One who has done
so is Naguib Sawiris, the head of Orascom, one of
Egypts largest conglomerates. But many fear that
al-Sisis approach will reduce private companies to
the role of subcontractors in projects dominated by
the military.
The al-Sisi regime has taken some important
steps toward putting Egypts economic house in
order, slowly reducing the budget deficit and cutting back energy subsidies and even bread subsidies.
Such measures were badly neededeven the Morsi
regime had tried to implement some of themand
the rate of growth has started to inch up. Even as
needed reforms are implemented, and even if some
of the large projects are eventually abandoned as the
Toshka project was, the consequences of the present
policies will be felt for a long time. Nasser created a
bureaucracy with a vested interest in the perpetuation of the state sector. Al-Sisi is strengthening the
importance of the military economy and in the process creating a new set of vested interests.

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