Sunday, December 25, 2011

Zombie Economics and the Egyptian Revolution

            Just a brief note since I don’t have access to my books and notes while I’m in Cairo.  I see that the meme that the Armed Forces control between 20 and 45% of the Egyptian economy is making its way around again.  While there is no doubt that the Armed Forces and SCAF have economic power and privileges to maintain  I’m very dubious about these figures.  And nobody wants to do the work of looking at it more careful so it just won't die.  When I return to Seattle I’ll see if I can find some actual numbers to plug into the argument, but I recently came to understand what people who use this figure are thinking.  If you think in terms of a ratio between army and the economy then there seems to be a confusion between the role of the state overall in the economy and the armed forces on the one hand and between industrial economy and the economy overall on the other.  Confusing the role of the armed forces with that of the state makes it seem proportionately larger than it is; confusing the latter two makes the economy seem smaller than it is (which again, makes the role of the army seem bigger). In other words we're looking at Army economy/Total Egyptian economy and coming up with something between 1/5 and 2/5 or 20-40%. 

            Let’s begin with one very simple definitional problem.  What do we mean by “the economy”?  I don’t mean any fancy postmodern issues.  I mean simply what do we count?  Are we looking at Gross Domestic Product or something like the total value of all economic exchanges in the country?  Are we looking at total capital formation or something like the value of all the productive capital in the country?  In the former case we’re concerned about returns to factors rather than the total value of productive factors but if the latter we’re interested in something like the replacement value of factors of production and especially land and capital goods.

            We can try, qualitatively, looking at both.  The Egyptian state owns a lot of capital.  Of course it owns all the capital that the Armed Forces own but it also owns a lot of property not owned by the Armed Forces.  It owns a very large canal linking the Red Sea with the Mediterranean from which it receives significant returns.  It acquired this asset at zero cost in 1956 but has spent quite a bit on repairing  it (generally and after several destructive wars)  as well as making capital investments to enlarge it.  It also owns a very large dam in the extreme south of the country which may need replacement in about 100 years.  The state also has extensive and valuable infrastructural investments in canals, roads, government buildings, civil airports, as well as educational, health and policing systems.  It also owns valuable mineral resources in the form of producing assets for its oil and gas reserves.

            The Armed Forces have extensive investments in industry as well as other sunk capital costs which we can think of as essentially worthless (unproductive) investments economically although they are very reassuring to society at large.  The Armed Forces appear to own a significant number of trucks, cars, busses, tanks, armored personnel carriers, airplanes which are rarely deployed and which carry neither passengers nor freight but which are capable of destroying significant quantities of capital if necessary.  The last time these planes appear to have been used for anything other than training was during the February demonstrations when they briefly took to the skies.  The armed forces also own significant numbers of weapons, uniforms, and the capital installations necessary to keep all of these investments in good repair. 

            The armed forces have also made a significant number of direct investments in industrial production whose total value we do not know.  If the army owned all the capital that produced the country’s industrial output, it would be responsible for close to 40% of GDP.  But this is to assume there are no other state-owned enterprises and no privately-owned industrial enterprises.  If only half of industrial output is produced by other state firms and private firms then the Armed Forces could control about 20% of GDP.  But if this were the case then it would be doubtful that we could account for the importance of private-sector investment over the past decade.  Nor would we be able to account for the sectoral shifts toward communications and services (including tourism and finance) which have been important sectors for economic growth (although not necessarily for employment growth). 

            Some of these investments must be profitable especially because the cost of capital for the Armed Forces must be very low (if not zero) and their labor costs may also be very low if they are using conscripts, but there is no reason to believe they are vastly more profitable than other state enterprises.  Given that private industry competes with the firms owned by the Armed Forces in a variety of sectors (bottled water, agricultural products and so forth) which do not have a zero cost of capital it is unclear what we are looking at. 

            If we think in terms of capital formation, then it would be clear that (apart from its investments in industry) the armed forces have very large and very unprofitable investments.  Theirs are, like military expenditure everywhere, an important element in maintaining demand for civilian goods but do not themselves play a significant role in the economy.  In addition to the Suez Canal, the High Dam, the educational, health, and security services there is another sector that matters in terms of capital formation: the private sector.  Although industry was nationalized in the 1960s, land always remained in private hands.  It is very hard to believe that whatever the army owns amounts to something like value of all of Egypt’s agricultural land and urban real estate which (at least as an order of magnitude) is what the armed forces would have to own if they were to control 40% of the economy. 

            The officers of the armed forces do have privileges and the institution has acquired significant property in Egypt which gives it a stake in whatever arrangements are made for the economy in the future.  But this, it seems to me, neither explains nor excuses how they have chosen to determine the country’s political future nor the methods they have employed to do so.  The armed forces bear the moral and political responsibility for what they have chosen to do.  Economics are an implausible substitute for insisting that they bear that responsibility. 

1 comment:

Simon said...

>I don’t mean any fancy postmodern issues. I mean simply what do we count?

This is one of the best phrases I have ever read.