Role of the state as a salient stakeholder in a transition economy: the case of Egypt

Role of the state as a salient stakeholder in a transition economy: the case of Egypt

Samir M. Youssef


Egypt, a developing country, is still going through a transition process from a socialist to a free market economy. With the declining role of centralized control, an institutional void was created. The various business stakeholders expected to fill in this gap are still in the process of formulation. The State continues to be in control of resources and is considered a major source of values that have considerable impact on society. Its tremendous sources of power make it more salient than other stakeholders. This paper aims at identifying this role of the State and its impact on other stakeholders


Since the 1980s, Egypt, a developing country, has been going through a transformation process from a socialist economy, where the State controlled 90 percent of the economy, to a mixed economy with the private sector controlling 75 percent of total economic activities. For about thirty years, prior to the start of economic liberalization, the business community was totally removed from proper business practices. The issues of business stakeholders, business ethics and social responsibility were not relevant. The Egyptian Government (Government, State or Bureaucracy are used interchangeably) assumed full responsibility for the society at large. Different stakeholders had no role because the Government was the sole arbitrator of their conflicting claims. During the transition stage which has started in 1975 and is still ongoing, some relevant stakeholders are still absent from the scene while those who have emerged are still weak. The purpose of this paper is to identify the role of the State as a salient stakeholder in a transition economy, using Egypt as an example, in light of the relevant theoretical formulations.


The subject of this paper is related to a number of theories dealing with the issues of stakeholders, transaction costs, principal-agent relationships, bureaucracy and corporate governance and integrity. Business stakeholders are those groups or entities that have a claim or influence on company’s resources and their welfare should be embedded in the company’s decision making process. The moment that business firms and their managers accept these claims and the ensuing responsibilities, they have entered the domain of moral principles and ethical behavior (Clakson, 1995). This takes place either in reaction to existing laws or in a proactive manner regardless of legal obligations (Frederick, 1995). The latter case is important in situations where laws or the status of stakeholders lag behind society’s expectations, a situation prevalent in less developed countries (LDCs) going through transition. It is generally agreed in management literature that achieving a balance between corporate interests and those of the various stakeholders will lead to a positive impact on corporate performance in the long run (Donaldson & Preston, 1995). Corruption as well as unethical behavior may create some short-term gains but it will cause long term difficult to repair damage to development and the social fabric of society (Williams, 1999). For example, bribery can help to cut “red tape” but it encourages uncivil behavior and disobedience of the law.

Business stakeholders are basically similar in all countries, regardless of the level of development. The difference is whether they are active or latent. They could be internal like stockholders and workers or external like consumers, suppliers, investors, creditors, government and the society at large. In some developed countries (DCs), like the United States, different stakeholders and the supporting legal framework are highly developed. In others, like Japan, there is more reliance on societal values than on formal or contractual relationships (Economist, 1992). Some stakeholders are more salient than others. This is due to differences in relative power, legitimacy and the ability to establish priorities or force urgency of issues (Mitchell & Bradley, 1997). In attempting to understand the roles of different stakeholders, the concept of levels has been introduced. These levels range from the international to the macro and the micro levels.

In a situation of flux where institutions and different stakeholders are still being developed it is important to understand the interactions between these different levels. Each level is supposed to carry out its responsibilities if the lower level is to act in an ethical manner (Enderle, 2003).

In LDCs going through transition, the bureaucracy continues to possess enormous power due to its continuous control over resources. It is even called by some the “mega-force” (Austin, 1990). During the period of socialism it controls and manages the economy and during transition it leads the change and it controls distribution of resources.

The bureaucracy, with its rules and procedures, is expected to provide fairness and equity, generating what is termed “the ethos of the office”. In modern times it may not be as efficient as more dynamic forms currently espoused by many corporations and management scholars. However, it is more equitable and even more efficient than traditional organizations where resources and rewards are allocated based on patronage rather than performance (Du Gay, 2000). Once the administrator of the office is subjugated to personal interests, corruption creeps in. In a transition economy when people become disenchanted with a long association with a large bureaucracy there is a danger of slipping into anarchy by replacing rules by personal patronage. This involves the eradication of various formal rules, regulations and procedures and their replacement by informal networks.

Even in cases where the different stakeholders are weak, corporations are expected to act with integrity as an enlightened citizen of society. Corporate management should make self-assessment and observe the impacts of their choices and practices on the society at large (McIntosh, 2003). At a minimum ,business firms should enjoy good corporate governance. Management (agent) should represent the interests of shareholders (principle) in maximizing corporate value. Shareholders are an important stakeholder. This is important in transition economies where economic conditions are severe, resources are scarce and taking advantage of externalities are prevalent (USAID, 2000). The corporation should have an internal system that assures the collective moral responsibility of organizational members and their loyalty to corporate interests and not their own individual interests (Kaptein & Wempe, 2002). In this latter case, the company is the principle and employees are the agent.

Different stakeholders enter into transactions with the business firm and among themselves. Transaction costs are the costs of negotiating, measuring and enforcing exchanges. In a transition economy, transaction costs are high because of the underdeveloped nature of different institutions including those of the different stakeholders. Every transaction is governed by formal rules, such as laws, and informal rules (values) such as trust and mutual respect. The result is power equalization between the different parties of the transaction. Whenever one party enjoys higher power it tends to dominate the terms of the transaction even if the other parties have legitimate claims and their demands are urgent. This leads to unethical behavior. For example, consumers will find it difficult to obtain their rights if there is no consumer protection law, difficulties in enforcing the law if it exists or if NGOs who can support consumers are weak. Under this situation business firms would be tempted to exploit consumers (Yeager, 1999).


It is the assertion of this paper that there are inherent elements in the Egyptian Bureaucracy that retards progression along the ethical continuum. Self-interest and using rules as ends in themselves are some of these important elements. Businessmen tend to dance to the tune of the State, keeping their interests and survival as primary objectives. The Bureaucracy possesses power since it still controls huge resources in addition to using coercion to obtain compliance. However, being inefficient, priorities and urgency of issues could be determined by a political, social as well as an economic agenda. In addition to the government, being the custodian of public interest, other stakeholders such as consumers and employees have a morally legitimate claim on business firms. (Mitchell & Bradley, 1997). Since the other groups lack the attributes of power and urgency their level of salience is low. The self interest of the Bureaucracy, by slowing the transition to a market economy with its pluralistic character, tends to suppress the development of these other stakeholders. Submission of other stakeholders to the will of the State is due to the unequal distribution of power in their mutual transactions. The Bureaucracy, being prominent, has contributed to the creation of a value system that promotes self-interest over common interest. The spread of these values to the society at large has been a deterring factor to the development of proper corporate governance and contributed enormously to business inefficiency. This paper will demonstrate that the Bureaucracy, through its values and actions has been responsible for the retarded development of the different stakeholders. In addition to available literature and English publications this paper relies on Arabic published sources, which are listed under “Notes”.


A transition economy like Egypt had been until the early eighties managed in a centralized hierarchical fashion. As soon as the economy opened up a number of societal issues such as environmental decay, child labor, women’s rights, intellectual property and money laundering became important primarily through international pressures. As Egypt entered into international and trade agreements and became a major recipient of foreign aid it was obligated to pay attention to these issues in the developmental process. Also, as the State largely abandoned its command role, the need arose to develop arrangements in order to safeguard the interests of consumers, labor and weak business firms from the possible abuse of a free market economy. The business community was also placed under public scrutiny as being now mostly responsible for developmental effort. During the last twenty years, laws covering the environment, stock market, consumer protection, NGO’s, competitive practices, intellectual property, bank’s operations have either been passed or are still being considered by Parliament. These laws require efficient enforcement mechanisms that are needed to detect deviations and insure prompt implementation of the law (Hill & Jones, 1992). These mechanisms will help curb opportunistic behavior by managers at the expense of other stakeholders. There has been considerable improvement in the area of environmental protection. The number of NGO’s, including Business Associations has increased significantly but their role is still weak. It is noticeable there is undue delays in passing laws and developing the needed legal and enforcement mechanisms.


Ethics in transition economies is generally discussed under the issue of corruption which is defined as “the misuse of entrusted power for private benefit”. It represents non-compliance with the “arm’s-length” principle, under which no personal or family relationship should play any role in economic decision making, be it by private economic agents or by Government officials (Pope, 2000). Due to the large and dominant role of the Bureaucracy in Egypt, corruption is often linked to transactions that involve government bureaus.

The process of transformation of the Egyptian economy has been relatively free of major social disruptions and the well known crony capitalism characteristic of the Soviet Union. The situation never reached the level of squandering public assets. However, Egypt is ranked high on the level of corruption according to Transparency International Index. It scores 3.4 out of 10, being the least corrupted. Its rank is 62 out of 102 with Finland on the top of the list (Transparency International, 2002). Meanwhile, according to Business Monitor International (2001), Egypt scores 61.2 out of 100 being the highest on business environment rating. This is compared with a regional average of 55.1. It ranks higher in that index than Tunisia, Turkey and Lebanon. This index is based on an indicator of investment climate that covers factors such as cronyism/corruption in addition to other factors such as red tape, legal framework, property rights and corporate tax regime. Admittedly, there are cases of corruption which are considered legal offenses, such as bribery, embezzlement and profiteering, which are reported in the press and legal action is taken. It is fair to say that not all cases of bribery are detected. There are cases of businessmen who fled the country after failing to pay off their huge debts to the banks. However official statements attempt to minimize the magnitude of this problem. It is officially reported that bad and doubtful loans only represent 5 percent of total credit.

Petty corruption among civil servants is wide spread, often linked to the tradition of wasta-the use of connections for personal gain. This type of corruption is difficult to detect and rarely has any legal implications. Studies show there is wide spread corruption in activities more connected with the Government, such as import and export transactions, tax collection, labor and insurance inspection, and loans from banks, in that order. The construction sector is more prone to bribery, since it is mostly connected with the Government and the petroleum sector is least infected since it is more connected with international companies (Fawzy, 1998).

Despite corruption reports the Egyptian economy is not performing badly on strict economic criteria. Growth rates of national income has ranged between a high of 5.7 in 1999 to an expected 3.3 in 2002. This is considered favorable compared with many LDCs. (1) However, if other measures are applied the picture may change. Per capita income is still very low. Approximately 22.9 percent of the population is below poverty line and illiteracy rate is around 45 percent (World Bank, 2001) The economy is also vulnerable to external events and has a meager export performance. Egypt has failed to match the average growth rates of exports of other developing countries during the nineties and in the year 2000. According to one author, the core of he problem is the lack of export culture. (2) International competitiveness requires, among other things, a highly efficient and disciplined work force and an efficient bureaucracy (Porter, 1990). Corruption creates a negative business atmosphere which deters foreign investment. It increases transaction costs and leads to inefficiency in the allocation of resources.

Some writers on Egypt maintain that the problem lies more in covert behavior that has constituted cultural complicity of a negative attitude encouraging defying the law and creating an uncivil behavior. The lack of trust of collective action through the Government and other institutions have given way to personalized solutions (Harik, 1998). This could be in the form of nepotism, favoritism and tax evasion. Some claims that a dangerous level has been reached when this attitude and behavior is not frowned upon but in fact has been institutionalized and legitimized and as such is threatening the basic moral fabric of society. (3) At this point, evading the law or collective rules and reaching instead personalized solutions is looked upon favorably and is considered the right thing to do.

Some of the cultural characteristics attributed to the Egyptian personality by one author may carry some unethical implications. These include limited tolerance for the different view, egocentrism, preference for job security and attachment to authority figures. (4)


Evidence suggests that corruption is universal. However, it is much more wide spread in LDCs. The primary reason is that these countries are patrimonial in nature where the public/private boundary is unstable or nonexistent. While DCs are non-patrimonial in nature and the boundary between public and private is existent and stable, Despite the existence of large bureaucracies in some LDCs they are still governed by patrimonial values. While political behavior and informal relationships are common in both LDCs and DCs, in the latter efficiency and merit are widely institutionalized. So, patronage-type relationships are governed by efficiency and not self-interest (Theobald, 1999). What is helping this is a pluralistic society that has a well functioning system of checks and balances exemplified; e.g, by real separation between the legislative branch and the executive branch in addition to democracy. Political pluralism helps institutional building; i.e., the rules of the game or the art of associating together. This helps in the allocation of resources based on the efficiency criteria (Manzetti, 1994). In patrimonial societies the objective is the stability of the regime, so allocation of resources is based on patronage; the spoils or resources circulate only within hegemonic groups. Promotion and recruitment decisions in public service are based on patronage.


Policies by the Government which are guided by political motives and patronage tend to set a bad example to follow as illustrated by the following cases. During transition, the Government continued to allocate huge chunks of real estate and desert land for reclamation among a number of hand-picked businessmen who showed promise, either real or imaginary. Also, whenever the government failed to supply public sector companies with their needs for foreign exchange it chose to close its eyes on violating the law by not discouraging them from relying on the black market (Harik, 1998).

As a reward for its suffering during the 1967 war, President Sadat rewarded the City of Port Said a free zone status. The original intention was to allow imports of raw material and components to enter the city tax- free to be processed and re-exported. Instead, the city was utilized as an outpost for smuggling ready-made cloths into the country which caused a great deal of damage to the local textile industry. Over the last 25 years the city’s merchants were given annually a total of 40000 import permits. Only 3000 persons were actively involved in importation and the rest sold their allotment for a price. The damage caused by this decision exceeded the creation of parasite activities to undermining the work ethos of the City’s population. Traditional crafts and professions (a total of 64) were neglected in favor of this new effortless activity. It is said that Port Said has institutionalized smuggling into the country. (5) It was only two years ago that a new direction for the city was announced that involved reactivating ship traffic through modernizing the port, agricultural development and natural gas exploration in addition to small business development.

Work ethos in Egypt has been highly damaged by a reward system which is not performance- based. In the government proper salaries are based primarily on level of formal education and years of service. While this may give the appearance of equity but in substance it is void of that quality. The Bureaucracy has institutionalized this practice and helped to make it spread out through the public and private sectors. In terms of its huge size and impact on the economy, the Egyptian Bureaucracy has been a major agent and carrier of values that govern relationships. Former bureaucrats and military officers occupy important positions in the joint and private sector. This process of value infiltration is explained here.

In face of low salaries, government bureaucrats have been preoccupied with devising ingenious means to augment their income by a web of supplements under different labels, such as for committee meetings and consulting services. These were financed from the State budget from funds originally set aside for other activities. Legal lee ways were used to justify these actions before the Public Accounting Authority charged with auditing the books of different governmental units. The top official of each unit enjoyed a great deal of discretion in allocating these supplements among his employees. In essence, this constituted payment for work that should have been performed during official working hours. This created a great deal of personal loyalty toward the top official of the unit to the point of carrying out oral directives even if it contradicted written rules. Bureaucrats never found it difficult to legally justify their actions given the enormous number of laws and regulations. One major objective of the liberalization program has been to simplify these rules and regulations.

These practices continued at a larger scale after creating public companies which enjoyed higher autonomy and became financially separate from the State budget. While the basic salaries in these companies were higher than those working in government proper they were still inadequate in face of the high inflation in the eighties. Under the new autonomy, officials of these public organizations developed their own by-laws in order to generously reward themselves and their employees so long as their units were self-financed.

Later on, to capitalize on liberalization trend, public sector companies started establishing joint companies with private sector participation in order to completely free themselves from government control. Heads of public companies appointed themselves as heads of these new companies. It became common that the same person occupied several top positions in several companies generating enormous benefits. These top officials definitely did not have the time to develop the internal management systems of these companies which continued to be run on a highly personalized basis. This self-seeking behavior that has spread from the government proper to the private sector has created a sense of inequity. (6)

Faced with a deep recession and pressures of competition many public sector and joint companies are currently undertaking restructuring and early retirement programs. Achievement along these lines are slow due to inherited culture, resistance by employees and limited commitment and vision of top management.


Laws and regulations that govern transactions have to be initiated, formulated and enforced by the Bureaucracy. It has been over thirty years since the adoption of the open door policy in 1975 but these issues are not yet fully resolved. During this period the path of a free market economy has seen ups and down. The Government, right from the start, has opted for a gradual approach to economic transformation. International Organizations claim there is undue delay in passing laws and they consider the institutional framework far from adequate for earnestly pursuing a free market economy. Procrastination is a well known attribute of Egyptian bureaucrats.


Formulating a whole new set of laws and regulations for a free market economy is not an easy task for a country that has lived under socialism for many years. Most of the laws needed for the new era have just been passed or are still being formulated or debated in Parliament. Environmental law was passed a few years ago. Laws which have recently been passed or still bending cover the areas of labor, intellectual property, antitrust, consumer protection and financial transactions. It is only in the area of the environment that enforcement has taken place.

Delays in passing and enforcing laws in the areas of social welfare and ethics are a common occurrence in LDCs. These countries give higher priority to economic growth over social welfare (Manzetti, 1994). For example, while the international code of marketing of breast-milk substitutes was supported internationally by powerful NGOs and international organizations it suffered from limited compliance from LDCs.

In addition to confusion over priorities, delays in the articulation process could be due to difficulties in envisioning consequences or to resistance by established interests. For example, one of the reasons for delays in passing the consumer protection law in Parliament, is arguments over the most appropriate enforcement mechanisms in light of a predominant producers’ market mentality, unsophisticated consumers, weak NGOs and slow litigation process. (7)

In formulating a law or a regulation another conflict, which needs to be resolved, is between the jurisdiction of different ministries or administrative units as well as between those affected by the law. Environmental law has been stranded for a long time in parliamentary debates resulting in a total of 17 different drafts. (8) Responsibility for submitting the antitrust law to Parliament was claimed by three different ministries; Ministries of Foreign commerce, Internal Commerce and Economy. Since its introduction in 1995 it has been revised 7 times. This delay is due to administrative haggling in addition to resistance by businessmen. They feared excessive government intervention in their activities under the guise of fighting monopolies. Businessmen also feared that firms may try to fetter competitors by falsely accusing them of engaging in monopolistic practices. (9) One of the debatable issues was the proper economic size of business firms and maximum allowable market share in light of the imposing size of multinational companies already represented in Egypt in a variety of forms. In fact there is a trend in the government and in the business community which favors mergers among banks and other companies. (10) Absence of rules that govern competition has encouraged concentration in various industries such as beverages, cement, insurance, banking, brokerage, textiles and investment. (11) Accusations of anti-competitive practices have already been made in areas like retail distribution, steel in addition to dumping of imported foreign goods.

Delays in the formulation and passage of laws could have been detrimental in creating excesses in the business community triggering the recent recession. In order to strengthen the cheque as a method of payment, the Government has been trying, unsuccessfully, on several occasions to pass a law prohibiting its use as a credit mechanism by deferring its date of payment. This latter practice has been used as a disguise for securing financing particularly in the construction sector, where buyers of units were asked to pay on installments by giving all the cheques in advance covering the expected period of completing construction. The developer would then submit these cheques to his bank for later collection and meanwhile they can be used as collateral for obtaining credit. In essence, the developer was obtaining credit twice, once from the buyer and another from the bank. Buyers would consent to this arrangement in anticipation of capital gain resulting from the increase in market value of their units. This practice has encouraged over-expansion in the construction sector, hundreds of court cases of bad cheques and the consequent defaults of businessmen on their loans. In tolerating this practice, the Government was torn between its role as a custodian of the public interest and its desire to stem the recession, even by closing its eyes temporarily on some unacceptable practices. While buyers and sellers may have benefited financially but at the price of not carefully examining efficiency considerations or projecting market needs. Failure to generate high returns during recession, many contractors preferred to stay out of the market all together, being not accustomed to improve their efficiency or to seek other market outlets.


There appears to be a close relationship between the size of the bureaucracy and corruption. One author maintains that corruption spreads whenever Government interference in the economy exceeds its capability of effective intervention. Also, corruption increases when rules and regulations become complicated, when bureaucrats are given subjective judgment, their pay is low and punishment for betraying public trust is low compared with the benefits that accrue to them from this behavior. (12) Despite privatization effort the size and influence of the bureaucracy is still huge. The government proper currently has a total of 5.5 million civil servants compared with 441 thousands in 1950. (13) On the average there is one public employee for each 10 citizens providing a total of 728 different services. This could provide a fertile area for delays and possibly corruption, considering the low salaries of public employees. It is estimated that only 1.2 million employees which is 25 percent of the current size is only needed. A bureaucracy of this size infiltrates all aspects of life; Its influence and cultural impact are tremendous. Officials clearly admit the negative influence of inefficiency and delays caused by civil servants. (14)

This problem is widely shared by many LDCs, where businessmen and even normal citizens are often exposed to corruption situations whenever they seek resources or any kinds of permits from the State. Officials may misuse public office for private gain (Szeftel, 2000). The extensive interlocking ownership and representation between the Egyptian public sector and the private sector creates an additional indirect impact. (15)

Ironically, while State dominance creates opportunities for corruption, it also acts as a catalyst for change, especially that other actors are not yet fully operative during the transition stage (Transparency International, 2002). The State, reluctantly, will have to initiate the development of the institutional framework necessary for a free market economy, a task not suited for the bureaucrat’s temperament.

Like any bureaucracy, the Egyptian State is hierarchical in nature with each unit primarily concerned about protecting its own turf. This bureaucracy has been described in the literature as “soft”, compared with that of Far Eastern countries which are efficient (Sprinborg, 1989). This characterization becomes clearly visible once you are dealing with the dynamic task of creating a whole set of institutions. This requires considerable horizontal interaction and coordination between different governmental units and between them and outside bodies such as NGOs and business firms. Overlapping responsibilities is a common feature which leads to diluting accountability. For example, while the Ministry of Internal Trade is primarily responsible for consumer protection, at least another four ministries are also involved. For example, the food industry is supervised by six ministries, each with its own set of regulations, causing delays and possibilities of corruption.

Developing and practicing the new role of an agent of change for the different ministries, which are accustomed to direct control, is not an easy task. The increasing complexity of the international and local environment, faced with a timid bureaucracy, hinders this new task. These difficulties were expressed by a recent Minister of Industry:

“Ability of the Government to ascertain quality level of various

products is constrained by limited technical and human resources.

These shortcomings are clearly noticeable in view of the increasing

number of producers as the economy opened up. The Industrial

Control Unit of the Ministry is currently checking quality

standards of a total of 16000 establishments. The way it performs

its role has not changed much since its establishment in 1957. For

example, in the automobile industry there are now a total of

sixteen plants instead of only one 25 years ago. In the past,

quality clearance by foreign producers was taken for granted.

Now, with the spread of production in many countries, there is an

urgent need to make local assessment of product quality. This

enormous task is making us consider contracting out this inspection

task”. (16)

It should be noted that toward the end of 1997 the Ministry of Industry considered giving exemptions from quality inspection to companies which have obtained ISO certificates. However, fear of inadequate compliance led to retraction of the decision. (17)

The bureaucracy stands paralyzed in face of a huge informal economy that operates outside official channels. For example, only 20 percent of firms in the food industry observe international standards of quality and packaging while 80 percent are operating unofficially and produce substandard products. Due to low income and unawareness, consumers buy these cheap but health- hazardous products. (18)


Environmental preservation is a latent demand by the society at large in LDCs, where citizens are preoccupied with their daily living. Despite preoccupation with economic development the Egyptian Government has succeeded in achieving major strides in this area primarily due to the unprecedented support by international donors. In principle, this activity is subjected to the same constraints associated with the Bureaucracy as discussed above. After considerable debate an environmental law was finally passed in 1994. There are sixteen ministries involved with environmental issues, most of them were originally against the creation of a strong Ministry of the Environment (ME) (Gomaa, 1997). During the process of law formulation and determining the authority boundary of ME, its power was reduced from a command authority immediately under the prime minister to a mere staff unit that relies mostly on giving incentives and granting permits rather than on imposing penalties. In the formulation of the National Environmental Action Plan, due to difficulties of establishing priorities and the complexity of formulating the task, the plan ended up by being a shopping list of projects to be presented to donor countries, thus creating redundancy, overlap and inefficient utilization of resources (Gomaa, 1997).

The role of ME was primarily coordination due to the fact that the task of environmental protection is divided among a number of ministries. This matrix structure is however falling short of achieving its objective due to the inherited shortcomings of the Bureaucracy and the limited development of the other player, namely NGOs and the business community. Absence of these institutions makes enforcement relies primarily on preventive measures by requesting an environmental impact study before authorizing new projects. However, while ME controls issuing permits after reviewing this study, penalties for noncompliance are within the jurisdiction of local municipal authorities where the projects are located.

Foreign funding has enabled the new ME to get around the traditional hierarchical structure by establishing a parallel structure manned by a nucleus of highly compensated and motivated professional staff carefully chosen from outside the Bureaucracy. Foreign donors are often involved directly in the management and follow-up of projects. This structure exists along side an old structure filled with the underpaid and de-motivated civil servants. Sadly, the new structure, which presumably performs an energizing function is only temporary in nature, until foreign financing dries up. Existence of a huge salary differential between the old structure and the parallel one creates a sense of inequity and demoralizes employees.

Coordination is most difficult whenever it is dynamic; i.e., it requires two way communication and mutual adjustment. It becomes more difficult once several organizations are involved. Most developmental projects in LDCs are of this nature (Brown, 1991). A common vision and clarity of roles are required (Garcia, 1991). For example, in the area monitoring and testing the environment there are at least seven government-sponsored research institutes involved. This is in addition to the many organizations and companies which themselves cause water pollution. For environmental degradation to stop, this issue should become an integral part of the strategy and work system in ME, various stakeholder and client organizations. The ME, with limited resources is only expected to play a catalyst role, but the major burden, including financing, planning and implementation have to be shouldered by stakeholder and client organizations.

Recognizing the importance of different stakeholders, the top board of ME has representatives of NGOs, concerned ministries as well as representatives of the business community and the public at large. While there is recognition at the policy level of the dynamic nature of the task, actual implementation at the operational level is relegated to the different ministries responsible for the execution of the law; e.g., while ME can recommend all types of pilot projects to protect the environment to different ministries; it is still up to them to go along and allocate the necessary resources (Gommaa, 1997). Active NGOs is an important prerequisite for environmental protection. The State, however, may act as a deterring force against their development as explained below.


Balancing the power of the State requires the creation of a strong civic society represented by different types of NGOs. The State still plays the dual but inherently contradictory role of controlling but at the same time encouraging these types of organizations. In doing this, their development has been largely retarded. The motive for control stems from the desire to maintain political and social stability by preserving the established order. Control comes through different means. Formulating needed laws is made by the executive branch which have to be approved by the legislative branch that is largely controlled by the ruling party. The pace of this process is usually slow. For example, consumer protection and labor laws are still bending. In fact it was the insistence of international donors to channel funds through NGOs that spurred heir development. So, environmental protection laws did not develop as a result of “grass roots” movement but rather as a result of government initiative (Bebbington & Farrington, 1993).

The Ministry of Social Affairs provides financial help to NGOs which are not allowed to get outside financing without prior authorization. A representative of the Ministry is always present in board meetings of these organizations which are not allowed to get involved in socially or politically sensitive issues. NGOs are not yet represented in the parliament and the green party had a difficult time getting approval by the authorities (Gomaa, 1997). Studies show that for NGOs to achieve any impact in LDCs they need to have some relationship with the government. The main issue is how to influence the government without loosing their autonomy and identity (Bebbington & Farrington, 1993).


During the socialist era, NGOs were dealt severe blows by the regime whenever they showed any independent movements. Unntil now the State preserves the right to dissolve any association. (19) The number of NGOs has almost doubled from 7593 in 1976 to more than 15000 in 2002. (20) However, the active ones do not exceed 1000 and the inactive ones try to reach he government for help. In the area of consumer protection there is currently a total of 240 with only 12 active ones. (21)

In addition to bureaucratic constraints, NGOs suffer from other external and internal problems. Due to low per capita income, most of the population is preoccupied with satisfying their basic needs. So, interest in civic matters is not high on the agenda of the average citizen. Improvements in consumer services in Egypt has been largely undertaken by the initiatives of local branches of multinational companies and some local companies. In cases of dissatisfaction consumers can submit complaints directly to the company rendering service and if not yet satisfied can complain to the ministry in charge.

For a consumer to file a complaint he needs to present a receipt which is not always given by stores out of fear of tax authorities. Other problems exist, of course, such as the lengthy and tedious procedure to file a complaint with the appropriate government unit which is not always accessible. Due to low per capita income, the average Egyptian consumer is price oriented rather than quality oriented. Until now, many stores adopt a no product return policy, reflecting still a producer’s mentality.

The active or inactive nature of NGOs depends on the person on top and his ability to develop personal and informal channels of communication with government officials rather than on any formal links. So, in addition to lack of funds, managerial and technical skills, NGOs suffer from personalized leadership style. Many NGOs are centered around individual leaders. The existence and life of these organizations depend entirely on these leaders. This in reality is typical of the Egyptian political system as well as the organizational system (Gomaa, 1997). It is a highly personalized culture. NGOs like other organizations, while voluntary in nature, are not precluded from the possibility of self-interest, opportunistic motivation and inefficiency (Bret, 1993).

Other types of NGOs are still weak, such as labor unions. Currently a new labor law is being enacted which gives employers the right to fire workers in exchange for the workers ‘right to strike. This is one clear area where the State has been procrastinating for years. The outcome of this process is still unclear since labor strikes are considered illegal. Professional syndicates like those of lawyers, doctors and engineers have been vocal but not infrequently suppressed by the State. This could be because of the active role of the Moslem Brotherhoods Association (A fundamentalist religious group) in these professions.


Compared with these other NGOs, (BAs) have been gaining in terms of number and influence. In 1975 there was only two Bas. While now there is a total of 16. (22) Their role has emerged to a significant degree as a result of the open door policy adopted in the seventies. They have played a pivotal role in mediating between the government and business firms due to their wide networks of relationships. Thousands of businessmen are unable to reach the government individually but they can do that through their elective representatives in the BAs.

While the role of consumer and environmental groups as business stakeholders is clear, the role of BAs needs clarification. During a state of transition, the State continues to dominate the economic scene in terms of allocating resources and passing laws; e.g taxation laws, that can have a tremendous impact on the business community. Also, the State is a major customer and it plays a mediating role in allocating foreign aid to various projects. Infrastructure projects carried out through the State budget cover all sectors of the economy. Determining the conditions of the privatization program is also controlled by the State. The business community, through its associations have every thing to gain from a close association with the Bureaucracy. The nature of underdevelopment makes capital accumulation in the market place hazardous and relatively unrewarding. The State is powerful in LDCs and it controls access to resources. This could be in the form of providing funds, jobs, contracts, loans, trade licenses, foreign exchange, donations, foreign aid and privileged information. These can bring huge rewards much easier than legitimate business. Access to government officials is therefore of extreme importance.

Businessmen, through their associations, can lobby for their claims. They negotiated with the Government the formulation of new laws and modification of existing laws, explained Government policies to firms and even were consulted in the formulation of economic policies. These associations arrange for meetings between appropriate ministries and businessmen for the latter to voice their complaints and requests. So they are an important communication intermediary between the Government and the business community. For example, they were consulted in issuing new taxes or revising existing ones. However, at the end it is the government which has the final say in these matters. BAs are also playing a role in helping business firms abide by environmental law. They have pointed areas where the Bureaucracy acted as a hinderer to business activities. Contradictions in government policies were pointed out, such as charging higher tariffs on knocked down parts than fully assembled products, contradicting the import substitution policy adopted by the Government.


Considering competitors who belong to the same association as a stake holder may be debatable by some since normally competitors do not seek benefits from the focal firm’s success; on the contrary, they may stand to lose whenever the focal firm gains. However, competitive firms can join together in common collaborative activities where the shared (noncompetitive) interests account for the stakeholder relationship (Donaldson & Preston, 1995). Examples include sharing of information, cooperation in joint projects and presenting their grievances to the government in a collective fashion to increase their bargaining strength. This is particularly crucial in LDCs where individual firms lack resources and they need to cooperate in areas like marketing, exporting, production and innovation in order to meet foreign competition.

The Investors’ Associations of newly established industrial cities are particularly active due to physical proximity of factories. For example the Association of the 6th of October City is attempting to establish an information base on the city’s factories (650 in total) and products in order to increase the level of cooperation, utilization of excess capacity and available raw material and intermediate products. Also, the association is mediating between tax authorities and businessmen regarding disagreements on estimating the tax base. (23) This is a significant improvement compared with the role of business associations in the past which used to be the allocation of import quotas given by the government. There is now a strong convection among businessmen that competition is growing and it requires cooperation among themselves. However, there is still mistrust with the government and inadequate trust between businessmen themselves. For example, the head of the 6th of October City Business Association complained bitterly about the reluctance of businessmen to provide the hoped-for information for the planned data base. (24) One reason for this short-term orientation of Egyptian businessmen, in the view of a former Minister of industry is the fact that most business firms are of the family and not the corporate type. (25) In family business, owners manage and monitor their companies. Boards of these companies are not really independent of management and as a result corporate governance is still underdeveloped (USAID, 2000).


In the absence of clearly developed institutions that have clearly defined and separate interests, the economy can be a fertile ground for favoritism, rent seeking and self interest. In the Egyptian scene this has taken different forms.


Taking advantage of tax loopholes is a major area that businessmen try to make use of. In order to encourage the establishment of new ventures, tax exemptions for a certain number of years are granted for newly established companies. As a result, many businessmen have preferred to keep jumping from one activity to another rather than deepening an existing activity or improving its efficiency. Tax authorities, for administrative reasons and possibly corruption are incapable of detecting this dubious behavior in many cases. While this behavior is perfectly legal, at least in terms of documentation, it is guided primarily by the short-term profit orientation of businessmen and encouraged by deficient laws that are followed in form rather than in spirit.

Trying to benefit from an import tax differential between fully assembled products and knocked down ones has been a major motive for local businessmen to establish local assembly operations regardless of efficiency. For example a total of 12 factories were established to assemble different brands of automobiles in a market with a size of 100000 cars per year. The profit is basically the difference in tariffs. Faced with a shrinking market and inefficient production, factory owners started demanding that government units, in buying their vehicles, should give first priority to locally assembled automobiles. In addition, these businessmen have always resisted removal or reduction of tariffs on imported cars as required by international agreements. While the temptation to take advantage of tax differential may not be classified as unethical, in light of the legality of this behavior, in a broader sense it would be difficult not to brand it as opportunistic.

On some occasions, businessmen, through their associations, tend to give vocal support to free market policies. They tend to resent bureaucratic interference which raises their transaction costs and delays the approval of new projects. They quickly realize, however, that a free market economy requires the skills of calculated risk taking that they are still short of possessing. For example, exempting businessmen from submitting a feasibility study as a prerequisite for approving new projects was a result of their demand to minimize bureaucratic interference. However, this led to over- capacity in some sectors, leading some businessmen to demand a return to some form of protection from imports and giving preference to locally produced products.


In Egypt, due to the high priority given to the private sector in development, businessmen have been courted by government officials and they have been encouraged to seek membership in the Parliament. Of course this carries with it the risk of politicizing the business environment. In fact there are cases where prominent businessmen are heading parliamentary committees that handle issues directly affecting their business sectors. This is a clear case of conflict of interests and the question can be raised are they projecting their self interest or the public interest. (26)

Businessmen have been repeatedly accused of not living up to the task of fulfilling society’s expectations and focusing their interest on reaping profits and concentrating on the local market. As a result, the State had to step in on more than one occasion to fill in the gap. This is an indication of reluctance on the part of the Bureaucracy to abandon direct interference in the market. For example, after freezing employment in the government and public sector following the liberalization trend, the Government, due to the current prolonged recession, has declared its intension to resume its traditional role of a job provider by hiring a total of 170000 graduates in an already crowded bureaucracy. According to some, the Government should have refrained from interfering directly in the market and instead could have provided incentives for privates businesses to hire people. (27)

While this criticism of businessmen has an element of truth in it, no one can ignore the simple-minded approach of the tax system which gives across the board exemptions generating all kinds of undesirable consequences. One explanation could be the inability of the bureaucracy to handle a more complex system which distinguishes between enterprises depending on their real contribution to the economy. The same pattern has been observed recently when the government passed an export promotion law which gave tax exemption only to exports from well defined export zones in the country and denying this privilege to other enterprises outside these zones whose activities are difficult to trace. The Minister of External Trade, who supported exempting exports regardless of location had to give in to the Minister of Public Finance who was responsible for administering the tax system. The latter’s restrictive approach was out of fear of loosing tax proceeds in face of an incapable bureaucracy and shrewd businessmen who have become experts in exploiting tax loopholes.


Developmental projects in LDCs are complex tasks that require the resources and efforts of a variety of governmental and private organizations. These include traditional development projects such as infrastructure projects, alleviation of poverty and combating environmental decay (Brown, 1991). It may also include upgrading the ethical foundation of the country through the cooperation of governmental units, NGOs and business organizations. This is not an easy matter. These difficult tasks require structural arrangements as well as shared values between different players.


In collaborating between the Government and NGOs, joint committees are established at different levels. This in theory should be an effective method of coordination that leads to power equalization (Einbinder el., 1997). Structural relationships are important in overseeing the day-to-day functioning of these relationships (Gulati, 1995). However in these committees the State’s representative plays a dominant role. Inadequate cooperation will lead to misuse of resources (Njoh, 1993).

When members of an alliance have incompatible expectations, the relationship becomes difficult to manage (Oliver, 1995). The best relationship is when there is reciprocal and mutual advantages, balanced bargaining position and the absence of a dominant relationship. Obviously countries which have been under socialism for a long time can not escape easily the dominating tendencies of the government. Considerable effort is needed to establish a balanced relationship with clear definition of roles.


In order for structural relationships to succeed, a common vision between different players is essential. (Garcia, 1991) Motives should be non-egotistic, such as conformity to norms rather than to authority or self-interest (Nooteboom, 1997). In this case common objectives will supersede the limited narrow objectives of participants. This will help generate trust and cooperation. Gains form voluntary cooperation as well as alliance is mostly long term in nature. Members, through their interaction will learn of new opportunities for gain, instead of immediate returns (Ciborra, 1991).

The experience of NGOs in Egypt shows that coordination between governmental units and NGOs in combating health problems was based on a dominant role by the Ministry of Health and the relationship was not effective. On the other hand, in charity activities, the relationship was dynamic, reciprocal and non-egotistic and it was effective. In the latter case, the structure is decentralized, informal and overlapping (Youssef, 2000). In charity, which is a clear religious duty, government officials were willing to change their control tendencies out of a religious obligation. However, in health matters, the religious duty is not clear, they rejected any threat to their authority.

One author identified the factors that affect business behavior in Arab countries. They include Islamic influence, tribal and family traditions, government intervention and western influence (All, 1990). In Egypt, religion is supreme. However its role in optimizing relationships is not yet fully realized. Islamic values if held deeply can generate trust and equalization of power among different players in the business scene.

Unfortunately, the open dialog that characterized early Islamic period is now replaced by a rigid outlook. Religious institutions are largely controlled by the State and have remained still for a long time preferring emphasis on rituals rather than venturing into debates. The teachings of Islam as dictated by the Koran and the Sayings of Profit Mohamed instill in Moslems high ethical and moral standards. Islam invites multiplicity, respect of contracts, honesty and fairness. Its original teachings goes beyond charity to cover a multitude of human behavior. However, there is a contradiction between these ideals and reality in the Islamic Arabic world. This is probably due to the interference of some of the forces listed previously in this paper. Underdevelopment and the struggle for survival keeps most people preoccupied with their daily needs. As a result one can observe a clear gap between form and substance, where many practice their religion by performing rituals but with limited effect on their value system.


In order to develop a spirit of cooperation and balanced relationships between different business stakeholders, members of society need to have a sense of equity in the allocation of resources and the distribution of income. It is essential for the State to abandon its dominating role and allocate resources based on efficiency and equity rather than on the basis of political and social patronage. Other forces in society such as democratization, modern education as well as religious values need to develop.

Democratization, through pluralism, will provide a system of checks and balances resulting in power equalization. Egypt is still ruled primarily through a one party system. Despite the existence of a number of small parties the National Party has been ruling the country for over 50 years. While there is now significant press freedom the major news papers are still owned by the State. They possess huge resources. In the area of education there has been significant strides in private education which has a modern outlook. However, public education with its emphasis on memorization is still predominant.

Due to bureaucratic and cultural characteristics it is not expected that the institutions of business stakeholders in Egypt will ever develop to a degree comparable to that of the West. In some countries like Japan, cultural norms of cooperation can fill in the gap. The example given earlier about the willingness of bureaucrats to act more participatory in religious-related matters than in authority-related matters points out to the possible role of religion, as a source of values, in a country like Egypt in upgrading and safeguarding business ethics. It can actually fill in any ethical void resulting from the underdeveloped status of different business stakeholders.


(1.) Interview with Dr. Atef Ebeid, Prime Minister of Egypt, AL-Ahram, September 19, 2002.

(2.) Talaat Abdelmalek, Exports: The Five-Piece Puzzle, Al-Ahram Weekly, May 16-22, 2002.

(3.) Ibrahim Shehata, My Will to My Country, Dar El-Amin Publishing, Cairo, 1999, p365.

(4.) Tarek Hegy, Criticism of the Arab Mind, Dar Al-Maarif, Cair, 1999.

(5.) Al-Ahram, January 14, 2002.

(6.) Economic and Strategic Directions 2000, Center for Political and Strategic Studies, Al-Ahram, Cairo, 2003.

(7.) Al-Ahram, February 11, 2002.

(8.) Salwa Gomaa, Environmental Policy Making in Egypt, The American University in Cairo Press, Cairo, 1997, p.43.

(9.) Al-Ahram Weekly, June 14-20, 2001.

(10.) Interview with the Head of Peoples Assembly, Al-Ahram, March 30, 2002.

(11.) For example there is currently a total of 165 brokerage firms, mostly of small size which has total transactions worth 60 million pounds daily, while in France there is only a total of 54 companies handling a much bigger volume, Al-Allam Alyoum, August 15, 2001

(12.) Ibrahim Shehata, Ibid., p.338.

(13.) Al-Ahram, January 19, 2001.

(14.) Interview with the Head of the Administrative Control Agency, Al-Ahram, July 31, 2001.

(15.) Sout El Omma, October 3, 2001.

(16.) Interview with Dr. Moustafa El-Refaai, Ex-Minister of Industry, Akhbar Elyoum, May 12, 2001.

(17.) Al-Akhbar, March 25,2002.

(18.) Al-Ahram El-Ektesadi, August 5, 2002.

(19.) Amani Kandil, Civic Society in 50 years, Al-Ahram, July 24, 2002

(20.) Ibid.

(21.) Al-Ahram, February 11, 2002.

(22.) Al-Ahram Weekly, May 16-22, 2002

(23.) Al-Ahram, March 5, 2002.

(24.) interview with Ahmed Ezz, Head of 6th of October Business Association, Al-Ahram El-Ektesadi, August 5, 2002.

(25.) Interview with Dr. Moustafa El Refaai, Ex-Minister of Industry, Al-Ahram Weekly, January 25-31, 2001.

(26.) Ibrahim Seida, editorial, The Political Situation, Akhbar Elyoum, June 16, 2001.

(27.) Panel of prominent economic experts, Program of Chief Editor, Egyptian national television, August 20, 2002


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Dr. Samir M. Youssef earned his PH.D. at University of Iowa in 1971. Currently he is a professor of management and international business at the American University in Cairo

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