Cronyism, firms’ Productivity and Informal Competition in Egypt

Source: Economic Research Forum

Author(s): Nesma Ali and Boris Najman

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This paper investigates the role of informal firms’ competition in determining the micro-level effect of cronyism on formal-firms’ productivity in the aftermath of the 2011 Egyptian revolution. Based on the World Bank panel Enterprise Surveys, we follow a constructive approach to indicate politically connected firms based on the findings of the previous literature. Using a propensity score reweighting – difference-in-difference estimator, we find that being a crony firm after the revolution could generate unsustainable gains in terms of productivity. This is mostly due to cronyism externalities that engenders a stronger intensity of informal competition, which jeopardizes any increase in productivity and creates a large disequilibrium at the firm level. We also provide evidence that crony firms’ excess in labor is the main channel through which this effect occurs. Hence, crony firm survival in Egypt depends on their ability to balance between the sustain provision of privileges and the threats imposed by the growth of the informal sector.

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