**Figure 1: The evolution of net profit differentials between connected and other firms**

<!-- Start of picture text --> 6.0<br>4.0<br>2.0<br>0.0<br>2003 2004 2005 2006 2007 2008 2009 2010 2011<br>-2.0<br>-4.0<br>-6.0<br>5% lnProfits diff 95%<br><!-- End of picture text --> Source: Orbis establishment database. Note: The graph shows the differential in profits between politically connected and unconnected firms demeaned at the 2-digit sector level; the coefficient is derived from an OLS regression of net profits on 2-digit sector dummies as well as a dummy variable which is equal to 1 for politically connected establishments and 0 otherwise. The dotted lines show the 5% confidence intervals.

# **7. The Policy Advantages of Political Connections in Egypt**

A substantial literature has focused on the advantages of connected firms with respect to access to credit: they enjoy favorable access to capital and they are more likely to be delinquent on their loans from state banks. In Egypt, as well, connected firms enjoyed privileged access to credit from state-owned banks. However, after the financial crisis at the end of the 1990s, policy reforms circumscribed the activities of state banks. In this section, we present evidence that, in the 2000s, connected firms enjoyed ample policy advantages in other areas, including protection from foreign competition and privileged access to energy subsidies or land.<sup>15</sup> They also appear to have been less exposed to the arbitrary or predatory application of business regulations more generally.<sup>16</sup>

# **Political connections and non-tariff trade barriers**

Although tariffs fell in Egypt at the end of the 1990s, the use of non-tariff technical import barriers increased.<sup>17</sup> Building on data from a new World Bank database (WITS) measuring NTMs (Malouche et al., 2013), Figure 2 illustrates the decline in average weighted tariffs from about 16.5 Mubarak’s fall might reflect that other policy privileges (temporarily) disappeared (e.g., implementation bias – see below) or that the new regime at least initially made it generally more difficult for these businessmen to operate in Egypt.

15 These are only some of the potential regulatory channels that advantage connected firms. Others include the benefits of FDI restrictions for specific service sectors or fewer licensing restrictions (e.g., related to operating licenses), as well as implicit bail-out guarantees that facilitate borrowing, for which we do not have data.

16 These benefits accrued to connected firms despite the fact that, at the same time, Egypt was acclaimed for its efforts to reverse decades of state control of the economy. That is, even as the formal rules of the game appeared to improve (as measured, for example, by sharp improvements in “Doing Business” indicators), connected firms were, in the terminology of Hallward-Driemeier, et al. (2010), able to make “deals” with government to tilt the playing field in their favor.

17 The World Bank database on NTMs provides either the year when a particular NTM has been introduced or the latest year in which it is has been substantially revised. Unfortunately, the database does not distinguish between the two.

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