When street protests led to the fall of Hosni Mubarak in 2011, Egyptians showed that protesting en masse can have powerful outcomes. London Business School’s Ahmed Tahoun, and colleagues Daron Acemoglu and Tarek Hassan, studied the effects the protests had on stock market prices, with some startling conclusions.
On January 28 2011, some 50,000 protestors gathered in Tahrir Square in Cairo. Over the following weeks the protests increased, peaking at more than half a million people in early February. On February 11, Mubarak resigned and leadership was handed over to the military.
For many Egyptians, Mubarak’s reign was characterised by economic favouritism and corruption. During his 30-year presidency, GDP per capita rose five-fold to US$2,973 by 2011. But the widespread impression among citizens was that the gains from this growth stayed largely within Mubarak’s immediate circle and politically connected companies – firms with at least one major shareholder or board member with a position in Mubarak’s NDP party.
This way of doing business, so alien to the democratic way of thinking, was an everyday part of Egyptian business life. “Even if you were talented and had the right skills, you couldn’t get jobs in the big companies unless you knew someone inside. Because that behaviour was all pervasive, companies would often lose the real talent,” reflects Tahoun.
During those years, if companies had been able freely to hire the right talent, Tahoun is convinced that the economy would have been in much better shape: “The companies had a dilemma: do we bring in the right person, and risk our standing with the government; or do we hire the relative or person with influence, and ensure we can continue being favoured?”
The turbulent political situation also created difficulties that percolated down to individual employees. “The stock exchange was closed for long periods,” says Tahoun. “With so many people protesting during those times, it was hard for businesses to function effectively. No one in Egypt expected life to be smooth.”
And so to the research. “Mubarak’s government had companies that were ‘favoured’,” Tahoun says. “We wanted to find out the effects of the street protests on Egypt’s economy and we did this by examining the relative stock market valuations.” A direct correlation emerged between the number of street protestors assembling and the stock price of the connected company on the next trading day.
The immediate effect of Mubarak’s fall was to bring in an era of competition between elites associated with the NDP, the military and the Islamist Muslim Brotherhood. Tahoun and his colleagues used this period of uncertainty as a litmus test against which the rise and fall of stock market figures could show that, with weak institutions, popular mobilisation and protests have a significant role in restricting the ability of connected firms to capture excess rents.
“For every half a million protestors, the stock value of companies connected to the regime tended to lose 0.8 per cent of their value, compared to non-connected firms,” says Tahoun. In the nine trading days that followed Mubarak’s fall, the value of NDP-associated companies dropped by 13 per cent, compared to the value of other firms.
Looking to the future
So is Egypt on the right track today? “Are we now in a society that’s free of corruption?” asks Tahoun. “Probably not, but such a goal would be unrealistic even for countries traditionally seen as virtuous. Yet we can cautiously conclude that certain pernicious kinds of corruption appear to be less frequent or at least less overt. In Mubarak’s day, the market didn’t necessarily respond to the fundamentals of company performance as much as news about whether the company hired the right person. Today, news about whether a company CEO is dining with the President should be irrelevant. But the value of political connections is still there; and we also see that in countries with strong institutions like the UK and the US.”
Tahoun sees more promise for individuals trying to set up business in Egypt. “There’s a surge in start-ups now,” he says. “That’s because in the old days, it didn’t matter how good you were – there was no point if you didn’t have connections. Today, the success or failure of the start-up is more likely to be a function of how great the idea is and how good the management team are. Companies once reluctant to bid for a government contract are now more willing to do so. It is too early to tell whether all firms, regardless of size, operate under fair terms. Nevertheless, the blatant favouring of Mubarak-related companies of the past, has ceased. It is unclear whether the new government will attempt to form connections with a similar group of favoured firms or whether it will be more even-handed when considering companies for government contracts, subsidies and other benefits.”
Similarly, there is now a very different economic climate for foreign investors looking at Egypt. “Instability is going to deter you from investing,” says Tahoun. “Foreigners were reluctant, or unable, to enter Egyptian markets because they didn’t have, or didn’t understand how to get, the right connections. Today, being connected to the right politician is becoming less relevant, so we are less likely to see reluctance to invest.”
This leads Tahoun to speculate on ground covered in Daron Acemoglu’s book, Why Nations Fail. Examining the changes between Egypt’s pre- and post-Mubarak era economy reveals wider implications about the nature of government influence and the movement of capital. “We have a strong economy in the UK because we have strong institutions,” says Tahoun.
“Why do we have those institutions? Because at certain points, from the Magna Carta via the 1832 Reform Act to the drive for emancipation, there were protests that were sufficiently forceful to generate actual change.”
Tahoun comes to three key conclusions. First, political regimes will not change unless there is direct physical action by citizens. “Mubarak showed what happened when a country is pushed to the point of revolution, to go out on to the street and actively demand change,” he says.
Second, social media has altered the map when it comes to successfully mobilising against a repressive regime– 311 million tweets were examined by the researchers, and the power of trending topics showed when more protestors appeared in the square after the word ‘Tahrir’ appeared in hashtags. “No revolution happened on Twitter,” Tahoun says. “The people made the revolution. But Twitter helped put them into the position where they could make it happen.” Third, large protests are a way of changing the future distribution of power and have a direct effect on the ability of connected firms to bank the returns from favouritism.
“Egyptians have always been unhappy with Mubarak,” Tahoun says. “It was daily unhappiness. But it never affected any decisions until the day it translated into street mobilisation”.