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

Journal of the Academy of Business and Economics, April, 2003 by Samir M. Youssef

ABSTRACT

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

1. INTRODUCTION

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.

2. THEORETICAL ISSUES

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.