Gamal Mubarak’s get-rich-quick scheme

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By Osama Diab

How can you make a return that is 12,000 times greater than the initial “investment” in under a decade? Ask Gamal Mubarak.


Friday 4 November 2016

Gamal Mubarak, the younger son of deposed President Hosni Mubarak, who was being groomed to become the country’s president before the 2011 revolution put an end to those plans, made an investment in which each dollar became 12,000 in fewer than 10 years.

In 2002, the businessman-turned-politician signed a contract with EFG-Hermes Holding, Egypt’s largest investment bank. Through the contract, which an anonymous source provided to Mada Masr, he managed to take in a net non-taxable profit of about $21 million from an initial investment of just $1,750 in less than a decade. Here is how he did it.

In 1997, the Cyprus-based company Bullion, which Gamal Mubarak co-owns, struck an agreement with EFG-Hermes Holding – in which Bullion would hold a 40% partnership share – to establish an offshore company called Egypt Fund that would manage EFG-Hermes Holdings’ private equity business.

In July 2002, about five years later, Egypt Fund was renamed EFG-Hermes Private Equity (EPHE) and its headquarters were opened on the British Virgin Islands. Bullion now owned a 35% stake and Gamal Mubarak was its director. The paid-up capital of the new company was a mere $10,000, of which Gamal’s share was $1,750.

Over the next decade, Gamal Mubarak’s initial $1,750 investment grew to about $20 million in “fees and commissions” through his ownership stake in Bullion. The vast sum was received with Gamal Mubarak barely making any significant investments, taking any risk or providing any real service that added value.

This is how this complex journey went:

Under the terms of the contract, which was signed on October 2002 as an “investment advisory agreement” between EFG-Hermes and EHPE, EFG-Hermes (the real holding company) appointed EHPE (the shell company) as an investment advisor for its private equity portfolio.

In other words, the subsidiary that only existed on paper and was without resident experts was intended to give investment advice to the holding company, which housed hundreds of experts.

The services described are listed in detail in the contract and include: carrying out regular reviews of the private equity portfolio, recommending and giving general investment advice to the customer in matters concerning the portfolio, coordinating with industry specialists and analysts, as well as risk management advisors, preparing a quarterly valuation of the portfolio and proposing minimum sale prices.

All of these services would have required manpower, but, in a shell company, there is none to provide these services. The people who provided these services were in actuality employees of the Cairo-based company.

While money was paid annually to a company whose existence didn’t extend much beyond a PO box and a mailing address at 3443, Road Town, Tortola, BVI, the holding company was buzzing with 876 employees, according to the company’s website.

This kind of agreement has been known to move profits from a tax jurisdiction like Egypt, where the government currently charges corporations a 22.5% tax on corporate profits, to a tax jurisdiction like the British Virgin Islands, where the corporate tax rate is 0%. The point is to record lower profit by inflating expenses in Egypt and greater profits in the British Virgin Island shell company.

One way of inflating expenses is to buy expensive “advisory services” from one of your subsidiaries in a tax haven, which would be recorded as an expense in the holding company’s accounts and reduce its profits on paper, but the money still appears in the holding company’s accounts, because it is still received by a subsidiary.

Profits in this case are usually transferred to a fully owned subsidiary. Because shell companies normally have a very small amount of capital invested in them and do not serve any material function, the rate of return on capital investment is usually very high, as the profits are not generated from real activities that require capital expenses. EHPE, with a mere capital of US$10,000 (LE61,500), garnered a net profit of about LE497 million between July 2003 and December 2009.

How Gamal Mubarak benefited from the deal

According to the 2002 contract, 10% of EFG-Hermes Holding’s capital gains in excess of cost or 2% of sale value, whichever was higher, would still be paid to Gamal’s company – in addition to an annual allowance of LE250,000 paid to him for his position on the company’s board.

However, it doesn’t make clear economic sense to allow an external party like Gamal Mubarak access to the large artificial rate of return that offshore entities garner, without him having anything to do with the parent company from which the funds were originally transferred. This discrepancy poses questions about the nature of Gamal Mubarak’s relationship with the holding company.

EFG-Hermes has repeatedly declined to answer our inquiries about the contract signed by Gamal Mubarak and refused to comment beyond their short 2012 statement on the involvement of the Mubarak family with EFG-Hermes. In the statement, the company said that no member of the Mubarak family held any shares in the EFG-Hermes Holding or its subsidiaries, with the exception of Gamal, who acquired 18% of EHPE in 1997, before he entered into political life.

Other than Gamal Mubarak’s direct gains as EHPE’s director, the contract seems to have served another purpose, namely to facilitate the movement of money through a lengthy chain of companies that terminates in secret accounts.

In 1993, Gamal and Alaa Mubarak started a complex network of secret offshore entities by establishing a company called Panworld Investment in the British Virgin Islands. Three years later, the company made its first known investment as a co-manager of a $9 million fund called International Securities Fund. In 1997, Panworld Investments, along with many of Mubarak’s associates, made a $250,000 investment in Horus I, one of Egypt’s first private equity funds. This was the same year that Mubarak’s Bullion entered into partnership with EFG-Hermes Holding to found what would become the British Virgin Islands-based EHPE. Bullion owned 35% of EHPE, with Panworld Investment owning half of this share, 17.5%.

This means that the profits would leave the holding company in Cairo and travel to the secret jurisdiction of the British Virgin Islands, before traveling back to Cyprus and then returning to the British Virgin Islands: a complex journey attempting to obscure the identity of the politically vulnerable beneficiaries.

Although Gamal owns half of Bullion, his name does not appear on official documents because his stake was brokered through Panworld Investment, the other British Virgin Islands-based shell company.

A Central Bank of Egypt report makes reference to US$22.5 million in net profits that were transferred from EHPE’s bank account to Bullion’s Cypriot bank account between 2008 and May 2011.

Further, according to a report by a judicial committee appointed by an Egyptian criminal court to investigate an insider trading case in which Gamal is a defendant, Bullion garnered $24.1 million in profit shares from 2007 to 2009, of which Gamal took in around $12.05 million. 

EFG-Hermes confirmed this information in a previous correspondence, saying that Gamal’s annual profit averaged $880,000 a year. “In the course of his investment in EFG Hermes Private Equity, Mr Gamal Mubarak received total dividends of $880,000 annually, in the context of which EFG Hermes notes that exchange rates were lower at that time than at present,” reads the 2012 EFG-Hermes statement issued to clarify the Mubarak’s involvement with EFG-Hermes.

Additionally, Bullion owned a 40-percent indirect stake in Horus Consultancy, to which EHPE transferred a total sum of LE92.3 million. Gamal Mubarak’s share of this sum was LE18.4 million, or around US$3 million, according to the average exchange rate at the time, as well as $1.25 million in compensatory payments for his role as a board member of EHPE.

Hazem Shawki, the director of EHPE during the 2011 revolution, said in an official interrogation held at the general prosecutor’s office that Gamal’s shareholder equity in EHPE was LE27 million, approximately US$4.5 million adjusted to the exchange rate at the time, in 2011.

This means that, between 2003 and 2011, Gamal made at least $20.8 million, a 1,188,400 percent rate of return on his paid-up capital of $1750. In other words, for every dollar he invested, he took in $11,884 in less than a decade.

Other deals

When looking into the registration location of EHPE, where Gamal Mubarak has an 17.5% indirect stake, we find that it was registered in a building called the KPMG Centre, also known as the Tropic Isle building, in the British Virgin Islands. It is an address that the Offshore Leaks database lists as the home of at least dozens of companies.

Managing partners of private equity funds are often registered in low-tax jurisdictions so that the fees and commissions they receive are exempt from taxes. EHPE was the managing partner of at least eight private equity funds worth collectively close to US$1 billion and received their share of profits made on these investments, of which 18% went straight to the Mubarak sons.

The judicial committee’s report in the insider trading case affirms that at least LE497 million in profits were shifted to the British Virgin Islands between July 2003 and December 2009. The report also notes that there is no indication that EHPE paid any taxes on these profits.

What is more, a similar investment advisory agreement seems to have been signed between EHPE and Bank Audi, in which EFG-Hermes Holding held a 28% ownership stake.

EFG-Hermes’s 2007 annual report states that Bank Audi transferred more than LE16 million in financial advisory services fees to EHPE, an indication that a similar agreement may have been in place between Bank Audi and EHPE.

These agreements have certainly reduced the Cairo-based holding company’s tax bill. “The effective tax rate for 2008 decreased substantially to 10%, from 13.1% in 2007, as revenues from outside of Egypt and non-taxable entities increased,” reads the 2008 financial statement of EFG-Hermes.

How does tax evasion occur?

Holding companies typically establish subsidiaries, also known as Special Purpose Entities (SPEs), in tax havens using a mere PO box, but without establishing real operations. Companies state that these subsidiaries have been founded for “tax planning” purposes, a euphemism for tax evasion and lax regulation.

“It is interesting to see that EFG-Hermes Private Equity is based in the British Virgin Islands, a notorious tax haven. The structure of the private equity industry makes great use of tax havens,” says Nick Mathiason, the director of Finance Uncovered, a global investigative initiative on illegal capital inflows. “Some of this is for legitimate reasons. When you have investors from all over the world, it is often simpler to base yourself in a tax neutral zone. However, on many occasions, businesses, including private equity firms, take advantage of the benefits of basing themselves in a tax haven, thereby denying governments huge sums in tax.”

Comprised of 35 of the world’s richest countries, the Organization for Economic Cooperation and Development is the world’s most important tax policy agency. It is currently trying to tackle Base Erosion and Profit Shifting (BEPS), which it defines as “tax planning strategies that exploit gaps and mismatches in tax rules, which big businesses often use to artificially shift profits to low or no-tax locations where there is little or no economic activity.”

The OECD says that, although some of the schemes used by big businesses are illegal, most are not, adding that “this undermines the fairness and integrity of tax systems because businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that operate at a domestic level. Moreover, when taxpayers see multinational corporations legally avoiding income tax, it undermines voluntary compliance by all taxpayers.”

A “tax haven” is a term used to describe a microstate – typically an island or a group of islands in the Caribbean Sea – in which corporate tax rates are zero percent and where the ownership of companies can remain unknown. Tax havens have been typically used as destinations to artificially shift profits in order to escape the sovereign tax authority operating in the territory where the corporation actually makes its profits.

These islands are so small and house such small populations that they can run their governmental affairs by charging the many large businesses they host very small administrative fees, rather than real taxes. Among the most famous tax havens are the British Virgin Islands, the Cayman Islands, Panama and the Bahamas.

Due to the fact that most registered companies have no real operations there, small buildings of no more than four stories can house as many as 20,000 companies. Even president Barack Obama took note of this phenomenon.

“For years, we’ve talked about shutting down overseas tax havens that let companies set up operations to avoid paying taxes in America,” Obama said in a 2009 speech on international tax reform. “I used to talk about the outrage of a building in the Cayman Islands that had over 12,000 businesses claiming this one building as their headquarters. And I’ve said before, either this is the largest building in the world or the largest tax scam in the world.”

Mathiason thinks that when there are literally thousands of companies operating out of a single address, it is a sign that there are thousands of shell companies there. “The way businesses have been allowed to organise themselves is that they can have subsidiaries set up as self-contained companies, trading and shifting revenues with each other,” says Mathiason. “Even big multinationals have shell companies in out-of-the-way places, in which not a single real employee actually works. This is a symptom of the systemic failure of our international tax system. It promotes artificial transactions and secretive companies to avoid tax. The very same system tremendously benefits organized crime, drug gangs and terrorists.”


This article first appeared on Mada Masr on 20 October 2016. Republished here with the author’s permission.

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Making halal sexy

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By Khaled Diab

Though halal sex may sound as logical as kosher bacon, it does make its own sense. Some Muslims are utilising the concept to break the taboo around sex.

Painting by Khoda-Dad Khan Zand, QAJAR IRAN, 1856-7.

Romantic painting by Khoda-Dad Khan Zand, Qajar Iran, 1856-7.

Tuesday 12 May 2015

Though Muslims attitudes to sex are as diverse as those found in any other global religious community, the image of contemporary Islam is certainly not sexy. This may explain why a news story about plans to open a halal sex shop in Mecca, Islam’s holiest city in one of its most conservative countries, went viral, among Muslims and non-Muslims alike.

While many assumed the misleading story actually meant that this was a concrete plan, or even that this shop had actually opened its doors, it remains only a wish – some critics claim wishful thinking – expressed by Abdelaziz Aouragh, the Moroccan-Dutch entrepreneur behind  El Asira, an erotic e-shop which describes itself as “halal”.

And El Asira is not the only erotic enterprise which carries such an Islamic label, quite a number have popped up in recent years. Over a year ago, Palestinian entrepreneur Ashraf Alkiswani launched Karaz, an e-store and online forum. “It’s not about just sex. It’s about love and the joy of expressing that love,” Alkiswani was quoted as saying at the time. “It’s about trying to build bridges across gaps that separate the husband from the wife by improving sexual harmony.”

Aouragh also described his motivations in similar terms, noting that “if couples don’t take the time to show the love for their partner nor themselves, they won’t be able to reach a deeper sensual, sexual or spiritual connection.”

Unlike Western erotic shops, neither El Asira nor Karaz sell sex toys but market various oils and creams which supposedly enhance foreplay and intensify pleasure during intercourse.

The notion that a sex shop can be “halal” – an Islamic concept similar to “kosher” – had many Muslims and non-Muslims bewildered.

At a certain level, describing erotica as “halal” is simply a branding exercise designed to tap the potentially lucrative and under-exploited erotic market in Muslim countries. “Considering we’re targeting a market of around 1.8 billion people, the potential is huge,” enthused Aouragh in a recent interview about El Asira’s new partnership with German erotica giant Beate Uhse.

But the “halal” label is not just about marketing, it is also about breaking the social taboo surrounding sexual pleasure prevalent in many conservative Muslim communities by demonstrating that sexuality is encouraged, not frowned up, in Islam. “I think Islam is more open [than Muslims are] to sex and issues surrounding sexuality,” Mohammed Abbasi, the co-director of the Association of British Muslims, the UK’s oldest Islamic organization, told me. “Islam is more about what people do in private is their business… whereas Muslims want to get involved in a person’s private life.”

To ensure that their products and sites are “halal”, both Aouragh and Alkiswani sought and gained the approval of numerous Islamic clerics and scholars. To the uninitiated and given the puritanism which pervades some current trends within Islam, this may sound weird and counterintuitive. “Religion or lack of it have nothing to do with sexuality,” Marwa Rakha, a prominent Egyptian relationship and dating expert, told me, noting that the main difference between many self-proclaimed “secular” and “religious” people is their attitude to pre-marital sex.

Historically, Islam possessed a relatively open attitude to sex. In medieval times, many Islamic scholars doubled as sex gurus. They penned countless manuals and guides, including one poetically titled The Perfumed Garden. Perhaps surprisingly, many highlighted the “importance of female fulfillment,” according to Kecia Ali, a professor of religion at Boston University, in her book Sexual Ethics and Islam.

Abu Hamid al-Ghazali, the 11th-century philosopher and mystic whose opus is regarded by many as the “proof of Islam”, wrote widely about the importance of the female orgasm. “The husband should not be preoccupied with his own satisfaction,” the sage advised. “Simultaneity in the moment of orgasm is more delightful to her.” Likewise, the prophet Muhammad himself was reportedly a huge advocate of foreplay, urging his male followers to send “messengers” to their wives in the form of “kisses and caresses”.

Painting from Qajar Iran, 1850-1885.

Erotic painting from Qajar Iran, 1850-1885.

This traditional Islamic focus on the carnal partly explains, in the words of Kecia Ali, why “medieval Christian polemics against Islam viewed its sensualism as barbaric in comparison with the purity of Christianity”.

This view of Muslim society continued into the European colonial era. Many Orientalists from the straitlaced, uptight and prudish 19th century were of the view that “everything about the Orient… exuded dangerous sex, threatened hygiene and domestic seemliness with an ‘excessive freedom of intercourse’,” in the words of the late Edward Said, the Palestinian-American scholar who authored the groundbreaking Orientalism.

Paradoxically, this is how some Muslims, especially in the more conservative sections of society, see today’s West, while today’s Westerners, especially those who are unaware of the existence of liberal Muslims, often see Muslim societies as sexually repressed. While this is partly due to actual changes, such as the rise of political Islam and the setbacks endured by secularism, it is also a factor of the centuries-old tendency of Islam and Christendom (the West) to see each other as diametrically opposed, despite their enormous similarities.

Around the world, many Muslims are pushing back against the conservative and sexually repressive interpretation of their faith. “I think more Muslims are becoming more mature and open in their attitudes to sexuality, but at the same time there is a backlash from the more conservative sections of Muslims,” says Abbasi.

For instance, in Egypt, while many young people became more open and assertive about issues relating to sex, Salafists set up vigilante “morality” patrols in some parts of the country, which locals often defied robustly.

Islamic history, scripture and legal texts have become a major battleground between liberals and conservatives for the body, heart and soul of Islam. However, while helpful at certain levels, attempts to find an “authentic” version of Islam which is progressive enough to fit with modern norms is, like with other religious traditions, also problematic.

“The discourse of Islamic authenticity has had a stifling effect on intra-Muslim debates about sex and sexuality,” writes Kecia Ali, especially when it comes to sex outside of marriage, gender equality and homosexuality.

One side-effect of the reluctance to bring sex out of the closet is that many Muslims are left to their own devices, and must engage in a process of oft-discreet self-education. In addition to familial disinclination, there is also the poor quality of sex education in numerous Arab and Muslim countries.

“Education and awareness are weak in general in Egypt and many other Arab/Muslim societies,” explains Rakha. “Those in charge of the education process do not want generations of knowledgeable and curious children, teens, and adults… How can you control a population that understands its rights and freedoms?”

Rakha believes that, like charity, sexual awareness and maturity must begin at home. “The revolution has to come from the core of every family – otherwise it is not happening,” she maintains.

However, despite the existence of a rising number of open-minded families, many parents are unlikely to want to cede control of their offsprings’ love lives, either because this is what tradition demands or because governing access to sex is a powerful weapon of control. “Most families want their children virgins until they get married,” observes Rakha. “To fulfill this beautiful dream, they will minimize sexual education and awareness, lest the sex dragons awaken and ruin the plan.”

Some young Egyptians are rejecting these restrictions, but many do so behind their families’ backs. “They revolt in secrecy, adding a new number each second to the hypocritical population,” says Rakha.

But not everyone is revolting in secret, with some young people, intellectuals and activists openly calling for a sexual revolution. In Egypt, for instance, a vanguard of women intent on seizing their rights is playing a prominent role in this awakening, whether they are combating sexual harassment, insisting on dressing as they please in public, rejecting the hijab, fighting the stigma of being single, and even choosing to live on their own.


Follow Khaled Diab on Twitter.

This article first appeared in Haaretz on 4 May 2015.

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Egypt’s heartless economic growth

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 By Osama Diab

Economic growth in Egypt has mainly benefited the well-off, with many of the poor falling off the tightrope of the poverty line.

18 October 2010

Two and a half years ago, a usually hectic Cairo became quiet and empty. It was the afternoon on a working day, when streets are normally congested with endless queues of cars. Government officials blamed the lull in activity on a sandstorm. But it wasn’t sand that kept people at home – it was a storm of anger, sparked by textile workers in the Nile Delta city of Mahalla.

On 6 April 2008, Mahalla carved out its name as a centre of labour resistance. A hundred kilometres away, much of Cairo went on a general strike in solidarity with Mahalla’s textile workers. Many across the nation also went on strike at home or protested in solidarity with them. And many have continued to commemorate the date of 6 April in the years following by staging demonstrations. There is also a prominent opposition youth movement named after the 6 April events.

While the city of Mahalla was literally set on fire due to clashes between the police and the public, government officials in Cairo were busy concentrating on their goals of achieving high economic growth rates and attracting foreign investment. The Egyptian cabinet prides itself on recent signs of economic wealth. Egypt’s economy (nominal GDP) has tripled in less than 10 years, from LE373.6 billion in 2001 to LE1,008 billion in 2009. All economic performance indicators have been positive, especially since the appointment of Prime Minister Ahmed Nazif’s cabinet (aka the ‘businessmen cabinet’) in 2004. 

Investment has also been flooding into the country in large amounts, making Egypt a major destination for foreign direct investment (FDI) in the Middle East and Africa. In 2001, Egypt received US$500 million in FDI, which increased 24-fold to US$12 billion in 2007, according to the World Investment Report.

It wasn’t long before the new money became visible. North Coast resorts, Italian designer shops, international high-end cuisine from all over the world, and mansions and luxury compounds springing up in New Cairo and 6 October City are all signs of this newfound wealth. Ahmed Ezz, businessman and National Democratic Party secretary-general for organisational affairs, famously argued that the increasing sales of luxury cars are living proof that Egypt is much more prosperous now than before. But, more accurately, these increased sales are living proof that the 1% of Egyptians who can now afford luxury cars are more prosperous.

No one can deny the rapid expansion of Egypt’s economy in the past decade. Egypt saw high growth rates of 7% for three consecutive years prior to the global economic downturn. The government is proud, but is the average Egyptian also proud?

Not really, because it was only when Egypt was witnessing this impressive yet questionable growth that labour strikes spread like wildfire. Social tension, if not social unrest, is on the rise, and political stability is at stake. 

Despite significant growth and the flow of large amounts of cash, many Egyptians still struggle to put food on the table. Labour strikes have been increasing in number as a new way of demanding change. It is obvious to any observer that something has gone wrong: the new money was not enough to stabilise the country socially and politically. On the contrary, an increase in negative social and political vibes have coincided with positive growth, an irony many experts and analysts are trying to grasp.

“We want to reach the poverty line”

Hundreds of strikes have been calling for the settlement of overdue payments or an increase in extremely low wages. A climax was reached on labour day this May when Egypt’s workers collectively demanded a minimum wage of LE1,200. Their slogan was “We want to reach the poverty line.”

With all the ostentatious signs of wealth and prosperity surrounding Egypt’s poverty-stricken, and with high inflation triggered by rapid economic growth, LE1,200 seems to be only just adequate for workers to survive. But the government does not agree.

It seems that Egypt’s government suffers from its businessman mindset. It is happy that the country is making profit, but fails to recognise there are other aspects to a country that need to be addressed: a nation is not just an enterprise.

The missing link in Egypt’s development formula is the social and political dimension neglected by the Nazif cabinet . The cabinet runs the country in the same way its members run the companies they own, where the only goal is to make profits on the balance sheet at the end of the year.

They also see a booming economy in the circles of the other businessman they are surrounded by, and it can be observed, from their statements – such as Ahmed Ezz’s pronouncement on luxury car purchases – how isolated they are from reality.

Trickle-down should not be left to nature

The government has been promising Egyptians that trickle-down will eventually happen and that citizens must wait and be patient before they can reap the harvest of economic growth, when the wealth trickles down to all layers of society.

We have been patient, but everything seems to be going in the opposite direction. According to the Human Development Report of 2010, Egypt ranks 123 out of 182 when it comes to income equality, with the richest 10% controlling 27.6% of Egypt’s wealth. Egypt ranked 111 out of 177 in the 2006 report.

According to Ahmed el-Sayed el-Naggar, economist and editor-in-chief of the al-Ahram Centre for Political and Strategic Studies’ annual economic report, there are two things that are vital if the whole of society is going to benefit from economic growth and if income is to be distributed more equally: taxes and wages.

One of the main objectives of taxation is redistributing wealth. In most tax systems, the more you make , the greater the percentage the government charges you in order to carry out its infrastructure projects and offer social services, such as pensions, healthcare, and so on.

In Egypt, there are only three tax brackets, with the highest starting at LE40,000 a year (LE3,333 a month). In other words, citizens making LE40,000 a year are positioned in the same bracket as those who make hundreds of millions. According to el-Naggar, the fewer tax brackets there are, the less efficient and the more unequal the system is. Imposing higher rates on upper-bracket income is a conventional and well-known way to redistribute wealth, he says.

Let’s compare the tax system in Egypt with that of other countries. In the United States, the bastion of capitalism, the highest income tax band is 35%, while it reaches 52% in some European countries, such as the Netherlands. In Egypt, Law 91/2005 reduced the highest income tax band from 42% to just 20%, as part of the government?s tax reform plan.

el-Naggar believes the current wage system in Egypt is one of the worst in the world. “It forces people to take bribes and steal, because it’s impossible to live off that income,” he says.

According to el-Naggar, the minimum wage in the government for a university graduate is LE108, which is only enough to buy 2.5kg of meat. In contrast, in 1979, the minimum wage for graduates was LE28, which was worth 35kg of meat. “So even if we have growth, the upper class is in total control of the newly obtained wealth,” says el-Naggar.

“The growth was more in the financial economy than the real productive economy,” explains el-Naggar. “The other thing is that growth is not real unless accompanied by social policies that improve the distribution of wealth through having a fair wage system, a fair taxation system, and a fair subsidy system.”

 This article was first published in the al-Borsa newspaper on 26 September 2010. Republished here with the author’s permission. ©Osama Diab.

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Is Europe not working?

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By Khaled Diab

The chair of a leading multinational claims that Europeans do not work hard enough and do not value work enough. I beg to differ.

7 May 2010

At a recent conference in Brussels, bigwigs from the political, business, trade union and academic worlds got together to discuss ways of boosting the performance and competitiveness of European industry. Amid talk of innovation, R&D, job creation and helping SMEs, one speaker caused a wave of uncomfortable murmurs to spread through the audience.

It was partly due to his aloof tone and partly his message which, though he did not say it explicitly, implied that Europeans were lazy and all too often spongers. Peter Brabeck-Letmathe, the chair of Nestlé’s board, claimed that Europeans were not working hard enough and had lost their work ethic.

“We have the problem of the hours people are working. If you look at the hours per capita worked in Europe, they are substantially below the rest of the world,” he explained.

Citing surveys which he said revealed that only a minority of Europeans believed hard work was a value to aspire to in contrast to a majority of Chinese, he claimed that Europe was facing a crisis of its work ethic and needed to pull itself up by its bootstraps. “Working smarter is not the solution for Europe. The only solution for Europe is working smarter and harder,” he told his bewildered audience.

Of course, assuming that Brabeck-Letmathe practises what he preaches, this would be quite understandable considering that, as a top manager, he makes millions and so may feel he owes it to his shareholders to work long hours – and he can probably afford an army of helpers to take care of all the practical aspects of his life.

However, I’m not entirely convinced of the economic and social value of Brabeck-Letmathe’s assertions. Do people in countries that clock up a lot of hours actually want to work so long, does it make them more productive, how does it affect their lives and impact their societies? For example, do workers in unregulated China want to spend most of their waking hours assembling cheap goods for export?

In the OECD, South Koreans work by far the longest hours, racking up a massive 2,300-plus hours a year per employee. So, what does this mean ? To demonstrate, allow me to introduce Lee, a civil servant at the South Korean ministry of agriculture and fisheries. He gets up at 5.30am, starts work at 8.30am and doesn’t return home before 9.00pm, just in time to snore. In addition, he doesn’t get to see his kids except at the weekend or on the three days of holidays he gets a year.

So, is Lee working these hours because he finds his job thrilling or he’s a workaholic? No, it’s because he feels insecure. “It’s the culture. We always watch what the senior boss thinks of our behaviour. So it’s very difficult to finish at a fixed time,” he admits.

Moreover, is this the kind of existence we Europeans want for ourselves? After all, if we, as a society, wish to use the economic gains of recent decades to have more leisure time, then we are entitled to do so. In any case, economies cannot continue to grow ad infinitum.

But to go to the bottom line, based on Brabeck-Letmathe theory, you would expect that the Europeans putting in the longest hours would be doing pretty well for themselves. So, who are Europe’s hardest workers? The Germans, I hear at the back? Perhaps the Swedes? No, it’s the Greeks who put in more than 2,000 hours a year – and yet their country is in financial meltdown.

And Greece is a perfect illustration that it is not the quantity of the hours you put in that matter, but the quality. For example, Luxembourg and Norway generate about twice as much GDP per hour worked as Greece.

Those who wish to bash the European way of doing things often point out that Americans work considerably longer hours. But it is something of a paradox that, in the 1970s, the United States had a considerably higher standard of living than Europe, yet Americans worked fewer hours than Europeans. Today, the gap in living standards has narrowed considerably, yet Europeans on the whole work fewer hours.

However, even if Americans do put in the time, they don’t make the most of this time compared with north-western Europeans. In fact, according to OECD figures for 2007, Luxembourg, Norway, Ireland, Belgium, the Netherlands, and France all had higher productivity than the United States.

Contrary to what Mr Nestlé suggests, in some parts of Europe, like Belgium, the problem isn’t how hard an individual works but the number of people out of work. And this has quite a lot to do with the behaviour of multinationals. At first sight, European industry seems to be in trouble. And yet labour productivity in EU manufacturing rose by more than double the rate of overall productivity (46% against under 20% between 1995 and 2007).

And what happened during those good times? Millions of jobs in industry were cut or relocated to cheaper countries – which could lead workers to the conclusion that they are the victims of their own productivity. The same trend has started in services, too, with the outsourcing phenomenon. In addition, there are fears that the forthcoming recovery in Europe could be a jobless one.

Well, how can this be? Many companies, rather than employ more people, will try to extract more bang from each of their workers – Brabeck-Letmathe’s famous work ethic in action. In fact, this is already happening: with the job axe hanging by a thread over the heads of millions of workers in all sectors, many people are putting in extra hours to save their jobs.

The current recession and economic crisis is likely to reverse the gains in work-life balance which Europeans worked so hard to secure. If that occurs, it will be a huge shame.

This article appeared in the Guardian newspaper’s Comment is Free section on 3 May 2010. Read the full discussion here.

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