Why political connections are driving business confidence in MENA

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This column reports the findings of a new study of how the political ties of firms in the Middle East and North Africa boost business confidence. The research suggests that this optimism is primarily driven by networked access to credit and lobbying, underscoring the need for greater transparency and institutional reform in corporate governance.

In a nutshell

Political connections create a privileged stratum of business leaders with unwarranted confidence in their future, driven by privileged access to resources.

Addressing this challenge requires not just broad anti-corruption measures, but specific targeted reforms that dismantle the networked mechanisms of crony capitalism that currently undermine the legitimacy and effectiveness of economic reform across MENA.

Targeted measures could include mandating transparency in corporate governance; strengthening independent institutions within credit systems and market regulation; and empowering independent business associations.

Policy-makers across the Middle East and North Africa (MENA) are currently engaged in various structural reform and privatisation programmes, aimed at shifting resources and boosting private sector growth. But a major concern that consistently undermines public trust and economic fairness is the persistence of cronyism and its role in shaping relationships between businesses and the state.

Research evidence for the region clearly demonstrates the material benefits enjoyed by politically connected firms. For example, research on Lebanon highlights how politically connected firms create more jobs than their unconnected peers, suggesting a reciprocal relationship where firms gain regulatory advantages (Diwan and Haidar, 2019).

Similarly, work on Morocco confirms that connected firms receive political privileges, including preferential access to finance and protection from foreign competition (Saadi, 2019). Another study shows that politically connected firms can override some trade and investment regulations (Aboushady and Zaki, 2025). These findings confirm that political affiliation remains a crucial determinant of success in the region.

But a key piece of the puzzle has been missing: how do these political connections affect the forward-looking expectations, or business sentiment, of firm owners and managers? Sentiment is a vital leading indicator that drives future investment, hiring and growth. If political connections disproportionately boost confidence, it signals a systemic allocation of resources and opportunity that favours the politically entrenched.

Shifting focus: from financial performance to sentiment

In our research (Gholipour and Farzanegan, 2025), we investigate this relationship using firm-level cross-sectional data from the World Bank Enterprise Surveys across nine diverse MENA countries, including Egypt, Iraq, Jordan, Lebanon, Malta, Morocco, Palestine (West Bank and Gaza), Saudi Arabia and Tunisia.

Our measure of political connection is based on whether the firm’s owner, the chief executive officer (CEO), the top manager or any board member has ever held an elected or appointed political position. We measure business sentiment based on the manager’s expectation for next year’s sales: coded as increase (+1), stay the same (0) or decrease (-1).

The focus on sentiment distinguishes our work from studies that concentrate solely on tangible outcomes such as profit or innovation. By analysing expectations, we capture the perceived security, preferential treatment and competitive edge that connected firms anticipate receiving from the political environment.

The findings: political ties generate optimism

Our analysis reveals a robust link between political connections and optimistic sales expectations in MENA. After controlling for numerous internal factors (such as innovation, firm size and spending on research and development, R&D) and external market factors (such as competition and business obstacles), we find that the presence of a politician on the board is associated with an approximately 10 percentage point increase in the predicted probability of a firm anticipating an increase in future sales. Conversely, this connection significantly reduces the probability of expecting a decrease.

Our finding provides empirical support for the ‘helping hand’ theory, which posits that government intervention favours connected firms, enabling them to achieve better performance and, consequently, greater confidence. It also supports the ‘income-smoothing hypothesis’ (Chen et al, 2010), where political connections secure and stabilise future earnings, leading to more predictable and positive forecasts.

The crucial missing link: business associations

The most significant policy finding from our research is the identification of the mechanism through which this confidence is generated. We show that the positive link between political connections and optimistic sales expectations is fully or partially mediated by the perceived benefits derived from membership of professional associations.

In other words, simply having a politician on the board is not enough: the connection becomes functional by granting firms superior networked access. When we account for the benefits that connected firms report receiving from these associations (such as improved access to credit, new markets and effective lobbying channels), the direct effect of the political connection on confidence diminishes or disappears.

This finding highlights the fact that cronyism in MENA is not just a direct transaction: it is systemic, leveraging formal-looking professional networks to channel undue benefits to connected firms. These associations, which are intended to foster collective business interests, become tools for market distortion and political favouritism.

Policy recommendations

Our findings underscore the urgent need for targeted policy interventions to foster a more level playing field for private sector development in MENA.

Mandate transparency in corporate governance

The most direct way to mitigate the distortionary effects of political connections is to introduce mandatory, publicly accessible disclosure of the political history of all members on a firm’s board of directors and top management.

This simple measure increases scrutiny and provides political activists, independent media and regulators with the necessary information to monitor potential conflicts of interest, thereby reducing the covert nature of political favouritism.

Institutional reform for resource access

The fact that association membership facilitates ‘super-access’ to credit and markets for connected firms suggests institutional weakness in the formal channels. Policy-makers must focus on strengthening independent institutions, such as:

Credit systems: enhancing the objectivity and independence of commercial banks and credit allocation mechanisms to ensure lending is based on merit (for example, firms’ financial performance and strategies), not political ties.
Market regulation: ensuring that information on government contracts, subsidies and new regulations is disseminated transparently and universally, rather than through exclusive association networks.

Empower independent business associations

Policy-makers should actively promote and support the development of truly independent, non-connected professional and business associations.

By providing resources and legitimacy to organisations focused on broad issues – such as quality standards, workforce training and general market intelligence, rather than lobbying – governments can dilute the power of connected networks and facilitate useful collective action for the entire business community (Sabry, 2020).

Conclusion

Our research provides robust evidence that political connections create a privileged stratum of business leaders with unwarranted confidence in their future, driven by privileged access to resources.

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