Corruption as leverage: How institutional weakness fuels neoliberalism
In April, a storm of controversy erupted over the sudden closure of B.Laban dessert chain, following government allegations of grave hygiene violations. Yet just as swiftly as the shutters came down, they were lifted again—this time after an unexpected intervention from the president himself. Officials soon reversed course, proclaiming the company’s facilities were “as sterile as an operating room.”
Many pointed to the company’s astonishing ascent—opening more than 100 branches across Egypt in just one year, and rapidly expanding into several other Arab markets—as evidence that something was amiss, amid speculations of being a front for money laundry.
Around the same time, the Egyptian Initiative for Personal Rights/EIPR secured a fourth court ruling in favor of residents of Wadi Al-Qamar, who developed health issues linked to pollution from the coal-powered Titan Cement plant. The plant’s coal-burning unit sits just ten meters from people’s homes. Despite Titan’s valuation exceeding $1.5 billion, the company delayed compensations citing financial incapacity—a claim EIPR challenged in its public statement.
Titan’s professed inability to pay likely aimed to avoid setting a legal precedent—especially given the plant continues to burn coal rather than switch to natural gas. This practice is enabled by a 2015 amendment to the executive regulations of Egypt’s Environmental Law, which legalized the use of coal even in factories located near densely populated areas.
These two cases underscore the chronic ineffectiveness of regulatory institutions in Egypt. It’s a reality that resonates far beyond national borders, echoing across much of the Global South. Institutional fragility—often flattened into the shorthand of “corruption”—remains one of development’s most enduring enigmas. Why does it persist in some places and not others? Is corruption a barrier to development, or does underdevelopment allow it to flourish? And why, despite decades of reform rhetoric, does it remain so stubbornly difficult to dismantle?
Recently, two leading scholars from the institutionalist school of economics were awarded the Nobel Prize, shining a spotlight on a theory that places institutions at the heart of development. According to this school of thought, sustainable economic growth cannot occur without institutional reform.
Institutions are seen as the scaffolding of development: they enforce contracts, protect property rights, and enable markets to function efficiently. Unlike neoclassical economists, who treat markets as natural and self-regulating, institutionalists argue that markets are constructed—and that building them requires robust, capable institutions.
Many have criticized this position, including Amr Adly, professor of political economy at the American University in Cairo. Adly has pointed to cases where significant economic growth, a reasonable degree of development, and transitions toward market economies occurred despite weak liberal institutions and even in contexts of widespread “administrative corruption,” as it’s commonly termed.
This article aims to shed light on a different dimension of the issue: that institutional weakness is not merely a technical flaw or unintended defect. Within the neoliberal global order and its division of labor, institutional fragility can become a comparative advantage. Weak regulatory frameworks may give certain industries a competitive edge in export-oriented economies.
If we frame “corruption” within this context, we can begin to understand why state institutions appear so ineffective in confronting or curbing corrupt practices.
Systemic fragility
The informal economy or practices that violate the law, even when originating from official institutions, are examples of the failure of institutions in peripheral economic systems. Although these systems urgently need to formalize wide swaths of transactions to boost tax revenues and social security contributions, informality remains a dominant trait. International financial institutions may claim to be tackling the problem, but their interventions rarely eliminate it.
In many countries of the Global South, including Egypt, informal economic activity constitutes a large portion of the overall economy. Yet efforts to formalize this sector, that is bringing it under institutional oversight, remain limited and cautious. The reason isn’t merely weak institutional capacity or a lack of political will. Rather, informality itself functions as a comparative advantage. It allows for significantly lower labor costs—a “benefit” widely promoted by some low-income countries aiming to attract investment. Egypt is among these, offering loose enforcement of minimum wage laws, labor protections, and environmental or health standards.
This dynamic becomes even more apparent when we consider environmental and labor disparities in export-oriented production from the “periphery” to the “core”. According to my analysis of EEMRIO—the Environmental-Economic Multiregional Input-Output database—every unit of goods exported from peripheral countries carries, on average, an environmental burden thirty times higher than its counterpart produced in core economies. It also consumes about ten times as much human labor.
Such staggering resource and labor disparities dictate a strict economic logic: production must remain cheap to stay globally competitive. That affordability hinges on the absence of stringent environmental regulations and poor labor protections.
The cash economy
The persistence of physical cash in these settings is not simply a matter of outdated technology or cultural inertia. Instead, cash functions as a tool for minimizing labor transaction costs. It allows employers to bypass formal documentation—evading taxes and social insurance contributions in the process—thereby sustaining a vast pool of cheap, informal labor.
This logic is not confined to self-employed workers or small-scale enterprises. Large corporations also exploit these dynamics to suppress wage costs and enhance labor flexibility. In effect, the very infrastructure through which money circulates evolves into a shadow system—one that institutionalizes what scholars call “unstructured labor”(1) as a defining characteristic of peripheral economies. These informal mechanisms, in turn, cement such economies’ roles in global value chains as dependable reservoirs of low-cost labor.
Even in the formal sector, wages remain low due to a lengthy supply chain of cheap informal labor. Informality provides officially employed workers with low-cost goods and services. Domestic labor, in particular, often sits at the base of this chain. Unpaid or underpaid household labor is essential to enabling a low-cost workforce. Without it, workers or the state would have to supply daycare services, nannies, and appliances to complete household tasks.
It’s no coincidence that only high-income earners can afford these services without state subsidies. Scaling such support to the wider population would require dismantling the entire economic and social structure.
The three defining features of neoliberalism
In two previous articles on the characteristics of neoliberalism, I argued that traditional definitions—focused on shrinking state roles and unleashing market forces—fail to capture its reality in this region. The first article identified monopolistic commodification as a key trait, and the second introduced the “regional division of labor” as a second pillar.
This article proposes a third defining feature: what I call “strategic institutional weakness.” This means institutions do not fail or erode randomly. Rather, they are deliberately designed or allowed to evolve in ways that render them incapable—or unwilling—to formalize or regulate markets, protect workers’ rights, manage the labor market, or uphold environmental standards.
This form of institutional weakness is not a temporary flaw to be fixed with capacity-building programs or awareness campaigns. It is a structural element of how neoliberalism operates in peripheral economies.
Egypt provides a clear example. Neoliberal reforms have coincided with—and even encouraged—a sharp rise in informal employment over recent decades, despite official attempts to contain it.
This brings us back to the concept of comparative advantage as presented by 19th-century economist David Ricardo. While his vision of comparative advantage and the international division of labor was idealistic, based on specialization derived from a country’s abundance of resources or skills, in “peripheral” countries and within the context of neoliberalism, comparative advantage transforms into “comparative disadvantage.”
A significant part of the informal economy’s resistance to regulation stems from its central role in the broader economic and social order. It supplies cheap goods and services to the formal sector, allows for lax health and environmental standards, and generates a low-cost labor force for both the state and private employers.
Thus, the informal economy in peripheral states is not, as claimed by international financial bodies, a deviation from neoliberalism to be reformed. It is one of its pillars.
The institutional theory of economics often overlooks how the international division of labor shapes domestic institutional structures—and entrenches corruption and institutional weakness. This school tends to attribute such dysfunction to internal failings: lack of political will, capacity, or even cultural backwardness. It rarely recognizes that these characteristics are not an incidental flaw, but rather deliberately produced to conform with the peripheral state’s position in the global economy.
Institutions in peripheral countries are not “weak by accident.” They are engineered to have limited capacity, creating an attractive environment for certain forms of global capital—capital that seeks higher profit margins with fewer regulatory costs. This is especially relevant as core countries attempt to externalize the environmental costs of their consumption.
This is what makes structural change so difficult. It is not merely about domestic reform. It requires dismantling the international power dynamics that reproduce institutional weakness as a competitive advantage rather than a liability.
(*) A version of this article first appeared in Arabic on May 25, 2025.
(1) Labor that is informal, unorganized, or lacking formal contracts, regulation, and social protections.