Who shall doubt "the secret hid

Under Cheop's pyramid"

Was that the contractors did

Cheops out of several millions?

Or that Joseph's sudden rise

To Comptroller of Supplies

Was a fraud of monstrous size

On King Pharaoh's swart civilians?

Rudyard Kipling's caustic verses denouncing the corruption of state officials sound as sharp and relevant today as they did in 1886. He drew examples from ancient Egypt, though his experience was in British-ruled India where things were supposedly better run. But Egyptians today should see nothing much to complain of in his picture of Egypt, ancient and modern, as a corrupt and parasitic growth siphoning off wealth into the pockets of the few.

The cynicism of Egyptians about the greed of their rulers knows few limits. A foot-and-mouth epidemic has been spreading through the countryside. Ruined farmers are dumping dead cattle outside official buildings to protest against the failure of the government to help. In Cairo, people have largely stopped eating meat; butchers' shops are empty. I went into one in the Abdeen district of central Cairo last week where Islam Manas and Abu Galal were cutting thin steaks from a joint of beef, but there were no customers. They put all the blame on the authorities, Mr Manas saying that "the government is pumping out a lot of propaganda about the epidemic so officials can make money out of selling fish and chicken". Other butchers assumed that the state's only reaction to this minor crisis would be to seek to profit from it.

Presumption of official wrong-doing and self-interest is pervasive. I also talked to bus drivers who are on strike across Cairo. At the Moneib bus station, Khalaf Abdul Kader, who has worked on the buses for 16 years, suspected that one reason why the state bus company did not want any reform was that its officials were fearful of having to account for how they have been spending the company's revenues in past decades. He said the strikers wanted not only better benefits, but "we want some respect from our employers".

Official corruption played a central role in provoking the uprisings that swept through the Arab world last year. In Egypt, the incompetence and dysfunctional nature of the state seems worse than elsewhere. For instance, one-third of the Egyptian budget is spent on subsidies, but Magda Kandil, the executive director of the Egyptian Centre for Economic Studies, says they "are the biggest source of social injustice". Subsidies such as bottled butane gas, a necessity for cooking in districts without main gas, is heavily subsidised but the money disappears into the pockets of middlemen so gas is still expensive. Bread, though cheap, is often inedible because the government doesn't inspect bakeries. Heavily subsidised cheap fuel means streets clogged with vehicles and some of the world's worst traffic jams. And so underpaid are officials that they cannot survive without bribes.

What makes Egyptian corruption so striking is the extent of open and degrading inequality compared with other countries in the region. Some 45 per cent of the 85 million Egyptians scrape by on less than $2 (£1.25) a day, while a small layer at the top live in palaces and work in air-conditioned glass towers. It would be difficult for anywhere to be more corrupt than Iraq, but at least it has $100bn in oil revenues. Iraqi soldiers and primary school teachers take home a reasonable salary, however much their leaders steal.

Corruption in Egypt is spreading fast into new and profitable areas: cigarettes are smuggled in from abroad and sold at rock-bottom prices. This is reported to cost the state $663m a year. The export of rice has been banned, but half the annual crop – some 600,000 tons – is smuggled out of the country. Importers in the Gulf say they can still buy Egyptian rice, but they have to deal with gangsters to get it.

Can this system of special deals, privileges and corruption be dismantled or even reformed? The question goes right to the heart of Egyptian politics. The Supreme Council of the Armed Forces which, in so far as anybody is running Egypt, is in charge, wants the military to retain the perks it has accumulated since Nasser seized power in 1952.

Probably the Muslim Brotherhood will let it do so, so long as the army loses its political supremacy. This may well happen. Professor Khalid Fahmy, chairman of the department of history at the American University in Cairo, says that the weakness of the council and the army is that "[they] do not have a political partner like South American military regimes, which are allied to big landowners or big capital. The military needs the brotherhood more than the brotherhood needs them."

Egyptian liberals often depress themselves with talk of the triumph of the counter-revolution, the success of the deep-laid plots of the military to retain power, or the coming enforced Islamicisation of the country under the brotherhood. Certainly, nothing is settled in Egypt and nobody knows how much power anybody holds or will hold infuture.

As crime and violence increases, the supreme council has encouraged xenophobia by persecuting foreign NGOs and presented itself as a bulwark against chaos. These tactics have had some success, but the military appears to be making up its strategy as it goes along. For instance, Egyptians are suspicious of foreigners, particularly Americans, so the persecution of NGOs was going well until the council lost its nerve under US pressure, allowing American NGO members, previously forbidden to leave Egypt, to go home. Violence has increased since the January 2011 revolution but, outside North Sinai, Egypt is remarkably peaceful.

The struggle between the council and the brotherhood is increasingly intense as the latter tries to get rid of a military-appointed government. The brotherhood, which won a plurality in the parliamentary election, has now decided it will run its own candidate for president in May. A new constitution is being drawn up. The army will fight to retain its authority, but the crucial dates in the political calendar revolve around elections or actions by elected bodies. The good news for the brotherhood is that the militarised police state that has misruled Egypt for 200 years, should not be a hard act to follow.

Whoever rules Egypt in future will have to deal with the legacy of a racketeering state in which education and health are in a state of collapse. Egyptian officialdom is unlikely to become honest, or even competent, overnight. Good times may not be around the corner, but the old police state that treated Egypt as if it were a conquered country has probably gone for ever.