Deregulation alone does not lure foreign direct investment, argues Salah El-Amrousi Press reports have been cropping up of a surge in foreign direct investment (FDI) to Egypt. In the fiscal year 2004/05 we are told that FDI climbed to $3.9 billion, from $407 million in 2003/04. Unfortunately this is just creative accounting. The recent figure includes oil investments worth $2.6 billion not included in last year's figures as well as privatisation receipts of $419.5 million which hardly constitute a real investment. Privatisation revenue denotes a change of ownership not an addition to production assets. The true figure for FDI is $884.5 million. And although it may be double that of last year, it continues to be lower than figures achieved in previous years The government tells us it wants foreign investment to rise to between $4 and $5 billion a year, a stunning ambition. In the last two decades the FDI ratio to gross domestic investment has remained steady at between four and nine per cent a year. How that ratio is to jump to 35-40 per cent a year is anyone's guess. But perhaps the government is right. Perhaps other nations have done it and now it's our turn. Let me discuss this possibility just for the sake of argument. China, the world's second largest recipient of FDI next to the US, has an FDI rate of between eight and 13 per cent of gross domestic investment. The only countries that have come close to the figure the government expects are Malaysia (15 to 20 per cent), Singapore (30 to 50 per cent) and Hong Kong (15 to 30 per cent). These are special cases: the countries in question all act as conduits of trade and capital to Southeast Asia, including China. So let's keep focussing on China and examine the differences between the legal and economic climate there and the one we have here. Egypt's neo-liberal government believes that it needs to free trade and capital movement, eliminate bureaucratic barriers and reduce taxes and tariffs to attract investment. The more you deregulate the economy, the government says, the more FDI you attract. The Chinese example shows exactly the opposite. In the 1990s China received $30-40 billion in FDI annually (as opposed to $0.8 to $1 billion that Egypt received in the same period). The flow of FDI to China has continued to rise in the last five years and now stands at $50-60 billion a year compared to $0.5-1.2 billion in Egypt's case. The per capita figures tell the same story. In China FDI per capita hovered at about $30 per year in the early 1990s while in Egypt it was $15 per year. In 2004 per capita FDI was $45 in China and $17 in Egypt, having dropped to $3-6 in the early years of the decade. If one were to believe the neo-liberals China is way ahead of us because its policies are more liberal. But nothing could be further from the truth. According to recent reports by The Wall Street Journal and the Heritage Foundation China ranks 112 in the world with regard to economic freedom. That's lower than Egypt, which ranks 103. China places high barriers on foreign investment and lacks transparency and a proper legal environment. China restricts capital movement to and from the country. Egypt, meanwhile, has moderate barriers for foreign investment. It has abolished prior permission and investors are now required merely to notify the authorities for the purpose of compiling statistics. Egypt's new laws allow 100 per cent foreign ownership of companies and protect them against confiscation, foreclosure and nationalisation. Foreigners are allowed to own land and residents and non- residents of Egypt are allowed to hold bank accounts in foreign currency. There are no restrictions on cash payments and transfers abroad. Egypt treats investors of any nationality without discrimination. However, it maintains certain restrictions. Foreigners are not allowed to own agricultural land and those wishing to invest in military production or in Sinai need permission from the cabinet. If it were not for these restrictions, intended to prevent Israelis from owning agricultural land in Sinai, Egypt would have been classified as a country with low investment barriers. How is it, then, that China is so far ahead of us when it comes to attracting foreign investment? The answer is simple. China has a better economic climate. Its economy is more dynamic, with high levels of integration and technological competence across sectors. China maintains a significantly higher level of domestic saving (40-50 per) and has high rates of savings, investment and growth in general. This is what attracts investors, and it is something the Chinese have achieved through intensive intervention in the economy. The Chinese government runs a major public sector and often interferes in the way private businesses operate. These are the simple facts and foreign investors don't seem to mind. Foreign capital seeks high profits. This is the primary motivation behind foreign capital moving into a country. Tax reductions and similar incentives are at best a form of passive motivation. They motivate investors because they decrease the cost of investment and ensure that a larger chunk of profits are kept by the investors. But such incentives cannot help a country with low rates of return. The Chinese have an amazing rate of savings. They don't need foreign investors to bring in money from abroad. This is not the case with Egypt where the rate of savings, at 15 per cent, is so low it drags down investment and growth. Furthermore, China's economic and industrial structure is far more advanced than that of Egypt. Neo-liberals can offer foreigners all the passive motivation they want. They can offer tax and tariff incentives and guarantees of ownership and free money transfers yet something would be missing. This country cannot solve its economic woes by relying on foreign investors. Egypt has a serious domestic savings problem and simply raising interest rates will not solve it. We need to address local problems first. We need to get the local economy to grow. That is the bottom line, and it is what attracts foreign investors.
