Political reform could be the most decisive condition for the success of economic reform. Wael Gamal reviews a recent economic report "Despite the political and social importance of building a full democracy in Egypt, the economic impact of such transformation is as important. Democratic reform is more significant than any mere economic procedure, especially concerning the investment atmosphere," wrote Ahmed El- Naggar, the editor of the yearly Strategic Economic Trends Report published by Al-Ahram's Centre for Political and Strategic Studies in the introduction to the 2005 edition. The flow of foreign direct investment (FDI) to Egypt has declined sharply during the last decade. According to the United Nations Conference on Trade and Development (UNCTAD), FDI was around $1.2 billion in 2000. Three years later, it plummeted to $237 million to put Egypt 11th among Arab states in FDI received, though it had been the top Arab recipient of FDI in the first half of the 1990s. El-Naggar argues that the reaction of the Egyptian stock market to the president's decision to amend the constitution proves his case. According to him, "it was so significant the way stock prices leapt as soon as the amendment was declared. We can imagine how the impact would be if a full package of democratic reforms was introduced." With an anticipated bounce in overall international FDI flows in coming years, the new government of Ahmed Nazif has made attracting FDI the cornerstone of its economic reform package. But this view, which links FDI with political transparency and stability, overlooks other potential results of political reform. In some aspects, it could hinder the engine of capital accumulation. For example, allowing the right to peaceful strikes and demonstration without any restraints, as suggested by the report as part of a political reform package, would likely lead to a rise in business-labour confrontations in Egypt, chipping away at profit margins. Stronger unions could negate the Egyptian comparative advantage of cheap labour, discouraging local and international businesses from investing in Egypt. The report shifts to use two contrasting viewpoints to discuss the foundations of Nazif's government reform procedures, another level where the political, the ideological, and the economic interact. The liberal former minister of economy, Mustafa El-Said, welcomes the free market policies of the government, calling it a huge step forward after years of economic stagnation. While El-Said acknowledges that the new government is "a businessmen's government, this doesn't mean accusing it of neglecting the interests of the poor. It means that it believes that the way out of the crisis of the Egyptian economy lies with supporting the local and international private sector in a framework of economic freedom." Egypt needs investments equal to about 25 per cent of GDP to achieve its development goals, which amounts to about $21 billion a year. This raises questions about the ability of the immature Egyptian private sector to fulfil that task. The liberal economist warns of the limitations of this free market formula. Putting all the eggs in the private sector basket could be disastrous, and the state has to play more than a marginal role. According to El- Said, "this role of the state is not based on ideology but on pragmatic considerations because the alternative will be that stagnating development levels because the private sector will not be able to finance the huge amounts of investment needed for development." The counter-argument presented in the report by the leftist economist Gouda Abdel-Khaleq, agrees with part of El-Said's conclusion. Abdel-Khaleq attacks the withdrawal of the state from economic activity, which is the most important aspect of the Washington Consensus political reform package religiously applied by the Nazif government. "We are not for the state playing the greatest role but the most active role. That means restructuring of its role by decreasing it in some fields and increasing it in others," he clarified. Other aspects of the economic policies of the second half of 2004 include the market and pricing mechanism and the relation between the internal and external factors. Concerning the former, Abdel- Khaleq challenged the government assumption that international prices are an unerring reference point. "The present structure of the international economic system implies that prices are not defined simply by the interaction of free market forces in the competition context. The existence of multinationals makes this a myth," he said. Also, any economic reform has to include procedures to deal with the harmful consequences of external shocks. "Until a new form of international economic morality is created, a buffer package of policies combining the market mechanism and central planning has to exist," stated Abdel-Khaleq.
