Salah El-Amrousi argues that the free flow of foreign capital is not necessary for economic development Whenever neo-liberals, in Egypt or elsewhere, speak of foreign direct investment (FDI), they tend to make two arguments. The first is that FDI is essential for development and progress, and that no country in the Third World, from Mexico to China, has achieved economic and capitalist growth without FDI. Secondly, that capital tends to flow from advanced countries, which have abundant capital and high wages, to developing countries, which have little capital and low wages, in search of higher profits. For the neo-liberals, the removal of restrictions on capital movement is a mainstay of economic policy. Once this is done, capital will end up where it is most needed, we are told. The neo-liberals admit that growth requires other things, such as improved infrastructure and education. But, for them, these are all of secondary importance. The main focus of liberalisation is the economy's ability to attract foreign capital. According to the neo-liberals, foreign investment makes up for the weakness of local savings. The free movement of capital is supposed to divert savings worldwide to the developing areas, where capital is scarce. Egyptian neo- liberals, for example, hope that foreign investment will increase from its current level of four per cent of gross domestic investment (GDI) to 25 per cent or even 30 per cent at some time in the future. Something in the vicinity of $5 billion a year would be quite reasonable, even modest in comparison to other nations who passed along that path before us, we are told. I beg to differ. Such high rates of FDI have been achieved only rarely by recipients of FDI in the developing world. The world's second largest recipient of FDI, after the US, is China. The rate of foreign investment in this country is about 10 per cent of its GDI currently, down from 15 per cent in the late 1990s. The only countries that achieved such high rates of foreign investment were Malaysia (15 per cent to 20 per cent), Singapore (30 per cent and up to 50 per cent in the past few years), and Hong Kong (15 per cent to 30 per cent, in some years up to 60 per cent). These countries were the exception, not the rule. Foreign capital interacts with the local economy, in Egypt and elsewhere, in a manner defying expectations of the neo-liberals. But let's first look at their two main arguments. The claim that FDI is a requisite for progress in all developing countries is more of an ideological point than a fact. The only true part of this claim is that industrialisation involves a transfer and absorption of technology. This makes it necessary for developing countries to do business, one way or another, with multi-national corporations. The transfer of technology differs from one country to another and is not always linked to FDI. Countries resort to a variety of arrangements to obtain technology, such as licences, franchises, turnkey projects, and international subcontracting. These forms of technological assimilation played a more important role than FDI in South Korea and Taiwan, and earlier on in Japan. South Korea imposes strict restrictions on foreign investment and has only received small amounts of it during the years of its rapid industrial growth. Egypt actually had received more foreign investment than South Korea until the early 1990s. Egypt's share of FDI inward stock (the total of FDI received by any country up to a given year) was $2.3 billion in 1980, compared to $1.1 billion in South Korea. In 1992, the figure was $11.8 billion for Egypt, compared with $7.1 for South Korea. From that point on, the tables began to turn. This may seem puzzling, but not if one remembers that it is the quality, not quantity, of FDI that matters. Foreign investment in Korea, although relatively small, played an important role in the country's technological transformation, for it was directed to targeted sectors within a comprehensive strategy for industrialisation. In Egypt, most FDI went to the oil sector, with FDI from the Gulf states channelled initially to real estate and tourism, then branching out into assembly projects. The second claim of the neo-liberals is that FDI, once freed, will flow from advanced countries with a surplus of capital to developing countries with a shortage of capital in search of cheap labour and higher profits. In reality, three quarters of FDI worldwide go to advanced countries. The rest, one-fourth of FDI, goes to the developing world, in an uneven manner. About 10 countries receive three quarters of the FDI going to the developing world, and these are countries with dynamic economies. This happens because the introduction of new technology in such countries involves a higher rate of profit, a rate sustained by a strong local market. It is wrong to assume that a cheap workforce is the key to attracting foreign investment. Numerous studies show that more important factors are in play, such as the size of the local market, the stability of prices and exchange rates, and political and institutional stability. In much of today's industry, labour is only a small part of the total cost. And, it is often cheaper to use skilled labour than unskilled. All of the above is relevant in Egypt's case. Egypt still attracts modest amounts of FDI despite the liberalisation policies of the 1990s and the incentives to foreign investors. Usually, this is blamed on the inadequate liberalisation of the economy. The Index of Economic Freedom, released by the Heritage Foundation and the Wall Street Journal, classifies Egypt as a country with moderate barriers to investment. One of the barriers the Index mentions is excessive red tape, a point well taken. But the two other barriers the Index mentions seem exaggerated, if not politically motivated. One is the ban on foreigners owning agricultural land, a restriction which is hardly significant since share-holding companies (which can be 100-per cent owned by foreigners) are entitled to own land. The other barrier is that cabinet approval is required for investment in military zones and in Sinai. Removing the latter restriction would pave the way for Zionist infiltration in Sinai. A free-moving foreign capital is not necessarily good for domestic development or industry, however beneficial it is for transnational capital. This is why we need restrictions ensuring that capital goes to where it is most needed. National interests, needless to say, should be placed above those of foreign capital. Going back to South Korea, this country had firm restrictions on foreign capital during its phase of rapid economic growth in the 1980s. In the 1990s, South Korea liberalised capital movement under pressure from local businessmen as well as international financial organisations. The liberalisation was one of the major factors in what was later termed the Asian crisis. China and Malaysia, both among the developing world's top recipients of foreign capital, still impose restrictions on capital flow. The aforementioned Index ranks them lower than Egypt in matters of liberalisation. Both are described as having high barriers on investment. Without such barriers, no country can hope to divert investment to where it needs. Egyptian neo-liberals are still adamant that removing red tape would change things in a radical manner. Not true. Removing the red tape is a good step, but other measures are needed if we are going to get the kind of capital and development we need. Unless economic policy changes in a fundamental manner, unless the economy is vitalised through local efforts and savings, more FDI would be of no help. Foreign investment is not a knight in shining armour.
