FDI's the key

By Aziza Sami
Whether or not Egypt improves its ability to attract investments will be the linchpin in the success or failure of the targets for growth announced by the prime minister on Friday. Within the next six months priority, the prime minister announced, will be given to policies helping the economy attain an eight per cent growth rate, and creating 880,000 jobs annually. Emphasis will be placed on soliciting FDIs, improving productivity levels, reforming the banking sector, stabilising the exchange rate and offsetting negative social and economic effects resulting from globalisation. But achieving an eight per cent growth rate will in large part depend on the economy's ability to attract $25 billion in foreign investments annually.
Recent experience does not suggest that meeting this target will be an easy task. In 1999-2000 foreign direct investments (FDI) coming to Egypt stood at just over $1.6 billion, representing less than one per cent of total investments directed to the world's emerging economies.
This may be partially attributed to the decline in capital flows to emerging markets in the wake of the global financial crises of 1997-98 and a deteriorating regional political situation. However, the existence of what may be termed 'chronic' problems within the Egyptian economy has, in its turn, also been one cause for the relatively low levels of investment over a longer span of time. Among the reasons cited by potential investors have been the lack of transparency and the absence of the regulatory environment necessary for investments to operate.
The UK retailer Sainsbury's recent, high-profile review of its operations in Egypt is one instance of a major investor contemplating withdrawal from the Egyptian market, in less than 12 months of setting up operations here. News of the company's possible retreat from Egypt instigated a flurry of activity. Prime Minister Atef Ebeid met with members of the company's board as well as with the British Ambassador (the UK is the biggest investor in Egypt). Reports in the British press at the end of last year mentioned that the company's new chairman had been "dismayed" to learn that Sainsbury's had expanded into a "hostile" Egyptian market. This was followed by the company's announcing that it was reviewing its investment in Egypt.
While there is little doubt that the whole Sainsbury's issue has become politicised, questions remain over the extent to which the company had undertaken the necessary research before entering the market in the first place.
Speaking at Cairo University's Centre for the Study of Developing Countries the British Ambassador Graham Boyce conceded that he had asked similar questions.
"A new chairman came to Sainsbury's around nine months ago. The chain had some problems [in its domestic market] so he wanted to review all of the company's operations. Egypt was the only market outside the UK and the US into which Sainsbury's had entered, so he asked why this was the case."
Sainsbury's, Boyce continued, had faced "some other surprises [inside the Egyptian market] such as problems in obtaining licences, and in getting in some of the imports it needed for its operations. There was also the boycott against Sainsbury's which was orchestrated by its competitors, not because the company was owned by Jews or any of these allegations, but because it had introduced the Egyptian consumer to a low priced commodity which was still of a high quality. And, this [spurious boycott] was a business practice which the company had not encountered anywhere else before."
Boyce hoped that Sainsbury's would "continue its [presence] here," adding that there was a "message" he wanted to send: "the Egyptian economy will be more capable attracting investment if Egyptians look to what is provided them by competition."
"Available investments on an unprecedented scale will go to [markets] which have a good regulatory framework, a transparent legal system, and a light bureaucracy," argued the British ambassador. He admitted, nevertheless, that the political situation in the Middle East has negatively impacted on the investment climate, noting that "a major American company pulled out of the Egyptian market last October, because of the Palestinian Intifada, even though the Intifada had no effect on Egypt."
Boyce, who has extensive diplomatic experience in the Middle East and was ambassador to both Qatar and Kuwait, admitted that the advanced countries need to reduce their protectionist measures on agricultural products, for instance, but added that on the other hand Egypt, as a developing country, needs to concentrate on industries where it has a comparative advantage, rather than concentrating, for instance, on setting up 14 costly automotive ventures whose production output combined is "less than that offered by one single car plant in Europe."
Former Prime Minister Abdel-Aziz Hegazi, commenting on Boyce's recommendations to open up the Egyptian economy, expressed reservations that liberalisation could in itself bring about the anticipated benefits. "Despite 25 years of economic liberalisation and privatisation the Egyptian economy's problems have remained, rooted in inadequate productivity, poor export performance and low levels of foreign investment."
Hegazi, who as prime minister oversaw the initiation of the open door policy in the mid-1970s, continued: "We have, in fact, become consumers for a wide array of multinational brands but retain an inability to manufacture." He cited the example of South Korea as the best instance of a country which "40 years ago stood in the same position as Egypt, but whose per capita income today is 10 times as much."
The advance of East Asian economies stands in stark contrast to those of the Middle East. Less than 15 per cent of their populations are today living below the poverty line, compared to 40 per cent four decades ago.
"Why have Western countries and multinational companies not assisted Egypt as much as they have South Korea. Why has it advanced while we are almost standing still?" queried Hegazi.
The debate brought to the fore the fact that while efforts have been made to liberalise the Egyptian economy over an extended period of time, the institutional and legal infrastructures effective in supporting a market economy, including the proper enforcing of laws, good governance and entrepreneurial practice, have not been accorded as much attention as have investment incentives.
"In Egypt there has been a concentration on tax incentives and free economic zones," said Boyce, "but the conditions which investors want when they talk to me are regulatory ones, such as a more transparent judicial system, speed in implementing procedures, and a good regulatory framework. You need to know where you stand all the time-when you are investing in a market."
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