How much FDI is enough to spur economic recovery?
 
 
Attendees register on the first day of the Egypt Economic Development Conference - Courtesy: www.egyptthefuture.com
 

In the lead up to the Egypt Economic Development Conference (EEDC) that opened Friday in Sharm el-Sheikh, Egypt’s government has tossed around a wide range of figures for the amount of investment it hopes to garner.

In October, officials said they hoped the conference would bring in US$100 billion in investment. By February, Investment Minister Ashraf al-Araby told reporters the government was aiming for US$10-15 billion over the next two years. Come early March, he said the hope was to attract US$60 billion in the next four years.

Meanwhile, other officials have indicated that Egypt plans to offer US$35 billion in projects at the conference, half of them supposedly in the energy sector, at least according to statements from the petroleum minister to Reuters.

“It’s not very clear what the government is really expecting,” says economist Amr Adly, a non-resident scholar at the Carnegie Middle East Center.

“Originally, they were talking about US$100 billion in the next five years. This is clearly an unreasonable amount,” he says. “They have been lowering expectations. US$10-15 billion can be done.”

However, Adly says that the bigger question is not how much money the conference will bring in, but rather, “Would such an amount of money in net foreign direct investment (FDI) be enough to launch a recovery of the Egyptian economy?”

Egypt has never been a particularly large recipient of FDI. Even at its peak in the early 2000s, FDI amounted to less than 6 percent of the country’s gross domestic product (GDP).

Much of this is due to long term structural factors, economists say, like the lack of transparency in government, overly complex and ineffective bureaucracy, outdated laws and weak enforcement of contracts and property rights.

“Private investment is naturally attracted to less risky, fast return, high-return investments,” says AbdelAziz EzzelArab, an economics professor at the American University in Cairo.

In countries like Egypt, where there is a very high cost of entry due to bureaucratic complications and lack of transparency, the target rate of return will be higher than usual.

In addition to suppressing investment overall, this also causes investment to over-concentrate in a few areas where Egypt is competitive: resource extraction and real estate chief among them, along with some manufacturing of consumer goods.
 

Meanwhile, little investment has flowed into capital-forming industries — sectors such as healthcare, education and infrastructure — that in and of themselves expand the capacity of the economy as a whole.

“Capital formation in Egypt has been declining rather than growing,” says EzzelArab. “These are things that expand the productive ability of the economy, and there are things that the private sector won’t do.”

The government has been making some efforts to reform laws to give investors more rights — often, activists claim, at the expense of protecting the rights of ordinary citizens. But even these pro-investment laws won’t be enough to overcome decades of weak governance, corruption and poor institutional capacity.

“It needs more than just policy change,” says Adly.

And even if Egypt does succeed in attracting hard currency, that won’t necessarily translate into growth that benefits the population as a whole.

Egypt doesn’t have a great track record for FDI, but the economy benefits from an influx of billions of dollars in worker remittances, while the government has had what Adly describes as “a long history of exceptional windfalls” in the form of foreign aid and debt relief.

“We can see that it didn’t have really a major impact on development, or on standards of living,”Adly says.

Changing this would require deep changes and a long-term perspective, at a time when the government can barely keep on top of financing its budget deficit and keeping its foreign reserves above crisis levels.

Right now, policymakers don’t have the luxury of thinking about the long term, Adly adds.
 

Geopolitical theater

“The conference as an event, a three-day event, is a political issue really, to show that the regime is accepted and has legitimacy,” says Adly.

Some of this message is focused internally.

The government has an urgent need to show it’s doing something to try and improve Egypt’s stalled economy, with most key indicators failing to shift in the 21 months since former President Mohamed Morsi was overthrown.

Under President Abdel Fattah al-Sisi’s rule, Egyptians have been asked to tighten their belts as subsidies are cut, get back to work and halt demands for their social and economic rights. For the time being, most have tolerated it — out of both hatred for the deposed Muslim Brotherhood, and out of fear of the instability that Egypt has suffered since the 2011 revolution, says EzzelArab.

“But this also has a lifetime. It was a kind of grace period premised on the ability to develop,” EzzelArab says.

Initially, the military-backed transitional government that took power from Morsi was supported by grants from its allies in the Gulf, who gave some US$23 billion in cash and petroleum products over 18 months.

This helped support stimulus packages, which did allow investment in key areas such as improvements to Egypt’s road network. “You needed an injection of blood, and it was done,” says EzzelArab.

Even the conference itself was first proposed by the late Saudi King Abdullah upon Sisi’s election in July.

At the time he called for a donor’s conference, but since then, rhetoric from the Gulf has shifted as allies have made it clear they will be looking to invest rather than continue to provide unconditional support.

The conference, in turn, was transformed from a donor’s meeting to an investment meeting, but like their willingness to donate, investment decisions from state-owned companies and sovereign funds are still largely based on political calculations rather than economic ones, says Adly.

The Gulf countries rely on Egypt as a bulwark against chaos in nearby countries like Syria and Yemen, and count on the current government to contain Brotherhood influence and on the military to suppress Islamist militants in Sinai and beyond.

“Supporting economic recovery is quite important for political stability,” Ady explains. “The Emiratis and the Saudis are the ones that are supporting Egypt’s reintegration into the global market.”

The presence of investors and sovereign funds at the EEDC is a way to send a message — both to Egyptians and to foreign governments and investors — that they are committed to the government.

This perhaps explains the inconsistency, or even ambivalence, about exactly how much investment Egypt can secure in Sharm el-Sheikh this weekend.

As Adly points out, “There’s very little economic about the conference.”

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Isabel Esterman 
 
 

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