The Politics of Foreign Investment in Egypt
A version of this article was published in The Cairo Times, Vol 2, Iss 4
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There are two main ways a foreigner can invest in Egypt: portfolio investment (including stocks and bonds) and foreign direct investment (or FDI, which is bricks-and-mortar stuff like factories and buildings). Whereas portfolio investments can be quickly sold and the money repatriated, FDI is immobile. No surprise, then, that the government loves FDI but is generally ambivalent about portfolio investment, welcoming it when it flows in and cursing it when it flows out. In fact, both types of investment are highly beneficial for the economy, but lately Egypt has seen more portfolio investment than FDI. Why?
Portfolio investment is sometimes derided as ‘hot money’, meaning that it is chasing high returns and will leave at the first sign of trouble. This overstates the case, of course, but it is not completely inaccurate. Since high returns come from high risk, portfolio investment is usually the first foreign money to move in to emerging (and therefore risky) economies precisely because investors can take it out again if the investment climate deteriorates. This flexibility reduces their long-term risk, which enables them to take on more of it. And by investing in the stockmarket, foreigners make life much better for locals: share prices rise, making it easier for local companies or the government to raise money by listing new shares; liquidity improves as more shares are bought and sold; the local currency strengthens as foreign money pours in; and international market analysts push for reforms in accounting standards and trading practices that improve market conditions for everyone.
It is this last benefit, the push for reform, that explains why governments (especially undemocratic ones) are wary of portfolio investment. Because the money can leave as quickly as it came, the level of investment becomes a barometer of government competence. Sound economic policies will be ‘rewarded’ with more investment and a rising stockmarket; but regressive policies will be ‘punished’ as foreign money will leave and the market will fall. For governments unaccustomed to oversight, this discipline is seen as a new and unwelcome intrusion on their right to screw things up without being accountable to anyone for it.
Thus portfolio investment is, in a sense, a kind of economic democracy, except that the voting population is foreign not local. That sounds imperialistic, but if you look closely at much of that supposedly foreign investment it is actually local in origin. That is, when the economy was at its worst wealthy Egyptians started stashing money abroad, but as soon as reform took hold they (and Egyptian expatriates) were among the first to see the new opportunities, causing much of that money – now labeled foreign – to flow back in. This doesn’t change the fact that genuinely foreign investors still get a ‘vote’ (in the form of repatriating their money) on the Egyptian government’s record, but given that they’re voting in support of a stronger economy, that’s not such a bad thing.
What then of FDI? From the government’s perspective, the nice thing about a multi-million dollar factory is that it can’t vote: once it has been built, you can’t move it out of the country. This seems to bring the benefits of foreign investment without any of the unpleasant side-effects of on-going accountability. But for precisely this reason, FDI is a vote of confidence in the government of a whole different order. It is a vote rendered once, at the beginning, and from then on it is hostage to the government’s ability to deliver on its promises. If FDI stays away, you know something is wrong.
Economies in transition often find it difficult to attract FDI because a couple of years of economic reform is not a long enough track record to off-set decades of socialist or protectionist policies. Egypt has had a particularly difficult time luring direct investment (in part because of low productivity, corruption and red tape) because its track record is littered with things that terrify foreign investors: nationalizations, unpredictable regulation, disorderly changes in government, inconsistent application of the rule of law, etc. Since FDI is necessarily a long-term proposition, investors must have confidence not only in the economic climate as it is today but also in what it is likely to be over the life of the investment.
Egypt’s past would haunt its future even if the government did everything right from here on out. Sadly, it is not. The number one thing that discourages FDI is uncertainty and the government, with its sudden announcement of changes in tax laws (as in the treatment of bonds by banks) or business practices (such as printing in the free zone), has not exhibited a long-term commitment to playing by the rules. If foreign direct investors are not consulted about policy changes and do not feel their interests will be protected, they will go elsewhere. But when the day comes that investors can look ten years into the future and have a pretty clear idea of what Egypt will look like, they will invest here in droves.
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