State-Business Relations and Investment in Egypt
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State-Business Relations and Investment in Egypt Abla Abdel-Latif Hubert Schmitz Research Report Centre for the Future State Institute of Development Studies University of Sussex Draft 18 April 2009 1 The Authors Abla Abdel-Latif is Professor of Economics at the American University of Cairo and Fellow of the Economic Research Forum in Cairo. [email protected] Hubert Schmitz is Professorial Fellow of the Institute of Development Studies, University of Sussex, and Convenor of the Research Programme ‘Public Action and Private Investment’. [email protected] Acknowledgements We thank the members of the Egyptian business and policy making communities who contributed to this research by providing valuable data and (often confidential) information. Without their support and trust it would have been impossible to address the often sensitive issues examined in this research. We are grateful for helpful comments provided by our colleagues in the Research Programme ‘Public Action and Private Investment’, participants of the Annual Meeting of the Centre for the Future State (Brighton 24-26 June 2008), and participants of the Conference of the Middle East Economic Association (Nice 18-20 March 2009). We acknowledge with gratitude the financial support from the Agence Française de Développement (Paris) and the Department for International Development (London). The responsibility for the views expressed in this study, as well as for errors or omissions, lies with us alone. 2 Summary This study shows that informal relationships between key policy makers and investors have played an important role in raising levels of investment and fostering economic growth. Comparative observations show that common social roots and common professional background facilitate the emergence of an effective public-private growth alliance but the only necessary conditions are common interest and common understanding of the problems to be solved. The comparative research on two old and two new sectors shows in detail how informal relationships have emerged and how they have made an impact but it warns against overstating their investment enhancing role. Effective relationships between policy makers and investors – abbreviated CIPI - are not the direct cause of increases in investment but can play a critical role in unleashing the profit potential of specific sectors. Research on the food industry shows how CIPI helped to overcome supply constraints and political obstacles in decision making. Research on the communications industry shows how CIPI helped Egypt to overcome initial barriers to entry and establish a new industry virtually from scratch. While the gains were sometimes appropriated by a few actors, the research shows that exclusive relationships can have inclusive effects, depending on how the private sector is organised. Quantitative examination of whether CIPI had an enduring investment enhancing effect was inconclusive. There is no doubt however that the CIPI was an effective transitional arrangement. It helped investors to overcome barriers to economic growth, it helped policy makers to overcome deficiencies in their own government agencies and it helped both sides to work together in establishing new sector specific rules and improving the general regulatory framework. The general lesson from this research is that such transitional arrangements deserve more attention, both to gain a better understanding of the political economy of investment and growth and to make research more relevant for policy. Key words: state-business relations, investment, economic growth, investment climate, transitional arrangements, Egypt JEL classification: P16, O10. 3 Table of Contents Summary ....................................................................................................................................................... 3 Part I Objectives, Analytical Framework and National Context 1 Introduction ........................................................................................................................................... 5 2 Rule-based governance and industrial investment in Egypt 1970 – 2007 ...............................................10 3 Conceptual framework ..........................................................................................................................12 4 Hypotheses and methodology ...............................................................................................................16 Part II Findings from the Old Sectors 5 Sectoral context: food and furniture .....................................................................................................20 6 Emergence of CIPI in old sectors ...........................................................................................................21 7 The impact of CIPI in old sectors............................................................................................................29 Part III Findings from the New Sectors 8 Sectoral context: communication and information technology ..............................................................42 9 Emergence of CIPI in new sectors ..........................................................................................................44 10 Impact of CIPI in new sectors ............................................................................................................52 Part IV Conclusions 11 Commonalities and differences .........................................................................................................64 12 Implications for policy and future research........................................................................................68 Appendix ......................................................................................................................................................72 References....................................................................................................................................................94 4 PART I: Objectives, Analytical Framework and National Context 1 Introduction Generating private investment for more and better growth is one of the key challenges for a better future. It is especially difficult in the political and institutional environments typical of developing countries. What can their governments do to achieve substantial increases in productive private investment? This is the question that drives the research programme ‘Public Action and Private Investment’ (PAPI) of the Centre for the Future State. The study presented here is a component of the PAPI programme. The policy relevance of the question addressed by this programme is clear. It is now generally accepted that substantial reduction in poverty requires accelerating economic growth and that such growth requires increasing investment. Low levels of private sector productive investment appear to be a major obstacle to economic growth in the poor countries. Even though this issue has received much attention in the academic debate in the last 40 years, solutions for developing countries remain difficult to derive. In the recent policy debate, these issues are discussed in terms of improving the investment climate. For example, the 2005 World Development Report ‘A Better Investment Climate for Everyone' identifies a range of obstacles and ideas for moving forward. Many other policy documents have appeared concerned with improving the climate for business. At their core is the suggestion that improving the institutional framework is essential for raising investment and growth. A lot of effort has gone into developing indicators to measure the burden of regulations. The best known is the ‘Doing Business’ indicator (of the World Bank- IFC) which is used to provide benchmarks, compare countries and urge governments to reform regulations. With such quantification, it seems, attention to investment climate issues has increased further. International conferences and workshops around the world are trying to take stock and derive lessons. The protagonists of regulatory reform claim that the key to investment and growth lies in clear property rights and low levels of regulation and that this can be shown empirically with their doing business indicators. The criticisms fall roughly into two groups: first, there are those that concentrate on the measurement: they criticise the choice of indicators, the reliability of the data, and the uses to which it has been put (for example, Commander and Tinn 2007; IEG 2008); or they argue that measurement is more effective if carried out at the sub-national level: the district or province (for example, VNCI 2007). The second group concentrates not on measurement but on dynamics and context, questioning the assumption that reforming regulations is the key to raising investment and generating growth. These critics are not against reforming regulations but against making it the all out focus for research and policy, suggesting that it is neither a necessary nor a sufficient condition for raising investment and generating growth (Altenburg and Drachenfels 2006; Khan 2005 and 2008; Moore and Schmitz 2008). What is necessary and appropriate is seen to depend on the circumstances. This view is expressed most clearly in the work of Rodrik and colleagues on growth strategies, which stresses that reform is contingent on the economic circumstances of the country and that the binding constraints differ from country to country 5 (Rodrik 2005; Hausmann et al 2007). This view has gained increasing acceptance