Investing in the Middle East: The Political Economy of European Direct Investment in Egypt 9780755610853, 9781848853362

The effect of foreign direct investment (FDI) on economic development has been widely debated. However, the real challen

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To my father and mother

LIST OF FIGURES

3.1 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 7.1

Global FDI flows into Egypt, 1972-95 Global FDI stock in Egypt by origin, 1972-95 EU FDI flows into Egypt, 1972-95 Three largest EU investors in Egypt, 1972-95 Middle rank EU investors in Egypt, 1972-95 EU investors in Egypt with FDI flows under US$57 million, 1972-95 Sectoral distribution of EU FDI flow into Egypt, 1972-95 EU FDI flows into Egypt’s manufacturing sector, 1972-95 Jobs created by EU companies in manufacturing, 1972-95 EU inward and outward FDI flows, 1996-2004 EU FDI flows to the largest four economies of the Mediterranean Partner states, 1996-2004 EU FDI flows into Egypt, 1996-2008 Five largest EU investors in Egypt, 1996-2008 Middle ranked EU investor in Egypt, 1996-2008 EU investors in Egypt with FDI flows under US$30 million, 1996-2008 Sectoral composition of EU FDI flows into Egypt, 1996-2008 EU FDI flows into Egypt’s manufacturing sectors, 1996-2008 EU FDI flows into Egypt’s manufacturing sector per industry, 1996-2008 EU FDI flows into Egyptian agriculture and tourism, 1996-2008 British and EU FDI flows into Egypt, 1996-2008

57 77 79 81 83 84 85 87 93 123 136 137 139 142 144 145 147 148 153 159

x

7.2 7.3 7.4 7.5 8.1 8.2 8.3 8.4 9.1 9.2 9.3 9.4 9.5 9.6

British and EU FDI flows into Egypt’s manufacturing sector per year, 1996-2008 British FDI flows into Egypt’s manufacturing sector by industry, 1996-2008 British FDI flows compared to that of major EU investors into chemical in inland, 1996-2004 Number of jobs created by British FDI in inland by sector, 1974-2004 Egypt’s real growth of GDP and inflation, 1991-2008 Average annual exchange rates of the Egyptian Pound to US Dollar, 1991-2008 Egypt’s trade with the EU compared to EU FDI flows into Egypt, 1996- 2008 Number of state-owned companies privatized between 1991 and May 2005 FDI inflows from the Agadir partner states into Egypt, 1996-2008 FDI flows into Egypt by non-Arab regional partners in Barcelona, 1996-2008 Percentage of FDI inflows of the CEECs and the Mediterranean partner states to total FDI inflows to developing countries, 1989-1999 FDI flows from the CEECs into Egypt, 1996-2008 FDI flows by the EU, the Arab states and the US into Egypt, 1996-2008 US FDI flows into Egypt by sector, 1996-2008

161 163 171 183 196 200 202 203 226 228 232 236 239 241

LIST OF TABLES

1.1 2.1 2.2 3.1 3.2 4.1 5.1 5.2 5.3 5.4 5.5 5.6 5.7 6.1 6.2 6.3 7.1

Average exchange rate of Egyptian pound to US dollar, 1970-2008 European direct investment in Egypt (paid-up capital and debentures in EGP), 1833-1933 Employment in manufacturing, 1907-37 Projects approved in inland and free zones, 1972-79 Projects approved with EC, US, Arab & joint participants, 1972-79 Number of EU companies, jobs created and percentage of total jobs created by EU FDI in Egypt, 1972-95 Selected economic indicators in Egypt, 1995-2008 EC financial protocols to Egypt, 1977-96 (€ million) EU Fund to Egypt: MEDA I, 1996-2000 (€ million) MEDA II funding for Egypt, 2002-04 (€ million) MEDA regional programmes for Mediterranean states, 1996-2005 (€ million) FEMIP TA support to MENA countries in 2003-04 (€ million) Egypt’s trade balance with the EU, 1996-2008 (US$ million) EU-15 outward FDI flows and their percentage to 12Mediterranean partner states, 1995-2003(€ million) EU FDI stocks in Mediterranean partner countries by member states in 2001 (€ million) Global FDI inflows in Mediterranean countries, 1996-2008 (US$ million) EU trade in textiles with Mediterranean countries in

12 42 45 60 72 92 101 105 107 109 111 114 116 131 133 135

xii

7.2 7.3 7.4 8.1 9.1

1995 and 2002 (€ million) Number of companies created by British FDI flows in the public free zones until 2004 Number of companies created by British FDI flows in the private free zones until 2004 Number of companies and jobs created by British FDI in the free zones until 2004 Terrorist attacks on tourist sites in Egypt, 1992-2005 Intellectual Property Rights and their protected periods (per year)

176 179 180 184 193 245

ABBREVIATIONS

ACC AMU ASEAN BITs CAP CBE CEECs COMESA EAD ECSC EDO EEC EFTA EGP EIB EMFTA ERSAP EU FDI FEMIP GAFI GAFTA GATT GATS GCC GDP GMP

Arab Cooperation Council Arab Maghreb Union Association of Southeast Asian Nations Bilateral Investment Treaties Common Agricultural Policy Central Bank of Egypt Central and Eastern European Countries Common Market for East and South Africa Euro-Arab Dialogue European Coal and Steel Community Economic Development Organization European Economic Community European Free Trade Association Egyptian Pound (currency) European Investment Bank Euro-Mediterranean Free Trade Area Economic Reform and Structural Adjustment Programme European Union Foreign Direct Investment Facility for Euro-Mediterranean Investment and Partnership General Authority for Investment and Free Zones Greater inter-Arab Free Trade Area General Agreement on Tariffs and Trade General Agreement on Trade in Services Gulf Cooperation Council Gross Domestic Products Global Mediterranean Policy

xiv

GNP IIAs IMP IPO IPRs MENA MIBank MFN MNCs MRPs NAFTA NBE OEEC SMEs SWRP TA TEP TRIMS TRIPS UNCTAD WIPO WTO

Gross National Products International Investment Agreements Industrial Modernization Programme Investment Promotion Office Intellectual Property Rights Middle East and North Africa Misr International Bank Most-Favoured Nation (treatment) Multinational Corporations MEDA Regional Programmes North America Free Trade Area National Bank of Egypt Organization for European Economic Cooperation Small and Medium-sized Enterprises Spinning and Weaving Restructuring Programme Technical Assistance Trade Enhancement Programme Trade-Related Investment Measures Trade Related Intellectual Property Rights United Nations Conference on Trade and Development World Intellectual Property Organization World Trade Organization

ACKNOWLEDGEMENTS

Numerous people deserve to be thanked for their help and support in preparing this book. Special thanks go to Professor Rory Miller, Professor Stuart Wall and Professor Terry Mughan for their comments and advice on the early version of the manuscript. I would like to thank the Egyptian Ministry of Investment, Ministry of Foreign Trade and Industry, and in particular the General Authority for Investment and Free Zones (GAFI) for providing me with data on foreign direct investment and trade in Egypt. My thanks go also to the editors of I.B.Tauris for their help and advice during the preparation of the manuscript, to Jane Tienne for helping with editing the manuscript, to Patrick Cavill for formatting, typesetting, and indexing the text, and to Marcus Hanwell and Brian Richardson for designing the cover of the book. Also, I would like to express my deepest gratitude to my father, mother, brother and sisters for their support. Without their encouragement this book could not have been completed and published.

INTRODUCTION

Economic relations between the European Union (hereafter Union, Community, EU, EC and EEC) and the Middle East and North African (MENA) region have developed considerably over the past 40 years. A series of policy frameworks and cooperation agreements has contributed to this, including the Global Mediterranean Policy of 1972, the Barcelona Process in 1995, and the European Neighbourhood Policy of 2004. The institutionalization of the economic relationship has further developed with the creation of the Union for the Mediterranean in 2008 with 43 member states. These developments are part of a wider EU global strategy and a common foreign and security policy that evolved to enhance its position in the international arena, widen its sphere of influence, and govern its relationships with southern neighbouring countries. Geographical proximity, historical ties, and mutual political and economic interests have facilitated EU-MENA economic relations. The dynamics and nature of these relationships have varied from one period to another, depending on the political situation on both shores of the Mediterranean. Although security, peace and political stability are currently key policy issues in European relations with the MENA region, economic expansion and market access have provided a strong impetus for greater European political and economic involvement in the southern region since the early nineteenth century. The progressive development of capitalism and the emergence of European political and economic power that emanated from the Industrial Revolution allowed for the internationalization of the European economies and subsequently the growth of their foreign trade and investment. The spread of international trade and the growth of foreign direct investment (FDI), due to an increase in specialization and accumulation of capital that outgrew the

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limits of domestic markets, have forced European countries to expand economically and seek new markets for their companies to invest overseas. These fundamentals have remained cornerstones in the formulation of the EU external trade and investment policies up to the present day. On the one hand, the EU has made extensive use of multilateral trade arrangements, such as the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO), to enforce the principles and rules of free trade and encourage developing countries to open up their economies and integrate with the global economy. The tremendous success achieved so far at the multilateral level has not, however, overcome the major dividing issues between developed and developing countries, including agriculture, services, competition, intellectual property, the environment, and labour standards. Difficulties of this kind are clearly evident in the failure of the Doha Development Agenda (2001-07) to reach a conclusive end to an extensive and exhausting seven-year period of trade negotiations. The persistence of some developed countries to restrict the export of agricultural commodities from developing countries into their markets while demanding that the latter countries open up their services sectors has added a further challenge to the multilateral trading system. On the other hand, EU trade policy has also developed through regional and bilateral free trade agreements. The latter approach has prevailed over the former, not only because of the difficulties facing the multilateral trading system but largely due to the fact that the Union itself has evolved from the progressive development of regionalism. The EU has hoped that developing economic relations through free trade agreements would further the liberalization of trade and investment regimes, reinforce the rules and principles of the free market, and open up the economies of developing countries as well as integrate them with the global economy. On regional and bilateral levels, EU external trade relations have developed considerably since the mid 1960s. A significant number of region-to-region agreements have been concluded with MERCOSUR (Latin America), CARICOM (Caribbean), ECOWAS (West Africa), COMESA (East Africa and Egypt) and ASEAN (East Asia). Numerous association agreements have been concluded with individual states in Eastern Europe, the Balkan and Mediterranean regions, which are motivated by the desire to promote economic development and political

INTRODUCTION

3

stability. Other categories of trade agreements such as economic partnership agreements are in place with African, Caribbean and Pacific states, while bilateral free trade agreements have been signed with countries such as Mexico, Chile and South Africa. These agreements have a mix of political, economic and commercial motives that aim to serve European political and economic interests. In accordance with the objectives of the Common Foreign and Security Policy, EU trade agreements with Central and East European countries were aimed at creating a stable post Cold War European economic and political order, while those with the Mediterranean countries aimed to promote economic and political stability around the Mediterranean basin. The EU Stability and Association Agreements with the western Balkan countries were also designed to eliminate the risk of renewed political tension and war. Economically, the EU has used free trade agreements as a framework to promote the European model of regional economic integration, most notably those concluded on a region-to-region basis. It is hoped that the prosperity, peace and stability that Europe has enjoyed over the past 50 years can be emulated in less developed, less stable parts of the world. However, it is difficult to attain this kind of outcome as most regions suffer from diverse levels of economic development and political problems.1 On a commercial level, the motives of the EU to negotiate free trade agreements varied from neutralizing potential trade diversion resulting from free trade agreements between third countries to forging strategic links with countries experiencing rapid economic growth and to enforcing international trade rules. For example, the EU-MERCOSUR agreement aimed to neutralize the potential trade diversion in favour of the US after the creation of North American Free Trade Area (NAFTA), while EUASEAN agreement followed the conclusion of bilateral free trade agreements between the US and Singapore, Thailand, Malaysia and South Korea. The EU has also used trade agreements to strengthen its strategic links with fast growing economies such as China, India, Russia and Brazil to secure natural and energy resources, while having access to large markets. Given the nature of these agreements, they both implicitly and explicitly enforce international trade rules such as free movement of capital and goods, global competition and intellectual property rights. Such motives have not differed greatly from those driving the economic relationships between the EU and the MENA countries since the establishment of the Union in 1958. As will be explained below, it was this process of European integration and the development of its external

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ties with the neighbouring states that reinforced the Euro-Mediterranean economic relations through the Community Global Mediterranean Policy of 1972. France’s active role in developing this relationship has been evident since the signing of the Treaty of Rome in 1957, when it made its signature conditional on the accommodation of its overseas dependencies in the newly founded Community. France’s objectives were to forge close economic relations with its former colonies through the provision of free trade and their social and economic development. To achieve such objectives, the first European development fund was created in 1958 to provide financial assistance to overseas territories, a provision that was embedded at a later stage in the preferential trade agreements concluded between the EC and its southern trading partners. Despite geographical proximity, Euro-Mediterranean economic relations were derailed by political considerations from as early as 1958, when Morocco and Tunisia refused to become associates in the EEC in protest against French political intervention in Algeria. During the 1960s, the complexity of the Arab-Israeli conflict added to the politicization of these economic relations. This left little room for improvement on the economic front, with only a few non-preferential trade agreements being implemented between the EC and Morocco, Tunisia, Israel, Lebanon and Turkey. The 1972 Global Mediterranean Policy, which aimed to widen and strengthen the EC economic relations with the MENA countries, failed to establish a region-to-region partnership model similar to that of the Lomé Convention, but led to the conclusion of a number of cooperation agreements with individual countries for unlimited periods. These agreements allowed the MENA countries preferential access to industrial goods in the EC markets and contained financial protocols that assist southern partners in their economic development. These agreements, which governed the trade relations between the EC and Syria, Iraq, Jordan, Egypt and Lebanon until the ratification of the Association Agreements conducted within the framework of the Barcelona Process, had little impact on the economic development of these countries. Preferential treatment and access of MENA manufactured goods to the EC markets played no role in either developing the industrial sectors or increasing the volume of trade between the two regions. Furthermore, the limited scope of financial and technical assistance stalled the process of economic development in the southern region. Concluded between the EU-15 and 12 southern Mediterranean countries in 1995, the Barcelona Process brought new dynamism to Euro-

INTRODUCTION

5

Mediterranean economic relations. It provided a more comprehensive approach for developing political, economic, social and cultural relationships between the EU and its partner countries, while placing emphasis on south-south economic cooperation. It also included financial assistance through the MEDA programmes for supporting economic transition, socioeconomic transformation and regional integration. Indeed, this process aimed to create a Euro-Mediterranean Free Trade Area by 2010, while contributing to the creation of the Greater inter-Arab Free Trade Area (GAFTA) in 1998 and the Agadir Agreement between Egypt, Jordan, Morocco and Tunisia in 2004. However, as this process has failed to develop a region-to-region model for partnership between the EU and the MENA region, their economic relations have developed on a bilateral basis. The EU concluded association agreements with Tunisia (1995), Israel (1995), Morocco (1996), Jordan (1997), the Palestinian Authorities (1997), Egypt (2001), Algeria (2001), Lebanon (2002) and Syria (2004), which will continue to govern their trade relations until they reach full liberalization in trade in goods and services. In common with other countries in the MENA region, Egypt’s economic relations with the EU have primarily focused on trade. This is particularly true of the three agreements that have governed EuroEgyptian economic relations to date: the 1972 Preferential Trade Agreement, the 1977 Cooperation Agreement, and the 2001 Association Agreement conducted within the framework of the Barcelona Process of 1995. The main objectives of these agreements were to assist Egypt in its economic development through economic and financial assistance and by enabling Egyptian products to access the EU market. The first and second agreements failed to achieve their objectives. A growing body of literature is examining the recent EU-Egyptian Partnership Agreement to determine whether or not this could have a more significant impact on Egypt’s economic growth.2 Most of this literature has primarily focused on analyzing trade and trade-related aspects of the relationship, but insufficient attention has yet been paid to the impact of this partnership on the growth of European direct investment into Egypt. In order to address this gap in the literature, this book examines the impact of the EU-Egyptian partnership on the growth of FDI into Egypt, especially from the EU. Given the strategic, political and economic importance of Egypt as a major regional power in the Middle East, this examination will provide a basis for wider discussions and debates on European direct investment in the region. The book enables academics and policy-makers to better understand the interplay between international

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trade agreements and economic policy reforms in host countries. It uses previously unexamined primary data from Egypt over a 40-year period to assess the synergy between free trade agreements, domestic reforms and economic growth, subsequently the attraction and increase of FDI. Thanks to Adam Smith and David Ricardo, the relationship between free trade and economic growth is well understood, but the growing role of FDI in global economic development is the impetus for this book’s examination of the correlation between foreign trade, FDI and economic growth in the Middle East region. As for trade and investment, the experience of the Far East and South East Asian countries shows that unilateral efforts to liberalize their economic and trade policies attracted record FDI over the past 20 years.3 Empirical evidence also shows that this becomes easier to achieve when a country accesses large regional economic areas. The Association of South East Asian Nations (ASEAN), Portugal and Spain’s accession into the EU in 1986, Mexico’s entry into NAFTA in 1994, and the accession of Central and East European countries into the EU in May 2004 are the most notable examples. Thus, the importance of FDI in economic development is growing, such that FDI is now considered the most viable and accessible alternative source of foreign capital while foreign economic assistance is steadily declining. It also allows for the avoidance of political concessions often associated with foreign economic assistance. The development of the EU-Middle East economic relations was derailed by political considerations relating to the Arab-Israeli conflict during the 1970s and the 1980s and it was not until the mid 1990s that these relationships began to gain momentum. The Barcelona Process (also known as the Euro-Mediterranean Partnership) was established after the Euro-Mediterranean Conference held in Barcelona, Spain, on 27-29 November 1995. The conference was attended by 27 delegations, representing the then 15 EU member states and 12 southern Mediterranean countries, including Algeria, Egypt, Lebanon, Jordan, Morocco, Tunisia, Syria, the Palestinian Authorities, Israel, Turkey, Malta and Cyprus. The importance of the 1995 Barcelona Process and the subsequent partnership agreements that followed the existing EuroMediterranean and Euro-Egyptian economic relationships has been highlighted in academic, media and political circles. The new agreements differed considerably from the previous ones in their objectives and substance and went beyond trade and trade-related issues to cover economic, industrial, agricultural, financial, scientific, technological,

INTRODUCTION

7

environmental and social cooperation, the fight against crime, drugs and money laundering, the freedom of movement of capital and the promotion of FDI.4 These agreements aimed to maintain Europe’s economic, commercial, political and historic ties with the MENA region, while providing its partner countries with incentives for political reform and economic liberalization. Considering the nature of the relationship between the EU, as one of the most advanced economic blocs in the world, and the developing Middle Eastern countries, it is important for this book to examine the assumption that regional trade arrangements and partnership agreements lead to a significant increase in FDI flows from developed to developing partner countries. Such an investigation is necessary for ascertaining why Egypt, as well as other countries in the region, saw a sharp decline in its FDI inflows from the EU after 2000, at the time when the EU became the main source of FDI capital worldwide. In 2003, the EU accounted for 49 per cent of global FDI outflows.5 An investigation into the EU-Egyptian Association Agreement can also provide insight into the prospect of EU FDI into Egypt. In addition, hopefully these findings will ultimately help us to understand why Egypt, despite the existence of competitive advantages in a number of areas, occupies a relatively low position in the global investment regime and has yet to achieve an early stage of the investment development path. In light of this approach, the objective of this book is to provide a descriptive and critical analysis of EU direct investment into the MENA region since 1972, the year that the Community began to effectively expand its external ties with southern Mediterranean countries, including Egypt. Particular attention is paid to the effect of EU-Egyptian partnership conducted within the Barcelona Process on the growth of EU direct investment into Egypt from 1996 to the present day. This will not only determine the internal and external challenges facing European direct investment in Egypt, but it will also establish whether this partnership has brought any fundamental changes in the value and pattern of EU FDI into the country, and whether this development is a sufficient measure for the attraction of FDI, particularly from the EU. This analysis will fill the current gap in literature on European direct investment into Egypt and help inform Egyptian officials in their decision making regarding EU FDI. It seeks to do so by analyzing in detail the development, the pattern and the static as well as sectoral composition of that investment into Egypt’s main economic sectors between 1970 and 2008. It will be shown that during this period EU capital flows tended to

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shift from one economic sector to another according to the development, restructuring, modernization and regulations governing investment in the concerned sectors. This shift was evident in the banking sector, whose share of total EU capital flows decreased from 56 per cent prior to the Barcelona Process to 27 per cent between 1996 and 2008, while the share of manufacturing increased from 39 per cent to 45 per cent over the same period. Moreover, this book shows how EU FDI into Egypt lacked consistency and sustainability over the 38-year period under consideration. One of the most prevailing patterns of EU FDI has been the periodic single investments made by numerous companies from EU member states. The clearest example of this was the one off investment of US$914 million by Italy in 2007, out of a total Italian FDI in Egypt of US$1.1 billion between 1996 and 2008. The underlying theme throughout the book is that despite the existence of the Egyptian competitive advantage in certain areas, the growth of European investment has been limited and ineffective in the country’s economic development between 1970 and 2008. With the exception of the FDI boom of the mid 1970s and between 2005 and 2007, Egypt’s share of EU FDI outflows has been marginal compared to the growing role of the EU in global investment and the level of capital flows from the EU into other economies in Latin America, Eastern Europe and East Asia. This book attempts to explain why and how this came about. What is more, this study is groundbreaking in that it is the first to show that the development of Euro-Egyptian economic relations still has had little effect on the growth of European direct investment into the country. It argues that neither the two major EU policy frameworks - the 1972 Global Mediterranean Policy and the 1995 Euro-Mediterranean Partnership - nor the two bilateral cooperation agreements of 1977 and 2001 had an immediate impact on the growth of EU direct investment into Egypt. Analysis shows that the resurgence of the Community’s FDI into Egypt during the early 1970s was not owing to the Global Mediterranean Policy of 1972, but was largely due to the 1971 constitutional amendment and the legal changes of 1971 and 1974 that offered guarantees against nationalization and allowed foreign investors to buy assets in local firms. It also shows that the Cooperation Agreement of 1977 failed to sustain the record EC FDI of US$1.6 billion in 1975, which gradually decreased to US$66.8 million in 1993. Similarly, by analyzing previously unused data it clearly shows that neither the 1995 Barcelona Process nor the Association Agreement of

INTRODUCTION

9

2001 directly contributed to the rise of EU FDI into Egypt between 1996 and 2008. Indeed, the growth of EU FDI into Egypt between 1996 and 2008 was largely due to the acceleration of privatization and the improvement in the country’s macroeconomic conditions following the successful implementation of the 1991 Economic Reform and Structural Adjustment Programme (ERSAP). It was also due to the economic reforms introduced in 2005 and the general improvement in the global economy after 2004. However, this level of FDI growth was not sustained between 2001 and 2004, despite the signing of the EU-Egyptian Association Agreement of June 2001, nor after 2008 due to the global financial crisis. However, the Barcelona Process did have significant impact on Egypt’s domestic situation. This was apparent through the substantial financial and technical assistance provided by the MEDA programmes and European Investment Bank, which allowed for further investment in infrastructural projects vital to attracting foreign investors. The Industrial Modernization programme attempted to assist small and medium sized enterprises and to strengthen the role of the private sector in the country’s economic development. Eventually, successful implementation of these measures will stimulate internal political, economic, legal and institutional reforms, which aim to readjust the regulatory framework and prepare the domestic market for the conditions of free trade. This book is also the first to show that the growth of EU FDI into Egypt has been largely associated with the country’s economic liberalization. This argument is explored and proven through an examination of the Infitah policy of the mid 1970s and the ERSAP of the early 1990s, which were followed by remarkable increases in EU FDI into Egypt. The former policy reoriented the Egyptian economy from a centralized socialist system to a semi-capitalist one. This introduced the principles and rules of the free market to the Egyptian economy and opened up the market to foreign investment. Analysis shows that the introduction of this policy in 1974 led to an increase in Egypt’s FDI inflows from US$522 million in 1974 to US$4.6 billion in the following year, with US$1.6 billion being invested by the EC member states. It also shows that the latter policy improved the country’s macroeconomic conditions, particularly gross domestic product (GDP), inflation, and its exchange rate policy, all of which restored the confidence of foreign investors in the Egyptian economy. Finally, this book also underscores the strong links between the growth of FDI and privatization. The data examined shows that the

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introduction of privatization in the early 1990s stimulated the growth of EU capital flows into Egypt, which increased from US$38.2 million in 1991 to US$114.7 million in 1995, and that the acceleration of this process over the following five years led to a further increase in EU capital flows into the country of US$307.3 million and US$673.9 million in 1996 and 1998, respectively. As the ERSAP came to an end by the late 1990s, the failure of the Egyptian Government to continue its economic reforms and the slowdown in privatization, together with the 2001 global economic downturn, led to a sharp decline in EU capital flows into the country. They reached only US$47.7 million in 2003, the lowest rate since 1990. While emphasizing this vitally important need for economic liberalization, this book also sheds new light on some vital dynamics in both the Barcelona Process and the 2001 Association Agreement that could lead to a significant improvement in Egypt’s attractiveness to foreign investors. The creation of the Euro-Mediterranean Free Trade Area by 2010 increases the size of Egypt’s regional market across Europe, Asia and Africa, and both of them encourage south-south economic cooperation and thus allow Egypt to integrate with its southern Mediterranean partner states in order to benefit from added value such as the cumulation of rules of origin. The book also shows for the first time how financial and technical assistance offered by the EU, particularly through the Industrial Modernization Programme, could have greater impact on small and medium sized enterprises and, thus, increases the role of the private sector in the country’s economic development. However, the outcome of these mechanisms can only be beneficial if Egypt continues its political and economic liberalization. In large, this book is based on primary materials obtained from the General Authority for Investment and Free Zones (GAFI), the only Egyptian governmental body that deals with foreign investors. The primary data used in this work has never previously been applied as it is in this book. The data covers all foreign investments made by the EU member states, the CEECs, European non-EU member states, the Arab countries, the US, and other countries from South East Asia and Latin America into Egypt between 1 January 1970 and 31 December 2008. Each data sheet consists of the country of origin of FDI, the economic sector within which foreign companies operate, the name of the foreign investor, the name of its local partner, the date of the initiation of the project, the total capital invested in the project, the share of capital committed by the foreign investor, and the number of jobs created by each investment.

INTRODUCTION

11

Thus, all data presented in this book and particularly in Chapters 4, 6 and 7, as well as all figures and tables are based on the primary data collected from GAFI, unless otherwise stated. This data does not include any foreign investments made in the petroleum sector, which accounted to 64 per cent of total FDI in 2004.6 However, it includes investments in petroleum services. This is because GAFI does not include FDI in the petroleum sector, where all matters related to foreign investment are dealt with through the Ministry of Petroleum. This is why some of the figures set in this book may differ from other figures mentioned by some national and international organizations, including the United Nations Conference on Trade and Development (UNCTAD), in its annually published World Investment Report.7 The data obtained from GAFI was provided in two different currencies. Investments made in inland, the whole geographical area of Egypt except free zones, were presented in Egyptian Pounds (EGP), and those in the free zones were in US dollars (US$). For the purpose of consistency and compatibility, the Egyptian currency was converted into US dollars at the average annual current exchange rates of the Central Bank of Egypt and the National Bank of Egypt between 1970 and 2008. The conversion of currency in this work is based on the average annual rate of exchange of each year, as shown in Table 1.1. It is worth noting here that over the past 50 years Egypt’s exchange rate policy has gone through several phases. During the 1960s and 1970s, Egypt adopted a multiple exchange rate, which specified different rates for government transactions, for exports and imports, and for national commercial transaction and transfers. 8 On 27 December 1978, the Minister of Economy issued decree No. 372 authorizing the use of a unified exchange rate for each of the official and incentive rates, for all transactions, with the exception of some thereof, which was effective from 1 January 1979.9 The rate was then set at US$1 to 0.70 Egyptian piasters. In July 1988, the Egyptian government began to use a ‘floating commercial rate’ of US$1 to EGP 2.30. As for the principle rate, the Central Bank exchange rate was devalued by 55 per cent and stood at US$1 to EGP 2, up from EGP 1.10.10 This rate gradually increased to a record EGP of 2.71 in July 1990. As from February 1991, the government declared that all dealings in foreign exchange were to be conducted through two markets: the primary market and the free market.11 Since then, the exchange rate used in this book has been based on the free market rate.

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Table 1.1: Average exchange rate of Egyptian pound to US dollars, 1970-2008 Year Rate Year Rate Year Rate 1970 0.43.5 1983 0.70.0 1996 3.39.0 1971 0.43.5 1984 0.70.0 1997 3.39.0 1972 0.43.5 1985 0.70.0 1998 3.40.0 1973 0.39.1 1986 0.70.0 1999 3.41.0 1974 0.39.1 1987 0.70.0 2000 3.60.0 1975 0.39.1 1988 2.30.0 2001 4.15.0 1976 0.39.1 1989 2.55.0 2002 4.60.0 1977 0.39.1 1990 2.63.0 2003 5.90.0 1978 0.39.1 1991 2.34.0 2004 6.16.0 1979 0.70.0 1992 3.32.0 2005 5.78.0 1980 0.70.0 1993 3.35.0 2006 5.73.0 1981 0.70.0 1994 3.38.0 2007 5.63.0 1982 0.700 1995 3.39.0 2008 5.43.0 Source: Central Bank of Egypt, National Bank of Egypt & EIU, various issues.

As for the EU, the total level of FDI flows into Egypt by each of its member states is calculated on the basis of the date of entry into the Community. For example, Greece’s FDI is not included in EU direct investment before 1981. Similarly, investments from Spain and Portugal are only included in the total EU FDI flows after their accession to the Community in 1986. This also applies to the ten new member states of the EU, which joined the Community on 1 May 2004. All this data points to one thing: despite the tremendous development in the EU-Egyptian economic relations over the past 40 years, EU FDI into Egypt has continued to encounter a significant number of obstacles that limited its growth to the present day. It reveals that though the growth of European FDI may have been encouraged by positive political and economic ties between Egypt and the EU, the level of involvement by European investors in Egypt’s economic activities varied considerably depending on the degree of economic liberalization and government interference in economic affairs. If Egypt is to achieve a reasonable growth rate of FDI it must unilaterally liberalize its trade and investment regime and develop its institutions, legal and regulatory framework. This may enable the country to maximize the benefit of the EU-Egyptian partnership and enhance its attractiveness to foreign investors.

1 FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH

Economic growth is the paramount objective of most economic policies and, as such, tops the economic agenda of developed and developing countries alike. The rate of growth is often determined by the level of investment in productive resources and by the increase, or decrease, in the productivity of these same resources. Until the mid 1990s, it was believed that investment in fixed capital was the most important determinant of growth, but recent studies have shown that increases in productivity through technical innovation are the main determinants of competitiveness and growth.1 This means that although fixed capital investment in plants and machinery is important, investment in education and training for improving the efficiency of the labour competence of the production process is equally vital. This is why FDI, which combines increased resources with innovation and technology transfer, has become a vital factor in the development process. While it may be easy to define FDI in terms of theory, its actual effects on economic growth have been widely debated by both the traditional and neo-liberal schools of thought. Traditionalists consider FDI to be a major dynamic of the structural power of international capitalism that is exploitive and harmful to developing countries - views that have recently been highlighted in the current debate on globalization. 2 This interpretation originated in the historical experience of most developing countries during the colonial period; it argues that the penetration of Multinational Corporations (MNCs) is likely to have undesirable political, economic and social impact on developing host countries. Meanwhile, neo-liberals argue that FDI can bring substantial benefits by creating

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economic growth through the utilization of land, labour and capital in the productive process. This view is currently endorsed by most international financial institutions, including the World Bank and the International Monetary Fund (IMF). These varying interpretations raise more questions than they answer in regard to the practices and objectives of MNCs when investing in developing countries. To date, traditional theories have failed to provide an explanation for the geographical concentration of global FDI flows into the developing world. If MNCs are exploiting developing countries, why do the latter still struggle to attract a substantial proportion of global capital flows? If MNCs are driven by profit maximization, how can they observe moral and ethical policies when dealing with authoritarian regimes in developing host countries? To what extent can FDI stabilize or destabilize the economic and political systems of host countries? What impact does FDI have on industrial and organizational development, employment, the environment, democratization and the socio-political and socioeconomic development of host countries? Particularly after the opening up economies for MNCs, to what extent can economic and political liberalization affect the national character, identity and sovereignty of states? Can FDI bring about political, cultural and economic harmonization between home and host countries? 1.1. Definitions of FDI A theoretical understanding of FDI depends, to a large extent, on the way it has been defined, particularly because FDI differs greatly from other forms of investment such as portfolio investment. FDI is the category of international investment that stresses the willingness of investors to commit themselves to long-term investment with managerial involvement, in enterprises in foreign countries. As one EU official put it, FDI is ‘the kind of investment that reflects the objective by an investor in one country to obtain a lasting interest in an enterprise in another country, which implies a long-term relationship between the investor and the enterprise and a significant degree of influence by the investor on the management of the enterprise’.3 According to the United Nations Conference on Trade and Development, FDI is ‘an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor’.4 This definition also implies that investors exert a

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significant degree of control over the management of enterprises located in other economies. Such investment involves both the initial transaction between the two entities and all subsequent transactions between them and among affiliates. These definitions highlight two fundamental concerns that distinguish FDI from other foreign portfolio investment. The first is the intention of the investor to maintain a long-term commitment to the foreign enterprise. The decision-making process for long-term investment is complicated and involves difficult questions on what, how, why, where and when to invest substantial amounts of capital in foreign markets. The decision to invest depends not only on the area of specialization and the capacity of the foreign firm to gain market access to a particular country, but also on the political, economic and socio-cultural environment within which foreign companies operate. The second concern is the involvement of the entrepreneur in the management of the company. This involvement is based on ‘ownership equities’ that give foreign entrepreneurs the power to have their say in the management of the company. Thus, ownership is a central factor in the promotion of FDI as it determines the relationship between foreign investors and host countries. In this context, FDI can be defined as an investment in which a company acquires a ‘substantial controlling interest in a foreign firm above a ten per cent share or set up a subsidiary in a foreign country’. 5 Ownership takes the form of acquisitions of capital and equity in existing firms or of greenfield investment in new companies. Foreign equity depends largely on the degree of political and economic liberalization of the host countries. In most developed countries, the legal system allows complete foreign ownership, but in many developing countries investment laws restrict foreign equity to less than 49 per cent of the total equity of a company. Whatever the economic and political nature of the host country, nominal shares of foreign equity in joint ventures account for more than ten per cent of shares, a level that gives investors the right to participate in management and to have a seat on the company executive’s board. FDI is comprised of equity capital, reinvested earnings and intracompany loans, which take the form of either flows or stocks. According to the World Investment Report 2003, FDI flows are the capital provided by foreign investors or received from an FDI enterprise by foreign investors, while FDI stocks are the value of the share of capital and reserves attributable to the parent enterprise, plus the net indebtedness of affiliates to the parent enterprise.6 This means that FDI capital does not necessarily have to come directly from outside the host country. Rather, it can be

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capital borrowed from another foreign firm operating under the investment law or it can be capital reinvested by the same firm or its affiliates in other economic activities in the same host country. FDI has also been classified as a vertical or horizontal investment, depending on the objective of the firm and the nature of the production process. Vertical FDI aims at entering a market of non-tradable products and services, utilizing the resources of host countries and eliminating the high cost of trade, particularly transportation, tariffs and customs. It is characterized by the geographical fragmentation of the production process in several countries, where production activities occur in geographical areas different to those that the product is distributed and marketed in. It is often conducted through regional or global strategies set by specific companies in order to dominate regional markets. By contrast, horizontal FDI is characterized by the similarity of the production process in both native and host countries, and it is located where most outputs of the production in the host country subsidiary are sold in the same host country for domestic consumption. Such investment tends to be carried out in industries requiring high levels of research and development (R&D) or industries associated with complex technological and production procedures.7 This kind of FDI gives foreign firms monopoly power over a certain product in a host country, while allowing it to enjoy the benefit of cheap labour and production costs. 1.2. Globalization and the Growth of FDI At present, there is still insufficient data to prove conclusively that the growth of FDI is particularly associated with the process of globalization or that linkage between them is inevitable. Analysis of some aspects of the present and past phases of the internationalization of production during the nineteenth century indicates a link between the acceleration of international production and the spread of capital across the world. This has been evident in the growth of international trade, freedom of movement of capital and the increase in the number of international companies operating in more than one country. Prior to the twentieth century, this phenomenon was achieved through a combination of the opening up of the global economic system and the forces of imperialism, which encouraged and safeguarded foreign capital investment worldwide. Such conditions provided great opportunities for many large and medium sized firms, and allowed imperial powers such as Britain, France and the Netherlands to spread their activities beyond their national borders and

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operate across the Americas, Asia, Africa and the Middle East. The contemporary process of globalization exhibits a similar pattern as the growth of MNCs in size and number accentuates the relationship between the growth of FDI and the advance of globalization. 8 This phase is clearly driven by highly measurable economic processes such as the growth of trade and the rapid spread of FDI flows worldwide. Although it began with intensive economic liberalization and privatization programmes launched by the British and American governments in the early 1980s, the present phase of globalization was further accelerated by major developments in the economic sphere such as the economic liberalization of developing countries, the spread of regional economic integration, and the strengthening of the international trading system through the creation of the World Trade Organization (WTO) in 1995. Indeed, the extent of financial globalization is wider and deeper than ever before. Since the early 1990s, statistics have shown that FDI accounts for one-third of global output, three-quarters of commercial technological capacity, and about three-quarters of all world trade.9 Global FDI grew by an annual increase of 27 per cent between 1983 and 1990, which seemed impressive at that time, but the rate of growth recorded during the past 20 years was much greater. For example, the global stock of FDI increased from US$2 trillion in 1990 to reach approximately US$15 trillion in 2007.10 The total global FDI flows increased rapidly from US$315 billion in 1995 to reach an estimated US$1.8 trillion in 2007, surpassing the previous peak of US$1.3 billion in 2000. Due to a decline in the global economy in 2001, this level decreased in value by 41 per cent in 2001, by 13 per cent in 2002, by 12 per cent 2003 and by 14 per cent in 2004, when global FDI inflows reached US$648 billion. 11 In 2008, FDI declined by more than 20 per cent from the previous year as a result of the global financial crisis, ending the growth cycle of FDI that began in 2004.12 Despite such statistics, one cannot assume that FDI has either reached the entire world economy or is evenly distributed. FDI is still concentrated in developed states, which attract almost three-quarters of the world’s total FDI flows, with the US and the UK being both the largest investors and recipients. However, FDI flows have reached some developing countries such as China, Singapore, South Korea, and Mexico, some of which have recently emerged as both host and home economies for MNCs. This has led to an increase in the share of developing countries in outward flows from five per cent in the early 1980s to 36 per cent in 2004, and it has also resulted in some of these states not only becoming exporters of FDI but also assuming a role in enhancing world production. 13

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Along with developments in economic liberalization and world trade, there has been a growing tendency in the global economy towards liberalization of FDI regimes and strengthening of international standards for the treatment of foreign investors. This tendency has been reinforced by pressure from major international financial institutions, such as the World Bank and the IMF, on governments in developing countries to promote economic liberalization. Meanwhile, the recognition of the role of FDI in economic development has led some governments to adopt unilateral and multilateral measures to improve their business and investment environments. For example, between 1991 and 2004, some 2,156 regulatory changes were introduced in national FDI regimes, of which 2,006 aimed at creating a more favourable environment for FDI. 14 In 2004, 235 of the 271 regulatory changes made by 102 countries were more favourable to foreign investors. In 2007, 74 of the 98 changes aimed to make the host-country environment more favourable to FDI, while the remaining 24 mainly related to extractive industries or reflected national security concerns.15 There has also been an increase in the number of bilateral investment treaties and double taxation treaties, which totalled 2,608 and 2,730, respectively, in 2007.16 These trends continue to grow as governments are now more willing than before to offer further guarantees and incentives to foreign investors, more liberal entry and operational conditions to foreign firms, and increased liberalization and privatization in economic sectors of interest to foreign entrepreneurs. 17 Theoretically, the liberalization of FDI can allow firms greater freedom in making international location decisions and in choosing the mode of entry whether through trade, joint ventures or licensing that suits the market and the business environment. In conjunction with privatization, this can open up new areas of economic activity and, consequently, increase the size of the national and regional market. Moreover, the liberalization of the FDI regime can help international firms to enhance their competitiveness by spreading their activities over different regions in order to attain locational advantages. This makes FDI the preferred way for companies to remain competitive in the global market. The growth of global FDI can be attributed to structural and functional changes that have occurred within the global economic system since the early 1990s. On a structural level, the collapse of the communist economic system in eastern and central Europe and the efforts made by these states to open up their economies and to integrate into the global

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economy increased investment opportunities for MNCs. Other countries in Latin America, Africa and the Middle East recognized the positive impact of FDI on East Asia’s economic growth and, thus, they pursued investment policies favourable to FDI. Indeed, one could attribute the rapid growth in FDI to the pursuit by many countries of national policies aimed at attracting FDI and the introduction of regional arrangements intended to create a favourable FDI environment. This latter factor is evident in most regional integration arrangements and partnership agreements that contain FDI provisions. Notably, such provisions have become key components of the recent association agreements between the EU and eastern European, Latin American and southern Mediterranean states, including Egypt. This not only stresses the importance of regionalism as a dynamic for FDI growth, but also the linkage between regional integration and capital inflows into large economic blocks. Evidence of the changes that have taken place in the post-Cold War global economic system can be seen in the increase in the number of international companies considered to be MNCs. They increased from about 44,000 parent companies and 280,000 foreign affiliates in 1997 to almost 79,000 parent companies and 790,000 foreign affiliates, with their FDI stock exceeding US$15 trillion in 2007. 18 Such a rise has been accompanied by integrated production structures adopted by MNCs designed to geographically expand the production process in order to benefit from cost and logistical advantages. However, the significance of MNCs is not their growth in number but in their financial and technological capacities to transfer capital as well as a whole culture of advanced technology, knowledge, management and marketing skills that can have a direct impact on host economies. MNCs are the main source of the capital required for investment. They possess almost three-quarters of the capital used for global FDI, which gives them the financial capacity to determine global capital flows. The structure of these corporations enables them to launch and coordinate their activities globally despite fundamental political, economic and cultural differences from one country to another.19 Thus, as MNCs have internationalized the production process and made the global economy more integrated, they have also been instruments of globalization. The role of MNCs in the economic development of states is determined by three main factors: the degree of economic liberalization; the mode of entry, including large-scale privatization programmes; and the freedom of foreign ownership. Regarding the first factor, the role of MNCs depends on whether or not they are allowed to penetrate the

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market of a given country. Market penetration depends on the type of government, its economic philosophy and its attitude to MNCs. Analysis of the geographical distribution of FDI worldwide shows that the marginal share of FDI in developing countries is due, in part, to suspicions over the intentions of MNCs to invest in their economies. This has been due to restrictions on market access for MNCs as well as protectionist policies adopted by governments to avoid exposure to international competition. The concentration of capital in specific regions such as the US, the EU and Japan reflects not only a degree of harmony between governments and MNCs, but also a positive relationship based on the ability of governments to liberalize their economies, pursue marketoriented policies and improve their economic environment by increasing their appeal to FDI. Most data presented by UNCTAD has identified a link between the spread of FDI and the implementation of large-scale privatization programmes. Foreign investors are active purchasers of the sale of stateowned companies that produce strategic goods such as minerals and cotton or those operating in vital economic sectors such as communications. This was evident during the 1990s, when most global FDI was done through cross-border acquisitions rather than mergers. While cross-border mergers did not exceed 2.3 per cent of the total number of deals in 1999, sales through acquisitions reached as high as 65.3 per cent of total sales of companies, 15.4 per cent of deals where more than 50 per cent of ownership was transferred, and 16.2 per cent of deals that included a transfer between ten and 49 per cent of the total share of company equity.20 Moreover, the continued consolidation of MNCs through cross-border M&As substantially led to the global surge of FDI between 2004 and 2007. According to UNCTAD, while the global economy was beginning to realize the effect of the sub-prime mortgage crisis in the USA, a number of very large deals took place during the second half of 2007, including the US$98 billion acquisition of ABNAMRO Holding NV by the consortium of Royal Bank of Scotland, Fortis and Santander and the acquisition of Alcan (Canada) by Rio Tinto (UK). In 2007, the value of such transactions amounted to US$1.6 trillion, 21 per cent higher than the previous record in 2000.21 This data demonstrates how the difference in the equity share of foreign companies reflects the nature of government regulations as well as corporate strategies. States with liberal economic and regulatory systems are more attractive to MNCs, particularly those that are formulating their

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long-term investment policies. This is often the case in developed capitalist states that allow freedom of ownership. However, states with poor regulatory systems are less attractive to foreign investors because they tend to limit foreign ownership. Thus, the more a country moves towards the capitalist economic system, the more attractive it becomes to foreign investors. Evidence of this can be found in transitional economies such as China, Singapore, Mexico, the Czech Republic and Hungary, where FDI has contributed significantly to economic growth. The data also emphasizes the importance of the right to private and foreign ownership. In order to maintain control over their assets, operations and management, most MNCs prefer to acquire full or large equity shares of privatized companies rather than equal or nominal shares. Foreign companies may consider greater size of equity when it comes to operations requiring economies of scale, large expenditures for R&D or the expansion of distribution networks. 22 The rationale behind this is that large-scale equity can provide the company with protective functions such as a stable position in the market, sizeable profits, and strength against competitors. Size also matters for foreign companies that aim to use a particular market as a base or a platform for regional expansion in production and marketing. 1.3. FDI and Economic Growth: the Neo-Marxist Perspective Despite the growing tendency towards adopting economic policies attractive to MNCs, there is a fundamental theoretical divide over the effect of foreign capital on economic growth, particularly between those who perceive it as a vehicle for modernization and those who view it as a tool of structural imperialism.23 The origins of the debate can be found in the fact that capital gains from FDI contributed to tremendous growth in the colonial powers, while the impact of these policies added to poverty, backwardness and a deterioration in the socioeconomic conditions of the colonized countries. Neo-Marxist and dependency theorists place much of the responsibility for the failure of developing countries to achieve a reasonable rate of economic growth on the structural barriers of the international capitalist system against development in these countries. 24 They argue that the dominant position enjoyed by the industrial states and the subsequent dependency of poor countries on the rich created profound inequalities in the North-South relationship. This dominance is central to maintaining the present structure in the capitalist world-system. Such views based their critiques on the structure of the capitalist world

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system and imperialism and, hence, not only called for more economic autonomy and sovereignty for national development but also for a new international economic order, which would make the world system less biased against developing countries.25 They argued that the capitalist world system was to blame for the core-periphery relationship between poor and rich states, and that this structure was responsible for the continued ‘peripheralization’ of the underdeveloped regions. The underdevelopment of the peripheral states, neo-Marxists argued, was caused by the nature of post-colonial control and exploitation by the western powers, and these both directly and indirectly affected the process of development in the peripheral regions. 26 Underdevelopment might occur directly through trade, economic aid and direct investment. It could also happen indirectly without direct western involvement through the collaborative role played by some internal elites in developing countries, who considered themselves part of the capitalist system and, hence, were willing to participate in the exploitation of their own states by the core states and their MNCs.27 While these theorists acknowledged the capacity of MNCs to contribute to economic development, they have argued that the ‘triple alliance’ between MNCs, host countries and local elites often acts to distort the process of development. This alliance can also diminish the levels of social welfare by creating both income inequality in developing host countries and a new international division of labour where wealth is being created unevenly.28 They argued that foreign investment was supposed to expand the manufacturing base of the economy and mitigate the harmful effect of dependency on primary commodity exports, but the fact that MNCs are driven by profitability has forced them to focus on and capture the exclusive sectors of the economy, thus distorting the development process so that FDI led to a process of uneven development. Neo-Marxists also link the process of underdevelopment and the democratic deficit in developing countries to the disarticulation of the economy and the unequal distribution of wealth, where only the elites that were connected to the world system benefited from the core-periphery interaction while many others were left worse off. This inequality brought with it other harmful manifestations such as class tension, political violence, rebellion and crime, factors that affect directly the socioeconomic and socio-political development of all states. They also argued that MNCs can influence the politics and the decision-making process in native and host countries alike, particularly when it comes to

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formulating policies regarding strategic economic sectors such as communications, oil and energy. The political influence of MNCs has raised fears among the governments of some developing countries, particularly when these corporations dominate or monopolize production and marketing in strategic economic sectors. 1.4. FDI and Economic Growth: the Neo-Liberal Perspective Neo-liberals maintain that this inequality in the distribution of wealth between developed and developing countries can be reduced through the advantages of backwardness.29 They argue that backwardness is advantageous for developing countries in the process of economic development because diffusion takes place from the core industrialized states to the periphery at faster rates than the core is able to adopt epochal innovations in key sectors.30 This analysis is relatively undermined by the fact that such diffusion occurred at a much slower pace over the past 50 years because the legacy of colonialism and the practices of MNCs forced many developing countries not only to minimize the level of cooperation with former colonial industrial states, but also to limit the access of MNCs to their markets. Unlike neo-Marxists who blame the world capitalist system for the backwardness of developing countries, neo-liberals argue that the internal conditions of these countries are the main cause of their underdevelopment. They draw their analysis from the internal political, economic and cultural differences between developed and developing countries. They believe that economic liberalism creates the right condition for political development, economic growth and social improvement and, hence, modernization has become a permanent feature of the development process in most capitalist industrial states. In their view, this is not the case in most developing countries, where authoritarianism and a centralized economy often determine the development process. In developing countries, modernization is retarded by the inability of the state to adapt to changing political, economic and social situations. Therefore, underdevelopment is caused by internal political upheaval, inadequate political institutions, inefficient economic policies and social incoherence, all conditions that make the political, economic and cultural environment highly unattractive to foreign capital. It follows that the relationship between political and economic liberalization and the process of development has a strong theoretical basis in neo-liberal thought. Government involvement in economic activities is dangerous to freedom because it concentrates power in the

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hands of the privileged few and destroys social pluralism. On the other hand, less government interference in the economy enhances the market, strengthens the private sector as an engine for economic growth, and increases the prospects for democracy as it allows alternative forces to develop within society.31 The positive effect of foreign capital and democracy on economic growth encourages neo-liberals through the socalled ‘Washington Consensus’ to exert political pressure on developing countries to open up their economies, to liberalize their trade and investment regimes, and to launch comprehensive political and economic reforms. This trend has led to a growing tendency across the developing world towards economic and trade liberalization. The actualization of political liberalization, however, appears to come more slowly because of the reluctance of many ruling regimes in developing countries to concede, let alone share, power. The inability of these regimes to effectively utilize their national resources and to achieve an acceptable level of economic growth forced them to allow MNCs, with their financial and technological capabilities, to participate in the process of economic development. Neo-liberals argue that capitalism is synonymous with a free market economy at home and with free trade abroad and, hence, economic development can only succeed under liberal economic conditions. Such conditions allow the state to most effectively utilize its physical, human and capital resources in the productive process. This often leads to a higher rate of economic growth, whereas underutilization of these resources is the main cause of underdevelopment in developing countries, particularly the lack of capital due to low savings rate. This places significant importance on the role that foreign capital investment can play in the economic growth of developing countries, especially where FDI becomes the main source of capital, knowledge and technology. 32 This makes FDI a key aspect in the North-South interaction. The neo-liberal theoretical perspective also stresses the importance of economic and trade liberalization that is conducive to economic growth in the industrialized states; such a process, if implemented in developing countries, can benefit greatly from open access to the much larger markets in the developed world. In this scheme, the importance of differentiating between the policy of import-substitution adopted by the governments of many developing countries and those of export-led economic policies practiced by the industrialized states becomes clear. The economic miracle of the East Asian economies strengthens the

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argument that trade liberalization serves as a mechanism for economic revolution in countries whose resources were previously underdeveloped.33 Therefore, foreign trade and investment cannot be considered as a zero-sum game but, rather, as a process in which every country gains. Industrial states gain substantial profit from their foreign trade and investment, while developing countries benefit from gaining access to the technological advances and the importation of machinery and scientific knowledge that contribute to the creation of their industrial bases. From the FDI perspective, multinational corporations are major instruments of modernization since they provide advanced corporate management, remove the bureaucratic and cultural barriers to productivity, introduce specialization in production, and encourage exposure to the global market. States with limited national resources can benefit from the availability of huge capital flows possessed by these corporations. If allowed to access a particular market, MNCs can improve market structure by developing production processes, strengthening the private sector, increasing exports, and generating employment. The growing importance of MNCs in economic development is reflected not only in allowing developing countries to improve the internal dynamics of their markets through deregulation and competitiveness, but also in the significant rise in the number of countries receiving and investing sizeable amounts of FDI. The number of countries reporting inward FDI capital of more than US$10 billion increased from just 17 countries in 1985 to 51 countries in 2000, before falling to 35 countries in 2007.34 This rise has been matched by serious efforts by MNCs to enhance competitiveness by spreading their activities over different regions in order to attain locational advantage. 1.5. FDI and Economic Growth: the Regional Perspective The relationship between FDI and economic development has been examined in several studies dealing with regional integration; some of these have revealed positive interaction between global trends of FDI flows and the process of regionalism. 35 These findings are based on empirical evidence from regional arrangements such as the EU, NAFTA and ASEAN, indicating that regionalism changes the economic environment in a way that is favourable to both MNCs and local firms. Another important feature of these studies is that they focus on the strong relationship between the entry mode of MNCs and regional economic developments, most notably in free trade areas.36 Regional trade

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agreements both intentionally and unintentionally serve the interests of MNCs, not only by bypassing trade barriers through FDI but also by creating large markets with a wide range of product specialization. Such factors have allowed the three largest economic regions (the EU, the USA and Japan) to account for the bulk of international production, providing and receiving most global FDI. Data shows that between 1998 and 2000, these regions accounted for 75 per cent of global FDI inflows and 85 per cent of outflows, and were home to nearly 50,000 MNCs and host to nearly 100,000 foreign affiliates.37 These studies also identified the positive relationship between the size of the market and the growth of FDI. Research into European integration concluded that the EU experienced a significant rise in FDI from outside the Community, as well as from within its member states, following the signing of the Single European Act (SEA) in 1986.38 The SEA allowed for mutual recognition of most legislative instruments such as national standards and the single license principle, thus strongly improving opportunities for market access. It provided both framework and rules for ensuring reciprocity and competitiveness, the two most important aspects for foreign companies operating in host countries. The data also shows that European integration was the main stimulus for the growth of FDI into the EU, as well as between the EU and the European Free trade Association (EFTA). Indeed, the growth of FDI inflows into the EU, which reached some US$804 billion in 2007, was due to deepening regional integration, political stability, market size, developed infrastructure and the unification of fiscal and monetary policies that resulted in the introduction of the Euro in 2002. Such measures stimulated foreign investment within the EU, with the UK becoming its largest outward investor in 2000 and, after the USA, the second in 2007. Crossborder M&As were important in areas such as telecommunications and the automobile industry and, to a lesser extent, in the banking sector, which tends to seek profits by expansion into emerging markets. EU growth has also been attributed to the tendency toward consolidation and concentration in the financial sector, which led to the formation of regional financial groups such as NORDEA in 2000. 39 Almost half of all EU FDI took place within the region, with few exceptions, such as Austria, where two-thirds of its outflows were directed towards central and eastern European countries. Most FDI inflows to the EU are from the USA, while a substantial level of outflows are increasingly directed towards the ten new EU countries, in line with rising

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privatization and their accession into the Community in May 2004. The objectives of regional economic arrangements have gone beyond the elimination of trade barriers to focus on the liberalization of investment, including FDI. From the early 1960s, regional agreements have been developed in their substance and character from partial regionalism designed to protect member states against non-member countries in respect of total liberalization, which aimed at boosting international trade and investment. The most significant development in regional integration was the further move beyond traditional trade agreements to advanced north-south trade relations based on equal partnership between developed and developing countries. The impact of this development was apparent in Mexico’s accession into NAFTA in 1994, leading to an increase in FDI from only US$4.3 billion in 1993 to US$11 billion in 1994.40 To a large degree, the political and economic conditions of participant states in regional agreements can determine the impact of regional integration on both the rise of FDI and economic growth. Empirical evidence shows that regional agreements between south-south states are unlikely to benefit their members unless they are accompanied by the liberalization of trade with the rest of the world, while north-south agreements can enhance the credibility of southern states and improve their economic performance through FDI inflows from developed partners. Regarding the latter, the impact of regional cooperation was positive in the case of EU arrangements with central and eastern European countries. Regional cooperation, which started in the early 1990s, brought about economic reforms, trade liberalization and privatization programmes, all vital ingredients for attracting FDI into CEECs. By 2002, the CEECs attracted FDI inflows of US$31 billion; this decreased to US$21 billion in 2003 due to the end of privatization in the Czech Republic and Slovakia. 41 Data also shows that privatization-related FDI transactions were a key determinant of FDI inflows, with the exception of Hungary, where the privatization process has been completed, and of the Commonwealth of Independent States, where large-scale privatizations involving foreign investors have not yet started. Moreover, the impact of regional integration is greater on developing countries that possess well-developed mechanisms for deepening economic integration. This is particularly true when the developing states adopt unilateral liberalization and export-oriented economic policies to improve their business environment. Such measures assisted Asian

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economies in achieving considerable growth in FDI, which reached US$319 billion in 2007, almost double the 2003 record due to the FDI boom in China and Hong Kong.42 The South East Asian economies have also done well in terms of attracting FDI inflows, but are still far behind those of the northern region. The most significant development in this region was the emergence of Asian MNCs operating in the region. This increased both economic activity and the amount of capital invested from and within this region. Regarding south-south economic cooperation, there has been some concern about the viability of this trend as a means for promoting investment and attracting FDI. This explains the poor economic performance of such regional arrangements as the COMESA and GAFTA, where most member states in these regions still pursue importsubstitution economic policies, which aim to restrict entry, protect national industries through tariff barriers and regionalize trade. These regions also failed to set up effective mechanisms for harmonizing their political and economic policies and, hence, regional problems severely undermine the process of regional integration. The case of the Arab states and their failure to develop a coherent regional economic order over the past half century raises the question of whether prerequisites such as the political and economic stability of the participant states are essential for the creation of a sustainable regional economic integration. Despite being rich in natural resources, geographically large and numerous in the number of its countries and populations, Africa’s failure to stabilize its political and economic conditions affected its share of global FDI inflows, which remained around three per cent, despite tripling its inward investment from US$18 billion in 2004 to US$53 billion in 2007. Although Nigeria, Angola, Egypt, Morocco and South Africa have improved in FDI shares, the overall outlook for FDI in Africa has not changed significantly and remains weak. Latin America and the Caribbean have also experienced a significant boost in global FDI inflows, which increased from US$68 billion to US$126 billion during the same period, with Brazil the largest recipient of FDI (US$34.5 billion), followed by Mexico (US$24.6 billion) in 2007. However, both continents attracted far less than the Asian region mainly due to political and economic instability. On the functional level, most bilateral investment treaties and international investment agreements have shifted the focus from traditional issues, such as protection, treatment, and dispute settlement, to more moderate goals that relate to the right to establishment, performance

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31

requirements and the employment of key foreign personnel. While rising in number from 385 in 1989 to 2,608 by 2007, most recent bilateral trade agreements are now covering investment issues such as pre-establishment and post-establishment national treatment, the prohibition of performance requirements, promotion and protection including expropriation and compensation, dispute settlement both at state-to-state and investor-tostate level, and transfer clauses guaranteeing the free transfer of capital, income, profits and royalties. Other comprehensive agreements that imply trade-related and investment-related provisions cover different issues such as trade and investment in services, intellectual property rights and competition, issues that are both implicitly and explicitly stated in the NAFTA and the MERCOUSUR agreements. These agreements aim to create a more favourable trade and investment framework through liberalization, not only of regional trade but also of restrictions to FDI, including operational restrictions. These measures lead to the general harmonization of the investment framework of member states by reducing obstacles and increasing investment flows. However, one can argue that these bilateral measures to improve the investment climate are complementary to the guidelines of the World Bank and the rules set up by the WTO, which aim to facilitate the further expansion of FDI regimes. These legally binding objectives can improve the investment environment by contributing to greater transparency, stability, predictability, and security for investment in sectors not yet covered by bilateral and multilateral agreements. In addition, many national governments have recently adopted FDI-specific regulatory frameworks to support their investment objectives and develop their investment regimes to meet the needs of MNCs and foreign investors. They have also begun creating investment promotion agencies and have established specialized schemes, such as export processing zones as well as free trade and investment zones.43 Empirical evidence of these investment measures can be found to varying degrees in several bilateral trade agreements, mostly conducted within regional arrangements. The most noticeable agreements are those between the EU with its southern neighbour states from the mid 1990s onwards, which are more comprehensive than those conducted during the 1970s, because they include various political, economic, social, educational and cultural dimensions. The agreements have already guaranteed market access to the EU countries and their MNCs to bypass trade barriers. In principle, they are expected to provide the mechanism through which southern neighbour states can develop their political, legal, financial and

32

INVESTING IN THE MIDDLE EAST

administrative systems, while simultaneously improving their economic conditions and business environment. This theory remains unproven and whether these new agreements can make developing countries attractive locations for labour-intensive FDI activities remains a matter of debate. This book examines how and to what extent all of the above factors have influenced European direct investment into Egypt in the period since the Global Mediterranean Policy of the 1970s.

2 EGYPT AND EUROPEAN DIRECT INVESTMENT, 1805-1972

Since the early nineteenth century, European direct investment has entered Egypt at varying levels depending on the domestic political situation and on Europe’s position in the global economic system. During the first half of the nineteenth century, European involvement in Egypt was limited to the supply of knowledge, technology and manufacturing expertise, but the degree of engagement intensified with the free movement of capital and labour following the expansion of European political and economic power between the mid-nineteenth century and the end of World War II in 1945. The declining position of the European powers following the onset of the Cold War, together with the impact of the 1952 Egyptian revolution, considerably affected European direct investment in Egypt up to 1972, the year that the Global Mediterranean Policy began. 2.1. European Involvement in the Mediterranean Region The roots of European investment in Egypt can be found in the progressive development of capitalism and the emergence of European political and economic power during the seventeenth and eighteenth centuries. These developments, particularly in the areas of industry and technology, were brought about by the industrial revolution. The most important development was the internationalization of the global economy and its subsequent impact on the growth of trade and FDI. This resulted in a strong interrelationship between the spread of trade and the growth of FDI because the growing importance of the latter was often linked with the role of large firms in international production. This

34

INVESTING IN THE MIDDLE EAST

relationship became apparent after the transition of the world economy from agrarian to industrial in the late eighteenth century, when increased specialization in production and the accumulation of capital outgrew the limits of domestic markets.1 The emergence of new technologies and innovations in machinery and communications systems enhanced this relationship by enabling large firms to invest overseas. Although the internationalization of economic activities contributed to the sustainability of the global system during that time, its stability was only maintained by the unchallenged political and economic control of Britain over large parts of the globe up to the time when it was challenged by the emergence of the superpowers - the US and the Soviet Union - after 1945. During this early period, the internationalization of production was facilitated by an open regulatory framework, unsupervised short and longterm capital movement, the unrestricted transfer of profits, and a superior gold standard which encompassed almost all major industrial and agrarian economies.2 It was also driven by the internationalization of the labour market that, assisted by large waves of inter-continental migration from Europe, reached unprecedented levels, particularly in the North and South American economies. Between 1870 and 1915, it was estimated that 36 million people left Europe, two-thirds of whom went to the US.3 Egypt had a substantial share of this wave of European immigration as the total number of foreigners rose from about 3,000 in 1836 to over 68,000 in 1878 and to 221,000 in 1907.4 These waves of migration were encouraged by relaxed legislation that allowed citizenship to be freely granted to immigrants. Statistics also show a significant growth in capital flows, which were estimated in 1914 at US$44 billion, of which the UK accounted for the largest share, followed by France and Germany. FDI stocks accounted for almost one-third (US$14 billion) of total global investment, with the UK accounting for 45 per cent of the total global FDI outward flows and the US, as the largest recipient, accounting for 20 per cent of FDI inflows. 5 Aided by the lack of formal restrictions on the flow of capital, this growth led to considerable harmony and integration in the financial markets and a remarkably high level of cross-national ownership of securities, including government as well as private bonds and stocks. The process was also accelerated by a significant growth in international production through FDI and the shift of resources from agriculture into industry where traditional sectors, such as textiles and clothing, were challenged by entirely new industries that were

EGYPT AND EUROPEAN DIRECT INVESTMENT

35

characterized by more capital-intensive production techniques, such as engineering, steel and chemicals. These structural changes were enhanced by the emergence of new methods of organizing production, such as assembly lines and new corporate structures suitable for large-scale production as well as the introduction of new modes of transportation and communications, such as steamships, railways, telegraph and cables. All of these simultaneously altered the scale and organization of modern production activities and facilitated the opening of new markets. By 1913, transportation was the primary sector for investment, accounting for 55 per cent of total global FDI stocks, followed by trade and distribution at 30 per cent with 10 per cent in manufacturing.6 These structural changes coincided with political and economic revolution in Europe. The political process developed with the introduction and reform of laws in the areas of public health, education, social justice, transport and navigation. The birth of the modern political party system and the participation of trade unions in industrial and political affairs also had an impact. Well advanced by the mid-nineteenth century, European economic development not only improved the European standard of living but also created a huge financial surplus that needed to be reinvested. Major financial institutions, such as banks, insurance companies and large Charter companies, emerged to play a key role in this process. Foreign capital investment became such a leading economic sector that the export of capital became both as important and as popular as the export of goods and commodities.7 This significant growth in foreign investment was attributed to the huge surplus of wealth, to the advanced financial apparatus, and to the rising experience and confidence of European financial institutions. The ethos of these institutions was that there was more profit to be made abroad than at home, a concept that was further strengthened by political and legal privileges secured by British administrations in colonized countries. During the nineteenth century, Europe’s capital markets flourished and London became the financial capital of the world. Made possible by European economic development, the influx of capital allowed investors to expand their economic activities beyond their own borders. Due to rapid economic development and growth in industry and finance, by the mid nineteenth century France’s position in the global capital market came close to that of Britain; meanwhile, the savings of Germany, Belgium, the Netherlands and the US grew to such an extent that Britain no longer enjoyed her unassailable position in the wholesale world market of

36

INVESTING IN THE MIDDLE EAST

capital.8 Nevertheless, British capitalists maintained their position as innovative pioneers in discovering and opening up new fields for development, due to their willingness to take risks, to their intensive trade relations, and to their experience and advantages gained from their political and economic ties with the rest of the world. French capitalists also played a significant role in overseas investment, particularly in the construction of railways in Austria, Spain and Algeria. Most notable was their success in 1854 in securing permission from Said Pasha to construct the Suez Canal in Egypt. The drive to gain control of such a strategic project as the Suez Canal encouraged the French to purchase 52 per cent of shares (to the value of 200 million francs for 400,000 shares at 500 francs each). While Britain took advantage of Egypt’s financial crisis and bought Khedive Ismail’s shares in the Suez Canal for just under £4 million in 1875.9 During the 1860s, the Netherlands re-emerged as a foreign investor with almost £60 million of capital invested abroad. Germany followed suit and became a major investor in the global economy as its investors became more willing to accept risk in return for a high yield. In particular, Germans tended to invest in riskier government bonds than the French, and their holdings of these bonds amounted to about £15 million in 1883.10 By the late nineteenth century, most European foreign investment went to the US, where capital was most secure and the prospect for development was higher than any other part of the world, with an estimated capital of US$3.1 billion (£620 million) invested mainly in railway bonds and stocks.11 2.2. The Beginnings of European Direct Investment in Egypt Despite these developments, European investment in Egypt was negligible during the first half of the nineteenth century. This was evident in the lack of European capital investment in Mohamed Ali’s Modernization Programme between 1805 and 1849, which sought to transform Egypt into a modern industrial state. This programme produced some notable achievements in the country’s economic, administrative and legal system, one of the most significant transformations being the replacement of the prevailing system of communal ownership of land by individual private ownership. This created a new group of small businesses as well as local investors and entrepreneurs whose role remained secondary to the government in economic development. In the economic sphere, major developments were achieved through

EGYPT AND EUROPEAN DIRECT INVESTMENT

37

the irrigation system that expanded the cultivated area from 3.1 million acres in 1813 to 4.2 million acres by 1852 and the planting of long-staple cotton that started on a commercial scale in 1821. A communications network was built to facilitate foreign trade, particularly sea-ports such as Alexandria. Achievements in the industrial sector were also impressive, particularly in the weaving of cotton textiles, with some new industries introduced such as cotton-ginning, rice milling, sugar and rum, edible oil, dairy products, woollen fabrics, silk, ropes, leather, glass, books, paper, saltpeter and sulphuric acid. Armament also flourished with the expansion of Egypt’s military activities in the Levant and Sudan during this period. The total investment in these areas of industry amounted to almost £12 million, with some 70,000 workers employed. 12 European participation in this development process did not focus on capital investment, but was limited to the hiring of managers, engineers and technicians, whose role in factories, arsenals and foundries was significant. 13 Perhaps European capital investment was not attracted by this impressive level of development because of the authoritarian nature of Mohamed Ali’ s rule and the strong governmental control over the country’s political and economic system and institutions, especially concerning the import and export of goods and commodities. Many European countries opposed the nature of Egypt’s system of state monopoly and the protective measures that regulated Egyptian industry. In 1820, intense European pressure resulted in a three per cent drop of duty on all Egyptian imports. This was increased to 12 per cent in the 1838 Anglo-Ottoman Treaty, which stipulated that Egypt must abandon its monopoly system. After Egypt’s military defeat by Britain and France in Rio in 1840, the 1841 treaty officially cut back Egypt’s military forces, reduced the general import duty to five per cent, and abolished the monopoly system, while it also secured the entry of foreign traders and investors into the Egyptian market. In the post-Mohamed Ali era (1850-1920), European interest in Egypt steadily increased, due to the growing strategic importance of the country following the opening of the Suez Canal in 1869, and the concomitant reorientation of the economy towards free market and export-led economic policies.14 Moreover, government interference in economic affairs during this period was limited. The emergence of European capital flows took two different forms. The first model was state-driven investment aimed at securing strategic interests in major projects, such as the Suez Canal; this kind of strategic engagement was evident in the large scale investment

38

INVESTING IN THE MIDDLE EAST

made by France and Britain in the Suez Canal Company. The second form was private investment by banks, financial institutions and entrepreneurs, all of which were mainly driven by commercial gains. During this period and until the Misr Bank was established in 1920, European banks were not only considered the principle agents of the new economic imperialism, but also the main source of funds for economic development. This was due to the easy entry and exit of capital, the limited restrictions on operations, the existence of appropriate standards of treatment and dispute settlement, and a stable and transparent regulatory framework. Based on an export-oriented economy, the economic climate was a major factor in the increase in European investment in Egypt. Until 1920, Egypt had a one-crop agriculture economy in which almost all activities centred on the cultivation and export of cotton; this increased from £17 million in 1845 to £250 million in 1920.15 As the principle commercial crop of the Egyptian economy, the intensive cultivation of cotton enhanced Egypt’s comparative advantage as an agrarian country and integrated her national economy into the global economy to the greatest extent up to that time. The increase in production and the quality of Egyptian cotton, notably long-staple cotton, encouraged European companies to invest in agriculture-related projects, particularly in irrigation systems that included building canals, barges and dams, all of which were financed and maintained by European funds. 16 Foreign investment further accelerated the cotton boom, which saw the value of cotton exports more than double by 1906, reaching its highest value during the Korean War in 1952. 17 It has been argued that the largescale immigration of foreigners and the US$400 million invested in Egypt by 1914 were largely connected to cotton production or related activities, such as finance, transportation and trading activities. In addition, external factors affecting the global market in other parts of the world contributed to the intensity of European investment in Egyptian agriculture. The American Civil War had impacted heavily on the British cotton and textiles industry, thus turning Egypt into a viable alternative cotton source for British textile companies. The British Administration in Egypt had no interest in subsidizing or protecting local industry and prevented the development of a local Egyptian textile industry. The administration encouraged Egypt to exclusively devote its economy to the cultivation of cotton. In this scheme, raw cotton was sent to British factories in Manchester and Leicester for manufacturing and then exported to Egypt at high cost. The cotton export surplus was absorbed by the repayment of

EGYPT AND EUROPEAN DIRECT INVESTMENT

39

huge foreign debts and servicing projects for imperial purposes, hence minimizing the positive impact of the influx of European capital and personnel on economic development. Another major determinant in attracting foreign investment into Egypt was the capacity of the Egyptian market for economic expansion. The Egyptian market was characterized by an ‘exceptional increase in the imports of industrial goods from Europe, and the growing number of the large-scale companies with foreign capital, operating in such important fields as transport, communications and production’. 18 European companies were encouraged to accommodate this absorptive capacity for industrial products and a high level of consumption due to the rapid growth of the population. Indeed, the rise of European capital flows into Egypt was a direct response to the increased demands of the Egyptian market where the multiplication of imports per capita of the population increased from just £0.1 in 1801 to almost £2.3 in 1907, a level of growth that was highly attractive to European investors. This capacity for expansion was a tangible asset for European investors, who wasted no time in building new factories for cotton ginning and pressing, textiles, beer, cement, cigarettes, tobacco, and manure. Most European companies specialized in very precise areas of economic activities in order to sustain the monopoly in these sectors. For instance, the concentration of FDI flows in transport and communications, including railways, ports, roads, buses and shipping facilities, gave European investors the power to control the most important and vital sectors of the Egyptian economy. Such monopolies not only secured economic influence for foreign investors but also ensured that their companies became an integral part of the country’s socio-economic structure. Yet another reason for the growth of European FDI in Egypt was the vast physical and human infrastructural facilities the country offered. The development of physical infrastructure was encouraged by the government through tax incentives for investment in vital areas of communications, such as road and port facilities, and in cultivable land and irrigation schemes. These incentives also promoted investment in the consumer goods that were necessary for meeting the increasing demands of a growing population. Not least, Egypt was viewed as an exceptionally cheap source of skilled labour vital for modern industrial production, particularly in labour-intensive, heavy industries. In 1907, it was estimated that most European investment, which focused on industries such as

40

INVESTING IN THE MIDDLE EAST

textiles, clothing, food and metal work, absorbed an average of 34 per cent, 19 per cent, 17 per cent and 12 per cent, respectively, of the total labour engaged in manufacturing.19 These figures highlight the extent to which labour forces added significantly to Egypt’s locational advantages. Egypt’s political climate was another major determinant for the growth of European investment in the country between 1850 and 1950. The imperial foreign policy adopted by most European powers provided protection for their national interests, safeguarded their capital and secured special status and legal privileges for their nationals. In effect, this policy weakened the position of the local political establishment - headed by the King and the national government - and this weakness was evident in the limited government intervention in economic affairs, in the inability of the state to generate sufficient domestic capital formation, and in the marginal participation of Egyptian entrepreneurs in the country’s economic development.20 Unlike Mohamed Ali, his successors were weak and offered no resistance to the European drive to dominate the country’s political and economic affairs. Nor did local rulers show concern about the country’s economic conditions or any interest in securing Egypt’s financial status in the global system. This was manifested in the efforts of Khedive Ismail that failed to re-activate state participation in economic activities. His policies were too expensive to be financed by public funds and, hence, he relied heavily on foreign borrowings, which further dramatically increased Egypt’s foreign debts. As a direct consequence of Egypt’s financial crisis, in 1875 Ismail had to sell shares in the Suez Canal to the British Government. In 1882, the weakness of Khedive Tewfik opened the door to the British military occupation; the weakness of subsequent rulers allowed the British administration to dominate all Egypt’s economic, financial and political affairs almost until the middle of the twentieth century. The consequence of this political weakness was that there was no government attempt to take the lead in the promotion of economic development during the period under consideration in this chapter. Statistically, the government’s share in the economy was as little as oneeighth of government consumption and capital expenditure in the national outlay: 16 per cent of state contributions to the gross domestic product, two per cent of state enterprises in production, and eight per cent of employment in public services.21 What is more, the government had neither the capacity nor the power to influence the volume, let alone the

EGYPT AND EUROPEAN DIRECT INVESTMENT

41

direction, of lending by local financial institutions and, hence, played no significant financial role in the process of development. Not surprisingly, the foreign banks performed this function. One can also argue that the substantial rise in both European capital and nationals in Egypt was due to the success of the European powers in maintaining the privileges and concessions provided by the Capitulation system. Under this system, between 1841 and 1937 most Europeans enjoyed fiscal and judicial immunity and, hence, Egypt was an attractive location for FDI since the system granted foreign investors preferential treatment over a wide range of investment opportunities. The benefits of such treatment were further enhanced by the financial and commercial links of European investors with their home markets, which gave them preferential treatment to their Egyptian competitors. While Egypt remained a predominantly agricultural economy, its industrial sector that began to emerge during the 1890s was almost exclusively financed and owned by European companies and nationals. As shown in Table 2.1, between 1833 and 1933, the paid-up company capital owned by foreigners increased from EGP 6.4 million in 1833 to around EGP 43 million in 1902, and reached EGP 102.3 million in 1933. The data also shows that almost 160 new European companies with a combined capital of EGP 43.3 million were established in Egypt between 1900 and 1907.22 It was also estimated that 91 per cent of the total capital controlled by foreign entrepreneurs, who practically dominated the entire communication system, industry and trade, was invested in joint-stock companies in 1914. These figures illustrate the depth of European involvement in the Egyptian economy, which was made possible by the large size of the expatriate community that totalled almost a quarter of a million by 1945, the majority of whom were British, French, Italian and Greek. Not only did they enjoy a legally privileged position under the nineteenth century capitulatory treaties, but they also dominated most of the more profitable parts of the economy. However, some major obstacles between 1917 and 1952 impacted heavily on European FDI flows into Egypt, most notably World War I (1914-17) and the global economic instability that followed. This led to structural and functional changes in Egypt’s economic system, chief of which was the usurpation of Egypt’s export-oriented economy, as described above, by a new economic system based on import-substitution industrialization. The impact of this was evident in the decline of the agricultural sector, whose share of GDP decreased due to the general fall

42

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in cotton export prices in 1920, 1921 and 1926. This decline in cotton prices continued throughout the Great Depression years (1929-32) and subsequently negatively impacted on the Egyptian economy that had relied heavily for many decades on one-crop-cotton. Thus, Egypt was forced to diversify its economic resources, to develop its industrial sector and to encourage investment outside agriculture. Table 2.1: European direct investment in Egypt (paid-up capital and debentures in EGP), 1833-1933 Firm activity 1833 1902 1933 Mortgage companies 3,826,000 10,525,000 44,310,000 Banks & finance 1,843,000 2,174,000 5,085,000 Agricultural & urban land 2,395,000 6,745,000 firms Transport & canals 62,000 3,645,000 4,445,000 Industrial mining & 669,000 5,903,000 20,780,000 commercial Suez Canal 18,350,000 20,930,000 Total 6,400,000 42,992,000 102,295,000 Source: A. Bonne, State and Economics in the Middle East, 1948, p.251.

The inter-war period was marked by the ‘Egyptianization’ of the economic system.23 The move towards this process began in 1919, when Saad Zaghloul’s revolution made clear the danger of the colonial economic system and demanded economic independence and diversification. The establishment of Misr Bank in 1920 illustrated the increasing tendency towards greater participation of national capital and labour in economic development and it also succeeded in mobilizing Egyptian capital and creating Egyptian-run industries in various economic sectors in order to give Egyptians some influence over their own economy.24 The Federation of Industries was founded in 1922 and worked towards setting up regulatory frameworks and policies favourable to the development of Egyptian industries. By 1939, Egyptians made up 52 per cent of its members, an increase of 40 per cent from 1925. The post-1920 era also witnessed greater involvement by Egyptian professionals in economic activities at various levels. By 1947 the number of teachers, engineers, physicians, lawyers and pharmacists reached 52,000, 16,000, 5,700, 5,000 and 1,600, respectively.25 Legislation was introduced to increase Egyptian participation in business. For example, the 1947 joint stock companies’ laws defined the minimum percentages of an Egyptian shareholding as follows: at least 51 per cent of a company’s capital, 40 per

EGYPT AND EUROPEAN DIRECT INVESTMENT

43

cent of its board of directors, while 75 per cent of employees had to have 65 per cent of the total salaries, and 90 per cent of the workers had to receive 80 per cent of the paid wages.26 These measures may well have been a reaction to the policy of some foreign companies to employ workers from their own ethnic minority groups. The impact of Egyptian participation in the economy was noticeable in the gradual decline in the number of foreigners from 240,000 in 1937 to 204,000 in 1947 and to 143,000 in 1960.27 Similar patterns of rising Egyptian participation and declining foreign participation in the Egyptian economy were manifested in company ownership; the percentage of Egyptian capital in joint stock companies rose gradually from only nine per cent in 1933 to almost 50 per cent in 1956. These figures indicate the dramatic impact of these measures on foreign investment activities, which dropped sharply from £81 million (apart from the £83 million foreign shares in the Suez Canal) in 1933 to an average of around EGP 9 million (of which EGP 5.2 million went into petroleum) between 1952 and 1961. Did the high level of concentration in European capital flows contribute in any significant way to the development of Egypt’s economic growth during the period between 1850 and 1952? An analysis of European involvement in Egypt’s economic activities shows that European capital was concentrated in specific economic sectors, and a general improvement was exhibited in the performance of these sectors. However, the overall impact of European investment during this period was minimal in terms of Egypt’s economic growth since most foreign investment was designated for projects that served imperial needs. In the economic sphere, where agriculture alone accounted for almost half of the EGP 100 million of European capital flows in Egypt’s joint stock companies in 1933, there was no significant improvement in the overall performance of the agricultural sector. Although funding projects like the construction of dams and canals did benefit over 2.4 million local agricultural workers, agricultural strategy was designed for imperial needs because it devoted Egypt’s resources to the cultivation of one high-value crop, cotton, which was of significant importance to the European textiles industry. The increase in cotton production by almost 150 per cent from under three million cantars (one cantar = 99lbs) in the early 1880s to some 7.5 million just before the WWI did not contribute significantly to the wealth of the country, as raw cotton was exported to Europe, mainly Britain, at low cost for manufacturing and returned to Egypt in the form of textiles and clothing at high prices.

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Exporting cotton also failed to reduce Egypt’s foreign debts because much of the trade balance surplus was wiped out by the payment of interest on debts.28 Even the textile industry, which was largely associated with cotton production, did not contribute proportionally to Egypt’s exporting capacity. Thus, Egypt’s largest industry did not enjoy a comparative advantage. Despite using high value long-staple cotton, Egypt’s textile industry produced low quality cloth at great cost in comparison to its counterparts in countries such as India, which used cheaper-value cotton yet produced high quality cloth cheaply. This made it difficult for the Egyptian textile industry to compete in the global market. In industry, European capital flows into Egypt were directed towards manufacturing in consumer production and aimed only to serve the local market because Egypt was not manufacturing goods or industrial products. This meant that the high profits made by these foreign companies came from the domestic financial sector and from the national economy. The system also failed to achieve balanced development in the industrial sector because foreign firms merely sought areas of high profit and, thus, never attempted to launch an industrialization programme or to improve Egypt’s wider industrial base. The data shows that there was a tiny proportion of the manufacturing labour force employed in a small number of large modern factory type enterprises. However, the role of FDI in generating employment should not be underestimated. Table 2.2 illustrates that the employment rate depended largely on the level of foreign capital flows in economic activities. It shows that the total number of people employed in 1907 and 1917, when foreign investment reached its peak, was 24,600 and 358,700, respectively. By 1937, the employment rate had fallen with the decline in FDI flows due to the Great Depression of 1929-32 and the outbreak of World War II. On a sectoral level, in 1907 the rate of employment fell in textiles, clothing, metal work and wood work to 29 per cent, 6.9 per cent, 8.2 per cent and three per cent of total employment in manufacturing in 1937, from 34 per cent, 19 per cent, 12 per cent and five per cent, respectively. However, there was a noticeable increase in the number of jobs created in other sectors, such as food and the chemical industry that grew, in 1937, from 17 per cent and 0.3 per cent in 1907 to 23.3 per cent and 4.6 per cent, respectively, which casts light on the diversion of FDI flows from the traditional sectors during this period.

EGYPT AND EUROPEAN DIRECT INVESTMENT Table 2.2: Employment in manufacturing, 1907-37. 1907 Industry Textiles Clothing Food Beverage & Tobacco Metal work Non-metallic minerals Building materials Wood & products Leather Chemical products Petroleum Construction of vehicles Printing & paper (paper) Others Total

1917

45

1937

Employees in 000s

% of total

Employees in 000s

% of total

Employees in 000s

% of total

83.2 45.8 40.7

34 19 17

72.8 89.9 61.8

20.3 25.1 17.2

40.5 9.6 32.5

29 6.9 23.3

10.3

7.4

30.1

10.3

12

4.2

28.5

7.9

11.5

8.2

7.7

5.5 -

10.2

2.8

-

12.8

5

56

15.6

4.2

3

1.2

0.5

2.5

0.7

1.4

1

0.8

0.3

2

0.6

6.4

4.6

0.2

0.1

3.9

2

4.3

1.2

-

-

9.4

4

11.8

3.3

6.9 (2.5)

4.9 (1.8)

4.4

2

18.9

5.3

5.9

4.2

242.6

100

358.7

100

139.6

100

Source: S. Radwan, 1974, pp. 173-191.

Although from a socio-political perspective the association of European investors with the political elite, in the form of the monarch and his inner circle in the government, secured their interests through privileges and legal status, this had a negative impact on the development of the political process. This became clear when Egypt’s political system rapidly deteriorated in the post-war period and the power centre shifted from the old conservative monarch and the traditional political elite towards new political, religious and nationalist forces that simultaneously engaged in an anti-colonial struggle. The negative impact of this coalition between foreign capitalists and a corrupt political elite was strongly reflected in the attitude of the revolutionary regime towards foreign investments and this attitude of distrust precipitated the end of European investment in Egypt by the early 1960s. It should also be pointed out that the cessation of some European

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capital flows from Egypt back to the native countries in the post-war period created widespread unemployment due to the closure of factories and workshops that had been at full capacity during the war. It has been estimated that almost 300,000 workers were dismissed, of whom only a very small number managed to find alternative employment in the private sector.29 Such socio-political conditions led to the spread of social unrest throughout Egypt and to internal political instability, as well as the spread of political radicalism, all of which challenged the fundamental principles of the attraction of FDI. 2.3. The 1952 Revolution and European Investment in Egypt By 1952, Egypt’s political and socio-economic conditions had badly deteriorated to such a degree that there was widespread dissatisfaction among the population and particularly army officers, who revolted against the conservative establishment on 23 July 1952. This revolution dramatically changed the political and economic landscape of Egypt from a liberal system to a centrally planned socialist economic system controlled by a revolutionary government, led by President Gamal Abdel Nasser. Between 1952 and 1971, this government failed to convince both foreign and private investors of the stated aims of the revolution merely to eliminate the corrupt political establishment and to put right the political damage caused by the poor performance of the Egyptian army and its defeat in the first Arab-Israeli war in 1948. Many foreign and private investors were reluctant to engage in economic activities, preferring to wait and see what Nasser’s intentions were. This marked the beginning of a withdrawal of foreign and private capital from the economy, which reached its peak in the late 1950s.30 From the government’s perspective, foreign and private companies had failed to honour their commitment to economic development. They had not responded enthusiastically to government efforts and incentives to promote industrialization and encourage the role of the private sector. For example, the modification of foreign investment Law 138 of 1947 that reduced the mandatory proportion of Egyptian capital in foreign firms from 51 per cent to 49 per cent did not allay the doubts of foreign investors. As a consequence, their failure to cooperate enthusiastically with the new government negatively affected Egypt’s economic performance, which in turn led to a decrease in the gross national production (GNP) from EGP 44 million on average between 1945 and 1952 to only EGP 27 million during the years 1953-57.31 This situation reduced the role of

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47

foreign capital in the national economy and allowed the government to assume greater power, on the grounds that ‘foreign capital is regarded with dark doubts in underdeveloped countries particularly those which were colonized’.32 In 1955, the British and American refusal to finance the long-desired High Dam in Aswan forced the Egyptian government to take radical action in order to obtain the financial resources necessary to implement its ambitious development programme. This refusal to fund the dam was interpreted in Egypt as a signal that the West was unwilling to provide the financial assistance required for economic development, which turned Egypt toward the socialist world for assistance, a move that was pragmatic and free of ideological implications.33 The impact of this refusal strained Cairo’s political relations with major western capitals and resulted in the nationalization of the Suez Canal Company in 1956. This was done in order to seek alternative resources to finance national projects, particularly since at that time the Suez Canal was the primary generator of income in Egyptian economy. In an attempt to regain control over the canal, Britain and France, together with Israel, launched the tripartite war on 29 October 1956. The failure to recapture the Suez Canal severely damaged Franco-British prestige and marked the end of their imperial glory. It also marked the beginning of a tense and hostile era in Euro-Egyptian relations that would last until the early 1970s. Foreign private investment was deeply affected by the drastic changes in Egypt’s economic climate, especially the transformation of the economic system away from a capitalist model towards a more centrally planned socialist system. This re-orientation had no economic objective but, rather, was an attempt to break away from western control over Egyptian affairs.34 Indeed, the origin of the Free Officers’ dissatisfaction was not due to a lack of understanding or appreciation of the benefit of capitalism but due to their desire to seek an alternative socio-political and socio-economic order distinct from that associated with a corrupt monarchy, bourgeoisie and landlord class.35 The nationalization of the Suez Canal marked the beginning of an intensive programme aimed at limiting foreign and private ownership in strategic economic sectors. This programme was driven by the belief that foreign domination was the cause of Egypt’s political, economic and social backwardness. This view was expressed by Ali Sabry, the Egyptian Premier (1962-65), who argued that ‘foreign domination was exercised through the economic machinery they set up on our soil. Most of the banks operating in Egypt were foreign

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banks, accumulating our national savings and exploiting them for the benefits of the imperialist countries, regardless of the consequent standstill in the growth of the Egyptian society. The same was the case with insurance companies and import and export agencies’.36 This attitude led to economic nationalization, the main objective of which was to free Egypt from foreign control over its financial institutions. This was achieved through an intensive programme of ‘Egyptianization’ of several foreign and private banks and insurance companies; this included Misr Bank, which was nationalized in February 1960. Shortly thereafter the whole cotton trade passed into government hands. The programme culminated in the breakdown of cooperation between the government and foreign banks and companies that had existed and operated in Egypt for many years. Consequently, by 1962 the economy had changed considerably and ownership of the main economic sectors was now into the hands of the government. Overall the role of foreigners had been substantially reduced and in some economic sectors it was badly eroded. Furthermore, the nationalization programme attempted to divert projects intended to attract foreign capital away from greenfields and unexploited raw materials, which had previously been the focus of foreign capital. Despite the government’s success in driving away foreign capital from greenfield projects, the economic impact of this action was highly damaging; Egypt lost approximately 92 per cent of her total foreign capital investment, which totalled only EGP 8.7 million (EGP 5.2 million went into the petroleum industry) in 1961 compared with EGP 100 million in 1948.37 To compensate for such a loss, the government relied heavily on loans and credit facilities from the Soviet Union, the USA and West Germany, which reached EGP 186 million, EGP 68.1 million and EGP 53.1 million, respectively, in 1961.38 This became an increasingly heavy burden for the government as interest charges and especially the repayment of principal placed a great strain on the Egyptian economy in subsequent years. Meanwhile, the very existence of most foreign companies operating in Egypt was jeopardized. The comprehensive programme of land reforms, the nationalization of foreign banks and companies, and the consolidation of the state-run public sector marked the end of the pre-1952 free market economic era. Structural control of economic activities had to be conducted through long-term plans for social and economic development by the National Planning Committee, which was set up by the Presidential

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decree 78 of January 1957. The economy became increasingly dominated by the government, with many privately-owned foreign and local companies falling under the management of the Economic Development Organization, which was created in 1957 and controlled some 64 companies with a total capital value of EGP 80 million by 1958. By early 1960, the government’s control and management of the main channels of finance hit a particularly high level, when almost 74 per cent of gross capital formation was carried out by the government in comparison to 28 per cent prior to 1952. 39 Government control of financial resources was also accompanied by direct government intervention in almost all economic activities, ranging from the imposition of controls on the flow of international trade and transactions in hard currencies to the licensing of imports and the discrimination against commodities purchased with hard currencies. The implementation of Law 153 in 1957 meant that government intervention in sectors of importance to foreign investors, such as insurance; this law prohibited the ‘founding of any insurance company without government authorization and decreed that a certain percentage of all reinsurance had to be done with Egyptian reinsurance companies’.40 The legal and regulatory system was firmly set to control and reorganize every area of the economy. For example, in 1961 Law 133 fixed a maximum work week of 42 hours for industrial units, while in the same year Law 115 established Arabization of language (making Arabic language compulsory) in business establishments where English and French had previously been used. These controls significantly restricted the role of private capital in economic development during the 1960s. The first five-year plan of 1960-65 confirmed that the government had taken full control of the planning and financing of national projects as well as of most economic activities, thereby leaving no room for foreign and private capital for investment. The role that had been played almost exclusively by European capital in Egypt’s economic development in the pre-revolutionary period was visibly subsumed by Soviet involvement in the Egyptian economy. This was particularly the case following the Soviet financing of the High Dam project, resulting in Egypt’s economy being increasingly run by Russian technology, machinery, and money. A large Russian community, made up mainly of technicians, supplanted the large European expatriate community that had reached almost a quarter a million people in the inter-war period. Moscow replaced London as the primary purchaser of Egypt’s cotton and, together with some other East

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European capitals, became Egypt’s new source of financial, economic and military assistance on relatively favourable terms.41 Unlike European capital, most Soviet capital investment was in the form of long-term loans administered by the state and was directed towards specific projects that had been agreed on with the Egyptian government. Thus, the pattern of foreign direct investment that peaked during the Nasserite era (1954-70) was radically different from the pattern of entrepreneurship previously employed by European investors. Moreover, an overall assessment of the causes that led to the decline of European direct investment in Egypt during the 1950s and 1960s reveals that European companies were greatly affected by the foreign policy of their native governments towards Egypt. This was apparent in the failure of the European governments either to understand the profound shift in mind-set of ex-colonial states or to realize that the 1952 revolution was part of a ‘worldwide movement against imperialism as a political system and all the values and cultural practices that empowered and sustained it’.42 The impact of this policy led to the emergence of nationalism across the Arab world. Nasser’s attempts to create a viable economic structure, free of European capital and influence, could be seen in Egypt’s Russia-sponsored industrialization programme as well as in his efforts to forge an alliance with Syria (1958-61) in creating the United Arab Republic and the Arab Common Market in 1964, similar to the model established by the EEC in 1958. However, due to a lack of economic dynamism and political will, the efforts to develop this interArab regional economic arrangement failed and it was not until the early 1970s that Arab capital flows began to be effective in the economic sphere. What is more, while Egypt’s political and economic climate was becoming increasingly unattractive to foreign investors Europe was taking serious steps towards economic integration, starting with the creation of the Organization for European Economic Cooperation (OEEC) in 1948, the European Coal and Steel Community (ECSC) in 1952, the European Economic Community (EEC) after signing the Treaty of Rome in 1957, and the European Free Trade Association (EFTA) in 1960. These measures, initiated by the newly established EEC, developed Europe’s organizational structures and improved its internal markets. These developments made it clear to investors that better opportunities for their business investments existed within the emerging European economic cooperation, rather than with Egypt. Nevertheless, it was this process of

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European integration and the development of its external ties with the neighbouring states that reinforced Euro-Egyptian economic relations, particularly through the Community’s Global Mediterranean Policy that began in 1972.

3 DEVELOPMENT OF EGYPT’S INVESTMENT ENVIRONMENT, 1972-1995

During the 1970s, Egypt experienced a radical re-orientation of its political and economic system. This era saw an end to the belligerent status quo with Israel that existed prior to the 1973 war, an end to the deterioration of the country’s socioeconomic conditions, and the integration of Egypt into the global system. It also witnessed the evolution of Egypt’s legal and administrative systems and the liberalization of its economic system. Political stability was achieved through Egypt’s rapprochement with the west, particularly the US, and its peace treaty with Israel in 1979. EuroEgyptian relations improved from the early 1970s through bilateral and multilateral initiatives such as the 1974 Euro-Arab Dialogue and the Cooperation Agreement of 1977. The country’s economic performance and investment climate also improved tremendously, in turn encouraging the resurgence of foreign investment into the country, which reached its peak in 1975. However, the growth in FDI was not sustained during this period due to lack of consistent political, economic, administrative and legal reforms. 3.1. The Evolution of Egypt’s Legal System The resurgence of Arab and European FDI flows into Egypt in 1972 emphasized the role of the legal system in attracting foreign investment. From the perspective of FDI, the evolution of the legal framework allowed foreign investors to re-engage in the country’s economic activities. The promulgation of investment laws was first directed at Arab capital

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flows through Law 65 of 1971, about the investment of Arab funds and the free zones, and Presidential Decree 109 of 1972, which ratified Egypt’s compliance with the ‘Agreement for the Establishment of the Arab Organization for the Safeguarding of Investment’. Ratification of these measures opened the way for Egypt to join the Agreement on Investment and Movement of Arab Capital among Arab countries. 1 Although Article 18 of Law 65 specifically dealt with Arab investment, investors from Italy, Germany and Switzerland took advantage of these stipulations, which allowed other foreign investors to benefit, after cabinet or presidential approval, from the incentives and guarantees provided by the law. This was evident in the US$2.3 million invested by Italy in Egypt’s chemical industry in 1972, while Germany and Switzerland invested around US$51.4 million (EGP 20 million) and US$79.2 million (EGP 31 million), respectively, in pharmaceuticals in the following year. Having taken the political conditions of the country at the time into account, the foreign response to this preliminary piece of legislation was encouraging and underscored the importance of incentives and guarantees for the promotion of FDI. Although offering capital repatriation after five years in the original currency and at the prevailing exchange rate, remittance of profits at the prevailing exchange rate, tax exemption for five years, and fair compensation in the event of nationalization or expropriation, this law was criticized for not exempting from customs duties the import of capital equipment for approved projects. The poor response of Arab investors to these preliminary laws motivated the Egyptian Government to target FDI flows from other destinations, particularly from Europe and the US. Law 43 of 1974 was legislated for this purpose, in order to allow up to 49 per cent of total equity foreign participation with public or private capital in Egyptian companies. The percentage was set at this level to prevent foreign dominance of the country’s financial institutions and, hence, eliminated the fear of a return to the colonial situation in one of the main economic sectors.2 Apart from the banking sector, the law did not specify a maximum percentage of foreign equity. A degree of flexibility was also extended to GAFI’s Board of Directors, by a two-thirds majority according to clause C of Article 4, designed to approve the investment of Arab or foreign capital without local participation in other fields, with the exception of banking.3 Such progress resulted in a sudden, sharp rise in Egypt’s FDI inflows from US$522 million (EGP 204.1 million) in 1974 to US$4.6 billion (EGP

DEVELOPMENT OF THE INVESTMENT ENVIRONMENT 57 1.8 billion) in 1975. This rise was due to the wider range of incentives extended by the law, which included tax exemptions on commercial and industrial profits for five years that could be extended to eight years depending on the nature of the project, its geographical location, and its importance to economic development. Exemptions were also extended for the same period for reinvested profits, as long as these profits were not subject to taxation in the investor’s home country or elsewhere. Foreign firms operating in the Free Zones enjoyed total freedom from customs duties and almost total relief from corporate taxes on profits for an unlimited time. This law also offered guarantees in case of nationalization, sequestration or confiscation, excluding judicial procedures.

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

US$ million

Figure 3.1: Global FDI flows into Egypt 1972-1995

Source: GAFI

Nevertheless, the impact of Law 43 on FDI inflows into Egypt was limited and FDI growth became unsustainable after 1975. Figure 3.1 shows a sharp decline in FDI flows by more than US$2.7 billion, from US$4.6 billion in 1975 to around US$1.8 billion in 1976. It shows that the impact of Law 32 of 1977, which attempted to address this decline in FDI, was also limited. The rise of Egypt’s FDI inflows from US$2 billion in 1977 to over US$2.5 billion in the following year was then followed by a dramatic decline in 1979, when FDI inflows reached US$768 million. Since then, FDI inflows have only twice topped US$1 billion; rather, they fluctuated and fell far below this level until the mid 1990s. This reveals serious problems in the Egyptian legal and bureaucratic system.

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Although Law 43 provided a sufficient basis for attracting foreign investment, foreign investors were critical of it because it contained many ill-defined regulations; they were also dissatisfied with the determination of the applicable exchange rate, as their capital entered at the official rate but the repatriation of capital had to be made at the prevailing rate. 4 Even the 1977 amendment to this law did not properly address the salient issues that foreign investors raised and, hence, it failed to attract a substantial number of new foreign companies. It was apparent that this law was biased against import substitution projects, which represented the largest amount of FDI, in terms of profit repatriation rights and foreign exchange availability. The companies Law 159 of 1981, which set out the rules and procedures for the incorporation of foreign businesses, regulated taxes, fees and employment rules, had little impact on the FDI growth rate during the following 15 years. Other measures designed to stop further deterioration in FDI growth, such as the investment Law of July 1989, also failed to address issues of prime concern to foreign companies, such as trademarks, patents, taxation and labour. 5 The combination of Egypt’s financial crisis in the late 1980s and the Iraqi invasion of Kuwait in August 1990 discouraged foreign firms from investing in the country and brought FDI flows to their lowest level - US$75.2 million - in 1990. The hard fact is that the cumbersome nature of Egypt’s legal system was a hindrance to the local business community and foreign companies alike. Most companies considered the system incapable of protecting them from fraud, forgery and the duplication of products, let alone of protecting the local market against very cheap imports from China and South East Asia. This vulnerability created a dilemma, in which the government was neither able to adopt a more liberal policy nor willing to sacrifice the importation of cheap goods from the Far East without risking the loss of foreign investments.6 3.2. Administrative and Bureaucratic Development Egypt’s bureaucratic system also failed to provide adequate support to foreign investors, whose investment plans faltered due to the length of time required for incorporating their businesses. The primary cause of this was the multiplicity of agencies involved and the many different steps that had to be taken, from the initial application for project approval to the final incorporation of the company. For example, a French joint venture with an Egyptian partner had to wait for almost 18 months to get the

DEVELOPMENT OF THE INVESTMENT ENVIRONMENT 59 necessary licenses and approvals from government agencies, while other firms stated that it took them almost three years to complete the required procedures.7 In part, this problem was caused by the absence of consistent criteria for officials to use in reaching decisions or determining the extent of various incentives for foreign investors, and this often ended in diverse and conflicting interpretations of the law. It was a typical developingworld bureaucratic system. Foreign investors routinely complained about the aggravating procedural requirements, including registration, securing investment incentives, getting a tax number, gaining access to land, obtaining building permits and municipal licenses, getting utilities and services connected, getting work permits for their employees, importing equipment and inputs and complying with employment formalities. 8 These complaints highlighted the inefficient administrative procedural machinery that was undermining the relatively modest improvement in FDI entry requirements (on average the number of procedures required was nine and the time until entry 52 days, compared to an average of 11 procedures and 68 days in most developing countries).9 The monetary cost of FDI entry was also much higher in Egypt at US$943, compared to the average cost of US$504 in other developing countries. In many cases, these factors not only resulted in long delays but also in escalating establishment and production costs, which, due to the relentless inflation and the rise in customs duties, accumulated between applying to set up and achieving actual establishment. Opposition to economic reforms favouring FDI also came from some high ranking officials and ministers, who were ideologically opposed to the private sector and, hence, undermined the efforts of the political leadership to liberalize the economic system. Challenges like these were common throughout the whole period, emerging at the early stage of the economic liberalization period when President Sadat dismissed his Prime Minister Abdel Aziz Hegazy, who in 1975 warned about the danger of foreign investment. Indeed, Sadat went on record to explain that his economic liberalization was victimized by ‘bureaucratic red-tape and erroneous ideological resistance’.10 Hegazy’s removal from the premiership immediately impacted on the number of projects being approved for investment in late 1975 and early 1976. Table 3.1 shows how political events, such as the food riots of January 1977, influenced the authorities to approve some 70 project applications in the first three months of the same year in an effort to underline its ongoing commitment to economic liberalization. During the

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first quarter of 1977, 70 foreign projects were approved; 65 of them were approved on 27 March 1977 and had an estimated US$1 billion (EGP 404 million), while only five projects had been approved from 1 January 1977 up to that date.11 The large number of approved projects was not attributable to the investment Law 32 of 1977 because it did not come into effect until June 1977. Table 3.1: Projects approved in inland and free zones 1972-79. Year Quarter 1 Quarter 2 1972 0 0 1973 4 in 9 (5in+4fz) 1974 1 13 (11in+2fz) 1975 21 (16in+5fz) 24 (22in+2fz) 1976 54 (21in+33fz) 34(19in+15fz) 1977 70 (57in+13fz) 47 (38in+9fz) 1978 81 (61in+20fz) 53(37in+16fz) 1979 63 (51in+12fz) 63(46in+17fz) Total 294 243 Source: K. Gillespie, 1984, pp.193-194. * in = inland and fz = free zones

Quarter 3 0 3 in 18 (16in+2fz) 43 (22in+21fz) 27 (11in+16fz) 52 (35in+17fz) 32 (23in+9fz) 69 (53in+16fz) 244

Quarter 4 7 (5 in+2 fz)* 9 (8 in+1 fz) 31 (28in+3fz) 62(35in+27fz) 24(11in+14fz) 39 (30in+9fz) 50(40in+10fz) 60 (53in+7fz) 282

Total 7 25 63 150 140 208 216 255 1064

However, the government failed to combine its economic liberalization programmes with reform of the bureaucratic system. The civil servants who were responsible for implementing the legislation and policies received no serious training nor were they informed about the objectives of the liberalization programmes. Such failure was apparent in the conflict in policy orientation between the political leadership and the lower levels of government, who since the 1950s had been giving priority to public rather than private sector applications. Between 1972 and 1995, foreign companies suffered from strict government control over such vital areas as employment policy, as well as bureaucratic restrictions concerning price controls on a number of strategic commodities, including cloth, bread, sugar, edible oil, soap and utilities. The government also maintained direct control over the exchange rate and the devaluation of the Egyptian Pound, and this control of the country’s main financial resources continued until the early 1990s. Altogether, it considerably affected the value of the profits of foreign companies in many respects, not least the earnings of their native managers and employees. The overvalued official exchange rate of the Egyptian Pound, which was used for government transactions, added yet more obstacles for foreign companies when submitting competitive tenders for public contracts that depended on importing goods or buying

DEVELOPMENT OF THE INVESTMENT ENVIRONMENT 61 materials on the black market. Not only did this limit the production and marketing activities of many foreign companies in the country but also made it difficult for them to compete in the market or secure substantial profits. Hence, the conduct of most economic activities fell to the uncompetitive public sector or the underdeveloped private sector. A study by the National Bank of Egypt identified further obstacles and argued that many foreign companies found it difficult to obtain land on which to set up projects because of lack of integrated industrial zones, the high price of land, and because formalities for the allocation of government-owned land to projects were excessively time-consuming.12 The report also pointed out that many foreign companies in the new industrial areas suffered from a lack of infrastructural facilities, particularly telecommunications. In general, studies and forecasts for investment projects, particularly in the area of marketing and consumer demand, were hindered by inadequate and inaccurate data regarding domestic and regional markets. The knock on effect was that some firms hesitated to undertake projects while others were discouraged from expanding their activities into other areas. 3.3. Economic Liberalization Programmes Between 1972 and 1995 Egypt launched two large-scale economic liberalization programmes. The 1974 Infitah policy aimed at transforming the economic system from a centrally planned socialist to a semi-capitalist system, thus allowing a greater role for foreign capital and the private sector in economic development. This transformation was inevitable because, on the one hand, the public sector was unable to lead the process of economic development while, on the other, the government could not afford the absence of foreign and private capital, if the country was to be modernized. The Infitah policy succeeded to a large extent in forging economic ties between Egypt and the West, particularly with the US and Europe and also strengthened the position of the government vis-à-vis the local business community that was clamouring for increased private enterprise.13 This success was evident in the mid 1970s, especially after Law 43 instigated a huge rise in FDI in Egypt and, subsequent to the introduction of the Infitah policy, Arab, American and European companies began to establish joint ventures and branches in Egypt. In 1975, Arab FDI flows increased to around US$1 billion from only US$341.2 million the previous year. This was also the case with the American FDI flows, which increased from US$157.8 million in 1974 to over US$1 billion in 1975. The most

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significant rise came the following year with the rise in capital investment from US$15.9 million in 1974 to approximately US$1.6 billion by EC companies. As foreign participation was permitted in almost all economic sectors, industry attracted the most support and, by 1981, some 55 foreign banks became active in the financial sector. From the FDI perspective, the Egyptian government implemented several external measures aimed at consolidating the Infitah policy. In order to benefit from American investment and technological expertise, US-Egyptian relations were consolidated through an economic agreement that ended double taxation. This had the double effect of encouraging the US to participate in reconstruction projects in the Suez Canal and of safeguarding American investments in Egypt.14 Financial and technical agreements were concluded with Germany, France, the UK and Spain that provided Egypt with loans and facilities for development purposes. The government also secured substantial financial support from major international institutions such as the International Bank for Reconstruction and Development (IBRD), the World Bank, the IMF and the Arab Fund for Economic and Social Development. Combined with earlier initiatives, these measures significantly aimed at securing investments from the Arab and oil-exporting countries in 1972, when the government approved the Resolution of the Arab League’s Economic Council that attempted to promote Arab investment, prohibit nationalization and expropriation of Arab capital, and provide for Arab countries to set down the conditions and the fields in which investment would be focused. In addition, the Arbitration Board was set up within the Arab League to consider investment disputes. At the national level, the Infitah policy increased the role of the private sector in developing the country’s infrastructure and modernization programmes by allowing greater participation of private and foreign capital, particularly in the areas of textiles, food and beverages, chemicals, metals, machinery and electronics.15 There were also some notable successes in foreign-national cooperation in the industrial sphere, most notably the automobile industry with Fiat that produced the Ramses with a German engine and a locally built frame. In the financial sector, the Infitah policy introduced a number of policy measures that eliminated market entry restrictions on foreign investors. The government introduced vital reforms to the financial market with laws designed to liberalize the capital markets; this was the specific purpose of Capital Market Law 95 of 1992. Under the direction of

DEVELOPMENT OF THE INVESTMENT ENVIRONMENT 63 the Capital Market Authority (CMA), the protection of investors against unlawful and unfair practices guaranteed the availability of relevant information through a prudential regulatory scheme that monitored the operation and performance of the Cairo and Alexandria stock exchanges. Unfortunately, the impact of the Infitah policy on investment was short-lived. The high annual rate of population growth of 2.3 per cent eroded the benefits of FDI. This was manifested in reduced per capita income, in the heavy debt-servicing burden that increased with the expansion of borrowing for development purposes, in large defence expenditures, in the high rate of inflation and in high government expenditures. The limited impact of FDI on economic development was also caused by the failure of the government to engage foreign capital in major national projects, such as the reconstruction of the Suez Canal zone in the mid-1970s, the building of the new industrial cities - the Sixth October and Tenth Ramadan - in the 1980s and the agricultural and land reclamation projects like Toshka in upper Egypt. The primary object of the Infitah policy was to revive the public sector and, hence, the privatization of Egypt’s public sector under it was narrowly implemented.16 This programme failed to achieve its objectives due to strong socialist sentiment across different layers of the government bureaucracy and to controversy surrounding how and to whom public companies should be sold. Under Law 43, the process allowed public sector companies to sell some of their equity shares to private investors or to enter into joint ventures with foreign companies, but it had little effect on FDI. This was due to several factors. Firstly, most sales did not go to foreign or private companies but to the employees of the concerned companies because of the belief that involving employees in ownership would stimulate productivity.17 Secondly, privatization was challenged by the controversial legal framework of Law 111 of 1975, which prohibited any decrease in the percentage participation of the state in the equity of public sector companies. In these circumstances, a presidential decree to bypass this law was required for any sale; the only way round this was if a company entered into a joint venture under Law 43. 18 Thirdly, privatization was mainly carried out by Egyptian nationals and, thus, by 1978 almost 55 per cent of all capital authorized under Law 43 had been supplied by the public sector and a few individual investors. The public sector invested in some 70 new non-financial projects with capital totalling EGP 232 million.19 This means that most new investments came from the

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very sector that most urgently required restructuring and development and, hence, neither technology nor new foreign capital was available to contribute to economic development. The poor quality of Egypt’s public sector and its policy of overemployment discouraged foreign companies from seeking joint ventures with public sector companies. This was apparent in the lack of foreign participation in the two phases of privatization during the mid 1970s and early 1990s. Even those companies that had already been operating in the country complained to their Egyptian partners about the many indirect employees that had to be kept on the payroll. Indeed, indirect workers, including guards and drivers, absorbed a substantial proportion of profit, which deprived Egypt of one of its main competitive advantages - cheap labour. In addition to the financial losses, long term employment in the public sector damaged the competitive edge of Egyptian managers and workers, leading one French manufacturer of electrical goods to complain that commercial considerations came second with their local partners because their inattention to costs and pricing reduced overall profitability of the enterprise.20 Another reason why Egyptian private funds were severely limited was that most of the assets of public companies were purchased by very few individuals, who did not commit themselves to long term investment but rather focused only on projects with short term returns and huge profit margins for their invested capital. The limited financial ability of employees to buy shares in public companies made it possible for a few individuals with good political contacts, such as Osman Ahamed Osman, to become major shareholders.21 Although these entrepreneurs declared themselves proponents of free market enterprise and competition, they were more of a hindrance than a help to economic liberalization. For instance, while he was a Cabinet Minister in 1973-77, Osman prevented market competition by limiting the approval of projects in the construction domain in order to protect Arab Contractors, the company he owned and chaired. During his four years in office, he approved only eight construction projects, but after his removal from the cabinet the same number was approved in a three-month period, and some 69 projects were approved in the following two years.22 Such factors hindered this phase of privatization and, consequently, Egypt remained a publicsector-led and inward-looking economy, promoting import-substituting industries until the early 1990s. The Economic Reform and Structural Adjustment Programme

DEVELOPMENT OF THE INVESTMENT ENVIRONMENT 65 (ERSAP) introduced in 1991 was the second major step towards economic liberalization during the period under consideration. Guided by the International Monetary Fund and the World Bank, this programme attempted to minimize the impact of Egypt’s economic crisis of the late 1980s, particularly after the sharp decline in oil prices and the unexpected rise in interest rates that led to fiscal and balance of payments deficits, to a high rate of inflation and to rising unemployment. 23 By 1991, Egypt’s inflation rate had reached 20.4 per cent and its GDP had declined dramatically to 1.2 per cent from 8.7 per cent in 1987, 24 which significantly added to an increase in the trade deficit, amounting to US$11.7 billion in 1990.25 By the early 1990s foreign debt had risen to US$50 billion, with an annual debt servicing of some US$5 billion.26 Far more comprehensive than the Infitah policy, ERSAP included deregulation, fiscal adjustments, tax reforms, the curtailment of subsidies, as well as financial and trade liberalization. The primary aim of privatization was to achieve sustainable economic growth, create new employment opportunities and shift the economy from a centrally planned to a decentralized, market-based and outward-orientated economy.27 It also attempted to raise Egypt’s GDP to an average of six per cent per annum and the ratio of investment to GDP to 25 per cent from 18 per cent, mainly through increased private investment.28 In 1991, Law 203 moved towards further economic liberalization by attempting to reform public enterprises and eliminating the differences in treatment between the public and private sectors. This law paved the way for privatization by separating some public companies from their ministries, re-organizing them into 17 diversified and financially autonomous holding and affiliated companies and, as a preliminary step for privatization, restructuring or liquidation, by making them dependent on their economic viability.29 Although the 1990s privatization programme achieved some stock market success in areas such as port services, telecommunications, electricity, and insurance companies, it encountered various other difficulties, such as the re-grouping of the companies to be privatized into specialized holdings according to their financial restructuring as well as other factors, such as unemployment and lack of foreign participation. Contrary to the declaration that only unprofitable public sector companies would be sold, most sales were of profitable companies and, subsequently, this further added to the deterioration in the public sector, which was the main engine of the country’s economic growth at that time. 30 The most distressing part of the process was the sale of strategically

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important companies. Alzojaj Almosatah was not only a very profitable company but also one of the most reputable and successful specialists in glass production in Egypt and the wider Middle East.31 The sale of Assuit Cement was another highly successful company of strategic importance that was sold at a much lower price than its actual market value; the sale of such a company represented a setback to the economy because the construction and housing sectors depended largely on cement imported from abroad. There was also massive corruption and mismanagement in the sales process, under the ministry responsible for privatization. For example, Al-Ahram Beverages, El-Nasr Steamers and Meridian Hotels were valued below their market worth and were sold to pre-selected buyers at much lower prices than those offered by competitors. In August 1994, Pepsi Cola Egypt was sold for EGP 157.6 million, another example of both lack of transparency and corruption since the company comprised of eight factories and 18 production lines, all of which was sold for the value of only two factories.32 In 1991, the distribution of the total revenues from the sale of public sector companies was estimated at around EGP 10 billion, a significantly low sum that further highlights the limited impact of privatization on economic growth during the 1990s. Statistics reveal that almost EGP 3.6 billion (36.1 per cent of total revenues) was used for debt repayment; EGP 1.9 billion (19.3 per cent) was used to compensate early retirement of workers; EGP 331 million (3.3 per cent) was used to pay the salaries of employees in unprofitable companies; only EGP 4.1 billion (41.3 per cent) went to the treasury.33 These figures indicate that the remaining revenues were too insignificant to add to investment in the economy, especially when the balance of trade deficit grew during the second half of the 1990s to US$12.5 billion and US$11.5 billion in 1998-99 and 1999-2000, respectively. Moreover, existing data demonstrates that the sales process was used to cover up the government’s failure to restructure both public sector companies and the huge deficits in the economy, which absorbed almost one third of the revenues. That the government had to contribute some 19.3 per cent of its total revenues to shore up early retirement exposes the failure of privatization to generate employment as it was supposed to do. On the contrary, it significantly added to the already high level of unemployment. The extent of the government’s failure either to promote an exportoriented policy or to balance a mixture of policies based on exportorientation and import-substitution is exposed by the nature of the

DEVELOPMENT OF THE INVESTMENT ENVIRONMENT 67 economic liberalization programme in Egypt between 1974 and 1995. The government focused on import-substitution industrialization, which led to a huge growth in the country’s balance-of-payments and balance-of-trade deficits. This policy resulted not only in this failure but also in the insignificant progress in developing export-focused projects. For most of the 1980s and early 1990s, the government adopted highly protectionist measures and policies against foreign competition that caused stagnation in the internal market and badly affected the activities of many foreign companies in Egypt. The impact of this was reflected in the reaction of two French mineral water companies and another that produced pressed concrete; they maintained that protection from competition led to overpriced products inappropriate to a low income mass market such as Egypt and that reducing the price would lower profits to the point where companies would leave the market.34 The inability of the government to develop the mechanisms of the internal market made it impossible for foreign companies, often operating in import-substituting sectors, to acquire some sort of monopoly status and, hence, reduced the country’s investment potential for these companies. The undeveloped nature of Egypt’s internal market meant that there was inadequate local operational and technical support for foreign companies operating in the market. From the operational perspective, the standard of local support, the quality of procedures and services and the delivery time were inferior and unreliable. This forced some firms to switch from using local fabrics and materials to importing most of their requirements from abroad, which yet again added significantly to the cost of their products. On the technical side, most incentives for investment were offered to companies operating in free zones and new industrial cities, such as Sixth October and Tenth Ramadan, which were set up by the government to accommodate workers and factories. Most of these new cities lacked the basic infrastructure of water, electricity, hospitals, schools and transport and, in turn, these conditions made it difficult for foreign and local firms to operate. One French confectionary manufacturer complained that for two years after having commenced operations there was still no electricity.35 The failure of the government to overcome these obstacles to foreign investment intensified the challenge of attracting foreign capital flows into the country.

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3.4. The Political Climate Developments in Egypt’s political system during the 1970s not only impacted positively on the country’s investment climate but also added to the FDI growth rate. The development of the internal political system began as early as May 1971, when the Corrective Revolution restored the sequestrated properties and dismantled large parts of Nasser’s apparatus, including the elite Arab Socialist Union (ASU), top army officers, the intelligence service and the police force. This process was consolidated by the emergence of the multi-party system in 1976, with the Arab Socialist Party in the centre, the National Progressive Union Party on the left and the Free Socialist Party on the right. The resurgence of the Wafd Party and the formation of the Umma Party strengthened the political process during the 1980s, all of which contributed to the country’s gradual political transition. Political reforms were closely allied with personal vision and driven by economic motives. This was especially true of President Sadat, who believed that his foreign and economic policies required a more flexible, liberal and democratic political system. This limited the role of institutions in the development of the political process, which was balanced somewhere between the desire to adopt the basic norms of democracy, such as political pluralism, and the desire to introduce measures to strengthen the power of the president.36 The manipulation of the process of democratization was evident in President Sadat’s efforts to form his own party, the National Democratic Party (NDP) in order to consolidate his power. Democratization was further undermined by his control over the political parties and the media and manifested itself in the introduction of emergency measures that severely curtailed political activity, controlled the press, made demonstrations and strikes illegal, and allowed measures that granted the president an unlimited number of terms in office. Political reform was even further constrained by measures that authorized the president to crack down on political opposition and Islamic movements as well as to rely on the army to defend and protect his legitimacy. 37 These measures slowed down the process of economic liberalization and development. This was apparent during the 1980s-90s, when Egypt experienced not only political but also economic stagnation. The FDI growth rate dramatically decreased from US$1,379.8 million in 1980 to US$258.2 million, US$75.2 million and US$324.2 million in 1985, 1990 and 1995, respectively. EU FDI flows into the country fell from US$923.5

DEVELOPMENT OF THE INVESTMENT ENVIRONMENT 69 million in 1980 to US$26.9 million in 1990, while US capital flows decreased from US$28.6 million to US$0.9 million during the same period. Arab investment also fell from US$317 million in 1980 to US$41.1 million in 1990, despite the improvement in Arab-Egyptian diplomatic relations. Although this decline occurred due to multiple factors as explained above, foreign investors considered Egypt a high political risk for investment, particularly after the Gulf crisis of 1990-91. For example, concerns over this led French investors to concentrate their investments in economic sectors from which it was easy to withdraw, which indicated a lack of confidence in Egypt’s investment climate.38 They believed that political risk in Egypt and the wider Arab world was higher than that of Asia and Latin America and was only slightly less risky than that of sub-Saharan Africa. More than anything else, the Egyptian-Israeli peace process marked a significant improvement in Egypt’s political environment and the country’s economic growth. It minimized the political and economic costs stemmed from the mutual hostility prior to the 1973 war, particularly when it became apparent that Arab territories could not be liberated by military means. It has also been argued that the peace process eased the economic and monetary challenges faced by Egypt during the 1970s-80s. During the mid 1970s, Egypt’s rapprochement with the West and particularly with the US, improved the country’s image in the developed world and re-positioned it as a major pro-western ally in the Middle East. This political transformation consolidated the country’s place in the global economic system, enhancing the credibility of the Egyptian Government with major international financial institutions, such as the World Bank and the IMF in relation to credits, loans and grants for social and economic development. The political re-orientation also allowed Egypt to cultivate political and economic ties with the US and the EC through bilateral and multilateral frameworks for cooperation, such as the 1974 Euro-Arab Dialogue. During those years, US economic and military assistance annually amounted to around US$2 billion. 39 The Egyptian economy was bolstered through measures of foreign agencies that increased the role of the private sector in the economy; this was particularly evident when the United States Agency for International Development (USAID) provided some US$25 million to Egyptian banks in 1978, to enable the private sector to import American goods.40 Though some critics have questioned the motives for this contribution, the fact is that since the mid 1970s Egypt’s

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major trading partners have been the two main western economic powers, the US and the EU. The former became Egypt’s largest single trading partner, accounting for 40 per cent of all Egypt’s imports up to the early 1990s; since that time the EU has overtaken the US as the major source of imports into Egypt. Together, these two economic powers accounted for an average of 62.1 per cent of Egypt's total imports and 63.3 per cent of its exports over the period from 1991 to 2001.41 However, although these political developments seemed to herald a major shift, in fact they neither significantly stimulated sustainable economic growth nor promoted foreign investment in Egypt. Moreover, the political and economic support Egypt got from the West was seriously undermined by the country’s isolation in the Arab world, after signing the peace treaty with Israel in 1979. This agreement cost Egypt almost all the economic and financial support that it previously received from major Arab donors, such as Saudi Arabia, Kuwait, Libya and Iraq. This isolation deprived Egypt of one of its main competitive advantages, namely, its geographical proximity to other Arab and Middle East countries. Major multinational companies, such as British Leyland, Ford, Coca Cola, Colgate Palmolive, Motorola, Xerox, and Revlon, which hoped that their investments in Egypt would provide them with a regional platform for exporting to other Arab markets, suffered from Egypt’s regional isolation until the mid 1980s. The desire of many of these companies to avoid being placed on the Arab Boycott List may also have impacted negatively on FDI inflows into the country. Egypt’s attempt to achieve political stability was also undermined by tensions and regional conflicts including the Lebanese Civil War, the Israeli invasion of Lebanon in 1982, the Iran-Iraq war of 1980-88, Iraq’s invasion of Kuwait in August 1990, the 1991 Gulf War, the Palestinian Intifada of 1988, and repeated deadlocks in the Middle East peace process. As political events often influence economic cooperation and development, the volatility of the region was highly unattractive to foreign capital flows and, hence, the impact of high political risk on the growth of FDI manifested in the lack of private investment during most of the period 1972-95. 3.5. Euro-Egyptian Economic Relations under the Global Mediterranean Policy Since the EEC’s establishment in 1957, Euro-Egyptian relations steadily developed through a serious of bilateral and multilateral frameworks for

DEVELOPMENT OF THE INVESTMENT ENVIRONMENT 71 cooperation, though real economic cooperation did not materialize until the mid 1970s. In the process of developing the Community’s external relations with the southern Mediterranean countries, the EC’s Global Mediterranean Policy of 1972 produced the first preferential trade agreement signed between the EC and Egypt in December of that year. This policy had no effective mechanisms for contributing to Egypt’s economic growth; hence, the agreement was significant only in that it institutionalized the EC-Egypt trade relationship. The legacy of colonialism and Europe’s support for Israel in its conflict with the Arab states prior to 1967 tainted their political relationship and slowed progress between them. The economic relationship was further influenced by the EC’s unwillingness to provide substantial economic and financial assistance to its former colonies, which raised doubts among its southern partners about the underlying objectives of the Global Mediterranean Policy. Not surprisingly, the first EC-Egypt preferential trade agreement failed to achieve its basic objectives. No trade barriers on industrial goods between Egypt and the EC were eliminated until the second agreement was signed in 1977. From the outset, the EC deprived Egypt of its main competitive advantage in agricultural commodities by refusing to offer suitable concessions of agricultural exports on the grounds that this could endanger the legitimate interests of member states and the EC Common Agricultural Policy (CAP).42 Furthermore, because Egypt was industrially incapable of producing goods that could compete in the EC market, the export of Egyptian manufactured goods into the EC market was minimal. Thus, neither the Global Mediterranean Policy nor the preferential trade agreement had a significant impact on the Euro-Egyptian economic relationship until 1974, when the Euro-Arab Dialogue was set up as a new multilateral framework for cooperation. Established in the aftermath of the oil crisis of 1973, the Euro-Arab Dialogue attempted to foster a political, economic and cultural relationship between the EC and the Arab countries. Although the Arab League’s headquarters were based in Egypt, the impact of the dialogue on Egypt’s social and economic development remained limited. From the outset, the dialogue was undermined by political considerations such as the Arab-Israeli conflict and the participation of the Palestinian Liberation Organization (PLO) in the framework’s deliberations. 43 Such issues not only overshadowed economic cooperation but also led to the

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postponement of the meetings until June 1975, and a complete suspension of the dialogue after the Egyptian-Israeli Camp David Accords and the exclusion of Egypt from the Arab League in 1979. From the FDI perspective, the EAD neither included mechanisms for improving the business environment of its participants nor did it encourage European companies to extend their activities to the Egyptian, let alone the wider Arab market.44 The EAD did not secure any legal privileges or diplomatic catalysts similar to those enjoyed by European firms in Egypt during the nineteenth century, and though Egypt saw an unprecedented rise in FDI inflows in the years following the initiation of the EAD, the role of the Dialogue in this rise remains debatable. Table 3.2 shows that the number of European firms approved for projects rose from 19 in 1974 to 51 in 1975. This was matched by a similar rise in the number of projects approved that involved companies of nonEuropean origin. For example, the number of Arab projects approved doubled from 35 in 1974 to 70 in 1975, while projects of joint foreign, Arab and Egyptian capital notably increased from only 2 to 14 during the same period. Table 3.2: Projects approved with EC, US, Arab & joint participants, 1972-79. EC US Arab Joint Total Year Projects Projects Projects Projects 1972 2 0 4 1 7 1973 5 3 12 0 20 1974 19 10 35 2 66 1975 51 11 70 14 146 1976 57 14 59 11 141 1977 68 21 70 15 174 1978 70 14 64 15 163 1979 84 21 60 11 176 Total 356 94 374 69 893 Source: K. Gillespie, 1984, pp. 198-201.

Moreover, GAFI data confirms that FDI inflows from the EC into Egypt rose to US$1.6 billion in 1975 from only US$15.9 million the previous year; a parallel increase of inflows from the US and Arab states, amounting to US$1,023.3 million and US$1,074.2 million in 1975 from US$157.8 million and US$341.2 million in 1974, was recorded. However, other domestic factors, such as Law 43, played a significant role in the upturn. This suggests that the EAD was not the primary cause of the rise in the number of projects approved or of the value of FDI inflows, but

DEVELOPMENT OF THE INVESTMENT ENVIRONMENT 73 that other factors also played an important role in attracting FDI into Egypt. By ‘contributing to the economic and social development of Egypt and helping to strengthen relations between the parties through economic, technical, financial and trade cooperation’, 45 the 1977 EC-Egypt Cooperation Agreement attempted to promote overall cooperation between the two parties. The success of the agreement lay in its capacity to provide a base for EC-Egyptian trade relations in the years prior to the ratification of the new association agreement that was signed under the umbrella of the Barcelona process in 2001. Indeed, the 1977 agreement institutionalized EC-Egyptian trade relations; the relationship was governed in accordance with the rules and principles of the General Agreement on Tariffs and Trade (GATT) and was supervised by the Cooperation Council, which was established to ensure that the contracting parties conformed to the spirit and terms of the agreement. Nonetheless, the economic impact of the agreement was not notable. It dealt solely with trade and, apart from US$204 million of economic aid provided after the agreement was signed, it paid minimal attention to financial and technical cooperation. No effort was made to encourage European firms to invest in the Egyptian economy and cooperation in the science and technology spheres never materialized because the agreement failed to take into account either the type of technology that was needed for Egypt’s development or how it should be transferred. As for trade, the preferential agreement neither stimulated Egypt’s export capability in the EC market nor narrowed the trade deficit that favoured the EC, as explained above. The agreement did not increase the rate of growth in Egypt’s trade or enhance the conditions of access for Egyptian products in the EC market. While the balance of trade with the Community was soaring, Egypt lost many of the protective and fiscal customs duties and tariff charges that had previously been associated with the import by EC countries of Egyptian industrial products. 46 Even the abolition of quantitative restrictions on imports from Egypt into the Community included codicils that exempted many goods and commodities listed in Annex II to the Treaty that established the EEC. Traditionally an agrarian country, while the agreement deprived Egypt of its competitive advantage in agricultural products, it failed to offer Egyptian agricultural products any significant advantage in terms of market access in the EC. Customs duties on imports originating in Egypt remained in force on almost all agricultural products. Though there was a

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small reduction in customs duties for products of less significant value to the Egyptian economy, such as lemons, overall customs duties and import charges remained high in regard to fruit and vegetables. 47 The Egyptian quota of rice was limited to only 32,000 tonnes, provided that Egypt levied a special charge on exports of the product. A similar requirement was also imposed on imports into the EC of bran and other residues derived from sifting, milling or other working of cereals. Based on the EC Common Customs Tariff (CCT) and Common Agriculture Policy, the agreement stipulated conditions on the quantity and price of Egyptian agricultural products, which precluded many agricultural commodities and products from meeting the standards required under EC regulations. 48 In the area of industrial goods, the agreement made minimal concessions to Egyptian industrial exports; customs duties and charges on industrial products originating in Egypt had already been in effect with regard to Denmark, Ireland and the UK since 1 January 1972 and with regard to the rest of the Community since 1 January 1975. Concessions for advanced industrial production, such as motor vehicles and the motor vehicle assembly industry, also did not impact favourably because Egypt’s industrial capacity was not sufficient to allow her to export spare parts or vehicles to the EC market. Furthermore, the agreement failed to specify measures that would contribute to Egypt’s industrialization or that would encourage European companies to invest in the industrial sector, which is usually the driving force of a country’s economic development.

4 DISTRIBUTION OF EUROPEAN CAPITAL FLOWS INTO EGYPT, 1972-1995

What impact did the tremendous improvement in Egypt’s investment climate, particularly during the 1970s, have on the growth of EU direct investment into the country from the beginning of the Global Mediterranean Policy of 1972 until the beginning of the Barcelona process of 1995? This chapter attempts to address this question, by using primary data collected from the General Authority of Investment and Free Zones, the main governmental body responsible for foreign direct investment in Egypt. The aim is to explain how the development of Egypt’s internal political and economic process and the progress that occurred in the EUEgyptian economic relationship affected the growth rate of EU FDI into the country. Before delving into this, the chapter first examines the growth in Egypt’s overall FDI inflows that originated in the EU, the Arab world and the US. This is followed by analysis and assessment of the growth of EU FDI inflows into Egypt during the period under examination. Section three analyses the static distribution of EU FDI, while section four looks at the sectoral distribution of these investments. 4.1. Global FDI Inflows into Egypt, 1972-1995 Data shows that global FDI flows in the mid 1970s responded positively to Egypt’s transition towards political and economic liberalization that derived from the constitutional and legal amendments of the early 1970s, in particular the efforts to reduce the risk of nationalization and the sequestration of foreign and privately owned properties. This response

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manifested in the gradual rise in FDI flows into the country from just US$11.5 million in 1972 to an unprecedented record of US$4.6 billion in 1975. As shown in Figure 4.1, the sharp rate of growth was due to an increase in diversified FDI flows that originated not only in the EC but also in other European non-EC member states such as Switzerland, the Arab world, the US and, to a lesser extent, East and South East Asia. By 1975, foreign investors were optimistic about Egypt’s investment potential. In fact, EU, US and Arab FDI flows increased by a remarkable 10,206 per cent, 648 per cent and 315 per cent, respectively in 1974-75. Attracted by the potential to benefit from Egypt’s competitive advantages, there was a marked increase in FDI flows from other regions such as Central America and the Far East, thus making Egypt an attractive destination for global FDI flows by the end of the 1970s. Although data shows that the record of US$4.6 billion of FDI was not repeated during the period under examination in this chapter, Egypt continued to attract substantial amounts of global FDI inflows, mainly from Arab and European firms, at an annual average of US$1.4 billion between 1976 and 1982. However, the 1975 peak in FDI should not be considered as evidence of liberalization but only as a reflection of the optimism that foreign companies had at that time about Egypt’s investment potential. Although the 1974 Infitah policy only achieved limited economic liberalization, by the mid 1980s Egypt had one of the fastest growing transitional economies and was among the top ten developing countries receiving FDI.1 However, due to the deterioration in Egypt’s economic situation during the second half of the 1980s, this position slipped away; the data shows that Egypt’s FDI inflows decreased dramatically from US$845.8 million in 1986 to US$75.2 million in 1990, confirming that Egypt was no longer a favoured destination for foreign investors. This dramatic decline in FDI flows into Egypt was particularly evident when compared with the years 1976-85. For instance, FDI flows from the EU into Egypt decreased from US$4.2 billion between 1976 and 1985 to US$809.5 million during the following ten years. For the same periods of time, American investment fell from US$952 million to just US$131.9 million and even Arab investment declined, though to a lesser degree, from US$4.2 billion to US$1.8 billion. Notwithstanding this decline, the data shows that Egypt had accumulated FDI stocks of US$21 billion by the end of the 24-year period under examination. Between 1972 and 1995, the Arab states were the

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largest foreign investors in Egypt, with FDI accounting for US$7.4 billion and with Saudi Arabia being the leading Arab investor in the country. Despite Egypt’s isolation and exclusion from the Arab League between 1979-89, Arab FDI flows into the country were more consistent than those from the US and Europe. Even when the country faced its worst economic and financial crisis in 1987, Arab FDI flows contributed US$83.6 million, accounting for 77.6 per cent of the total global FDI inflows into Egypt.

US$ million

Figure 4.1: Global FDI stock in Egypt by origin 1972-1995 8000 7000 6000 5000 4000 3000 2000 1000 0 Arab States

EU European non-EU USA

East Asia

Others

Source: GAFI

Figure 4.1 also shows that the EU was just behind the Arab world, with investment in Egypt accounting for US$7.1 billion between 1972 and 1995. Standing at US$2.3 billion, US direct investment lagged behind that of the EU; US$1 billion of this total had been invested in 1975. The absence of significant US investments after 1977 reflected the lack of confidence among American private investors in Egypt as an attractive area for investment, despite its apparent political and economic development. Though the US government was the main sponsor of the Egyptian-Israeli peace treaty, private US companies continued to perceive Egypt and the Middle East in general as an area of high political risk. They preferred to invest their capital in Latin America, Europe and the Far East. US officials even acknowledged that the government had failed to convince private US investors of the political stability of the Middle East. 2 Consequently, some in the American business community remained doubtful of the durability of peace in the region, while others considered the economic and financial support of their governments for Egypt as being nothing more than a reward for its peace with Israel. 3 Moreover, the

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small share of US investment in Egypt was not only due to the limited size of the Egyptian market compared with the size and capacity of US corporations that prefer to invest in economies of scale, but also to the fragmentation of the regional market that was caused by the absence of Arab-Israeli cooperation and the lack of economic integration among Arab states, whose inter-trade relations did not exceed four per cent of their total foreign trade in the early 1990s.4 Other countries, most of them in Central America and the Caribbean, also invested similar amounts to that of the US. The data shows that around US$2.3 billion was invested by companies and banks located in Panama and the Cayman Islands. Asian investors exhibited the least interest in the Egyptian market, putting only US$411 million into Egypt during this 24-year period. Of this total, US$120 million was invested by Japan in 1982. Despite Egypt’s emergence as a global economic power, there was no substantial Japanese investment between 1982 and 1995. Of non-EC European countries, only Switzerland invested around US$1.4 billion. 4.2. EU FDI Flows into Egypt, 1972-1995 During the period between 1972 and 1995, the EU was the largest nonArab foreign investor in Egypt, far ahead of the US or the Asian tiger economies. The pattern of growth of EU investment was similar to that set out above. Between 1972 and 1974, EU FDI flows into the country were limited due to fear of nationalization and sequestration of foreign owned companies, as had happened during the 1960s. The first to test the Egyptian market were the Italians in 1972. The following year, German firms invested US$51.4 million in the pharmaceutical industry. In 1974, they were followed by Britain, Luxemburg and the Netherlands. By 1995, Egypt had received FDI flows from most European countries; including 14 of the 15 EU member states. Portugal was the only EC member state that did not have investments in Egypt before 1995. As shown in Figure 4.2, EU FDI flows into Egypt peaked in 1975 with US$1.6 billion, but fell dramatically to US$496.1 million the following year. This was due to concerns raised by European investors about Egypt’s investment climate; these issues were subsequently addressed in Law 32 of 1977. This figure also shows that EU FDI flows were relatively high between 1976 and 1983, with an annual average of US$560 million during those years. While the rate of FDI flows was relatively close between 1977 and 1978 at around US$880 million, investments fluctuated

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between US$923.5 million in 1980 and US$129.8 million in 1983. The next sharpest fall occurred in 1981 with a drop of 662 per cent on the previous year. This was probably due to Egypt’s internal instability after the assassination of President Sadat in 1981. Between 1984 and 1995, the EU’s total FDI flows into Egypt rose to about US$1 billion. The lowest rate of EC FDI flows was US$19.5 million in 1987, when Egypt’s economic and financial situations were at their lowest ebb. The highest rate of EU FDI flows during this period was 1992-94, with an average of US$175 million each year. This rise was probably due to the implementation of the 1991 ERSAP, sponsored by the IMF and the World Bank, as well as the introduction of privatization.

1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

US$ million

Figure 4.2: EU FDI flows into Egypt 1972-1995 1800 1600 1400 1200 1000 800 600 400 200 0

Source: GAFI

Egypt’s FDI inflows from the EU into the free zones were insignificant between 1972 and 1995. Total investments amounted to about US$48.1 million: US$20.8 million from Britain; US$8.4 million from Luxemburg, all of which was invested in 1981; US$7.4 million from the Netherlands, of which US$6.5 million was invested in 1994; US$5.6 million from Germany, of which US$3 million was invested in 1992; French investments in the free zones fell just below US$3 million for the whole period. In addition, the free zones received some investment from European countries outside the EU: Norway invested US$2 million in 1989 and Cyprus invested US$5.3 million in 1994-95. These figures show that prior to the Barcelona process of 1995, European investments in Egypt’s economic activities were limited. Only six of the 15 EU member states maintained their interest in the Egyptian market over the 24-year period under examination, and it fluctuated over

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the years.5 For instance, British FDI flows only exceeded US$100 million three times between 1972 and 1995, and this occurred only two years in row in 1979 and 1980. French FDI flows exhibited a similar pattern of fluctuation with only three successive years of investments over US$100 million (1976-78). German FDI flows into Egypt oscillated extremely, rising sharply from US$200,000 in 1991 to US$40.4 million in 1992 and disappearing entirely in 1993. Similarly, Luxemburg’s FDI flows exhibited the same pattern during the first half of the 1990s. EU member states accumulated FDI stocks valued at US$7.1 billion between 1972 and 1995. The UK had the largest share of EU FDI stocks in the country, with US$2.6 billion, followed by France with US$2 billion, while the Netherlands accumulated US$1 billion during this period. Luxemburg and Italy had relatively similar amounts of FDI stocks, with US$467.6 million and US$422.3 million, respectively. German FDI stocks accounted for US$361.6 million, making up only 0.04 per cent of total EU FDI stocks during that period. Denmark and Belgium each had around US$56 million worth of stocks, and Sweden had US$41.8 million. Finland and Spain had around US$11.5 million and US$10.6 million, respectively. Portugal was the only EU country that did not have any FDI stock in Egypt before 1995, while the remaining EC member states had only minor shares. 4.3. Static Distribution of EU FDI into Egypt, 1972-1995 Between 1972 and 1995, the data shows that the EU’s total FDI flows into Egypt were unevenly distributed by its member states. The UK, France and the Netherlands were the top three EU investors in Egypt, followed by Luxemburg, Italy and Germany, as middle ranking investors. Investments made by Austria, Belgium, Denmark, Finland, Greece, Spain and Sweden were of little consequence. However, despite being second to that of the Arab states, the significance of EU investment was great, particularly as Europe was the main source of technology transfer and management skills associated with FDI at a time when American companies exhibited little interest in the Egyptian market. Of the three main EU investors in Egypt, Britain was the largest European investor with a total FDI of US$2.6 billion between 1972 and 1995. Figure 4.3 confirms this and shows how Britain led France and the Netherlands by an estimated US$600 million and US$1.6 billion, respectively. The figure also shows that these three countries invested the majority of their FDI flows between 1974 and 1983, during which time

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each of these three countries invested significant capital flows at different times. Britain was the main investor in 1975 and 1980, France invested most of its capital in 1977 and 1978, and the Netherlands was the main investor in 1982. Figure 4.3: Three largest EU investors in Egypt 1972-1995 1200

US$ million

1000 800 600 400 200

UK

France

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

0

Netherlands

Source: GAFI

Most British capital flows centred on the financial and industrial sectors, though a noticeable shift from the former to the latter occurred in the 1980s-90s. Egypt’s industrial sector absorbed the largest share of British capital flows, with investments worth nearly US$1.4 billion between 1972-95: 94.9 per cent was invested in the pharmaceutical (58.3 per cent) and food (36.6 per cent) industries. The financial sector received just under US$1.2 billion, of which 88.8 per cent was invested in the banking in 1975, while the remaining share went to the investment sector. Tourism, services, agriculture and infrastructure received US$38.8 million, US$11.6 million, US$10.4 million and US$6.1 million respectively between 1972 and 1995. French investment in Egypt amounted to US$2 billion and almost 82.3 per cent of this was concentrated in the financial sector. As available data shows, French investors were not enthusiastic about investing in the manufacturing and services sectors. Rather, they focused on the economic sectors that could be easily withdrawn from. This was apparent in the share of the French investment in the industrial sector that received as little as US$146 million, of which 35.4 per cent, 22.8 per cent, 11 per cent, 9.2 per cent, and nine per cent went to food, building materials, chemical, pharmaceuticals and the metals industry, respectively.

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The majority of this investment went to the banking sector, which received US$1,278.3 million, while the investment sector received US$368 million. Investments in tourism and agriculture amounted to US$23 million and US$4.6 million respectively, while those in services and construction were highly insignificant. This analysis reveals not only the preoccupation of French investors with Egypt’s political and economic stability, but also of the lack of French commitment to long-term investment in the country.6 Moreover, it seems evident that French interest in Egypt was driven by a desire to create market penetration rather than financial gains and, therefore, the involvement with industry was modest.7 Dutch FDI flows into Egypt exhibited a similar pattern to that of Britain. Most investments were made in the industrial and financial sectors, with the latter receiving US$566.3 million, of which 83.8 per cent was made in the banking sector and 16.2 per cent in the investment sector. It was followed by the industrial sector that took US$427.5 million, for which building materials, pharmaceuticals and engineering received 47.4 per cent, 34.8 per cent and 15.2 per cent, respectively, making up to 97.4 per cent of the total Dutch investment in industry between 1972 and 1995. About US$5.7 million went to the food industry and US$4.2 million to chemicals, while textiles received only US$1.2 million. Unlike the other two leading EU investors, the Netherlands invested as much as US$10.2 million in agriculture, while its investment in tourism was much less than Britain and France, and stood at only US$2.6 million during the period under examination. Figure 4.4 illustrates the distribution of FDI flows by a middle-ranking group of countries. Their FDI flows were much lower than that of the top three EU investors, but the pattern of investment was also far more complex than that explained above. By contrast, Luxemburg, Italy and Germany demonstrated constant interest in the Egyptian market, even at the time of Egypt’s economic downturn. However, unlike Germany, Luxemburg and Italy made large investments and so some years they were classified as major EU investors. For instance, in 1977 Luxemburg was second only to France, which invested US$700.8 million, as its FDI flows amounted to US$121.2 million; in 1994, it invested US$122.3 million, making the largest EU investment in Egypt by any EU country, accounting for 68.1 per cent of the total EU investment for that year. In 1989, Italy’s investment of US$154.9 million accounted for 94.7 per cent of the EU’s total FDI flows

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into the country. For any given year between 1972 and 1995, although German investment was less than US$50 million, its flows continued to be relatively constant in value, particularly when compared to other countries. Figure 4.4: Middle ranked EU investors in Egypt, 1972-1995 180 160 140 120 100 US$ million

80 60 40 20 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

0

Luxemburg

Italy

Germany

Source: GAFI

Taking the size and population of Luxemburg into account, its investment was notable. Between 1972 and 1995, it invested US$467.6 million, of which US$277.9 million went to the financial sector, with 51.2 per cent of total FDI going to the investment sector, while the remaining 48.8 per cent went to the banking sector. The industrial sector received US$144.5 million; the food and chemical industry received US$121.5 million and US$20.3 million, respectively, totalling 98 per cent of investments in the entire industrial sector. Agriculture and the construction sector received relatively similar sums, with each taking around US$6.9 million. Tourism was of little interest to Luxemburg investors, receiving only US$2.1 million between 1972 and 1995. Different to Luxemburg, Italy invested more capital in the industrial sector than in the financial one. Italy invested US$216.4 million in industry, with 89.8 per cent of total investment going to engineering and six per cent went to building materials. The chemical industry and food accounted for US$5.6 million and US$2.2 million, respectively. Between 1972 and 1995, investment in the financial sector amounted to US$150.8

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million. The banking sector received 98.4 per cent of this investment, all of which was made in 1975, and the remaining 1.6 per cent (US$2.5 million) was made in the investment sector. Tourism attracted some US$6 million, while US$1.5 million was invested in infrastructure. German investors were far more attracted to Egypt’s industrial sector than their Italian counterparts. Almost 67.5 per cent of total German investment, which amounted to US$361.6 million, went into the industrial sector. The metals industry, pharmaceuticals, engineering, and chemical received US$68.6 million, US$61.2 million, US$58 million, and US$52.7 million, respectively. Altogether they accounted for 98.3 per cent of total German FDI in the industrial sector. Textiles and building materials each received US$1.5 million, while US$700,000 was invested in the food industry. Germany invested more capital in the construction sector and tourism than in the financial sector; while some US$36.8 million and US$29.8 million were invested in the former, the latter received only US$24.8 million, of which 61.7 per cent was invested in the banking sector and 38.3 per cent went into investment. Agriculture and services benefited from US$7.5 million and US$3.7 million, respectively, between 1972 and 1995.

60

Figure 4.5: EU investors in Egypt with FDI flows under US$57 million, 1972-1995

US$ million

50 40 30 20 10 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

0

Belgium Ireland

Denmark Sweden

Greece Finland

Spain Austria

Source: GAFI

Figure 4.5 shows the EU member states with FDI flows totalling less than US$57 million between 1972 and 1995. Only Portugal did not invest in Egypt during those years, while the remaining eight EU member states

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invested to varying degrees. Belgium, Denmark and Sweden invested US$55.5 million, US$56.3 million and US$41.8 million, respectively. The majority of these investments were made in specific years rather than being evenly distributed over the whole period. For example, Belgium invested 91.3 per cent of its FDI in 1980, while Denmark and Sweden made 82.2 per cent and 81.3 per cent of their investments in 1976 and 1986, respectively. This pattern also applies to Finland, Spain, Greece and Austria, which invested almost 80 per cent, 67 per cent, 69.7 per cent and 76.5 per cent of their total investments in 1978, 1981, 1977 and 1995, respectively. Ireland made a single investment of US$250,000 in the free zones in 1994. 4.4. Sectoral Distribution of EU FDI Flows into Egypt, 1972-1995 The data shows that EU FDI flows were unevenly distributed across Egypt’s main economic sectors. Figure 4.6 shows clearly that finance and industry attracted most capital flows with shares of around US$3.8 billion and US$2.6 billion, respectively, accounting for 95 per cent of total investment between 1972-95. Tourism, services, construction and ICT, and agriculture received US$161.9 million, US$82.5 million, US$62.6 million and US$40.8 million, respectively. Figue 4.6: Sectoral distribution of EU FDI into Egypt, 1972-1995 Services 1%

Construction & ICT 1%

Finance 56%

Tourism 2%

Industry 39%

Agriculture 1%

Source: GAFI

Between 1972 and 1995, the financial sector attracted 56 per cent of total EU investment in Egypt and almost all investments in this sector were made between 1975 and 1983. At the beginning of the era of

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economic liberalization, the attractiveness of the banking sector drew in around US$3.1 billion. This was due to Investment Law 43 of 1974 that authorized the establishment of joint Egyptian/foreign banking ventures for undertaking business in local currency, provided that Egyptian participation was not less than 51 per cent. The law allowed foreign banks to establish both ‘on-shore’ and ‘off-shore’ branches to deal solely in foreign currency. Accordingly, several joint banking ventures were created, including those between Chase Manhattan Bank and the National Bank of Egypt and Barclays Bank International and the Banque du Caire. 8 Other international banks such as Lloyds Bank International, the Bank of America, American Express International, First National City Bank, Manufacturers Hanover Trust and the National Bank of Abu Dhabi opened branches for dealing in foreign currency. The number of banks registered with the Central Bank of Egypt increased from 31 in 1975 to 43 by the end of 1976, with foreign and joint venture banks established under Law 43 increasing from eight to 19 banks.9 The data shows intensive European involvement in the banking sector. In 1975, two famous British financial institutions, Lloyds Bank and Barclay’s Bank, put in 33.7 per cent of all EU investment in banking, while French banks put in almost 41.2 per cent in 1977 and 1978. Dutch, Italian and Luxemburg banks also invested around US$474.7 million, US$148.3 million and US$135.7 million, respectively. German and Greek investments were minor and accounted for as little as US$15.3 million and US$4.6 million during the period under consideration. Despite these tentative financial investments from foreign banks, the Egyptian government’s failure to restructure and develop its banking sector meant that there was little further foreign investment after 1983. Due to this, some well-established international institutions, such as Lloyds Bank, were forced to withdraw from the country, which accentuated the weakness, the underdeveloped code of practice and the inefficiency of the Egyptian banking system. One could argue that the concentration of most EU FDI in the country’s financial institutions might have caused the government to fear foreign domination of its financial system and, hence, perhaps the liberalization of the banking sector was deliberately stalled to preclude that from happening. However, the slowdown of capital investment in the banking sector further added to the financial crisis of the late 1980s as well as depriving Egypt of the benefit of international financial and technological resources that could have significantly promoted the country’s economic development.

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The investment sector received much less FDI than banking did. Some 51 EU companies invested US$763.2 million, accounting for the remaining 19.5 per cent of total EU investment in the financial sector between 1972 and 1995. Unlike the banking sector, much of the capital invested in this sector came from 25 companies between 1991 and 1995. France was the largest investor with almost 48.7 per cent of total investment, followed by Luxemburg, the UK and the Netherlands, with 18.8 per cent, 17.5 per cent and 12.1 per cent. Germany, Sweden, Italy, Denmark and Belgium each invested US$9.5 million, US$7 million, US$2.5 million, US$1.2 million and US$0.6 million, respectively, accounting for the remaining 2.7 per cent of total EU FDI in this sector. While such a distribution suggests some small improvement in the Egyptian financial sector during the 1990s, it did not significantly impact on the banking sector. Between 1972 and 1995, Egypt’s manufacturing sector attracted over US$2.6 billion, with pharmaceuticals and the food industry receiving 38 per cent and 26 per cent, respectively. Each of these industries benefited from a single large investment made by British companies; this input in pharmaceuticals accounted for 78.2 per cent of total EU investment, with some US$790.7 million invested in 1980. The same applies to the food industry, in which the British share reached 73.5 per cent with US$433.3 million invested in 1979. These large investments reflected the favourable conditions of the Egyptian market for FDI between 1975 and 1984. Despite the fact that pharmaceuticals were the first industry to attract large capital flows, the majority of investments were small and, hence, their contribution to research and development was insignificant. Taking advantage of the cheap cost of labour and production materials, there was substantial EU investment into labour-intensive areas, such as the food industry.10 This sort of investment generated employment but almost all the products were consumed locally. The food industry benefited from US$687.4 million of investment made by 54 EU companies but the majority of it originated in the UK, Luxemburg and France. This industry was almost totally dominated by 33 British companies operating in the market with US$505.1 million, while Luxemburg and France had seven and two companies with investments of US$121.5 million and US$51.7 million, respectively.

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INVESTING IN THE MIDDLE EAST Figure 4.7: EU FDI in Egypt's manufacturing sector, 1972-1995 Textiles 1% Pharmaceuticals 38%

Metals 5%

Construction Materials 10%

Chemicals 6%

Wood Working 0%

Food 26%

Engineering 14%

Source: GAFI

The concentration of FDI in this industry reflected its comparative advantage in terms of labour intensiveness and the local availability of production materials. The dependence on local production materials eased the financial burdens that companies in other sectors had to face, due to having to use hard currency for the necessary imports. This was particularly important given the restrictions faced by foreign firms in obtaining foreign currency under government regulations and a fixed exchange rate. Whenever imported materials had to be purchased with hard currency at a higher rate from the black market, profit margins were appreciably reduced. It was also apparent that some industries were dominated by a single EU member state, which had either the largest number of companies operating in the country or invested the highest amount of FDI flows in a specific industry. For instance, between 1981 and 1991 the engineering industry attracted investments from 55 companies with FDI of US$367.6 million, with US$194.3 million being invested by nine Italian companies. Dutch companies were responsible for almost 72.5 per cent of total EU investment of US$279.3 million in construction materials, while German companies were the dominant force in metals and the chemical industry, with almost 30 per cent and 35 per cent of the US$144.2 million and US$154.6 million, respectively.

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Spain and the Netherlands made equal investments totalling US$14.6 million of the US$20.1 million in textiles. The Spanish investment of US$7.3 million in textiles accounted for almost 70.1 per cent of the total EU investment in this industry inland, (the whole geographical area of Egypt, except free zones) which amounted to US$10.4 million. The remaining US$9.7 million was made in the free zones by Dutch, French, Italian, British and Irish companies, which invested US$7.3 million, US$1.3 million, US$500,000, US$375,000 and US$250,000, respectively. The Dutch invested US$813,000 in textiles in 1979 and US$6.5 million in 1995. Although the manufacturing sector attracted investment from 248 EU companies, these investments did not notably contribute to improving Egypt’s industrial capacity, nor did they help the country either to build an industrial base or to become a regional platform for exporting manufactured goods. Indeed, most investments in the industrial sector aimed at import-substitution industrialization and, hence, were designed to serve the needs of the internal market. Egypt’s major industry, textiles, received no substantial capital flows. The lack of capital and technology in this important sector severely retarded the process of development and, subsequently, the export of Egypt’s famously high quality long staple cotton, thus denying the country from becoming a major exporter of textiles and clothing. The data shows that only infrastructure and agriculture were less attractive to foreign investors than Egypt’s services sector. Some 33 EU companies invested total capital flows of US$82.5 million in this sector, with US$63 million going to inland and US$19.5 million to the free zones. This investment spread over five sub-sectors, namely financial services, hospitals, consultancy, petroleum services, and general services. General services received US$60.1 million, accounting for 73 per cent of the total investment in this sector. In 1978, petroleum services received US$19.5 million, with US$16.8 million being invested by Britain’s Off Shore Oil Service in the Public Port Said Free Zone. Between 1972 and 1995, hospitals received around US$1.7 million, while financial services and consultancy each attracted as little as US$500,000. The undeveloped nature of the services sector during this period was due to a number of reasons. Most business activities had not sufficiently developed to require supporting services. Most companies operating in Egypt relied neither on consultancy nor on business and legal advice in their decision-making, particularly in regard to investment. Therefore, the

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majority of companies did not pay sufficient attention to training and human development and, thus, there was almost no demand for the services of consultancy companies during the period under consideration. These factors at least partially explain why investment in financial services, consultancy and hospitals did not occur until the early 1990s. Although during the 1970s Egypt gave high priority to ICT and the construction sector, EU investment in these areas was insignificant. Despite the growing demand for housing due to a dramatic increase in the population, the construction sector was one of the least attractive to EU investors, receiving only US$62.6 million during the whole period. This lack of investment by EU companies was due to a local monopoly over the construction sector by large Egyptian companies, such as Arab Contractors. The elevation of the chairman of Arab Contractors to a ministerial position (1974-77) further hindered the entry of EU companies into construction sector. The data shows that between 1972-77 only four European companies operated in this sector with total capital of US$8.4 million (EGP 3.3 million). Despite the urgent need to rebuild the area next to the Suez Canal for the repatriation of around half a million people, EU FDI into this sector did not commence until he was removed from office in 1977. Between 1978 and 1983, some 21 companies invested almost US$42.7 million (EGP 29.9 million) in construction but no more EU FDI came into the sector until 1995. This absence of investment prior to 1995 confirms that this sector once again favoured national over foreign investment. Infrastructure facilities such as communications and transport attracted US$11.7 million from six EU companies, most of which was invested between 1984 and 1989. British companies contributed almost 52.1 per cent (US$6.1 million) of this investment between 1987 and 1989, while Dutch, German and Italian companies each invested around US$1.5 million in 1989. There was no more EU FDI for infrastructure between 1989 and 1995, when Spain invested US$1.2 million. The inconsistent pattern of investment in infrastructure is a reminder of the lingering government mistrust of foreign involvement in the strategic areas of water, power stations and communications. Tourism did not attract European investors until the early 1990s. Over the entire period, the total investment in this sector amounted to US$161.9 million (EGP 302 million), with US$50.7 million being invested by Belgium in 1980. British, German and French investments in tourism accounted for US$38.8 million (23.9 per cent), US$29.8 million (18.4 per

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cent) and US$23 million (14.2 per cent), respectively. Italy and Denmark each invested around US$6 million, Sweden invested US$3 million, while the Netherlands and Luxemburg invested US$2.6 million and US$2.1 million, respectively. Despite Egypt’s tremendous potential for tourism due to its rich history, sea resorts and tradition, the contribution of EU investors in tourism were insignificant. Between 1972 and 1995, agriculture also suffered from a lack of EU investment. Despite being an agrarian country, Egypt attracted as little as US$40.6 million, with 50 per cent being invested by the UK and the Netherlands,11 while Germany, Luxemburg and France invested the remaining 50 per cent, amounting to US$7.5 million, US$6.9 million and US$4.6 million, respectively. This insignificant contribution in agriculture severely undermined Egypt’s competitive advantage in agricultural products, particularly for strategic commodities such as cotton and wheat. 4.5. EU Investment and Employment Levels in Egypt, 1972-1995 Between 1972 and 1995, the most significant impact of EU investment in Egypt was the creation of 275 companies, which generated 66,135 jobs. 12 Almost 67.7 per cent of these jobs were created by 165 companies established in the manufacturing sector. It was followed by tourism, where 31 companies created 6,753 jobs that accounted for 10.2 per cent of the total jobs created by EU companies. Investment in services generated 4,090 jobs, with 11 construction and ten agriculture companies resulting from the investments and creating 3,122 jobs and 2,095 jobs, respectively. The financial sector, which received the largest amount of EU FDI flows, did not record any notable employment during the period under examination. Some 86 British companies contributed to the creation of 34.8 per cent of these jobs. Together, German and French companies accounted for 33.6 per cent of the total jobs, with 14,482 jobs (21.9 per cent) being created by 56 German companies and 7,745 jobs (11.7 per cent) by 33 French firms. These three countries created almost 68.4 per cent of the total jobs. Investments made by companies from the Netherlands, Italy and Luxemburg generated 5,883 (8.9 per cent), 5,234 (7.9 per cent) and 3,729 (5.6 per cent) of jobs, respectively, collectively accounting for 22.4 per cent of jobs. Nine other EU member states created the remaining 9.2 per cent of jobs.13 Table 4.1 shows that the financial sector, which accounted for 56 per cent of the total EU investment, did not contribute to job creation and its

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impact on socioeconomic development was insignificant. This was due to the fact that most of these investments were made in existing banks and companies during the second half of the 1970s, but then stopped in the 1980s and 1990s. It also shows that manufacturing, which received 39 per cent of total EU FDI, was the leading sector for employment. Apart from the chemical industry, which generated 28.9 per cent of the total jobs in manufacturing, there was a relatively similar distribution of employment among other industries, with an average of 5,000 jobs. During the 24-year period under consideration, investment in construction materials, processed food and engineering generated 5,895, 5,583 and 5,546 jobs, accounting for 13.2 per cent, 12.5 per cent and 12.4 per cent of jobs, respectively. Metals and the pharmaceuticals industry generated 10.4 per cent and 9.2 per cent of the total jobs, while textiles and woodworking created 7.6 per cent and 5.9 per cent, respectively, as Figure 4.8 shows. Table 4.1: Number of EU companies, jobs and percentage of total jobs created by EU FDI in Egypt, 1972-95 No. of No. of jobs % of total jobs Sector companies Agriculture 10 2,095 3.2 Industry 165 44,814 67.7 Construction & ICT 11 3,122 4.7 Finance 0 0 0 Services 21 4,090 6.2 Tourism 31 6,753 10.2 Free zones 37 5,261 8 Total 275 66,135 100 Source: GAFI.

Although there is no data available on the quality of the jobs created by EU companies, the concentration of investment in such industries as chemical, engineering and pharmaceuticals indicates that a relatively high degree of specialization and training would have been provided to employees. This sort of industry is mainly based on research and technology and, hence, technological and human development represents a vital element of their competitiveness. Moreover, increasing demand in the labour market of these industries could have led to an increase in the number of professionals, engineers and scientists, which would have significantly enhanced the quality of the labour force. However, while the impact of investment in sectors such as services and tourism was

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significant in terms of job creation, it had a lesser impact on the quality of the jobs created since these sectors do not so much rely on technology as on public relations and customer services skills. 14 Altogether, the EU contribution to employment was modest when compared to the objectives set out by the Egyptian government in its first ten-year plan in 1973; this called for the creation of 11.4 million jobs by 1982. 15 This objective further increased with the fast growth rate of the population from 35 million in 1973 to 67.8 million in 1995. Figure 4.8: Jobs created by EU companies in Egypt's manufacturing sector, 1972-1995 14000 12000 Number of jobs

10000 8000 6000 4000 2000 Pharmaceuticals

Metals

Construction Materials

Engineering

Wood Working

Chemicals

Food

Textiles

0

Source: GAFI

As the above data clearly shows, between 1972-95 EU FDI flows into Egypt fluctuated sharply and were unevenly distributed among the country’s economic sectors. In 1972, it surged in response to internal political and legislative developments, and sharply increased following the multilateral initiatives of the Global Mediterranean Policy of 1972, the Euro-Arab Dialogue and the Infitah policy of 1974. However, by the early 1980s the limited scope of internal development seriously undermined European capital flows into Egypt over the following 15 years. Moreover, it was apparent that the 1977 Cooperation Agreement that governed EUEgyptian economic relations for over a quarter a century had neither narrowed the trade deficit in favour of the EU nor contributed to the country’s overall economic growth. Ultimately, the search for a new framework to govern EU-Egyptian

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economic relations became a necessity in the post-Cold War era, particularly given the growing importance of regionalism and the acceleration of globalization. The subsequent development of these dynamics increased the role of MNCs and improved the dynamics of internal markets, highlighting the importance of FDI to economic growth. Therefore, it is now necessary to examine the most recent political and economic framework governing EU-Egyptian relations - the EuroMediterranean Partnership - that took effect in November 1995.

5 THE BARCELONA PROCESS AND EURO-EGYPTIAN ECONOMIC RELATIONS

On 28 November 1995, after signing the Barcelona Declaration between the 15 EU member states and their 12 Mediterranean partners in Barcelona, Spain, the Euro-Mediterranean Partnership was established. The aim was to create a shared area of peace, stability and prosperity around the Mediterranean basin. 1 Through this partnership, Egypt became linked to the EU, one of the most powerful economic entities in the postCold War era. Not only did it enhance the credibility of the Egyptian Government and its subsequent economic policies with regard to major international financial institutions, but it also increased the confidence of foreign investors entering the Egyptian market. At the heart of this relationship are a number of policy measures designed to bring into existence a Euro-Mediterranean Free Trade Area by 2010, to encourage horizontal integration across the southern Mediterranean region, to implement the comprehensive 2001 EU-Egyptian Association Agreement, and to provide provisional financial and technical assistance to Egypt under the umbrella of the MEDA programmes. The successful implementation of these measures will eventually stimulate internal political, legal and economic reforms that are conducive to a general improvement in Egypt’s business environment. However, the growth of European capital flows into Egypt also depends on the ability of the host government to develop its political and economic systems and eliminate barriers to FDI. Unlike the Global Mediterranean Policy and the Euro-Arab Dialogue

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of the 1970s, the Euro-Mediterranean Partnership of 1995 provided Egypt and the EU with the most comprehensive political and economic framework for cooperation to date. Under this political and security umbrella, the process set out a framework for political dialogue, for peaceful resolution of disputes, for a Middle East free of weapons of mass destruction, for commitment to a pluralistic society with democracy and human rights, and for the establishment of a Euro-Mediterranean stability pact that would incorporate mechanisms for crisis prevention and crisis diffusion. These mechanisms reflected the desire of Egypt and the EU to adopt a new approach to bilateral ties in the face of evolving post-Cold War security challenges in the Middle East. The challenges were among the key issues under discussion at both the June 1994 EU Council meeting in Corfu and the summit of EU leaders in Essen, Germany, the following December. In laying the foundation for the partnership, the Barcelona Declaration set out political and security protocols for dealing with these challenges. The Declaration’s economic and financial protocol was the most dynamic aspect of the partnership. It represented the most comprehensive economic and social agreement that the EU had entered into with Egypt since its creation in 1958. It embodied the participants’ commitment to sustainable and balanced economic and social development, with the intention of realizing an area of shared prosperity. Moreover, it paved the way for a comprehensive, coherent attempt to implement large-scale political and economic reforms in the southern Mediterranean countries through economic cooperation, financial assistance and the establishment of a free trade area by 2010. 5.1. The Euro-Mediterranean Free Trade Area The creation of a Euro-Mediterranean Free Trade Area by 2010 offers Egypt the opportunity for membership in one of the largest global free trade areas. By extension Egypt gains access to a large market across Europe, the Middle East and North Africa. The free trade area objective has been central to the efforts to increase the pace of sustainable economic and social development in the southern Mediterranean states. Initial steps towards this were taken by initiating and ratifying of a series of bilateral association agreements. For example, the EU entered into bilateral trade agreements with Tunisia and Israel in 1995, with Morocco and Cyprus in 1996, with Turkey, Jordan and the Palestinian Authority in 1997, with Egypt in 2001, with Lebanon in 2002, with Algeria in 2002 and

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with Syria in 2004. These agreements operated under the conditions of free trade and in accordance with the rules and regulations of the World Trade Organization. This meant that the Barcelona process played a key role in introducing the economies of the underdeveloped Mediterranean states to the profound, structural economic changes in the global economy that have taken place since the end of the Cold War. This opportunity opened up Egypt’s economic system and enabled it to embark on a programme of economic transformation that would help it integrate into the global economic system. It can be argued that Egypt has benefited from being a member of the Euro-Mediterranean Free Trade Area because the post-Cold War international order was defined by geo-economic politics, which not only gave rise to globalization but also enhanced the process of regionalization, a process that has become a major feature of the global economic system. 2 Indeed, the creation of the Euro-Mediterranean Free Trade Area was a natural consequence of the gradual spread of regionalism, making it possible for the Egyptian economy to become a partner of the EU, as one of the three major economic blocs - the others are the North American Free Trade Area and East Asia. As a consequence of the increased competitiveness among these blocs, each has had to seek ways to strengthen its economic structure; they have resorted to various mechanisms for enhancing the capacity of the internal markets while also widening their spheres of influence to their peripheries through trade agreements and economic partnerships. In 1994, this became apparent when the 1988 Canada-US Free Trade Area was expanded to include Mexico, creating the NAFTA. In 1992, members of the ASEAN transformed their political organization into a free trade area. In Africa, several initiatives were launched, such as the Common Market of Eastern and Southern Africa (COMESA), which expanded as far north as Egypt and was comprised of 21 member nations. During the mid 1990s, the EU negotiated free trade agreements with East and Central European countries and launched the Barcelona process with the Mediterranean states. Although the degree of integration varied from one region to another, the shared objective was the elimination of trade barriers among participants and the dismantling of discriminatory policies that were directed at external trade partners. Global developments of this kind stimulated further moves towards trade liberalization. By the end of the 1990s, the Egyptian Government was negotiating five free trade areas.3 First and most importantly,

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negotiations with the EU began in 1994 and were concluded with the signing of the Egypt-EU Association Agreement on 25 June 2001. In 1997, Egypt and the US commenced discussions with a view to establishing a free trade area, but these negotiations have not yet materialized due to the strict conditions imposed by the US Government in areas such as intellectual property rights. By January 1998, Egypt and some other Arab states cooperated in the creation of the Greater InterArab Free Trade Area (GAFTA), the most viable economic arrangement established by the Arab League to date. In June 1998, Egypt became a member of COMESA,4 resulting in negotiations with Turkey that led to the creation of an Egyptian-Turkish free trade area. Although the EuroMediterranean Free Trade Area was the most important for Egyptian regional integration, the other four arrangements significantly enhanced this process. On the practical level, the establishment of the Euro-Mediterranean Free Trade Area enabled Egypt to harmonize its economic system with the functional changes that were occurring in the global economic system, particularly after the round of GATT talks in Uruguay in 1994 and the subsequent creation of the World Trade Organization in January 1995. While these institutions aimed at promoting liberalization, competitiveness and non-discrimination in international trade, based on the assumption that such policies are conducive to the national welfare of their member states, the EU-Mediterranean Free Trade Area ensured the smooth economic transition of the Egyptian economy through a scheduled timetable for the elimination of trade-related barriers. This included tariffs and customs duties on industrial goods and commodities up to 2010. This transition period for economic liberalization is vital to the social and economic stability of the country, particularly when it experiences periods of low GDP and high unemployment, as shown in Table 5.1. The transition period also facilitated the transformation of Egypt’s economic policies, positioning them to be compatible with those of the international institutions that administer the growing volume of international trade, which has doubled over the past 20 years, and with the cross-border flow of FDI, which has risen ten times faster than world production. 5 This transition period was a pre-requisite if Egypt was to integrate successfully into the global economic system, because its trade and investment strategies had to fall in line with more liberal trade policies as well as with the acceleration of deregulation and market-oriented reforms.

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Table 5.1: Selected economic indicators in Egypt 1995-2008. Real Fiscal Foreign GDP Inflation Unemployment Deficit Year Debt Growth % % (%GDP) (% GDP) Rate 1995/96 5.0 7.3 9.2 0.0 45.9 1996/97 5.3 6.2 8.8 0.9 36.7 1997/98 4.1 3.8 8.8 1.0 33.2 1998/99 5.4 3.8 8.1 2.9 31.2 1999/00 5.9 2.8 9.0 3.9 28.2 2000/01 3.4 2.4 9.2 5.5 28.5 2001/02 3.2 2.4 9.0 5.9 32.6 2002/03 3.1 3.2 9.9 6.1 35.6 2003/04 3.8 8.4 9.87 5.9 39.2 2004/05 4.5 11.7 10.5 9.6 28.9 2005/06 6.8 4.2 10.6 8.2 28.9 2006/07 7.1 10.9 8.9 7.5 29.9 2007/08 7.2 11.7 8.4 7.0 33.8 Source: Egyptian Ministry of Foreign Trade & Industry, Quarterly Economic Digest, Vol. X, No. 3, p.17; Central Bank of Egypt, Ministry of Finance, January 2009.

The framework for Egypt’s economic liberalization was provided for by the Barcelona process, especially since its declaration in November 1995 implied that signatories must pay due observance to the rule of the international trade and WTO obligations. As a result of this framework, Egypt embarked on large-scale liberalization and privatization programmes, while also putting in place effective measures for minimizing the political and socio-economic consequences of these policies. Economic reforms were compatible with these global rules and principles, such as reciprocity, market access and the transparency of trade-related and investment policies. Further measures for economic and political liberalization focused on a wide range of key economic sectors and issues, from industry, agriculture, foreign trade, and technical and financial assistance, to the environment, transport and communications, scientific cooperation, crime and money laundering. These measures simultaneously offered Egypt the opportunity to deal with domestic issues, such as legislative and regulatory rules, as well as with regional and global matters, such as south-south economic integration and attracting foreign direct investment.

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5.2. South-South Economic Integration The Barcelona Process promoted horizontal integration by encouraging economic cooperation among the EU’s Mediterranean partners. This inter-regional cooperation became a necessary precondition for the accumulation of rules of origin to be effective, which would then allow them greater access to the EU market. Not only did this condition force the southern partners to strengthen their relationship with the EU through the successful implementation of bilateral agreements but also to maximize their efforts to formulate policies conducive to inter-regional economic cooperation among themselves. The revival and reinforcement of the idea of inter-Arab economic cooperation that led to the creation of the GAFTA in 1998 was a notable success in this respect. The Barcelona Process also motivated Egypt, Jordan, Tunisia and Morocco to establish the Mediterranean Arab Free Trade Association (MAFTA) in 2001, with the aim of achieving regional free trade prior to the 2010 deadline for the establishment of free trade with the EU.6 The Agadir Declaration of 8 May 2001 underlined the commitment of these four governments to regional trade liberalization. This included the most advanced Maghreb and Mashreq countries and it was also open to other Euro-Mediterranean partners once full free trade among the four signatories had been achieved in 2006. The MAFTA attempted to achieve enhanced economic and industrial integration, encourage investment, enhance competitiveness and increase intra-regional trade in each of the four partner countries. In 2003, the EU supported this process with financial and technical assistance worth €4 million, which was provided through the Directorate-General EuropeAid Cooperation Office and the Regional Indicative Programme 2002-2004, which encouraged SouthSouth trade and integration on a sub-regional basis while introducing panEuro-Mediterranean accumulation of rules of origin and the liberalization of trade in services.7 Egypt also entered into negotiations with the non-Arab partners of the Barcelona Process, such as Turkey, to liberalize trade ties, foster economic cooperation and enhance access to the EU market. However, progress on the Egyptian-Turkish front was stalled by political considerations, in particular Turkey’s military cooperation with Israel, which was viewed as a national security threat by some Arab states, especially Syria. 8 Egypt considered these issues to be negative aspects of the Egyptian-Turkish relationship and, as such, they definitely obstructed further economic cooperation.

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Apart from political obstacles related to the breakdown in the IsraeliPalestinian peace process, the GAFTA was also impeded by several legal and practical hurdles that threatened the development of an inter-Arab free trade area. On the one hand, the treaty lacked precise definitions and failed to specify exactly which products were excluded from the evolving trade liberalization. This was notable in its first year of existence when ten member states listed almost 600 commodities and goods to be exempted from free trade regulations.9 Also lacking effective enforcement mechanisms, the treaty allowed some member states to delay, or postpone, their trade liberalization programmes beyond agreed deadlines. The GAFTA suffered from the contrasting visions adopted by the Arab League’s Economic Council and its Social and Economic Council on how to revive the fragmented Arab economic system. While the latter promoted economic cooperation through trade liberalization and the gradual establishment of a new Arab free trade area, the former insisted on the need to revive and ratify the Arab Common Market, which had been introduced by President Nasser in 1964. Ultimately, this effort proved unworkable in the face of numerous political difficulties including the 1967 Arab-Israeli war, the Lebanese civil war of the 1970s and the splits inside the Arab League following the Egyptian-Israeli peace treaty of 1979 and the 1990-91 Gulf crisis. Moreover, inter-regional cooperation has been hampered by the fact that most Arab and Mediterranean states produce similar commodities in terms of composition, quality standards and technological and manufacturing techniques. They have a limited industrial base, which renders their share of manufacturing goods as a percentage of foreign trade very small. In 1997, the average percentage of the industrial sector share of GDP varied between 6.7 per cent and 11.2 per cent in the Arab region. Since then, of the 22 Arab countries, only Tunisia, Egypt and Morocco have managed to improve their industrial performance with their industrial sectors accounting for 19.5 per cent, 18.2 per cent and 18 per cent of GDP, respectively, in 2005.10 These two factors - the production of similar commodities and a limited industrial base - have to be overcome if inter-Arab economic integration is to be successfully implemented in accordance with the rules of free trade. Since the 11 September 2001 terror attacks on the US, another major challenge to inter-regional cooperation has been the preoccupation of Arab and Middle Eastern governments with regime protection and the consolidation of their domestic position at a time of both external and

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local demands for a move towards greater democracy and political freedom. The preoccupation of these governments with their political survival has definitely slowed down the implementation of structural adjustments and liberalization programmes. Political instability in the region forced some governments to concentrate the formulation of their national economic policies on ways of dealing with short term challenges rather than with long term strategic goals; consequently, there has been little serious focus on the modernization of legal, regulatory and administrative systems. Such a limited approach to economic liberalization across the Mediterranean countries made the prospect of regional integration less likely to match the expectations of either their people or their European partners who, through MEDA programmes, have provided substantial financial and economic assistance to support reforms, which are essential if horizontal integration is to occur. 5.3 EU Financial and Technological Assistance to Egypt Prior to the Barcelona Process, EU financial and technical assistance to Egypt was channelled through four bilateral protocols, each for a fouryear period, and concluded on the basis of the 1977 EEC-Egypt Cooperation Agreement.11 After 1996 all new projects in Egypt were funded by the MEDA programme.

Financial Protocols Table 5.2 shows that EU funds allocated to Egypt increased progressively from protocol to protocol and tripled between 1977 and 1996. During this period, most of the funding was designated for agriculture and the environment, although funds for economic cooperation, energy, industry, scientific cooperation, and health were also included in the protocols. The total funds made available to Egypt in the form of grants amounted to €661 million. European Investment Bank (EIB) lending provided €802 million during the same period, making a total of €1.463 million. 12 However, despite the concentration of funds in agriculture and the environment, progress in these sectors did not live up to expectations. Agriculture was hampered by poor access to irrigation and water across large areas, by the insufficiency of financial resources to updating and upgrading agricultural production, by the lack of a systematic approach to increased export of agricultural products, by the slow development in the agricultural processing industry and by continued migration and

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unbalanced development between urban and rural areas. Progress on environmental issues was hindered, on the one hand, by the lack of balance between preserving natural and historical sites and, on the other, of promoting tourism. The environment suffered at the expense of tourist development, particularly due to the construction of tourist resorts, holiday developments and hotels. Table 5.2: EC Financial protocols to Egypt 1977-1996 (€ million) Financial Protocols EU Grants EIB Loans Total Protocol I (1977-81) 77 93 170 Protocol II (1983-86) 126 150 276 Protocol III (1988-91) 200 249 449 Protocol VI (1992-96) 258 310 568 Total 661 802 1.463 Source: Delegation of the EU Commission in Egypt, Annual Report 2001, p.9.

The MEDA Programme Under the umbrella of the Barcelona Process, EU financial and technical assistance to Egypt has been provided through a new financial policy framework called MEDA. MEDA funds support policy-led national programmes of structural reform and liberalization through integrated sector-wide programming. The bilateral implementation of EU financial and technical assistance to Egypt under MEDA was covered in a Framework Convention signed in February 1998. While funds were essential for the implementation of projects, considerable technical assistance proved to be valuable in assisting small and medium-sized Egyptian enterprises to comply with new environmental legislation. According to the annual report of the delegation of the EU Commission in Egypt in 2001, the MEDA programme was the EU’s principle financial tool for implementing the Euro-Mediterranean Partnership, with some 86 per cent of the resources allocated to MEDA being bilaterally channelled to partner countries, while 14 per cent were devoted to regional or horizontal activities, from which all parties can benefit. These financial resources attempted to support the implementation of the Association Agreement through: 1. Support for economic transition by increasing competitiveness and the development of the private sector in order to increase competition in the domestic and international markets. 2. Strengthening the socio-economic balance by alleviating the short-term costs of economic transition with appropriate measures in social policy.

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Regional cooperation by complementing bilateral activities with measures for strengthening cooperation at the regional level. 13 One of the ways in which the MEDA programme was most dynamic is that its funds were designed to mobilize its own resources in order to achieve sustainable structural changes. Despite the progress made in projects intended to foster economic transition and socio-economic balance, so far this dynamism has not helped Egypt achieve the targeted sustained economic growth above seven per cent per annum. However, compared with the financial resources made available under previous financial protocols, progress has been made through a significant increase in financial cooperation via the MEDA programme, signed in February 1998.

MEDA I Funding MEDA I (1996-2000) attempted to prepare Egypt for the new Association Agreement. It provided financial and technical support for projects that deal with economic transition and increase competitiveness in Egyptian industries, as well as those that alleviate the negative effects of employment and social reform. Under MEDA I, the EU provided some €3,435 million to the 12 non-EU participants in the Barcelona Process, of which Egypt received €615 million - 17 per cent of the total funds. MEDA I also provided around €38.7 million to Egypt for EIB interest rate subsidies. Table 5.3 shows that Egypt’s funding was divided between four large MEDA programmes - education enhancement, health reform, social development and industrial modernization. In respect of Egypt’s economic transition, the EU financed three key programmes that amounted to around €100 million during the second half of the 1990s. The Private Sector Development Programme, the Public Enterprise Reform and Privatization Programme and the Banking Sector Reform Programme absorbed around €45 million, €43 million and €11.7 million, respectively. The fourth programme was the Industrial Modernization Programme, which commenced in 2001 with total grant funding of €250 million. The previous Private Sector Development Programme and the current Industrial Modernization Programme not only represented a commitment by Egypt and the EU to modernize Egypt’s industrial base but also provided a good model for the continuity of policy-led cooperation. These programmes helped Egypt prepare for increased competition following the dismantling of import tariffs under the new Association Agreement.

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Table 5.3: EU funds to Egypt: MEDA I, 1996-2000 (€ million) Project Number EG/B-7-4100/IB/97/0011 EG/B-7-4100/IB/1050/98 EG/B-7-4100/IB/97/0361 EG/B-7-4100/97/0733 Total fund for projects

Programme Title Education Enhancement Programme Health Sector Reform Programme Social Fund for Development Phase II Industrial Modernization Program EIB Interest Rate Subsidies EIB Risk Capital

Total Fund granted Source: European Union, Annual Cooperation Report Egypt 2003, p.23.

Amount allocated 100 110 155 250 615 38.7 30 683.3

Under MEDA I, government-led policies that dealt with social inequality, creating employment and the restructuring of service delivery in order to increase efficiency and enhance quality, received substantial funds from the EU that were distributed as follows: 1. The Education Enhancement Programme received €100 million to improve the basic education system at primary and preparatory levels. 2. The Health Sector Reform Programme received €110 million, with €10 million for the Support to the Population Programme in Upper Egypt - a family planning initiative. 3. The Social Fund for Development which received €155 million.

MEDA II Funding The MEDA II programme (2001-05) allocated €5.35 billion to Mediterranean states participating in the Barcelona Process in order to support their industrial development and ease balance of payments pressure in the course of their economic transition. Concomitantly, the contribution of the EIB was €6.4 billion, in addition to €1 million for transnational projects. As for Egypt, its Country Strategy Paper (CSP), which includes the National Indicative Programme (NIP) adopted in December 2001, defined key priorities such as the private sector, improving the socioeconomic balance, strengthening civil society, the environment, energy, transport and structural adjustments. According to its NIP, the indicative value of grants received by Egypt during 2002-2004 was €332 million, including up to €41 million in interest rate subsidies on loans made to Egypt by the EIB.14

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In order to support the process of economic transition, stability and balanced socioeconomic development, much attention has been paid to promoting the implementation of the Association Agreement. In 2003, the Trade Enhancement Programme (TEP) was launched to promote effective implementation of the Association Agreement. TEP-A provided €20 million in technical assistance for upgrading the capacity of Egypt’s Ministry of Foreign Trade in critical areas, such as commercial representation, export promotion, and trade facilitation. TEP-B provided €40 million for encouraging and accelerating the implementation of policies and reforms with the aim of reducing the cost and duration of foreign trade operations, particularly export, import and the transit of goods. TEP-C provided €6 million to support Egypt’s effort to reform customs, in particular the streamlining of customs procedures and the reduction of non-tariff barriers in order to enhance foreign trade. 15 Furthermore, in 2003 €80 million was provided through the Spinning and Weaving Restructuring Programme (SWRP) to assist Egypt in restructuring its critically vulnerable and socially-sensitive spinning and weaving sector. A project worth €2 million was also launched to provide limited technical assistance and equipment to reinforce the Egyptian administration’s capacity to prepare the implementation process and raise awareness of the challenges and opportunities posed by the agreement. MEDA II also provided support for the process of economic transition through three pivotal programmes. The most important of these was the Financial and Investment Sector Reform Programme, which provided €15 million for improving financial sector supervision and its responsiveness to the needs of savers and borrowers in a modernizing economy. This programme was sub-divided into three projects: FISCRural, FISC-Social (agreed to in 2003 and signed in 2004), and FISCFinancial which was agreed to in 2004. The Technical and Vocational Educational Training Programme provided €33 million to support reform in Egypt’s training and vocational system and to ensure that Egyptian enterprises have access to better trained work forces, and the competitive skills required to meet the challenges of a modern economy. Finally, the third, the Trans-European Mobility Scheme for University Studies (TEMPUS) Programme, was extended to the Mediterranean countries in June 2002 and, over a two year period €11 million was earmarked for Egypt in order to enhance its higher education system by developing inter-university cooperation between universities in Egypt and the EU. In 2002, some 12 joint European partnership projects were

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selected and established in October 2003, with some 61 applications being received for the academic year 2004-2005.16 The Integrated Local Development Programme for South Sinai, designed to support stability and sustainable and balanced socio-economic development, received €64 million for promoting sustainable, diversified and environmentally sensitive economic activities in the area, while Support for Social Development and the Development of Civil Society programmes received €20 million for reducing poverty and enabling the Ministry of Insurance and Social Affairs to facilitate the social re-integration of five categories of children at risk, such as girls with no access to education, girls at risk of female gentile mutilation, street children, working children and disabled children. Table 5.4: MEDA II funds to Egypt, 2002-2004 (€ million) Programmes Projects Starting Date Funds Trade Enhancement August 2002 66 Effective Programme (A-B-C stages) (5 years) (20+40+6) Implementation Spinning & Weaving of the 2004 80 Restructuring Programme Association Promotion of the Agreement 2004 2 Association Agreement Technical & Vocational 2004 33 Training (6 years) Support for Economic TEMPUS 2003 11 Transition Financial & Investment 2004 15* Sector Reform Integrated Local Development Programme 2004 64 for South Sinai Balanced Socioeconomic Support for Social Development Development and the 2004 20 Development of Civil Society Total 8 projects 291** (3 programmes) Source: Delegation of EU Commission in Egypt, EU-Egypt Cooperation, 2005. * This figure was set at €52 million in the EU Annual Report Egypt 2003, p.27. ** Figure does not include €41 million towards EIB interest rate subsidies.

MEDA Regional Programmes (MRPs) Egypt has undoubtedly benefited financially from MEDA regional programmes that have attempted to deal with problems common among many Mediterranean partners and to reinforce bilateral cooperation,

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enhancing North-South cooperation and the tackling of issues of a transnational dimension. In 2002, MEDA regional payments accounted for €61 million. This almost doubled in 2003 to reach €112 million. According to the Regional Strategy Paper 2002-2006, the objectives of the regional programmes were to make the Euro-Mediterranean Free Trade Area a reality, to promote regional infrastructure initiatives, enhance the Rule of Law and Good Governance, and bring the partnership closer to the people. As indicated in Table 5.5, the MRPs committed around €669.8 million to these priority projects and Egyptian institutions were active participants in them.

The Industrial Modernization Programme (IMP) Egypt’s Industrial Modernization Programme attempted to revitalize national industry through technical and financial support provided by the Government of Egypt and the EU.17 It was the largest programme to be implemented and financed outside the EU, with a budget of €250 million from MEDA I funding and €106 million from the Egyptian government. The programme attempted to promote GDP growth and competitiveness of the private enterprise sector, with special emphasis on small and medium sized enterprises in the context of economic liberalization and internationalism. The IMP also attempted to create a competitive and sustainable policy framework within which ‘the private sector can grow, generate more FDI to increase investment and technology transfer, develop innovation and technology which is a key for future growth and development, and to help modernize the Ministry of Trade and Industry to better serve the changing needs of the private sector’.18 In other words, the objective of the IMP was to prepare the industrial sector for the challenge that would follow the introduction of free trade conditions and exposure to global markets through the modernization of its production methods, management and employment skills, and quality standards required to meet European specifications. The IMP also attempted to create a competitive and sustainable policy framework within which ‘the private sector can grow, generate more FDI to increase investment and technology transfer, develop innovation and technology which is a key for future growth and development, and to help modernize the Ministry of Trade and Industry to better serve the changing needs of the private sector’.19 In other words, the objective of the IMP was to prepare the industrial sector for the challenge that would follow the

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introduction of free trade conditions and exposure to global markets through the modernization of its production methods, management and employment skills, and quality standards required to meet European specifications. Table 5.5: MEDA Regional Programmes for Mediterranean states 1996-2005 (€m) Programmes Projects Fund FEMISE 6.3 MEDATAT 50 UNIMED Business Network 2.5 Making EMFTA a 1 Reality Industrial Cooperation 30 EU-Med SMEs Cooperation 2.8 Risk capital Resources 250 Transport Programme II

2

3

Promoting Regional Infrastructure Initiatives

Enhancing the Rule of Law & Good Governance

Cooperation in Energy Water Management Water Information Information Society (EUMEDIS) Environment II Private participation in Infrastructure

13.8 40 3.3 65 36

Good Governance & Rule of Law

6

Network of Foreign Policy Institutes Malta Diplomatic Training Seminars Human Rights & Democracy Euromed Heritage

Euromed Audiovisual Euromed Youth Action Euromed Dialogue: Information and Communication Total 4 21 Source: EU Annual Report Egypt 2003, pp.30-32. 4

Bringing Partnership closer to the People

20

2.6

2.5 36 57 20 16 10 669.8

To achieve this objective, in 2000 the Industrial Modernization Centre (IMC) was established by Presidential Decree 477, to act as the focal point for ensuring that Egypt became a strong player in the global market place as well as to deliver support to various enterprises. 20 Though the role of the IMC is largely advisory, its cooperation with partners such as

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Technology Centres, Business Representative Organizations and R&D institutions has deep implications for the structure and functioning of enterprises, particularly when their access to funds has been linked to an improvement in their competitiveness. Over the past ten years, both the Integrated Technical Assistance (ITA) and Business Resource Centres (BRCs), which are strategic delivery arms of the IMP, provided significant technical and practical support services to a large number of SMEs particularly, in the food industry; however, the effectiveness of their services remains difficult to assess. The Egyptian Government founded the Carroll Growth Investment through the IMC in order to attract foreign investment to industrial projects. It invested €6 million in this vehicle and managed to attract a further US$20 million in early 2005.21 Some leading private sector companies have also assumed an active role in the development of Egyptian industry. Concord International Investments invested US$35 million in industrial projects, which included the purchase of 56 per cent equity in Bisco Misr in early 2005.22 However, the success of the IMP largely depends on its capacity to redefine its general objectives and to increase its financial resources for coping with the demand to modernize a wide range of private sector enterprises in various industrial areas.23 It also depends on both the willingness and the capacity of large private sector companies to play an active role in the industrialization programme by investing more in industrial projects than in services. The exclusion of public or state-owned majority shareholders from the IMP sheds some light on the limited scope and capacity of the programme to modernize the public sector economy, which is of extreme importance to the national economy.

European Investment Bank (EIB) Lending to Egypt Prior to the Barcelona Process, the EIB provided Egypt with loans worth €802 million to finance projects relating to rebuilding the infrastructure of the country, while placing particular emphasis on assisting Egypt’s private sector and, in particular, on dynamic small and medium sized companies. It also allocated special additional loans in the form of risk capital contributions of €30 million and extra loans of €325 million, which brought the total EIB lending committed under Protocols and its own resources to around €1,157 million.24 During Protocol I (1977-81), the EIB provided some €93 million; the Suez Canal Authority received €25 million, Shoubra El Kheima (€25

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million), DIB I Global Loan (€15 million) and Abu Qir Gas Development (€28 million). During Protocol II (1983-86), the bank provided around €150 million of its own resources to finance projects in the energy and cement sectors, and €3 million on risk capital resources from the EC budget. These loans were extended during Protocol III (1988-91) to €248.9 million of the EIB’s own resources and they covered projects in the agri-business, manufacturing, water and sanitation, gas and energy and tourism sectors. The bank also provided around €11 million on risk capital resources from the EC budget, of which €3 million each went to the Alexandria Tyre Factory and Misr Compressor Factory, €2 million to the Winter Palace Hotel, and €1.5 million to Jardins du Nil. During protocol IV (1992-96), EIB loans to Egypt rose to around €651 million, including €310 million of the bank’s own resources, €16 million loans on risk capital resources and €325 million (loans offprotocol) from the Horizontal Facility for Mediterranean regional and environmental projects.25 These loans financed investments in sanitation, air transport, steel and aluminum production, highways and energy, pollution abatement, cement, ceramics production, tyres, compressor and industrial gases, gas pipelines, oil refining, printing, irrigation as well as small and medium sized enterprises; all of these were provided via public and private commercial banks that managed resources on behalf of the EIB. Under the Euro-Med framework signed in July 1997, the EIB committed €1.3 billion to non-EU Mediterranean partners; Egypt received €411 million of soft loans provided under favourable conditions, of which €382 million were in the form of long-term loans from the bank’s own resources. Almost €100 million of this was invested in the Suez Oil Refinery, €150 million was divided equally between EgyptAir and ANDSK II Flat Steel Plant, €45 million was invested in two projects in ECC Grey Cement, €46 million was designated for two projects in GASCO Gas Pipeline, €25 million went to Red Sea hotels, and €16 million was invested in Lecico Ceramic.26 The EIB also provided €29 million in the form of risk capital contributions from EU budgetary resources (MEDA I), of which €25 million was invested in a competitive upgrading of Egyptian enterprises and the remaining €4 million was invested in Lecico Ceramics. Under MEDA II, between 2000 and 2001 the EIB allocated €330 million in loans to support infrastructural projects in water, energy and transport; the Cairo North Power Plan I benefited from loans worth €150

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million, €30 million was invested in the Industrial Development Bank of Egypt Global Loan II (IDBE GL II), and €150 million was divided equally between the National Drainage Programme, the Industrial Development Bank of Egypt Global Loan III (IDEB GL III) and the Cairo Metro Line II Extension. Established in May 2003, the Facility for EuroMediterranean Investment and Partnership (FEMIP) made it possible for Egypt to benefit from financial and technical assistance provided by the EIB. Between 2003 and 2006, the bank allocated €105 million for technical assistance to FEMIP partners; €54.7 million of this was spent during 2003-2004, with €12.6 million going to Turkey, €22.8 million going to the Maghreb countries and €19.3 million going to the Mashreq countries.27 Table 5.6 shows that the majority of assistance was allocated to areas of traditional concern to the bank, such as the environment, water and infrastructure. Table 5.6: FEMIP TA support to MENA countries in 2003-2004 (€ million) Sector Maghreb Mashreq Turkey Total Environment/ Water

9.8

7.7

Infrastructure 8.0 6.5 Industry/Finance 3.8 4.5 Human Capital 1.2 0.6 Total 22.8 19.3 Source: EIB, Report on FEMIP TA Support Fund, 2005.

4.4

21.9

2.7 5.5 12.6

17.2 13.8 1.8 54.7

The EIB also planned to invest between €8 billion and €10 billion in MENA countries by 2006, via existing Mediterranean lending mandates, risk capital resources from the EU budget, and investment aid funds provided by the EU. Such assistance proved vital to Egypt’s economic transition as the EIB gave special priority to the development of private sector economic activities and to projects that contributed to the creation of a favourable climate for private investment.28 In line with this objective, the FEMIP Trust Fund (FTF) was established at the end of 2004, with a budget of €30 million; it focused on small business lending, the provision of privatization services and mainstream technical assistance activities. The EIB office in Cairo was active in coordinating the first FTF project on ‘How to Improve the Efficiency of Worker’s Remittances’, which was approved by the FTF Assembly of Donors in January 2005. 29

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5.4. The EU-Egypt Association Agreement of June 2001 The conclusion and signing of the Egypt-EU Association Agreement on 25 June 2001 has been the most important and dynamic development in Euro-Egyptian relations since the Barcelona Declaration was agreed in 1995. Ratified in 2004, the agreement is expected to govern the economic relationship between Egypt and the EU until the two parties reach total liberalization of their trade in goods, services and capital by 2020. The dynamism of this agreement not only rests in its predominant concern with trade liberalization, which includes the free movement of industrial, agricultural, fisheries and processed agricultural products, but also in the wide scope of issues of prime importance to the interests of both participants. The agreement covers political dialogue, foreign policy coordination, security cooperation, economic and financial cooperation, social and cultural cooperation, the environment, transport and telecommunications, technology transfer, the exchange of information, human rights, the fight against drug trafficking, terrorism, organized crime and money laundering. In economic terms, this agreement aims to strengthen Egypt’s trade relations with the EU, which as the country’s main trading partner represented 34 per cent of Egypt’s total trade with the rest of the world in 2008.30 At the time of the ratification of the agreement, the EU’s total exports to Egypt were around 40 per cent and imports around 34.6 per cent of total trade. Therefore, the creation of the Euro-Mediterranean Free Trade Area is expected to foster the trade relationship and to narrow the trade deficit that currently favours the EU, as seen in Table 5.7. There is growing optimism due to the gradual increase in Egypt’s export quotas in agricultural commodities and products. 31 For instance, while the agreement eliminated all tariffs on industrial goods exported to the EU immediately after its ratification, it waived tariffs on such commodities as new potatoes (exports allowed between 1 January and 31 March each year) from 130,000 tonnes in the first year, to 190,000 tonnes in the second year, and to 250,000 tonnes in the third year. Also applying to frozen vegetables, this quota increased by a thousand tonnes annually in the first three years after the agreement came into force. This has reduced the cost of Egypt’s imports from the EU markets, particularly since the introduction of the Euro as a unified currency across the EU member states (except Britain, Sweden, Denmark, and the ten new member states), which led to stability in financial dealings and transactions. Now, Egypt also benefits from the increased size of the EU market following of its

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enlargement in 2004, which increased its consumption capacity and its population to around 450 million people. Table 5.7: Egypt’s trade balance with the EU, 1996-2008* (US$ million) Balance of Trade 1996 1614 4714 6328 -3100 1997 1555 5050 6605 -3495 1998 1192 5960 7151 -4768 1999 1236 5668 6904 -4432 2000 1900 4803 6703 -2903 2001 1311 3773 5084 -2461 2002 1304 3339 4643 -2035 2003 2026 2801 4827 -775 2004* 2736 3593 6329 -857 2005* 3629 4760 8389 -1131 2006* 4649 4789 9438 -140 2007* 4703 6209 10912 -1506 2008* 9261 14396 23657 -5134 Total 37116 69855 106970 -32737 Source: Ministry of Foreign Trade and Industry, International Trade Unit, Cairo, Egypt, 2004 & 2009. * Figures for 1996-2003 represent Egypt’s trade with EU15, while for 2004-2008 they represent trade with EU27. Year

Exports

Imports

Total Trade

Notably, while the agreement guaranteed constant EU financial assistance to Egypt, it also provided the most effective legal and institutional mechanism for consultation and settlement of trade disputes between Egypt and the EU. For example, in the event of serious difficulties in relation to a given issue or product, the situation may be reviewed within 30 days by the Association Committee and/or the Association Council, whose decisions are binding on both parties. 32 Trade issues that are not thoroughly explained by the agreement can be resolved in accordance with the provisions of the WTO and the GAAT of 1994. For disputes concerning balance of payments, the agreement demands that Egypt and the EU implement restrictive measures in conformity with the conditions laid down within the framework of the GATT and Articles VIII and XIV of the Statues of the International Monetary Fund. Regular meetings and consultations by officials and experts were convened to arrive at this institutional mechanism in order to consolidate and facilitate the movement of capital between the EU and Egypt and to achieve its complete liberalization as soon as the conditions are met.

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The impact of the recent agreement on European direct investment into Egypt depends largely on the capacity of the agreement to assist Egypt in improving its economic performance and in bringing about fundamental structural changes in the country’s economic system. As for FDI, the most important dynamic of this agreement was its affirmation of the ‘free circulation of capital for direct investment made in companies formed in accordance with the laws of the host country, and the liquidation or repatriation of these investments and of any profit stemming thereafter’.33 This affirmation was followed by the call to increase the flow of capital, expertise and technology to Egypt in the following ways: 1. Appropriate means of identifying investment opportunities and information channels on investment regulations. 2. Providing information on European investment regimes (such as technical assistance, direct financial support, fiscal incentives and investment insurance) related to outward investments and enhancing the possibility for Egypt to benefit from them. 3. A legal environment conducive to investment between the two parties where appropriate, through the conclusion by the member states and Egypt of investment protection agreements, and agreements to prevent double taxation. 4. Examining the creation of joint ventures, especially for SMEs and, when appropriate, the conclusion of agreements between member states and Egypt. 5. Establishing mechanisms for encouraging and protecting investment.34 The Association Agreement also encouraged cooperation between the EU and Egypt for planning and implementing projects that demonstrate the effective acquisition and use of basic technology (Article 43), the use of standards (Article 47), the development of human resources and job creation, especially educational and vocational training that improves the skills and quality of the Egyptian labour market (Article 42). Although this encouragement was apparent in joint governmental projects or policy-led programmes designed by the Egyptian Government and financed by the EU in areas such as the environment and infrastructure, the approach has not yet involved the participation of small and medium-sized private enterprises. By addressing issues so fundamental to the attraction of FDI as a developed infrastructure, the agreement focused primarily on cooperation that leads to sustainable development in economic sectors,

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such as the environment (Article 44), transport (Article 51), information and telecommunications (Article 52), and energy (Article 53), in particular renewable energy. Moreover, the agreement addressed basic principles of concern to foreign investors in Egypt, such as the rule of law, adequate and effective protection of intellectual property rights (Article 37), standardization (Article 47), cooperation with harmonizing methodological procedures in order to create reliable statistics and data (Article 56), scientific and technological cooperation particularly in innovation and Research and Development (Article 43), simplifying the procedures of the customs systems (Article 55), and the quality of financial services, particularly the improvement of accounting, supervisory and regulatory systems of banking, insurance and other parts of the financial sector in Egypt (Article 49). No less important, the agreement also paid attention to significant social matters. Article 62 of the agreement addresses the rights and well being of Egyptian and European nationals who legally reside and are employed in the territory of the other party and seeks to ensure the free movement of labour while also improving working conditions and protecting the social security rights of their workers. 35 Such measures have not only addressed the concerns of European managers and employees in Egypt but have also effectively put in place ways of dealing with the issue of illegal immigration, which is of great concern to EU member states. Some of the measures set out in Article 65 call for: 1. Improving living conditions, creating jobs and income generating activities, and developing training in areas from which emigrants come. 2. Promoting the role of women in economic and social development. 3. Improving the social protection and healthcare systems. 4. Implementing and financing exchange programmes for groups of Egyptian and European young people, with the view of promoting mutual knowledge of their respective cultures and fostering tolerance, which was a primary aim of the 1970s EAD. This shows clearly that the Barcelona Process provided an opportunity for Egypt as well as other MENA countries to enhance economic cooperation with the EU. Indeed, this process has contributed to the significant development of Egypt’s economic environment not only on the national but also on the regional level by promoting horizontal

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integration. The agreement is expected to encourage more foreign investors to set up export-oriented industries in Egypt to target the EU and other markets that Egypt has free trade agreements with, such as the GAFTA and COMESA. By streamlining the rules of origin of the EU partner countries, diagonal accumulation with these partners will be possible and, thus, will boost intra-Arab trade and investment. How and to what extent this process impacted on the growth of European direct investment into Egypt is the main focus of the following chapter.

6 DISTRIBUTION OF EUROPEAN DIRECT INVESTMENT IN EGYPT, 1996-2008

Do free trade agreements or economic partnerships impact on the growth of FDI? The answer may vary according to the nature and scope of the trade agreement, to the objectives and expectations of the agreement, to the instruments of foreign trade and investment policies, and to the political agenda and economic priorities of the partner countries. Indeed, the 1995 Barcelona Process raised high expectations among academics, government officials and the public that this partnership agreement would lead to a significant increase in the economic growth of Egypt and the wider Middle East and North African (MENA) countries. As discussed earlier, the EU-Egyptian partnership contributed to an improvement in Egypt’s political, economic and trade relations with the EU, as well as their financial and technical cooperation. As a result of this partnership, Egypt was integrated into a vast regional market, making the country an attractive destination for foreign investment. This agreement also led the government to introduce a wide range of reforms in domestic politics, including the legal system, regulatory frameworks and administrative procedures that increase transparency and facilitate the efficient incorporation and operations of foreign and local companies. These reforms have contributed to an improvement in the Egyptian investment environment. In order to examine the extent to which this partnership has impacted on the growth of European direct investment in Egypt, the primary focus of this chapter is on the growth levels of European capital flows into the

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country in terms of static and sectoral composition between 1996 and 2008. The rising role of the EU as a major source of global capital flows since the mid 1990s is examined in order to determine whether this development has positively affected the growth levels of European direct investment in the Mediterranean region, in particular Egypt. This is followed by a detailed analysis, using primary data from the General Authority of Investment and free zones (GAFI), Egypt, to explain the country origin of EU investment in Egypt, highlighting the hierarchical structure of the main European investors in the country and the levels of their capital flows, as well as their geographical allocation in inland and the free zones during the Barcelona era. The data is analyzed statistically to determine the extent to which each member state of the EU contributed to the overall growth of FDI inflows in Egypt. It is also used to analyze the sectoral distribution of EU capital flows in the economy and to examine whether or not the pattern of distribution exhibited during this period led to a significant degree of growth or specialization in specific industries or economic activities. 6.1. The EU’s Rising Role in Global Investment Since the mid 1990s, the EU has emerged as the main source of capital flows worldwide and became the world’s largest global investor. This was first achieved in 2000, when Britain overtook the US as the world’s leading individual investor.1 This role was reaffirmed in 2002 when Luxemburg became the world’s top investor and recipient of FDI flows.2 Figure 6.1 shows that prior to this achievement, EU direct investment had appreciably increased in terms of inward and outward flows between 1996 and 2000. This trend declined sharply in 2001 due to the general downturn in the global economy, gradually decreasing over the next three years and hitting a point close to the low in late 1997. Between 2004 and 2007, the EU made a remarkable recovery in both inflows and outflows, before again declining in 2008, due to the global financial and economic crisis that began in the US as a result of the sub-prime mortgage debacle.3 The data shows an unprecedented rise in EU FDI outflows, which reached a historic record of US$1,142,229 billion in 2007. This figure represented 67.5 per cent of all FDI outflows from developed counties in that year. Similarly, FDI inflows also increased fourfold from US$196,100 billion in 2004 to US$804,290 billion in 2007. The data shows that global FDI flows in the EU increased by 595 per cent during the first five years of the Barcelona era, from US$113.3 billion

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in 1996 to US$674.5 billion in 2000. This was due to an improvement in the EU’s economic performance and the strengthening of its macroeconomic indicators, as well as the introduction of the Euro in 1999, which underscored the significance of reducing transaction costs and the fact that greater price transparency facilitates and accelerates capital flows and cross-border M&As.4 This growth was also due to European political stability, market size, and a well-established infrastructure, advantages that allowed the Community to attract almost half of US FDI outflows by the late 1990s.5 Japanese companies were also attracted to the Euro zone because of the stability of its exchange rates. Figure 6.1: EU inward and outward FDI flows 1996-2008 1200

US$ billion

1000 800 600 400 200 0 96

97

98

99

00

01 Outflows

02

03

04

05

06

07

08

Inflows

Source: UNCTAD, World Investment Reports, 2003, 2005, 2008 & 2009

Between 1996 and 2000, almost all EU member states recorded a sharp increase in their FDI inflows. Germany was the largest recipient of FDI inflows in the EU during the peak period; this increased from US$6.5 billion in 1996 by 188 per cent, 378 per cent, 862 per cent and 3,051 per cent in 1997, 1998, 1999 and 2000, respectively. Next came the UK, where the share increased sharply from US$24.4 billion in 1996 by 136 per cent, 305 per cent, 361 per cent and 487 per cent in 1997, 1998, 1999 and 2000, respectively.6 In 1999, Belgium and Luxemburg combined were the largest recipient of FDI inflows with a record US$119.7 billion. The share of FDI inflows for the Netherlands and France increased from US$16.6 billion and US$22 billion in 1996 to US$63.8 billion and US$43.2 billion in 2000, respectively. Ireland did particularly well during this period as its inward flows increased from US$2.6 billion in 1996 to US$25.8 billion in 2000. However, between 2001 and 2004, there was a decline in FDI inflows in

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the EU, with Denmark, Germany, the Netherlands and Sweden experiencing divestment in 2004. What is more, the enlargement of the EU in May 2004 impacted significantly on the growth of FDI inflows in the Union. The data shows that the new historic record of FDI flows into the EU 27, which rose by 43 per cent in 2007, was mainly attributable to the restructuring and concentration process in the enlarged common market, which subsequently led to a renewed wave of cross-border acquisitions. For example, in 2007 six of the ten largest M&As worldwide took place in the EU, while seven intra-EU cross-border M&As were valued at more than US$10 billion.7 In addition, in the same year inward FDI flows into the 13 countries of the European Monetary Union (EMU) grew by 50 per cent to US$485 billion. Much of this investment was intra-EMU FDI stirred by favourable economic growth. European companies in the common currency area continued to consolidate their activities, contributing to a sharp increase in FDI flows in their home countries. For example, the increase in FDI flows into the Netherlands from US$8 billion in 2006 to a record US$99 billion in 2007 was due to the single large acquisition of ABN AMRO by a consortium of three European banks for US$98 billion. In 2007, France’s FDI inflows almost doubled to US$158 billion, raising its inward FDI stock to more than US$1 trillion. French companies made only a few large cross-border acquisitions of and almost 66 per cent of this investment was due to intra-company loans of foreign investors to French affiliates. This was also the case in Austria where a number of European firms used Austrian affiliates as a gateway for investing in Eastern European markets. In 2007, FDI inflows into the 12 new EU member states stood at US$65 billion, almost the same as the previous year, with Poland, Romania, Czech Republic and Bulgaria accounting for more than two thirds of the total investment. Poland’s rapidly expanding domestic market, with its flexible and skilled labour force and solid banking system, prompted a steady and sizable flow of FDI, amounting to US$18 billion in 2007. European companies were the primary investors in this region, though US firms made some large acquisitions in the telecommunications industry. As for outward FDI flows, the EU was the main source of capital flows during the period under examination. In 1996, its share of global investment increased from US$183.2 billion and continued rising by 121 per cent, 227 per cent, 399 per cent and 447 per cent in 1997, 1998, 1999

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and 2000, respectively. In 2001, FDI outflows decreased by almost 55 per cent on the previous year. This investment gradually declined during the period up to 2004, when it recorded flows of US$276.3 billion. In 1996, Germany was the largest EU investor overseas with US$50.8 billion. The UK, the Netherlands and France came next, with investments around US$34 billion, US$32.1 billion and US$30.4 billion, respectively. By 2000, the UK had become the largest EU investor, accounting globally for 30.4 per cent (US$249.8 billion) of total EU outflows, followed by France, the Netherlands and Germany investing US$177.5 billion, US$73.5 billion and US$56.8 billion, respectively. Belgium and Luxemburg increased their share from US$8 billion in 1996 to US$86.4 billion in 2000. Some countries such as Ireland, Spain, Portugal and Greece emerged as exporters of capital flows, with Spain increasing its FDI outflows from US$5.4 billion in 1996 to US$54.7 billion in 2000. In 2002, Irish FDI outflows increased by almost 1,421 per cent, reaching US$10.3 billion from US$727 million in 1996. In the same year, Luxemburg, the smallest of the then 15 EU member states, recorded the highest share of FDI outflows, with a total of US$126.1 billion that amounted to over one-third of the total EU outward flows. This made Luxemburg the world’s largest investor and recipient, accounting for about 19 per cent of world inflows and 24 per cent of outflows. 8 This was due to investment links with the US economy and the progressive development of European integration. It was also due to favourable conditions, including tax exemptions offered by Luxemburg for holding companies and corporate headquarters. Such conditions produced large cross-border M&As. The 2000 Vodafone-Mannesmann deal, with its significant FDI inflows and outflows, made Luxemburg one of the most important investors and FDI recipients worldwide. This position was further enhanced in late 2001 when Arbed (Luxemburg), Aceralia (Spain) and Usinor (France) formed the steel group Arcelor with its headquarters in Luxemburg.9 However, Luxemburg’s outward flows did not significantly impact on investment in developing or transitional economies and it was definitely not comparable to the UK in terms of its commitment to long-term investment in specific developing markets or in terms of the distribution of its capital flows across a number of economic areas. British investors showed a more permanent and constant presence in global markets due to their willingness to take risks and to their experience and knowledge, dating back to the colonial era of many parts of the global market. Unlike

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Luxemburg, which concentrated its investment in manufacturing and services in the US and the EU, British capital flows tended to focus on resource-seeking investment in developing countries and, thus, its capital flows were disbursed across various economic sectors such as agriculture, raw materials and mining. Moreover, despite its impressive record of FDI in 2002, Luxemburg’s share of EU GDP was only 0.2 per cent and its domestic investment stood at only US$4.4 billion. This confirms the fact that Luxemburg’s position as a leading world investor did not benefit developing economies because the increase and decrease in its inflows and outflows merely reflected a transfer of funds between affiliates within the same group located in developed countries; this was underscored when Luxemburg’s Central Bank admitted that capital invested in the country for further transfer as FDI elsewhere was estimated at about 80 per cent of the inflows and outflows of FDI from Luxemburg in 2002. 10 This was particularly true in the case of Egypt, whose FDI inflows from Luxemburg were at the lowest level in 2002, while Britain remained the main European investor in the country, as explained below in detail. The record FDI outflows from the EU in 2007 reflected the economic growth of most European countries and the financial strength of many European companies that undertook several large-scale foreign acquisitions. According to UNCTAD, six of the top ten source countries of global FDI were EU members. In 2007, FDI outflows from the UK increased more than threefold to US$266 billion compared to the previous year. France was the second largest source of FDI in the EU, and the third largest globally, with US$225 billion, followed by Germany and Spain. FDI outflows from the 12 new EU members accounted for US$14 billion in 2007; a few companies from East Europe such as CEZ, the largest electricity producer in the Czech Republic and among the 25 largest energy MNCs in Europe in terms of foreign assets, are becoming important players with the EU. This growth of outward FDI was evident in the rise in all components of FDI, including equity capital, intra-company loans, and reinvested earnings. According to UNCTAD, the growth in EU FDI outflows was due to several large-scale M&As, particularly in the manufacturing and services sectors, which were responsible for doubling the EU FDI outflows to US$1.142 billion in 2007. These activities were facilitated by further deregulation, privatization and restructuring of key industries such as financial services, telecommunications, and utilities that included

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electricity, gas and water. Between 2000 and 2007, they were also encouraged by the depreciation of the US dollar, which lost 33 per cent of its nominal value against the euro and 24 per cent against the pound sterling. This huge appreciation of both the euro and the pound sterling increased the relative wealth of European investors and reduced the cost of their investments in the US that had to be paid for in US dollars. Furthermore, major European companies such as BMW, Volkswagen, Fiat and Alstom took advantage of the falling US dollar by creating new production facilities or expanding existing plants to create a natural hedge against the sharp appreciation of the euro. The effect of this was apparent in the huge rise in US FDI inflows, which increased from US$53 billion in 2003 to US$233 billion in 2007, with 60 per cent of this originating in EU countries.11 The global financial and economic crisis in 2008 severely impacted on the level of growth in FDI and the number of cross-border M&As and this downward trend is likely to deepen throughout 2009 and 2010. The data presented above shows that the EU’s contribution to global investment was largely affected by the general trend and development in the global economic system during the period under consideration. So far, there is insufficient data to confirm this in relation to the current financial crisis, but it was particularly true during the 2001 global economic downturn, when global FDI outflows decreased by 40.1 per cent on the previous year. According to UNCTAD, global FDI flows decreased from US$1,393 billion in 2000 to US$833.8 billion in 2001, and were reduced by a further 21.9 per cent in 2002, falling to US$651.2 billion, the lowest level since 1997.12 This decline occurred at the same time as a decline in the global economy by almost half from 4.8 per cent in 2000 to 2.4 per cent. In 2001, this was due to the slow down in the US economy, particularly after the September 11 terror attacks that dramatically affected economic activity worldwide, particularly in the areas of tourism and foreign direct investment.13 The decline in EU FDI flows was also caused by a lack of large scale M&As by MNCs from developed countries, particularly the US. This reduced the number of M&As, limited the movement of capital among developed countries and, hence, decreased the overall sum of global FDI outflows. The data also shows that the decline in EU FDI flows was partly caused by the general decline in GDP in the developed countries from 3.9 per cent in 2000 to one per cent in 2001 and to 1.8 per cent in 2002 and 2003. Although the US GDP was worst hit by the September 11 event, it

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recovered from 0.3 per cent in 2001 to 2.4 per cent in 2002 and 2.6 per cent in 2003, while the impact of global economic decline was much greater in the EU, which recorded a steady decline in GDP from 3.5 per cent in 2000 to 1.5 per cent in 2001, 0.9 per cent in 2002, and 0.5 per cent in 2003. As one of the most important destinations for EU FDI outflows, Latin America was similarly affected by a sharp decrease in its GDP from four per cent in 2000 to 0.7 per cent in 2001, (minus) -0.1 per cent in 2002, and 1.1 per cent in 2003.14 However, the relationship between a state’s GDP and global economic decline was less clear in developing countries. For instance, East European and Middle Eastern countries were the least affected by the 2001-2003 global economic slowdowns due to an increase in oil prices and the introduction of large scale economic reforms and liberalization programmes. 15 The drop in EU FDI flows can also be attributed to the widespread insecurity and instability caused by the September 11 attacks on the US and the subsequent US-led wars in Afghanistan and Iraq, which created an environment not conducive to FDI. These developments were highly damaging for US and European companies operating in the MENA region, as well as in the wider Muslim world. 16 However, most European companies found themselves in a better position than their US counterparts operating in the Middle East, many of them managing to sustain their investment in the region and some even taking over investments left behind by American companies that quickly departed the region after September 11. The data also shows that the EU benefited from this event by receiving large sums of capital flows from the Arab and Muslim countries when anti-Americanism increased after September 11, 2001. This can be seen in the record of FDI inflows into the EU, which increased from 46.7 per cent of the total global FDI inflows in 2001 to 57.5 per cent in 2002 due to diversion of huge capital investment from the oil-rich Arab Gulf states from the US to the EU. Completing privatization programmes was a key way of attracting foreign investment into developing countries. By the early twenty-first century, this factor directly affected the trend of FDI outflows from the EU. Common during the 1990s, this mode of entry proved less risky and more cost efficient as the time and the amount of funds required to generate profits was significantly less than that required when investing in greenfield projects. Therefore, some European companies adopted a wait and see strategy and hoped that new opportunities might emerge, while

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others diverted their investments to other potential markets such as those in East Asia and Eastern Europe. Despite this decline in investment, one can argue that EU global investment remained strong as the Community was the home to half of the world’s 100 largest non-financial MNCs, which emphasizes the extent to which the Community can influence the trends of FDI flows worldwide. In 2008, the EU was the home of 42,089 parent MNCs and 317,687 foreign affiliates.17 Denmark possessed the largest number of parent MNCs with 9,356 companies, followed by Germany, Italy, the Netherlands and the UK, which had 5,935, 5,750, 4,788 and 2,368 parent companies, respectively. Cyprus, Spain and Portugal had 1,650, 1,598 and 1,300 parent companies and Sweden, France, Estonia, Austria and Finland had 1,268, 1,267, 1,168, 1,048 and 1,017, respectively. With the exception of Belgium that has 991 parent companies, each of the remaining EU member states had significantly fewer than one thousand parent companies. There is no doubt that these corporations and their affiliates operating abroad can affect the level of economic development of states, if their FDI flows are to be reallocated or diverted to other economies. Furthermore, the geographical distribution of EU FDI flows worldwide provides a better understanding of both the position and the role of the EU in global economic development. According to the European Commission, between 1995 and 2005 EU capital flows were linked to the world’s three major economic regions. NAFTA was the first destination of EU FDI, followed by EFTA, MERCOSUR and ASEAN. 18 Surprisingly, neither the geographical proximity nor the historical ties of the Mediterranean region assured that a substantial proportion of European capital flows into the area because of its lack of political and economic development. 6.2. EU FDI in Partner Mediterranean Countries Between 1996 and 2004, the EU’s Mediterranean partners received an average of 1.2 per cent of total EU FDI outflows. This figure positioned these partners far behind the MERCOSUR and East European countries, which received around eight per cent and seven per cent, respectively, of the EU’s total FDI outflows. While the total share of FDI flows from the EU into these regions fluctuated between five per cent and 12 per cent, the total share of the Mediterranean partners never exceeded two per cent of EU outflows and remained consistently low between 0.5 per cent and 1.8 per cent during this period.19 The absence of radical transformation in

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the economic structure of the Mediterranean region and the subsequent inability of this region to absorb large levels of FDI inflows makes this clear. By contrast, Latin American countries increased their share of FDI inflows from 3.4 per cent in 1995 to 8.5 per cent, ten per cent and eight per cent in 1996, 1998 and 2001, respectively. Similarly, East European countries demonstrated the capacity to absorb as much as 12 per cent of FDI in 1995; even their declining share of FDI inflows from the EU of 8.5 per cent and eight per cent in 1997 and 2001, respectively, was still much higher than that of the Mediterranean countries. Comparing the rise and fall of EU FDI flows in these three regions during the period under examination reveals that the rise of the Latin American share of EU outflows was matched by a relatively similar percentage decline in the East European share. However, no such match was recorded on the Mediterranean side. This analysis suggests that the EU diverted its capital flows between regions that achieved satisfactory records of political and economic development, which contrasted with the trade record of the EU because trade tends to be less sensitive than FDI to political and economic instability. For example, after the US the MERCOSUR countries received the largest share of FDI inflows from the EU; they conducted only two per cent of their trade with the EU, while in 2000 the Mediterranean partners that received the lowest share of FDI conducted eight per cent of their total trade with the EU. In terms of FDI, the relatively limited importance of the Mediterranean region to European investors reduced its total FDI stocks from the EU to as little as 1.5 per cent, compared with 7.5 per cent for the MERCOSUR and five per cent for East Europe. Despite being one of the least attractive regions for EU FDI outflows, the Mediterranean partners of the Barcelona Process experienced a substantial increase in EU FDI inflows, from €737 million in 1995 to €3.6 billion in 2003, with an intermediate peak of €5.2 billion in 2000. This rise was largely due to a general improvement in the global economy and renewed economic cooperation with the EU through the 1995 EuroMediterranean partnership.

-

-

-

-

12-Med. 737 885 1420 2304 countries (100%) (100%) (100%) (100%) Source: Arno Backer, European Commission, Brussels, April 2005 * Data for Cyprus and Malta are not available before 2001.

Malta* 1144 (100%)

-

5261 (100%)

-

Table 6.1: EU-15 outward FDI flows to 12-Mediterranean partner states (€m) 1995-2003. Region 1995 1996 1997 1998 1999 2000 Maghreb 100 201 659 520 -15 872 Countries (13.6%) (22.7%) (46.4%) (22.6%) (-1.3%) (16.6%) Morocco 33 154 470 113 91 215 (4.5%) (17.4%) (33.1%) (4.9%) (8%) (4.1%) Mashreq 169 80 236 546 442 2312 Countries (22.9%) (9%) (16.6%) (23.7%) (38.6%) (43.9%) Egypt 97 61 79 346 406 1387 (13.2%) (6.9%) (5.6%) (15%) (35.5%) (26.4%) Israel 118 199 100 225 -227 653 (16%) (22.5%) (7%) (9.8%) (-9.8%) (12.4%) Turkey 350 405 425 1013 944 1424 (47.5%) (45.6%) (29.9%) (44%) (82.5%) (27.1%) Cyprus* 2001 778 (18.6%) 235 (5.6%) 600 (14.3%) 566 (13.5%) -329 (7.8%) 3013 (71.6%) 170 (4.1%) -38 (-0.9%) 4194 (100%)

2002 706 (39.7%) 420 (23.6%) 1742 (97.9%) 1352 (76%) 63 (3.5%) 983 (55.2%) 504 (28.3%) -2218 (-24.6%) 1780 (100%)

2003 1393 (38.6%) 1635 (45.3%) 1252 (34.7%) 968 (26.8%) 74 (2.1%) 917 (25.4%) -462 (-2.8%) 432 (12%) 3606 (100%)

DISTRIBUTION OF EU FDI IN EGYPT, 1996-2008 131

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INVESTING IN THE MIDDLE EAST

As indicated in Table 6.1, the distribution of FDI flows from the EU to the Maghreb and Mashreq countries changed from year to year, but their shares grew steadily over the years, accounting for around €1.4 billion and €1.2 billion, respectively, in 2003. It also shows that Morocco and Egypt received the largest share of EU outflows to the Maghreb and Mashreq countries. In the case of the Maghreb, Morocco’s share increased from as little as 4.1 per cent in 2000 to as much as 45.3 per cent of the total EU flows to the region in 2003. Egypt’s share also fluctuated from as little as 5.6 per cent of the total EU FDI in the Mashreq in 1997 to as much as 76 per cent in 2002. This table also shows that of the 12 Mediterranean countries, Turkey was the favoured destination of EU flows, receiving an average of 40 per cent during that period and 82.5 per cent of the total EU outflows to these countries in 1999. In addition, Turkey was the largest recipient of EU capital flows during the downturn period (2001-2002), when its shares accounted for 71.6 per cent and 55.2 per cent of the total FDI inflows from the EU to the Mediterranean partners in 2001 and 2002, respectively. This level of concentration is due mainly to Turkey’s 1996 Customs Union with the EU, as well as fiscal and microeconomic reforms, and the huge economic and political strides that the Turkish Government made in preparation for full membership of the EU. Israel’s FDI inflows from the EU were relatively small during this period due to the second Intifada in the Palestinian Territories. Figures for EU FDI flows into Cyprus and Malta were not available prior to 2001 and were largely influenced after that by preparation for EU membership. The data shows that these two countries saw large FDI withdrawals, most of them due to the re-organization of companies based there. The decline in EU investment after 2001 resulted in large withdrawals of FDI mainly by the Netherlands and the UK from the Mashreq countries; most noticeable was Portugal’s FDI withdrawal from Egypt in 2002, a year during which EU FDI stocks in the Mediterranean fell to the lowest level since the launch of the Barcelona Process in 1995. The UK, the Netherlands and France remained the main European investors, and together owned almost half of the EU FDI stocks in the region. EU FDI stocks in Mediterranean partner countries increased steadily in the Barcelona era. In 2002, EU FDI stocks in the Maghreb, Mashreq and Turkey amounted to between €7.1 billion and €8 billion. 1 The Maghreb was the only area where the EU FDI stocks showed uninterrupted growth, from €2 billion in 1995 to €2.5 billion, €3 billion, €4

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billion, €4.5 billion, €5 billion, €6 billion, and €7.5 billion in 1996, 1997, 1998, 1999, 2000, 2001 and 2002, respectively. The Mashreq also recorded steady growth until 1999, when its EU FDI stocks increased sharply from just over €3 billion to approximately €8 billion in 2000. This increase was due to the sudden rise in Egypt’s FDI stocks from €2 billion in 1999 to €5.4 billion in 2000, though in 2001 it decreased to €4 billion, as indicated in Table 6.2, which also shows that most British and Dutch investments were made in Turkey and Egypt, while French firms tended to invest more in the Maghreb countries. In 2001, German FDI stocks in the region were distributed fairly evenly between the Maghreb and Mashreq countries, receiving €446 million and €426 million, respectively. Turkey was also the main market for German and Italian investors. Despite the small decrease in 2001, the Mashreq’s share of the EU FDI stocks remained above €7 billion in 2002, due to the general surge of extra-EU FDI though not necessarily due to the Mediterranean being more attractive to foreign investors. In 2002, Egypt accounted for nearly half of the EU FDI stocks in the Mashreq region, indicating that FDI flows and stocks in the Mediterranean region depend on political stability and the willingness to embark on economic reforms. Table 6.2: EU FDI stocks in Mediterranean partner countries by member states in 2001 (€ million) Extra12Maghreb Mashreq Morocco Egypt Israel Turkey EU MPC UK 466998 5257 247 2426 100 2046 375 2076 FR 273242 4448 2102 1061 1488 614 224 996 NL 184907 3204 168 1308 35 925 DE 329698 2881 446 426 189 354 245 1404 IT 70228 2410 810 307 253 232 64 1065 DK 39330 1122 7 66 25 169 PT 12423 1088 581 492 173 492 0 0 AT 19991 541 7 5 FI 18513 36 -12 GR 6256 1 54 0 9 0 16 IE 17718 0 EU 1777591 26495 5974 6343 2611 4025 1631 7062 -15 Source: Eurostat, Statistics in focus, theme 2, 12/2004. UK=United Kingdom, FR=France, NL=Netherlands, DE=Germany, IT=Italy, DK=Denmark, PT=Portugal, AT=Austria, FI=Finland, GR=Greece, IE=Ireland.

6.3. EU FDI Flows into Egypt in the Barcelona Era Since the mid 1990s, there have been some significant developments in Egypt that have led to an increase in global FDI inflows into the country. Chief amongst these was the promulgation of Law 8 of 1997, which offers tremendous incentives and guarantees for investment and allows foreign

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investors 100 per cent ownership of firms. This law has added significantly to the enhanced credibility of Egypt after its successful implementation of the 1991 Economic Reform and Structural Adjustment Programme and the initiation of the Euro-Egyptian Partnership under the umbrella of the Barcelona Process of 1995. The impact of these developments led to a parallel increase in the country’s GDP, which steadily increased from 2.9 per cent in 1993 to six per cent in 1999 and 7.1 per cent in 2007, when global FDI inflows into Egypt peaked. Table 6.3 shows that between 1996 and 2007 Egypt received US$34.5 billion, accounting for 14.7 per cent of global FDI flows into the Mediterranean countries. Egypt was only behind. Only Turkey and Israel attracted more investment, with 27.7 per cent and 22.9 per cent, respectively, of global FDI flows into the region during the same period. In 1996, Turkey’s membership in a Customs Union with the EU and the concentration of most US FDI flows into the Middle East going to Israel positioned both countries to be the first and second most attractive destinations for FDI in the region. Furthermore, the data shows that Egypt’s share of EU FDI flows into the Mediterranean region fell behind Turkey, Morocco and Israel during the latter half of the 1990s. In 1999, Egypt received about 17 per cent of European FDI outflows to the region, while by 2000 it managed to top the list as the main recipient of EU FDI flows with €1,157 million; however, this position that was overtaken by Turkey in 2001.2 Figure 6.2 not only confirms this but it also shows a sudden decline in European direct investment, which decreased by over 90 per cent in that year. This dramatic decline considerably affected the overall growth of global FDI inflows into the country. Apparently this decrease resulted from the re-allocation of European investment from Egypt and Israel to Turkey and Morocco. In 2000, FDI flows from the EU into Turkey increased sharply from €754 million and rose to €1271 million in 2001. Morocco’s share also increased from as little as €8 million in 1999 to €196 million in 2000 and €212 million in 2001. The fall in Egypt’s total FDI inflows occurred at the time of the 2001 recession in the global economy, which affected both the EU and Egypt and, hence, European investors showed a lack of commitment to long term investment until the end of 2004. This is evident when the percentage of movement of FDI flows among the major recipients of EU FDI flows into the Mediterranean is measured.

1076 310 200 417 218 82 668 264 1887 267 940 6830

1065 158 250 850 189 263 368 685 3111 822 783 9051

1235 787 298 215 62 270 779 804 5011 622 982 11503

510 100 249 2825 20 110 486 652 3549 281 3266 13244

647 64 257 481 -5 1030 821 1057 1770 -426 1063 7824

1065 237 424 358 2314 1084 584 1011 3880 294 1753 12573

634

882 1253 620 288 853 1206 639 1146 1619 421 2733 11660

5376 1774 2791 1653 47 500 782 1186 4881 675 10031 30777

10043 3219 2739 2450 19 600 3312 1504 14729 1865 19989 62264

1795

2006

* Cyprus and Malta are not considered Mediterranean partners after their accession in the EU in May 2004.

Source: UNCTAD, World Investment Reports 2002, 2003, 2004, 2005, 2008 & 2009.

887 361 150 1188 7 80 365 491 1950 81 805 6625

1196

636 16 80 357 4 89 351 54 1357 277 722 4213

438

Egypt Jordan Lebanon Morocco Palestine Syria Tunisia Cyprus* Israel Malta* Turkey Total

507

1081

501

270

Algeria

260

2005

Table 6.3: Global FDI inflows in Mediterranean countries1996-2008 (US$ million). Country 1996 1997 1998 1999 2000 2001 2002 2003 2004 11578 1835 2845 2577 21 885 1618 2079 9998 959 22029 58089

1665

2007

9495 1954 3606 2388 29 2116 2761 2167 9639 879 18198 55878

2646

2008

DISTRIBUTION OF EU FDI IN EGYPT, 1996-2008 135

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INVESTING IN THE MIDDLE EAST

Figure 6.2: EU FDI into the largest four economies of the Mediterranean states 1996-2001

US$ million

1400 1200 1000 800 600 400 200 0 -200 1996

1997 Egypt

1998 Morocco

1999

2000

Israel

Turkey

2001

Source: Quefelec, S., European Communities, 2003.

The percentage of decline in EU FDI flows into Egypt and other Mediterranean partners was closely matched by an increase in EU FDI flows into other parts of the world, particularly the former Soviet sphere, where economic reforms and privatization programmes began at the same time.1 It was also reported that the economic development achieved by East European countries attracted as much as 18 per cent of the total EU outward flows in 2002, up from only seven per cent the previous year. This diversion of FDI flows considerably affected the position of European FDI stocks in Egypt and impacted on the country’s general economic growth, despite the fact that FDI represented a small share of the country’s overall GDP. However, since 2004 this situation has changed and Egypt has once again become a major destination for EU outward flows into the Mediterranean region. This is largely reflected in Egypt’s record of FDI inflows and FDI stocks between 1996 and 2008, when the 27 EU member states invested US$9.38 billion. Moreover, Figure 6.3 shows that just over one quarter of this investment was made between 1996 and 2003, when the 15 EU member states invested around US$2.5 billion. The majority of European direct investment in Egypt took place between 2004 and 2008, a time of expansion that has been closely linked to the country’s economic growth, to macroeconomic stability, and to extensive economic liberalization, particularly when it was the main entry mode of FDI into

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the country. This growth is also linked to the rise and fall in total EU outward flows, apparent in the overall growth of FDI inflows from the EU between 1996 and 2000 and in the sharp decrease in these flows after that time, which were in line with the general slowdown in global FDI flows into this region. Figure 6.3: EU FDI Flows into Egypt 1996-2008

US$ million

2500 2000 1500 1000 500 0

96

97

98

99

00 01 02 03 Source: GAFI

04

05

06

07

08

6.4. Static Distribution of EU FDI Flows into Egypt, 1996-2008 The nature and scope of EU direct investment into Egypt has remained basically the same throughout the Barcelona era. Almost 55.8 per cent of the US$9.38 billion invested by the 27 EU member states in Egypt during this period was made between 2005 and 2007, with a record US$2.1 billion invested in 2007. The data shows that this was a significant increase in EU direct investment in the country compared to the first nine years of the Barcelona Process, when the 15 EU member states invested just over US$2.5 billion in Egypt, with US$1.6 billion being invested in the inland and US$909 million in the free zones. Each member state’s contribution to this varied considerably, with countries such as the UK contributing as much as 35.32 per cent of the total EU FDI flows into the country with others, such as Estonia, Lithuania, Slovenia and Czech Republic, collectively contributing as little as 0.01 per cent. This unevenness created a hierarchical order of the member states, with the UK occupying the top position with the highest percentage of FDI flows, while others whose contributions were relatively smaller, such as France, Italy, Spain and the Netherlands, were lower on the totem pole. During the period under consideration, the majority of the member states had FDI flows well below US$500 million, the most visible changes in Egypt’s FDI inflows being the emergence of Spain and Greece

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as major investors and the Republic of Ireland as a new investor. Though prior to the 1995 Barcelona Process Luxemburg’s investments were of considerable importance to Egypt, this era also witnessed its dramatic decline. Figure 6.4 shows that between 1996 and 2008 the UK was the only EU country that recorded FDI flows into Egypt above US$3.3 billion. France ranked second with FDI flows just above US$1.3 billion, followed by Italy, Spain and the Netherlands, with US$1.18 billion, US$1.15 billion and US$1.04 billion, respectively. The investments of traditional European investors such as Greece, Germany, Luxemburg, Denmark and Belgium ranged from US$368 million to US$141 million, while the rest of the member states occupied the lower end of the scale with investments ranging between US$67 million and US$50,000 throughout the period under consideration. With the exception of the new member states and minor investors such as Finland, most EU member states showed a degree of consistency in their FDI outflows into Egypt. However, the pattern of these FDI flows was characterized more by fluctuation than by steady growth and was probably due to the availability of opportunities for investment in joint ventures at particular times rather than to an interest in the economy as a whole. The concentration of FDI flows in some economic sectors more than others was due to the period of restructuring and modernizing taking place in them in a way that created more room for foreign companies to participate in their activities. The marked degree of fluctuation was most noticeable in FDI flows from Belgium, which recorded as high as US$104.6 million in 1996 but later fell to as little as US$1.3 million. In 2002, Luxemburg was the largest global investor, yet all its investments were made in three separate years (1996, 1998 and 2000) with no investments recorded in any of the remaining six years prior to the boom period that started in 2004. Contrary to the record FDI investments of the rest of the EU member states in 2007, Luxemburg disinvested US$50 million, which set it apart from the rest of the EU. However, the investment pattern of Italy, Belgium, the Netherlands and Spain also differed in that their FDI flows were made in one-off investments between 1996 and 2008. Of the US$1183.48 million worth of Italian investment, 78.7 per cent was made in 2007. Belgium invested US$105 million in 1996, while the remaining US$52 million was invested over a period of 12 years. Almost a quarter of the Netherlands FDI flows into

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Egypt were made in a single investment in 1998, while 48 per cent of Spain’s FDI flows were invested in 2005. This highlights the ill-defined pattern of investment exhibited by most EU member states in Egypt during the Barcelona era. Figure 6.4: Five largest EU investors in Egypt 1996-2008 1000

US$ million

800 600 400 200 0 -200

96

97 UK

98

99

00

France

01

02 Italy

03

04 Spain

05

06

07

08

The Netherlands

Source: GAFI

Between 1996 and 2008, FDI flows from the UK into Egypt constituted almost one third of total flows made by EU member states; in 2006 and 2007, British firms made equal investments of over US$1.5 billion, as almost twice the amount invested in the first eight years of the Barcelona era. Up to 2003, the available data shows that funds were concentrated in projects located in the inland with a total of US$568.5 million, while US$272.3 million was invested in the free zones and that investments in the inland declined over the first eight years, from US$153.8 million in 1996 to US$6.7 million in 2003. Though the decline was accompanied by fluctuations, they were much smaller than in the case of the Netherlands and Spain. Throughout this period, the UK remained the primary European investor in Egypt. Between 1996 and 2008, France was the second largest EU investor into Egypt, with total investment worth US$1.38 billion; almost 87 per cent of this was invested between 2004 and 2008, with a record US$459.44 million in 2005. This latter amount was almost equally divided between the financial and industrial sectors. In 2006, France invested US$400 million in the financial sector, made possible by its disinvestment

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of around US$53.6 million and US$26.7 million from the construction and industrial sectors, respectively, in the same year. Over the following two years, French investments continued to be concentrated in finance and industry. Between 1996 and 2003, French FDI flows accounted for US$178.8 million, with US$157.5 million being invested in the inland and the remainder in the free zones. These flows grew steadily between 1996 and 1999, but decreased dramatically over the following four years. They increased from US$300,000 in 1996 to US$41.3 million, US$49.5 million and US$60.3 million in 1997, 1998 and 1999, respectively. Between 1998 and 1999, French FDI flows were of significant importance as US$94 million was invested in Egypt’s infrastructure, which contributed to general improvement in the country’s main infrastructural facilities and, hence, attracted more FDI. Between 1997 and 2000, French firms invested US$13 million in metals in 1997, US$11.3 million in the food industry in 1998, and US$14.3 million in chemicals in 2000. Only two US$1 million investments were made in financial services and tourism, while the majority of FDI flows, which extended across several economic sectors, were minor investments and, therefore, had little impact in terms of employment and economic development. Perhaps surprisingly, the US$931.4 million invested in 2007 made Italy the third largest EU investor in Egypt, with over US$1.18 billion of FDI flows invested between 1996 and 2008; US$914 million of it was invested in the financial sector. This was both the largest FDI capital flow to be invested by any single European country in the country up to the end of 2008 and the largest amount ever to be invested by Italy in Egypt. Italy’s second largest investment amounted to US$110 million in 1998, with investments in infrastructure, engineering and the chemical industry over subsequent years putting Italian investment ahead of France, Germany and the Netherlands between 2001 and 2003, and the UK between 2002 and 2003.2 This demonstrates the departure of Italy’s investment pattern from its European competitors. With the exception of US$30 invested in 2004 and the US$29 million in 2008, Italian investments were minor and hardly exceeded US$10 million in any single year. Similarly, Spain occupied fourth place among EU investors, behind the UK, France and Italy, with a single investment in 2005, when five Spanish companies invested a total of US$551.8 million in the industrial sector. The second largest investment was made in 2001, when the UNION FINOSA GAS company invested US$300 million in Spanish Egyptian

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Gas (SEGAS), located in Damietta. Up to 2003, this was the largest single investment by any European company and generated employment for 3,000 Egyptian workers; in 2004 and 2008 respectively, a further US$166.8 million and US$67.6 million were invested. Apart from these investments, total Spanish FDI flows into Egypt were around US$58 million, with US$30.6 million being invested in manufacturing in 2006, US$17.3 million in the chemical industry in 2002 and US$6.6 million in financial services in 2001. Of the 15 Egyptian companies that received Spanish capital, only five got over US$0.5 million. For instance, the second largest investment in the free zones made by the Hermomar 2000 Limited in the Union for Laser Company in 2004 was nearly US$300,000, which underscores the limited value of most of the Spanish investments. Between 1996 and 2008, the Netherlands was the fifth largest EU investor in Egypt, with total investments worth US$1 billion. Almost half of this capital was invested between 2004 and 2008, with the largest being made in 1998 when US$239.8 million was invested in Vodafone Egypt. This dropped sharply in the following five years, with an intermediate peak of US$142.5 million in 2002. Dutch companies made two large investments in the free zones worth US$159 million. The first was made by the Dutch Middle East Gas Pipe with US$25 million in the Egyptian company East Mediterranean Sea Gas in 2000, creating 500 jobs for Egyptian workers. The second investment was made by the ENI International BV in the UGDC (Egyptian Gas Company located in the Port Said free zone) with US$134 million, creating a further 220 jobs in 2002. The second largest group of European investors consists of five countries, which exhibited a different pattern of investment in terms of value and consistency of their capital flows into Egypt. Between 1996 and 2008, the total value of capital invested by Greece, Germany, Belgium, Denmark and Luxemburg almost equalled that of the Netherlands. Their investments ranged from as high as US$368.7 million made by Greece to as low as US$141.6 million invested by Luxemburg during the entire period. The data also indicates that these countries exhibited a higher degree of inconsistency in the flow of capital, in particular Belgium and Luxemburg. Between 1996 and 2008, Greek investment in Egypt was around US$368.7 million, with US$241 million investment being in the financial sector in 2005. This was followed in 2007 by another large investment in the same sector worth US$70 million and, in 2008, US$19 million in

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tourism. Figure 6.5 shows that Greek companies began to take interest in the Egyptian market in 2005. Up to 2003, their total investments amounted to only US$14.2 million, with US$2 million being invested in the free zones and US$11.6 million in the inland. Almost half of this latter amount (US$5.8 million) was invested in the food industry and in engineering between 1996 and 1997. Apart from one investment in the metals sector worth nearly US$3 million in 2000, Greek FDI flows were small. Figure 6.5: Middle ranked EU investors in Egypt 1996-2008

US$ million

300 250 200 150 100 50 0 -50 -100

96

97

98

99

Greece Denmark

00

01

02

03

Germany Luxemburg

04

05

06

07

08

Belgium

Source: GAFI

During the same period, Germany invested US$368.7 million in Egypt with US$117.8 million being invested in 2007. This amount almost equalled all German investment in Egypt between 1996 and 2003, with US$5.5 million being invested in the free zones and the remainder in the inland. Until 2008, though the value of their investments was small, German companies had shown constant interest in Egyptian market. The withdrawal of US$48.8 million from the financial sector in 2008 was the first major disinvestment by German companies for many years. This was over twice the total capital invested in that year, brining a negative German equity worth US$20.5 million in 2008. As will be explained below, after 2004 most German investments were made in industry and finance, while 68 per cent of total German FDI flows prior to that year were invested in tourism. The majority of investments were made in 1997 and 2007. In 1997, Germany invested US$28.4 million in agriculture, with two other investments of US$5 million and US$4 million, respectively, being made in chemicals and

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143

tourism. Between 1998 and 2000, on average German FDI flows grew by US$12.2 million per annum, but declined dramatically to between US$2 million and US$5 million over the following three years. Although there were some major industrial projects, such as that established by Bavaria Auto Trading (a joint venture between investors from the Gulf, Egypt and Germany) in BMW’s new production facility of around US$60 million, 3 the value of German investment remained small compared to that of the UK or France. According to the president of the Egyptian-German Business Council, this small FDI contribution was due to a lack of trust on the German side and to the failure of institutions, such as the Egyptian Businessman’s Association and the German-Arab Chamber of Industry and Commerce, to develop ties.4 During the same period, Belgium invested US$157.4 million, with US$115.4 million being invested before 2004. Although this investment was 11 times higher than that of Austria, Belgium was a small player in terms of constant growth, as 66.5 per cent of its total FDI took place in the construction materials industries in 1996. Denmark invested US$147.5 million, with US$49.6 million being invested in the industrial and services sectors in 2008. Although Danish firms invested US$32 million and US$25.9 million in 1997 and 1999, respectively, inconsistency on the one hand and concentration of investment in the free zones on the other marked Danish FDI during the period under consideration. Although in 2002 Luxemburg was the world’s largest investor (US$126 billion) and FDI recipient (US$154 billion), it made no investment that year in Egypt. Figure 6.5 shows that between 1996 and 2008, of the US$141.6 million invested by Luxemburg US$48.8 million went to the free zones in 1998, US$17.7 million to the investment sector in 1996 and US$10.2 million to the food industry in 2000. The US$50 million invested between 2004 and 2006 were disinvested in 2007. This insignificant contribution was due to the nature of Luxemburg’s economy, which was closely linked to the US economy and depended on large cross-border M&As. Moreover, most of Luxemburg’s FDI flows were concentrated in manufacturing and services, sectors that were far less developed in Egypt than in industrial countries. The third group comprises of five European countries with relatively small investments in Egypt between 1996 and 2008. Figure 6.6 shows Cyprus at the top of the list with US$67.7 million, followed by Sweden with US$61.6 million, and Ireland with US$46.1 million. Austria invested US$14.6 million, while total Hungarian investments amounted only

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US$5.6 million. During the Barcelona era, the emergence of Ireland as an investor in 1996 was a major development in EU FDI flows into Egypt. Making its first investment of US$250,000 in 1994, Ireland invested US$43.7 million between 1996 and 2004, which placed it ahead of Austria, Portugal, and Finland. Moreover, by committing 92.7 per cent of its total FDI flows to two large investments, amounting to US$15 million and US$25.5 million in 1997 and 1999, respectively, Ireland exhibited a similar investment pattern to most EU member states. Such large investments disappeared in the following years as total Irish FDI flows accounted for just over US$3.6 million between 2000 and 2006.

30

Figure 6.6: EU investors in Egypt with FDI below US$30 million, 1996-2008

25

US$ million

20 15 10 5 0 -5

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

-10 Cyprus

Sweden

Ireland

Austria

Hungary

Source: GAFI

FDI flows from the EU’s Scandinavian countries varied considerably in terms of value and importance. Sweden, with its US$61.6 million, was far head of Finland, which invested only US$1.39 million between 1996 and 2008. Almost 60 per cent of all Swedish FDI flows were invested between 2005 and 2007. Prior to this, there were three large investments, with US$10.8 million invested in the free zones in 2002. Two large investments were made in the inland with US$13.3 million, with US$7.5 million and US$5.4 million invested in 1998 and 2000, respectively. During this period, Austria invested US$14.3 million, with US$5.4 million invested in chemicals in 2001. With the exception of Hungary, total investments made by each of the remaining 12 EU member states were

DISTRIBUTION OF EU FDI IN EGYPT, 1996-2008

145

below US$5 million, underscoring their insignificant presence in the market. 6.5. Sectoral Distribution of EU FDI Flows into Egypt, 1996-2008 The distribution of European FDI flows across Egypt’s main economic sectors was generally tied to the prevailing conditions of each sector, to their strategic importance to the national economy and to their attractiveness to foreign companies. As shown in Figure 6.7, this distribution illustrates the relative degree of development undertaken in particular industries, the potential for higher growth and profitability, and the comparative advantage that some Egyptian industries enjoyed compared to their counterparts in the Mediterranean region. To a large extent, between 1996 and 2008 these factors determine the degree of concentration of capital and, hence, explain the degree of unevenness in the distribution of European capital flows into Egypt’s economic sectors. Figure 6.7: Sectoral composition of EU FDI flows into Egypt, 1996-2008 Services 10%

ICT 3%

Construction 4%

Tourism 7%

Industry 45%

Finance 27%

Agriculture 4%

Source: GAFI

The sectoral composition of EU FDI flows shows a great disparity between the share of the industrial sector, which received as much as 45 per cent of EU FDI flows, and the shares of agriculture and information and communication technology (ICT), which together attracted as little as seven per cent. Between 1996 and 2008, the industrial sector, which received around US$4.17 billion of EU FDI flows, has been the most favoured sector for investment, while finance attracted US$2.53 billion, amounting to 27 per cent of FDI from the EU; most of this investment

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was made between 2005 and 2007. Italy was a major investor in this sector, with US$914 million invested in 2007. The services sector received US$907.33 million, only US$103 million was made between 1996 and 2003 and the rest was invested after 2004. Tourism attracted US$609.3 million, accounting for seven per cent of EU investment. Agriculture received US$330.9 million, with US$246.6 million coming from the UK in 2008. Construction received around US$382.6 million, accounting for four per cent of EU FDI flows into the country throughout the period under consideration, while ICT took three per cent (US$272.2 million) during the same period. Most of these investments were in the areas of telecommunications, communications, power stations and water. Despite being one of Egypt’s main economic sectors in terms of employment and contributions to the country’s gross national product, the data indicates that agriculture (which took only US$330.9 million) is no longer viewed as an attractive sector by European investors. This is also true of the financial sector until the privatization of banks in 2005. For example, this sector attracted as little as US$44 million and accounted for only two per cent of all European investment between 1996 and 2004. It was not until 2005 that this sector began to receive investment from Europe, in particular Italy and France. The modest share given to tourism emphasizes the impact of issues of security and political stability in the country on the potential for growth in this sector. It also shows that the service sector is still underdeveloped and, thus, it has remained less attractive to European investors due to the lack of supporting services to main industries and the poor quality of services offered by local companies in terms of delivery time and quality. Figure 6.8 shows that of the US$4.17 billion invested in the manufacturing sector, US$515.14 million, US$1 billion, US$535.3 million and US$346 million were invested in 2004, 2005, 2006 and 2007, respectively. The attraction of this sector to European companies began almost a decade earlier due to a large number of state-owned companies being introduced to privatization. This manifests in the value of investments that reached US$280.4 million, US$366 million and US$304.5 million in 1996, 2001 and 2002, respectively. Though this decreased sharply to US$32.3 million in 2003, the level of investment that reached its peak in 2005 was due to the acceleration of privatization. Between 1999 and 2002, the gradual increase in FDI was due to huge investments in projects related to natural gas. In 2001, Spain invested US$300 million in a chemical plant for gas liquidization, while two British and Dutch firms

DISTRIBUTION OF EU FDI IN EGYPT, 1996-2008

147

made equal investments of US$268 million in an engineering project in natural gas. In the latter five years (2004-08), European investment diversified across various industries and grew on average by US$522.8 million per year. Figure 6.8: EU FDI flows into Egypt's manufacturing sector, 1996-2008

1200 US$ million

1000 800 600 400 200 0 96

97

98

99

00

01

02

03

04

05

06

07

08

Source: GAFI

Construction materials absorbed US$1.25 billion, accounting for 32 per cent of the total EU FDI flows into industry between 1996 and 2008. This high share was due to the boom in Egypt’s construction sector during the 1990s, which was further accelerated between 2005 and 2008, when US$975 million was invested in this industry. Local Companies did carry out most of the actual building work and, thus, European investors concentrated their investments in construction materials, a sector that flourished between 1996 and 2001. However, the economic slowdown in 2001 considerably affected FDI in this industry, leading to a sharp decline in the following three years. This situation has changed after the economic recovery in 2004, with most investments made in the construction materials went to the cement industry. Spain, the UK, France, Belgium and Denmark were the main investors, investing US$537 million, US$435 million and US$191 million, US$104.6 million, US$51.6 million, respectively between 1996 and 2008. The majority of Spanish investments were made in Sempore Egypt, while Alarabia for Trading (Alarabia Cement) received only US$82.1 million. France made its investments in Suez Cement, while the UK invested US$162 million in South Valley Cement. Most investments were made between 2005 and 2007. Between 1996 and 2008, 27 per cent of EU investment went to manufacturing, with the engineering industry receiving US$1 billion. In

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the past four years, Spain has become the largest European investor in this industry with US$240 million invested in the Spanish Egyptian Gas Company (SEGAS) in Damietta, while the UK and the Netherlands made equal investments of US$230 million in UGDC in Port Said. Apart from US$135 million invested by the Cayman Islands, the remaining investments were made by British, French, Dutch and Italian firms in small projects, each hardly exceeding US$10 million. Figure 6.9: EU FDI into Egypt's manufacturing sector by industry, 1996-2008 Construction Metals 4% Materials 32%

Pharmaceutical 3%

Mining 0%

Textiles 2%

Woodwork 1%

Food 10%

Chemicals 20%

Engineering 27%

Source: GAFI

Prior to these investments, engineering received US$481 million, with 32 per cent of EU investment going to industry between 1996 and 2004. Almost three quarters of this investment was made by two British and one Dutch company in the area of natural gas. In 2000, East Mediterranean Gas Pipeline of Britain invested US$94 million in East Mediterranean Gas, which is located in the Private Port Said Free Zone. Two years later, BP Global Investment of Britain and ENI International BV of the Netherlands each invested US$134 million in UGDC, which is also located in the Private Port Said Free Zone. Firms from other EU member states invested US$16.2 million in the free zones. Some 19 joint ventures in the engineering sector were established in the inland with US$102.6 million from the EU, 50 per cent of which was made by British

DISTRIBUTION OF EU FDI IN EGYPT, 1996-2008

149

companies. The majority of these investments were made in the automobile industry, communications, gas energy, air-conditioning and computer programming, which received US$24.7 million in 1996 and US$40.2 million in 2000. Italian, German and Dutch companies were the largest EU investors in engineering, investing US$15.4 million, US$11.7 million and US$10.3 million, respectively, between 1996 and 2004. The chemical industry received US$790 million, amounting to 20 per cent of total EU FDI in manufacturing between 1996 and 2008. Almost 43.2 per cent was invested in the past four years, with the majority of the investments being made by French and British companies in glass and packaging materials. Between 1996 and 2004, the remainder of European investment in chemicals amounted to US$448.3 million. Two thirds of the latter investment was made in a chemical plant for gas liquidization, in which Spain’s Union Finosa Gas invested US$300 million in SEGAS in 2001. Of the remaining US$148.3 million of EU FDI in this industry, around US$123.9 million was invested inland, and US$24.4 million in the free zones. Most of these funds came from British, Dutch, Italian, French, Spanish and German companies, which invested US$42.9 million, US$23.7 million, US$20.3 million, US$18.4 million, US$17.5 million and US$12.8 million, respectively. Most of these investments were made in companies that specialize in environmental services, fertilizers, glass manufacturing, coating, fibres, glue, plastics, leather, industrial cleaning, liquid gas, paper and packaging materials. The data shows that the chemical industry flourished after 1996 due to a rising interest in the availability of natural and raw materials, underscoring the fact that Egypt was still viewed as a resource-seeking market. For instance, only four of the 41 Italian companies operating in this industry were established before 1996. Of the 18 Dutch companies, 15 were created after 1996, with almost 50 per cent of their investments being made by Future Pipes International, which invested US$11.8 million in 1997, and Eli Lilly, which invested US$13.4 million in Eli Lilly Egypt almost a decade later. Apart from two projects, the 17 French chemical companies were established after 1996, including the US$97.2 million invested in Alexandria Sodium Carbonate Co. and another investment by the CFN Investment of US$11.7 million in the IPM (International Paper Manufacturing company), which created 600 jobs. German investment in the chemical industry took place earlier than that of Spain, Italy and France, as only 19 of the 28 companies were established between 1997 and 2008. However, these investments tended

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to be of small value. The largest German investment in this industry was US$7.5 million in Egyptian Fertilizer in 2007, followed by US$2.9 million by Finer Plastics in the NAT Pack (packaging company) in 1997. Further EU investments in the chemical industry are unlikely to increase substantially as the government is still trying to deal with the major obstacles of liberalization in pricing, distribution and exports. 5 Moreover, structural developments are slow due to technical problems in the factories, which result in new chemical plants taking up to 30 months to begin production. The share of foreign investment in this industry will remain small as long as market mechanisms and the private sector remain of secondary importance. The food processing industry attracted US$396.3 million, with ten per cent of EU FDI going to manufacturing. Almost 78.3 per cent of this investment was made in the past four years, with only US$85.8 million being invested between 1996 and 2004. This investment grew at a steady rate from US$2.9 million in 1996 to US$40 million in 1999. In 1999 and 2001, there were no investments in this industry other than those made by Britain. The Netherlands was the main investor, with US$74 million, followed by the UK and France with US$33 million and US$30 million, respectively, all of which were made in the past four years. Cyprus, Belgium and Luxemburg had relatively smaller shares and were far behind the Dutch and British investments. German investors took the least interest in the food industry, evidenced by their total investments accounting for less than US$0.5 million over the period under examination. This level of investment was incompatible with the comparative advantage that the food processing industry holds, especially the high quality and low-price agricultural output of the country. It was also nominal in comparison with the expansion of land reclamation, which added around 1,000 hectares of vegetable and fruit cultivation over the past decade and, hence, increased the supply of cost-competitive agriculture inputs to this industry.6 The pharmaceutical industry attracted US$153 million, four per cent of the total EU investment in manufacturing between 1996 and 2008. Almost 72.5 per cent was invested by British, Dutch and German companies in the past four years, while investments of US$42 million were made between 1996 and 2004. Given the nature of this industry as capitalintensive, one can argue that the lack of investment in pharmaceuticals was due to concerns about fundamental issues challenging its

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development, not least the weakness of the legal system and intellectual property rights. Meanwhile, the metals industry received US$165.7 million, accounting for four per cent of total EU FDI in manufacturing. Between 1996 and 2004, US$117.6 million were invested in this industry, with 81 per cent being made by two companies from Luxemburg and Italy, which invested US$48.7 million and US$46.1 million in Al-Ezz Heavy Industries, located in the Private Suez Free Zone, in 1998. Surprisingly, this company experienced huge disinvestment during the past four years. The data shows that Japanese, British and German investors withdrew US$40.1 million, US$12.4 million and US$6 million; disinvestment by companies from Ireland and Luxemburg was at a much lower level. The textiles industry received almost half (US$69.2 million) of European investment to the manufacturing sector during the same period. British, Italian and Dutch companies invested US$24 million, US$15.4 million and US$3.6 million in the past four years. However, despite these investments, this industry has underperformed for many years due to the poor condition of state-owned companies and their distorted financial records and debts, which obstructed their sale to European investors. This lack of investment in textiles was also reflected in the nominal share of German imports of textiles from Egypt, which was estimated at €72 million, accounting for only 0.25 per cent of the €29 billion of total German imports of textiles in 2002.7 Though Egypt produces 30 per cent of Africa’s high-quality cotton, its small share of the European market indicates both the lack of investment and the underdeveloped condition of the textiles industry. This small share of investment also emphasizes the insignificant contribution of EU FDI to this sector. Despite being second only to manufacturing, the financial sector had limited appeal to European investors during most of the thirteen-year period under consideration. This sector received a total of US$2.53 billion, with 98 per cent being invested between 2004 and 2007. In spite of the two small investments made by the UK and Luxemburg in the investment sector in 1996 and 1997, the banking sector was more attractive to Italian, French, Greek and British companies, which invested US$921.24 million, US$849.77 million, US$331.1 million and US$252.4 million, respectively. GAFI data indicates that the banking sector did not receive any investment at all from the EU member states until 2004 because, as one financial expert explained, most Egyptian banks are very small and undercapitalized compared to regional and international standards. 8 The

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Governor of the Central Bank of Egypt also confirmed that the inefficient, artificially protected and peculiar conditions was characteristic of more than 60 financial institutions, of which state-owned banks accounted for 56 per cent of total assets in the banking system, while joint ventures accounted for 38 per cent and foreign banks for six per cent. 9 Though Banking Law 88 of 2003 required all banks to increase their paid-in capital to EGP500 million by 14 July 2005 in an attempt to consolidate the sector into 25 stable financial institutions, the impact of it did not materialize until August 2005. At that time, France’s second biggest bank, the Societé Générale, acquired 69.7 per cent of the total equity of the Misr International Bank (MIBank), giving it overall control of one of Egypt’s big banks. Not only was this US$298.8 million deal the first to occur in the past 25 years, but also it marked the beginning of a new wave of foreign involvement in the banking sector that is expected to increase with the acceleration of privatization in the ensuing years. The global financial and economic crisis, which began in 2007 and severely affected the banking sector in most European countries, put a halt to EU investment in this sector, which stood at US$4.6 million in 2008. In addition, the distribution of EU FDI flows into the economy also demonstrates that the services sector was relatively underdeveloped as it attracted only US$907.3 million, accounting for ten per cent of the total FDI flows made by the EU. Almost 88.6 per cent of this investment was made by European firms in the past five years, with the British contributing US$621.5 million, the majority of which was invested in 2007 and 2008. They were followed in 2008 by the Dutch and French, who made large investments in services worth US$57.5 million and US$15.7 million, respectively. The data shows that it was not until 2007 that the services sector began to attract European firms and that their investments increased almost nine-fold in 2003. Of US$103.2 million invested by EU firms in services between 1996 and 2003, almost US$95.8 million of this investment was made inland, while US$7.5 million was invested in the free zones. Most of that investment was made in petroleum and financial services. Public services, such as hospitals, suffered from a lack of investment stemming from the fact that the business community had no intention of investing in support services, such as consultancy. In 2007, the potential for expansion allowed tourism to occupy fourth place amongst Egypt’s main economic sectors but it was overtaken by services, with total investment worth US$609.3 million from the EU between 1996 and 2008. Almost 78 per cent of that investment was made

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in the past five years, as shown in Figure 6.10, while the remaining US$133.4 million was invested between 1996 and 2004. The UK is the largest investor in tourism, with US$310.3 million, 82.6 per cent being invested between 2005 and 2008. Germany and Italy come second and third, with US$85 million and US$60.1 million, respectively; two thirds of that investment was made in the past five years. Greece emerged as a new investor in this sector with US$30.2 million, 89.3 per cent was invested in 2007 and 2008. The Netherlands, Belgium, Cyprus, Luxemburg and Denmark invested US$22.5 million, US$21.7 million, US$18.1 million and US$17 million and US$15.3 million, respectively. In addition, Figure 6.10 shows that prior to the rise in EU investment that began in 2005 FDI inflows from the EU reached their height in 1997 with US$42.6 million, but this decreased by almost half the following year as a result of the Luxor massacre on 17 November 1997, in which 58 foreign tourists were killed by Islamist extremists. The impact of this incident was clearly reflected in the level of growth in foreign investment in an industry that is highly sensitive to security and political stability. Despite its steady decline between 1999 and 2001, FDI flows from the EU continued to average US$15 million per annum. European investment in tourism reached its lowest rate in 2003 with only US$300,000 but the potential for growth and profitability allowed for a fast recovery in 2005, when FDI flows increased to US$60 million, followed by a record US$245.4 million in 2006. Unfortunately, the Sharm El-Sheikh bombing of July 2005, which resulted in the death of 88 people and the destruction of the Ghazala Hotel, marked another setback to this industry and future investment in tourism will remain subject to the country’s internal security, as well as to the political stability of Egypt and the Middle East region as a whole.10 Figure 6.10: EU FDI flows into Egyptian agriculture and tourism, 1996-2008

300

Agrculture Tourism

US$ million

250 200 150 100 50 0 96

97

98

99

00

01

02

Source: GAFI

03

04

05

06

07

08

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In 2008, the agricultural sector received a total of US330.9 million, with US$246.6 million being invested by the UK in Alwatania Investment and Agriculture Company (Gozor). Prior to this, the UK made two investments worth US$13.2 million and US$8.5 million in 2005 and 2007, respectively. During the second half of the 1990s, some US$$57 million was made by EU companies in this sector, with US$14.7 million being invested in the free zones. Eight EU countries made US$42.7 million investment in the inland, with 76.6 per cent being invested by Germany. Agriculture received no investment from any EU member states in 1996, but the following year Germany made the relatively large investment of US$28.6 million. This was followed by US$4 million in 1998 and 2000, and by around US$1.5 million in 1999 and 2004. Although the level of investment was very poor between 2001 and 2003, this period saw a steady increase from US$300,000 and US$400,000 to US$600,000 in 2003. Compared to the size and strategic importance of agriculture to the national economy, this sector received no significant investment from other European countries; only the Netherlands, Italy and France accounted for US$4.4 million, US$2.8 million; and US$1.3 million, respectively, of total FDI flows to agriculture between 1997 and 2008. The construction and ICT sectors were the least attractive to European investors, accounting for four per cent and three per cent, respectively, between 1996 and 2008. Together they accounted for US$673 million, with US$530.4 million being invested between 1996 and 2000. Almost 82.5 per cent of all European investment in ICT was made in 1998 by Dutch, British, Italian, French, Irish and German companies, which invested US$250 million, US$99 million, US$46.8 million, US$35 million, US$14.5 million and US$3.5 million, respectively. The Dutch investment of US$239 million in Vodafone Egypt demonstrates the appeal of large investments targeted at strategic sectors such as telecommunications, which guaranteed a monopoly position in the market and, hence, control over price and profit. This sector attracted a further US$50.7 million between 2004 and 2008, when the UK invested US$15 million in 2008 and Luxemburg US$12.5 million three years earlier. Similarly, the construction sector received US$382.6 million, with US$290.6 million being invested between 1996 and 2000. Although construction attracted a substantial investment worth US$181.3 million from the UK between 2006 and 2008, this sector witnessed a wave of disinvestment by France, Italy and Cyprus, which withdrew US$53.5 million, US$43.7 million and US$8.1 million in 2006, 2006 and 2008,

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respectively. Latvia’s first and only investment in Egypt with US$1.7 million was made to construction in 2008. However, ICT was the only sector to receive the largest foreign investment to date in the country, with US$1.17 billion invested by United Arab Emirates in Etisalat Misr in 2006. Overall, this substantial investment in construction and ICT has contributed to an improvement in some infrastructural facilities, particularly telecommunications. However, the level of European investment made in 1998 was not repeated in the following years. Apart from a minor investment in 2001, no further input was made in these sectors between 2000 and 2004. Analysis of the nature and main characteristics of EU FDI flows into Egypt over the past 13 years draws into harsh relief an unhealthy pattern that is based on single large investments and inconsistency in the flow of capital. This is also evident in the huge disparity in the static and sectoral composition of European direct investment in Egypt. Analysis also shows that the UK has been the largest European investor and, globally, second only to Saudi Arabia, while manufacturing is the most attractive sector to foreign companies. The industrial sector is not only the largest and most dynamic sector in the economy but it has also been made a priority by both the Egyptian Government and the EU under the jointly sponsored Industrial Modernization Programme of 2000. How and to what extent British direct investment has impacted on the pattern and growth of Egyptian manufacturing sector is the focus of the next chapter.

7 BRITISH DIRECT INVESTMENT IN THE INDUSTRIAL SECTOR

Over the past 40 years the UK has been one of the major foreign investors in Egypt. The levels of growth, the consistency, and the pattern of British investments in the country all testify to the UK’s deep commitment and the enduring relationship with the Egyptian market. According to GAFI, between 1970 and 2008 British companies invested US$5.97 billion in Egypt and by mid 2009 there were 985 British companies, functioning in practically all the economic sectors. This level of commitment reflects the gradual improvement in Egypt’s investment environment as well as the prominent position of the UK as the second most important source of global FDI outflows, after the USA. In Egypt at the present time, industry is both the most dynamic and the largest economic sector in terms of the percentage of gross national product and, hence, its modernization has become a necessity if the country is to achieve sustainable economic growth. The emerging importance of industry is also reflected in the country’s economic strategy that is increasingly based on export-oriented economic policies; hence, there is even greater need for capital, technology transfer and knowledge through FDI. The importance of this is manifested in the degree of attention given to the Industrialization Programme that was implemented by the Egyptian Government and has received strong technical and financial support from the EU since 2000. In light of the contemporary economic climate in Egypt, this chapter aims to examine the extent to which the improvement in Egypt’s business environment has led to an increase in British FDI flows into the industrial sector between 1996 and 2008. It shows that since the early 1970s more

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than 44 per cent of the British companies and 41.5 per cent of all capital flows invested by them were made between January 2005 and June 2009. Without minimizing the significance of this development, this chapter will also closely examine the first ten years following the establishment of the Euro-Egyptian partnership in 1995, in order to determine whether British investment was affected by this partnership or the improvement in Egypt’s investment environment. The chapter begins by focusing on the UK’s role as the largest European investor in Egypt and charts the flow of capital that has continued to increase to the extent that British investment in the country constituted 33.5 per cent of total EU investment in the country between 1996 and 2008. This is followed by an analysis of the sectoral composition of British investment in the seven key industries located inland and in the free zones. It ends by examining the extent to which this investment has impacted on job creation and employment levels in Egypt during the period under consideration. 7.1. Britain: the Leading EU Investor in Egypt Between 1996 and 2008, British direct investment in Egypt amounted to US$3,310.8 million, with 74.9 per cent being invested in the last five years. This huge increase in British FDI flows into Egypt after 2004 was a fair share of the relative distribution of global FDI flows worldwide, which reached US$1.8 trillion in 2007. In the same year, Egypt attracted US$11.4 billion, with US$750.6 million being British investments. Almost the same amount of investment was made by British firms in the previous years, 322 per cent and 225 per cent higher than 2004 and 2005, respectively. With 410 companies established and US$2,479.52 million invested in the country, the UK was again confirmed the largest non-Arab foreign investor in Egypt between 2004 and 2008. This was already the case between 1996 and 2004, when British FDI flows accounted for one third of total EU FDI inflows into Egypt. The Netherlands, which was the second largest EU investor, accounted for only 20.1 per cent during the same period. The data also shows that the percentage of British FDI flows almost equalled the combined total of Spain, France, Italy, Germany, Belgium and Ireland, which accounted for 13.1 per cent, 7.2 per cent, 7.1 per cent, 4.7 per cent, 4.6 per cent and 1.7 per cent, respectively. Luxemburg was the world’s largest investor in 2002, yet its share did not exceed three per cent, while Portugal accounted for less than 0.08 per cent of the total EU FDI flows during the nine years.

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Analysis of the available data also indicates that British FDI flows were more constant on an annual basis than that of any other EU member state. This is evident in the comparison set out in Figure 7.1, which shows that the UK accounted for half of the EU FDI outflows to Egypt in 1996, 34.7 per cent in 1997, 37.7 per cent in 1999, 53.5 per cent in 2000, and 42.7 per cent in 2002. The lower percentages of FDI in 1998 (23.7 per cent), 2001 (15 per cent), 2003 (27.7 per cent) and 2004 (20.4 per cent) were not due to a reduction of FDI flows from the UK but rather to an increase in investments made by other EU countries, which increased the overall total flows from the EU. For instance, although the UK recorded the highest level of FDI flows with US$160 million in 1998, it was the single Dutch investment (US$239 million) in Vodafone Egypt and investments by Italy (US$110 million), France (US$49.5 million) and Luxemburg (US$48.8 million) that increased the total EU FDI flows into Egypt by 261 per cent over the previous year. This was also the case in 2001, when Spain’s investment of US$300 million in the free zones reduced the percentage of British FDI flows to its lowest level (15 per cent), regardless of the US$60 million invested by the UK. Figure 7.1: British and EU FDI flows into Egypt 1996-2008 2500 EU

US$ million

2000

UK

1500 1000 500 0

96

97

98

99

00

01

02

03

04

05

06

07

08

Source: GAFI

In 2004, the UK was the leading EU investor, ahead of Spain, the Netherlands and France, which invested US$166.8 million, US$166.3 million and US$105 million, respectively. In 2006 and 2008, the UK was again far ahead of France and the Netherlands, the second and third largest EU investors. However, the UK was overtaken by Spain and France, which invested US$554.5 million and US$459.4 million, respectively, in 2005 and by Italy, which invested US$931.4 million in 2007.

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Between 1996 and 2004, British FDI flows were geographically distributed across Egypt, with the inland accounting for 66.9 per cent (US$568.5 million) while the free zones received almost one third (US$272.3 million) of the total investment. During this period, most investments inland were made between 1996 and 1999. In 1996, almost all British capital flows were invested in inland companies. In the following three years, investment projects and companies based inland received as much as 84 per cent, 93.2 per cent and 90.2 per cent, respectively, of total British FDI flows into the country. This situation was almost reversed between 2000 and 2003, as the majority of investment went into the free zones. In 2000, British investment in the free zones accounted for 73.4 per cent of its total capital flows into the country, and 99 per cent of total flows in 2002. This unprecedented concentration of FDI in the free zones fell to 47 per cent in 2003 and decreased further in 2004. 7.2. British FDI Flows into the Industrial Sector Egyptian industry has been one of the most attractive sectors to British companies, which invested a total of US$1,215.1 million between 1996 and 2008. This sum reflects the dynamics of the manufacturing sector and the expertise that made British companies successful in this domain. Growth levels of British investment were also linked to the intensity of economic reforms, for which Andrew Cahan, the Chief Executive of the UK Trade and Investment, commended Egypt’s performance that won it the top spot on the World Bank’s list of countries to have successfully implemented economic reform.1 Not only does this demonstrate the confidence that British investors have in Egypt, but it also reflects the high level of economic growth, which rose to more than 7.2 per cent in 2006 and 2007 for the first time since the early 1980s. The effect of this was clear in the concentration of investment in the industrial sector during the latter half of the 1990s and even more evident between 2004 and 2007, when investment peaked at US$417.9 million in 2006, as shown in Figure 7.2. However, after 40 years of financial linkage the first disinvestment by British companies from the Egyptian manufacturing sector began in 2008. The disinvestment of US$100.1 million from industry, as well as US$50.03 million from the financial sector, could be attributed to the slowdown of economic growth to 4.3 per cent, set in motion by the global financial crisis that began in the US in 2007. As the British economy was the most affected, many British companies faced huge financial difficulties due to

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lack of liquidity in the banking system, and this forced many companies to downsize their operations and withdraw capital flows from their overseas affiliates. However, at the same time there was a strategic reallocation of capital from the industrial and financial sectors to agriculture, which benefited from a sharp rise in British investment to US$246.6 million in 2008, up from US$8.5 the previous year. Figure 7.2: British FDI flows into Egypt's manufacturing sector per year 1996-2008

500

US$ million

400 300 200 100 0 -100

96

97

98

99

00

01

02

03

04

05

06

07

08

-200

Source: GAFI

However, after 40 years of financial linkage the first disinvestment by British companies from the Egyptian manufacturing sector began in 2008. The disinvestment of US$100.1 million from industry, as well as US$50.03 million from the financial sector, could be attributed to the slowdown of economic growth to 4.3 per cent, set in motion by the global financial crisis that began in the US in 2007. As the British economy was the most affected, many British companies faced huge financial difficulties due to lack of liquidity in the banking system, and this forced many companies to downsize their operations and withdraw capital flows from their overseas affiliates. However, at the same time there was a strategic reallocation of capital from the industrial and financial sectors to agriculture, which benefited from a sharp rise in British investment to US$246.6 million in 2008, up from US$8.5 the previous year. Prior to the economic boom that began in 2004, Egypt’s manufacturing sector attracted US$602.2 million from the UK, which accounted for 44 per cent of total EU FDI flows into manufacturing between 1996 and 2003. During this time, British firms invested US$335.2 million in industrial projects inland and US$267 million in manufacturing in the free zones. The data shows that between 1996 and 2001 this

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contribution grew annually by an average 53 per cent of total investment in industry, though in 1997, it decreased to 20 per cent before rising again to 84.5 per cent in 2001. It also shows that this contribution reached its lowest level of 0.7 per cent in 2002 and increased slightly to 1.5 per cent in 2003. This kind of inconsistent level of growth raises serious concerns not only about the pattern of British FDI flows into Egyptian industry but also about the state of the sector and its capacity to attract further FDI from the UK in ensuing years. British capital flows into the industrial sector were attracted by the growing diversification in Egyptian manufacturing goods, the expanding domestic market, improvements in product competitiveness and quality, and the shift in government policy from import-substitution industrialization toward exported-oriented economic policies. By the early 2000s, manufacturing output stood at 18.1 per cent of total output, with some 62 per cent being contributed by private and foreign companies. According to the Egyptian Government, almost 35 per cent of total private investment in Egypt went to the manufacturing sector, which at the time was one of the most attractive sectors for investors due to the introduction of a privatization programme begun in 1994; it allowed foreign and private companies to buy shares in most public sector manufacturing enterprises.2 In 1996, though the response of foreign investors to the privatization programme was highly positive, the subsequent slowdown led to a decline in overall FDI flows from the UK and the rest of the EU to the industrial sector, which lasted until almost the end of 2004 when investment began to raise again. However, modernization of the industrial sector as a whole did not deter British investors, many of whom simply became more selective in their investments. This was particularly evident at the sectoral level, where just over half (50.7 per cent) of total British capital flows into Egypt in 2007 went to the services sector; this was more than twice the amount invested in the industrial sector, which accounted for only 24 per cent. It is worth noting that in 2008 62 per cent of total British investment went to agriculture while industry witnessed disinvestment worth US$100.1 million. Between 1993 and 1998, the growth of the textiles and agroindustry sectors by 48.8 per cent and 85.5 per cent, respectively, did not influence the distribution of British FDI flows.3 Rather, between 1996 and 2008 the concentration of these investments shifted to construction materials and engineering, which accounted for 33 per cent and 29 per cent, respectively. Figure 7.3 shows that food processing attracted 17 per cent of British FDI in manufacturing, while chemicals and

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pharmaceuticals received nine and six per cent, respectively. The textile industry figures are insignificant, especially because Egypt has had a competitive advantage; hence, the value of manufactured textiles grew by 85 per cent during the same period. The following details how most of the US$39.7 million was invested in clothing rather than textiles. The wood working sector also received three per cent (US$47.3 million), while metals was the only industry that severely suffered from British disinvestment of US$12.4 million in 2008, which reduced total British investment in this industry worth (minus) -6.2 million between 1996 and 2008. Figure 7.3: British FDI flows into Egypt's Manufacturing sector by industry, 1996-2008 Food 17%

Construction Materials 32%

Pharmaceuticals 6%

Textiles 3%

Metals 0%

Wood Working 4%

Chemicals 9%

Engineering 29%

Source: GAFI

Surprisingly, the mining industry did not attract any British investment, and was totally dominated by German, Italian and French companies, which jointly invested over US$5.9 million during this period. The main beneficiary in this industry was the Aswan Development and Mining (ADMCO), which received US$2.9 million from the German company Mansman Demage, US$1.4 million from the French company Segleke and a similar investment from the Italian company TAKNET SBA Bomine, altogether creating 2,520 jobs in 1997. In 2004, an Italian investment of US$32,000 in Italian-Egyptian Marble and Granite created 21 jobs, which reveals that although the UK was still the main EU investor in Egypt, it was outdone in some industries by its European competitors.

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7.3. Sectoral Distribution of British Direct Investment Inland Most British direct investment in the manufacturing sector was concentrated inland and spread across almost all key industries. Some, such as construction materials and engineering, received more investment than others. Available data shows that British direct investment inland accounted for US$988.8 million, with 45.4 per cent being invested in construction materials. Between 1996 and 2008, investment in food, engineering, chemicals and pharmaceuticals amounted to US$222.5 million, US$139.7 million, US$104.8 million and US$76.1 million, respectively. Wood working and textiles received US$47.3 million and US$20.3 million, respectively. The metals industry experienced disinvestment on aggregate worth (minus) -US$14.2 million during the same period. Moreover, the data shows that all British investment in construction materials, food and wood-working was inland, while the majority of investment in metals was made in the free zones.

British FDI in Construction Materials Manufacturing Between 1996 and 2008, the construction materials industry received US$435 million of total British FDI flows, all of which was invested in inland manufacturing; almost 57.2 per cent of this was invested between 2005 and 2008 and 42.8 per cent was invested between 1996 and 2001. This reflects the correlation between the boom in Egypt’s construction sector, construction materials and the country’s economic growth. Since local companies carried out almost all construction projects, British companies concentrated their investments in related building material industries, particularly cement, iron and ceramics. This sort of investment flourished during the peak periods of economic growth, but the slowdown in Egypt’s economic growth after 2001 considerably affected this industry, leading to a sharp decline in British investment over the following three years. Over the past five years, the majority of British investment in construction materials has been in the cement industry. Egypt’s South Valley Cement Company received two investments totalled US$180.7 million and there was one disinvestment of US$5.9 million. A further US$60 million was invested in Nile Valley Cement, while Alexandria Portland Cement and Alarabia El Watania Cement received US$5.3 million and US$1.3 million, respectively. These investments demonstrate the interest of British, as well as Spanish, firms in key strategic industries, such as cement. Surprisingly, neither iron nor steel attracted similar interest because the whole industry was monopolized by Al Ezz Steel

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Group, which holds over 80 per cent of the Egyptian market; this kind of monopolistic competition might have contributed to the recent withdrawal of US$12.4 million of British FDI flows from Al Ezz Steel Rebars, located in Menoufia. British firms were also attracted to ceramics, with investments of US$13.2 million in Lecico Misr and US$1.96 million in Al Ezz Ceramics and Porcelain. Between 1996 and 2003 and prior to those particular investments, British FDI flows into construction materials manufacturing totalled US$186.3 million. The Lecico Misr (Egyptian-Lebanese Ceramics Company), which was established in 1975, was the only company of the 16 British-Egyptian joint ventures operating in this sector that benefited from British FDI flows in the pre-Barcelona era. The British share in this company was owned by Intage Holdings Limited with two other minor investments by individuals, not exceeding US$1 million. The largest British investment in this sector was made in 1996. With the exception of the US$104.6 million invested by the Belgian company HOLSEPLE in 1996, Almasria Llasmant (Egyptian company for Cement) received US$128.5 million from the UK-based Egyptian Company for Cement Limited, which was the largest single investment made in this industry. These investments were notable because of the 900 jobs generated between them and this contribution was further enhanced by the creation of another 2,500 jobs by two British firms, Lady Well and Blue Nile, which invested US$0.9 million and US$5.2 million, respectively, in the Egyptian company South Valley Cement in 1997. In 2001, the second largest British investment was made in Blue Circle Egypt Cement Industry, which received US$51 million from the British company Blue Circle Europe Limited. A further US$500,000 and US$300,000 were invested by the Associated International Limited Cement and Blue Circle Home Products International Limited. However, over the next three years the absence of any large investments signalled the decline in British and European FDI in this sector. In 2004, there were only two minor British investments, one in Alseramic Alouropy (European Ceramics) of US$811 and the second, made by a British investor of Egyptian origin, of US$32,000 in the Mega Art Works (Abdallah Ali Ragab Mohamed & Partner). This latter investment draws attention to the contribution and role played by migrant investors in the economic development of their native countries. Available data shows a relatively close connection between the rise and fall of FDI flows from the UK and the total contribution of EU member

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states in the construction materials sector. The large share of FDI from British companies led to a significant increase in the total contribution of the EU, though notable investments from Belgium and Denmark respectively, contributed US$104.6 million and US$23 million over the same period. Apart from the two Danish investments of US$18.5 million and US$4.5 million by the Borg Portland and the Industrial Fund for Developing Countries in the Egyptian company Sinai White Portland Cement, the data shows direct ties between the rise and fall in British and EU investments into this sector between 1997 and 2004, including 2001, when British FDI flows accounted for 99 per cent of total FDI flows from the EU. Between 1996 and 2004, Britain’s dominance of this sector was due to the limited involvement of other major EU investors, such as Germany, Italy, France and the Netherlands, whose investments were as little as US$2.2 million, US$600,000, US$200,000 and US$36,000, respectively,. The data also confirms that the two large investments made by Belgium in 1996 and Denmark in 1999 were the only investments made by those countries and, hence, British FDI flows faced no competition in this industry from any of its main European competitors. Compared to British investment, the majority of EU investment in the building materials sector was minor, though their contribution to job creation was meaningful. For example, the US$247,000 invested by the French company Le Farge Pelater Internationale in the Egyptian company Le Farge Gypsum Egypt led to the creation of 100 jobs in 2001. Though German investments did not exceed US$2.2 million, nevertheless they created 1,530 jobs in 1996. In the following year, Deter Christian Franklyn (a German company) invested a further US$300,000 in the GermanEgyptian firm Industrial Marble, creating another 65 jobs, while Hanash George Winter invested US$200,000, creating 80 jobs in 1999.

British FDI in the Engineering Industry Inland Between 1996 and 2008, British firms invested US$392.2 million in engineering, with US$103.7 million going to engineering projects in inland. This accounted for only 26.4 per cent of total British FDI in the engineering sector since, during this period the majority of investment was made in the free zones. Most British investments were made in petroleum, electronics, cinema production, air-conditioning and computer programming. Over the past five years, the engineering sector simultaneously experienced large investments and disinvestments in a way that

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considerably affected total British FDI stock in this sector. For example, while British Petroleum (BP) invested US$115 million in United Gas Derivatives Company (UGDC), making it an equal partner to the Egyptian Natural Gas Company (GASCO) and ENI International BV, the London-based Arab Film Limited withdrew US$31.6 million from the Egyptian company Alarabia Llintag wa Altawzea Alsinimaei (Cinema Production and Distribution Co.). This withdrawal was equal to the total investment made by this company in 2000, which had been the largest British investment in engineering before 2004. Moreover, the data shows that British firms made two relatively large investments worth US$10 million and US$7.3 million in S.E. Wiring Systems Egypt and Egyptian Electronics Technology, respectively; subsequently, they invested another US$5.9 million in Borg Al-Arab Industry. A further eight investments were made in this industry inland, but most of them were small in value. In 2000, the Hatef Telecom BVI invested US$2.7 million in the Egyptian Electronics Technology Co., creating 50 jobs. These figures indicate the limited capacity of this industry to generate employment because it depends more on technology and knowledge than on manpower. In 1998, this was noticeable in the two investments made by Multimedia East and the Preda Investment Corporation of US$5.9 million and US$1.7 million, respectively, in the Egyptian company Nology International Group; between them they created only 11 jobs. However, the US$6.3 million invested in 1996 by BICC DUCAB Investment Limited in BICC Egypt created 150 jobs, the largest number of jobs generated by a British investment in this industry. The number of lesser investments made by individual investors and small companies should not be underestimated in terms of capital and employment. In 1997, the investment of US$600,000 by a British investor in Egyptian-British Air-Conditioning (Mizoshi) led to 26 jobs and a minor investment in the Nile Petroleum Industries (Incub), which received US$7,374 and US$14,749 from the Try Core and the Edico Petroleum, created 44 jobs. In 2001, four British companies invested US$2.4 million in Deba Misr Lltasmim wa Eltaghiz. Almost US$1 million of this capital was invested by British Deba Holdings Limited and other three companies, each of which contributed US$260,000 and collectively created another 60 jobs. The engineering industry was not completely dominated by British companies. During the 1990s, German, Italian and French firms also made a significant contribution in the electricity, gas, communications,

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information systems and, in particular automobile industries. In 1996, Germany’s Mercedes Benz invested US$4.6 million (57 per cent of total German FDI in engineering) in Egyptian German Automobile (AGA), creating 400 jobs. In 1999, Italy’s Fiat Auto SPA invested US$11.8 million in Fiat Auto Egypt Manufacturing, creating 500 jobs. In 1993, the French company Peugeot Automobile invested over US$10 million in Peugeot Egypt, though most French investments in this industry were smaller, averaging US$50,000. In 1996, Dutch companies made some contributions in the gas and technology sector, with US$8.8 million invested by the Eni International BV in the Egyptian company Egyptian International Gas Technology Company (GASTIC), creating 167 jobs. Meanwhile, Belgian companies specialized in electrical equipment and services. In 2000, the single Belgian investment made by the Vina Nsirdy Iplikson d’Electricité of US$4 million, together with two individual investors who each contributed US$1,600 to the Shredder Egypt Lightening and Cities Supplies, created 51 jobs.

British FDI in the Food Industry By 2008, there were 38 British firms and joint ventures operating in the food industry; while a quarter of them were established in the last five years, 14 of them were established before 1995. This demonstrates continuous British interest in this industry, going back to 1979 when Mac Beverages invested around EGP 193 million in Coca Cola Egypt. Between 1996 and 2008, British firms invested US$225.7 million in food processing, all of the investments being made inland. Almost 80 per cent of this investment was made in the last five years, when a British firm invested US$143.6 million in Chipsy International Company (formerly Chipsy for Food Industries), the largest investment in this industry for over 25 years. Arma Food Industries received US$9.6 million, while an oil producing company located in Suez attracted US$5.3 million. The potential for growth in food industry encouraged another British firm to invest US$7.7 million, together with a Cypriot firm making US$12.9 million worth of FDI in the Greek affiliate Edita Food Industries, which is located in Giza. Two further investments were made in Cairo Food Industries and a company producing fine tea worth US$3.3 and US$1.8 million, respectively. Between 1996 and 2003, total British investment in food processing stood at only US$44.5 million, accounting for 13 per cent of total British FDI flows into inland manufacturing. Most of this investment occurred in 1999, when a British company invested US$37.8 million in EBC Industry

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(the Egyptian British Canadian Company), creating 120 jobs. That year also witnessed a medium-sized investment by Financial Holdings International of just over US$2 million in the Lacto Misr (a company producing milk and food for children), creating another 120 jobs. Moreover, in the same year the potential for expansion in this industry encouraged two British entrepreneurs to each invest US$72,647 in the fast food company Master Bay. As illustrated above in the discussion of investments in engineering, the data shows that British FDI flows into the food industry were highlighted by a large single investment during that period. British investment was far greater in 1999 than in 1997 and 1998, when British investment accounted for US$1.5 million and US$2.4 million, respectively. In 1997, the British E.F.C. Holdings invested a little over US$1.4 million in Red Sea Fizzy & Non-Fizzy Drinks, which resulted in the creation of 55 jobs. In addition, two small British investments worth US$104,000 were made to the Egyptian company F & B Manufacturing, creating 22 jobs. In 1998, British Overseas Trading and Engineering invested US$1.3 million in the Fantra Beef Industry, creating 53 jobs. The British company Olay Holdings Limited invested US$579,000 in Olay Manufactured Food, creating 110 jobs. International Foodstuffs Co. Limited and Allana Inlerateon Limited made investments of US$4262,000 and US$226,000, respectively, in the EFCO Foodstuffs, creating a further 110 jobs. Between 2002 and 2004, British FDI flows decreased steadily to their lowest level of US$74,000 in 2003, from US$262,000, US$104,000 in 2000 and 2001, respectively, while no investment was made at all in this sector in 2002. In 2004, investment stood at US$99,000. The pattern of British investment in the food industry, which was marked by a single large investment in 1999, was similar to that of other EU investors in the same area. For instance, while total French FDI flows amounted to US$11.7 million between 1996 and 2004, Fromage Bel-Sa invested US$10.6 million in Bel Egypt in 1998, gaining almost 100 per cent ownership and creating 100 jobs. Luxemburg’s total FDI flows were made in a single investment in 2000, when BR Investment put US$10.2 million in Mashreq Dairy Products, creating 250 jobs. 4 Of the three Dutch investments made in the food industry totalling US$7.7 million, in 2002 the SLBA Netherlands BV invested US$7.5 million in the Danoun Mashreq Fine Biscuits, creating 388 jobs. This pattern was repeated to a much lesser extent in the case of Italian companies, where total input (US$5.5 million) was distributed over two large investments in 1997 (US$3

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million) and 2000 (US$2.1 million), and was absent in the German case as the total contribution of German companies to the food industry over the nine-year period amounted to less than half a million dollars.

British FDI in the Chemical Industry Inland Between 1996 and 2008, chemicals attracted a total of US$127.6 million, with British firms investing US$104.8 million inland and US$22.8 million in the free zones. Two thirds of this investment was made inland in the last five years. Egypt’s Sphinx Glass received the largest British investment in this industry, with US$74.8 million; this transaction took place in 2008, just before Dubai Group, in concert with the Cairo-based private equity firm Citadel Capital, acquired 49 per cent of the company’s equity. British firms were also attracted to other industries, such as packaging and cleaning materials. For example, two of the large British investments went to Hay Pack Packaging and EL Watania Packaging Materials Industries, which received US$7.1 million and US$4.5 million, respectively; meanwhile, most of the 11 investments in Egyptian companies in the past five years were small in value, each being worth less than US$1 million. British investment was concentrated mainly in soap and cleaning materials, packaging, paper, glass and plastics. Such diversity in the distribution of capital flows within this sector, as well as the large number of companies involved, underscores the persistent commitment of British investors to the chemical sector. In 1996, the UK-based firm Gulf Red Sea made two large investments totalling US$14 million, with US$6 million being invested in Hay Pack Packaging, creating 161 jobs and, in 1999, with US$8 million being invested in Arma Soap and Cleaning, creating a further 186 jobs. In 1996, the Egyptian company El-Watania Manufacturing Packaging Materials (NAT Pack) received two investments from two British companies, the Arabian Fenter Investment Co. and the Plastic Packing Co. that were worth US$3.5 million and US$3.8 million, respectively, and created 65 jobs. In 1999, Kokson Overseas Limited invested US$1 million in Visofuse Mideast Limited. The majority of investments were small in value, but made a significant contribution to employment, in particular the 450 jobs that were created by Water Hall following an investment of US$400,000 in the Egyptian company Tanzifico Alalamia in 2001. Between 1996 and 2004, the UK was ahead of the Netherlands, Italy, Spain, France and Germany, which invested US$23.7 million, US$20 million, US$17.5 million, US$15 million and US$12.8 million, respectively. However, despite their leading position in this sector, British companies

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faced tough competition from their European counterparts, particularly the Dutch and Italians. Figure 7.4 shows that although the UK contributed the largest share of total EU FDI flows into the chemical industry, it was overtaken by the Netherlands in 1997, by France in 2000, by Spain in 2002 and by Italy in 2003. Unlike most other sectors, the chemical industry was the only one to receive constant and continuous FDI flows from the EU during the period of economic slowdown after 2001. For example, in 2001 Austria’s single investment in this sector was US$5.3 million, while Spain’s largest investment of US$17.2 million was made in the following year. In 2003, Italian and Dutch companies invested US$11.3 million and US$7.3 million, respectively. This European involvement at a time of economic downturn highlights the strategic importance of the chemicals sector to private and foreign investors, particularly in terms of specialization and, hence, the monopoly of production and market prices. This also indicates that Egypt was still a resources-seeking market, where the availability of natural materials, constituted a major attraction to foreign companies. Figure 7.4: British FDI compared to that of major EU investors into chemicals inland*, 1996-2004

30

US$ million

25 20 15 10 5 0 1996 EU

1997 UK

1998

1999

2000

The Netherlands

2001 Italy

2002

2003 Spain

2004 France

Source: GAFI *This figure does not include British FDI in the free zones.

The degree of specialization on offer from European companies in the chemical sector was notable. While British companies specialized primarily in the manufacturing of packaging and cleaning materials, in 1997 the Dutch concentrated their investments in fibre, coating and plastics materials, with almost 50 per cent (US$11.8 million) of total Dutch FDI flows being invested by Future Pipes International in its Egyptian affiliate

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Almostaqbal Lisinaat Alanapip (the Future for Manufacturing Pipes). Meanwhile, more than half of the 34 Italian companies operating in this sector specialized in environmental services. For instance, in 2003 the Egyptian company EM Al-Arab Environment received the largest single investment of US$7.9 million from the Italian company EM International SBA, with a further US$400,000 from the company Semeast SBA, creating a total of 720 jobs. In addition, Aldawlyia Environmental Services received investments from Semeast, Gakorosy Impress, Gezenio and Sechet, which invested US$900,000, US$700,000, US$700,000 and US$100,000, respectively, and jointly contributed to the creation of 3,100 jobs. Meanwhile, the majority of French investments in the chemicals sector were in paper production and liquid gas. In 2002, CFN Investments made the largest French investment of US$11.7 million in the Egyptian company I.P.M (International Paper Manufacturing), creating 600 jobs. This was followed by another large investment by De Pertoli Brema Gas, which invested US$2.6 million in the Egyptian company Liqugas in 2002.

British FDI in the Pharmaceuticals Industry Some experts have considered the pharmaceutical industry to be one of the most promising and fast growing sectors in the Egyptian economy. 5 By 2002, the pharmaceutical market was estimated to be worth US$1 billion and local production covered almost 94 per cent of local demand by volume, while sales increased by over 150 per cent between 1991 and 2002.6 This industry benefited from the global experience that came with investments made over the past 30 years by international companies, such as Squibb, Bristol-Meyers, Merck Sharp & Dohme, Pfizer, Hoechst, SwissPharma and Glaxo-Wellcome.7 Between 1996 and 2008, total FDI flows from the EU to this R&Dbased industry accounted for as little as US$153 million, with US$76 million being made by British firms. This made the UK the largest EU investor in pharmaceuticals during this period. All investments in pharmaceuticals were made inland and 72.6 per cent of them were invested in the last five years. The most recent and largest British investment of US$30.2 million was made in Astrazenica Egypt Drug Industries, located in Giza; it accounted for 100 per cent of the company’s equity. In 2004, Astrazenica Treasury Limited invested US$3.9 million in Astrazenica Egypt, creating 110 jobs. Seven other investments were made in the past five years, when BioPharm Research and Drug Industry, Hikma Pharma and Vina Biotex Egypt received US$9.1 million, US$7.4 million and US$2.6 million, respectively. The remaining investments,

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worth around US$8 million, were all invested in the production of drug bottles. In 1998, the Egyptian company Almotahyda Llzogag Almotaadel (United Treated Glass) received investments of US$7 million, US$8.6 million and US$1.2 million from Overseas Arab Gulf Limited, Egypt Invest Wan Limited and Tely Cab Limited, respectively, creating 300 jobs. However, it is worth noting that GlaxoSmithKline (GSK) Egypt, which was established in 1981 in partnership with the Egyptian company Advanced Medical Industries (ABI) and which changed its names in line with the restructuring of its London-based parent company, has been one of the most important British companies in Egypt. GSK has increased its stake in its Egyptian partner from 51 per cent to 90 per cent in 1995. 8 However, not until 2001, when GlaxoWellcome and SmithKline Beecham merged in GlaxoSmithKline, did the Egyptian company change its name to GlaxoSmithKline (GSK) Egypt. Despite rich resources and raw materials, as well as a skilled labour force, GSK Egypt imports bulk chemicals and processes them into final dose forms. 9 With the minor exception of developing some products for the local market, there is hardly any R&D taking place in this subsidiary.10 Nevertheless, GSK Egypt remains important not only because of its ranking as the number one pharmaceutical company in Egypt but also because of its recent progressive restructuring strategies that view the country as an export base to other markets. As the only foreign company engaged in exporting Egyptian pharmaceutical products to the Middle East and African markets, the success of GSK Egypt’s export strategy could encourage other foreign subsidiaries in Egypt to follow suit and, hence, make Egypt a potential export base for the wider MENA region. Apart from British investment, FDI from other major EU countries was very small. In 1998, Sweden, which was second to the UK, invested US$5.7 million, with US$2.2 million and US$2.9 million being invested by the Swedish companies HIPI Health Care AB and HIPI Holding AB, respectively, in the Egyptian company HIPI Drug Supplies. Germany invested US$4.2 million, with US$1.8 million coming from two German investors in the Egyptian company Almotahyda Llzogag Almotaadel (United Treated Glass) in 1998; in 2003 the second large investment was made by Paul Hartman AG with US$1.3 million going to Paul Hartman Medical Industry and creating 210 jobs. There were also a number of smaller German investments such as Karl Baish GMBH, which invested US$300,000 in Baish Egypt in 1998, and German Rhine Biotech, which invested US$200,000 in Rhine Mina Pharm Biogenetics and created 100

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jobs in 1999. These investments were not made in the development of drugs or in R&D but in secondary services such as the manufacturing of glass bottles and packaging.

British FDI in the Textiles Industry Inland Although textiles are Egypt’s most strategically important industry, it was one of the least attractive areas for British, as well as other European, investors. Between 1996 and 2008, total British FDI flows into this industry amounted to just over US$39.7 million, with US$19.5 million being invested in the free zones and only US$20.7 million being invested inland. The largest British investment inland was made in Egyptian Textiles Industry, which received US$18.7 million. This, together with the minor investment of US$178.630 in Egyptian Linen (EGLAN), was the only investment made inland in the past five years. Apart from this large amount, few British investments inland took place in 1997, when the Irish Egyptian Linen company (IRELAN) received US$1.1 million, with US$716,000 being invested by Thomas Sinton & Co Ltd and US$358,000 from Stanley Deak, resulting in the creation of 220 jobs. During the same year, the Egyptian company Alalmyia Weaving and Tricot received US$199,000 from a British investor, creating 60 jobs. The remaining investments were small and made by individuals and, hence, their contribution to the industry was less significant from either a managerial or technological point of view. It is worth noting that almost 49 per cent of British FDI in this industry was made in the free zones and that the majority of this investment was made in clothing, rather than in textiles. This was due to the deteriorating conditions of most textile companies, to their inefficient methods of production, to the complexity of their financial records and to their huge existing debts. These factors deprived Egypt of one of its main competitive advantages, the availability of high quality and long staple cotton and, consequently, much of British FDI flows were diverted from Egypt’s textile industry into similar industries elsewhere in the Mediterranean, particularly Tunisia, Morocco, and Turkey, where the textile industries had developed much faster than in Egypt. Between 1996 and 2004, Egypt’s textile industry also received capital flows from Italian and Belgian investors, who contributed US$1.4 million and US$1.1 million, respectively, occupying first and third places, with the UK in second place, in terms of total EU investment in textiles and clothing inland. The data shows a relatively constant Italian involvement in this industry, with investments made in eight Egyptian companies

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during the period under consideration. These investments, however, were small in value and tended to generate a limited number of jobs. Made in 2001, the largest single Italian investment was of US$588,000 went to Egyptian Vertical and created 30 jobs. In 2000, the Egyptian company Insemi Italy Clothing received US$585,000 from three Italian investors, creating a further 60 jobs. In 2003, the Belgian company NV GOS Vanesta SA invested US$1 million in Valley Vanesta Weaving and Textiles, creating 55 jobs. In 2004, Luxor Shirts (a clothing company) received US$39,000 from G May Aramco Gilberg, creating 92 jobs, while Salem Shirts received over US$81,000 from two Belgian investors, creating a further 80 jobs. In 2003, total French investment in textiles amounted to US$714,000, with US$428,000 being invested in the Egyptian company Maidany Industrial Fibres, and US$200,000 being invested in the Egyptian company I.T.I Clothing three years earlier (2000), with the French company Gel Klod investing US$120,000.11 In 1997, Spanish companies also made a contribution, with Ecumers A investing US$44,000 in the Egyptian company Alalamyia Weaving and Terrico, creating 60 jobs. In the same year, a Spanish businessman invested US$36,000 in the Cairo Madrid (CAMA) Company, which led to the creation of 175 jobs. Over the past 30 years, Germany made only one investment in this area; in 1977, five members of the Shabib family jointly invested US$72,000 in the Syrian Socks and Clothing Company (FOALA), creating 27 jobs. One could argue that the low rate of European FDI flows into Egypt’s textile industry, particularly in inland projects, is closely linked to the country’s poor record of trade in textiles with the EU in comparison with the trade record of other Mediterranean partners. For example, in 2001 Egypt’s trade in textiles accounted for only 17 per cent of total Egyptian textile exports, while those of Tunisia, Morocco and Turkey accounted for 42 per cent, 33 per cent and 33 per cent, respectively.12 At the same time, these three countries accounted for 90 per cent of the trade with the EU in textiles and clothing which, in 2002, accounted for nearly 40 per cent of Tunisia’s total trade with the EU, a third of EU-Moroccan trade and about a quarter of trade between the EU and Turkey. The data presented in Table 7.1 also shows that between 1995 and 2002, Egypt made very modest progress in its trade in textiles with the EU compared to that achieved by the above mentioned Mediterranean partner states. Moreover, the table shows that on the one hand Egypt was only just ahead of Israel, Syria and Malta, which are not major cotton

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producers, while on the other, it is far behind Turkey, Tunisia and Morocco. What is more, the nature of EU-Egyptian trade in this sector underlines the condition of Egypt’s textiles industry. According to the Ministry of Foreign Trade and Industry, the EU primarily imported clothing and exported textiles (fabric and yarn) to Egypt. This means that the Egyptian textile industry (e.g. spinning, weaving and knitting) has failed to develop its manufacturing capacity and cannot meet the needs of the domestic market. It also means that European investors have kept their capital in EU-based textile industries, while investing in the manufacture of clothing in Egypt and other Mediterranean partners, which does not require a sizeable investment but is labour-intensive and, hence, this means lower labour costs. Table 7.1: EU trade in textiles with Mediterranean countries in 1995 and 2002 (€m). Country 1995 2002 % variation Imp/exp Import Export Import Export Import Export 12-MPCs 9247 4435 16294 7069 76.2 59.4 Turkey 4274 799 8964 1873 109.7 134.4 Tunisia 1841 1287 3115 2083 69.2 61.8 Morocco 1733 1060 2735 1764 57.9 66.4 Egypt 495 171 596 155 20.2 -9.3 Israel 453 472 366 367 -19.2 -22.1 Syria 177 51 271 64 52.7 23.8 Malta 138 109 170 117 22.8 7.3 Source: Eurostat, Statistics in Focus, theme 6-3/2003, p.3

British FDI in the Wood Working Industry Since 1972, only four joint ventures operating in wood-working have received British FDI flows. The most recent and largest investment was US$42.7 million invested in Egyptian British Vatrin Display Company, located in Sharkia, while the remaining investments were made in 1997, 1998 and 2001 and amounted to US$4.6 million, accounting for only 9.7 per cent of the total FDI flows from the UK into this sector. A number of small investments from other European investors were also made in this industry. In 1997, the Egypt Switzerland Wood Sawing Co (SAWMILL EGYPT) received around US$3.2 million, creating 70 jobs. In 1998, Egypt Forming received US$226,000 from Formix Limited. In 2001, Binomeroni Wood and Metal Industries received US$1.2 million, with US$729,000 being invested by Binomeroni 2000, while three other companies each invested US$156,000, creating 200 jobs.

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7.4. British FDI Flows into the Free Zones Up to this point, British FDI into Egypt focused on activity inland. In the free zones, the UK was the largest EU investor, with US$302.7 million FDI flows invested between 1996 and 2008. During this period, British firms invested US$252.5 million in engineering projects, while chemicals and textiles attracted US$22.8 million and US$19.4 million, respectively. In the free zones, all British direct investment was made in engineering, metals, chemicals and textiles. With the exception of 1996, the UK was the only EU member state that had uninterrupted annual FDI flows into the free zones over this period. This pattern differed dramatically from that of Spain, which invested 99.7 per cent of the US$300.9 million in free zones in 2001, and Luxemburg, whose total investment of US$48.8 million was made in 1998. Not only does this constant flow of British capital underscore the importance of the free zones to British investors but it also highlights the increased diversity of capital into industries, such as engineering, textiles and clothing. Unlike most EU companies, British companies operated across ten public and private free zones in Egypt. According to GAFI, between 1972 and 2008 the UK invested US$335.1 million in 58 projects in the free zones. The majority of this investment, estimated at US$257.5 million, was invested in 11 projects in the private free zones in 1997, 2000 and 2002, while the remainder was invested in the public free zones. Surprisingly, the free zones attracted only US$36.2 million invested in 14 projects during the FDI boom between 2005 and 2008. The largest British investment went to the Port Said Free Zone, with US$10 million being invested in SE Wiring Systems Egypt. In terms of value, this was followed by two relatively large investments worth around US$8 million and US$5.9 million invested in El Watania Metals Industry located in Ismailia Free Zone and Borg Al-Arab Industry located in Alexandria Free Zone, respectively. A further investment worth US$4.5 million was made in El Sokhna Biofuel Company located in the Suez Free Zone, while the remaining ten investments were spread across various free zones and were small in value. However, the UK remained the leading European investor in the free zones, ahead of Spain, with US$273.9 million of investments during the same period.

British FDI in the Public Free Zones GAFI data reveals that British companies did not begin to pay sufficient attention to the incentives offered by the Egyptian government for

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investment in the free zones until the mid 1990s. Prior to that, the earliest British investment came from the Offshore Oil Service; in 1978 it invested US$16.8 million in the Egyptian company Maritime and Oil Services (Maredaiv), located in the Public Port Said Free Zone. This created 160 jobs. In 1981, it was followed by a much smaller investment in the Egyptian textiles company Randolina Manufacturing Clothing, which received US$375,000 from Mid East Investment Limited, creating 32 jobs. Randolina was based in the Public Alexandria Free Zone. No further British investment was made in the public free zones until the early 1990s, when Bariod Limited invested US$1.5 million in Bariod Egypt in 1990, and the Bedoria Ch.Z.M.M invested US$225,000 in the AgroFood Free Zone. Between them, these two investments created 55 jobs. Since then, British FDI flows have entered the free zones at a slower though steadily increasing rate. The Public Cairo Free Zone attracted ten British investments, with only two being made before 1995; the remainder occurred between 1996 and 2002. Almost half of these investments were in textiles and the clothing industry. In 1997, the largest investment in textiles was made by Indo-Mediterranean Commodities Limited, which invested US$2.2 million (plus an extra US$300,000 from a private investor) in Indo-Med Garments. This investment constituted 100 per cent of the total equity of the company and created as many as 600 jobs, which significantly added to the development of the zone in terms of employment, managerial skills and technology transfer. In 2001, the second largest investment in this zone, worth US$1 million, was invested in Euro Textile and created 125 jobs. Though of lesser value, further investments made in this sector were made by Zara International; in 1998, it invested US$500,000 to set up Zara Egypt Limited TIF, creating 35 jobs. Two years later, a British entrepreneur invested a further US$350,000 in IKTIVA Manufacturing Clothing, creating 60 jobs. In addition, some investments were made in engineering and chemical companies in the Public Cairo Free Zone; for example, in 1991 the International Printing House set up an affiliate with an investment of US$592,000, taking 100 per cent ownership of the company and creating 110 jobs. Almost ten years later in 2001, together with two entrepreneurs Universal Industries set up Universal Industries Limited Egypt with US$200,000, creating 20 jobs. The Public Alexandria Free Zone received a total of US$11.1 million invested in 16 companies, six of which were made prior to the Barcelona Process and ten since 1995. Most of these investments were made in

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engineering though a substantial amount of capital also went into textiles and clothing, which took a total of US$6.5 million. The largest investment in this zone was made in 1998, when Mary Teresa Said invested US$5.8 million in the Nile Linen Group; this accounted for almost 50 per cent of the equity of the company and contributed to the creation of 50 jobs. In 2002, three female British entrepreneurs jointly invested US$300,000 to set up ASK Clothing, creating as many as 200 jobs. There were also a significant number of investments in engineering but their overall value and contribution to employment were relatively small. For example, in 1997 two British companies, Oil Tools Limited and Oil Tools International Limited, jointly invested as little as US$100,000 in Oil Tools Egypt, while some other investments were made in complementary services such as petroleum, environmental products and the mining industry. In 2001, Nalco Exxon Energy Chemicals Marketing Limited also invested US$200,000 to set up its affiliate in this zone, creating 25 jobs. Despite receiving the largest number of investments, this zone was much less attractive than others and total investment remained small in terms of value and employment. Table 7.2: Number of firms and value of British FDI in the public free zones. Free Zone Number of British FDI flows (US$ m) companies Public Cairo Free Zone 10 6 Public Alexandria Free Zone 16 11.2 Public Port Said Free Zone 2 17.3 Public Suez Free Zone 2 2.3 Public Damietta Free Zone 1 0.08 Public Six October Free Zone 2 4.5 Source: GAFI.

Four other public free zones received FDI flows from the UK in seven separate investments, and each zone was marked by investments in particular industries. The Public Port Said Free Zone had two investments in petroleum services and the engineering industry. Both came from one British company, Offshore Oil Service, which invested US$16.8 million in Maritime and Petroleum Services (Maredaiv) in 1978 and US$500,000 in the Maredaiv Offshore Projects in 1992, creating a total of 237 jobs. The Public Suez Free Zone received three investments in ship-building. The first, in 1998, was made jointly by S.L.S Sealand Service and Gin Investment Worldwide, of US$16,000 and US$304,000, respectively, in Imprsop International. The second, in 2000, was made by Coral Stone

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Enterprise, of US$1.9 million in Ocean Classic International Yacht Manufacturing. Seven years later a further investment was made in Oceandro Yacht Industry of around US$0.5 million. In 2002, two investments in the engineering industry were made in the Public Sixth October Free Zone; the Egyptian company Digital Media Systems received US$2.4 million from Matron Holdings Limited and US$41.6 million from Wellston Investment Inc, creating 150 jobs. Musk International Art Production also received US$500,000 from the UKbased Arab Media Company, accounting for 50 per cent of the total equity of the company and the creation of 50 jobs. The Public Damietta Free Zone received only one investment made by Almaxen Limited, of US$80,000 in CST Belgium Manufacturing, creating ten jobs.

British FDI in the Private Free Zones The four private free zones attracted 11 investments with a total value of US$257.5 million. The Private Cairo Free Zone had six investments, divided between the maritime services, agricultural products, electronic engineering, and the textile industry. In 1997, the largest investment was made by SWAIR Pacific Offshore, which invested US$5.3 million in the Ocean Marine Service Egypt, creating 250 jobs. In 2003, Cambridge Weavers Limited made the second largest investment of US$3 million in Cambridge Weavers England-Egypt, leading to the creation of 357 jobs. In the same year, Blue Sky Holdings Limited invested US$602,000 in Blue Sky Agricultural Products, creating 102 jobs. In 2003, a further investment was made by Traveller Limited, which invested US$1.8 million in the Cairo Airport Duty Free Company, creating 98 jobs. Table 7.3 shows that the Private Port Said Free Zone received US$228.9 million from four British companies, accounting for 76.5 per cent of the total British FDI flows into the free zones. The two largest investments of US$228 million were made in the gas industry and a third investment was made in the textiles and clothing industry of US$900,000. Table 7.3: Number of firms and value of British FDI in the private free zones. Free Zone Number of British FDI flows (US$ m) joint ventures Private Cairo Free Zone 6 11.1 Private Port Said Free Zone 3 228.9 Private Alexandria Free Zone 1 8.1 Private Suez Free Zone 1 9.4 Source: GAFI.

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As for the Gas industry, in 2000 the British East Mediterranean Gas Pipeline invested US$94 million in the Egyptian company East Mediterranean Gas, creating 500 jobs. This was followed in 2002 by a much larger investment by PB Global Investment Ltd, of US$134 million in the Egyptian company UGDC (United Gas Products), which brought a further 220 jobs to this sector. In terms of job creation, the two small investments of US$900,000 made by Bagir Ucky Limited and B.P. Tailoring in Middle East Tailoring Clothing (METCO) created 1,400 jobs, a significant number for both this free zone and the country as a whole. The Private Alexandria Free Zone received one investment from Cornish Management Inc. and the Melania Investment Corp., of US$2.2 million and US$5.9 million, respectively, in Borg Al-Arab Industry; there was no available data on the number of jobs created by this investment. In 1998, the Private Suez Free Zone had one investment in the chemical industry worth US$9.4 million. This was made jointly by Lady Well and Equity Holding International with US$7.4 million and US$2 million, respectively, in the Egyptian Fertilizers Company, creating 372 jobs. 7.5. The impact of British FDI on the Egyptian Labour Market According to GAFI, between 1970 and 2008 British companies invested US$5.97 billion in Egypt. By mid 2009, UK Trade and Investment confirmed that the number of these companies reached 985 companies, operating across almost all economic sectors. The impact of this investment on the Egyptian labour market cannot be ignored in terms of job creation. Owing to unavailability of data on the number of jobs created by British investment in the past five years, when 41.5 per cent of all capital flows invested by more than 44 per cent of the British companies were made, this section limits its analysis to the period between 1974 and 2004. All data used here is based on the information provided by GAFI and, hence, the credibility of the analysis depends largely on the accuracy of the data provided by this governmental organization. Between 1974 and 2004, British FDI flows contributed to the creation of 252 companies and joint ventures and led to the creation of 57,644 jobs in Egypt. This was a significant contribution to Egyptian employment in a labour market that annually expanded by almost half a million people. Over this period, British investments in job creation accounted for 0.38 per cent of the new labour force entering the market, estimated at 15 million people during this 30-year period. Nevertheless, the British contribution was important to Egypt, where the government had been

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unable to sustain the annual GDP growth above seven per cent that is needed both to increase employment and improve the average income of the majority of the population, over one third of which lives under or close to the poverty line.13 Moreover, the British contribution to the labour market was significant as most jobs were created in the private sector, which took further pressure off the already over-crowded public sector and civil service. One could also argue that the impact of both British and European investment on the development of Egypt’s labour market was greater than that made by Arab or local companies. This is particularly true in terms of the improvement of skills and qualifications of the work force employed in European companies through their training programmes and their use of advanced technical and managerial skills. With almost 40 per cent of British investment made in the industrial sector, the degree of specialization introduced by British and European companies, particularly in chemicals, engineering, pharmaceuticals and the food industry, cannot be underestimated. Such specialization required highly qualified and welltrained professionals and, hence, the creation of these jobs added significantly to the quality of the country’s labour force.14 This was also true in terms of the skills and experience acquired by the semi and unskilled labour force employed by both British and other European companies, in industries such as construction materials and clothing that depended on a large pool of cheap labour. In these cases, quality goods could not be guaranteed without an improvement in the basic education and training programmes provided both by the Egyptian Government and the foreign companies, which in turn contributed to the overall welfare of the labour work force in Egypt. Figure 7.5 shows that British investment created a total of 22,057 jobs in the industrial sector between 1974 and 2004, with construction materials, chemicals and the food industry accounting for two thirds of the jobs created. Construction materials had 7,131 jobs, accounting for 32.3 per cent of the total jobs created by British firms in manufacturing, the majority of which were in a cement industry that required a large number of cheap labourers. Chemicals and the food industry were almost equal in terms of the number of the jobs created, accounting together for 8,622 jobs over these 30 years. They were followed by engineering, metals, pharmaceuticals, textiles, clothing and wood-working, which accounted for 9 per cent, 7.9 per cent, 5.8 per cent, 4.4 per cent and 1.2 per cent, respectively, of the total jobs created in the industrial sector. Between 1996 and 2004, despite attracting 48 per cent of total British FDI in

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manufacturing, jobs in engineering were fewer than in labour-intensive industries such as construction materials, textiles and clothing. For example, in 2002 the investment of US$134 million made by PB Global Investment Limited in the Private Port Said Free Zone created only 220 jobs, which is insignificant when compared to the 200 jobs created with an investment of US$300,000 in clothing, in the Public Alexandria Free Zone in the same year. 25000

Figure 7.5: Number of jobs created by British FDI inland by sector 1974-2004

number of jobs

20000 15000 10000 5000 0 Industry Infrastructure Tourism

Services Agriculture Finance

Source: GAFI

Combining both construction and ICT, infrastructural projects attracted investment from 21 British companies and created 15,089 jobs. Tourism was the second biggest non-industrial sector to benefit, with some 11,123 jobs being created by 28 companies. The expansion of the services sector attracted 35 British investments but created only 2,363 jobs. The 17 British investments in the financial sector did not contribute to employment, and agriculture, which is still an important economic sector for the national economy, attracted only eight investments, creating 832 jobs. This distribution underscores the growing importance of manufacturing, infrastructure and tourism, not only as attractive sectors for FDI but also as employment sectors. Although the 44 British investments in the free zones created 6,180 jobs, analysis of these investments indicates that there is no link between the number of investments made and number of jobs created. For example, the three investments made in the Private Port Said Free Zone created twice as many jobs as the sixteen investments made in the Public Alexandria Free Zone. Table 7.4 also shows that the single investment

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made in 1998 in the Egyptian Fertilizers Company, located in the Private Suez Free Zone, created more jobs (392 jobs) than the five investments made in the Public Suez Free Zone, the Public Port Said Free Zone and the Public Damietta Free Zone, which altogether accounted for 378 jobs. Table 7.4: Number of firms and jobs created by British FDI in the free zones 1972-2004 The Free Zone No. of Companies No. of Employment The General Cairo 10 1123 The General Alexandria 16 1092 The General Port Said 2 237 The General Suez 2 131 The General Damietta 1 10 The General 6th October 2 200 The Private Cairo 6 895 The Private Alexandria 1 0 The Private Port Said 3 2120 The Private Suez 1 392 Total 44 6180 Source: GAFI

Since the beginning of the Barcelona era, the overall British contribution to employment in Egypt has been 37 per cent of the total jobs created by EU direct investment, which is estimated at 99,675 jobs in 611 companies. Between 1996 and 2004, the 144 firms created by British FDI flows generated some 36,925 jobs. These figures put the UK ahead of Italy, which created 113 firms and 13,426 jobs, of Germany, which created 108 firms and 16,238 jobs, of France, which created 80 firms and 7,103 jobs, of the Netherlands, which created 47 firms and 4,672 jobs and of Spain, which created 23 firms and 9,580 jobs, during the same period. Greece and Belgium had 36 investments divided equally between them, creating 1,715 and 1,584 jobs, respectively. By contrast, the five investments made by Luxemburg created 2,331 jobs, while the 15 Swedish investments created only 1,853 jobs. The eight Irish investments created 1,686 jobs, while the 14 and 13 investments made by Austria and Denmark generated 1,258 jobs and 1,153 jobs, respectively. Portugal had only three investments creating 121 jobs, while the single Finnish investment generated only 30 jobs during this entire nine-year period. Between 1996 and 2004, in terms of sectoral distribution of the jobs created by EU investment, chemicals was the top sector with 19,517 jobs; of this Italy, Spain and Germany created 5,292 jobs, 4,936 jobs and 4,242

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jobs, respectively. British investment in this sector generated 1,818 jobs, accounting for only nine per cent of total employment created by EU investment in this industry. Tourism was the second largest employment sector for EU investment with a total of 15,349 jobs, with 57 per cent (8,764 jobs) being created by 17 British firms. The British contribution to employment in the free zones accounted for 37 per cent of the 15,030 jobs created by 86 EU companies. British investment also contributed to 94 per cent of total employment (13,570 jobs) created by EU FDI in infrastructure. Between 1996 and 2004, engineering was the fourth largest industry in terms of employment, with 11,036 jobs, of which the UK, France, Germany, Italy and the Netherlands accounted for 35 per cent, 22 per cent, 16 per cent, 11 per cent and eight per cent, respectively. The services sector had 5,136 jobs, of which 40 per cent were created by six Italian companies and 24 per cent by 17 British firms. Spanish FDI contributed to the creation of 676 jobs, while Dutch, German, French and Swedish firms created 542, 282, 152 and 105 jobs, respectively. EU investment created 4,439 jobs and 4,137 jobs in the food industry and construction materials, with the British contributing 19 per cent and eight per cent, respectively; textiles, metals and pharmaceuticals each had around 1,500 jobs from EU FDI, with the British contributing 22 per cent in textiles and 26 per cent in pharmaceuticals.15 In agriculture, EU investment created 3,321 jobs, with 41 per cent, 18 per cent, 17 per cent, 11 per cent, five per cent and four per cent being generated by Irish, Italian, French, British, Dutch and German firms, respectively. However, the overall EU and British contribution to employment was low because the majority of investments were made in existing companies (joint ventures) that were integrated in the national economy. Not until the promulgation of Law 8 of 1997 allowed for 100 per cent foreign ownership did greenfield investment begin to have a positive effect on employment levels of all jobs in newly created companies. Since then, greenfield investment has become the dominant mode of entry, accounting for 46 per cent of investment, followed by joint ventures, partial acquisition and acquisition at 37 per cent, 12 per cent and five per cent, respectively.16 In addition, there was growing opportunity for improvement in the quality of employment as training offered by foreignowned companies had a direct impact on the quality and productivity of labour, even though the average share value of training expenditure in foreign companies in Egypt over the percentage of their sales remained as

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low as 1.89 per cent.17 Thus, the government should direct FDI to where investments are most needed, if they are to play a greater role in the social and economic development of the country. While this chapter dealt solely with the British FDI flows into the industrial sector, the case of the UK retailer Sainsbury’s, which withdrew from the Egyptian market less than a year after setting up its operation facility in 2000, reflected some of the factors that led to the decline of British capital flows between 2000 and 2004. It was apparent that Sainsbury’s was affected by a general recession in the Egyptian market at that time, as well as by an economic boycott against western goods in solidarity with the Palestinian Intifada. This caused sales to drop to 25 per cent of the level prior to the eruption of the Intifada on 28 September 2000.18 However, according to the British ambassador to Cairo, its withdrawal from the market emphasizes some concerns shared by many British companies in Egypt, in particular the lack of competition laws. 19 As such, it is necessary to re-examine the nature of the investment climate and the factors affecting business practice in the Egyptian market. Moreover, this has become vital as the above analysis clearly highlights the modest rate of EU FDI flows into Egypt, which is much smaller than those of countries with similar demographic and economic capabilities in Latin America, East Europe or South East Asia. Thus, the final part examines some of the main internal and external factors affecting the attractiveness of Egypt as a FDI destination, with special reference to the EU.

8 INTERNAL DETERMINANTS OF EUROPEAN INVESTMENT IN EGYPT

Over the past 30 years, Egypt’s modest FDI record and its inability to compete with East European and Latin American countries, many of whom began their economic reforms much later than Egypt, has raised serious concerns over the government’s economic policies and the country’s investment climate. This is even more alarming as Egypt was in the top ten developing countries receiving FDI during the early 1980s but has fallen to third place among the countries included in the global investment tables during the Barcelona era. This ranking is based on four criteria that chart a country’s attractiveness for FDI, with the US, the EU and Japan being at the top, followed by China, the Asian tiger economies, Brazil, Argentina, Mexico, Chile, Poland, Hungary and the Czech Republic. Countries with some investment potential, such as Egypt, Morocco and Tunisia, are ranked third, only just ahead of the rest of the developing world, which is classified as the fourth category of peripheral economies.1 The reasons for this decline are both internal and external, affecting both directly and indirectly the country’s investment climate and, hence, the growth of foreign direct investment. The aim here is to examine some of the internal determinants that impacted on European investment into Egypt during the Barcelona era. It analyses the policies that the Egyptian Government implemented to attract European investment, in particular the introduction of privatization. It also looks at some of the structural

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challenges facing foreign direct investment into Egypt, while external determinants are examined in the following chapter. With a view to improving Egyptian attractiveness to foreign investment, two fundamental aspects must be considered. The first and most important determinant is political stability, which has improved in relative terms over the past few decades. The second determinant is Egypt’s economic stability and its evolution from a socialist to a market oriented system, with the further transition from import-substitution to export-oriented growth. The progress achieved along these lines has been fundamental to improving Egypt’s attractiveness to foreign investors. This was evident during the second half of the 1970s, when the sharp growth in FDI inflows coincided with the peace initiatives that brought about national and regional stability and with the 1974 Infitah policy that resulted in partial economic liberalization of the country’s economic system. Therefore, the following two sections examine how and to what extent further progress along these two lines affected Egypt’s FDI inflows from the EU. Then the impact of institutional, legal and infrastructural developments on the growth of EU FDI into the country is analyzed. 8.1. Political Stability From the FDI perspective, political stability is often assessed by the degree of risk perceived by foreign investors as a result of political events, particularly when such events lead to a change in the business environment within which foreign companies operate. A stable political system and environment means little or no political risk, while high political risk is often associated with turbulence in the political system and uncertainty about the future of the government or the political leadership. Domestic violence, social tension, and terrorism also lead to internal insecurity and often negatively affect the stability of the country. This assumption is hugely important for foreign investors, who simply do not risk their capital in a country that is considered unstable. 2 Thus, while political stability creates confidence among foreign investors as the laws and regulations governing the market and hence their investments remain the same over the long term, political instability causes anxiety and reluctance. This is the basic description of how the political stability of a country functions as a pre-condition for its FDI attractiveness. Since the mid 1970s, political stability has become a key determinant of Egypt’s attractiveness to FDI. Prior to this, the country’s political stability discouraged foreign investors from taking risks in the Egyptian

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market. The 1960s saw intensive government interference in economic affairs through regulations and the nationalization of foreign-owned companies and private property. The impact of this was severe on FDI due to limited private and foreign involvement in the economy. However, after the 1973 October War and the subsequent Egyptian-Israeli peace initiatives, Egypt’s political situation improved sufficiently to make the country an attractive destination for FDI. The effects of political stability were evidenced in high economic growth and increased FDI due to de-regulation in some economic sectors that allowed access to foreign investors. Decreased governmental interference in economic affairs during the era of economic liberalization was encouraging to foreign companies. In particular, the cut in subsidiaries for basic commodities such as bread, sugar and edible oil had impacted severely on the socioeconomic conditions of the majority of the population. It had also led to food riots in 1977, which dealt a blow to the country’s internal political stability. However, the data shows that this event had limited impact on FDI, which decreased by only two per cent from US$1,878.8 million the previous year to US$1,721.5 million in 1977. Its rise to US$2.5 billion in 1978 demonstrated that Egypt’s involvement in the peace process was impacting positively on the growth of FDI; hence, between the mid 1970s and the mid 1980s, the country became a favoured destination for FDI. 3 Over the past 20 years, there has been a perceivable link between Egypt’s slow political evolution and the low rate of FDI into the country. Though in fact Egypt has been more politically stable than many Middle Eastern and North African countries, the lack of democracy and the absence of internal political reform have hindered sustaining high levels of FDI. Strict governmental controls over the state’s institutions and persistent intervention in the country’s economy were of serious concern to foreign and private investors, many of whom identified the lack of political reform as a major obstacle to investment.4 While government controls provided stability in terms of political leadership, they effectively blocked any real development in the internal political process until the constitutional Clause 76 amendment in 2005, which allowed various candidates to be nominated along with the sitting president for the presidential election.5 In 2005, this development together with the unanticipated electoral victory of the Muslim Brotherhood, which won 88 seats, demonstrated the growing political and social frustration among the public as well as the increasing demand for democratization. 6 Even recent

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measures, such as a new law that aimed to increase the number of seats in the lower house of parliament from 454 to 510 and to reserve all new seats for women, are likely to have little impact on widening participation political life or contain public dissatisfaction with inadequate salaries and poor living standards. Though the political situation had remained stagnant for decades, these new and sudden changes meant that the progress achieved in the economic sphere was faster than that achieved in the political system over the past two decades.7 How did this stagnant political situation affect the growth of EU FDI into Egypt? A study done in 2000 by the University of Ulster on the determinants of FDI argued that 73 per cent of foreign investors in Egypt were highly optimistic about the country’s political situation, and another 24 per cent agreed that the situation under President Mubarak was stable; however, they were uncertain about the long-term, particularly when Mubarak’s reign comes to an end.8 Moreover, the study showed that 94 per cent of the foreign companies surveyed believed that Egypt enjoyed political stability and that this had a positive effect on Egypt’s attractiveness to FDI.9 This conclusion was largely due to the stability of the political leadership over a long period rather than to any of the concerns of foreign investors about intensive government interference in economic affairs and lack of political reforms and democracy being addressed. Though one could argue that the impact of political stability has not been as positive as the above study claims and that the growth of FDI between 1996 and 2000 was more specifically due to the acceleration in privatization, nevertheless Egypt’s FDI inflows have been highly influenced by political and security developments at national and regional levels. In particular the country’s internal security has been a matter of concern to foreign investors, especially those considering an investment in the tourism industry. Table 8.1 makes it clear that terrorist attacks targeting foreign tourists have significantly disrupted this sector. For example, the Luxor massacre in 1997, when 58 foreign tourists died, negatively affected the country’s attractiveness for FDI. Moreover, these acts damaged most economic sectors because tourism is the country’s main source of hard currency; hence, the decline of tourism caused a shortage in cash flows, which directly affected the balance of payments. On many occasions the government had to withdraw hard currency from its foreign reserves in order to finance import of basic commodities and its currency reserves fell

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by almost half from US$20 billion in the late 1990s to nearly US$10 billion in 2004. Table 8.1: Terrorist attacks on tourist sites in Egypt, 1992-2005. Date

Place

Incident

21 October 1992 26 February 1993 26 October 1993 4 March 1994 26 August 1994 27 September 1994 23 October 1994 18 April 1996 18 September 1997 17 November 1997 7 October 2004 7 April 2005 30 April 2005

Dairut, Upper Egypt Cairo

Attack on a tourist bus Bomb explosion

Cairo

Gunman shot tourists

Sidfa, Upper Egypt Nag Hamadi

Fire on cruise ship

Hurghada

Gunfire on tourists

Naqada, Upper Egypt Outside a hotel near Pyramids Egyptian Museum, Cairo Hatshepsut Temple, Luxor

Gunfire on tourist minibus 4 militants opened fire on tourists 2 gunmen fired on tourists Militants opened fire on tourists

23 July 2005 Total

Taba, Sinai Khan al-Khalili Cairo Sharm el-Sheik 14 attacks

Fire on tourist bus

No of Deaths 1 Woman 2 men 3 people 1 woman 1 boy 4 people 1 person

Nationality British Turk & Egyptian 2 Americans & 1 French German Spanish 2 Germans & 2 Egyptians British

18

Greek

10

9 Germans & 1 Egyptian 58 foreigners & 4 Egyptians 33 foreigners & Egyptians 2 French & 1 American 3 attackers, 4 foreigners & 3 Egyptians Mostly Egyptians. Mixed

62 people

Detonated bomb

34

Detonated bomb

3

2 women opened fire on tourist bus; and bomber detonated. Series of car bombs at hotel & shops Gunfire & bombs

10 88 233

Source: The Associated Press, Saturday 23 July 2005.

The 1997 Luxor massacre had a severe socioeconomic impact on the country, as almost two million people lost their jobs and many hotels and tourist companies had to close down. Furthermore, while Egypt lost more than US$1 billion in tourism revenue after this incident as a direct loss, the indirect losses were incalculable. However, this kind of security concern did not impact equally on all foreign companies. Foreign investors in tourism and the banking sector that directly engaged with the public were more affected by terrorist acts than those investing in manufacturing and oil exploration. 10 Although most factories are located outside urban areas, the impact of terrorism has

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often had an adverse effect on foreign companies, because most of them operate for the domestic market and, hence, stagnation in the internal market impacts directly on the performance and revenues of these companies. As a result of this, many foreign companies had to choose either to bear the risk of the financial and physical damage from terrorist acts or to seek insurance against terrorism; either way, their financial and production costs were further increased. Currently, Egypt’s internal political stability is at a crossroads. On the one hand, it seems to be caught between the government’s efforts to crack down on Islamists and contain the Muslim Brotherhood, Egypt’s largest opposition movement and to control disparate forms of opposition, including the independent judiciary, the opposition press, and political activist and, on the other hand, to be faced with mounting internal and external pressure for democratization and respect of human rights. This is a critical dilemma for the government because of the imperative that it ensures the stability of the country. Meanwhile, the government urgently needs to build and strengthen the foundations of the civil society, which would enable the political system to ensure greater stability in social relations, to gain the legitimate consensus of the people living under it, and to unite the society in the face of diverse and divisive viewpoints. It should also be stressed that whichever general orientation concerning the primacy of individual rights versus the needs of the large community prevails within Egyptian society, any resulting political instability could easily jeopardize the foreign companies currently operating in the market as well as discourage potential investors. What is more, Egypt’s internal political stability is related to the stability of the whole MENA region and, hence, it has often been affected by events occurring beyond its borders. This was apparent during regional crises, such as the 1990-91 Gulf War, the Palestinian Intifada of 2000-04, and the invasion of Iraq in 2003, all of which impacted on FDI growth in Egypt and the country’s GDP. Moreover, these events led to an increased level of political risk. This was evident between 2001 and 2004, when some foreign companies disinvested while those that continued to operate in the country reduced their cash flows. 8.2. Economic Stability In this age of globalization, it is often difficult to separate the Egyptian economy from the global financial scene. This is apparent in the correlation between the stability of the world economy and that of Egypt

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over the past ten years. Although it has not yet become an important player on the global stage, its contributions in foreign trade and investment have increased substantially in the past four years, which demonstrates that Egypt has made big strides towards integration with the global economy. This growing role in international business activities is also manifested by the notable number of foreign companies functioning; between 2004 and 2008 the number of them reached 10,516, with a record of 4,061 new companies in 2007. Such progress could not have been achieved without the progressive steps in economic and fiscal reforms that have been taken since the early 1990s. In the aftermath of the financial crisis of the late 1980s, the 1991 Economic Reform and Structural Adjustment Programme made it possible for Egypt to successfully manage and improve its economic conditions. The most significant developments were the stabilization of the country’s main macroeconomic indicators, particularly the country’s real growth of GDP, and controlling the inflation rate and exchange rate policy; all of these impacted directly on the revenues and transaction costs of foreign companies. The data shows that most indicators were positive until the end of 2008, when the global financial crisis put an end to five consecutive years of uninterrupted economic growth. This mirrored the situation during the latter half of the 1990s, when the 2001 global economic downturn damaged Egypt’s economic performance. For instance, although Egypt’s GDP increased steadily from 1.9 per cent in 1992 to 6.3 per cent in 1999 and 7.2 per cent in 2007, this growth declined twice during that period. The first decline was after 2001, when economic growth gradually decreased and returned to its pre-1993 level. The second decline resulted from the global financial crisis in 2009, when Egypt’s GDP dropped to 4.3 per cent, from 7.2 per cent in the previous year. Although the first decline occurred at the time of global economic downturn, the Egyptian economy had already begun to show signs of recession by the late 1990s with an increased budget deficit, large domestic debt, and unmatched growth in public revenues to compensate for increased public expenditures.11 By 2004, economic policies were at a crossroads and the lack of consensus among senior government officials was obvious in regard to economic policies, particularly in monetary policy. For instance, the minister of investment suggested that higher interest rates could contain inflation and help make the Egyptian pound more convertible, which would have been an incentive to FDI. However,

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the response of the business community was mixed, from outright rejection to conditional approval, underscoring the discrepancies between government policies and business interests. 12

percentage

25

Figure 8.1: Egypt's real growth of GDP and inflation 1991-2008

20 15 10 5 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Real GDP % Inflation % Source: Economic Intelligence Unit, Egypt, various issues.

As shown in Figure 8.1, before inflation rose again to 18.3 per cent in 2008, the economic reforms of the early 1990s and the mid 2000s succeeded in bringing it under control from 19.7 per cent in 1991 to 4.3 per cent in 2003; only 1995 was an exception. 13 These initiatives reduced the budget deficit and inflation, but failed to bring real GDP growth back to the level achieved by the Infitah policy of the 1970s, when Egypt’s real GDP growth recorded an average of nine per cent per year between 1974 and 1981.14 In addition, they led to price liberalization in consumer goods and basic commodities, except on sensitive goods such as edible oil, rationed sugar and pharmaceuticals. Gradually, these programmes eliminated large subsidies and freed consumer prices, facilitating the government’s efforts to meet IMF targets in the 1990s and reduce budget deficit in general. For instance, petroleum prices rose from 36 per cent of the international price in May 1989 to 90 per cent in June 1995 and reached the full international price by the end of 1999. Electricity, water and food subsidies were also dealt with in a similar manner. As a percentage of total current expenditure, subsidies fell by 21 per cent in 1991, by 7.7 per cent in 1997 and by 6.3 per cent in 2002. In May 2008, the government reduced the cost of energy subsidies for industrial use and fuel for transportation, which led to a spike of inflation in the latter half of

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the year. In the following year, it also announced a reduction in the cost of gas subsidies for fiscal year 2009-2010 to EGP 1.5 billion (US$268 million) from EGP 6.5 billion in the previous years, a decline of 77 per cent.15 However, normally an increase in the international price of basic goods is likely to increase subsidies and, subsequently, to affect the consumer price index. For example, in 2004 the decision of the government to increase subsidies to as high as EGP 15.6 billion was a result of the increase in the international price of basic goods, which led to a sharp rise in consumer price inflation to 11.3 per cent from only 4.5 per cent in the previous year. Since 2005, consumer price inflation has been a major policy challenge; probably affected by the global food and financial crises, it continued to rise and reached 18.3 per cent in 2008. Meanwhile, the ERSAP managed to achieve relative fiscal sustainability by balancing public revenues and expenditures.16 This was attained through an increase in revenues, which accounted for a fall of 40 per cent in the budget deficit, and a reduction in public expenditure, which covered the remaining 60 per cent.17 This achievement reduced the budget deficit from 5.5 per cent of GDP in 1991-92 to one per cent in 1997-98. It was also consolidated by an increase in the price of oil, in Suez Canal profits, and the adoption of the sales tax, which boosted revenues by an amount equivalent to 1.4 per cent of GDP. In May 1991, improvement in the budget deficit followed a reduction of US$19.6 billion of the total outstanding foreign debts made by the Paris Club; this was in addition to the debt relief offered by the US and some Arab countries after the 1991 Gulf War. In 2008, efforts of this kind reduced total external debts to US$29.8 billion and the annual debt service paid to US$2.9 billion, which was almost 59 per cent less than in 1990. These developments in fiscal policy were clearly reflected in the increase in GDP from 1.9 per cent in 1991 to 7.2 per cent in 2008 and contributed significantly to restoring the confidence of foreign investors in Egypt’s financial credibility and improved the country’s image in the global financial market over the past 15 years. However, due to the lack of constant modernization in Egypt’s capital and credit market and the underdevelopment that ensued, the positive impact of these developments was lost. The incapacity of this market to provide capital and financial services forced the majority of foreign companies operating in Egypt to depend on self-finance rather than on local credit.18 The data shows that some 66.7 per cent of foreign companies were completely dependent on self-finance, while only 6.1 per

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cent depended on the Egyptian capital market; this was possibly due to a lack of information about the capital and credit market, including its regulations, procedures and operational systems. What is more, Egypt’s interest rate was considered high compared to other emerging markets. It was not until July 2009 that the newly created General Authority for Financial Supervision (GAFS) was launched to oversee and regulate all non-banking financial services. GAFS merged with the Capital Market Authority, the Egyptian Insurance Supervision Authority and the Mortgage Finance Authority, with a mandate to ensure market stability, regulate activities conducive to further market expansion, and promote transparency and disclosure, thus furthering knowledge about investment in the non-bank financial services sector and protecting the rights of investors. While it is too early to judge or assess the functions and credibility of the new organization, its establishment is timely and important in light of the harsh criticism directed at ill-equipped financial services authorities in Europe and the US and their role in the global financial crisis. Moreover, lack of continuity and consistency in economic reforms hindered the pace of economic growth during the past 15 years. It took almost five years for the Egyptian Government to put in place a second generation of economic and fiscal policies to replace the ERSAP that terminated towards the end of the 1990s. Between 2001 and 2004, this discontinuity resulted in a serious financial crisis, because no effective measures were taken to stop the deterioration in either Egypt’s economic growth or FDI inflows into the country. When a new fiscal reform programme took effect in 2004, it included ‘public revenue programmes, public expenditure programmes, the corporatization of public economic authorities, domestic and foreign public debt management and the modernization of the National Investment Bank’. 19 The most significant of these measures was the new income tax law that aimed to move towards a full value added tax (VAT), to relieve tax burdens on individual incomes by reducing tax rates and increasing exemptions, to simplify taxation procedures, adopt risk management, rationalize tax exemption practices, collect tax debts and prosecute tax evasion. In 2007, the impact of these policies on the country’s overall performance and economic outlook was clearly evident in the record FDI inflows of US$11.4 billion and in the increase in GDP above seven per cent in 2007 and 2008 consecutively for the first time since the early 1980s.

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The stability of the exchange rate policy was another significant determinant of EU investment in Egypt. Between the early 1960s and the early 1990s, the Egyptian Government maintained foreign exchange controls and multiple exchange rates, a system that created various rates for governmental and commercial transactions. This multiple exchange system differentiated between the official rate of governmental transactions and the unofficial rates of the market and, consequently, disadvantaged foreign companies in several ways. Most notably, they were unable to bid on governmental tenders because their offers had to be based on the official exchange rate while they had to purchase most raw materials for production from the informal market. Furthermore, the official fixed exchange rate had a negative impact on the transfer of some profits back to their home countries, as well as on the earnings of their native managers and employees. This system not only discouraged new FDI flows into the country, but also for many years it limited the possibility for existing companies to expand. It was not until the early 1990s that the government unified the exchange rate system and, after a minor devaluation of the pound in 1991-92, adopted a ‘managed floating regime’, which lasted until June 2000. 20 During this period, Egypt had a stable pound/dollar exchange rate at nearly EGP 3.40 to US$1. This degree of exchange rate stability impacted positively on Egypt’s economic performance and explained the relatively high level of FDI between 1996 and 2000. This, in turn, made it possible for the country to steadily increase its foreign reserves, which amounted to US$20 billion in 1998. However, the stability in the exchange rate regime was eroded following the 1997 Luxor massacre and as a consequence of the regional tension emanating from the Israeli-Palestinian conflict. These incidents considerably affected the exchange rate market equilibrium because of a shortage in foreign currency due to a decline in tourist revenues and, subsequently to the heavy reliance on foreign reserves for purchasing essential imports in hard currency. By the end of the decade, this had increased the trade deficit by more than US$12 billion. In addition, in 1998 the deficit in the Egyptian-EU trade balance reached US$4.8 billion in favour of the EU. Pressure of this kind on the balance of payments and foreign reserves, together with external shocks such as the September 11 attack on the US, led to a general decline in the economy and a depreciation of the Egyptian pound, which reached EGP 6.20 for one US dollar by the end of 2004,21 as shown in Figure 8.2. The impact of these factors was notable in the poor economic performance of the government

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and the dramatic decline in Egypt’s FDI inflows during the first five years of the twenty-first century.

7

Figure 8.2: Average annual exchange rates of the Egyptian Pound to US dollar 1991-2008

percentage

6 5 4 3 2 1 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Source: IMF, Financial Statistics; and National Bank of Egypt.

One could also argue that the delay of trade liberalization in Egypt was caused by the government’s fear of losing out on major sources of revenue, in particular customs tariffs, which accounted for 18 per cent of tax revenues and 4.4 per cent of the country’s GDP in 2001-2002.22 It was not until September 2004 that the Egyptian Government took serious steps towards reducing the high customs tariffs imposed on imported goods, spare parts and materials. In the words of the Foreign Trade and Industry Minister, this measure was ‘just the first step in a government plan to bolster trust in the economy’.23 Not only did it reduce customs tariffs on foodstuffs, furniture, durable goods, air-conditioners and vehicles from an average of 14 per cent to nine per cent, but it also consolidated the list of goods susceptible to tariffs from 13,000 to 6,000 in an attempt to simplify customs procedures. Industries of importance to foreign companies such as chemicals, engineering and construction materials also benefited from some significant reductions. For instance, tariffs on various automotive spare parts were reduced from 23 and 33 per cent to 12 and five per cent, respectively. Imported cement saw a reduction from 37 to 22 per cent, while tariffs on fertilizers decreased from 33 and 13 per cent to just two per cent.24 Prior to these tariff reductions, most foreign companies complained that high customs tariffs, which averaged 21 per cent compared to 15 per

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cent in most developing countries, affected their production costs and increased their prices and, hence made it difficult for them to compete with local manufacturers who used local materials for the production process. On top of this, many of these companies could not compete with cheap imported goods from China and the Far East. Conditions of this kind hindered many foreign companies from developing their production, raising their competitiveness and boosting their exports and, in turn, this forced many of them to produce low cost products for the local market. On an administrative level and particularly in the Information Technology (IT) industry, some companies complained that they had problems with customs officials, who refused to apply the law on shipments of CDs, despite the fact that all imports of IT spare parts and technical components had been exempted from duties in an attempt both to promote the sector and to meet Egypt’s commitment to the World Trade Organization Information Technology agreement. In addition, other companies complained about dual taxation and the over-valuation of duties. For these companies, the implementation of new customs reforms have not only eliminated such problems but also exposed industry to competition, which leads to better allocation of resources and cheaper prices for consumers, as well as limits on the profitability of producing for the local market, all of which encourage exports. As for the link between trade liberalization and FDI flows, Egypt’s experience shows that most foreign companies preferred trade protection than trade liberalization, because the majority of them depended on local inputs and produced for the domestic market. 25 Only those companies that imported most of their inputs and produced for export favoured trade reform, but this preference weakened the inter-relationship between export and FDI in Egypt. Although Egypt’s exports to the EU increased from US$1,304 million in 2002 to US$2,026 million in 2003, the data presented in Chapters 4, 6 and 7 shows that there is no significant shift in the focus of EU FDI from import-substitution industrialization to exportorientated activities. This means that EU FDI in Egypt did not develop the country as a platform for exports, particularly in such industries as textiles and processed food where Egypt enjoyed competitive advantages.26 This was caused by the high tariff barriers that supplemented production costs, which resulted in high profits of over 20 per cent when serving the local market as compared with 5-7 per cent when producing for foreign markets.27 In addition, this was caused by the insignificant level of intra-industry trade between Egypt and the EU due to a lack of

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specialization in most Egyptian industries, and to an absence of European horizontal investment into Egypt, despite the country’s relatively cheap production and labour cost. Figure 8.3: Egypt's trade balance with the EU compared to EU FDI flows into Egypt 1996-2008

US$ million

13000

8000

3000

-2000

96

97

98

99

00

01

02

03

04

05

06

07

08

-7000 Exports

Imports

Trade balance

EU FDI Flows

Source: GAFI and Ministry of Foreign Trade and Industry, Egypt.

8.3. Privatization Privatization, in particular the 1991 ERSAP, was a major component of Egypt’s economic reform programmes. It was viewed not only as a means of increasing and enhancing the role of the private sector in the economy, but also as a mechanism through which foreign companies could purchase equity in local companies.28 In 1997, Law 8 enhanced this mechanism by allowing 100 per cent foreign ownership. By allowing foreign companies to set up their own affiliates and branches with entire control over their equity, management, operations and marketing, this law offered them a great deal of freedom beyond traditional entry modes, such as acquisition and joint ventures. This encouraged investment in greenfield projects that required foreign companies to create entirely new subsidiaries and use their own managerial, technological and capital resources. 29 Thus, privatization was an essential element for attracting FDI inflows into Egypt, particularly during the latter half of the 1990s. In spite of the expectations, the progress made in the privatization programme has been insignificant. There was an intermediate peak in

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1999 when 40 state-owned companies were sold, but, otherwise, the process has been slow. Between 1991 and 2005, 241 companies were sold to a value of EGP 21.6 billion, with 217 of these companies being sold under Law 203 for EGP 17.5 billion. Between1999 and 2005, 24 joint ventures were sold with revenues amounting to EGP 4 billion. Comparing the data in Figure 8.4 and FDI inflows into Egypt during the same period confirms a correlation between the acceleration of privatization and the growth of FDI and vice versa. The data shows that privatization reached a high between 1996 and 2000, with an intermediate peak of 40 companies in 1999, while FDI inflows into the country steadily increased from US$636 million in 1996 to US$1.2 billion in 2000. The drop in FDI by more than half to US$510 million in 2001 was matched by a decrease in the number of companies sold from 19 in 2000 to ten, seven and 13 companies in 2001, 2002 and 2003, respectively. This parallel between slow privatization and a decline in FDI also underscores the preference of foreign investors to invest in existing firms in order to avoid the complexities of Egyptian bureaucracy and both the costly requirements and lengthy procedures necessary for creating a new company. Figure 8.4: Number of state-owned companies privatised between 1991 and May 2005 50 40 30 20 10 2004/05

2003/04

2002/03

2001/02

2000/01

1999/00

1998/99

1997/98

1996/97

1995/96

1994/95

1991/94

0

Source: Ministry of Investment, 2005.

Since June 2004, available data shows that rapid privatization has once again become a key objective, with 25 companies being sold between June 2004 and May 2005. This process accelerated further following a new government decree to sell another 43 state-owned companies during 20052006.30 The most remarkable development in this recent phase was the privatization of the banking sector, which started in August 2005 with the

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sale of Misr International Bank to the French bank Societé Générale for US$298 million. The process was also extended to cover large, wellestablished, companies such as Egypt Air’s in-flight services company, on the basis that a partnership with a foreign investor would guarantee extra funding, international marketing and improve service quality. Nevertheless, the impact of privatization on the private sector in Egypt remains limited. Despite contributing the largest share of the country’s GNP, Egypt’s private sector is still emerging and there is still a long way to go before this sector becomes a powerful force in the Egyptian economy. This was confirmed in a previous study, which revealed that 64 per cent of the foreign companies and joint ventures surveyed believed that Egypt’s private sector is emerging, while 16.5 per cent considered it to be weak. Only 19 per cent believed that the sector is strong.31 Such a modest position is due to the fact that neither privatization nor the entry of MNCs stimulated competition among local firms, many of which lacked both efficient management techniques and technology. The study also concluded that foreign companies found it difficult to find the right business partner because many local firms either did not have the capacity to provide the inputs required for their production process or they provided services at low quality standards but with high prices. This forced over 65 per cent of foreign companies operating in Egypt during the past 20 years to import their production inputs, while the remainder used both imported and local inputs.32 This condition is unlikely to change in the short-term as the present phase of privatization is unable to attract FDI flows into manufacturing and finance, which are the two most dynamic sectors of the economy. Moreover, the government is targeting Arab investors, particularly after the retreat of many European and US firms in the wake of 9/11 and the current global financial crisis, which has affected most developed countries. Early indications show that Arab investment is targeting the retail and services sectors. In the retail sector, Kuwaiti investors made the largest investment of US$300 million in Omar Effendi, one of Egypt’s oldest retailers, which has 82 stores nationwide.33 8.4. The Legal System The evolution of the Egyptian legal system over the past 40 years has had a major impact on the growth rate of FDI into the country. This was apparent in the resurgence of FDI into Egypt in the early 1970s, when it

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rose to an unprecedented rate of US$4.6 billion in 1975, due to the constitutional amendments in 1971 and to Law 43 of 1974, which offered guarantees to foreign investors against nationalization and allowed limited foreign ownership. In 1997, the role of the legal system was extended in Law 8, which dealt with investment guarantees and incentives to foreign investors. Foreign companies were able to hold 100 per cent ownership and set up their subsidiaries with full control over their management, functions, operations and marketing in any of the 16 areas of economic activity set out in Article One. Some of these areas had previously been restricted, such as industry and mining, tourism, petroleum production and refining, cinema production, housing and computer software systems. While providing investment guarantees, Law 8 offered incentives to foreign companies, including tax exemptions on the revenues of commercial and industrial activities for a period of five years from the first fiscal year following the beginning of production, and for ten years for companies that were established in the new industrial zones and new urban communities. In addition, incentives were extended to the assignment of land and to investment in the free zones, where activities accounted for almost one third of total FDI into Egypt between 1997 and 2003. However, tax incentives were found to be less important than other factors, such as the investment environment, good economic performance, and political and economic stability. The impact of tax incentives was insignificant because Egyptian corporate tax was 42 per cent, among the highest rates worldwide, particularly when compared with emerging economies, such as Vietnam, Singapore, China, Czech Republic, Hungary, and Brazil, which had 25 per cent, 26 per cent, 33 per cent, 35 per cent, 36 per cent, and 25-40 per cent, respectively. This high tax rate impacted negatively on Egypt’s share of FDI inflows between 1996 and 2005 either by discouraging new potential investors or by forcing existing investors to evade tax. Almost 70 per cent of foreign companies operating in Egypt considered Egypt’s corporate tax to be higher than international rates. Modification of the investment law and the tax system in a way that simplifies, stabilizes and provides more certainty and transparency is urgently needed. There is also a need to bring the corporate tax rate into line with international norms. Moreover, as the inefficiency of the legal system was still perceived to be an impediment to private and foreign investment, it could be argued that Egypt’s legislative system was stigmatized by the lack of a unified

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policy framework for reform, time-consuming procedures, frequent amendment of laws and unpredictability of regulations, all of which affected the credibility of the legislative process.34 The commercial legal system was also considered by many companies to be slow and expensive, as well as tainted by petty corruption, and the average time period for resolving a case was six years.35 Moreover, this system lacked efficient mechanisms for resolving disputes and, therefore, 80 per cent of foreign companies operating in Egypt preferred to seek arbitration rather than go to court to resolve their disputes with either the government or their local partners. The non-implementation of the protection of intellectual property rights (IPRs) impacted heavily on foreign investment in areas based on R&D, such as pharmaceuticals and agricultural chemicals and has been a major obstacle to the entry of many international companies into the Egyptian market place. What is more, the institutions required for implementing the IPRs law have not yet been established, even though the law has been ratified by the Egyptian Parliament. The government is struggling to build an institutional capacity in the IPRs area in order to secure long-term large investments and technical assistance. The government must amend laws and regulations, upgrade the judicial and administrative framework, build a human resource capacity, and collect and disseminate technical information about IPRs. The lack of progress on this front has increased the reluctance of many European companies to invest in the pharmaceutical industry due to the improper implementation of copy-right protection. As a consequence, between 1996 and 2008 the total European investment in pharmaceuticals only amounted to about one fifth of the single investment made by Glaxo Group Limited in GlaxoSmithKline Egypt in 1980. In this respect, improper compliance with the Trade-Related Intellectual Property Rights (TRIPS) agreement has prevented Egypt from taking advantage of the protection of IPRs in areas where it enjoyed a competitive advantage, particularly in agriculture and the food industry. The implementation of IPRs could allow Egypt to develop products, such as fruit and vegetables, for both local and EU markets, as it did with the use of high-yield varieties of cereal crops to increase food production during the last 15 years. Most consideration was given to the negative impact of the IPRs on the socioeconomic well-being of the majority of farmers, who were not allowed to develop and sell certain seeds without paying royalties. The government feared that differential access to high

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cost seeds of high yielding varieties between small and large farmers could lead to increased income inequalities and endanger food security at the household level. It also feared that improved varieties could be monopolized by large firms and that MNCs might raise the cost of new technologies to a rate that the majority of Egyptian farmers could not afford, simply for the sake of high profit.36 The long, inconclusive negotiation of the Egyptian-US Partnership over the past 15 years is another casualty of the lack of compliance with IPRs.37 The US argued that the lack of copy-right protection is harmful to its trade and investment relations with Egypt and, hence, no progress could be made towards a partnership until serious steps were taken to amend the judicial system and to comply fully with the TRIPS agreement. Although these measures would entail some financial loss, the implementation of them would likely change the market outlook and allow some major MNCs with research-based activities to consider Egypt as a base for their regional operations. 8.5. Institutional Development and Transparency The experience of the 1970s Infitah policy shows that the role of institutions is pivotal to the success of Egypt’s economic liberalization. The limited success of this policy in attracting FDI emphasized the importance of connecting micro-level economic activity with macro-level incentives provided by an institutional framework. 38 The existence of such a framework, which guarantees a continuous process of transformation over time, has become imperative since the modernization of Egypt’s bureaucracy, which is one of the oldest civil services in the world, is very slow. As explained earlier, the cumbersome and ineffective nature of the administrative system undermined government efforts to liberalize the economy and improve the country’s investment climate over the past 30 years. This challenge has continued to affect both domestic and foreign businesses up to the present day. Between 2001 and 2002, Cairo’s Economic Forum conducted a survey of foreign companies operating in Egypt and concluded that this ineffectiveness impacted negatively on start-up businesses due to the complexity and lengthy procedures needed to complete paperwork and obtain licences. It also concluded that presently operating companies suffered from the ineffectiveness of the taxation system and widespread corruption that increased business costs. 39 Therefore, increasing efficiency and transparency of institutions is a key determinant in the country’s

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attractiveness to FDI. In another study, all the foreign investors and joint ventures surveyed confirmed that they faced bureaucratic problems with administration either during the establishment or the operation of their companies. Some 78.3 per cent of these companies also stated that the economic and administrative reforms of the 1990s had not improved the administrative system. From the perspective of foreign companies, the underdeveloped and inefficient nature of financial institutions was one of the most deleterious factors concerning corporate investment activities. This failure of most Egyptian bands to modernize is due to the government’s tight control over the Central Bank of Egypt, where policies and operations were conducted in accordance with the general needs of the government rather than of the market. These controls were in force from the early 1960s until 2002, when the Central Bank of Egypt became independent and its policies began to be formulated in response to market needs rather than political considerations. Government interference in business resulted in extensive bureaucracy that contributed to the downgrading of Egypt’s investment environment. Between 1984 and August 2005, there has in fact been a total absence of FDI inflows from the EU into the banking sector. Despite the establishment of almost 38 private banks and six foreign banks since 1972, the role of the public sector in the financial system remains dominant. More than half of business loans are still provided by the four big stateowned banks: the National Bank of Egypt, Misr Bank, Bank de Cairo and the Bank of Alexandria. The combination of the continued dominance of the public sector banks and the reluctance of the government to allow foreign participation in banking has delayed reform of this vital sector and, hence, reduced its attractiveness to FDI. When the government attempted to privatize the Bank of Alexandria in 2004-2005, it faced daunting obstacles, not least the upgrading of the bank’s operational system and the introduction of an advanced information system.40 It was not until 2002 that this bank had an electronic system for conducting its exchange and transaction operations. According to the president of the bank, the main challenge for him was not only to restructure and develop a system but to find accurate data that he could use for drawing up a development strategy and make decisions. He stated that the deteriorating conditions of the bank required the entire restructuring and modernization not only of the physical assets of the bank, including buildings, but also the human resources of the bank,

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including its management and 8,000 employees nationwide, who have not received sufficient training for many years. There is an urgent need for transparency as the most challenging issue for foreign and private investors was the widespread corruption within the administrative system. In the first place, this was caused by the inability of the government to improve the socioeconomic conditions of underpaid civil servants, the very ones who were largely responsible for implementing government policies and laws. This situation made petty corruption a common practice among many employees who saw it as a way of compensating for their low wages and salaries. These practices increased following the sharp rise in the price of basic commodities that followed the slashing of government subsidies. Insufficient training and a lack of incentives for progress inclined bureaucrats to resist any kind of reform that might threaten their careers. The impact of corruption led Transparency International to rank Egypt 54 out of 59 countries in terms of corruption and left it with a global score of 3.6 in the Corruption Perception Index published in 2001. In 2005, the country’s ranking in Transparency International’s Corruption Perception Index deteriorated to 70th place with a global score of 3.4, which indicates that there is a highly perceived level of corruption. Two years later, this position deteriorated further and the country was ranked 105 out of 179 countries with a global score 2.9.41 This low ranking further decreased the attractiveness of the country to foreign investors and placed great pressure on the government to establish the rule of law, good governance and transparency in order to boost investment. 8.6. Infrastructure Facilities During the period under consideration, Egypt’s infrastructural facilities simultaneously benefited from and spoiled the country’s FDI attractiveness. Compared to other developing countries, foreign investors considered Egypt’s infrastructure satisfactory. Huge investments were made in key infrastructural facilities such as ports, roads, power stations, transportation and telecommunications. Although the information technology (IT) industry remains small in comparison with other sectors such as manufacturing and tourism, it has recently grown as the number of companies operating in this industry rose by 25 per cent to 2,938 and total employment to 175,100 in 2008.42 The data also shows that the number of mobile-phone subscribers increased to 41.3 million, while internet users reached 12.6 million in the same year. The potential for

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growth in these areas offers huge business opportunities to local and foreign companies, as well as promising better infrastructural facilities in future. The Global Competitiveness Report of 2008-09 ranked Egypt 60 out of 134 countries where governments gave high priority to investment in infrastructure.43 This high ranking was due to the government’s long-term strategy of rebuilding the country’s infrastructure and the growing role of the private sector in activities that relate directly to the improvement of key physical and human infrastructural assets. The government’s longterm strategy aimed at increasing inhabitable areas from only three per cent around the valley of the Nile to 20 per cent by the year 2020 by creating industrial zones and new communities in the desert. The establishment of new industrial cities such as Sixth October and Tenth Ramadan, with tax exemptions for up to ten years, encouraged new FDI inflows and contributed to the socioeconomic development of these cities, at least in terms of employment. However, this goal has only been partially attained. Though many of these zones have managed to emerge as well-established industrial centres, so far none of them has attracted the population that would allow for their development into fully-fledged cities.44 Infrastructure was also improved through the growing role of the private sector in economic development, in particular its participation in large scale projects in telecommunications, roads, airports, railways, water, power stations, gas, schools and hospitals. For example, widespread participation by the private sector in the construction industry during the 1990s and the 2000s led to the revival of the construction of materials industry, which received over 32 per cent of the total EU FDI flows in the industrial sector between 1996 and 2008. Regarding human capital, Egypt’s cheap and skilled labour force added a significant competitive advantage to the country’s FDI attractiveness. The importance of human development has been an integral element of the country’s infrastructure and was evident in the nature of FDI, which was made in vertical investments aimed at utilizing national resources and human capital to meet the needs of the local market. The data shows that Egypt’s labour force increased the country’s competitive advantage vis-àvis many other developing countries, particularly Eastern Europe. In 2001, the average nominal cost of labour in Egypt was US$3 per day, while the average nominal cost of labour in Poland and the Czech Republic was US$2.9 per hour and US$11.6 per hour, respectively.45 Nevertheless, despite these advantages, Egypt fell behind these countries in relation to

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secondary school enrolment, qualified engineers and scientists, training, and R&D expenditures. A previous study showed that 91 per cent of foreign companies in Egypt believed labour skills to be one of the most important factors in attracting FDI, while only nine per cent considered the skill factor as unimportant. The study found that foreign companies operating in tourism, banking, electronics, chemicals and pharmaceuticals were more concerned about labour skills than labour costs. 46 Companies in other sectors, such as the food industry and metals, were more concerned about labour costs than labour skills. It also revealed that 95 per cent of foreign companies found it either difficult or very difficult to recruit local workers and advisors with the necessary skills. When compared with other emerging markets, 57 per cent of foreign companies operating in Egypt considered the skills of Egyptian workers as moderate, while 26 per cent believed their level of skill was lower than in other emerging countries. This led to the recruitment of some 18,000 Asian workers at a time when Egypt has over 7 million unemployed. According to foreign companies, the low level of skills directly relates to the nature of the Egyptian educational system (57 per cent), training (20 per cent), experience (13 per cent), as well as labour laws and cultural factors. 47 Thus, the skill factor is not only a major problem in the Egyptian labour market but also an obstacle that will continue to undermine the country’s ability to attract more technical and R&D-based FDI. Egypt’s low R&D standard has negatively impacted on the growth of EU FDI in the country. Apart from some government-funded R&D programmes in agriculture, there have been no large-scale R&D activities in Egypt. Smaller ventures that have been undertaken aimed at solving specific problems for Egyptian end-users or specific problems identified by the government. The lack of attention to R&D was reflected in the quality of foreign companies investing in Egypt, with 48.6 per cent considering R&D as unimportant, while only 13.5 per cent and 27 per cent saw it as very important and important, respectively. In addition, the data shows that 51.4 per cent of foreign companies believed Egypt’s R&D standard is lower than those in emerging markets, while 40.5 per cent did not pay any attention to the country’s standard of R&D. Only 2.7 per cent of these companies considered it higher than standards in other emerging countries and 8.1 per cent believed it to be the same level as in other markets. Indeed, the impact of this low R&D standard was reflected in

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the small share of EU FDI in industries, such as electronics, computers, chemicals and pharmaceuticals. Furthermore, Egypt lagged behind many developing countries in terms of access to business information. The role of GAFI was insufficient for foreign investors, who hoped to obtain sufficient information about the rules, procedures, legal framework and environment within which they operated. It was not until 2005 that GAFI underwent a radical transformation to meet the needs of foreign investors. The most noticeable development was the “one-stop-shop” style of bureaucracy that enables foreign investors to complete all the procedures and documentation in one, rather than several, government departments. The growing role of the Investment Promotion Agencies in attracting FDI 48only got the attention of Egyptian officials in the past five years, but as yet it has had a limited impact on the growth of FDI inflows in Egypt. In 2001, the London-based Investment Promotion Office Egypt (IPO Egypt) was created with responsibility for Europe; it had a limited role in the promotion of Egypt’s investment potential and tended to focus its activities on the UK and Ireland. Located within the Egyptian-British Chamber of Commerce, IPO Egypt had only one staff member and, thus, could not provide adequate services and information for the 27 member states of the EU. Despite the tremendous efforts of this office to organize four annual conferences before its closure in 2005, most attendees were representatives of Egyptian companies operating in Egypt and of British companies already established in the country, many of whom used the conference as a forum to raise their problems and meet government officials. No serious effort was made to target new investors. The impact of agencies like IPO Egypt is unlikely to contribute to a real increase in FDI inflows in Egypt, unless a substantial increase in their size and capacity takes place. According to the UN’s Foreign Investment Advisory Service, the size of the agency does matter because small agencies do not effectively attract FDI. Undoubtedly, the above determinants have had a mixed impact on the investments made by foreign companies in the Egyptian market during the period under consideration. Indeed, the accessibility of the market depended largely on its stability and the continuity in the growth of domestic consumption. Most foreign investors found it more profitable to invest in the local market as the country’s population, which accounted for 81.5 million in 2008, was increasing at an annual rate of over two per cent. This high population growth rate has meant large aggregate consumption

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and, subsequently, greater demand for domestic and inward investment to meet this expansion. This kind of market trend broadly determines the nature and quality of FDI into Egypt rather than increasing the value of FDI inflows into the country. Since the early 1970s, the dominance of vertical over horizontal investment has resulted in FDI aimed only at serving the local market. This has also led to the growth of FDI inflows into the Egyptian market at the expense of outward investment.

9 EXTERNAL DETERMINANTS OF EUROPEAN INVESTMENT IN EGYPT

European direct investment in Egypt has been influenced by a number of regional and international developments, most of which resulted from the accelerated process of globalization and regionalism. Indeed, the globalization process has changed the demographic structure of the world economy, most notably the changing world output, international trade, and foreign direct investment. In the past 40 years, US dominance of global economic activities has declined by almost half; measured by GDP, the US share in the global economy declined from 40.3 per cent in the 1960s to 20.7 per cent in 2007. The share of US MNCs in global FDI, which accounted for 66.3 per cent in the 1960s, was also challenged by the rise of other MNCs in Europe, Japan and most recently by the emerging Asian tigers. The stock of FDI accounted for by US companies declined from 38 per cent in 1980 to 19.1 per cent in 2006, while the share of FDI stock by firms from developing countries increased from 1.1 per cent to 12.8 per cent during the same period. The world political and economic order has also changed over the past two decades. The post-Cold War international order has largely been defined by geo-economics rather than by geo-politics, with a clear shift in global economic power from the US towards the EU and East Asia following the dramatic effects of the recent global financial and economic crisis on the US economy. Enlargement of the EU in 2004 both increased the size and enhanced the capacity of the EU market, allowing the EU to

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become the most powerful economic bloc on the globe. Meanwhile, in 2009 firm policy coordination between China and Russia at the World Economic Forum in Davos, Switzerland, and the tough competition between China and India make it graphically clear that the three largest emerging Asian economies are now influential players in setting the agenda and determining the direction of the global economy of the twenty-first century. The global economy has also been marked by the spread of regionalism. EU success has encouraged many countries across the globe to create one form or another of regional economic integration, with the aim of reducing and, ultimately, eliminating tariff and non-tariff barriers to the free movement of goods, services and factors of productions between them. According to WTO, all its member states are participants in one or more regional trade agreements, of which 205 agreements are in force. Most of these agreements are motivated by the desire to exploit the gains from free trade and investment, which has led to the creation and deepening integration among member states of the EU and the NAFTA, as well as the expansion of the Andean Community, MERCUSOR, ASEAN, APEC and COMESA. Since the mid 1990s, Egypt and the EU have been affected by both globalization and regionalization. Between 1996 and 2008, the impact of these two parallel but contradictory phenomena was evident in the rise and decline in Egypt’s economic growth, particularly in the area of FDI. The Barcelona Process of 1995 and its subsequent developments, including south-south economic cooperation and the creation of the Euro-Mediterranean free trade area by 2010, together with enlargement of the EU in 2004, were the most significant developments that impacted on Egypt’s investment environment and the growth of European investment into the country. At the same time, Egypt was also affected by the changes taking place in the multilateral trading system following the creation of the WTO in 1995. Therefore, the development of the multilateral trade and investment regimes impacted both directly and indirectly on Egypt’s investment strategy and its investment climate, especially in relation to foreign investors. 9.1. Egypt’s Regional Investment Strategy Prior to the 1995 Barcelona Process, Egypt’s investment strategy depended largely on internal political and economic developments in order to attract FDI. This took place through the promulgation of laws that allowed foreign participation in economic activities, providing

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guarantees against nationalization and incentives such as tax exemptions, as well as allowing the acquisition of state-owned enterprises by foreign investors. These regulations prevailed over structural changes in the institutions concerned with investment policies, as well as the overall strategy concerned with attracting FDI. This situation characterized Egypt’s investment strategy until the mid 1990s as a consequence of the fragmentation of Arab regional order after Egypt’s peace treaty with Israel and the exclusion of Egypt from the Arab League between 1979 and 1989. Even with the restoration of inter-Arab diplomatic relations, Egypt’s attempt to revive its regional role through the creation of the Arab Cooperation Council with Jordan, Iraq and Yemen in 1989, was aborted as early as August 1990, due to Iraq’s invasion of Kuwait and the 1991 Gulf War, which further added to the deterioration in the inter-Arab regional order.1 The regional dimension did not begin to emerge as a cornerstone of Egypt’s foreign policy and its strategy for economic development until the mid 1990s. The intention was to use regionalism to eliminate trade barriers in a manner consistent with the WTO multilateral approach to global trade liberalization, while increasing Egyptian exports to regional markets by maximizing access to the benefits of regional economic integration. This strategy has the potential to revive the fragmented Arab economic system, which was under strain in a period of globalization and regionalization in the international system. During the negotiation of the EU-Mediterranean partnership, which was conducted on a bilateral rather than a multilateral basis, it became apparent that a south-south regional and sub-regional grouping could aggregate the economic leverage of the developing partner states in trade negotiations with developed countries. During the latter half of the 1990s, Egypt negotiated five trade partnership agreements with the US, the EU, the Arab states, Turkey, and COMESA.2 The successful conclusion of negotiations with the Arab states and COMESA in 1998 and with the EU in 2001 led to the expansion in Egypt’s regional market in a way that also enhanced its domestic market while increasing its investment potential to foreign investors. This was imperative if Egypt was to integrate with the global economy, particularly because the post-Cold War era global system had become increasingly defined more by geo-economics than by geo-politics, at least until the September 11, 2001 attacks on the US. Developing parallel to the restructuring of the national economy, the objective of these trade partnerships was also to transform the country into a ‘regional

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hub’ of a vast market extending to the EU, the Arab world and the wider Middle East and Africa, an area with a population of nearly one billion people. Indeed, of the five free trade agreements negotiated by Egypt in this period, the 1995 Barcelona Process and the subsequent EU-Egyptian Association Agreement of 2001 were the most significant. As of the autumn of 2009, the negotiations towards a partnership with the US that started in September 1994 have yet to be concluded. Apart from signing a Trade and Investment Framework Agreement (TIFA) in 1999 to provide a platform for discussion towards a free trade arrangement, no significant progress has been made in US-Egypt trade relations. Even the repeated efforts of Egypt’s Foreign Trade and Industry Minister and other senior government officials between 2005 and 2009 failed to persuade the US administrations to open negotiation on the US-Egyptian free trade area.3 This delay emphasizes the severity of the conditions laid down by the US Government for an agreement, some of which were defined by US Ambassador to Cairo, Daniel Kurtzer (1997-2001), as follows: 1. Egypt must implement the provisions of the World Trade Organization's Trade Related Intellectual Property Rights (TRIPS) agreement. 2. Egypt must comply with the WTO's Customs Valuation Agreement, after the one-year extension granted upon the request of the Egyptian government. 3. Egypt must join the WTO Information Technology agreement, which eliminates tariffs on computers, computer equipment, computer software products, telecommunications and related products. 4. Egypt must join the WTO Basic Telecommunications Agreement, which liberalizes a wide range of telecom services. 5. Egypt must make additional tariff reductions. 6. Egypt must increasingly liberalize services. 7. Egypt must provide more IPR protection by passing a new IPR law. 8. Egypt must sign the World Intellectual Property Organization (WIPO) Copyright Treaty and the Performances and Phonograms Treaty. 9. Egypt must consider joining the WTO Government Procurement agreement.4 Although these demands are severe, their aim is to encourage Egypt to make rapid progress towards economic liberalization. As well as leading to

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rising investments and increased exports, this could also generate jobs and enable the country to compete better in the global economy. This pressure is meant to bring Egypt, the second largest recipient of US foreign aid after Israel, to the position where it relies less on economic aid for its economic development. Moreover, progress in the Egyptian-Turkish Free Trade Agreement dragged on for almost ten years before concluding an agreement. The slow progress was due to the limited scope of the agreement and the length of time for implementation, which was extended to 12 years. From an investment perspective, the agreement neither defined mechanisms through which Egyptian and Turkish businesses could work together to launch joint projects in the short or medium terms, nor did it include any reference to cooperation in areas such as tourism and construction, where Egypt has competitive advantages. It was also limited to trade liberalization in industrial goods, not in services or agricultural commodities, and it ignored the issue of freedom of movement of capital flows between the two countries. Even in the industrial domain, there was no substantial cooperation in vital areas, such as power stations, the automobile industry, foodstuffs, electric and electronic industries, where both countries have made some significant progress during the past decade. These factors reduced the possibility of any benefit being gained from the agreement in either the short or the medium term and, hence, it emphasized that this agreement was primarily driven by political objectives rather than economic ones, not least the improvement of Arab-Turkish relations. Similarly, advances on the African front have been very slow due to the underdeveloped nature of the economies of the 21 member states of the COMESA, which was established in 1993. Despite the large size of the market, with a population of 370 million and combined gross national products estimated at US$165 billion in 2004, there was no evidence of any improvement within the market in relation to FDI or joint investment projects. Foreign investors are constrained by the restrictions in many African states on travel procedures and the movement of both capital and individuals within the market. Furthermore, the lack of FDI in this vast market is due to the absence of information on the market, investment opportunities, and potential business partners in the region. The combination of a lack of trust and the underdeveloped financial system, without which transactions could not be facilitated, hindered trade and investment cooperation among member states and, consequently,

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many partners import goods and commodities that are already available in this market. For example, many COMESA members satisfy their demands for fertilizers, cement and pharmaceuticals from countries other than Egypt, while Egypt seeks cereals from producers outside the COMESA.5 It has taken almost a decade to get the member states to sign the free trade agreement of October 2000, designed to facilitate trade movement and remove obstacles related to the issuance of certificates of origins, taxes and customs fees. In terms of trade, the data shows some improvement in Egypt’s trade record with COMESA as of the value of its exports of pharmaceuticals, tires, iron and steel, cement, ceramic, construction materials and textiles to the market increased from US$48 million in 2000 to US$64 million in 2002, while its imports from COMESA, which are mainly agricultural products such as tea and tobacco, increased from US$188 million to US$300 million during the same period.6 This assessment not only indicates a lack of development on the investment side but also a growing imbalance in Egypt’s trade relations with COMESA. The following section explains how Egypt’s 1997 efforts along with other Arab states to develop an inter-Arab regional economic order have been undermined by some structural and functional difficulties in the process of integration. In particular, the small share of trade and investment by Arab states in each other’s economies continued to hinder inter-Arab regional integration. Stemming from various political and economic factors, slow progress along these lines minimized the impact that the rights to cumulate origins could have had on industrial development in some of these countries, including Egypt. In addition, intra-industry trade between these countries and the EU is severely limited. Egypt has yet to coordinate its economic and industrial policies with Arab states in a way that encourages MNCs to spread their investments across the industrial sectors in the region in order to take advantage of their different competitive advantages. The successful implementation of this strategy could greatly benefit Egypt and Arab states through horizontal FDI, in which manufactured goods are partially produced in one country and assembled or completed in another partner state. Not only would such a process lead to the revival and expansion of the industrial base of Egypt and the Arab states, but it would also encourage these states to develop south-south economic integration in order for these products to be eligible to be free of custom duties when exported to the EU market.

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9.2. South-South Economic Integration The Barcelona Process encouraged horizontal integration between Egypt and its Mediterranean partners. By increasing Egyptian exports to the EU market through the rights of cumulation of origins, this was expected to improve the trade-FDI relationship. However, the rules of origin set out in the partnership were not as advantageous as was originally thought. 7 As mentioned above, low intra-regional trade between Egypt and its southern partners and the adoption of a number of rules in Egypt that differed from those in the Maghreb countries minimized the effect of the right to cumulate origins.8 This made investment in Egypt less advantageous, particularly after the accession of CEECs with similar FDI potentials to the EU in May 2004, which created a hub and spokes type effect on Egypt and other Mediterranean states and negatively impacted on FDI growth in these countries. Foreign firms may find it more attractive and profitable to invest in the new EU accession countries that have low production costs and cheap labour and, hence, to benefit from the right to cumulate origin in all the members of the EU and the ten countries of the EU-Mediterranean Partnership, rather than investing in Egypt. This will remain the case as long as Egypt and its Mediterranean neighbours are unable to deepen the process of sub-regional integration among themselves, which could increase their FDI attractiveness and maximize the rights of cumulation of origins. Progress along those lines is examined below in relation to the GAFTA, the Agadir Agreement and Egypt’s relations with non-Arab regional partners in the Barcelona Process.

The Greater Inter-Arab Free Trade Area In 1998, the creation of the Greater Inter-Arab Free Trade Area (GAFTA) revived the idea of inter-Arab economic integration. Though some progress was made in the area of trade, no significant attention has yet been given to the promotion of FDI. The GAFTA lacked a viable intra-regional FDI strategy for the utilization of vital capital, human and natural resources that existed in the region, but none of these were not fully utilized for regional development. This is the case despite the fact that GAFTA’s investment potential is much greater than of many other regional groupings in Asia, Africa and Latin America. This is particularly true in respect of the huge capital resources of the oil producing countries, the human resources from labour exporting countries such as Egypt, Jordan, Syria and Yemen, and the availability of physical and natural

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resources, in particular oil and energy resources. This region experienced huge intra-regional capital and labour flows over the past three decades. The remittance flows from the oil producing countries to recipient states such as Egypt, Lebanon and the Palestinian Territories played a significant role in economic development.9 This was also true in the case of Jordan and Yemen, which both relied heavily on workers’ remittances for their economic development. Despite such potential, inter-Arab regional integration through GAFTA has been very slow. This has largely been caused by fragmentation of the Arab economic system due to structural and functional factors that existed prior to the creation of GAFTA in 1998. Not only did many of these developments undermine the efforts of the Arab states to form an Arab Common Market in 1964 but also they continued to obstruct other attempts launched by these states to develop an inter-Arab regional economic order. GAFTA has also been impeded by several legal and practical obstacles that threaten the development of the free trade area in the medium term. For example, the GAFTA agreement lacks precise definitions and fails to specify exactly what products are excluded from the evolving trade liberalization programme. This became evident as early as the first year of its creation when 16 member states submitted a list of almost 600 commodities and goods to be exempted from free trade regulations. Moreover, there is a lack of effective enforcement mechanisms, thus providing the opportunity for some member states to delay or postpone their trade liberalization beyond agreed deadlines. Tellingly, GAFTA continues to suffer from the differing visions adopted by the Arab League’s Economic Council and its Social and Economic Council, on how to revive the Arab economic system. While the latter has promoted and initiated economic cooperation through trade liberalization and the gradual establishment of a new Arab free trade area, the former has continued to insist on the need to revive and ratify the 1964 Arab Common Market as a vehicle for pan-Arab cooperation through trade; so far this has proved unworkable in the face of numerous political difficulties, including the 1967 Arab-Israeli War, the Lebanese Civil War of the 1970s and the polarization inside the Arab League following the Egyptian-Israeli peace agreement of the same decade. At a functional level, the development of GAFTA is further undermined by the similarity of the goods and commodities produced by its member states. This is due to the limited industrial and technological capacity of most Arab economies, which make the share of manufactured

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goods as a percentage of foreign trade very small. The data shows that only three of the GAFTA member states - Tunisia, Morocco and Egypt have managed to improve their industrial performance to 18.6 per cent, 17.7 per cent and 17 per cent of GDP, respectively, from an average percentage of the industrial sector share of GDP, which varied between 6.7 per cent and 11.2 per cent in the Arab region in 1997. 10 Unless these factors are improved, they will continue to undermine the development process of GAFTA and hinder the efforts of its member states from reforming their economic systems in accordance with the rules of free trade. Indeed, the impact of this slow pace of inter-Arab economic cooperation has greatly impacted on the growth rate of FDI flows into the GAFTA member states. The data shows that inter-Arab FDI flows amounted to only US$15.2 billion between 1985 and 2002.11 This was highly insignificant in comparison with Arab FDI outflows to the US, Europe and Asia, which accounted for US$800 billion in 2002. 12 It also shows that inter-Arab investment declined from US$6.2 billion in the 1980s to US$2.6 billion in the 1990s, accounting for only two per cent of total Arab GDP. This decline was caused by the continuing political differences among Arab states and the lack of economic development, especially in the area of privatization. However, this was also due to the insignificant level of capital investment by the rich Arab oil producing countries, in comparison with their investments overseas, particularly in the US and Europe. The data reveals that almost 90 per cent of the total inter-Arab investment was made by Saudi Arabia, Kuwait and the United Arab Emirates, with the majority of capital flows concentrated in services sectors such as real estate and tourism. Egypt received almost a one third of total Arab FDI flows into GAFTA;13 the pattern of FDI distribution within it indicates not only the negative effect of the underdevelopment of the Arab industrial bases, but also the slow pace of economic liberalization, which has discouraged Arab investors from investing in projects in other Arab countries. Having failed similar to the Arab League to formulate a coordinated long-term economic strategy for the Arab states over the past 65 years, GAFTA lacks the capacity to formulate unified trade and investment policies for its member states. The most notable result is the considerable attention given by the Arab states to developing coordinated efforts at a sub-regional level. This has led to the establishment of the several Arab sub-groupings over the past decades, most notably the Gulf Cooperation

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Council (GCC), the Arab Maghreb Union (AMU), and the Arab Cooperation Council (ACC). These sub-regional groupings developed outside the grand strategy of the Arab League and, hence, the focus of their objectives has tended to be limited to the interests of their member states. The successful investment policies adopted by the member states of the GCC, improvement in their investment climate and the incentives offered to foreign and Arab investors made it more attractive to FDI than other sub-groupings, such as the AMU.14 This two-tier development in the Arab economic system reinforced the huge financial and economic gap between rich and poor Arab states. Apart from the GCC, these subgroupings, have either stagnated or been hampered in their effectiveness by political considerations and, consequently, the formation of the 2001 Agadir Agreement by Egypt, Jordan, Morocco and Tunisia has reopened the debate as to whether such sub-regional groupings can be considered to be a workable alternative to a comprehensive and collective Arab economic system.

The Agadir Agreement The Agadir Declaration of 2001 between Egypt, Jordan, Tunisia and Morocco went beyond the traditional measures of trade liberalization, with the aim of deepening sub-regional economic integration through policy coordination at the macroeconomic level.15 The objective of this approach is not only to liberalize their trade by 2005 but also to minimize the hub and spoke effect of the Euro-Mediterranean partnership on the four member states of the agreement. While the rest of GAFTA maintain highintra-trade barriers, the deepening of sub-regional integration encourages foreign companies to invest in their economies (spokes) instead of in the EU (hub) in order to benefit from their cheap production and labour costs. It is also argued that the four signatories of the agreement have a base to build on, namely their partnerships with the EU and all the accompanying conditionality, including the EU rules of origin, antidumping and anti-subsidy mechanisms, which give the Agadir Agreement an advantage over GAFTA. This is particularly true since the existing rules of origin with GAFTA are weak, which means that EU products can freely enter Arab countries, while commodities from other Arab countries would be subject to customs. While maintaining partnership agreements with the EU, the Agadir Agreement allows companies from different member states to manufacture jointly and then export the end product to the EU. This means also that a company can use any raw material or component from

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the Agadir area in the manufacture of finished products, without running the risk of losing free trade status if it is exported within the area. For example, Egyptian textile producers may export their intermediate products to Tunisia and Morocco where they are manufactured into ready-made garments and then exported to the EU. This can attract investment and encourage manufacturers to produce goods not only for local consumption, but also for both the regional and wider EU markets. In spite of these improvements, the Agadir Agreement missed out on some of the fundamental elements of the promotion of FDI, namely the liberalization of trade in services, capital and labour movement, the right to establishment, and the creation of a customs union. Assessing the trade among the four Agadir member states over the past five years shows that trade liberalization has been minimal. For example, in 2004 Egypt’s trade with Jordan, Tunisia and Morocco stood at US$136 million, US$99 million and US$74 million, respectively and yet, in respect of FDI between themselves, the case was almost the same. The Agadir member states made insignificant investments in each others economies, which is probably due to the fact that these countries are major recipients of FDI, and none of them has yet reached the status of being an outward FDI investor. This argument is supported by the available data, which shows that Jordan, Morocco and Tunisia had very small investments in Egypt between 2001 and 2008. With the exception of the two investments made by Morocco in 2006 and Jordan in 2007, the level of FDI from these countries is still low when compared with their investments prior to the Agadir Agreement. Figure 9.1 shows total investments made by these two Maghreb countries equalled only 39.8 per cent of the total Jordanian investment between 1996 and 2008. Moreover, the total investments of the two countries were less than half of the US$168.8 million invested by Jordanian firms in Egypt between 2001 and 2008. It was not until 2008 that Jordanian investment began to extend into Egypt’s various economic sectors, with industry, agriculture, services, tourism and construction attracting US$10.6 million, US$7.3 million, US$3.7 million, US$3.2 million and US$1.7 million, respectively. In the same year, ICT sector and finance received minor investments worth US$0.12 million and US$0.10 million, respectively. Between 1996 and 2008, of the total of US$356.17 million invested by the three Agadir countries in the Egyptian economy, almost 70 per cent of this investment occurred after 2001. Morocco and Tunisia invested

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US$58.9 million and US$21.8 million between 2001 and 2008, but their FDI flows over the whole 13-year period amounted to US$68.1 million and US$22 million, respectively. Morocco made its largest investment of US$43.1 million in 2006, which accounted for almost 63 per cent of total Moroccan FDI into Egypt between 1996 and 2008. The remaining 37 per cent was made up of smaller investments, the majority of which were invested in 1997 and 2004. Figure 9.1: FDI flows from Agadir partner states into Egypt 1996-2008

80

US$ million

60 40 20 0 -20

96

97

98

99 Jordan

00

01

02

03

Tunisia

04

05

06

07

08

Morocco

Source: GAFI

The poor performance of the Agadir member states in FDI shows that there are no benefits to be gained from this agreement if the member states do not, in the first instance, unilaterally intensify their efforts to liberalize their trade and investment regimes. This might help these countries attract FDI, whose capital flows can serve to build up a strong industrial base for manufacturing and, hence, increase their capacity to export to both the regional and the wider EU markets. In addition, the analysis found no evidence of the Agadir Agreement adding significantly to the institutional structure of the Arab states. Lack of development at the GAFTA level was not automatically sufficient to increase the importance of the Agadir Agreement, in the hope that this agreement might serve as a process for economic development, institution-building and political cooperation. If the existing institutions cannot develop the capacity to build consensus and further a collective approach to the common concerns of their member states, how can this agreement do so? Between 1990 and 2002, the successful application of deep integration that allowed the CEECs to accumulate FDI stock of almost US$150

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billion did not necessarily mean that this strategy would be successful in the Arab region. Whether or not the Agadir Agreement succeeds in improving the FDI attractiveness of its member states depends largely on the pace of economic growth, the degree of liberalization in trade and investment, the quality of economic reforms, the restructuring of the administrative systems, and the development of their institutions, infrastructures and physical and human resources, as well as the willingness of their governments to relinquish some of their internal policy control, adopting common strategies and policies that strengthen the regional market and increase FDI attractiveness.

Egypt and Non-Arab Regional Partners in the Barcelona Process The impact of the Barcelona Process on Egypt’s economic relations with non-Arab southern partners, principally Turkey and Israel but also Cyprus and Malta, before their accession into the EU, has been limited to some positive links at institutional and trade levels; however, the level of integration has not gone beyond the superficial integration provided by the Barcelona framework. This is probably due to the preoccupation of each partner state with seeking the means to strengthen its ties with the EU, rather than with deepening their south-south economic relations. This was notably the case with Cyprus and Malta, where prior to May 2004 the objective was to prepare their political and economic system for accession into the EU. Between 1996 and 2008, political considerations undermined any possible development in the relationship between Egypt and Israel. In particular, their relations were severely affected by the breakdown of the Israeli-Palestinian Oslo peace process, which resulted in Egypt withdrawing its ambassador in protest against Israeli policy in the Occupied Territories.16 Moreover, the Palestinian Intifada had a negative impact on the Israeli economy and this spilled over onto neighbouring economies such as Egypt. The Gaza crisis in 2008 was further blow to Egyptian-Israeli relations. Meanwhile, Turkey’s military cooperation with Israel affected its relationship with Egypt, as this agreement was perceived in some Arab countries as a threat to Arab national security. By the time Egypt and Israel had reconciled their differences and reached a free trade agreement in 2005, almost a decade had passed. Thus, the impact of these factors was clearly reflected in the small shares of FDI flows into Egypt, as well as the minimal amount of FDI stocks accumulated by these countries between 1996 and 2008.

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Of the four non-Arab southern partners, Turkey was the only country to invest most of its FDI flows in Egypt during the Barcelona era; its FDI flows into Egypt increased from US$442,500, made in a single investment in the engineering industry in 1995, to US$128.3 million in 2008. The majority of this investment was made between 2006 and 2008. Although the Egypt-Turkish free trade agreement might have facilitated this FDI growth, it is hard to claim that this was a direct result of the agreement since the FDI boom Egypt experienced during these years was in line with the record increase in global FDI. However, the positive development is that Turkish FDI was the only uninterrupted investment made any nonArab partner country between 1998 and 2008, regardless of the small amount of most of these investments, as shown in Figure 9.2.

US$ million

70 60 50 40 30 20 10 0 -10

Figure 9.2: FDI flows by non-Arab Mediterranean partner in the Barcelona process 1996-2008

96

97

98

99 Cyprus

00

01

02

Turkey

03

04 Israel

05

06

07

08

Malta

Source: GAFI

Between 1996 and 2008, almost 88 per cent of total Turkish FDI was invested in the industrial sector, with 80.1 per cent of this being invested in 87 industrial projects in the last three years. Most investments were made in the chemicals industry, engineering and food processing. In 2007, three tourism projects received US$9.6 million. Medical services, construction, ICT and agriculture received minor investments. The data shows that Turkey made no investment in Egypt between 1996 and 1997, nor did it have any FDI stocks prior to its first single investment, was made in 1995. Cyprus had uninterrupted FDI flows during the Barcelona era, with the exception of 1997 and 3002. The data shows that Cyprus accumulated US$64.2 million, 84.4 per cent of this invested between 2005 and 2007. In

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those three years, services, tourism and industry attracted US$19.23 million, US$18.1 million and US$16.45 million, respectively. Cyprus was the only non-Arab partner state to disinvest in Egypt in 2008, with US$7.2 million withdrawn from the construction industry. Prior to the Barcelona Process, in 1992 Cyprus made its first investment in Egypt of US$751,500 in the chemicals industry; in the following year, it made its largest investment with a further US$8.9 million going to the same industry. In addition, in 1994 and 1995 it invested US$5.1 million and US$247,000 in the petroleum services, respectively. The data shows that all investments in the industrial sector were made in chemicals, construction materials and the engineering industries, which received 53.6 per cent, 11.1 per cent and 2.2 per cent, respectively. Tourism and agriculture were relatively similar in value and each received around US$4.3 million. The services sector recorded 21 per cent of Egypt’s total FDI inflows from Cyprus, though infrastructure accounted for only 1.1 per cent of total investment. Of the four non-Arab southern partners, Israel was the third largest investor with US$42.14 million, 88 per cent of this being invested between 2005 and 2006, when the services sector received US$15 million and US$21.75 million, respectively. Both investments were made in East Mediterranean Gas, which is located in Alexandria. In 2006 and 2007, industry attracted only US$0.47 million and US$0.14 million. Prior to this, in 1996 only 4.8 million was invested by Israel in two projects in the free zones, with US$4.5 million and a minor investment with US$0.3 million. Malta invested least in the Egyptian market, with total FDI stock of just under US$5.4 million, of which US$4.3 million was invested between 2005 and 2008, while the remaining US$1.1 million was made between 1996 and 2004. In 2006, the services sector attracted its largest investment with US$2 million, while industry received the second largest investment with US$1.57 million invested in Moby Factory for Communications Equipment in 2008. Prior to the 2005 FDI boom, Malta invested just over US$1.1 million, of which three investments were made in the engineering industry of US$0.5 million while US$0.6 million was invested in the free zones. Malta’s first investment was made in the petroleum services (in the free zones) in 1980, when the Edgo Holding Limited invested US$0.6 million in the Mina Petroleum Services. In 1999, this same company made a further investment of US$ 10,000. Malta’s remaining investment was in the inland. In 1994, four Maltese companies made an investment in the Arabia Manufacturing Radiators Company; this was equivalent to 34.7 per

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cent of the total FDI flows into the engineering industry up to 2004. In 2001, Egyptian Credit Cards took 51.8 per cent of the total investment in engineering from I. T. M Holding Malta, which also invested US$0.68 million in Egypt R. S. T. for Programming and IT in the same year. 9.3. The EU Enlargement Eastward Since the collapse of Communism in 1989, the EU has been strengthening its economic ties with the CEECs. These ties developed through a series of association agreements in the early 1990s and reached their peak in May 2004 with the accession of eight of these countries, as well as Malta and Cyprus, into the EU.17 Three years later, the EU offered membership to Romania and Bulgaria, increasing the number of member states to 27. While these developments increased the size and capacity of the EU market, they have impacted negatively on Egypt in a number of ways. 18 The most affected economic sectors in Egypt were trade and investment, with a possible higher diversion in trade and FDI to the new member states after 2004. This diversion stimulated competition between Egypt and some East European countries, particularly with those that export similar products to the EU. The impact on FDI emanated from the higher competitive advantages of countries such as Hungary, Poland, the Czech Republic, Latvia and Lithuania, which have better human capital, a skilled labour force, and a higher degree of industrialization, particularly in heavy industries.19 Such competitive advantages, together with the cultural affinity and geographical proximity between the EU and Eastern European countries, further enhanced the attractiveness to the investment potential of these countries; consequently, they attracted more FDI flows from the EU at the expense of Egypt and other Mediterranean partners.

EU Enlargement and the Mediterranean Countries Since the beginning of the economic transition in East European countries, FDI has increased significantly in the CEECs due to rapid economic liberalization and the removal of restrictions on capital movements.20 This trend was further accelerated by the opening of negotiations for EU accession in 1998. Launched in order to meet the accession criteria, these structural economic and political reforms led to a stable market economy, a transparent legal framework for the business environment, and a modernized industrial base through privatization, all of which contributed to a significant increase in the volume of FDI into CEECs.21 During the 1990s, the growth in FDI inflows increased significantly from US$1.8 billion in 1991 to US$17.8 billion in 1999.22 This

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was a tremendous achievement compared to the record achieved by the Mediterranean countries, whose FDI inflows increased from US$2.2 billion to US$7.2 billion during the same period, though the CEECs did not have FDI stocks during the Communist era. The data shows a relatively close link between the rise in FDI inflows into the CEECs and the gradual decline in FDI flows into the Mediterranean. Figure 9.3 illustrates the changing position between the two regions in relation to their share of the total FDI inflows into the developing countries during the 1990s. Among the causes that led to a rise in FDI flows into the CEECs was the gradual improvement in their political stability and democratization. Meanwhile, the Mediterranean countries continued to suffer from political and economic instability, as explained in the previous section. By comparison, the CEECs exhibited a relatively higher degree of transparency in government attitudes towards FDI than those exhibited by Egypt and some other Mediterranean states. These factors not only enhanced the FDI attractiveness of the CEECs but also increased their share of FDI inflows, which accounted for seven per cent of extra EU outflows compared to only two per cent by their Mediterranean partners during the second half of the 1990s. From 2000 until their accession into the EU in 2004, the CEECs structurally manifested a greater potential for attracting FDI than Egypt and other Mediterranean countries. The degree of harmony between most economies in East Europe strengthened the regional market, which increased their attractiveness to EU companies. This was particularly true in the case of market-seeking investments, where firms paid considerable attention to the regional market, since a large part of total demand often comes from consumers outside the country of their foreign production base. Comparatively, this kind of determinant gave the CEECs an advantageous position vis-à-vis the Mediterranean region, whose regional market segmentation, together with non-tariff barriers, reduced the attractiveness of the region. One could also argue that the enhanced capacity of the CEEC markets and their growing FDI attractiveness minimized the impact of the global economic slowdown and the related decline in global FDI flows in 2001. While this decline impacted dramatically on Egypt’s FDI inflows, which decreased by 58 per cent in 2001 from US$1.2 billion in the previous year, FDI inflows into the CEECs decreased by only 17 per cent (reached €18.8 billion in 2001 from €22.6 billion in 2000), with Hungary and Estonia

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recording a surplus of 53 per cent and 42 per cent, respectively. 23 This decrease in FDI inflows did not dramatically affect FDI stocks in these countries, which amounted to €78.3 billion in 2000, with Poland accounting for €36.8 billion and the Czech Republic €23.4 billion; together they made up to 77 per cent of total FDI stocks.

12

Figure 9.3: Percentage of FDI inflows of CEECs and Mediterranean partner states to total global FDI to developing countries, 1989-1999

10 percentage

8 6 4 2 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Central and East European Countries

Mediterranean Partner States

Source: Carlo Altomonte & Claudia Guagliano (2001), p. 16.

Unlike Egypt and its Mediterranean partners, the CEECs also gained a growing share of FDI outflows of 4.7 per cent and 5.4 per cent of the total FDI transactions in 2000 and 2001, respectively.24 Despite a reduction in FDI outflows from Poland and Latvia, three other countries Hungary, Slovenia and Estonia - accounted for 82 per cent of total FDI outflows from the CEECs in 2001. In the same year, FDI inflows accounted for 4.6 per cent of the GDP of the CEECs, underscoring the growing importance of the role of FDI in their economic growth. 25 Prior European experience in enlargement already suggested that the Eastern part of the EU would become the main destination for FDI outflows from the Community for at least the next decade. On the one hand, this argument is supported by the Spanish experience after the country’s accession into the EU in 1986, when Spain not only experienced rapid economic growth and the expansion of private enterprise in both manufacturing and services but also huge inflows and outflows of FDI, which accounted, respectively, for 4.2 per cent and 1.2 per cent of GDP in

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1991.26 Accession almost doubled Spain’s FDI inflows and the destination of its FDI outflows to roughly two-thirds of total FDI compared to 30-50 per cent prior to 1986. This experience also revealed a relatively high degree of FDI diversion from and to the US and Latin America at the time when European countries were becoming popular with Spanish firms. What is more, Spain’s accession was reflected in closer regional cooperation with non-EU member states such as Morocco, which became attractive to Spanish FDI outflows, particularly in the manufacturing sector. The data from 2001-2003, the two years prior to the CEECs’ accession to the EU, not only supports the above argument but also highlights the growing gap between the position of the new EU member states and that of the Mediterranean countries in terms of share of FDI flows from the EU-15 member states. This was evident in 2002 when Egypt, together with the Mediterranean partner states, accounted for 2.8 per cent of EU FDI outflows (from one per cent in 2001), compared to 17.5 per cent received by the eight CEECs.27 This gap has widened further since the 2004 enlargement because the EU is currently intensifying its efforts to improve the infrastructure capabilities of the new member states as well as their social and economic conditions. Over the past six years, substantial European regional development funds were invested in infrastructural projects and key economic sectors, creating further investment opportunities for European companies in the new accession countries. Notable progress has also been recognized in institutional and infrastructural development, in macroeconomic stability, in health, primary and higher education, in efficiency of goods, labour and financial markets, and technological readiness and innovation. The CEECs have developed their legal systems and regulatory frameworks to be in line with the rest of the EU member states. In the light of such changes, the competitiveness of these countries has significantly improved, with Estonia, Czech Republic, Slovenia, Lithuania, Slovakia, Poland, Latvia, Hungary, Romania and Bulgaria ranking 32, 33, 42, 44, 46, 53, 54, 62, 68 and 76 with global score 4.68, 4.62, 4.50, 4.45, 4.40, 4.28, 4.26, 4.22, 4.10, and 4.03, respectively, in the Global Competitiveness Index 2008-09. At the same time, countries such as Morocco, Egypt and Syria were ranked 78, 81 and 99 with global scores of 3.99, 3.98 and 3.71, respectively. The impact of this improvement is seen in the trends in FDI in the CEECs, where investments moved from

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traditional manufacturing to services industries, such as banking, IT and telecoms, as well as to technology-based industries such as automobile plants in the Czech Republic and Slovakia. Macroeconomic stability has also encouraged a significant number of existing foreign companies to reinvest their profits in these countries rather than seeking business opportunities elsewhere. Prior to the global financial crisis of 2008, a survey conducted by an international consultancy company concluded that the CEECs were regarded by international executives as the second most attractive foreign investment location after Western Europe and are the most favoured place for investment in the manufacturing sector. It also concluded that 40 per cent of respondents to the survey with declared relocation projects indicated that the CEECs were their preferred choice, followed by 22 per cent for China and seven per cent for India. In relation to manufacturing, the figures were 30 per cent for the CEECs, 23 per cent for China and only 16 per cent for Western Europe. 28 While this deepening process of integration of the new member states into the EU will certainly provide an advantageous position for EU firms to invest within the geographical boundaries of the enlarged EU market, it will happen at the expense of peripheral Mediterranean partners, including Egypt.

EU Enlargement and Egypt Eastern EU enlargement has negatively affected Egypt. In terms of foreign investment, the data shows that Egypt saw a gradual decline in FDI flows from the CEECs over the past 35 years, particularly with the improvement of the ties between these countries and the EU over the last two decades. For example, East European FDI flows into Egypt, which totalled US$422.2 million between 1976 and 2008, declined from US$233.7 million in 1977 to US$87 million in 1988, US$5.5 million in 1992, US$0.6 million in 2002, (minus) -US$45.78 million in 2006, and (minus) -US$2.21 million in 2008. Of the total US$422.2 million made by the CEECs, between 1976 and 1988 Romania invested US$456.7 million in the financial sector and tourism and withdrew US$58.5 million between 2005 and 2006, leaving the country with aggregate FDI of US$409.8 million. In 1992, Poland made its first and largest investment of US$5.5 million, before withdrawing US$0.21 million and US$4.98 million in 2007 and 2008, respectively; Poland was left with a total FDI stock of US$1.41 million in 2008. Among the CEECs, Hungary had the second largest FDI stock in Egypt of US$5.66 million, with US$4.46 million being invested in 2005. All Hungarian investments were made between 2004 and 2007. All

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Egypt’s FDI inflows from Hungary, Latvia, Bulgaria, Slovakia, Slovenia and Lithuania, which accounted for US$5.66 million, US$1.95 million, US$1.55 million, US$1.42 million, US$0.64 million and US$0.08 million, respectively, were invested after their accession into the EU. Analysis shows that the declining position of FDI flows from the CEECs into Egypt is probably due to the fact that the majority of these countries, with the exception of Romania, have little experience with FDI, and their outward flows have just begun since 2002. 29 Also, the rapid economic development of the CEECs over the past 15 years made them host rather than source countries for FDI. As such, Eastern European investors might find more business opportunities at home than in Egypt. They might also have been affected by Egypt’s economic slowdown between 2001 and 2004, which negatively affected the country’s economic growth and its FDI attractiveness. Overall, the CEECs were marginally involved in the Egyptian market in the post-1995 Barcelona declaration. The effect of the recent global financial crisis is likely to further marginalize these investments. The sectoral distribution of FDI flows from the CEECs shows a concentration in the financial sector and tourism industry, with minimal interest in the manufacturing sector, services and infrastructure. No investment was made in agriculture or the services sector before 2005 and those made afterwards, mainly by Poland, did not exceed US$0.5 million in 2008. The financial sector received US$239.2 million over the past 35 years, of which 97.7 per cent was invested by Romania in 1977 and the remaining 2.3 per cent by Poland in 1992. Bulgaria’s first and largest investment was made with US$1.43 million in the financial sector in 2005. Tourism took US$152.2 million, with the majority being made by Romania in 1976 and 1988, while Hungary and Slovakia invested US$4.47 million and US$1.03 million, respectively, in 2005. The remaining investments were made by Poland, the Czech Republic and Hungary, with US$617,600, US$146,100 and US$73,000, respectively, between 1996 and 2004. The manufacturing sector received US$1.3 million, with 81.9 per cent going to engineering, 9.7 per cent to metals, 8.3 per cent to chemicals and 0.07 per cent to textiles. Almost all investments in the engineering industry were made by Slovenia, the Czech Republic and Hungary, whose investments accounted for 48.6 per cent, 20.5 per cent and 9.6 per cent of total FDI in the manufacturing sector. Hungary had two investments, one investment in the chemicals industry in 1990 and the other in 2005, while in 2002 Poland was the only country to invest in the metals industry.

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Though not all CEECs had invested in Egypt prior to the Barcelona Process, these statistics show a gradual decline of FDI flows from these countries since the early 1990s, with a further negative effect after May 2004 due to a possible FDI diversion from the EU-15 to the new member states from Eastern Europe.30 Although there is not sufficient data available to precisely assess the impact of EU enlargement on FDI diversion between the EU and its partner states, early indications show that Egypt may find it difficult to compete with the new entrants to the EU in attracting investment. According to Peter Goepfrich, executive director of the German Arab Chamber of Industry and Commerce, this is due to an increasing tendency, especially in Germany, to look towards the East to relocate factories or invest in new projects because the CEECs offer proximity, relatively low labour costs, minimal language barriers and competitive quality.31

10

Figure 9.4: FDI by the CEECs into Egypt 1996-2008

0 -10 US$ million

-20 -30 -40 -50 Poland Hungary Czech Slovenia Slovakia Romania Lithuania Latvia

Bulgaria

Source: GAFI

Despite reassurances from the EU prior to the 2004 enlargement that this process would not affect its relations with the Arab countries, the accession of the CEECs has significantly challenged Euro-Egyptian trade relations. Although the enlargement resulted in the EU population rising by 20 per cent to a total of 450 million people, its demographic structure neither guarantees an increase in Egyptian exports to this vast market nor a substantial increase in EU funds to assist Egypt with its economic development programmes. This is because the current EU economic priority is to reduce the socio-economic gap and improve standards in the accession states. In 1987, the EC exerted considerable pressure on Egypt and other Arab states to amend their cooperation agreements in order to

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offset the economic consequences of Spain and Portugal’s entry into the Community the previous year. The level of quotas and the volume of exports allowed into the EC market were reduced so that similar Spanish and Portuguese goods and commodities would have greater access to the EC’s internal market. Although a recent study at Cairo University concluded that the increase of exports from the CEECs to the EU prior to the 2004 enlargement only had a nominal negative impact on Egyptian agricultural exports to the EU, this situation had changed after 2004 once these countries had become full members of the Community. 32 This translated into rapid improvement in the quality of their goods and commodities because they had to comply with the specifications and quality standards demanded by EU health and safety regulations. Moreover, now their agricultural commodities enjoy preferential treatment under the Common Agricultural Policy, at the time when the EU has become increasingly selfsufficient in agricultural products and, consequently, imports fewer commodities from non-EU states. This has put Egypt under extreme pressure as some of its main agricultural exports, such as molasses, strawberries, green peas, potatoes, oranges, and onions, account for 12 per cent of its exports to the EU and now these are produced in large quantity by the ten new EU member states. Since the 2001 Association Agreement, Egyptian exports have been guaranteed tariff-free access to the markets of the ten new member states of the EU, whereas previously they were subject to customs duties. However, in the short term this advantage is unlikely to substantially increase Egypt’s exports to these markets. Though this is primarily due to the stringent EU rules on the importation of agriculture products that these countries now abide by as EU members, it also stems from the minimal level of Egypt’s trade with the new entrants to the EU, with the trade balance being in favour of these countries. For example, in 2002 Egypt’s exports to these countries did not exceed US$30.2 million, while imports were US$222.4 million, with most of these transactions being with Poland, Slovenia and the Czech Republic. The export capability of these states is likely to improve much faster than that of Egypt precisely because of the technical and financial support that the EU provides in this respect. Whether or not there is an increase in Egypt’s exports to the new member states of the EU largely depends on the speed at which their socioeconomic conditions and the standard of living are improved and, hence, on the ability of their markets to absorb more imports. It also depends on

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Egypt’s capacity to improve its manufacturing and exporting capabilities while enhancing its competitiveness in a way that enables its products to compete in the ten new member states and in the wider EU market. 9.4. Egypt’s Major Foreign Investors Analysis of the performance of Egypt’s main foreign investors - the EU, the Arab World, and the US - reveals that each investor has its distinctive features and characteristics. Since 1996, the level of FDI flows from the EU and Arab states has steadily grown over the years, but US investment has remained far below its competitors. The data shows that after 1995 the position of leading foreign investor in Egypt alternated between the EU and the Arab states, though between 1996 and 2008 the Arab states were ahead of the EU with total FDI flows of US$11.13 billion. It was not until 2006 that the Arab states overtook the EU by a huge margin, when the United Arab Emirates invested US$1.2 billion in Egypt’s ICT sector. The dominant position of the Arab states was maintained by large investments from the United Arab Emirates, Saudi Arabia, and Kuwait over the following two years. During the same period, though the EU was slightly behind the Arab states prior to the Barcelona Process, once again it was in second place with total FDI flows of US$9.38 billion. In third place, the US was far behind the EU and Arab states, with only US$936 million invested in non-petroleum sectors, while 65 per cent of US FDI stocks in Egypt were in petroleum and natural gas. Figure 9.5 illustrates the performance of FDI flows by the three main foreign investors in Egypt in relation to one another between 1996 and 2008. The most distinctive feature was the tough competition between Arab and European investors in key sectors such as manufacturing. This figure shows that Arab and EU FDI alternated in terms of being the largest investor on an annual basis, with the Arab states being the top foreign investor in 1996, 1997, 1999, 2003, 2006, 2007 and 2008, while the EU was the main investor in 1998, 2000, 2001, 2002 and 2005. Furthermore, it demonstrates how EU FDI flows was overtaken by the huge size of the Arab investment in Egypt over the last four years. For example, in 2006 and 2007 Arab investment increased almost threefold, from its US$950 million FDI record in 2005. Even with the global financial crisis on the horizon, European investment was overwhelmed by the size of Arab FDI, which was almost double the total investment made by the EU in 2008. On aggregate, it was the huge investments made by Saudi Arabia, the United Arab Emirates and Kuwait that amounted to US$3.24 billion, US$2.51 billion and US$2 billion, respectively and made it

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possible for Arab FDI to overtake European investment between 1996 and 2008. Nevertheless, they were behind the UK, which remained the largest investor on aggregate with a total of US$3.31 billion of FDI flows during the same period.

3000

Figure 9.5: FDI flows by the EU, the USA & Arab States into Egypt 1996-2008

US$ million

2500 2000 1500 1000 500 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 EU FDI

Arab FDI

US FDI

Source: GAFI

However, when comparing the quality of Arab investment to that of the EU, one could argue that European investment hardly faced any real competition from other foreign sources. To a large extent, Arab investment lacked the technological and managerial capabilities required for manufacturing, R&D and technology-based industries, such as pharmaceuticals, chemicals, and engineering. This lack of vital capability in Arab investment led most Arab investors to distance themselves from technology and knowledge-based projects and, hence, they concentrated on areas such as telecommunication services, real estate and the establishment and management of hotels and tourist resorts. There was no significant Arab involvement in high-tech industrial activities and, thus, manufacturing, Egypt’s largest economic sector, was competition-free with regard to Arab FDI. Not only did this situation give EU firms great business opportunities in manufacturing but also it allowed the EU to monopolize vital industries, such as chemicals and cement. In addition, the data reveals a glaring disparity regarding the origin of Arab capital flows into the country during the Barcelona era, with 77.5 per cent originating in the six member states of the GCC, followed by 17.6 per cent from Mashreq countries, and 4.7 per cent from Maghreb countries. Due to this imbalance, the growth in Egypt’s FDI inflows from the Arab

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states became highly dependent on the political stability of the Gulf region and the wider Middle East. Between 2000 and 2005, the impact on Egypt of the Palestinian Intifada and the 2003 Gulf war was reflected in the decline of Arab FDI flows into Egypt, hence reducing the Arab states to second rank during this period. The other distinctive feature was the minimal involvement by US private investors, whose investments not only remained low but consistently below US$208.6 million, the record achieved in 2007. It was only in 2003 that the record US FDI flows approached that of the EU. This was caused by a slight increase in US FDI to US$10.4 million and by a dramatic decline in EU FDI flows, which recorded its lowest share of US$47.7 million in the same year. US firms, with comparable financial, technological and managerial capability of that of the EU, were less involved in the Egyptian economy, outside of the petroleum sector, which is not included in this analysis. Up to 2003, almost 91.7 per cent (US$159 million) of total US investment was made inland and 8.3 per cent (US$14.3 million) in the free zones. Some US$8.3 million was invested in the Private Cairo Free Zone, while US$4.6 million was invested equally in the Private Alexandria Free Zone and the Public Suez Free Zone. Between 2004 and 2008, the data shows that the level of US investment increased significantly in relative terms to US$145.1 million, US$168 million, US$96.9 million, US$208.6 million and US$161.6 million in 2004, 2005, 2006, 2007 and 2008, respectively, but remained far below their Arab and European counterparts. Between 1996 and 2008, US investment has a clear sectoral composition in Egypt’s non-petroleum industries. The manufacturing sector received 47 per cent of total US FDI flows into Egypt. The chemical industry, food, engineering, textiles and metals received the largest share, while construction materials and the pharmaceutical industry were the least attractive sector to US firms. Between 2000 and 2002, Egypt’s industry experienced a dramatic decline in US investment due to the withdrawal of many US firms from the Egyptian market. 33 The share of US investment in industry decreased from US$73 million in 1999 to minus US$58 million and minus US$330 million in 2000 and 2001, respectively.34 Though not recorded in GAFI database, this withdrawal increased further after the September 11 attack on the US, reaching its lowest level in 2002. US FDI into Egypt was also affected by the growing anti-American sentiment in the region after the US involvement in Afghanistan and Iraq, which led to boycotts of products made by US firms.35 The most notable effects were a reduction in the size of the

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American community in Egypt, shrunk by almost half since September 2001, and a growing tendency towards franchising US companies as an alternative to FDI, whereby McDonald’s, the largest US food chain, transformed its presence in Egypt from investor to franchiser in October 2002.36 Figure 9.6 shows that the services sector attracted US$349.5 million, the majority of this invested after 2004. Prior to that, minor investments of US$6.5 million were made in financial services, US$4.8 million in petroleum services, US$4.1 million in the general services and US$1 million in hospitals. The financial sector was in the third place with US$87.5 million, with US$25.2 million being invested between 1996 and 1997. The was followed by construction, tourism and ICT, which attracted US$72.7 million, US$16.9 million and US$11 million, respectively, between 1996 and 2008. Agriculture was the least attractive sector to US investors, and received US$3.7 million between 1996 and 2008. Figure 9.6: US FDI flows into Egypt by sector 1996-2008

Construction 7%

ICT 1%

Tourism 2%

Agriculture 0%

Finance 9% Industry 47%

Services 34%

Source: GAFI

The modest US investment in Egypt was due to a number of factors. Most notable was the negative perception among American investors of the Egyptian market, a perception that has been aggravated by the uncompromising position of the US government regarding the USEgyptian partnership over the past 15 years. Despite its strategic relationship with Egypt, the US has insisted that no such partnership would be concluded until Egypt’s economic and political conditions met exacting criteria.37 What is more, Egypt was required to alleviate impediments to a free trade area through serious tax and customs reforms,

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stiffer protection of intellectual property rights (especially for US pharmaceutical firms), improvements in the regulatory climate in the areas of investment and procurement and an overall increase in liberalization and privatization.38 Another factor was the model upon which the partnership would be concluded. While Egypt preferred the EU-style partnership that allows gradual liberalization of trade and investment, the US insisted on a NAFTA-style agreement, which calls for total liberalization. 39 The Egyptian view was that the NAFTA model that applied to Mexico in 1994 was problematic for Egypt given its economic and political conditions, in particular the EU’s willingness to conclude the EU-Egyptian partnership of 2001. A third factor was the possible diversion of US capital flows from Egypt to other destinations that were more attractive to US firms. Given their geographical proximity and market size, Latin American countries, in particular Brazil, Argentina and Chile, became favoured markets for many US companies. In political and economic terms, Mexico was a more attractive market for US firms than Egypt, not only because of its membership in NAFTA but also because of its liberalized investment regime that offered the right to establishment and national treatment to foreign investors without any restrictions with regard to export, the use of local materials and repatriation of profits to source countries. Similarly, US firms were attracted to Asian markets, with Hong Kong and Singapore being the most preferred markets, followed by Indonesia, South Korea, Thailand and Taiwan. With regard to the Middle East region, Egypt’s share of US FDI flows was similar to that of Israel and Turkey, but the majority of US investments in these two countries were made in manufacturing, while the majority of Egypt’s share went to the petroleum sector, with minor shares in chemicals and textiles.40 Although privatization between 2005 and 2008 appeared to have stimulated the interest of US firms in some Egyptian companies such as Egypt’s biggest producer of polyethylene, Sidi Kreir for Petrochemicals, no substantial investments similar to those of the EU or Arab states have been made, confirming once again the unattractiveness of the Egyptian market to US companies. The decline of US investment in Egypt can also be attributed to the fall of the US share of global FDI from 25.9 per cent in 1995 to 12.1 per cent in 2000, compared to the EU, which provides 49.2 per cent of all global FDI. These factors impeded US competition with the Arab states and the EU. Despite providing almost half of all global FDI and becoming Egypt’s second largest foreign

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investor in the Barcelona era, EU investment in Egypt remained less significant compared to the Community’s investment in other developing countries in Eastern Europe, Latin America and East Asia. 9.5. International Trade Regimes and Egypt’s FDI Liberalization In the Barcelona era, Egypt’s modest performance in attracting FDI was largely due to the slow liberalization of the country’s investment regime. This was a result of the considerable attention paid to regional arrangements that led to partial liberalization at the expense of international trade and investment regimes that call for total liberalization of FDI. Although Egypt was one of the original 23 countries that signed the General Agreement on Tariffs and Trade (GATT) on 9 May 1947, its trade and investment liberalization did not start until almost the mid 1990s and since then it has developed very slowly. For example, the elimination of tariff and non-tariff barriers to trade did not start until the 1994 Uruguay Round and the subsequent creation of the WTO in 1995. Most efforts along this line were made within regional and bilateral arrangements, such as the EU-Egyptian association agreement, but no serious efforts have yet been made by the Egyptian Government to liberalize trade on a unilateral or multilateral level. Compared with trade, the liberalization of FDI has been delayed. This is partly due to a lack of clearly defined multilateral rules for investment policies, such as the right of establishment and national treatment for foreign investors.41 Moreover, the WTO has been pre-occupied with trade and trade-related aspects, while far less consideration has been given to liberalization and protection of FDI. This means that evolution of the multilateral investment rules remained limited to three areas related to FDI, namely the General Agreement on Trade in Services (GATS), the protection of FDI in intellectual property rights (IPRs), and the TradeRelated Investment Measures (TRIMS) associated with FDI and FDIcompetitiveness. This kind of limitation of the multilateral rules of FDI enabled only developed countries to achieve a higher degree of FDI liberalization, while developing countries like Egypt sought other means such as offering incentives and guarantees to attract FDI. Under the GATS agreement, which was the only multilateral framework to deal directly with investment, Egypt had to comply with the rules that applied to trade in services with all WTO members, with the schedule of commitments tabled by its government specifying for each service sector the degree of liberalization, and with other rules affecting

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trade in services elaborated in the GATS or Ministerial Decisions.42 However, the implementation of these rules was far less effective in the extension of Most-Favoured Nation (MFN) Treatment, National Treatment, and Market Access to other WTO members, as well as in transparency in the administration of regimes governing trade in services and FDI. While there was no discrimination against any nationality, some restrictions undermined the principle of national treatment and limited market access to some economic sectors. This latter aspect was evident in Law 8 of 1997, which limited market access to foreign investors to only 16 sectors as specified in Article One. This law fell short of full FDI liberalization because it depended largely on offering incentives and guarantees rather than on eliminating restrictions to foreign investors. Similarly, Egypt failed to benefit from the transition periods offered by the WTO to readjust its policy framework and regulations to the WTO/GATS rules and principles. Taking the maximum exemptions of transition periods offered to developing countries did not produce a gradual readjustment or improvement in the business environment, but rather it further delayed the liberalization process of trade in services and FDI. For example, of the 620 separate commitments specified by the GATS, Egypt tabled only 104 specific service sector commitments in its GATS schedule,43 hence committing itself to only 16.7 per cent of the total commitments of liberalization of trade in services and investment. Further delays in liberalization were caused by restrictions imposed by the Egyptian government on trade in services and FDI, under Article XII of the GATS,44 to address its balance of payments and maintain a level of reserves adequate for its development programmes. The agreement on Trade-Related Investment Measures (TRIMS), which identified issues often associated with investment and investmentpromotion that are considered inconsistent with the GATT because of their negative impact on trade, only negligibly enhanced Egypt’s investment climate. Under this multilateral agreement, Egypt was obliged to report all TRIMS inconsistent with GATT provisions within three months of entry into the WTO, and to eliminate all measures inconsistent with the GATT by 1 January 2000. During this five-year transition period (1995-2000), the introduction of new measures inconsistent with the agreement were not permitted, nor was Egypt allowed to increase the number of existing measures already inconsistent with GATT provisions.45 Egypt was injuncted by the agreement not to apply any TRIM that was inconsistent with Article III on national treatment or Article XI on the prohibition of quantitative restrictions. With no

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distinction made between FDI and domestic investment, Egypt was required to treat the products of another WTO member no less favourably than domestically produced products. Thus, rather than forcing Egypt to eliminate existing barriers to FDI the only notable effect of this agreement was to prevent Egypt from imposing further restrictions. The trade-related Intellectual Property Rights agreement impacted severely on the growth of FDI into Egypt, particularly over the past 15 years. Under this agreement, Egypt was obliged to provide adequate and effective protection to intellectual property rights, and must not discriminate between foreign investors (as stated in the MFN) nor against foreigners (National Treatment) with regard to IPRs. In addition, it had to comply with the rules and obligations of Copyright and Related Rights to ensure the protection of products during their period of protection as specified in Table 9.1. However, the reluctance of the Egyptian government to fully comply with the obligations and commitments of IPRs had a negative effect on FDI in vital industries such as pharmaceuticals. The lack of patent protection discouraged international pharmaceutical firms in Egypt from either investing in new drugs or allocating substantial capital for R&D in their Egyptian affiliates. What is more, these firms found it difficult to invest in a country where the government was unwilling to crack down on imitators of copyable products in industries such as pharmaceuticals and agricultural chemicals because such a crackdown would mean both the end of many small domestic industries and would result in products sold at unaffordable prices. Table 9.1: Intellectual Property Rights and their protected periods (per year). Product Period of Product Protection protection Period Computer 50 Patents 20 Programmes Film Production 50 Industrial Designs 10 Sound recordings 50 Integrated Circuits 10 Broadcasting 20 Trademarks 7 Materials Source: Nathan Associates Inc. (1999).

Between 1996 and 2008, although there were some benefits to be gained from full compliance with IPRs in areas such as industrial design and, particularly, in textiles and clothing where Egypt enjoys a competitive advantage, this had little impact on the government position on IPRs. The

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1 January 2005 expiry date of the transition period meant that Egypt had to comply with the rules of IPRs by allowing patent applications to be filed for those submitted after that date, as well as those submitted during the transition period of 1995-2004. Such a workload is likely to cause severe disruption to Egypt’s regulatory regime for years to come, due to the shock of suddenly having to comply with these multilateral rules and obligations.

CONCLUSION

The prospect of European direct investment in Egypt depends largely on understanding the development, trends and patterns of that investment into the country over the past 40 years. To this end, this book has presented a detailed analysis of European direct investment into Egypt between 1970 and 2008. The book compares the growth of European FDI flows into the country under the 1972 Global Mediterranean Policy with growth levels following the Barcelona Process of 1995 in order to determine whether the EU-Egyptian partnership conducted within the latter framework has led to a sustainable growth of European FDI into Egypt. In the course of examining this key issue, it descriptively analyzes European direct investment into Egypt during this period, while also examining the impact of the institutional development of EU-Egyptian economic relations, in conjunction with Egypt’s political, legal and economic reforms, on the growth of European FDI into Egypt. The Barcelona Process and its subsequent EU-Egyptian partnership are also scrutinized to assess their impact on the growth of EU FDI into Egypt, with special focus on British FDI in the manufacturing sector. By examining the interplay between the external and internal forces that impacted on the growth levels of foreign investment in Egypt, this study reveals that the growth of European direct investment into Egypt was often determined by the degree of liberalization in Egypt’s political and economic system rather than by improvement in EU-Egyptian economic and investment relationships. However, though the flow of capital may have been encouraged by positive political and economic ties between Egypt and the EU, the level of involvement by European investors in Egypt’s economic activities has varied considerably depending

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on the degree of economic liberalization and government interference in economic affairs. In light of this, there is no evidence to conclude that either the Cooperation Agreement of 1977 or the Association Agreement of 2001 had an immediate impact on the growth of European investment in Egypt. Rather, analysis reveals that the resurgence and growth of EU FDI flows into Egypt, which peaked in 1975, were hardly attributable to any of these or other agreements. This growth was mainly due to the legal, economic and political reforms introduced by the Egyptian Government itself during the 1970s. Similarly, the record level of FDI into Egypt of US$4.6 billion in 1975 was not a product of the 1974 Euro-Arab Dialogue but a direct response by foreign investors to the 1974 Infitah policy, which initiated Egypt’s economic liberalization, and Law 43 of the same year, which allowed foreign ownership of up to 49 per cent of a company. Surprisingly, the Cooperation Agreement signed in 1977 failed to sustain either this high level of FDI growth or prevent its sharp decline from US$2.5 billion in 1978 to US$768.6 million, US$258.2 million and US$75.2 million in 1979, 1985 and 1990, respectively. This study shows that the decline occurred because of the failure of the Egyptian Government either to follow up or continue with the political, legal and economic reforms introduced during the early 1970s. The government maintained strict control over the country’s main financial resources, including the Central Bank of Egypt, the exchange rate, the power to devalue the Egyptian Pound, employment policies and prices of a number of strategic commodities, all of which directly affected the determination of foreign companies to operate in the country. As for the Barcelona era up to this point, despite the signing of the Association Agreement in 2001 and its ratification in 2004, European investment remained in second place, behind the Arab states, while the gap between Arab and European investment that was negligible in the pre-Barcelona era, has grown significantly since 2006. Indeed, though European investments grew in value and became more diversified across various economic sectors and regions in the last five years, the level of growth and diversification was also matched by huge Arab and, to a lesser extent, US investments in the country, particularly in new industries such as ICT that attracted as much as US$1.2 billion from UAE in 2006. Nevertheless, the EU-Egyptian partnership has witnessed some notable achievements in the area of foreign trade and, most significantly, Egypt’s domestic situation. This was apparent in the substantial financial and technical assistance provided through the MEDA programmes and

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European Investment Bank (EIB), allowing further investment in infrastructural projects vital to attracting foreign investors. EU financial and technical assistance effectively increased, particularly through the Industrial Modernization Programme, which provides assistance to small and medium-sized enterprises (SMEs), many of which have a crucial role in providing support services to foreign companies and multinational corporations. Successful implementation of these efforts to strengthen the role of the private sector in the country’s economic development will eventually stimulate internal political, economic, legal and institutional reforms, which aim to readjust the legal framework and prepare the domestic market for the conditions of free trade. At a regional level, this partnership integrated Egypt into a vast market covered under the Euro-Mediterranean Free Trade Area and it encouraged south-south economic integration, which stimulated the creation of the GAFTA of 1998 and the MAFTA of 2001. Nevertheless, these arrangements were undermined by functional factors that limited deep integration among southern partners and minimized their benefits from access to the EU market, at least in terms of accumulation of rules of origin. In terms of the pattern of investment, this study found no fundamental change in the pattern of European investment into Egypt. Between 1972 and 2008, EU FDI flows have been characterized by periodical single large investments rather than by a consistent level of capital flows. The most apparent and recent case was Italy’s US$914 million investment in the financial sector in 2007, a record that ranked Italy the third largest EU investor in Egypt, after the UK and France between 1996 and 2008. This was also the case with Spain in 2001 and 2005 and with Greece in 2005. FDI in Egypt remained vertical and aimed at serving the needs of the internal market. Horizontal FDI was limited because of low intra-industry trade between Egypt, the wider MENA region, and the EU. In terms of the origin of EU capital flows and their sectoral composition, the UK has been the largest EU investor in Egypt and a major investor in most economic sectors, especially manufacturing between 1972 and 2008. France, Italy, Spain, the Netherlands and Germany have been major investors, while the Republic of Ireland, Portugal and the new accession countries have recently emerged as new EU investors in Egypt. The sectoral distribution was marked by a large shift in the concentration of capital from the financial sector to the areas

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of manufacturing and services. The share of the financial sector of EU FDI flows into Egypt dropped from 56 per cent between 1972 and 1995 to 27 per cent between 1996 and 2008. The share of manufacturing increased from 39 per cent to 45 per cent during the same period. If this concentration of capital in manufacturing continues at a sustainable rate, it could lead to an expansion in Egypt’s industrial capacity and, hence, to an increase in its exporting capabilities. Between 1996 and 2008, construction and ICT, which together accounted for one per cent in the pre-Barcelona era, attracted four per cent and three per cent, respectively. The share of tourism, services and agriculture also increased from two per cent, one per cent and one per cent between 1972 and 1995 to seven per cent, ten per cent and four per cent, respectively, between 1996 and 2008. Despite these small shares, such an increase highlights the growing importance of tourism and services to European investors during the Barcelona era. In industry, European investors shifted their focus from pharmaceuticals and the food industry, which respectively received 38 per cent and 26 per cent of EU FDI flows between 1972 and 1995 to construction materials (32 per cent), engineering (27 per cent) and chemicals (20 per cent), which together accounted for 79 per cent of total EU FDI into manufacturing between 1996 and 2008. The fact that during the latter period the share of pharmaceuticals and processed food decreased to four per cent and ten per cent, respectively, underscores the concern of European firms about Egypt’s legal system, particularly in regard to copy right protection. This also indicates that the manufacturing sector is no longer dependent on capital-intensive and R&D-based industries, but rather on labour-intensive industries such as building materials, chemicals, non-Information Technology engineering projects and clothing. Most investment in textiles went to clothing rather than actual raw materials, as the manufacturing of the latter is increasingly becoming a capital-intensive and technology-based industry, while the former depends largely on the availability of cheap labour. In terms of economic development, the impact of EU FDI on Egypt was far less than expected. European investment had a minor share in knowledge-based and capital-intensive industries, which highlighted the lack of transfer of capital, knowledge and advanced technology into the country. The impact, however, was positive on job creation as most investments were made in labour-intensive industries. This was important as Egypt suffered from both a high rate of unemployment, which averaged nine per cent between 1996 and 2008, and the inability of the government to absorb annually over half a million new entrants into the

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already overcrowded public sector. However, the lack of investment in knowledge-based and capital-intensive industries minimized the impact of FDI on the quality of the Egyptian labour market and labour skills at the professional and technical levels, even though foreign companies tended to spend more on educational and training programmes for their employees than their local counterparts. Moreover, analysis reveals the limitations of FDI in the EU-Egyptian Partnership Agreement. Although it acknowledged the importance of FDI and the freedom of movement of capital, it failed to set out specific measures through which the EU could divert substantial proportions of FDI flows into Egypt. It did not contain provisions dealing with the free mobility of capital, the unrestricted repatriation of profits, the right to establishment, and effective mechanisms for the settlement of commercial and legal disputes between local partners or the government and foreign companies. Nor did the agreement call for negotiations with regard to the attraction of FDI between the EU and Egypt or within the EuroMediterranean zone.1 Not only did this limitation expose the failure of Egyptian officials to learn from the experience of CEECs with the EU where the 1992 association agreements paid considerable attention to the attraction of FDI and their narrow recognition of the growing importance of FDI in economic development, but it also revealed their preoccupation with trade that was the top priority throughout the negotiation of the agreement.2 This considerably affected the position of FDI in EU-Egyptian economic relations and weakened the inter-relationship between FDI and exports in Egypt. The agreement also failed to shift the focus of European firms from import-substitution to export-oriented activities that could develop the country as a platform for exports. This was even evident in industries such as textiles and processed food, where Egypt enjoyed a competitive advantage. Looking forward, any improvement in the FDIexport relationship will depend largely on the progressive liberalization of trade and investment and an expansion in Egypt’s industrial capacity in a way that increases the share of the industrial sector in total Egyptian exports to the EU, as well as a fundamental shift in the orientation of FDI towards export-oriented investment. European direct investment into Egypt was also affected by internal and external factors. At the internal level, analysis revealed that EU FDI was significantly influenced by Egypt’s political and economic stability, particularly macroeconomic indicators and political risk index, which

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emphasized parallels between the growth of FDI and economic liberalization. In particular, the acceleration of privatization during the latter half of the 1990s attracted a relatively high level of FDI, which in turn decreased as the number of companies privatized dropped from 40 companies in 1999 to 19, 10, 7 and 13 in 2000, 2001, 2002 and 2003, respectively. It also showed that EU FDI into Egypt was negatively affected by the exchange rate, taxation and fiscal policies, inflation, the country’s real growth GDP, institutional development and transparency, and infrastructural facilities. If Egypt is to attract a high growth rate in EU FDI, the government must embark on a radical transformation of its political, economic, legal and bureaucratic systems and must develop its institutions and infrastructure on an ongoing basis. In addition, there were a number of external factors that impacted negatively on the growth rate of EU direct investment into Egypt between 1996 and 2008. On the European side, EU enlargement eastward had a negative impact on Egypt due to the diversion of FDI funds from the Mediterranean region. The region’s share of FDI stood at only two per cent, compared to the CEECs, which accounted for up to seven per cent of extra EU outflows by the end of the 1990s. Between 1994 and 2004, Egypt’s share of FDI flows from the CEECs decreased dramatically to 0.5 per cent (US$2 million), down from US$384.2 million between 1972 and 1993. This was due to the tremendous development achieved by the CEECs, which differentiated them from Egypt and the wider Arab world over the past ten years in terms of the pace of economic growth, the degree of liberalization in trade and investment, the quality of economic reforms, the restructuring of the administrative systems, and the development of their institutions, infrastructure and physical and human resources. On a regional level, Egypt failed to make FDI a principle aspect of its regional economic arrangements. Market expansion and added values, such as the accumulation of rules of origin, were not effective in increasing Egypt’s share of FDI from the EU because of low intraregional trade, a lack of unified rules between Egypt and its southern partner states, and structural as well as functional impediments in the GAFTA and MAFTA. The Agadir Agreement of 2001 neither added significantly to the institutional structure of the Arab states nor stimulated the growth of FDI among its partner countries. At a multilateral level, Egypt’s external trade and investment policies did not help to improve its attractiveness to FDI. Between 1995 and 2005, this was not only evident in the reluctance of the Egyptian Government to

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fully comply with such multilateral rules as IPRs, but in the policy of the government of using the maximum limit of concessions and exemptions in terms of transition periods granted to developing countries for readjusting their policy framework and regulations to the rules and principles of the WTO and GATS. These factors damaged the country’s attractiveness to FDI, and the lack of implementation of IPRs and copy right protection severely affected R&D-based industries, such as pharmaceuticals where the share decreased to four per cent of total EU FDI flows into manufacturing between 1996 and 2008, from 38 per cent between 1972 and 1995. Not only was the impact noticeable in the minor share of US FDI into this industry, which stood at only US$1 million between 1996 and 2008, but also in the minimum transfer of new technologies and R&D activities by most international pharmaceutical firms to their affiliates in Egypt. Egypt’s practices during the past 15 years suggests that it is unlikely to adopt a strong IPR regime, which is likely to limit the growth of FDI because MNCs tend to allocate a high percentage of their FDI to R&D and final products to affiliates that have strong IPR protection.3 Although Egypt’s record FDI in 2007 is not sustainable during the current global financial and economic crisis, the potential for improvement in the country’s investment environment is greater than ever before. However, this potential cannot be realized until the government widens and deepens the process of economic, financial, political and legal reforms that began in 2005. Successful implementation of reforms requires a change in mind set and attitude towards FDI and MNCs. These reforms may improve the business environment, develop infrastructural facilities, and enhance the capacity of the country’s institutions. The creation of the Ministry of Investment in 2004 and the One Stop Shop in GAFI are positive steps at an institutional level, but it is the functionality of these institutions that really matters. So far, much attention has been given to the restructuring and privatization of public sector enterprises, while little attention has been directed at attracting FDI, at least in providing basic services that guide and support both existing and potential investors, such as aftercare and investor development. The vast majority of staff in these institutions lacks the appropriate level of expertise, business acumen and up-to-date information, as well as the range of skills and management techniques that would enable them to respond effectively to the diverse needs of international companies. Therefore, the real challenge is not only to attract foreign investors but to guide the

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companies that have established operations in the country in ways that ensure their continued presence, growth and development, to the mutual benefit of themselves and the host cities. Egypt and other MENA countries can benefit greatly from the Asian and Irish experience of economic growth, not to mention the pivotal role of FDI in their economic and social development. Moreover, empirical research shows that the stimulus given to domestic economic growth by the relatively rapid increase in FDI comes not only from long-term increase in the share of the country’s GDP attributable to inward investment, to the rise in its gross fixed capital formation, to job creation and technology transfer but also from the growing share of MNCs in industrial production, which ranges between 25 and 30 per cent in Europe and can rise to 70 per cent in some countries, like Ireland and Hungary. 4 If Egypt is to benefit from such stimulus it must develop a far more comprehensive investment strategy that will enable it to attract high quality inward investment. While recognizing the need to attract more FDI flows into labour-intensive industries, it is equally important to view inward investment works as a vehicle for innovation, technology transfer and the creation of a knowledge-based economy. This realization gives prime importance to the role that European and American companies, with their huge financial, technological and R&D activities, can play in developing the Egyptian economy. However, to attract this kind of companies on a large scale and enable the country to achieve a reasonable rate of FDI growth similar to countries in a comparable position, such as Mexico, the Egyptian Government must unilaterally adopt a programme of full liberalization in trade and investment. Not only will this encourage the US to conclude its partnership agreement with Egypt, but it will also allow the country to maximize the benefits of regional integration and enhance its attractiveness to foreign investors, in particular those from the EU.

NOTES

Introdution Woolcock, S. (2007), European Union Policy towards Free Trade Agreements, ECIPE Working Paper, No. 03/2007, pp. 2-4. 2 For example, see: Ahmed Ghoneim, “Determinants of the Egyptian Exports Market Access to the European Union”, Center for Economic, Financial Research and Studies, Cairo University, Research Projects, Vol. 10, December 2000; see also: Gamal Siyam, “The Partnership Agreement and its Impact on Agriculture in Egypt”, Center for European Studies, Cairo University, European Papers, Issue No. 1, June 2004. 3 N. Freeman & F. Bartels, The Future of Foreign Investment in Southeast Asia, (London: Routledge Cruzan, 2004); and T. Ito & A. Krueger, The Role of Foreign Direct Investment in East Asian Economic Development, (Chicago: Chicago University Press, 2000). 4 Ministry of Foreign Trade, Texts of the EU-Egyptian Partnership, Cairo, Issue 180, July 2002 (Arabic version). 5 UNCTAD, World Investment Report 2004, p. 100. 6 See special notes by UNCTAD on recent changes in the methodology of FDI, stating that FDI inflows into Egypt started to include investment in the petroleum sector in the third quarter of 2004. UNCTAD, World Investment Report 2005, (New York: United Nations, 2005), p.299. 7 International Monetary Fund (IMF), Financial Statistics, Washington D.C., Vol. XLIII, No.10, October 1990, pp. 209-211. 8 Central Bank of Egypt (1979), Economic Review, Vol. XIX, No. 1, 1979, p.12. 9 Economic Intelligence Unit, Country Report: Egypt, issue No.3, 1990, p.10. 10 Central Bank of Egypt, Economic Review, Vol. XXXI, No. 4, 1991, p.173. 1

Chapter 1 Brian Morgan, “Regional Issues in Inward Investment and Endogenous Growth” in S. Hill & B. Morgan (eds.), Inward Investment, Business Finance and Regional Development, (London: Macmillan Business, 1998), p.13; and Indra de Soysa, Foreign direct investment, democracy and development: assessing contours, correlates, and concomitants of globalization, (London: Routledge Taylor & Francis Group, 2003), pp. 23-66. 1

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2 Uri Dadush, Dipak Dasgupta and Marc Uzan, Private Capital Flows in the Age of Globalization: the Aftermath of the Asian Crisis, (Cheltenham, UK: Edward Elgar, 2000); John Dunning, Globalization, Trade and Foreign Direct Investment, (Oxford: Elsevier Science Ltd, 1998; and Anthony Bende-Nabende, Globalization, FDI, Regional Integration and Sustainable Development: theory, evidence and policy, (Aldershot, Hants, UK: Ashgate, 2002). 3 Stephane Quefelec, “European direct investment in the Mediterranean countries”, Eurostat, Statistics in Focus, Brussels, Theme 2-13/2003, p.3. 4 UNCTAD, World Investment Report 2003, p. 231. 5 John-Ren Chen, “Foreign Direct Investment, International Financial Flows and Geography” in Chen, John-Ren (ed.), Foreign Direct Investment, (London: Macmillan, 2000), p. 6. 6 UNCTAD, World Investment Report 2003, pp. 231-232. 7 John-Ren Chen (2000), Foreign Direct Investment, p. 20. 8 Joseph Battat, Isaiah Frank & Shen Xiaofang, “Suppliers to Multinationals: Linkage Programs to Strengthen Local Companies in Developing Countries”, Foreign Investment Advisory Service, Occasional Paper, No. 6, (Washington, D.C.: The World Bank, 1996), pp. 7-10. 9 UNCTAD, World Investment Reports 1985-2003; and J. Dunning, “Governments, Markets and Multinational Enterprises: some emerging issues”, International Trade Journal, Vol. 7, fall 1992, pp. 111-129. 10 UNCTAD, World Investment Report 2005, p. ixx; and World Investment Report 2008, p. 257. 11 UNCTAD, World Investment Report 2005, p. 3. 12 UNCTAD (2009) Assessing the impact of the current financial and economic crisis on global FDI flows, January 2009. 13 In 2004, developing countries’ share of global FDI increased by 40 per cent to reach US$233 billion on the previous year; almost 60 per cent of this capital was received by the top five recipients: China, Hong Kong (China), Brazil, Mexico, and Singapore, in that order. 14 UNCTAD, World Investment Report 2005, p. 26. 15 UNCTAD, World Investment Report 2008, p. 11. 16 UNCTAD, World Investment Report 2008, pp. 14-16. 17 Kathy Megyery and Frank Sader, “Facilitating Foreign Participation in Privatization”, Foreign Investment Advisory Service Occasional Paper, No. 8, (Washington, D.C.: The World Bank, 1996), pp. 2-7. 18 UNCTAD, World Investment Report 1997, (Geneva: United Nations, 1997), pp. 37; and UNCTAD, World Investment Report 2008, p. xvi. 19 United Nations Centre on Transnational Corporation, The Determinant of Foreign Direct Investment: A Survey of the Evidence, (New York: United Nations, 1992), pp. 6668. 20 UNCTAD, World Investment Report 2003, p. 101. 21 UNCTAD, World Investment Report 2008, p. xvi. 22 UNCTAD, World Investment Report 2000, p. 143.

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23 Duncan Snidal, “International Cooperation among Relative Gains Maximizers”, International Studies Quarterly, Vol. 35, Issue No. 4, (December 1991, pp. 387-402; Robert Keohane, “International Institutions: Tow Approaches”, International Studies Quarterly, Vol. No. 32, Issue No. 4, (December 1988), pp. 379-396; Helen Milner, “International Theories of Cooperation among Nations: Strengths and Weaknesses”, World Politics, Vol. No. 44, Issue No. 3, (April 1992), pp. 466-496; Jeffrey Leonard, “Multinational Corporations and Politics in Developing Countries”, World Politics, Vol. 32, No. 3, (April 1980), pp. 454-483; J. Galtung, “A Structural Theory of Imperialism” in G. Modelesi (ed.), Transnational Corporations and World Order, (San Fransisco: W.H. Freeman & Co., 1979), pp.155-171; and H. Megahed, Imperialism as a Global Phenomenon, (Cairo: World Books, 1985). 24 Immanuel Wallerstein, The Capitalist World-Economy, (Cambridge: Cambridge University Press, 1979). 25 S. Krasner, Structural Conflict: The Third World against Global Liberalism, (Berkeley, CA: University of California Press, 1985); cited in de Soysa, Foreign Direct Investment, Democracy, and Development, p. 35. 26 The most detailed studies on this issue were made by Walter Rodney in How Europe Underdeveloped Africa, (London: Bogle-l’Ouverture, 1973); Stephen Gill & David Law, “Global Hegemony and the Structural Power of Capital” International Studies Quarterly, Vol. 33, No. 4, 1989, pp. 475-499; and Frank Klink, “Rationalising Core-Periphery Relations: The Analytical Foundations of Structural Inequality in World Politics”, International Studies Quarterly, Vol. 34, No. 2, 1990, pp. 183-209. 27 The role of domestic forces (e.g. the often so-called national bourgeoisie or comprador class) that ally themselves with foreign capitalists in the exploitation of their own society, is dealt with in several studies; for example, see: Samir Amin, Neo-Colonialism in West Africa, (New York: Monthly Review Press, 1974); S. Amin, Imperialism and Unequal Development, (New York: Monthly Review Press, 1977); and F. H. Cardoso & E. Faletto, Dependency and Development in Latin America, (Berkeley: University of California Press, 1979). 28 De Soysa, Foreign Direct Investment, Democracy, and Development, p. 38. 29 The concept of ‘backwardness’ was first introduced in A. Gerschenkron in Economic Backwardness in Historical Perspective, (Cambridge, MA: Harvard University Press, 1962). 30 De Soysa, Foreign direct investment, democracy and development, p. 29. 31 Ibid, pp. 41-42. 32 On the effect of FDI through knowledge and technology transfer on economic development in developing countries, see: S. Lall & P. Streeten, Foreign Investment, Transnationals and developing countries, (Boulder, CO: Westview Press, 1977); and S. Kuznets, Modern Economic Growth: Rate, Structure and Spread, (New Heaven, CT: Yale University Press, 1966). On the relation between FDI and technology transfer, see: R. Leonhardt, Foreign Direct Investment, Ownership and the Transfer of Technology, (Frankfurt: Peter Lang, 2004). 33 M. Todaro, Economic Development in the Third World: An Introduction to Problems and Policies in a Global Perspective, (New York: Longman, 1977), p. 33. 34 UNCTAD, World Investment Report 2001, p. 49.

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M. Schiff & L. A. Winters, Regional Integration and Development, (Washington D.C.: The World Bank, 2003); De Soysa, Foreign Direct Investment, Democracy, and Development: assessing contours, correlates, and concomitants of globalization, (London: Routledge, 2003); and J-R. Chen, “Foreign Direct Investment, International Financial Flows and Geography” in Chen J. (ed.), Foreign Direct Investment, (London: Macmillan, 2000). 36 T. Ito & A. Krueger, The Role of Foreign Direct Investment in East Asian Economic Development, (Chicago: Chicago University Press, 2000); J-R. Chen, “Foreign Direct Investment, International Financial Flows and Geography” in Chen, J-R (ed.), Foreign Direct Investment, (London: Macmillan, 2000); and M. Schiff & L.A. Winters, Regional Integration and Development, (Washington D.C.: The World Bank, 2003). 37 UNCTAD, World Investment Report 2001, p. 9. 38 C. Smekal & R. Sausgruber, “Determinants of FDI in Europe” in Chen, J. (ed.), Foreign Direct Investment, (London: Macmillan Press Ltd, 2000), pp. 35-36. 39 Nordea was created as a result of mergers between Merita Bank (Finland), Nordbanken (Sweden), Unidanmark (Denmark) and Christiania Bank of Kreditkasse. UNCTAD, World Investment Report 2001, Promoting Linkages, p. 15. 40 M. Schiff & L.A. Winters, Regional Integration and Development, (Washington D.C.: The World Bank, 2003), p. 17. 41 UNCTAD, World Investment Report 2004, p. 69. 42 UNCTAD, World Investment Report 2008, p. 282. 43 Jacques Morisset and Kelly Andrews-Johnson, “The Effectiveness of Promotion Agencies at Attracting Foreign Direct Investment”, Foreign Investment Advisory Service Occasional Paper, No. 16, (Washington D.C.: The International Bank for Reconstruction and Development/ The World Bank, 2004), pp. 1-17. 35

Chapter 2 UNCTAD, World Investment Report 1994, p. 119. 2 R. Mckinnon, The Order of Economic Liberalization: Financial Control in the Transition to a Market Economy, Second Edition, (New York: John Hopkins University Press, 1993), p. 3. 3 UNCTAD, World Investment Report 1994, p. 120. 4 C. Issawi, Egypt in Revolution: An Economic Analysis, (New York: Oxford University Press, 1963), p. 29. 5 UNCTAD, World Investment Report 1994, p. 121. 6 . Ibid, p. 121. 7 . H. Croome & R. Hammond, An Economic History of Britain, (London: Christophers, 1937), p. 244. 8 C. K. Hobson (1914), The Export of Capital, p. 121. 9 K. Gillespie, The Tripartite Relationship: Government, Foreign Investors and Local Investors during Egypt’s Economic Opening, (New York: Praeger, 1984), p. 35. 10 Hobson, The Export of Capital, p. 146. 11 In 1899, European holdings in the US economy were made by Britain, the Netherlands, Germany, Switzerland, France, investing US$2.5 billion, US$240 million, US$200 million, US$75 million and US$50 million, respectively, while only 1

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US$35 million was invested by the rest of Europe. Hobson, The Export of Capital, (London: Constable & Company ltd., 1914), p. 154. 12 Carr, Foreign investment and development in Egypt, p. 12. 13 The role of European engineers and technicians was significant as they provided training programmes for local employees, assisted in the installation of new machinery, developed parts of imported goods for local production and up-graded Egyptian manufacturing techniques. It is also argued that Mohamed Ali depended largely on French experts for developing the navy and the army, and in establishing new schools of medicine, engineering, chemistry and military science. Gillespie, The Tripartite Relationship, p. 33. 14 C. Issawi, “Egypt Since 1800: A study in lop-sided development”, Journal of Economic History, vol. 21 (March 1961), pp. 7-8. 15 Ibid, pp. 7-8. 16 S. Radwan, Capital formation in Egyptian industry and agriculture 1882-1967, (London: Ithaca Press, 1974), pp. 17-65. 17 R. Owen & S. Pamuk, A History of the Middle East Economies in the Twentieth Century, (London: I.B.Tauris Publishers, 1998), p. 31. 18 A. Bonne, State and Economics in the Middle East: A Society in Transition, (London: Kegan Paul, Trench, Trubner & Co. LTD, 1948), p. 274. 19 Government of Egypt, Department of Statistics, Population Census of 1907, Cairo, 1909, pp. 192-359. 20 It was argued that Egyptian industrial, financial, commercial and business bourgeoisie did not emerge in a coherent form until the 1930s and, therefore, its participation in economic activities remained marginal to foreign entrepreneurs until this role disappeared after the 1952 revolution. M. Zaalouk, Power, Class and Foreign Capital in Egypt, the rise of new bourgeoisie, (London: Zed Books Ltd., 1989), pp. 17-23. 21 K. Gillespie (1984), The Tripartite Relationship, p. 40. 22 S. Radwan, Capital formation in Egyptian Industry & Agriculture 1882-1967, p. 172. 23 Robert Vitalis, When Capitalists Collide: Business Conflict and the End of Empire in Egypt, (Berkeley and Los Angeles: University of California Press, 1995), pp. 10-27. 24 By 1930 the bank formed 9 companies in the areas of paper, cotton ginning, silk weaving, fish and flax. The biggest company was Misr Cotton Spinning & Weaving Company with capital worth EGP300,000. Carr, Foreign Investment and Development in Egypt, pp. 17-18. 25 C. Essawi, 1963, pp. 87-88; and D. Carr, 1979, p. 19. 26 F. Harbison, Human Resources for Egyptian Enterprise, (New York: McGraw Hill Book Co., 1958), pp. 56-57. 27 R.L. Tignor, “The Egyptian Revolution of 1919: New Directions in the Egyptian Economy”, Middle Eastern Studies, Vol. 12, 1976, p. 48. 28 R. Mabro & S. Radwan, The Industrialization in Egypt 1939-73: Policy and Performance, (Oxford: Clarendon Press, 1976), p. 20. 29 Middle East Economic Service, vol. 1, no. 1, January 1947, p. 6. 30 Michael Twomey, A Century of Foreign Investment in the Third World, (London: Routledge, 2000), pp. 65-67.

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O’Brien, The Revolution in Egypt’s economic System, p. 219-20. Information Department, U.A.R., The Charter, presented by President Nasser at the Inaugural Session of the National Congress of Popular Powers on the evening of 21 May 1962, cited in El Baghdadi, A., The Five Year Plan for the Economic and Social Development of U.A.R. 1960-65, p. 61. 33 Information Department United Arab Republic, The Arab Socialist Union, Cairo, 1963, pp. 3-12. 34 Abdellatif El-Baghdadi, Egypt’s Vice President and Minister of Planning, “The Five Year Plan for the Economic and Social Development of U.A.R. 1960-65”, General Congress of the National Union, Cairo, July 4 1960, p. 4. 35 C. Issawi, Egypt at Mid-Century: an Economic Survey, (London: Oxford University press, 1954), pp. 261-62. 36 Information Department, Statement on Government Policy, by Ali Sabry, Egypt’s Premier and Minister of Planning in the National Assembly on 6 April 1964. 37 Al-Ahram newspaper, Cairo, 26 November 1961. 38 Issawi, Egypt in Revolution: an Economic Analysis, (London: Oxford University Press, 1963), p. 240. 39 Patrick O’Brien, The Revolution in Egypt’s Economic System: from free Enterprise to Socialism 1952-1965, (London: Oxford University Press, 1966), p. 85. 40 C. Issawi, Egypt in Revolution: An Economic Analysis, (London: Oxford University Press, 1963) p. 57. 41 M. Zaalouk, Power, Class and Foreign Capital in Egypt: the rise of new bourgeoisie, (London: Zed Books Ltd., 1989), p. 32. 42 P. Darby, At the Edge of International Relations: Post-colonialism, Gender and Dependency, (London: Pinter, 1997), p. 18. 31 32

Chapter 3 D.W. Carr, Foreign Investment and Development in Egypt, 1979, p. 41. 2 National Bank of Egypt, Economic Bulletin, Special Studies, Cairo, Vol. XXVIII, No. 3, 1975, pp. 251-252. 3 D.W. Carr, Foreign Investment and Development in Egypt, 1979, p. 44. 4 Ibid, p. 47. 5 United Nations, Intellectual Property Rights and Foreign Direct Investment, (New York: United Nations, 1993), pp. 11-15. 6 Susan Strange et al., “European Direct Investments in North Africa: the Investors’ perspective”, in N. Ayubi (ed.), Distant Neighbours, 1995, p. 237. 7 Ibid, p. 237. 8 James Emery, Melvin Spence Jr., Louis Wells, Jr., and Timothy Buhrer, “Administrative Barriers to Foreign Investment: Reducing Red Tape in Africa”, The World Bank’s Foreign Investment Advisory Service Occasional Paper, No. 14, Washington D.C., 2000, p. 16. 9 Jacques Morisset and Olivier Lumenga Neso, “Administrative Barriers to Foreign Investment in Developing Countries”, The World Bank Policy Research, Working Paper, No. 2848, Washington D.C., May 2002, p. 11. 1

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10 J. Waterbury, Egypt: Burdens of the Past Options for the Future, (London: Indiana University Press, 1978), p. 232. 11 K. Gillespie, The Tripartite Relationship, 1984, p. 74. 12 National Bank of Egypt, Economic Bulletin, Vol. XXX, No. 2, 1977, pp. 156-157. 13 D. Hopwood, Egypt Politics and Society 1945-90, Third Edition, (London: Routledge, 1991), p. 131. 14 National Bank of Egypt, Economic Bulletin, Vol. XXVIII, No. 3, 1975, p. 252. 15 UNCTAD, “Investment Policy Review: Egypt”, United Nations Publications, Geneva, 1999, p. 132. 16 Frank Sader, “Privatising Public Sector Enterprises and Foreign Investment in Developing Countries 1988-1993”, Foreign Investment Advisory Service Occasional Paper, No. 5, (Washington, D.C.: The International Finance Corporation and the World Bank, 1995), pp. 7-8. 17 Middle East Economic Digest, London, Vol. 22, (10 February 1978), p. 24; and K. Gillespie, The Tripartite Relationship, 1984, p. 123. 18 Egyptian Ministry of Economy, “Foreign Trade and Economic Cooperation, Study on Law 43 Investment Policies”, Economic Studies Unit, Cairo, 1979, p. 23. 19 Egyptian Ministry of Economy, Foreign Trade and Economic Cooperation, 1979, pp. 7-23. 20 Susan Strange et al (1995), “European Direct Investments in North Africa: the Investors’ perspective”, in N. Ayubi (ed.), Distant Neighbours, 1995, p. 239. 21 K. Gillespie, The Tripartite Relationship, 1984, p. 124. 22 Fiani and Partners (1980), Egypt Investment Directory, Cairo, Egypt; cited in Gillespie, The Tripartite Relationship, p. 126. 23 Ahmed El-Naggar, Egyptian Economy: from July experience to the future model, (Cairo: Al-Ahram Centre for Strategic and Political Studies, 2002), p. 145 (in Arabic). 24 International Monetary Fund (IMF), World Economic Outlook 1994, pp. 116 and 124. 25 IMF, Direction of Trade Statistics Yearbook 1994, p. 183. 26 Susan Strange et al, Op cit, pp. 235-236. 27 The World Bank, Trends in Developing Countries, Washington D.C., 1996, p. 152; and United Nations (1998), Foreign Direct Investment Legislation Reflecting Environmental Concerns in the ESCWA Region: The Cases of Egypt and Jordan, New York, 1998, p. 22. 28 World Bank, Trends in Developing Countries, 1996, pp. 155-56. 29 UNCTAD, “Investment Policy Review: Egypt”, United Nations publications, Geneva, 1999, p. 21. 30 Ahmed El-Naggar (2002), Egyptian Economy: from July experience to the future model, p. 147. 31 Ibid, pp. 159-160. 32 This claim was made by the former chairman of Pepsi Cola Egypt before it was privatised. Ibid, pp. 153-154. 33 Ministry of Public Sector Administration, Researchers file, cited in A. El-Naggar, Egyptian Economy: from July experience to the future model, pp. 161-162. 34 Susan Strange et al, Op cit, p. 236. 35 Ibid, p. 238.

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Derek Hopwood, Egypt Politics and Society 1945-90, Third Edition, (London: Routledge, 1991), p. 112. 37 The most obvious example of this was in 1986, when President Mubarak ordered the army to crack down when riots broke out among the Central Security Forces, often used as the arm of the state to deal with demonstrations and strikes. 38 Louis Blin, (1995) “French Investments in the Arab World”, in Ayubi, N. (ed.), Distant Neighbours, op., p. 270. 39 Ahmed Galal & Robert Lawrence (eds.), Building Bridges: An Egypt-US Free Trade Agreement, (Cairo: The Egyptian Centre for Economic Studies, Cairo & John F. Kennedy School of Government, US, 1998), p. 8. 40 Middle East Economic Digest, London, Vol. 22 (November 1978), p. 27; and in Vol. 23 (May 1979), p. 26. 41 Sherine Abdel-Razek, “FTA inches forward”, Al-Ahram Weekly, Issue 641, 5-11 June 2003. 42 European Community Executive Commission, “Relations with the Mediterranean Countries”, Bulletin of the European Communities, 10/1, 1977, pp. 119120. 43 Rory Miller & Ashraf Mishrif, “The Barcelona Process and Euro-Arab Economic Relations: A Decade On”, MERIA, Vol. 9, No. 2, June 2005, pp. 94108. 44 H. Jawad, Euro-Arab Relations: A study in Collective Diplomacy, (Reading: Ithaca Press, 1992), p. 160. 45 Text of Article 1 of the Cooperation Agreement of 1977. European Union, Official Journal L266, 27/09/1978, pp. 0002-0103. 46 Many of these protective and customs duties tariffs were abolished in accordance with the rules set in Articles 10 and 11 of the 1977 Cooperation Agreement. 47 See text of the 1977 Cooperation Agreement, Article 17- paragraph 2. 48 Hassan Khadr, “Analytical Study of Egyptian Exports of Fruits and Vegetables during the period 1986-1990”, in Wadouda Badran (ed.), The Development of Egypt’s Relation with the EEC 1989-90, (Cairo: Centre for Political Studies and Research, 1992), p. 375 (in Arabic). 36

Chapter 4 During the 1970s, Egypt was ranked ninth among the top ten developing countries receiving FDI, and by the mid 1980s the country moved to fifth place, only behind Mexico, Brazil, China and Malaysia. International Finance Corporation and Foreign Investment Advisory Service, “Foreign Direct Investment, The Role of FDI in Developing Countries”, IFC and FIAS, Washington D.C., 1997, p. 17. 2A. McKay, “US Investment in Egypt May Grow”, Journal of Commerce, March 29, 1978. 3 D.W. Carr, Foreign Investment and Development in Egypt, 1979, p. 93. 4 Susan Strange et al., Op cit, p. 250. 1

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5 The six countries are Britain, France, the Netherlands, Luxemburg, Italy and Germany. 6 French companies were very concerned about the perceived higher political risk in Egypt and the Arab world compared to Latin America and Asia, but was only lower than that of Sub-Saharan Africa. For further details on this issue see Louis Blin, “French Investments in the Arab World”, in Ayubi, N. (ed.), Distant Neighbours, pp. 270-271. 7 Moroccan industry was the only sector in the Arab world to received considerable attention from French investors who look upon Morocco as a base for re-exports. 8 National Bank of Egypt, Economic Bulletin, Vol. XXVIII, No. 3, 1975, p. 258. 9 Of the 19 foreign banks 2 were joint ventures and 9 were branches of foreign banks. National Bank of Egypt, Economic Bulletin, Vol. XXX, No. 2, 1977, pp. 137138. 10 The food industry includes six sub-sectors: sugar and confectionery, tobacco and cigarettes, food preservation, oils and oils products, fermentation, distillation, and alcoholic beverages, and milk and dairy products. 11 Dutch investment in agriculture was made by one company in a single project with EGP23.3 million (equivalent to US$10.2 million at the time of investment) in 1988. 12 The employment figures are totally based on the data collected from GAFI, where foreign companies register their projects, the capital invested and the jobs created. 13 With the exception of Portugal which did not have FDI in Egypt during the period under consideration, the number of jobs created by the 9 EU member states were as follows: Sweden 1,402 jobs (2.1 per cent), Denmark 1129 (1.7 per cent), Finland 1,092 (1.6 per cent), Spain 890 (1.3 per cent), Greece 245 (0.4 per cent), Belgium 207 (0.3 per cent), Austria 163 (0.246 per cent), and Ireland 125 (0.189 per cent). 14 Robert E. Baldwin, “The Effects of Trade and Foreign Direct Investment on Employment and Relative Wages”, OECD Jobs Study, Working Paper, No. 4, Paris, 1995, p. 6-25. 15 Middle East and African Economist, “Sadat’s outline of Egypt’s ten-year National Action Programme 1973-82”, Vol. XXVII, No. 5, 1973, p. 61.

Chapter 5 The 12 southern Mediterranean states are Algeria, Morocco, Tunisia, Egypt, Jordan, Palestinian Authorities, Lebanon, Syria, Israel, Turkey, Malta and Cyprus 2 Anoushiravan Ehteshami, “Political economy of EU-Middle East relations” in Manochehr Dorraj (ed.), Middle East at the Crossroads, (Oxford: University Press of America, 1999), p. 240. 3 Al-Ahram Centre for Political and Strategic Studies, “Egyptian-European Partnership and the General Debate around It”, Arab Strategic Report 2000, Cairo, 2001, p. 317. 1

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4 COMESA includes 21 African countries: Zambia, Uganda, Malawi, Angola, Burundi, Moon Islands, Eritrea, Ethiopia, Namibia, Kenya, Madagascar, Rwanda, Sudan, Swaziland, Tanzania, Zimbabwe, Cecil, Moriches, Democratic Congo, Djibouti and Egypt. 5 Bernard Hoekman & Michael Kostecki, The Political Economy of the World Trading System: the WTO and Beyond, (Oxford: Oxford University Press, 2001), 2nd edition, p. 2. 6 Eberhard Rhein, ‘Euro-Med Free Trade Area for 2010: Who will benefit?’ in George Joffé (ed.), Perspective on Development: the Euro-Mediterranean Partnership, (London: Frank Cass, 1999), p. 13. 7 European Commission, “Euro-Mediterranean Partnership and MEDA Regional Activities”, Euromed Information Notes, Brussels, June 2002, p. 6. 8 Ahmed F. Raslan, The Turkish-Israeli Rapprochement, Al-Siassa Al-Dawlya (International Politics), Political Quarterly Journal, (Cairo: Al-Ahram Foundation), vol. 130, October 1997, pp. 115-118; and Arab Strategic Report 2001, Arab-Turkish and Regional Relations, (Cairo: Al-Ahram Centre for Political and Strategic Studies, 2001), pp. 193-202. 9 Al-Ahram Center for Political and Strategic Studies, Arab Strategic Report 1998, Cairo, p. 169. 10 Economic Intelligence Unit (EIU), Country Profile: Egypt, London, 2005, pp. 2829; EIU, Country Profile: Tunisia, London, 2005, p. 39; and EIU, Country Profile: Morocco, London, 2005, p. 42. 11 The four Financial Protocols covered the period from 1977 until 1996, and were concluded as follows: First Protocol from 1997 until 1981, Second Protocol from 1983 until 1986, Third Protocol from 1988 until 1991, and Fourth Protocol from 1992 until 1996. 12 Delegation of the EU Commission in Egypt, Annual Report 2001, Cairo, p. 9. 13 Ibid, Annual Report 2001, Cairo, 2002, p. 8. 14 European Commission, Annual Cooperation Report Egypt 2003, p. 26. 15 Ibid, p. 27. 16 Ibid, p. 28. 17 Ambassador Gamal Bayoumi, “Revitalising National Industry”, Al-Ahram Weekly, 28 December 2000-3 January 2001, Issue No. 514. 18 Industrial Modernization Centre, Industrial Modernization Programme: Overall Work Plan April 2003- May 2006 (unpublished document), Cairo, 2004, p. 3. 19 Industrial Modernization Centre, Industrial Modernization Programme: Overall Work Plan April 2003- May 2006 (unpublished document), Cairo, 2004, p. 3. 20 The eligibility criteria for small and medium sized enterprises to receive support from the IMP or the IMC is that the company must operate in the industry or service sectors related to industry, have at least 10 full-time employees, be fully or privately owned with a majority private share, be legally established in Egypt, and show potential for growth and profit-making. Industrial Modernization Centre, Industrial Modernization Programme: Overall Work Plan April 2003-May 2006 (unpublished document), Cairo, 2004, pp. 2-4. 21 Al-Ahram Al-Eqtisadi, Cairo, June 19, 2005, p. 13.

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22 Mohamed Younis, Chairman of Concord International Investments, Al-Ahram Al-Eqtisadi, June 19, 2005, p. 13. 23 Rashid Mohamed Rashid, Egypt’s Minister of Foreign Trade and Industry, Industrial Modernization Centre News, Issue No. 4, January 2005, p. 8. 24 Delegation of European Commission in Egypt, Annual Report 2001, Cairo, p. 18. 25 Ibid, Annual Report 2001, Annex V, pp. 68-69; and Euro-Med Partnership, Egypt: Country Strategy Paper 2002-2006 & National Indicative Programme 2002-2004, p. 18. 26 Delegation of European Commission in Egypt, Annual Report 2001, p. 70. 27 European Investment Bank (2005), Report on FEMIP Technical Assistance (TA) Support Fund: Objectives, Strategy and Scope of Activities, FEMIP Ministerial Meeting, Alexandria, Egypt, June 7, 2004, p. 3. 28 Philippe de Fontaine Vive, European Investment Bank Vice President, confirmed that 37 per cent of total EIB fund was granted to private sector projects. Al-Ahram Weekly, Issue No. 694, 10-16 June 2004. 29 European Investment Bank (2005), Report on FEMIP Technical Assistance (TA) Support Fund: Objectives, Strategy and Scope of Activities, FEMIP Ministerial Meeting, Alexandria, Egypt, June 7, 2004, p. 2. 30 Eurostat, Egypt-EU Trade Statistics. Available on: http://www.eudelegation.org.eg/en/EU-Egypt_Trade_issues/Docs/EUEgypt_Trade_Statistics.pdf [access on 26 June 2009] 31 Ministry of Foreign Trade, Ten Advantages of the Egypt-EU Association Agreement, vol. 4, Cairo, July 2002, pp. 6-10. 32 Title VIII “Institutional, General and Final Provisions”, Articles 74-86 of the Egypt-EU Association Agreement of 2001. 33 Article 32, Chapter 1, Title IV of the Egypt-EU Association Agreement of 25 June 2001. 34 Article 46, Egypt-EU Association Agreement of 2001. 35 Title VI, Chapter 1 “Dialogue and Cooperation on Social Matters, the 2001 Egypt-EU Association Agreement.

Chapter 6 The US continued to be the single largest host country for FDI, while its role as the largest outward investor was overtaken by the UK in 1999 and 2000. UNCTAD, World Investment Report 2001, p. 12. 2 In 2002, Luxemburg was the world’s largest outward investor and largest FDI recipient, accounting for about 19 per cent (US$126 billion) of world inflows and 24 per cent (US$154 billion) of outflows. UNCTAD, World Investment Report 2003, p. 69. 3 It is estimated that the growth rate of FDI inflows into Europe declined by 39.3 per cent in 2008, while FDI outflows decreases by 22.1 per cent in the same year. UNCTAD (2009) Assessing the impact of the current financial and economic crisis on global FDI flows, April 2009. [The document was the advanced, unedited version supplied by UNCTAD during the UNCTAD-WAIPA Investment Conference held in Geneva, 4-7 May 2009.] 4 Financial Times Survey, “Birth of the Euro”, April 30, 1998. 1

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5 European Commissions, “Economic Accounts of the EU”, Eurostat, Luxemburg, 1997, p. 64. 6 UNCTAD, World Investment Report 2001, p. 15. 7 UNCTAD, World Investment Report 2008, p. 73. 8 8. UNCTAD, World Investment Report 2003, p.69. 9 Ibid, p. 69. 10 Ibid, p. 69. 11 UNCTAD, World Investment Report 2008, p. 19. 12 UNCTAD, World Investment Report 2003, pp. 249-252. 13 International Monetary Fund (IMF), World Economic Outlook, September 2003, pp. 173-181. 14 Ibid, p. 181. 15 Al-Ahram Centre for Political and Strategic Studies, Strategic Economic Trends Report 2003-2004, Cairo, January 2004, p. 24. 16 Yasser Sobhi, ‘Casualties of conflict’, Al-Ahram Weekly, Issue No. 630, 20-26 March 2003; Mona El-Fiqi, ‘Waiting for war’, Al-Ahram Weekly, Issue No. 630, 2026 March 2003; and Wael Gamal, ‘Paying the war price’, Al-Ahram Weekly, Issue No. 627, 27 February-5 March 2003. 17 UNCTAD, World Investment Report 2008, p. 211. 18 This order was defined according to the net assets invested by the EU in these economies. NAFTA comprises the US, Canada and Mexico. EFTA comprises of Switzerland, Liechtenstein, Iceland, and Norway. MERCOSUR comprises of Argentina, Brazil, Paraguay and Uruguay. ASEAN includes Malaysia, Thailand, Philippines, Singapore, Indonesia, Brunei and Vietnam. 19 S. Quefelec, ‘European direct investment in the Mediterranean’, Eurostat, Statistics in Focus, Theme 2- 13/2003, p. 2. 1 Arno Backer, ‘The impact of the Barcelona process on trade and foreign direct investment’, paper presented at the Conference of Middle East and North African Economies: Past Perspectives and Future Challenges, Brussels, 2-4 June 2005, p. 27. 2 S. Quefelec, ‘The Egyptian Economy and Relations with EU-15’, Eurostat, Statistics in Focus, General Statistics, Theme 1-9/2002, p. 2. 1 S. Quefelec, Statistics in Focus, Theme 2-12/2004, pp. 2-3. 2 Eman Youssef, ‘Italian IT looks south’, Al-Ahram Weekly, Issue 687, 22-28 April 2004. 3 Wolfgang Clement, German Federal Minister of Economic and Labour, AlAhram Weekly, Issue 691, 20-26 May 2004. 4 This lack of trust was apparent in the boycott of all major German companies operating in Egypt of the Egyptian-German Business Council meeting in November 2004 to discuss means of developing more economic cooperation between German and Egyptian businessmen. Salem Mashhour, President of the Egyptian-German Business Council, in Al-Ahram Weekly, Issue No. 719, 2-8 December 2004. 5 Mahmoud Mohieldin, Al-Ahram Weekly, Issue No. 716, 11-17 November 2004.

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Azza El-Shinnawy & Heba Handousa. ‘Egyptian Case Studies’ in Saul Estrin & Klaus Meyer (eds.) Investment Strategies in Emerging Markets, (Cheltenham, UK: Edward Elgar, 2004), p. 113. 7 Sherine Nasr, “See You on the Autobahn”, Al-Ahram Weekly, Issue No. 719, 2-8 December 2004. 8 Nabil Hashaad, a financial expert, Al-Ahram Weekly, Issue 709, 23-29 September 2004. 9 Comments made by Farouk El-Oqda, Governor of the Central Bank of Egypt, on the objective of the Banking Law 88 of 2003; see: http://www.businesstodayegypt.com/articleID=5364. 10 Sarah El Deeb, ‘Egypt hunts for attackers who killed 88’, Associated Press, 24/7/2005. 6

Chapter 7 Al-Ahram, 2 July 2009. 2 Egyptian Ministry of Economy, ‘Egypt: A Land of Opportunity’, Investing in Egypt, Volume II, Cairo, 2001, p. 12. 3 Ibid, p. 12. 4 Luxemburg had four other companies operated in the foods industry, all established in the 1970s and 1980s. 5 Azza El-Shinnawy & Heba Handoussa, ‘Egyptian Case Studies’, in Saul Estrin & Klaus Meyer (eds.), Investment Strategies in Emerging Markets, (Cheltenham, UK: Edward Elgar, 2004), pp. 98-101. 6 American Chamber of Commerce in Egypt, The Egyptian Pharmaceutical Industry, Business Studies Series, Cairo, Egypt, 2001; and Egyptian Ministry of Health and Population, Health Sector Analysis and National Essential Drug List, (Cairo: Ministry of Health and Population, 2002). 7 The majority of investments by these companies were made between 1971 and 1995. 8 Between 1990 and 1995, the company increased its assets in ABI to 69 per cent in 1991 and to 87.8 per cent in 1992. 9 Wael Gamal, “Hard choices”, Al-Ahram Weekly, Issue No. 653, 28 August-3 September 2003. 10 Azza El-Shinnawy and Heba Handoussa, “Egyptian Case Studies” in Saul Estrin & Klaus Meyer (eds.), Investment Strategies in Emerging Markets, p. 105. 11 The first investment was made by three members of the Al-Maidany family, who are probably of Egyptian origin and resided in France, while the US$80,000 of the second investment was made by two members of the Al-Amar family. These investments underscore the role played by individual investors in the textiles industry, particularly clothing. 12 S. Quefelec, “Textile industry in the Euro-Mediterranean region”, Eurostat, Statistics in Focus, theme 6-3/2003, p. 2. 13 Euro-Med Partnership, Egypt, Country Strategic Paper 2002 & National Indicative Programme 2002-2004, p. 12; and Niveen Wahish, ‘Dividing Lines: overall poverty 1

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in Egypt may have dropped but there is a growing welfare disparity between urban and rural areas’, Al-Ahram Weekly, Issue No. 609, 24-30 October 2002. 14 Organization for Economic Cooperation and Development (OECD), ‘Foreign Direct Investment, Trade and Employment’, OECD, Paris, 1995; and Robert Bladwin, ‘The Effects of Trade and Foreign Direct Investment on Employment and Relative Wages’, The OECD Jobs Study, Working Paper, No. 4, (Paris: OECD, 1995). 15 The UK did not have investment in the metals industry between 1996 and 2004. 16 Saul Estrin & Klaus Meyer, Investment Strategies in Emerging Markets, (Cheltenham, UK: Edward Elgar, 2004), pp. 32-33. 17 Ibid, p. 48. 18 Dina Ezzat, Sherine Nasr and Mona El Fiqi, ‘The message is the medium’, AlAhram Weekly, 2-8 November 2000, Issue No. 506. 19 This was stated by H.E. Graham Boyce, the UK Ambassador to Egypt, in his speech at Cairo University’s Centre for the Study of Developing Countries, where he announced that the case of Sainsbury’s highlighted concerns shared by many British companies operating in Egypt. Al-Ahram Weekly, 22-28 February 2001, Issue No. 522. Chapter 8 Bassem Kamar & Damyana Bakardzhieva, ‘The reforms needed to attract more FDI in Egypt: lessons from the CEEC experience’, The Ninth Annual Conference of the Economic Research Forum for Arab Countries, Turkey and Iran, 26-28 October 2002, p. 6. 2 Reda Ali, The Determinants of Foreign Direct Investment: a comparative study with reference to Egypt, PhD thesis, University of Ulster, 2000, p. 266. 3 UNCTAD, World Investment Report 1994, p. 54. 4 Bassem Kamar & Damyana Bakardzhieva , The reforms needed to attract more FDI in Egypt, p. 9. 5 Gamal Nkrumah, ‘A leap for democracy’, Al-Ahram Weekly, Issue No. 732; and Gamal Essam EL-Din, “Road to democracy”, Al-Ahram Weekly, Issue No. 745, 28 June 2005. 6 The victory of the Muslim Brotherhood in the 2005 parliamentary election could not be seen as a desire or a trend towards an Islamic dominated political system, but as a way of exerting pressure on the government and the political elites to launch comprehensive social and political reforms. The Muslim Brotherhood, though banned as a political party, managed to benefit from presenting itself as a socio-economic force, pledging free and inexpensive social and healthcare services, reduction in educational fees, and other solutions for alleviating poverty and reducing the cost of living. It also managed to benefit from a number of events such as anti-war demonstrations against the 2003 invasion of Iraq, students protests in Egyptian universities, the role of the Kifaya movement, the popular campaign for change, all of which strengthened the organizational structure and improved the PR campaign of the Brotherhood. Nabil Abdel-Fattah, “How the 1

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Brotherhood won”, Al-Ahram Weekly, Issue No. 775, 29 December 2005-4 January 2006. 7 Contrary to this statement, President Mubarak argued in an interview with Osama Saraya, editor-in-chief of Al-Ahram newspaper, that he was keen to see political progress go hand in hand with economic and social progress; full interview published in Al-Ahram International, Issue No. 43369, September 2, 2005, pp. 1-3. 8 Reda Ali, The Determinants of Foreign Direct Investment, p. 268. 9 Ibid, p. 269. 10 Ibid, p. 273. 11 Doha Abelhamed, ‘The future of fiscal reform’, Al-Ahram Weekly, Issue No. 699, 15-21 July 2004. 12 Mahmoud Mohieldin, Al-Ahram Weekly, Issue No. 702, 5-11 August 2004. 13 The Economist Intelligence Unit (EIU), Country Report: Egypt, data collected from various issues between February 1996 and July 2009. 14 EIU, Country profile Egypt 1995-96, p. 13. 15 EIU, Country Report Egypt, July 2009, p. 12. 16 Al-Ahram Center for political and Strategic Studies, Arab Strategic Report 1997, Cairo, February 1998, pp. 325-327. 17 Doha Abdelhamid, Al-Ahram Weekly, Issue No. 698, 8-14 July 2004. 18 Reda Ali argued that 42 per cent of foreign companies believed that the capital market in Egypt was sustenance to FDI activities, but his general remarks confirmed that the capital market was not strong enough to sustain foreign companies operation in Egypt. Reda Ali, The Determinants of Foreign Direct Investment, p. 227. 19 Doha Abelhamed, ‘The future of fiscal reform’, Al-Ahram Weekly, Issue No. 699, 15-21 July 2004. 20 Bassem Kamar & Damyana Bakardzhieva, ‘Economic Trilemma and Exchange Rate Management in Egypt’, paper presented at the Tenth Annual Conference of the Economic Research Forum for Arab Countries, Turkey and Iran, December 16-18, 2003, pp. 1-2. 21 Central Bank of Egypt, Economic Review, No. 2, 2005. 22 Omnia Helmy, “The effect of trade liberalization on government revenues in Egypt”, (Cairo: Egyptian Center for Economic Studies, 2004); and Niveen Wahsh, “Slashing traditional wisdom”, Al-Ahram Weekly, Issue No. 708, 16-22 September 2004. 23 Rashid Mohamed Rashid, Foreign Trade and Industry Minister, Al-Ahram Weekly, Issue No. 708, 16-22 September 2004. 24 Mona El-Fiqi, “The Great unknown”, Al-Ahram Weekly, Issue No. 709, 23-29 September 2004. 25 Reda Ali (2000), The Determinants of Foreign Direct Investment, p. 231. 26 Ahmed Ghoneim (2000), Determinants of the Egyptian Exports Market Access to the European Union, Center for Economic and Financial Research Studies, Cairo University, Egypt, Vol. 10, December 2000, p. 39.

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Nathan Associates Inc. (1998), Enhancing Egypt’s Exports, report prepared for the Government of Egypt, Ministry of Trade and Supply, cited in Ahmed Ghoneim (2000), Determinants of the Egyptian Exports Market Access to the European Union, Center for Economic and Financial Research Studies, Cairo University, Egypt, Vol. 10, December 2000, p. 40. 28 Frank Sader, ‘Privatization and Foreign Investment in the Developing World: 1988-1992’, The World Bank Policy Research, Working Paper No. 1202, October 1993, pp. 24-30. 29 Klaus Mayer and Saul Estrin, Investment Strategies in Emerging Markets, (Cheltenham, UK: Edward Elgar, 2004), pp. 12-18. 30 Egyptian Ministry of Investment, ‘Companies to be privatized in 2005/2006’, unpublished report, Cairo, 2005. 31 Reda Ali, The determinants of foreign direct investment, p. 237. 32 Ibid, pp. 235-238. 33 Sherine Abdel-Razeq, ‘What is in store for Omar Effendi?’, Al-Ahram Weekly, Issue No. 768, 10-16 November 2005; see: http://weekly.ahram.org.eg/2005/768/ec2.htm. 34 N. El-Mikawy & H. Handoussa, Institutional Reform and Economic Development in Egypt, (Cairo: American University in Cairo Press, 2001); and Meryse Louis et al, “Foreign Direct Investment in Egypt” in Saul Estrin & Klaus Meyer (eds.), Investment Strategies in Emerging Markets, p. 55. 35 Ibid, pp. 54-55. 36 This is because the majority of farmers have small pieces of land and tend to use a large part of their corps for household consumption. 37 Ahmed Galal & Sahar Tohamy, “Towards a Free Trade Agreement between Egypt and the US: The Egyptian Perspective”, in Ahmed Galal & Robert Lawrence (eds.), Building Bridges: An Egypt-US Free Trade Agreement, (Cairo: The Egyptian Centre for Economic Studies, Cairo & John F. Kennedy School of Government, US, 1998), p. 24. 38 Adel Beshai, ‘Privatization, liberalization and all that revisited, ten years on’, AlAhram Weekly, Issue 642. 39 Meryse Louis et al (2004) ‘Foreign Direct Investment in Egypt’ in Saul Estrin & Klaus Meyer (eds.), Investment Strategies in Emerging Markets, p. 54. 40 Mahmoud Abdel Latif, president of Bank of Alexandria, stated that all transactions and exchange operations used to be conducted manually until 2002. Al-Ahram Al-Ektysadi, Issue 8, 3 July 2005, p. 9. 41 Transparency International, Annual Report 2007, Berlin, 2008, p. 27. 42 EIU, Country Report Egypt, July 2009, p. 16. 43 World Economic Forum, The Global Competitiveness Report 2008-2009, (Geneva: World Economic Forum, 2009), pp. 167-168. 44 Sherine Nasr, ‘Real cities at last?’ Al-Ahram Weekly, Issue No. 722, 23-29 December 2004. 45 Bassem Kamar & Damyana Bakardzhieva, The reforms needed to attract more FDI in Egypt, p. 13. 46 Reda Ali, The determinants of foreign direct investment, pp. 244-245. 27

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Ibid, p. 250. Over the past four years, the Egyptian-British Chamber of Commerce held four conferences in London, usually in July at London’s Churchill Intercontinental Hotel; the first event held in Ireland was “Egypt: Priorities for Business and Investment”, Dublin, 30 June 2003.

47 48

Chapter 9 Y. Sayigh, ‘The Gulf crisis: why the Arab regional order fail’, International Affairs, Vol. 67, No. 3, 1991; and I. Karawan, ‘Arab Dilemmas in the 1990s’, Middle East Journal, Vol. 48, No. 3, 1994. 2 Hassan Amer, ‘Among five free trade agreements with Egypt, the EU Partnership wins’ World Today, Issue No. 2912, August 21, 2000. 3 Al-Ahram, ‘Egypt and the US agree to begin negotiations towards a free trade area within weeks’, Issue No. 43462, December 4, 2005. 4 These conditions were spelled out by Daniel Kurtzer, US Ambassador to Egypt (1997-2001) in his speech at the Egyptian Centre for Economic Studies in Cairo on 18 July 2000. See also Niveen Wahsh, “Condition for agreement”, Al-Ahram Weekly, Issue No. 429, 27 July-2 August 2000. 5 Comment made by Mr. Erastus Mwencha, Secretary-General of the COMESA during his visit to Cairo in May 2004. Al-Ahram Weekly, Issue No. 690, 13-19 May 2004. 6 Sherine Nasr, ‘Empowering COMESA’, Al-Ahram Weekly, Issue No. 690, 13-19 May 2004. 7 Sherine Nasr, “The key to growth: trade and more trade may be the only answer to MENA’s fragile rates”, Al-Ahram Weekly, Issue No. 646, 10-16 July 2003. 8 Ahmed Ghoneim, “Rules of origin and Trade Diversion: the Case of the Egyptian-European Partnership Agreement”, paper presented at The Economic Research Forum’s Eighth Annual Conference, Cairo, January 2002; and Ahmed Ghoneim (2000), ‘Determinants of the Egyptian Exports Market Access to the European Union’, Center for Economic and Financial Research Studies, Cairo University, Vol. 10, December 2000, p. 37. 9 Denis Eby Konan, ‘Alternative paths to Prosperity: Economic integration Among Arab Countries’, paper prepared for the conference Arab Economic Integration: between Hope and Reality, Cairo, October 21, 2001, p. 3. 10 Al-Ahram Center for Political and Strategic Studies, Arab Strategic Report 2000, Cairo, 2001, p. 159. 11 Giyas Gőkkent, ‘Regional Integration in the Middle East and North Africa’, unpublished paper, 2004, p. 5. 12 Abdel Motaleb Abdel Hamid, Arab Common Market: Reality and Prospect in the Third Millennium, (Cairo: Arab Nile group, 2003), p. 184. 13 Giyas Gőkkent, ‘Regional integration in the Middle East and North Africa”, p. 6. 14 Alfonse Aziz, ‘The Arab Nation and Encountering the Economic Challenges of Globalization’, in Salah Salem Zarnouka (ed.), The Globalization and the Arab Nation, Development Issues, No. 23, (Cairo University: Center for the Study of Developing Countries, 2002), pp. 193-195. 1

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Bassem Kamar, ‘Euro-Med Partnership, Agadir Agreement and the Need for Exchange rate Policy Cooperation’, paper presented at The International Conference on The Euro-Mediterranean Partnership, Ten Years after Barcelona, Cairo, April 19-20, 2005, p. 3. 16 Graham Usher, ‘The cost of vengeance’, Al-Ahram Weekly, 23-29 November 2000, Issue No. 509. 17 The eight countries are Hungary, Poland, the Czech Republic, Latvia, Lithuania, Slovenia, Slovakia and Estonia. 18 The negative impact of the EU relation with CEECs on Egypt was discussed in Sandro Sideri, ‘The Impact of the EU’s Partnership for Action on the Mediterranean Economies: Dependent Development or Regional Integration?’, paper presented in The FEMISE Network First Annual Conference, Marseilles, 17-18 February 2000; and Sergio Alessandrini, ‘Consequences of EU Enlargement for the Med Countries’, paper presented in The FEMISE Network First Annual Conference, Marseilles, 17-18 February 2000. 19 Barnard Hoekman & Simon Djankov, ‘Catching up with Eastern Europe? The European Union’s Mediterranean Free Trade Initiatives’, in Raed Safadi (ed.), Opening Doors to the World: A New Trade Agenda for the Middle East, (Cairo: The American University Press, 1998), pp. 281-312. 20 Organization for Economic Co-operation and Development, ‘Market Access: FDI/Trade Linkage in Eastern Europe’, OECD Working Paper, Paris, Vol. 2, No. 43, 1994. 21 Carlo Altomonte & Claudia Guagliano, ‘Competing Locations? Market Potential and FDI in Central and Eastern Europe vs. the Mediterranean’, LICOS Centre for Transition Economics, Belgium, discussion paper 108/2001, p. 3. 22 Ibid, p.16. 23 Irene Lovino, ‘Acceding Countries still attractive for Foreign Direct Investment: 1997-2001 Data’, Eurostat, Statistics in Focus, Theme 2-51/2003, p. 2. 24 UNCTAD, World Investment Report 2003, p. 64. 25 This percentage of FDI ratio to GDP amounted to 16 per cent on average between 1997 and 2000 in the CEECs. This was largely due to the tremendous growth rate of FDI stocks by 171 per cent, from €28.8 billion in 1997 to €78.3 billion in 2000. Irene Lovino (2003), “Acceding Countries still attractive for Foreign Direct Investment: 1997-2001 Data”, Eurostat, Statistics in Focus, Theme 251/2003, p. 3. 26 J.M. Campa & M.F. Guillén, ‘Spain: a boom from economic integration’, in Dunning, J. & Narula, R. (eds.), Foreign Direct Investment and Governments: Catalysts for economic restructuring, p. 214. 27 Eurostat, Statistics in focus, Theme 2-12/2004, p. 2. 28 Ernest & Young’s 2005 European Attractiveness Survey cited in Allen & Overy LLP, Foreign Direct Investment in Central and Eastern Europe, 2006, p. 4. 29 UNCTAD, World Investment Report 2003, p. 64. 30 Claudia Buch, Robert Kokta & Daniel Piazolo, ‘Does the East Get What Would Otherwise Flow to the South?: FDI Diversion in Europe’, Kiel Institute of World Economics Working Paper, No. 1061, Kiel, 2001; and Alan Bevan (2001), ‘The impact 15

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of EU Accession Prospects on FDI Inflows to Central and Eastern Europe’, University of Sussex at Brighton Economic and Social Research Council Policy Paper, No. 06/01. 31 Interview by Niveen Wahsh with Peter Geopfrich, executive director of the German Arab Chamber of Industry and Commerce, Al-Ahram Weekly, Issue No. 688, 29 April-5 May 2004. 32 R. Gomaa, Egyptian Agricultural Exports and the European Union Barriers, MA Dissertation, Cairo University, 2001 (in Arabic). 33 By the end of 2002, the US trade representative, Robert Zoellick, expressed some dissatisfaction about this and argued that Egypt was still no closer to a free trade agreement. Al-Ahram Weekly, “Egypt-US: no FTA in sight”, Issue No. 590, 13-19 June 2002. 34 Lobna Abdel Latif, ‘American Direct Investment in Egypt’, Centre for American Studies, Cairo University, Issue No. 2, January 2003, pp. 12-13. 35 Sherine Nasr, ‘Just say no’, Al-Ahram Weekly, Issue 633, 10-16 April 2003. 36 Yasser Sobhi, ‘Casualties of conflict’, Al-Ahram Weekly, Issue 630, 20-26 Mach 2003. 37 David Welsh, US Ambassador to Egypt, Al-Ahram Weekly, Issue No. 644, 26 June-2 July 2003. 38 William H Lash, US Assistant Secretary of Commerce for Market Access and Compliance, Al-Ahram Weekly, Issue No. 697, 1-7 July 2004. 39 Hugh Moeser, “Investment Rules in the NAFTA”, in the Organization for Economic Cooperation and Development, Investment Policies in Latin America and Multilateral Rules on Investment, (Paris: OECD, 1997), pp. 127-131. 40 Textiles and clothing were the main Egyptian exports to the US market, after petroleum. The US market accounts for 40 per cent of Egypt's total textile and clothing exports, a figure that would have been drastically reduced in the face of cheaper exports from the Far East. Al-Ahram Weekly, Issue No. 723, 30 December 2004-5 January 2005. 41 Stephen Young & Thomas Brewer, “Multilateral Investment Rules, Multinationals and the Global Economy”, in Nicholas A Phelp & Jeremy Alden (eds.), Foreign Direct Investment and the Global Economy: Corporate and Institutional Dynamics of Global-Localization, (London: The Stationary Office, 1999), pp. 15-25. 42 Nathan Associates Inc., Egypt: Obligations and Commitments under the GATT/WTO Agreements, report prepared for the Egyptian Ministry of Trade and Supply in August 1999, p. 45. 43 The 12 basic service sectors were business, communications, construction and related engineering, distribution, educational, environmental, financial, health related, tourism and travel-related, recreational, cultural and sporting, transport, and other services not included elsewhere. They were divided into 55 sub-sectors based on the International Standard Industrial Classification system utilised by the WTO, a total of 165; the WTO made 10 sub-sectors overlap and thus the operative number is 155. To make a commitment, the country had to apply the 155 to the 4 mode of supply for services with a result of 620 separate specific commitments. The 4 specific modes of supply for services were: cross-border

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supply of a service, consumption abroad, commercial presence and natural persons such as labourers and consultants. Nathan Associates Inc. (1999), Egypt: Obligations and Commitments under the GATT/WTO Agreements, p. 47. 44 Article XII of the GATS permits states to impose restrictions on trade in services with regard to commitments in order to address the serious balance of payments situation, on condition that these restrictions do not discriminate against WTO members, nor cause unnecessary damage to the interests of other members. 45 Nathan Associates Inc. (1999), Egypt: Obligations and Commitments under the GATT/WTO Agreements, p. 96. Conclusion The first Euro-Mediterranean investment conference took place ten years after the signing of the Barcelona Declaration. It was held in Marseille, France, on 13-14 January 2005. 2 Bassem Kamar & Damyana Bakardzhieva, The reforms needed to attract more FDI in Egypt, p. 17. 3 The most notable example is India, where weak IPRs discouraged almost 80 per cent of international chemical firms to engage in joint ventures or transfer new technologies to their subsidiaries or related firms operating in the country. Keith E. Maskus, “IPRs and FDI”, in Bijit Bora (ed.), Foreign Direct Investment: Research issues, (London: Routledge, 2002), p. 198. 4 Cohen, Stephen (2007), Multinational Corporations and Foreign direct investment: Avoiding Simplicity and Embracing Complexity, (New York: Oxford University Press), pp. 56-58. 1

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Foreign Direct Investment: A Survey of the Evidence‟, United Nations Publications, New York, 1992. United Nations Industrial Development Organization (UNIDO), „Foreign Direct Investment Flows to Developing Countries: Recent Trends, Major Determinants and Policy Implications‟, UNIDO Policy Paper Discussion. No. 167, 10 July 1990. Vitalis, Robert, When Capitalists Collide: Business Conflict and the End of Empire in Egypt, (Berkeley and Los Angeles: University of California Press, 1995). Wallerstein, Immanuel, The Modern World-System I: Capitalist Agriculture and origins of the European World-System in the Sixteenth Century, (New York: Academic Press, 1974). Waterbury, John, Egypt: Burdens of the Past Options for the Future, (London: Indiana university Press, 1978). -------, The Egypt of Nasser and Sadat: the Political Economy of two regimes, (Princeton: Princeton University Press, 1983). Wells, Louis and Wint, Alvin, „Marketing a Country: Promotion as a tool for Attracting Foreign Investment‟, Foreign Investment Advisory Service Occasional Paper, No. 1, Washington D.C., 1990. World Bank, „Trends in Developing Countries‟, The World Bank, Washington D.C., 1996. Young, Stephen & Brewer, Thomas, „Multilateral Investment Rules, Multinationals and the Global Economy‟, in Nicholas A. Phelp & Jeremy Alden (eds.), Foreign Direct Investment and the Global Economy: Corporate and Institutional Dynamics of Global-Localization, (London: The Stationary Office, 1999). Zaalouk, M., Power, Class and Foreign Capital in Egypt, the rise of new bourgeoisie, (London: Zed Books Ltd., 1989). Zarnouka, S., Multinational Corporations and Development (Political Dimensions), Centre for the study of Developing Countries, Cairo university, Cairo, Issue 21, 2002 (in Arabic).

INDEX

A ABN-AMRO 22 Accession 6, 12, 29, 221, 227, 230233, 235, 236, 249 Administrative system 32, 55, 104, 208-209, 227, 252 Affiliates 17-18, 21, 28, 124, 126, 129, 160, 203, 245, 253 Africa 1-3, 10, 19, 21, 30, 69, 98-99, 121, 151, 173, 191, 218, 220-221 Agadir Agreement 5, 221, 224-226, 252 Agadir Declaration 102, 224 Agricultural products 73-74, 91, 104, 115, 180, 220, 237 Agriculture 2, 34, 38, 42-43, 74, 8185, 89-92, 101, 104, 126, 142, 145-146, 150, 154, 161-162, 183, 185, 207, 212, 225, 228-229, 235, 237, 241, 250 Airport 180, 211 Alexandria Portland Cement 164 Al-Ezz Heavy Industries 151 Ali, Mohamed 36-37, 40, 165 Arab Common Market 50, 103, 222 Arab economic cooperation 102, 223

Arab funds 56 Arab investment 56, 62, 68, 76, 205, 223, 238-239 Arab League 62, 71-72, 77, 100, 103, 217, 222-224 Arab regional order 217 Arab-Israeli conflict 4, 6, 71 Arabization 49 Arcelor 125 Argentina 189, 242 Arma Food Industries 168 ASEAN 2-3, 6, 27, 99, 129, 216 Asia 2, 6, 8, 10, 19, 21, 27, 30, 58, 69, 76, 78, 99, 129, 186, 189, 211, 215-216, 221, 223, 242, 254 Asian tigers 215 ASK Clothing 179 Association agreements 2-5, 21, 230, 251 Astrazenica 172 Aswan Development and Mining (ADMCO) 163 Austria 28, 36, 80, 85, 124, 129, 143, 144, 171, 184 Automotive 200

294

INVESTING IN THE MIDDLE EAST

B Balance of payments 65, 107, 200, 244 Balkan 2, 3 Bank of Alexandria 209 Bank of America 86 Banking system 86, 124, 151, 161 Banque du Caire 86 Barcelona Declaration 97-98, 115, 235 Barcelona era 122, 132-133, 137, 139, 143, 165, 184, 189, 228, 239, 242-243, 248, 250 Barcelona process 1, 4-10, 73, 75, 79, 97-119, 121, 130-138, 216-218, 221, 227-229, 235, 238, 247 Barclays Bank 86 Bavaria Auto Trading 143 Belgium 35, 80, 84, 87, 90, 123, 125, 129, 138, 141, 143, 150, 153, 158, 166, 180, 184 Bilateral investment treaties 20, 30 Bilateral trade agreements 31, 98 Bisco Misr 112 BMW 127, 143 Brazil 3, 30 British capital flows 81, 126, 160, 162, 186 British companies 87, 90-91, 148149, 151, 157-158, 160-161, 164, 166-167, 170-171, 173, 177, 179181, 183, 186, 213 British direct investment 155, 157186 British Government 40 British investments 150, 157-158, 165-166, 169-170, 174, 178, 181, 183 Budget deficit 195-197

Building materials 81, 83, 84, 166, 250 Bulgaria 124, 230, 233, 234, 235 Bureaucracy 63, 203, 207-208, 212 Bureaucratic system 57, 58-60, 252 Bureaucrats 209 Business environment 29, 32, 72, 97, 157, 190, 230, 245 C Cahan, Andrew 160 Camp David Accords 71 Capital Market Authority 62, 198 Capitalism 1, 15, 26, 33, 47 CARICOM 2 Central and East European countries 3, 6 Central Bank of Egypt 11, 86, 151, 208, 248 Ceramics 113, 164, 165 Chase Manhattan Bank 85 Chemical industry 44, 56, 83, 88, 91, 140-141, 149, 170-171, 182, 241 Chile 3, 190, 242 China 3, 19, 23, 30, 58, 189, 201, 205, 216, 234 Chipsy International 168 Citizenship 34 Civil society 107, 109, 194 Civil war 38, 70, 103, 222 Coca Cola 70, 168 Cold War 93, 97-99, 215, 217 COMESA 2, 30, 99-100, 119, 216, 218, 220 Common Agricultural Policy 71, 237 Communism 230 Comparative advantage 38, 45, 88, 145, 150 Competition law 186

INDEX Constitutional amendments 204 Construction 36, 43, 45, 62-63, 210, 219, 220, 225, 228, 240, 241, 250 Construction materials 88, 91, 143, 147, 162, 164-166, 182-183, 185, 200, 220, 229, 240, 251 Consultancy 89, 152, 234 Consumer price index 197 Cooperation Agreement 1, 4, 5, 8, 55, 73, 93, 104, 236, 248 Corporate tax 57, 205 Corruption 66, 206, 207, 209 Corruption Perception Index 209 Cotton 22, 37, 38, 42-44, 49, 89, 91, 151, 174-175 Credibility 29, 69, 97, 134, 181, 198, 206 Customs tariffs 200 Cyprus 79, 98, 132, 143, 227-22 Czech Republic 23, 29, 124, 126, 137, 189, 205, 210, 230, 232-233, 235, 237 D Damietta 140, 147, 180, 184 Davos 216 Debt 39, 40, 44, 63, 65, 66, 151, 174, 195, 197-198 Debt service 197 Domestic debt 195 External debt 197 Democracy 26, 68, 98, 103, 191-192 Democratization 16, 68, 191, 194, 231 Demographic structure 215, 236 Denmark 74, 80, 84, 87, 90, 115, 124, 129, 133, 138, 141, 143, 147, 153, 166, 184 Dependency 23-24

295

Deregulation 27, 65, 100, 127 Determinants 15, 189-245 Internal determinants 189-213 External determinants 215-245 Devaluation 60, 199 Discrimination 49, 100, 243 Doha Development Agenda 2 Double taxation 20, 62, 117 Domestic violence 190 Discrepancies 196 Durable goods 200 Dutch investments 133, 169 E East Mediterranean Gas Pipeline 148, 181 Economic growth 157, 160-161, 164, 191, 195, 198, 216, 226, 232, 235, 252, 254 Economic independence 42 Economic integration 3, 19, 29, 50, 77, 101, 103, 216, 218, 220-221, 224, 249 Economic liberalization 7, 9, 10, 12, 17, 19, 20-21, 25, 59-60, 62-68, 75, 85, 100-101, 104, 110, 136, 190-191, 207, 218, 223, 230, 248, 252 Economic performance 29-30, 46, 55, 117, 123, 195, 200, 205 Economic reforms 9-10, 26, 29, 59, 97-98, 101, 128, 132-133, 136, 160, 189, 196, 198, 227, 247-248, 252 Economic Reforms and Structural Adjustment Programme 9, 64, 134, 195 Economic stability 30, 82, 100, 136, 190, 194, 205, 233, 251

296

INVESTING IN THE MIDDLE EAST

Economic transition 5, 100, 105-109, 114, 230 ECOWAS 2 Edita Food Industries 168 Education 15, 31, 35, 106-109, 117, 182, 211, 233, 251 Educational system 211 Egyptair 113 Egyptian British Chamber of Commerce 212 Egyptian Government 10-11, 47, 50, 56, 62, 69, 86, 93, 98-99, 110112, 117, 155, 157, 162, 177, 182, 189-200, 218, 243-245, 248, 252, 254 Egyptian Insurance Supervision Authority 198 Egyptian pound 11, 12, 60, 195, 199, 248 Egyptian-German Business Council 143 Egyptianization 42, 48 Egyptian-Turkish Free Trade Area 100 Election 191 Electricity 65, 67, 126-127, 168, 196 Electronics 62, 166-167, 211-212 Employment 16, 27, 31, 40, 44-46, 58-60, 64, 65, 66, 88, 91, 93, 100, 106-107, 110-111, 140, 146, 158, 167, 170, 178-179, 181-185, 209, 210, 248, 250 Engineering 35, 82-84, 88, 91-92, 140, 142, 146, 147, 148, 162, 164169, 177-180, 183, 185, 200, 228229, 235, 239-240, 250 ENI International 141, 148, 167-168 Enlargement 116, 124-125, 216, 230237, 252

Estonia 129, 137, 231-233 EU-Egyptian Association Agreement 7, 9, 115-118, 218 Euro-Arab Dialogue 55-56, 70, 72, 93, 98, 248 Euro-Mediterranean Free Trade Area 5, 10, 97-100, 110, 115, 216, 249 European Investment Bank 112114 European Union (EU) 1-12, 22, 6970, 76-83, 102-119, 122-155, 159160, 170-174, 189-201, 208, 212, 215-245 Expenditure 23, 40, 63, 185, 195198, 211 Export-oriented policy 66 Export-oriented industries 119 Expropriation 31, 56, 62 F FDI destination 196 Fertilizers 149, 181, 183, 200, 220 Fiat 62, 127, 168 Finance 85, 106, 110, 112-113, 117, 140, 142, 145, 192, 197-198, 204, 225 Financial assistance 4-5, 47, 71, 98, 101, 116 Financial crisis 9, 19, 36, 40, 58, 77, 86, 127, 160, 161, 195, 198, 204, 234, 235, 238 Financial institutions 20, 35, 38, 41, 48 Financial protocols 4, 104, 106 Financial sector 28, 44, 62, 81-83, 85, 87, 91, 108, 118, 141-142, 146, 151, 160-161, 234-235, 241, 249-250

INDEX Financial services 89, 118, 127, 140141, 152, 197, 198, 241 Finland 80, 129, 138, 144 Fiscal reforms 195 Food industry 82, 84, 87-88, 112, 140, 142-143, 150, 168-169, 170, 182, 185, 195, 206, 211, 250 Food processing 150, 162, 168, 228 Foodstuff 168, 200, 219 Foreign direct investment 1-2, 15, 50, 75, 101, 127, 189-190 Foreign reserve 192, 199 Fragmentation 18, 78, 217, 222 France 4, 18, 34, 37-38, 80, 86-88, 90, 123-126, 132, 138-139,140, 249 Franchiser 240 Free Officers 47 Free trade agreements 2-3, 6, 99, 119, 121, 218 Free trade area 3, 5, 10, 27, 97, 99100, 115, 216, 221-222, 241, 249 Free zones 10, 11, 56, 57, 60, 67, 75, 79, 85, 88-89, 122, 137, 139-144, 148, 149, 152, 154, 158-161, 166, 170, 174, 177-185, 205, 229, 240 Private free zones 177, 180 Public free zones 177-179 Furniture 220 G Gas 113, 127, 140-141, 146- 149, 167-168, 172, 180-181, 197, 210, 229, 238, 113, 127, 140-141, 146149, 167-168, 172, 180-181, 197, 210, 229, 238 GASCO 113, 167

297

General Agreement on Tariffs and Trade 2, 73, 243 General Agreement on Trade in Services (GATS) 243, 244, 253 General Authority for Financial Supervision 198 General Authority for Investment and Free Zones 10 Geographical proximity 1, 4, 70, 129, 230, 242 German investments 142, 166, 173 German-Arab Chamber of Industry and Commerce 143 GlaxoSmithKline 173, 206 Glaxo-Wellcome 172 Global economic downturn, 195 Global economy 2, 9, 19-22, 33, 36, 38, 99, 122, 127, 130, 134, 195, 215-217, 219 Global Mediterranean Policy 1, 4, 8, 32-33, 51, 70-71, 75, 93, 98, 247 Globalization 15, 18-19, 21, 93, 99, 194, 215-217 Goepfrich, Peter 236 Good governance 110, 209 Government intervention 40, 49 Government officials 121, 195, 212, 218 Government policies 196, 209 Great Depression 42, 44 Greater inter-Arab Free Trade Area 5, 100, 211 Greece 12, 80, 85, 125, 133, 137-138, 141, 152, 184, 249 Greek investments 86 Greenfield 17, 48, 128, 185, 202 Gross domestic product 9, 40 Gulf War 70, 194, 197, 217, 239

298

INVESTING IN THE MIDDLE EAST

H Hard currency 88, 192, 199 Harmonization 16, 31 Hikma Pharma 172 HOLSEPLE 165 Hong Kong 30, 242 Horizontal FDI 18, 220, 249 Horizontal integration 97, 101, 119, 104, 221 Hospitals 89 Host country 17-18, 117 Human development 89, 93, 210 Human rights 98, 115, 194 Hungarian investments 143, 234 Hungary 23, 29, 144, 189, 205, 230235, 254 I Immigration 34, 38, 118 Imperialism 18, 23-24, 38, 50 Import-substitution 26, 30, 41, 66, 67, 89, 162, 190, 201, 251 India 3, 44, 216, 234 Industrial Modernization Programme 9-10, 106, 110, 115, 249 Industrial Revolution 1, 33 Industrial sector 4, 37, 41, 42, 44, 74, 81-84, 89, 103, 110-111, 139-140, 145, 155, 157-186, 210, 220, 223, 228-229, 251 Industrialization 41, 44, 46, 50, 67, 74, 89, 112, 157, 162, 201, 230 Inequality 24-25, 107 Infitah Policy 9, 61-63, 76, 93, 190, 196, 207, 248 Inflation 9, 59, 63, 65, 195-197, 252 Information Technology 201, 209, 218, 250

Infrastructure 28, 39, 62, 67, 81, 83, 89-90, 110, 112, 114, 117, 123, 140, 183, 185, 209-210, 227, 229, 233, 235, 252 Inland 11, 80, 85, 88, 89, 122, 129, 137-140, 142, 144, 148-149, 152, 154, 158, 160-161, 164, 166-168, 170, 172, 174-175, 177, 229, 240 Innovation 15, 25, 34, 110, 118, 233, 254 Institutional development 207, 247, 252 Insurance 35, 48, 59, 65, 109, 117118, 194, 198 Intage Holdings limited 165 Intellectual property rights 3, 31, 100, 118, 150, 206, 218, 241, 243245 International Monetary Fund 16, 65, 116 International trade 1, 3, 6, 18, 29, 49, 100-101, 116, 215, 242-243 Internationalization 1, 18, 33-34 Intervention 4, 40, 49, 191 Invasion of Iraq 194 Investment climate 31, 55, 67, 69, 75, 78, 186 Investment environment 20, 31, 55, 121, 157-158, 205, 208, 216, 253 Investment Promotion Office Egypt 212 Investment regimes 2, 26, 31, 117, 216, 226, 243 Ireland 74, 85, 123, 125, 137, 143, 144, 151, 158, 212, 249, 254 Irish investments 184 Ismail, Khedive 36, 40 Italian investments 140

INDEX J Japan, 22, 28, 78, 123, 151, 189, 216 Job creation 91, 93, 117, 158, 166, 181, 250, 254 Joint ventures 17, 20, 61, 63, 64, 117, 138, 148, 151, 165, 168, 176, 181, 185, 202-204, 207 Jordan 5, 98, 102, 207, 221-222, 225 K Knowledge-based economy 254 Kurtzer, Daniel 218 Kuwait 238 L Labour 250, 251, 254 Skilled labour 39, 210, 230 Unskilled labour 182 Labour force 210, 230 Labour laws 211 Labour-intensive 39, 87, 174, 183, 250, 251 Lacto Misr 169 Language barriers 236 Latin America 2, 8, 10, 21, 30, 77, 128, 130, 186, 189, 221, 233, 242 Latvia 154, 230, 232, 233, 235 Lebanon 4-6, 70, 99, 135, 222 Legal system 17, 36, 55, 58, 121, 150, 204-206, 233, 250 Liberalization 2, 5, 7, 9, 10, 12, 1617, 19-21, 25-27, 29, 55, 59, 6061, 64-66, 68, 75-76, 85-86, 99106, 115-116, 128, 136, 149, 190191, 196, 200-201, 207, 217, 222, 230, 241-245, 248, 251, 254 Libya 70 Liquid gas 70, 171 Lithuania 137, 230, 233, 234

299

Lloyds Bank 86 Locational advantage 20, 27, 40 Lomé Convention 4 Luxor 153, 175, 192, 199, 249 M Macroeconomic 9, 123, 136, 195, 224, 233, 251 Maghreb 102, 114, 131-132, 221, 224-225, 239 Malta 6, 111, 131-132, 135, 175-176, 227, 229-230 Managed floating regime 199 Mansman Demage 163 Manufacturing 24, 33, 35, 38, 40, 4345, 81, 87, 89, 91, 103, 113, 126, 141, 143, 146-147, 149-151, 158, 161-171, 176, 178, 180, 182-183, 193, 204, 209, 221, 229, 232-235, 238-40, 242, 247, 249-250, 253 Market Domestic 2, 9, 34, 124, 162, 176, 194, 201, 217, 249 Emerging markets 28, 198, 211 Financial market 34, 62, 197, 223 Informal market 199 Labour market 34, 117, 181, 182, 211 Egyptian Labour Market 117, 181, 211, 251 Mashreq 102, 114, 131, 132-133, 169, 239 McDonald‟s 240 MEDA 5, 9, 97, 104-110, 248 Mediterranean countries 3-4, 98, 104, 108, 176, 231, 233 Mergers 22 Metals industry 81, 84, 150, 164, 177, 235

300

INVESTING IN THE MIDDLE EAST

Mexico 3, 6, 19, 23, 29-30, 99, 189, 242, 254 Middle East1, 5-7, 19, 21, 42, 66, 69-70, 77, 98, 103, 121, 128, 134, 141, 153, 173, 181, 191, 218, 139, 242 Middle East and North Africa 1, 98, 121 Mining industry 163, 179 Ministry of Investment 203, 253 Ministry of Trade and Industry 110 Misr Bank 38, 42, 48, 208 Misr International Bank (MIBank) 152, 203 Modernization 8-10, 23, 25, 27, 36, 62, 104, 106, 110-111, 155, 157, 162, 197-198, 207-208, 249 Monetary policy 195 Money laundering 7, 101, 115 Morocco 4-6, 30, 98, 102-103, 131135, 174-176, 189, 223-225, 233 Mortgage Finance Authority 198 Most-Favoured Nation (MFN) 243 Mubarak, President 192 Multilateral trading system 2, 216 Multinational Corporations 15, 27, 249 Multiple exchange rates 199 Muslim Brotherhood 191, 194 N NAFTA 3, 6, 27, 29, 31, 99, 129, 216, 242 Nasser, Gamal Abdel 46 National Bank of Abu Dhabi 86 National Bank of Egypt 11-12, 61, 86, 200, 208 National Democratic Party 68

Nationalization 1, 8, 18, 33, 34, 4748, 56-57, 62, 75, 78, 191, 205, 21 Natural gas 146, 148, 167, 238 Neo-liberal 15, 25, 26 Neo-Marxist 23-25 Nile Linen Group 179 Nile Valley Cement 164 The Netherlands 18, 35-36, 78-82, 86, 88, 90-91, 123- 125, 129, 132, 137-141, 147-148, 150, 153-154, 158-159, 166, 170-171, 184-185, 249 O Obligations 101, 245 Off Shore Oil Service 89 Omar Effendi 204 Oslo 227 Osman, Osman Ahmed 64 Ownership 17, 21-23, 34, 36, 43, 4748, 63, 134, 169, 178, 185, 202, 205, 248 P Packaging materials 149, 170 Palestinian Authority 98 Paris Club 197 Patent 58, 245 Peace process 69-70, 102, 191, 227 Peripheral economies 189 Peripheralization 24 Petroleum 11, 43, 48, 89, 152, 166167, 179, 196, 205, 229, 238, 240242 Pfizer 172 Pharmaceutical 56, 78, 81-82, 84, 87, 92, 150, 162, 172-173, 182, 185, 196, 206, 211-212, 220, 239-241, 245, 250, 253

INDEX Pluralism 26, 68 Poland 124, 189, 210, 230-237 Political climate 40, 67 Political dialogue 98, 115 Political leadership 59-60, 190-192 Political stability 1, 3, 28, 55, 70, 77, 123, 133, 146, 153, 190-194, 231, 239 Port Said 89, 141, 147-148, 177-180, 183-184 Portugal 6, 12, 78, 80, 84, 125, 129, 132-133, 144, 158, 184, 236, 249 Post-Cold War 21, 93, 97-99, 215, 217 Preferential trade agreement 4-5, 71 Price liberalization 196 Private funds 64 Privatization 9-10, 19-22, 29, 63-66, 79, 101, 106, 114, 127-128, 136, 146, 152, 162, 189, 192, 202-204, 223, 230, 241-242, 252-253 Procurement 218, 241 Public expenditure 195, 197-198 R Railways 35-36, 39, 210 Regionalism 2, 21, 27, 29, 93, 99, 215-217 Regionalization 99, 216-217 Regulations 8, 22, 58, 74, 88, 99, 103, 117, 190-191, 198, 205-206, 217, 222, 237, 244, 253 Regulatory system 22-23, 49, 118 Research and development 18, 87, 118 Retail sector 204 Revenues 194-195, 197, 199, 200, 203, 205 Revolution 1, 27, 33, 35, 42, 45-46,

301

49-50, 68 Ricardo, David 6 Risk management 198 Roads 39, 194-195, 209-210 Romania 124, 130, 233-235 Rules of origin 10, 102, 119, 221, 224, 249, 252 S Sadat, President Anwar 59, 68, 79 Said Pasha 36 Sainsbury‟s 186 Saudi Arabia 70, 77, 155, 223, 238 Scandinavian countries 144 Sectoral distribution 75, 85-91, 122, 145-155, 164-166, 194, 235 Security 1, 3, 20, 31, 98, 102, 115, 118, 128, 146, 153, 190, 192-193 Segleke 163 Sempore Egypt 147 Services sector 2, 81, 89, 126, 143, 145, 152, 162, 183, 185, 198, 204, 223, 229, 235, 241 Sharm El-Sheikh 153 Shoubra El Kheima 113 Singapore 3, 19, 23, 205, 242 Single European Act 28 Sixth October 63, 67, 180, 210 Slovakia 29, 223, 234-235 Slovenia 137, 232, 234-235, 237 Small and medium sized enterprises (SMEs) 9-10, 110, 112113, 117, 249 Smith, Adam 6 Social tension 190 Societé Générale 152, 203 Socioeconomic conditions 23, 55, 191, 209

302

INVESTING IN THE MIDDLE EAST

Socioeconomic development 91, 108, 210, 16 South Valley Cement 147, 164-165 South- south economic cooperation 5, 10, 30, 216 Spanish investments 141, 147 Spanish-Egyptian Sea Gas (SEGAS) 140, 147, 149 State-owned companies 22, 146, 151, 202-203 Subsidiaries 173, 191, 202, 205 Subsidies 65, 106-107, 109, 196-197, 209 Suez Canal 36-38, 40, 43, 47, 62-63, 90, 113, 197 Suez Cement 147 Superpowers 34 Syria 4, 5, 6, 50, 99, 102, 175, 221, 233 T Tariffs 2, 18, 73, 100, 106, 115, 200, 218, 243 Tax Tax exemptions 57, 125, 205, 210, 217 Tax incentives 57, 125, 205, 210, 217 Taxation 20, 57, 58, 62, 117, 198, 201, 207, 252 Technical assistance 4, 9, 10, 97, 102, 104-105, 108, 112, 114, 248249 Technology transfer 15, 80, 110, 115, 157, 178, 254 Telecommunications 28, 118, 124, 218 Tenth Ramadan 63, 67, 210 Terrorism 67, 115, 190, 193-194

Textile industry 38, 44, 162, 174-176, 180 Textiles 34, 37-40, 43-44, 62, 82, 84, 88-89, 92, 151, 162-164, 174-179, 180, 182-183, 185, 201, 220, 235, 240, 242, 245, 250-251 Thailand 3, 243 Tourism 81-85, 90-91, 93, 105, 113, 127, 140-142, 146,153, 183, 185, 192-193, 205, 209, 219, 223, 225, 228-229, 234-235, 241, 250 Trade Trade balance 44, 199, 237 Trade barriers 28-29, 31, 71, 99, 217, 22 Trade diversion 3 Trademarks 58 Trade-Related Investment Measures (TRIMS) 243-244 Trans-European Mobility Scheme for University Studies (TEMPUS) 108-109 Transformation 5, 36, 47, 61, 69, 99100, 130, 207, 212, 252 Transparency 31, 66, 101, 121, 123, 198, 205, 207, 209, 231, 243, 252 Transparency International 209 Transportation 18, 35, 38, 196, 209 TRIPS 206-207, 218 Tunisia 4-6, 98, 102-103, 174-175, 189, 223, 224, 225 Turkey 4, 6, 98, 100, 102, 114, 132134, 174-176, 217, 227-228, 242 U UK Trade and Investment 160, 181 Underdevelopment 24-27, 197, 223 Union Finosa Gas 140, 149 United Arab Emirates 154, 223, 238

INDEX United Kingdom (UK) 133, 137140, 143, 146-147, 150-174, 177, 179-186, 212, 238, 249 United States (US) 3, 10, 19, 22, 29, 35, 55, 69, 75, 76-78, 100, 103, 122, 125-127, 157, 189, 197-199, 217-218, 223, 233, 240-242 Uruguay Round 243 V Value added tax (VAT) 198 Vehicles 74, 200 Vietnam 205 Vodafone 125, 141, 154, 159 Vodafone Egypt 141, 154, 159 Volkswagen 127 W Washington consensus 26 Water 146, 170, 210, 67, 90, 104, 113-114, 127, 146-147, 196, 210 Wood working 163, 164, 176 World Bank 16, 20, 31, 62, 65, 69, 79, 160 World Trade Organization 2, 19, 99100, 201, 218 Y Yemen 217, 221-222 Z Zara International 178 Zara Egypt 178

303