The promotion of private investment is being widely discussed at present by officials and intellectuals in most countries, developed and developing, irrespective of their political ideologies or economic philosophies. Developing countries in particular have come to realize that prospects for increased external grants and loans are dim and that funding investment through domestic borrowing, with its adverse effects on the rate of inflation, cannot be sustained indefinitely. Furthermore, governments have learned from experience that expansion and tight control of the public sector require the adoption of policies to protect that sector from competition and funds to meet the mounting budget deficits caused by its losses and subsidization. Such protection further impairs the public sector’s ability to compete internationally and reduces the prospects for increased exports. The call for the promotion of private investment has emerged as a practical response to these growing concerns.

The promotion of private investment is being widely discussed at present by officials and intellectuals in most countries, developed and developing, irrespective of their political ideologies or economic philosophies. Developing countries in particular have come to realize that prospects for increased external grants and loans are dim and that funding investment through domestic borrowing, with its adverse effects on the rate of inflation, cannot be sustained indefinitely. Furthermore, governments have learned from experience that expansion and tight control of the public sector require the adoption of policies to protect that sector from competition and funds to meet the mounting budget deficits caused by its losses and subsidization. Such protection further impairs the public sector’s ability to compete internationally and reduces the prospects for increased exports. The call for the promotion of private investment has emerged as a practical response to these growing concerns.

Dr. Hazem El-Biblawi and I were among the first to address the topic of inter-Arab investment. Nearly 25 years ago, we pointed out that a distinction had to be made between the Arab countries that would increasingly be accumulating surplus funds and seeking investment opportunities and those that would suffer from severe financial deficits despite the investment opportunities available in their territories.2 We emphasized the need to create an optimal environment to facilitate the movement of capital, goods, and services among all the Arab countries. Twenty-five years later, only a fraction of overall external Arab investments has flowed among Arab countries for the purpose of direct investment. Worse still, resources seem to be flowing now from some of the poorer Arab states to the developed countries in what appears to be an increasingly widespread phenomenon.

The purpose of this paper is to discuss frankly the factors that would allow for a greater flow of investment funds to and among Arab countries and provide an appropriate framework for the promotion and encouragement of the investment of Arab and foreign capital in Arab countries.

Summing Up the Experience

While working for institutions concerned with investment issues and through my involvement in the establishment of the Inter-Arab Investment Guarantee Corporation (Kuwait) and, more recently, my responsibility for the establishment of the Multilateral Investment Guarantee Agency (Washington, D.C.), I have had the opportunity to gain some familiarity with trends in the movement of foreign investment and to meet with numerous private investors and executives of major corporations that invest abroad. Before discussing the detailed issues facing Arab countries, I would like to present my general conclusions from these experiences (bearing in mind the importance of political and social stability to any comprehensive, long-term investment drive and the specific characteristics of world investment flows in general and Arab investments in particular). Since the following facts represent, in my view, the sum and substance of the practical experience of many countries, I hope that they will be taken as such, and not as being prompted by ideological considerations or purely personal convictions.

First, it is neither practical nor useful for a country to try to encourage foreign investments by means of tax exemptions and similar financial incentives in the absence of a proper environment for successful investment in general. Such an environment cannot be established solely on the country’s natural, human, and financial resources; it depends basically on the degree of confidence in its national economic potential. That confidence, in turn, rests on many factors where facts and illusions sometimes overlap and where rational, political, and at times purely psychological considerations interplay. The greatest influence on that confidence seems to be macroeconomic policies and the extent to which they respond to changing realities. Such policies profoundly affect the balance of payments and the state budget and, consequently, exchange and interest rates and the rate of inflation. Also to be taken into account are policies relating to labor legislation, taxation, and even those that affect the training and productivity of workers. In other words, to address investment promotion one has ultimately to be concerned with the country’s management of its economic resources and the overall organization of production, distribution, and consumption, both in the legislative context and, more important perhaps, in practice.

Second, it is essential that the government’s role in managing the economy be predictable and that disruptive changes in this role be avoided. From the viewpoint of both domestic and foreign private capital, it is of course important that the government’s role, whether as direct investor or as investment regulator, be that of a catalyst and promoter whose scope for intervention is at the same time limited. Perhaps even more important for investors is that the authorities not pursue policies that change abruptly from one government to the next and upset projections and calculations on the basis of which the project’s profitability and competitiveness were computed. Although as a general rule foreign investment prospers in countries with liberal economies, private foreign investment may also flourish in countries where state enterprises dominate production so long as the government’s positive policies vis-à-vis foreign investment remain stable. Such investment may also disappear from countries where governments are unstable and their detailed policies are constantly changing, despite the pursuit of a generally liberal economic policy.

Third, if a government opts for continued reliance on the public sector as the basis of its national economy, it must adjust its financial and institutional structures to allow that sector to operate successfully without depending on a monopoly position or on benefits that are not available to the private sector. This essentially requires that the public sector be freed of governmental administrative controls and that its profits and losses be treated as relevant and decisive factors. The principal role of the public sector is not to help the government increase the volume of disguised employment or enforce unrealistic prices. Such practices can only lead to a huge and irresponsible waste of a country’s limited resources, an elimination of new real employment opportunities, and ultimately to the failure of the public sector. This will be a disservice to the objective which may, and indeed should, be served by other means that do not distort the productive process. By virtue of the public sector’s sheer magnitude, its failure in turn adversely affects the economy as a whole and the prospects for the expansion of private investment in particular. Should there be well-founded reasons for retaining a large public sector, it becomes important also that any further expansion should not be at the expense of public investment in infrastructure (physical and human). This latter type of investment, by its very nature, requires a major role by government (as its financial returns are indirect and unattainable in the short term). It is also vital in order to increase new productive investments, be they national or foreign, public or private.

Fourth, an extremely important prerequisite for expanding private investment is the existence of a strong financial sector characterized by flexibility and an ability to innovate and to compete with external financial institutions. This should not be restricted solely to modernizing banking institutions. It also requires updating legislative controls and strengthening the agencies responsible for tax collection and financing in general. It further calls for the introduction of sound legal and accounting frameworks and innovative instruments to mobilize savings (including those of smaller depositors) for investment purposes under a reasonable degree of government control but without excessive supervision and intervention. The financial sector is a basic and effective motivator for the development of a satisfactory overall investment climate; its weakness or backwardness will be reflected in all aspects of investment. It is most important therefore that a developed and sustainable financial sector be in place without becoming a financial burden on the government. The sector must play an active part in transforming growing monetary wealth into new real wealth.

Fifth, in light of the foregoing, there can be no great hope for increased private domestic or foreign investment if the economy is marked by a rigidity imposed by inherited rules and procedures that are for the most part futile. Unfortunately, this may be the situation in most Arab countries. Historical experience has brought about considerable suspicion of both foreign and local capital. While this may be quite understandable, the world is changing, and economic isolation can only lead to a diminishing ability to compete and a decline of the productive segments of the economy. It is possible to increase foreign investment and open the door to local entrepreneurs and financiers within a framework that provides safeguards against the abuse of resources and power and requires a minimum of social responsibility from investors. Such safeguards would require a certain degree of efficiency and integrity on the part of the supervisory agencies. This may be achieved, in the context of appropriate macroeconomic conditions, by changing, through reform of the educational system and otherwise, the conditions that have led to a decline in government services, to poor labor productivity, and to excessive restrictions and the large number of bureaucrats in charge of implementing them. Restrictions tend to create additional restrictions; officials tend to increase their own numbers. The inevitable result is more intermediaries, rather than investors, and widespread corruption that encourages only the worst type of investor and prevents serious investors from even considering opportunities in the country. One of a government’s most important duties is indeed to establish clear limits and to ensure their proper application. But a government cannot succeed in doing so if it establishes exaggerated restrictions and procedures, creating a host of beneficiaries of their existence and continuation.

Finally, if it is true that private investment relies on entrepreneurs who are able to identify and efficiently exploit investment opportunities, it is also true that a proper investment environment in which sound economic policies are practiced is likely to lead to the emergence of such entrepreneurs and to encourage them to stay at home in addition to attracting successful investors from abroad. It serves no useful purpose to say that the people of a given country, by their very nature, lack the qualities required of entrepreneurs. The policies and procedures in force are responsible, to a large extent, for the presence or absence of such qualities. Furthermore, most investments nowadays are made by corporations where decision making depends on specialized professionals of whom additional numbers can always be trained.

Characteristics of Global and Arab Investment

Generally speaking, investors tend to invest outside their own countries when the net financial returns from external investment, adjusted to allow for risks, are greater than those that can be expected from investment at home. This assumes that the risk factor involved is not of such magnitude as to make the overall domestic investment environment unacceptable. Thus, if a private U.S. corporation has the choice of making a particular investment in New York or, for example, in Mexico City, with net annual returns of 20 percent in the former and 30 percent in the latter, the decision may finally rest on whether the difference between the two rates warrants the additional risks involved in investing abroad. Such risks may be related in particular to the decline in the value of local currency relative to the dollar, the extent to which profits can be freely remitted, and the possibilities of government interference in investment issues. There are of course investment opportunities in certain sectors (such as newly discovered oil fields and mines), which will, because of their high rates of return, attract investments despite a poor overall investment climate. And there are investments where a low exchange rate might be an advantage because of the investment’s export orientation, especially when production is not heavily dependent on imports and where exporters have the right to retain profits in foreign exchange accounts. There are also cases where bank deposits may move from one country to another solely owing to political risks, or other discretionary factors (particularly in the case of individual investors). Moreover, short-term adverse economic conditions have not particularly affected the flow of funds to the United States because of continued confidence in the stability of the country and in the position of the dollar in the longer term. Many investments are characterized by their search for high rates of financial return in the short term and many are motivated by the “herd instinct” or the tendency to follow the lead of larger investors. As a general rule, however, investors only tend to invest abroad in the expectation of a higher return, duly adjusted to allow for risk factors, including exchange rate and transfer risks.

An investor opts to invest in one country over another on the basis of a comparison of the risk-adjusted returns in each case. Accordingly, there may be a preference for a more modest net return in a particular country because of the strength of its currency and its stability over a higher return from a country where there is a potential for continued currency depreciation, or for drastic and abrupt changes in local conditions. Such preferences are generally shown by individual and corporate investors alike. Larger corporations may however enjoy a greater degree of flexibility because of their ability to diversify their investments, both geographically and in terms of sectors, and hedge against risks through “self insurance.” In addition, major corporations are better able to incur losses in the short term. This enhances their ability to take an interest in new projects that require expenditure with no immediate return. Like other investors, however, such corporations may, if they have incurred losses in a given country, be influenced by the experience when they decide on new investments.

The diminishing need for primary commodities in sophisticated industrial production (because of technological advances relying on alternative materials), the gradual reduction in the numbers of workers needed for such production (as against increasing reliance on technical knowledge), as well as the great scientific advances and their impact on the structure of agricultural and industrial production have led some commentators to fear an increasing deterioration of the comparative advantages enjoyed by developing countries in general. They also suspect that these and other factors will foster the tendency in industrial countries to concentrate on production at home, with the possibility of a spread of regional economic groupings adopting protectionist measures for their respective markets. Commentators also note that, notwithstanding these fears, there is an increase of certain types of foreign investment in developing countries that goes beyond the usual exploitation of natural resources, for obvious comparative advantages (such as in industries that require vast numbers of unskilled workers, or which are close to principal consumer markets, or have an adverse impact on the environment). In such cases, investments might increase in developing countries to avoid social problems arising out of importing labor into the developed countries and the complications associated with environmental issues in such countries.

Observers of direct foreign investment flows also note that they are heavily concentrated in geographic terms (with both home and host countries largely being western developed countries), and in terms of developing country economic sectors. (Such flows were formerly directed toward agriculture in equatorial regions and mining or the production of consumer goods in countries with relatively large markets; lately, they have increasingly been directed toward export industries and services that depend on the purchase or leasing of advanced technology.) Observers further note the spread of “institutional investors,” such as pension funds and insurance companies that hold considerable liquid funds and seek to invest them in securities in promising and stable markets.

The United States is still the major importer and exporter of foreign direct investment worldwide, although Japan has begun competing as an investment exporter (most Japanese investments being directed to the United States, Europe, and South East Asia). For a long time Latin America, particularly Brazil and Mexico, provided a preferred location for foreign direct investment in the developing world because of its relatively large domestic markets and proximity to the American market. The situation has changed for several reasons, the more important being the deterioration of the macroeconomic situation, with those countries facing severe inflation, a huge external debt, contracting domestic markets, and unfavorable exchange rates. Many foreign investments tend now to prefer South East Asia and China (with the beginnings of an increasing interest in India) where the countries concerned do not face abnormal debt-servicing burdens, are characterized by a more disciplined work force, and where, again, there are large markets and a tremendous ability to compete and export.

Inter-Arab investments (excluding loans) are marked by their paucity (whether in terms of each investment or of the accumulated volume of investments among Arab states) and by a lack of diversification (most are directed toward real estate as well as some small industries and services in the banking, tourism, and transport sectors). Relatively large-scale projects have usually taken the form of joint ventures involving governments (joint investment corporations or joint ventures in a particular production sphere). Their operation has in many cases been assigned to civil servants with no prior investment experience, whose activities have been marked by inefficiency and a pattern of mutual complaints. The governmental nature of the ownership and management of many such joint ventures has been an important reason for their lack of success in several cases. The general difficulties besetting joint Arab action and the little care paid to management techniques have compounded the problem. At the same time, private Arab funds have been typically marked by their search for a quick and easy profit, even if the result is a mere transformation from one to another form of financial resource (without creating real wealth). Initially at least, many Arab investors either acted through foreign corporations owing to shortcomings in their own institutions, or were merely satisfied with portfolio investments (buying up a minority share of stocks in project equity, without trying to exercise management control or play an active part in operations). “Investment” in bank deposits and securities continued to be the prevailing pattern of Arab capital flows even to the western countries, either out of fear of political reaction against direct investment in foreign countries or owing to a lack of adequate knowledge of direct investment in foreign markets. Furthermore, Arab financial markets, which remain limited and weak, were unable to compete against foreign markets in attracting funds to invest in securities, particularly institutional investor funds.

With the exception of the oil and gas sector, investment inflows into the Arab states have been small in comparison to the overall level of investment, which has in each country been predominantly governmental (excluding the agricultural sector). Investments as a proportion of gross national product have been high in many Arab states since 1975, especially in Saudi Arabia, Algeria, and (until recently) Egypt, but unfortunately many such investments have had low rates of (financial and economic) return. Enterprises intended to be market oriented did not always conduct their business in ways that would allow them to be competitive at prices reflecting their production costs and benefits; in many cases, they instead relied on government protection from competition, on employment monopolies, and, ultimately, on direct government subsidization.

Finally, the legal framework for inter-Arab investments has been characterized by a plethora of bilateral and multilateral agreements. The ambitious provisions of some of these agreements seem, however, to have given expression to what should have been achieved ideally, rather than to what is achievable in practice.

Foreign Investment—Incentives and Restrictions

Most countries are at present competing to attract foreign investments. This is particularly true of developing countries and countries in Eastern Europe; yet few have succeeded in attracting useful investments of a magnitude that can materially influence growth rates. Although successful examples include countries that do not grant foreign investors any preferential treatment, most developing countries have resorted to what might be termed the “incentives and restrictions game,” which is similar in many ways to the children’s board game “snakes and ladders.”

Most incentives take the form of customs exemptions and tax benefits. Some countries (particularly those where macroeconomic conditions are not attractive) are extravagant in granting such exemptions instead of ensuring that taxation levels, applicable to all concerned, are not so excessive that they curb new investments or lead to tax evasion by investors. Other countries go so far as to offer grants to foreign investors (as if it were not enough to provide disguised subsidization by means of exemptions and make materials and services available to them at less than their real prices). Others provide preferential treatment in borrowing from local money markets or—what is much worse—ensure protection from competition either by locking markets or imposing excessive restrictions on the importation of comparable products.

While a few incentives may be necessary or useful in some cases, mainly because of competition with other countries, fiscal or similar incentives often represent an unjustified sacrifice by the country’s treasury, since they rarely play an important part in investment decision making (although they are naturally welcomed by the investors); they usually merely increase the profits of investments that would have been made in any case. Worse, some of these incentives can be counterproductive, as is the case when a central bank compels commercial banks to lend at lower rates for projects in particular sectors, or to particular investors, leading the banks to avoid funding such projects and to concentrate instead on less important enterprises to which they can lend at higher rates. Furthermore, tax exemptions on bank deposits may result in their being preferred over real investment opportunities that may not enjoy the same exemptions. Incentive approval procedures and the broad discretionary powers wielded in their implementation may also open the way to discriminatory treatment on subjective grounds.

The situation is exacerbated when incentives are coupled with numerous restrictions. Even when restrictions are justified in theory, they may often result in unnecessary bureaucratic interference in investment affairs and an increase in the possibilities of delay and the potential for corruption. Furthermore, the coupling of excessive restrictions with overindulgent incentives sends mixed signals to potential investors that can confuse their evaluation of government’s intentions or of the overall investment environment.

Most restrictions can be explained by considerations that are easy enough to understand. The restrictions may be intended to improve the balance of payments position or benefit local industry (for example, performance requirements pertaining to a minimum local component or to the exportation of a proportion of production); to train or increase the employment of nationals (for example, conditions limiting the employment of foreigners); to assign labor an important role in management matters or a share in profits; to develop specific sectors or geographical areas; or to develop local technology or limit the role of foreign companies in the economy (for example, requiring a commitment to a particular volume or proportion of local production).

Many such restrictions, however, ignore the integral nature of a country’s economy, the interchange of benefits among its various components, and the response of such components, however disparate they may appear to be, to economic incentives resulting from appropriate overall policies. Certain restrictions may be based on erroneous ideas that give priority to attractive slogans over the needs of competition in the marketplace. Indeed, some restrictions may, inadvertently, have an adverse effect on the economy, for example, because of their possible effects on exchange rates.3 Generally speaking, excessive restrictions discourage investors and lead them either to turn to other countries where their investments will not be subject to similar restrictions or to overcome such restrictions in other costly or objectionable ways (for example, through reaching agreement with the government for special treatment, resorting to legal or other means to avoid the application of regulations, or corrupting government officials responsible for approval or supervision).

Some investment codes, such as Egypt’s 1989 Investment Law, have adopted a procedure requiring approval by successive levels in the government hierarchy. Thus, the Board of Directors of the Egyptian General Investment Authority is required to approve numerous detailed aspects of an investment project, and all of the Authority’s resolutions are subject to the approval of the Prime Minister, even though the Authority’s Board is chaired by the Prime Minister himself. True, the law provides that approval by the Prime Minister is assumed if no response is made within 15 days,4 but this is another anomalous solution because of the possible risks implicit in such “tacit” approval. Would it not be more advisable to limit the need for the Prime Minister’s approval to decisions of strategic importance and vest the Authority’s Board with final authority to approve other general resolutions, leaving decisions on detailed matters to the Chairman of the Authority or his duly authorized associates, in the light of the limits set by the Board? A minimum of restrictions dictated by the public interest that are possible to supervise adequately would seem to be the more sensible practice.

Mobilization and Utilization of Savings: General Status and a Specific Proposal

I have referred to the importance of the financial and banking sector in particular in ensuring increased private investment. Recent studies indicate that, despite its great importance, the sector is marked by severe shortcomings in most developing countries, to the extent that, if sound accounting practices were applied, or constant government subsidization were brought to a halt, most local development banks and some commercial banks might not survive bankruptcy procedures. Moreover, there have been certain unfortunate experiences, particularly in Kuwait and Egypt, where some individuals were able to amass enormous amounts of other people’s savings in schemes which were, at best, illusory or deceptive. Such schemes ultimately ended in major financial crises and in the loss of payments made by numerous savers who, in the absence of minimum supervision by government authorities, had been misled by a false hope for quick profits.

Experience in many Arab countries confirms that substantial liquid funds are available for investment but are not being tapped owing to the lack of institutions operating prudently in the mobilization and investment of funds within a general framework conducive to successful operations. As already mentioned, most institutions established as Arab investment corporations have assumed the form of intergovernmental joint ventures with all the ills to which this course of action is prone. Such ventures have failed in any case to play a significant part in mobilizing and investing private savings. Conditions have improved with the increasing number of Arab firms specializing in financial matters and the development of Arab experience in banking and fiscal matters. However, the need for further organized training (for example, through an advanced training center, set up by agreement of various banks), and the need to gain further information on the innovative financial instruments constantly being developed in foreign markets should be recognized.

One important institutional deficiency is the scarcity of arrangements whereby savings of expatriate workers and others wishing to invest in a specific Arab state or states may be mobilized with a reasonable degree of security and return. Relevant experience outside the Arab world (for example, in the Republic of Korea, Mexico, Malaysia, Taiwan Province of China, Thailand, the Philippines, India, and lately Portugal and Hungary) resulted in the setting up of so-called country funds for this purpose. The idea is rather simple, namely, to provide a trustworthy mechanism through which investors can convert their monetary contributions into financial papers of real investments. The funds in effect collect private savings from persons willing to contribute acceptable foreign exchange (or from specific institutional investors) and invest such funds in the form of corporate shares negotiable in financial markets and hence available for trading or for use as collateral in banking operations.

The most important feature of this approach is that it requires no funding by the beneficiary state and no sponsorship role on the part of any government. Moreover, no external subsidization is required; only a small contribution by a respected financial institution may be needed as evidence of seriousness and confidence. Such funds have been set up as holding companies or trusts administered by a management company. The initiative for setting up such funds has come in most cases from the International Finance Corporation (IFC)—a World Bank affiliate—sometimes in partnership with private U.S. financial institutions. The operation is preceded by a study of the local investment and financial markets, their potential for expansion, and the risks involved. Also considered are the possibilities of mobilizing savings for this purpose, especially from expatriates or resident nationals who have already converted savings into a foreign currency and deposited them in foreign accounts.

The most suitable legal form for the operation is in addition considered before implementation. If the operation appears to be feasible, the fund or investment corporation is established in the appropriate form (usually registered in a small foreign country to avoid complexities and taxation difficulties). Subscriptions may be limited to certain specific investment institutions, with the IFC or some well-known private financial house subscribing a minor share in each case. The new corporation selects an efficient management team of international stature, issues a detailed prospectus, and chooses the financial market in which its securities will be listed. Upon receipt of contributions, the corporation places them in stocks issued by corporate bodies in the countries concerned (either for existing investments, for expansion or restructuring purposes, or for new ventures). The holding corporation or the private contributors may take out insurance against the political risks involved, including currency exchange risks, through government agencies and private corporations in industrial countries. If needed, the Inter-Arab Investment Guarantee Corporation and the Multilateral Investment Guarantee Agency (MIGA) may also be asked to provide such insurance for investment flows among their members which are directed to a specific Arab country.

The Commonwealth Secretariat is now in the process of setting up a collective fund of this type for the benefit of its developing member countries. Preliminary studies for the fund have now been completed. The fund would be established as a limited liability company, which receives subscriptions from institutional investors only for long-term investment in securities representing equity of projects in developing Commonwealth countries. Arab countries may well consider a similar project to mobilize and invest private savings, and study the format proposed for possible adaptation to their own needs without burdening the budget of any government. Each Arab state whose nationals hold substantial funds abroad and are presumably seeking safe investment opportunities in their own countries may also seek the creation of a foreign-based investment corporation to attract such funds, possibly with the assistance of the IFC, or any private financial institution of international standing, in the preparation of studies and in the implementation of the scheme. The basic requirement is a framework that inspires confidence and convinces Arab and foreign investors of the seriousness of the project and its prospects for success. For purely practical reasons, setting up separate country funds of this type may prove to be a much more feasible undertaking than a joint Arab fund.

In view of the substantial and increasing volume of dollar savings by its nationals, both at home and abroad, the Egyptian Government, in particular, may take the initiative in promoting the establishment of an international financial investment fund for Egypt along the lines just described. The success of any such fund presupposes that the Government will not oppose its participation in existing and future investments on the pretext of protecting the public sector. Full or partial subscription by the fund to the capital of public sector enterprises, after appropriate restructuring, may be needed to allow for the creation of a relatively large financial market where securities may be purchased or sold. It would be useful in this respect to seek the involvement of the IFC in devising the most appropriate techniques and details relating to the funds that may be set up either by one or a group of Arab states, in view of its experience in assisting the establishment of national funds by the other above-mentioned countries.


A significant expansion of private investment, domestic or foreign, in an Arab country requires the creation of an attractive investment climate on the basis of a comprehensive economic strategy adopted by the country concerned. Such a strategy must be based on realistic macroeconomic policies that achieve stabilization at home without overlooking the ever-increasing relationships between local and international economies. This requires

  • Economic incentives designed to encourage efficient use of resources based on sound macroeconomic policies and structural, including pricing, adjustments.

  • Infrastructure representing the minimum requirements for investment, be it material (roads, communications, etc.) or human (requisite number of workers in the specializations needed, coupled with proper training and discipline).

  • A banking system managed by institutions able to mobilize and utilize domestic savings and inflows of funds efficiently and effectively with limited but effective supervision by governmental regulatory agencies.

  • An overall stable institutional framework based on (a) up-to-date laws and regulations protecting the public interest and providing stability and protection of private property without excessive restrictions that could adversely affect initiatives and lead to delays and corruption; (b) practical and rapid action to ensure respect for regulations and the settlement of any disputes without delay or complication, either by means of administrative action, domestic tribunals, or conciliation and arbitration; and (c) government agencies exercising duly publicized limited powers, efficiently and impartially.

This paper has pointed out the particular importance of modernizing the financial sector. Establishing a higher Arab institute for research and training may be considered for this purpose. This may also assist in following developments in external money markets and the creation of new mechanisms for the effective mobilization and safe investment of funds. The paper presupposes major economic policy changes which may infringe on the vested interests of limited groups. The principal starting point may therefore be on the intellectual front, and in particular the extent to which new realities succeed or fail in bringing about new economic policies in the countries concerned.


This is a translation of a paper prepared in Arabic and is based on a paper prepared for presentation at a seminar, “Prospects of Sustainable Development,” held in Cairo in March 1990. The paper expresses the views of its author and not necessarily those of the institutions with which he is associated.


Ibrahim Shihata and Hazem El-Biblawi, “Pan-Arab Economic Cooperation,” Annex to Al-Ahram Al-Iktissadi, Cairo, 1965 (in Arabic).


For example, Egypt’s new Investment Law (No. 230 of 1989, Article 22) provides that the transfer of net profits of invested capital should “be limited to the credit balance of the project’s foreign exchange account” thereby making it impossible for a producer distributing exclusively in the domestic market to transfer profits, unless the foreign exchange is purchased from the market (rather than being allowed in an orderly way through the Central Bank). According to an earlier ministerial decree, the additional costs involved in transferring profits in such a manner are deductible from gross project profits, which adds another unwarranted adverse effect on local partners. The situation becomes more distorted when the gap between official and market rates of exchange widens.


See Article 48 of Law No. 230 of 1989. Morocco has also adopted (in September 1989) a procedure whereby government approval is assumed of any request by a foreign investor if no reply is received within two months.