The rate of capital accumulation is the key variable that determines the rate of growth of an economy in the medium term, while the allocation of investment resources across sectors and activities is critical in determining the pace and sustainability of long-term growth and equilibrium. After experiencing a decade of unprecedented growth in investment and gross domestic product (GDP) (9 percent per annum) from the mid-1970s to the mid-1980s, Egypt is again suffering from all of the symptoms of structural imbalance and stagnation that colored the interwar period, 1967–73. Investment strategy, together with the package of macroeconomic policies adopted since the Infitah of the 1970s, is largely responsible for the suboptimal pattern of investment that has in turn accentuated the underlying problems of disequilibrium in the labor market, the foreign exchange market, and the government budget.

The rate of capital accumulation is the key variable that determines the rate of growth of an economy in the medium term, while the allocation of investment resources across sectors and activities is critical in determining the pace and sustainability of long-term growth and equilibrium. After experiencing a decade of unprecedented growth in investment and gross domestic product (GDP) (9 percent per annum) from the mid-1970s to the mid-1980s, Egypt is again suffering from all of the symptoms of structural imbalance and stagnation that colored the interwar period, 1967–73. Investment strategy, together with the package of macroeconomic policies adopted since the Infitah of the 1970s, is largely responsible for the suboptimal pattern of investment that has in turn accentuated the underlying problems of disequilibrium in the labor market, the foreign exchange market, and the government budget.

Over the past 15 years, structural change has involved the rapid growth of the nontraded goods and services sectors of the economy at the expense of the traded commodity sectors except for petroleum. The relative neglect of investment in agriculture and manufacturing has in turn led to a wide gap between the rates of growth in aggregate demand and supply with its negative repercussions on reduced exports of agricultural and manufactured goods and increased reliance on the importation of consumer goods as well as capital goods and intermediates.

Ironically, the persistence of an import-substituting strategy has resulted in increased dependence of the economy and especially the manufacturing sector on imports. This trend was reinforced by the gradual overvaluation of the domestic currency (Dutch disease) of the 1970s.1

Moreover, the overvalued exchange rate, together with the development of a negative real rate of interest, has encouraged a process of rapid mechanization in the two major sectors of productive employment—agriculture and manufacturing. The result of adopting capital-intensive techniques has been a significant decline in labor absorption, which was exacerbated on account of the Government’s shrinking resources and the forced reduction of recruitment in the civil service. Open unemployment thus shot up from 7 percent in 1976 to 15 percent in 1986.

Another salient characteristic of the past decade and a half is the Government’s inability to control inflation, which, coupled with price controls on public sector output, has led to the vicious circle whereby the Government’s attempt to contain inflationary pressures has itself been responsible for inflationary financing, with the consequent chronic deficit in the budget, growing price distortions, and continuing inflation. The uneven pattern of price increases has had a detrimental impact on the allocation of savings and investments, encouraging speculative activity, hoarding, and capital flight as opposed to investment in the productive sectors of the economy.

It was against this background of structural imbalance that the Government adopted a program of economic reform and macro-economic stabilization in mid-1986. The key instruments of reform are domestic prices for public sector goods and services, the exchange rate, interest rate, and government expenditure. As far as investment policies are concerned, the Government envisages an increasingly liberalized and competitive environment that will attract additional capital from private domestic and foreign investors. However, the major issue at stake is the extent to which the reform agenda will lean toward expenditure-reducing as opposed to expenditure-switching measures of stabilization. What is of relevance to investment performance is the degree to which credit rationing is implemented and interest rate increases wielded so as to restrict aggregate investment expenditure.

The purpose of this paper is to survey developments in the legislative, policy, and planning framework that have affected the rate and pattern of investment since the early 1970s and to assess the roles of private and public sector investments in Egypt’s recent development experience. The next section gives a brief summary of major changes that have taken place in Egypt’s economic system from the 1950s to the present. The paper then focuses on investment legislation introduced since the early 1970s in an attempt to accelerate the flow of private domestic and foreign investment. The following section analyzes the size and structure of private investments and their contribution to the national economy. Then the role of planning in the liberalization era and its impact in the context of structural adjustment is appraised. In the final section, the paper defines the major challenges facing the reform of Egypt’s investment climate and suggests some measures for improved resource mobilization and investment allocation.

Survey of Development Strategy Since the 1950s

Throughout the period since 1950, Egypt has experimented with three different approaches to economic development. During the 1950s the private sector dominated economic activity, operating under a relatively protective trade regime. State intervention was limited to the provision of finance or equity participation to those new industrial projects established within the framework of an industrialization program. Investment policies were liberal, and an investment law was enacted to attract foreign capital.

Starting in 1960, a radical shift was made toward socialism, with large-scale nationalization of the private sector in all key activities outside agriculture. State-owned enterprises were now to monopolize all of the formal manufacturing sector, finance, and foreign trade, as well as the bulk of transport and distribution, working within the framework of comprehensive planning and centralized control. Private ownership and operation was restricted to agriculture, real estate, and the informal sectors, but even these sectors were subjected to centralized control of pricing, marketing, and the procurement of raw materials and foreign exchange.

The interwar period from 1967 to 1973 was to drain the economy, as a disproportionate share of resources were diverted to the mobilization effort, while Egypt’s complex and reasonably well-developed infrastructure and industrial base were deprived of the necessary investments for maintenance or expansion. Medium-term planning was abandoned, and the Government struggled to finance the minimum requirements of food and intermediate imports.

Ever since the late 1960s, evidence shows that the Government became increasingly aware that it could not meet with the competing demands of current and capital expenditure, and that the public sector alone could not take up the challenge of economic development. A number of measures were taken to reduce centralization and give the private sector some freedom to import and export. In 1971, an investment encouragement law was enacted (Law No. 65) that would attract foreign capital into newly established free zones and invite Arab capital to undertake inland projects.

The Open Door Policy was officially adopted by Sadat in 1973, bringing about a radical reorientation toward a market economy. This comprehensive shift was intended to reinstate the domestic private sector, attract foreign capital and technology, promote exports, and pave the way toward recovery, prosperity, and the maximum use of the country’s potential for long-term development.

The package of liberalization measures came in quick succession and covered investment legislation, the trade and exchange rate regime, and the system of centralized control over the public sector. The government monopolies of finance and foreign trade were abolished, and private sector activity could now enter all fields and sectors without exception. However, comparing Egypt’s economic environment of the mid-1970s with that of the mid-1950s, two variables seemed to have irrevocably changed. The first was that the large public sector that had spread its weight across the economy was here to stay, and the second was that the bureaucracy had become so large and well entrenched that decentralization would take a long time to achieve. Potential private investors had therefore become highly antagonistic toward and suspicious of government action.

Meanwhile, the petroleum boom in the Arab world meant massive out-migration of Egyptians and significant aid and investment flows to Egypt. Moreover, Egypt’s rapprochement to the West brought about the resumption of aid transfers from countries of the Organization for Economic Cooperation and Development (OECD), the growth in trade with OECD countries, and the activation of foreign investment in petroleum exploration. The country’s political reorientation, together with the growth in foreign commercial and investment interests in Egypt, was to act as a catalyst in restoring domestic private confidence, and it soon responded with significant investment in various sectors as detailed later in this paper.

Now that business confidence was regained and the Government was able to tap foreign aid and its own petroleum income to rehabilitate the war-torn cities and the infrastructure, it was up to the planners to design an appropriate strategy for the medium-and long-term growth of the economy.

An examination of key macroeconomic variables over the past four development decades serves to emphasize five major themes that have underlined Egypt’s recent economic history. The first is the obviously high correlation between the changing share of GDP devoted to investment and the corresponding rates of GDP growth achieved. The second is the limited domestic savings capacity of the private (household) sector, which has been supplemented with workers’ remittances since the mid-1970s. The third is the glaring trade-off between government consumption expenditure and resource mobilization for investment and growth. The fourth is the cyclical nature of foreign aid flows as measured by the savings gap and their impact on the size of the investment effort. The fifth is the persistence of an import-substituting investment strategy as exemplified in the small share of manufactured exports as a percentage of GDP.

Investment Policies and the Legislative Framework

Law No. 43 can be considered the cornerstone of Egypt’s Open Door Policy, as further amended by Law No. 32 of 1977 and more recently repealed in favor of the more generalized Investment Law No. 230 of 1989. In June 1974, Law No. 43 for Foreign and Arab Investment and Free Zones was issued, replacing the previous Law No. 65 of 1971. The old law had provided incentives such as tax holidays, liberal terms of profit, and capital transfers, and guarantees against noncommercial risks. The main significance of Law No. 43 was its opening the door to foreign, in addition to Arab, capital, its explicit description of all fields of economic activities open to such investors (except petroleum, which is subject to separate legislation), and the provision of firmer guarantees against nationalization.

Law No. 43 clearly distinguished between free zone investments, for which local participation is not required and tax holidays are indefinite, and inland projects, which must be carried out in partnership with local enterprises unless exemption is specifically sought and provided. The income (profit) tax holiday would be 5 years for a typical project, 8 years or more for projects with special value to the economy (for example, export-oriented projects), and 10–15 years for projects in land reclamation or in new cities. The additional privilege of customs exemption on imported capital goods could also be offered by special decree. Apart from the positive incentives of the law, the main attraction of working under Law No. 43 status was exemption from labor laws, exchange control regulations, and from the need to obtain licenses for importing or exporting.

The amendment to Law No. 43, Law No. 32 of 1977, provided an additional impetus to foreign and local private investment. First, it spelled out that the opportunity for private domestic investors to take advantage of the law was available on equal terms to those provided to foreign investors, with the criterion for a project’s eligibility being foreign currency rather than foreign nationality. The amended Law No. 43 also redefined the exchange rate applicable to the valuation of foreign capital from the official exchange rate to the highest announced rate, to give the foreign-currency-denominated equity component full advantage of partial devaluations of the exchange rate. It also removed the earlier condition that each project maintain a foreign currency account that could only be fed with export earnings and foreign currency transfers from abroad, which has meant that investors have been able simply to purchase foreign currency on the local market with their local currency earnings, removing the need to export.

During the 1970s, it became increasingly apparent that Law No. 43 could not serve as the all-embracing channel for private investment in Egypt and that it was neither designed nor appropriate for such a purpose. Instead, the company law (Law No. 26 of 1954), which had been subjected to various amendments during the socialist era, would now have to be revised to serve as the basic legislation pertaining to the establishment or expansion of joint stock, limited partnership, and limited liability companies. The new company law, Law No. 159, was issued in 1981, and by 1989, both it and the new investment law (Law No. 230 of 1989 replacing Law No. 43) have become the two legislative instruments governing private investment in Egypt. The implementing bodies are the Capital Market Authority for Law No. 159 and the General Authority for Investment (GAFI) for Law No. 230.

The salient feature of Law No. 159 is that it has removed all of the restrictive rules that governed private companies under the old company law (Law No. 26). These rules had required private companies, like public firms, to follow rigid rules on the distribution of their profits and the participation of employees in management. According to Law No. 26, up to 25 percent of company profits would be distributed among workers and another 5 percent used in the purchase of government bonds, four members of the board of directors would be elected from among the workers, and the salaries of managers were subject to the ceiling of LE 5,000 per annum. The new company law was successful in abolishing these and many other restrictions that placed existing private companies at a substantial disadvantage vis-à-vis Law No. 43 companies. In fact, the record shows that only 27 joint stock companies had been formed over the 20-year period from 1960 to 1980. In contrast, since its enactment, Law No. 159 of 1981 has seen the establishment of more than 200 such companies.

Law No. 159 is primarily intended for fully local private investments, although foreign investors can participate in joint ventures with a maximum 51 percent share in equity. However, this law makes no provision for the repatriation of profits or capital, and all companies subject to it must abide by the exchange control and licensing regulations for importing and exporting. Since the law does not discriminate among areas of economic activity, it is less generous than Law No. 43 in offering tax and other fiscal incentives. Moreover, the company law abides by a number of labor laws to which Law No. 43 projects are not subject. Until the enactment of the new investment law (Law No. 230 of 1989) the only advantages of Law No. 159 over Law No. 43 were that the prices of major local inputs such as energy were heavily subsidized.

With the enactment of the new investment law in July 1989, investors now have a choice between opting for establishment and operation under either Law No. 159 or Law No. 230. Table 1 summarizes the major changes between the old and the new investment encouragement laws (Law Nos. 43 and 230) and compares them with Law No. 159.

Table 1.

Comparison of Law Nos. 43, 230, and 159

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Notes: The relevant article of the law is given in parentheses; asterisk denotes GAFI discretion in recommending special status.

A number of observations can be made on the rules and incentives provided by Egypt’s investment legislation for the private sector. One is that the provisions of Law No. 230 are significantly more generous than those of Law No. 43, especially to foreign investors who are no longer required to have an Egyptian partner, and who can now own land and real estate in relation to their project. Additional profit tax exemptions have also been extended for projects in medium- and low-cost housing and for other projects that GAFI may deem to deserve a longer than typical tax holiday. Another important change is that certain fields of activity including finance, consultancy, contracting, and transport are no longer subject to the investment encouragement law. This change is welcome in view of the proliferation of these service activities, which are no longer a priority area of investment from the point of view of the economy.

Two new rules in the investment law have been criticized by Egypt’s business community: Article 20 of Law No. 230, which stipulates that companies must distribute a minimum of 10 percent of their annual profits to workers with no upper limit (as exists in Law No. 159). Another complaint is about Article 9, which gives the Council of Ministers the right to impose price or profit ceilings on necessities if the need arises. Given that Law No. 230 was intended to reduce the extent of the difference between Law Nos. 43 and 159, it is difficult to explain why legislators have increased rather than reduced the gap between the rules governing profit sharing by employees. Again, output price controls (even on necessities) should have no place in an environment that is being liberalized, especially when Article 9 itself mentions that price discrimination on the provision of inputs is being phased out for all private producers.

A final comment on the new investment law is that it maintains and perhaps even increases the discretionary power of GAFI in awarding special privileges to projects. As Table 1 shows, this is true of key elements of the legislation: area of activity, domestic participation, tax holidays, and foreign ownership of land. This feature of the law is disturbing, since it may encourage abuse of such power by GAFI officials and/or result in all investors obtaining the maximum of privileges available under the law, without offering the economy extra benefits. It is a known fact that the tax contribution of all Law No. 43 projects (more than 700) in operation is still insignificant because of the overindulgence of the authorities in awarding tax concessions. It would therefore have been wise for the new investment law to have become more specific on areas of economic activity subject to the law and on the duration of the concessions to be awarded.

All in all, Egypt’s new investment code (Law No. 230 of 1989) can be considered most generous and flexible when compared with similar codes ruling in other semi-industrialized economies, especially in the treatment of foreign investors. So far, it is Egyptian capital that has responded to the generous terms offered by the previous law (Law No. 43), and it remains to be seen if foreign investors will now be attracted by the additional concessions offered by Law No. 230. In the next section, an appraisal is made of the impact of Law No. 43 on inland projects. Free zones are excluded from the analysis for lack of space and because they have had a negligible impact on the economy to date.

Investment Response of the “New” Private Sector

By mid-1989, the Investment Authority reports that a total of 1,427 inland projects had been approved since the early 1970s, with a cumulative value of authorized capital of LE 7.5 billion and total investment costs (authorized capital plus loans) of LE 14.0 billion. However, these totals include figures for the financial sector—banks and investment companies—of LE 2.4 billion of authorized capital and LE 2.6 billion of investment costs, and these figures should be deducted because they otherwise involve double counting since most placements and credits from the financial sector appear in the authorized capital plus loans item of the nonfinancial sectors. The adjusted figures for the aggregate authorized capital of inland nonfinancial projects of LE 5.1 billion and for aggregate investment costs of LE 11.4 billion are therefore a more accurate representation of the size of actual and prospective investments over the period from 1974 to the early 1990s as approved under the status of Law No. 43.

The data for mid-1989 also show that 721 projects in the nonfinancial sector were in operation out of the total of 1,158 projects approved (or two thirds of the total), with total investment costs of LE 6.5 billion out of the total of LE 11.4 billion approved (57 percent of the total). Another 194 projects, worth LE 1.9 billion of total investment costs, were under execution. The proportion of projects that are either in operation or under active implementation together account for 79 percent of total approved projects and 74 percent of total approved investments to date. The absolute number of projects and the total value of investments are impressive, reflecting that Law No. 43 has indeed been successful in attracting substantial capital flows toward various sectors of economic activity.

In current prices at which all projects are valued at the time of approval, the estimated growth in annual investment under Law No. 43 is also high. Taking three-year averages, annual investment expenditure by Law No. 43 projects grew from LE 65 million during 1975–77, to an estimated LE 300 million in 1978–80, to about LE 800 million during 1981-83, and close to LE 1,320 million during 1984–86. The figure reported by the Investment Authority for 1987 is LE 1,562 million.2 Valued at constant prices, the annual growth rate of investments is of course much less significant, given the domestic rate of inflation and the successive devaluations of the rate of exchange at which imported capital is valued.

The share of foreign currency in total investment is well over half, which can be expected, given that the basic criterion for eligibility for Law No. 43 status is foreign capital, irrespective of the nationality of the investor. The predominance of foreign as opposed to domestic currency in the equity capital and total investment costs of projects is also due to Egypt’s heavy dependence on imported capital goods that themselves account for the major proportion of assets in most projects.

In relation to aggregate capital formation in the economy, it can also be shown that Law No. 43 investments account for a significant share of gross fixed investment in the economy since the beginning of the Infitah. There are at least two ways of estimating the contribution of these investments to aggregate investments. The first is to compare aggregate capital costs of Law No. 43 projects over the decade 1977 to 1986/87 with the investment figures reported for the same period in the first and second Five-Year Plan (see Tables 2 and 3). The second and perhaps more reliable method is to calculate the proportion of total dollar imports of capital goods to Egypt undertaken by Law No. 43 projects.

Table 2.

Public Sector Gross Fixed Investment by Sector, 1977–92 (In million Egyptian pounds)

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Sources: Figures for 1977–1981–82 are from Five-Year Plan 1982/83–1986/87, Table 36. Figures for 1982/83–1986–87 and for 1987/88–1991/92 are from Five-Year Plan 1987/88–1991/92, Tables (6) and (80).

The plan document (1987/88–1991/92) does not specify what prices were used for valuation. It would seem, however, that current prices are used for both five-year intervals.

Includes a contingency fund of LE 683 million.

Table 3.

Private Sector Gross Fixed Investment by Sector, 1977–92 (In million Egyptian pounds)

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Sources: Figures for 1977–1981/82 are from Five-Year Plan 1982/83–1986/87, Table 36. Figures for 1982/33–1986/87 and for 1987/88–1991/92 are from Five-Year Plan 1987/88–1991/92. Tables (7) and (80).

See note a to Table 2.

Foreign private investment in petroleum is excluded from totals.

The first estimate puts Law No. 43 investments over the decade 1977 to 1986/87 in current prices at LE 5,276 million,3 compared with the achieved gross fixed investments for the same period as reported by the Five-Year Plan documents (for 1982/83–1986 and 1987/88–1991/92) of LE 54,100 million (in current prices) for the economy as a whole. As a proportion of gross fixed investments in the economy, Law No. 43 projects have thus accounted for about 10 percent, which is a small but significant share. As a proportion of gross fixed investment in the private sector in the economy at large, these projects have accounted for 41 percent, which shows how important the new private sector has been to capital formation in the aggregate private sector. In the non-agricultural private sector, Law No. 43 projects (excluding projects in agriculture both from Law No. 43 figures and from plan achievements) have accounted for 47 percent of gross fixed investment. It is therefore clear that Law No. 43 investments have become a most significant force in resource mobilization in the economy and that these investments have played a leading role in reasserting the vigor and initiative of a liberalized private sector.

The second methodology used to calculate the share of Law No. 43 investments in aggregate investment in the economy is to focus on expenditure as reported in customs statistics on imports of capital goods and their dollar value. Egypt has no capital goods industry to speak of, and import statistics therefore give a reliable picture of the value and distribution of investment in machinery and equipment. Over the decade 1975–1984/85, aggregate imports of capital goods to Egypt reached $25.4 billion, of which $3.3 billion or 13 percent are accounted for by Law No. 43 projects (Table 4).

Table 4.

Imports of Capital Goods, 1975–1984/85

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Source: Heba Handoussa, “The Impact of Foreign Aid on Egypt’s Economic Development: 1952–1986,” paper presented to Conference on Aid, Capital Flows and Development, Talloires, France, 1987 (revised in 1988), p. 44.

The figures in Table 4 clearly show that the share of Law No. 43 projects in capital accumulation has been dramatic and impressive, accounting for 41 percent of total private sector (excluding petroleum) imports of capital goods. The figures also show that the aggregate share of the private sector (total of Law No. 43 plus non-Law 43 and petroleum) during the boom decade of the mid-1970s to mid-1980s was more than half of the economy’s total expenditure on the import of capital goods. It is therefore of paramount importance for policymakers to direct their attention to improving the investment climate and to giving the appropriate set of incentives to secure the continued flow of valuable private investment resources into the most productive sectors from the point of view of the economy.

Sectoral Composition of Law No. 43 Projects

The distribution of Law No. 43 projects across sectors of economic activity shows that the dominant sectors in terms of numbers and investment value are manufacturing, finance, and tourism. The manufacturing industry is responsible for about 44 percent of total approved projects and their total investment costs. The share of manufacturing is also rising; it accounts for 56 percent of the number of projects under execution as opposed to 40 percent of those in operation, and for 54 percent of authorized capital of projects under execution as opposed to 35 percent for projects in production (see Appendix Tables 1, 2, and 3).

To date, it seems fair to say that the bulk of investments in Egypt’s formal private sector is undertaken by Law No. 43 projects. Our estimate of the cumulative value of Law No. 43 investments in manufacturing for 1977–1986/87 is LE 2,298 million, which is equivalent to as much as 85 percent of the value of aggregate private sector investment in manufacturing as reported by the plan documents over the same period (see Table 3). Law No. 43 investments in manufacturing also account for a respectable share of aggregate investment in manufacturing (public plus private) over the 1977–1986/87 period with a share of 18 percent. Given the target of the current Five-Year Plan (1987/88–1991/92) of raising the share of private manufacturing to as much as 52 percent of total investment in manufacturing (see Tables 2 and 3), a great deal of effort must be exerted by authorities to motivate the formal private sector to accelerate its rate of growth in manufacturing.

The finance sector has been the second largest in terms of the number of investment companies and banks that have been attracted to operate under Law No. 43. By mid-1989, 269 finance projects had been approved by the Investment Authority, of which 210 were operating (143 investment companies and 67 banks) and another 19 were under implementation (17 investment companies and 2 banks). In spite of the many criticisms of the proliferation of banks and investment companies and of the recommendations made for discouraging the entry of more such projects since the late 1970s,4 the annual number of new approvals for finance projects has continued (see Appendix Table 4). The nature and magnitude of the problems created by many of these risky or unsound ventures are too extensive to deal with in this paper but have recently received special attention and new legislation by policymakers (Law No. 146 of 1988).

The third largest sector in size is the Law No. 43 tourism sector, which numbered 121 approved projects by mid-1989 worth LE 1,955 million in investment costs. Half of these projects in terms of both number and investment cost were in operation, and another 27 projects worth LE 484 million were under implementation. It is important to note that a significant number of investments in tourism have been approved and executed under separate legislation for the promotion of tourism projects (Law No. 1 of 1973), so that Law No. 43 investments in tourism significantly underestimate total investments undertaken in that sector since the early 1970s.

Tourism has been by far the big success story of the Infitah era. Hotels, transport, and other projects servicing the tourism industry have proliferated and multiplied over the past 15 years, and the expanded capacity of the industry has enjoyed high rates of return. The contribution of the sector to the balance of payments has made it compete with petroleum and workers’ remittances as one of the key earners of foreign exchange. The tourism sector also plays an essential role in the direct and indirect generation of employment opportunities and in creating linkages with the small-scale informal sectors in manufacturing and services.

The Size Distribution of Projects and Their Implications

In assessing the role of Law No. 43 in attracting investments, it is important to analyze the size distribution of projects to evaluate the extent to which the law discriminates against small investors. Although the law does not stipulate a minimum amount of equity, it is clear from looking at the size distribution of projects that small-scale investors stand no chance of obtaining the privileges of the law. Appendix Table 5 was prepared carefully, using the actual balance sheets of all projects in production for 1984 to distinguish between different sizes of projects according to capital employed (defined as fixed assets plus working capital). In the smallest category, only 5 projects had capital employed of less than LE 100,000, the smallest project having capital employed of LE 64,000. The next category of LE 100,000–500,000 of capital employed had 46 projects, and another 40 projects employed between LE 500,000 and LE 1 million. The size LE 1–10 million had 221 projects and that of more than LE 10 million had another 111 projects.

The above results imply that only large projects have obtained Law No. 43 status, so that medium- and small-scale investors have been deprived access to the same attractive rules offered to large firms. In a situation where unemployment is high, where small savers are the rule, and when opportunities for setting up viable small-scale enterprises are plentiful, it seems unwise to ignore the potential of private sector initiative and its likely response to legislation that offers it similar incentives to those provided to large-scale investors.

If one looks at the savings profile of the Egyptian private sector, one finds that small savers predominate. The bulk of savings are generated from the windfall incomes earned from working for an average of two to four years in petroleum-rich countries. The small saver is looking for a safe investment that will yield a secure return to complement his modest income from employment in Egypt when he returns home. The proportion of small savers who will seek an independent “Mashroo” (project) that they will personally operate or consign to a member of their family is still limited but finds no support from the policy environment.

Unfortunately most savers end up allocating their “one-time” savings in one of three ways: a housing unit, a foreign currency account, or an investment company. The first two are a hedge against inflation but do not yield the kind of productive returns of which the economy is in dire need; the third has proved to be not only unproductive but also highly risky for the depositor. The result of neglecting the need to develop effective savings instruments and of ignoring the negative repercussions of inflation is that policymakers now face the unenviable situation in which a significant proportion of Egypt’s private savings are tied to unproductive assets or have been lost to the depositor altogether. The 1986 census thus puts the number of unoccupied housing units at 1.8 million, while estimates of foreign currency deposits placed abroad range from $10–75 billion. The latest figures on the ratio of recovered assets to deposits at the “Rayan” investment company that collapsed two years ago is only 17 percent. Such scandals are far from confidence raising among the saving public and have doubtless had a negative impact on the savings effort of the typical saver.

The Shares of National Private and Public Capital

Although Law No. 43 was initially promulgated to benefit foreign and Arab investors, it was soon interpreted to include domestic capital, as long as it participated with foreign currency in the equity of a project, even if no nonnational took part in the investment. The amendment to Law No. 43 (Law No. 32 of 1977) gave the equal treatment of Egyptian capital explicit recognition, and the result was that fully Egyptian-owned projects began to multiply. Whereas 102 projects out of a total of 505 approved projects (20 percent) by the end of 1978 had between 90 and 100 percent of their equity share contributed by Egyptians, the proportion of approved projects that are 100 percent Egyptian owned had grown to 42 percent by mid-1988 (Appendix Table 1).

The distribution of authorized capital (Appendix Table 6) shows that the share of Egyptian capital in the total authorized equity capital of projects is even more striking. By the end of 1978, more than half of aggregate capital (54 percent) was Egyptian, and this share reached as much as 68 percent or more than two thirds of the total by mid-1988. The allocation of Egyptian capital is highest in manufacturing, housing, and tourism, which together account for 82 percent of total Egyptian equity capital. Although Egyptian equity participation accounts for more than half of the equity capital of all sectors other than petroleum services, investment in sectors such as agriculture, mining, and other services is small in absolute value. The share of national capital in the equity of banks and investment companies is also important, with 75 percent and 57 percent Egyptian equity in these two sectors, respectively, by mid-1988.

Turning to the distinction between private and public domestic capital (Appendix Table 7), one of the most striking observations is on the significance of the role public enterprises have played in initiating and contributing to the capital of Law No. 43 projects, in cooperation with domestic or foreign partners, and sometimes with public capital alone contributing all of the equity of a project. As of June 1988, public enterprises were contributing to 18 percent of total projects approved in all sectors of economic activity, and these projects represented 23 percent of total authorized capital. In the nonfinancial sector, the public sector was represented in as many as 156 projects worth LE 921 million of equity capital. Out of these projects, 85 were in manufacturing, 19 in agriculture, 16 in tourism, and 21 in services. The public sector was also participating in 42 banks and 52 investment companies.

Information on the status of total approvals as of June 1989 enables a direct comparison of the contribution of the public and private domestic participation in Law No. 43 projects. The authorized capital of the public sector stood at LE 1.5 billion, compared with LE 3.5 billion for the private sector, implying a contribution of 30 percent by the public sector in aggregate domestic capital of these projects. When the financial projects are excluded, the respective contributions of public and private national capital were LE 830 million and LE 2,682 million, implying a contribution of 24 percent by the public sector in aggregate nonfinancial domestic capital of Law No. 43 projects. Although, as stated earlier, the addition of the financial sector may overstate the size of overall investments under this law, it must be remembered that we are here working with figures on equity capital rather than total investment costs. In any case, since we are interested in this section in identifying the overall contribution of the public sector in financing Law No. 43 projects, it is fair to consider that the major part of the credit obtained by these projects comes from wholly owned public sector banks or joint venture banks with majority participation of the public sector.

The above information and reasoning lead us to conclude that at least one third of the total cost of domestic investment under Law No. 43 has been contributed by Egypt’s public sector, either in the form of direct equity participation or in the form of long-term loans from public sector banks. This highly significant contribution by the public sector raises two important questions: first, to what extent have public sector resources drawn into Law No. 43 projects meant a sacrifice in terms of the alternative investments that could have been made to rehabilitate Egypt’s traditional public sector? Second, to which extent has this obvious form of privatization through expansion of the joint venture sector undermined the competitive position of the old, established public sector enterprises?

The major issue at stake is the pervasive dualism in the legal framework and in the degree of centralization that governs public as opposed to private sector operations. Joint ventures set up under Law No. 43 status with public sector participation are treated as fully private enterprises with all of the privileges and autonomy described in the previous section of this paper. Attempts at reforming the legislation ruling public sector enterprises to achieve autonomy and decentralization have so far been unsuccessful insofar as the old public sector firms still suffer from considerable constraints on their potential for competitive behavior. The key problems relate to wage and salary scales for skilled workers and management personnel, the controls on the pricing of output, product mix, and marketing strategy of public enterprises, and the rigid rules that interfere with investment and financing decisions. As long as this excessive discrimination against the public sector continues, the answers to the two questions raised earlier can only be negative.

In a liberalized and truly competitive environment, decisions made on setting up joint ventures between public and private firms can be expected to benefit the economy, as public and private capital join forces in what is a nonzero sum game. Both partners stand to gain from drawing on each other’s resources of technology, experience, skills, and market access at home and abroad. On the other hand, given the nature of the advantages available to private companies alone, it would be no surprise to find that in a number of cases the establishment of a Law No. 43 joint venture has been motivated by the desire of top management in a given public sector firm to improve their own prospects with no regard for the health of the enterprise as a whole. In such cases, the joint venture has only served the limited personal gains of those public sector managers and employees absorbed into the joint venture. While the old public enterprise is drained of its best skills, what is even more important is that it also loses to the new joint venture a significant share of its market because of the discrimination that limits its competitive behavior.

Fortunately, the majority of joint ventures established under Law No. 43 are viable projects with high returns and healthy prospects for expansion, especially in manufacturing and tourism. Their output of goods and services has served to raise quality competition and make the old, established public enterprises strive to improve their management skills and become more conscious of consumer preferences. The increasing number of enterprises operating in each field of economic activity from the private and public sectors has not only raised competition but has also created such an increase in the total capacity of individual subsectors that enterprises are now being forced to search for foreign markets in which to sell their products. This shift away from the captive domestic market situation of the 1960s and 1970s is still in its very early stages, but the drive and potential for export are now clearly present.

The Contribution of Foreign Investment

The major contribution of foreign investment in Egypt’s economy over the period since the Infitah has been in the petroleum sector, which operates outside Law No. 43.5 In spite of the generous terms offered by this law to all investors, the economy has attracted only small but nevertheless significant flows of direct foreign investment in such sectors as tourism, manufacturing, and finance. By mid-1988, the cumulative value of authorized capital (for the total number of approved projects) of foreign nationals stood at LE 1.6 billion, or 31 percent of the aggregate value of authorized capital in the nonfinancial sector (Appendix Table 6). In annual dollar terms the flow does not seem to have increased over time although it is difficult to make a precise estimate, since the Investment Authority considers all capital denominated in foreign currency as foreign, without distinction between nationalities.

Arab capital has its largest concentration in the tourism sector, accounting for 26 percent of total authorized capital of the sector. Non-Arab capital has its largest concentration in manufacturing, with 21 percent of the sector’s total authorized capital. In the finance sector both Arab and non-Arab capital have been evident, with shares of 17 percent and 19 percent, respectively. Between the end of 1978 and mid-1988, the share of Arab capital in the nonfinancial sector was almost constant (13 percent in 1978 and 12 percent in 1988), whereas that of other foreign nationalities declined from 33 percent to 19 percent. Even so the experience across subsectors is uneven. The share of non-Arab capital has thus declined in tourism (from 53 percent in 1978 to 18 percent in 1988) but has been maintained in manufacturing at 21 percent over the decade. The reverse is true of Arab capital, whose contribution in manufacturing has declined from 17 percent in 1978 to only 9 percent in 1988, while its contribution in tourism has risen from 7 percent in 1978 to 26 percent by 1988. These percentages in fact understate the extent of the changes because they refer to cumulative values of capital rather than increments.

What the above trends seem to indicate is that Arab capital made a slow and cautious entry into the Egyptian economy and was subsequently discouraged from increasing its relatively small stake as a result of disrupted political relations following Camp David in 1979. On the other hand, non-Arab capital made an important start in the mid-1970s but decelerated its investment effort, following the general slowdown in the economy starting in 1984/85.

There are two major criticisms that may be leveled at the investment legislation as it pertains to foreign investment. The first is its lack of priorities with regard to sectors of economic activity as indicated by the absence of either a positive or a negative list identifying specific investment areas. This lack of selectivity is in sharp contrast to the very precise foreign investment codes of successful semi-industrialized countries such as the Republic of Korea, where the Government maintained tight control over those fields available to foreign investment, thereby maximizing the benefits of technology transfer and export promotion in those areas where Korea had the least experience.

The second serious criticism concerns the laxity of Egypt’s investment code with regard to exchange control and export commitments. Although, initially, Law No. 43 stipulated that each project maintain a foreign currency account that could be fed only with export earnings or transfers from abroad, the amendment of 1977 (Law No. 32) made it possible for projects to buy foreign currency in the domestic market. This in turn reduced the need for projects to export either for the purpose of importing intermediates or for repatriating profits. The Investment Authority can also be criticized for not exerting pressure on Law No. 43 projects to fulfill their export commitments as stipulated in the initial approval of the project.

The Impact of Investments on Employment and Exports

In comparison with labor absorption throughout the economy, Law No. 43 investments have made a very small contribution to employment generation. Taking the decade 1978–88, the number of jobs created by Law No. 43 companies over the period was about 145,000 jobs (Appendix Tables 2 and 3), or only 10 percent of the total number of jobs created by the aggregate private sector.6 However, if one excludes the private small-scale informal activities and agriculture, it becomes evident that the share of Law No. 43 projects in employment creation has been significant.

The manufacturing sector has been responsible for employing more than two thirds of the work force engaged by Law No. 43 companies, with 98,000 jobs created between 1978 and 1988. This figure compares favorably with the total increase in manufacturing employment for the economy as a whole of 671,000 (Law No. 43 manufacturing equal to 15 percent). If we exclude the number of jobs created by public enterprises in manufacturing over the same period (about 120,000 jobs), Law No. 43 manufacturing projects are responsible for 18 percent of jobs created in Egypt’s private sector manufacturing industry. Although this ratio may seem acceptable, one can say that it is too small in comparison with the very much larger share of Law No. 43 projects in total private manufacturing investments, estimated at 85 percent. The example of manufacturing is symptomatic of one of the major weaknesses of Law No. 43 investments, which is their very high capital intensity, a characteristic shared by all subsectors.

As early as 1979 it was clear that the incremental capital to labor ratio of Law No. 43 projects approved to date was about LE 15,000, which was more than twice the overall average for the economy.7 By 1988/89, the average capital intensity of these projects had increased to LE 41,000, implying an even larger increase in the incremental capital to labor ratio. The problem of using relatively capital-intensive techniques of production in a country that boasts an abundant, relatively skilled, and low-wage labor force is especially disturbing given that unemployment has been accelerating since the early 1980s. Reform of the package of macro-economic policies, including the rate of interest and the rate of exchange, could do much to promote investments that are more labor intensive.

The export performance of Law No. 43 projects has also been very weak over the decade 1974–84. As late as 1984/85, exports of Law No. 43 firms in operation were only $26 million in contrast to imports of $609 million over the previous year.8 Although the trade regime is partly to blame because of its strong anti-export bias, the Investment Authority could have played a more assertive role in coaxing Law No. 43 firms to export.

Fortunately, the devaluation of 1987 has made Egypt’s manufactured exports more competitive on the international market, and Law No. 43 firms have made significant progress toward achieving their export potential. Figures for 1987 show that exports worth LE 200 million (about $100 million) were made in that year by Law No. 43 manufacturing projects, a large improvement over the previous decade. Even though two textile projects alone account for more than half of these exports, the figures give optimism in the sense that a large number of enterprises (64) have taken part in export marketing, which should help them acquaint themselves with foreign markets and step up their export targets and achievements.

Plan Strategy: Targets and Achievements

In the context of a liberalized economic system, a plan is only useful insofar as it makes available official data on the actual performance of the economy over the previous period, gives clear guidelines on the strategy to be adopted over the medium to long term, and provides consistent forecasts of trends in the broad macroeconomic variables that the economy must deal with in the next plan period. Accurate figures on the growth in GDP, employment, exports, imports, and sectoral value added are all essential to policymakers in appraising performance and designing appropriate policies for the future. Moreover, the confidence of the business community, both local and foreign, can only be gained if statistics on key variables are perceived as reliable and timely. Recent experience with Egypt’s plan documents demonstrates a degree of inconsistency that gives rise to much concern and skepticism.

Examples of glaring inconsistencies can be found in the plan estimates of employment and unemployment and of aggregate and sectoral growth rates for the economy, when compared with data available from separate official sources. Another perturbing feature of the most recent second Five-Year Plan (1987/88–1991/92) is that it fails to specify the prices used (constant or current) in valuing past and future investments. Subject to these major reservations, an attempt is made here to analyze the overall strategy and structural changes as presented in the first and second Five-Year Plan documents.

Main Features of the First and Second Five-Year Plans

The strategy of import substitution is still the basic feature that characterizes both Five-Year Plan strategies. In spite of the Government’s pronouncements about export promotion, the package of policies as well as the range of projects actually selected and the goals of self-sufficiency by product are all to satisfy the domestic market without due regard to the notion of comparative advantage.

Both Five-Year Plans have targeted an increasing role for private investment in the economy. The second Five-Year Plan hopes to raise the share of private sector investments to 39 percent of gross fixed investment, up from its estimated share of 24 percent in the previous plan period (1982/83–1986/87). Another common feature of both plans is that public investments are confined to infrastructure and utilities and investment in public enterprises is restricted to rehabilitation and renewal.

Given the sharp decline in investment resources available to the Government over the current Five-Year Plan, the plan document rightly focuses on the need to raise capacity utilization and efficiency rather than to create new capacity in the public sector.

Public Sector Investment and Planning

In spite of the many calls made for decentralization and increased autonomy for the public sector, state-owned enterprises continue to conform to rigid centralized planning procedures. The Ministry of Planning and the National Investment Bank together coordinate public investment across sectors of economic activity according to the Government’s budget constraint. What this means is that individual enterprise investment goals are almost invariably tampered with by the Ministry of Planning, and once the final size and composition of the investment budget are approved for an enterprise, the room for change in response to changing conditions becomes virtually impossible.

Not only do public enterprises have to abide by the rigid investment targets specified in the plan documents but their production must also conform to the strict physical output targets according to detailed commodity plans. This planning approach is totally unsuited to the spirit of liberalization, and its negative repercussions permeate the entire decision-making apparatus of public enterprise. This Soviet style of centralized decision making is being abandoned in socialist countries, and it is high time that Egypt discards it in favor of giving public enterprises full autonomy in their investment, finance, and output decisions. Unfortunately, until today, most public enterprises still measure their own productivity in terms of quantity of output at the expense of quality and marketability.

Sectoral Distribution of Private Investment

The private sector’s share in gross fixed investment is to increase from the 19 percent achieved in the five-year period 1977–1981/ 82 and that of 24 percent over the first Five-Year Plan 1982/83–1986/87 to as much as 39 percent of gross fixed investment during the current Five-Year Plan. This targeted increase seems overly optimistic given the economic recession the country is experiencing, with its accompanying decline in domestic absorption. Unless policies can be introduced to shift the incentive regime that now guides trade and investment away from nontradables back toward tradables and away from import substitutes toward exports, it is unlikely that the size of private investment resources envisaged by the plan will materialize.

What is more important, the second Five-Year Plan target of radically transforming the structure of private investment toward the commodity sectors (see Table 3) will be even more difficult to achieve under present conditions. As much as 57 percent of actual private gross fixed investment had been allocated to housing in the first Five-Year Plan. The current Five-Year Plan hopes to reduce the share of housing to 37 percent, in favor of an increase in manufacturing from the 19 percent achieved in the first Five-Year Plan to as much as 36 percent.

What is implied by the sectoral distribution of gross fixed investment in the current plan document is that the private sector’s share in manufacturing gross fixed investment will be able to jump from the 20 percent achieved in 1977–1981/82 and the 22 percent achieved in 1982/83–1986/87 to an unrealistic 53 percent during the second Five-Year Plan. In absolute terms, investment undertaken by the private sector in manufacturing is expected to multiply to 3.7 times its value over the previous plan period. The plan document gives no indication of how this dramatic leap is to be achieved.

In policy and strategy terms, the only way these ambitious goals for the private sector can be realized is for the country to adopt a radical package of trade, exchange rate, and tax measures and incentives for export promotion in the style of Turkey in the early 1980s. Given the present untapped potential that exists, for example, in Egypt’s textile industry with its comparative advantage, a turnabout from modest performance to dynamic growth can perhaps be envisaged only if a dramatic increase in exports is achieved.

Structural Adjustment and Macroeconomic Policies

Investments since the mid-1970s have been biased toward services rather than the commodity sectors, whose share in gross fixed investment fell from 61 percent during 1966–73 to 49 percent in 1974–81 and to 45 percent in the first Five-Year Plan. This bias has resulted in unbalanced growth, with agriculture and manufacturing suffering the most neglect. Gross fixed investment in agriculture and irrigation as a proportion of gross fixed investment in the economy actually fell from 16 percent in 1966/67–73 (excluding investments in the High Dam) to 7.3 percent in 1974–1980/81 and to 9 percent in the first Five-Year Plan. In manufacturing and mining, their share in gross fixed investment fell from 28 percent to 27 percent to 21 percent over the same time periods.9 The outcome has been the relatively poor performance of these two sectors as well as the increased dependence of the economy on windfall earnings such as petroleum and workers’ remittances.

Consequently, when petroleum prices were hit and all other windfall incomes stagnated, the economy found itself with no fallback position, and a serious economic crisis ensued. Structural adjustment became mandatory to redress the balance between the commodity-producing sectors and other sectors of the economy. It is now clear that Egypt’s investment strategy must not only shift from import substitution to export orientation but that this new strategy must be backed by a total package of appropriate macroeconomic policies. These policies should include not only a reformed investment regime but also a revision of the trade and protection regime and of price, employment, and fiscal policies.

Major Issues and Recommendations

This paper has reviewed the investment record of the Infitah and shown that liberalization of the legislation and policy environment has been successful in bringing the private sector back to the fore, with a share of 24 percent of gross fixed investment in the national economy, up from less than 10 percent throughout the 1960s and early 1970s. Law No. 43 has been the major instrument of legislation, and projects executed under it are responsible for about one half of aggregate private investment outside agriculture.

Two major criticisms of the investment encouragement laws have been made. One is that they cater only for the large-scale projects and ignore the medium-and small-scale investor; the other is that they do not distinguish between high-priority and low-priority fields of economic activity. The negative result is that small, labor-intensive investments have been discouraged and that highly protected consumer goods industries have taken an unduly large share of total investment resources. The laxity of the Investment Authority in implementing Law No. 43 has also been responsible for poor achievements in export performance, in spite of the export target being one of the major goals of the investment law.

Another important conclusion of this study is that public sector resources have made a significant contribution to Law No. 43 joint ventures, with a share of about one third of the total investment costs of projects approved to date. Yet because the traditional public sector is still subject to a high degree of centralization and rigid legislation as regards finance, pricing, and wage determination, this excessive discrimination has meant that public enterprises may sometimes make investment decisions of low priority to the economy, simply as a way of obtaining favored treatment under Law No. 43. Immediate reform of public sector legislation is required to remove the present dualism in the policy environment and to enable an autonomous public sector to make the necessary improvements in its competitive behavior.

The role of planning in the economy is also in need of revision, toward reduced centralization and better coordination between plan targets and the package of macroeconomic policies. Planning cannot achieve results unless all policies are geared to a clearly chosen and clearly stated strategy. The import-substitution strategy followed by Egypt since the 1930s must be abandoned in favor of a bold strategy of export promotion, with far-reaching changes in the trade and price regimes that until the present imply a strong anti-export bias.

The reforms suggested for the trade regime include a reduction in tariff protection, a review of domestic indirect taxes, and removal of the serious price distortions that currently discriminate in favor of production for the domestic market. Reforms of the interest rate and capital market must also be implemented to mobilize domestic savings and channel them into productive investment. One important option would be to allow public enterprises to sell their shares on the stock market, a step that would relieve enterprises of their financial constraints and attract private sector savings into high-priority public investment.

In concluding this paper, it seems fair to say that despite the serious economic crisis that Egypt is experiencing, there is much room for optimism if the Government undertakes its adjustment program with determination. This optimism is based on the fact that much of Egypt’s potential is still untapped, so that adjustment policies could bring about dramatic growth based on the export sector leading the economy toward fuller utilization of its rich resources of manpower and manufacturing capacity.


Ahmed El-Ghandour

The author successfully presents a lucid and detailed review of Egypt’s investment strategy and policies and surveys the legislative and planning framework that has affected the rate and pattern of investment since the early seventies. The paper, however, mainly emphasized issues related to the private sector and in particular investment under Law No. 43. Moreover, from the beginning of the paper the author did not hesitate to confirm that the investment strategy, together with the package of macroeconomic policies adopted since the Infitah of the 1970s, is largely responsible for the suboptimal pattern of investment.

The core of the paper, as the author defines it, is to examine factors responsible for the gap between the optimal pattern of investment—that is, the pattern of investment that should have prevailed if the right strategy, the right policies, and the right performance had been secured—and the suboptimal pattern that actually materialized.

To that end, the paper focuses on two major themes: the first is related to volume, pattern, policies, and performance of private investment during the liberalization era of the early seventies. The second theme is concerned with the nature of the planning process within the context of a liberalized economic system and how much it is responsible for the suboptimal pattern of investment that has already occurred.

While the major part of the paper deals with the analysis of private investment during the Infitah era, the attention paid to investment in the public sector is relatively small. In fact, the preponderance of the share of public investment in the overall investment effort, together with the set of macroeconomic policies related to it, determines the final impact of the plan on the economy as a whole.

In that context, it may be useful to remember that the share of the public sector in total production assets has grown quite large. Public enterprises dominate industry, transport, and financial sectors. Even in agriculture, public investment in land reclamation companies, in agricultural marketing, and sometimes in direct production of agricultural commodities is also quite significant. Thus, it is clear that if present research is targeted at investigating factors responsible for the suboptimal pattern of investment of the economy as a whole, it should mainly concentrate on analyzing the system of public investment.

Let us remind ourselves of the present economic situation in Egypt and how it is linked to the performance of public enterprise. This situation may be summed up as a set of serious imbalances and distortions that led to an inefficient system of investment and production. The deficits on the balance of payments and budget have attained critical levels; the current account deficit rose from $2,350 million in 1982/83 to $5,325 million in 1985/86. Recently, the fiscal deficit increased from LE 4,748 million to LE 8,844 million. The external debt was 112.5 percent of gross domestic product (GDP), and the debt-service ratio (related to GDP) was more than 16 percent in 1986/87. Domestic production of commodities has been losing weight in the overall structure of the economy, with the result that the country is becoming more dependent on the outside world for a major part of its consumption and investment. Distortions of price, trade, and foreign exchange regimes are partly responsible for the above-mentioned imbalances and are the root of inefficiencies of production and resource allocation.

There is a general consensus that the investment and performance of the public sector contributed significantly to the forces leading to the present impasse of the Egyptian economy. This is true whether we refer to the overall deficit of the public sector or to the excessively low rate of return on investment in public enterprises.1

The above facts may lead one to reject the eminent author’s declared contention at the start of her analysis that “…the large public sector that had spread its weight across the economy was here to stay. …” Such an “ideological” position constitutes a serious and rigid constraint on the scope and content of the author’s analysis of investment in Egypt. Had investment of the public sector been given its due weight in the author’s analysis, the diagnosis and policy messages of the paper would have been otherwise.

Regarding the general content of the paper one may also argue some of the author’s assumptions. Among those assumptions is the one related to the nature of Sadat’s economic system. From the start, the author emphasized that Sadat’s Open Door Policy brought about a “radical reorientation toward a market economy” and that “this comprehensive shift was intended to reinstate the domestic private sector. …” In fact, it is difficult to accept the author’s proposition that Sadat’s regime was radically different from Nasser’s regime and to pursue the analysis as the author did on the assumption that it is the change of regime that is responsible for all the evils of the present economic situation in Egypt.

In fact, the essence of both systems is statism; a huge and dominant state sector in industry and in services was the fundamental feature of both Nasser’s and Sadat’s economic and political systems. Liberalization measures brought about by Sadat did not envisage the establishment of a liberal system mainly based on private ownership and initiative. Thus, in explaining economic performance during the liberalization era, the main issue is whether or not the measures above could cope with the inefficiencies of the state-oriented regime as defined by public sector predominance and central planning. Actually, superimposing Sadat’s Open Door measures on Nasser’s regime deepened the inefficiencies of the latter.

Relevant to this remark is what the author points out about the magnitude of the public sector’s contribution to the investment effort through joint ventures under Law No. 43. According to her estimate “at least one third of the total cost of domestic investment under that law has been contributed by Egypt’s public sector either in the form of direct equity participation or in the form of long-term loans from public sector banks.” Such a dominant share for the public sector clashes with the main logic and basis of a blueprint of a liberal economic system as envisaged by Sadat’s Open Door Policy. Whereas such logic entails giving more room to private sector and initiative, the public sector, on the contrary, crowded out investment opportunities available to the private sector. In so doing, the public sector stood against a radical change toward establishing a liberal economic system. Thus, it may be difficult not to reject the author’s conclusion that the expansion of public sector enterprises under Law No. 43 is a form of privatization. Alternatively, it seems more reasonable that expansion of the public sector under Law No. 43 is a sort of “publicization” that stood against a radical change in the statism of the sixties.

Moreover, extending the previous analysis, one is rather tempted to reject the paper’s stipulation that “expansion of public enterprises under Law No. 43 undermined their competitive position.” Indeed, it seems more plausible to state that such an expansion extended the monopolistic status of the public sector, thereby threatening the competitive tendencies in the economy.

In the relatively small part of the paper that deals with plan strategy, the author examines briefly the performance of public enterprise and emphasizes decentralization as the means of improving that performance. The paper thereby explicitly discards privatization as an instrument that could improve the functioning of public enterprise and could also help the economy rid itself of a part of the burden that affects, as mentioned earlier, its overall economic and financial performance. This view may be partly attributed to the author’s a priori value judgment position in favor of the public sector. In fact, the author focuses on central planning as the source of all evils for the poor performance of public enterprise in Egypt. Thus, the paper emphasizes that

In spite of the many calls made in favor of decentralization and increased autonomy for the public sector, state-owned enterprises continue to conform to rigid centralized planning procedures. This planning approach is totally unsuited to the spirit of liberalization, and its negative repercussions permeate the entire decision-making apparatus of public enterprise.

Though one would not disagree with the author over the shortcomings of the planning process in Egypt, it is difficult to accept her argument that decentralization should be the core of a program for public enterprise reform. In fact, analysis of measures and procedures for decentralization that have taken place throughout the liberalization era, and of those measures and procedures undertaken by Nasser’s regime itself clearly shows that they failed to bring about a tangible improvement in the performance of public enterprises. On the contrary, some of these measures were mainly responsible for a part of the negative aspects of the present public sector situation. A World Bank study emphasizes that the freedom given to nonfinancial public enterprises to contract foreign loans induced many enterprises to borrow excessively from abroad without regard to their debt-service capacity.2

Apparently, in connection with privatization, the paper may not have made a sufficiently clear distinction between decentralized planning procedures for the public sector (where, given the nature of public ownership, central authority bureaucratic directives are indispensible) and liberal market forces based on private initiatives and expectations. Indeed, a private company facing competitive conditions must be efficient to survive and grow. The transfer of property rights from the public to the private domain creates new attitudes and incentives capable of raising standards of efficiency. More important, in explaining the attitude toward decentralization versus privatization, the paper does not sufficiently examine investment and performance of the public sector within a wider framework that takes into account the difficulties of the economy as a whole and that establishes a comprehensive reform program.

Earlier discussion of difficulties facing the Egyptian economy and their interrelationship with the poor performance of public enterprise made privatization an important ingredient of any viable reform program. The impact of privatization on productivity and on budget and balance of payments deficits should appear here as a major issue.

The author quite appropriately pointed out that the role assigned by the current Five-Year Plan to the private sector is overly optimistic. She notes that according to the plan’s estimates the share of the private sector in gross fixed investment has to increase from 24 percent during the first Five-Year Plan to the high percentage of 39 percent during the current Five-Year Plan. In fact, one notices on reading the plan documents that they do not reveal how such a large share is calculated. The feeling is that this estimate is a residual left after the planner has exhausted all potential government finance of the overall public investment package. Nevertheless, given this ambitious target for the private sector, one should entirely agree with the author that for this goal to be realized it is necessary for the country to adopt a radical package of trade, exchange rate, and tax measures and incentives, and a reformed investment regime. Relevant to the author’s conclusion, one might ask whether the new investment regime in Egypt has sufficient potential as a positive step forward and in particular whether the new law succeeded in making at least a partial breakthrough in overcoming the obstacles to establishing an appropriate investment climate.

One cannot disagree with the author’s emphasis on the need for an export promotion drive. Nevertheless, it is difficult to accept export promotion investment as an alternative to import substitution. Both are strategies that are not mutually exclusive.

A successful import-substitution strategy may have the double advantage of improving the balance of payments deficit in the medium term, while at the same time paving the road for the newly developed industries to become important exporters to the international market.

In fact, the problem with the import-substitution policy in Egypt does not reside in the concept itself but rather in the way the strategy has been conceived and adopted. At the conceptual level, import substitution does not imply development of activities to “satisfy the domestic market without due regard to the notion of comparative advantage.”

In so saying, one erroneously identifies import substitution with self-sufficiency. In other words, while the import-substitution policy may be looked at as a corollary of List’s infant industry argument, self-sufficiency is a corollary of the autarky planning of the Soviet bloc. Given the very large range of industries and activities that a developing country could launch, there is no need to start import-substitution strategy in the fields in which the country cannot have a comparative advantage in the long run. In the light of the above argument, earlier investment in the textile industry proved successful in paving the way for Egypt’s textile exports to the international market, while investment in iron and steel, automobiles, aluminum, and the like is a self-sufficiency device that deprived Egypt of investing in quite a broad range of activities in which it would have had a comparative advantage in the long run. Moreover, taking into account direct and indirect effects, the investment in the automobile industry and the like did not result in net savings of foreign exchange.

The paper calls for reform by introducing a comprehensive package of “appropriate” macroeconomic policies including reformed investment, exchange rate, trade, protection, price, employment, and fiscal policies and regimes, together with an export promotion strategy. That reform package should be able to “bring about dramatic growth” and tap a significant portion of Egypt’s potential that is “still untapped.”

In this respect the eminent author accepts the consensus among economists and policymakers that there is dire need for macro-economic reform. It is the job of economists to derive the stylized formula and specific mechanics of such an “appropriate” package.

Appendix: Developments in Law No. 43 Projects, 1978–88

Appendix Table 1.

Profile of Total Projects Approved, End-1978 and Mid-1988

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Appendix Table 2.

Profile of Total Projects in Production, End-1978 and Mid-1988

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Appendix Table 3.

Profile of Total Projects Under Execution, End-1978 and Mid-1988

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Appendix Table 4.

Developments in Approved Projects, 1979–89

(In million Egyptian pounds)

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Appendix Table 5.

Projects Classified by Size of Capital Employed and Capital Intensity per Worker

(Projects in production as of mid-1984)

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Appendix Table 6.

Participation of Egyptians, Arabs, and Foreign Countries in Authorized Equity of Total Approved Projects as of End-1978 and Mid-1988

(In million Egyptian pounds)

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Appendix Table 7.

Participation of Public Sector in Approved Projects as of June 1988

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Refers to number of projects with public participation.

Refers to total value of authorized capital of projects in which public sector participates.


For a discussion of Egypt’s version of the Dutch disease, see Heba Handoussa, “The Impact of Foreign Aid on Egypt’s Economic Development: 1952–1986,” paper presented to Conference on Aid, Capital Flows and Development, Talloires, France, 1987 (revised in 1988).


For 1975–80, the annual investment figures were estimated by the Economic Studies Unit in the Study on Law No. 43 Investment Policies, Ministry of Economy and Economic Cooperation, December 1979, Table 11 of appendix. Investment figures for the 1980s are from an unpublished World Bank report. These figures include investments under Law No. 159 of 1981.


This estimate is obtained by subtracting 1978 figures from 1988 figures for capital costs of nonfinancial projects in operation only. This estimate is conservative, with an implied lag of only one year in implementation, while the flow of investment was in fact growing over time. All figures on Law No. 43 projects in production can be found in Appendix Table 2.


See Study on Law No. 43 Investment Policies (cited in fn. 2).


All entries pertaining to petroleum in the appendix tables are for petroleum services.


See Five-Year Plan 1986/87–1991/92 for estimate of increase in employment of private sector of 767,000 over the period 1981/82–1986/87. For period 1977–1981/82, estimate is made by author of another 700,000.


Study on Law No. 43 Investment Policies (cited in fn. 2), p. 15.


H. Handoussa (cited in fn. 1), p. 46.


Figures for 1960–76 are from Report on Investment Policies over 1959/60 to 1982/83 Period, Economic and Financial Affairs Committee, Shura Council (Cairo, 1984). Figures for 1977–1986/87 are from Five-Year Plans 1981/82–1986/87 and 1987/88–1991/92.


World Bank, “Egypt: Review of the Finances of the Decentralized Public Sector,” Vol. I (unpublished, March 1987). See also Said El-Naggar, “Prospects and Problems of Privatization: The Case of Egypt,” paper presented to Thirteenth Annual Symposium, Center for Contemporary Arab Studies, Georgetown University, Washington, April 1988.


World Bank, “Egypt: Review of the Finances of the Decentralized Public Sector,” Vol. I (unpublished, March 1987), p. iv.