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SOUTHERN EXPOSURE
BY REHAB EL-BAKRY
A policy shift in Egypt has put developing countries
at the forefront of the government’s trade and investment
strategy. Does this mean Egypt should abandon its traditional relations
with wealthy developed nations? Veteran economist Samir Radwan,
head of the Economic Research Forum, thinks there’s room for
both. But to be successful, Egyptians will need to change their
thinking.
The government’s economic and industrial strategists are
setting a new course. Traditionally Egypt has directed its industrial
and trade initiatives towards the US and EU. Now it is shifting
economic gears to actively woo countries in Asia, the Middle East
and Africa. Although the shift may seem abrupt, Samir Radwan, managing
director of the Economic Research Forum (ERF), explains that the
decision reflects the realization that the new trend in foreign
direct investment (FDI) is South-South investment. “This is
a sign that we are paying very close attention to what the data
of FDI patterns is [indicating], and that the government is [being
responsive] by shifting its strategy accordingly,” he says.
Radwan explains that the shift marks an increased understanding
of the importance of data in the top-level decision-making process.
“Officials are becoming very interested in using data in their
policy development, which is why we see this diversification to
target FDI from countries of the South as well as the North.”
According to the “World Investment Report 2006,” published
by the United Nations Conference on Trade & Development (UNCTAD),
the biggest shift in international FDI trends is the increase in
the amount of FDI from developing and transitional economies to
other developing and transitional economies, which represent 17
percent of the world’s total FDI, or around $133 billion.
“If we look at the recent data on FDI, we will find the latest
trend is South-South investment. India and China are very [instrumental
in this] shift. These countries excel at technology and are looking
for ways to open new markets for themselves and to expand their
industries. Egypt is, in turn, one of the countries in which they’re
interested and we are very much interested in their FDI.”
And that’s where Radwan comes in. A veteran economist, he
has dedicated much of his career to observing and interpreting the
economic policies and data of developing and transitional economies,
with an emphasis on the Middle East. A graduate of Cairo University’s
Faculty of Economics and Political Science, he completed his master’s
and doctorate degrees in economics at the University of London.
He taught at Oxford University’s prestigious Institute of
Economics and Statistics during the mid-1970s before joining the
International Labor Organization’s (ILO) head office in Geneva,
where he remained for 28 years. His last position with the international
body was as a consultant to the director-general on Arab states
and development policy.
In 2003, Radwan returned to Cairo to head up the ERF, an independent
research body focused on studying the economies of the Middle East
and North Africa, including Turkey and Iran. The economic think
tank is funded through a variety of international donor agencies
including the EU, the Arab Fund for Economic & Social Development,
USAID and the Ford Foundation. “Our main goal is to encourage
and promote economic research on issues that concern the region,”
says Radwan, “We’re financed from several sources. However,
we are not allowed to take any money from the governments of the
region in order to keep the independence of the organization.”
The ERF team also acts as a consultant to several ministries, including
the Ministry of Trade & Industry, where the ERF helped in the
development of the current industrial strategy, and the Ministry
of Investment, though Radwan would not discuss the nature of the
ongoing projects.
Wooing the world
Globalization is redefining trade policy. Increasingly, companies
seeking lower labor and material costs are sourcing the components
of their products from more varied and distant markets, with production
lines spread across several continents. Radwan believes Egypt can
no longer afford to focus its trade and investment policies on a
select few markets. Like other countries, it must diversify its
portfolio and open channels with all world markets, wherever opportunities
exist.
Egypt’s traditional ties with the North have been based on
strategic interests, says Radwan. “In Egypt, we recognize
the role that the US and Europe play in the problems of our area,
which are plenty. [Meanwhile], they have realized through experience
that Egypt remains the hub of the region... Egypt [is] the country
that sets the pace and the tone for the region for obvious reasons
– it’s the largest country in the region, the most heavily
populated and the largest market. Ideas usually come from here.
For these reasons, it’s a very strategic relationship.”
But Radwan is quick to point out that the shift in policy towards
South-South investment should not be seen as Egypt turning its back
on its traditional trade and investment partners, the US and Europe.
“Trade, investment and economics is never a zero-sum game.
We can look towards the South without forgetting our relationship
with the North,” he says. “The pattern of worldwide
economics is globalization and Egypt simply can no longer afford
to [do business] with one or two countries; it has to woo the entire
world.”
And the world is very much interested. For instance, he notes, the
qualifying industrial zones (QIZ) agreement, which gives Egyptian
products manufactured in specific zones quota- and tariff-free access
to the US market provided that they contain 11.7 percent Israeli
content, has enormous appeal to southern countries that no longer
have this access to the US market. “Countries such as China
and Turkey are rushing to register in the QIZs because the end of
the Multi-Fiber Agreement (MFA) [on December 31, 2004] made their
products a lot less competitive compared to other countries that
have special bilateral agreements with the US. Being in our QIZs,
they can have access at a much lower expense. In the case of China,
they can save around $5.4 billion a year in customs duties if they
export through Egypt. Turkey would save about $4 billion. So there’s
a lot at stake on both sides. So from that perspective, we need
to look to the South, and they need us,” explains Radwan.
He says one of the obvious areas that Egypt has ignored for far
too long is Africa. Despite the country’s strategic location
as the gateway to the continent, Egyptian companies have overlooked
the potential for expansion and investment in sub-Saharan Africa
for the past two decades. “In the 1980s, we were among the
first to invest and expand into Africa. Then we retreated. Contrast
our performance to that of South Africa, for instance, which has
emerged as a regional power in terms of investments in the rest
of Africa. In fact, they dominate in terms of the export of projects
to the rest of Africa, as well as to investments in technology and
telecommunications.”
According to the UNCTAD report, South Africa is both the highest
recipient and source of FDI on the continent. FDI inflow to South
Africa, estimated at $6.4 billion, represented 21 percent of FDI
in the continent. And although the outflow of FDI from South Africa
into the rest of Africa stood at a meager $70 million, the country
still remains the largest African source of FDI to others on the
continent.
Many developing economies are catching on to the potential of Africa,
most notably China, and are actively seeking investment opportunities.
Egypt, on the other hand, continues to shy away, mostly because
its private sector is “small and thin,” says Radwan.
Investing in Africa is classified as high risk and many in the Egyptian
private sector are neither aware of its potential returns, nor willing
to take the risk. “We need to create a knowledge base about
Africa,” he says. “I don’t believe that Egyptian
investors are aware of the possibilities in Africa – in Zambia,
Zimbabwe or even Sudan.”
He explains: “If you can ignore the political horror they
are going through, the [Sudanese] economy is witnessing a tremendous
boom. There’s a construction boom and government expenditure
is increasing by leaps and bounds. So if the conflict is settled,
Sudan will be a very lucrative area for investment. But again, without
this knowledge base, we will be too late.”
So far, he says, Egypt has invested in North African countries such
as Libya, Morocco, Algeria and Tunisia, but these investments have
been limited to a handful of sectors, particularly communications
and information technology. Yet even this cooperation has been rather
limited due to the fact that these markets are very similar. “This
is why the Agadir Agreement, which brings together Morocco, Egypt,
Tunisia and Jordan, has not resulted in any sort of sizeable change
in the trade relations between these countries. They export the
same things and have a very similar production structure, so there
is only limited potential. But when you look south, towards sub-Saharan
Africa, there is a huge untapped potential.”
So far, this has not happened. “It’s our culture to
look north and ignore the South,” he says. “We can no
longer afford to do that.”
Thinking outside the box
While Egypt attracted the second highest amount of FDI in Africa
last year, it amounted to just $5.4 billion, less than the going
price of some Manhattan apartment complexes. Radwan points out that
if Egypt truly wishes to be a competitive FDI destination, it should
take to heart a lesson from India, China and even some of the smaller
countries like Malaysia and Singapore – to stop talking about
problems and focus instead on solving them. “Our biggest issue
is improving our labor performance,” he says. “We talk
about it all the time. On any given day, we have four or five different
workshops or seminars about unemployment and job creation, but that’s
where it stops, talk. We need to learn from Asia how to go a step
further. They identify what they need to do to address the problem
and then they set a plan of action and implement it. We simply don’t
seem capable of doing that. We no longer [seem interested] in thinking
outside the box.”
By contrast, Gulf countries such as the United Arab Emirates have
created booming economies by doing just that. “Some of these
countries, though not all, have oil, but other than that, they don’t
have much,” he says. “Take Dubai. They have very little
to offer and yet FDI is pouring into the country because they managed
to create a very efficient port and a beautiful city around it.
Now, switch to Egypt. We have the Suez Canal, which runs through
the desert, and yet we never had the foresight to build simple container
storage [terminals] to make the transfer time more efficient.”
He says too often people complain that the money isn’t here.
But the money is available through FDI; the problem is Egyptians
never plan projects and implement them properly. “We simply
have no vision. So we can’t compete.”
Fortuitously, it is the enterprising vision of Gulf investors that
has made Egypt one of their favorite FDI destinations. Since the
second half of 2004, FDI from the Gulf has poured into Egypt, particularly
in construction and, more recently, in telecommunications. Radwan
says Gulf countries have been working not only to attract FDI in
their own countries, particularly in IT infrastructure and services,
but they have also developed a strategy to invest in other developing
markets. “They have become very savvy in investing their money
domestically and internationally,” he says. “They have
developed a cadre of specialists who have become very good at the
management of projects and development of ideas. They’ve also
managed to create an FDI niche for their money such as the opportunities
they have developed in Egypt.”
But Egypt’s problem, he says, is one of attitude. Too often
Egyptians dismiss investment opportunities unless they come from
Europe or the US. “We still don’t consider FDI from
other southern countries to be as valuable as FDI from the North,
but we really need to adapt our attitude,” says Radwan.
He acknowledges that there are differences between FDI from the
North and the South; mainly that it’s a lot easier for Egyptians
to do business with investors from the North because, for the most
part, we have adjusted to their management style and the know-how
they bring along with them. He says Egyptians will simply have to
accept the fact that the amount of FDI from the South is growing
and will continue to do so. “We can no longer afford to look
down on certain types of investments or see ourselves as the best
nation around because, simply put, we are not. The sooner we can
accept that, the better we will be able to better utilize and channel
the investments we are receiving.”
Instead of busying ourselves with these minor issues, Egyptians,
he says, have to work harder to not only attract FDI, but to attract
it in the areas that the economy needs the most, namely industry.
He says the bulk of FDI that comes into Egypt is still in primary
sectors such as oil, gas and agriculture. As Egypt is facing a serious
unemployment challenge, what the country really needs is huge investments
in industry to create a large number of jobs. “We’re
still not attracting enough of these types of investments and if
this pattern [of South-South investments] proves true and continues,
then it’s more likely that these types of investment [opportunities]
will come from the South, and from Asia to be specific,” he
says. “That’s why we need to solve our labor efficiency
issues and we need to solve the issue of overall system efficiency.”
Radwan believes that the biggest hurdle Egypt faces is not in making
plans, but putting them into action. He says this is what makes
the current cabinet stand out – the fact that they are making
plans and implementing them. “We need to try to support the
government’s initiatives because, thus far, their ideas are
perhaps the most creative [we’ve seen] when it comes to addressing
our current problems,” he says. “Their plans might take
a while for everyone to actually feel their impact, but they are,
for the first time in a while, on the right track.”
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