State-Business Relations and Investment in Egypt

Abstract

Summary

This study shows that informal relationships between key policymakers and investors have played an important role in raising levels of investment and fostering economic growth. Comparative observations show that common social roots and common professional background facilitate the emergence of an effective public-private growth alliance but the only necessary conditions are common interest and common understanding of the problems to be solved.

The comparative research on two old and two new sectors shows in detail how informal relationships have emerged and how they have made an impact but it warns against overstating their investment-enhancing role. Effective relationships between policymakers and investors – abbreviated to CIPI – are not the direct cause of increases in investment but can play a critical role in unleashing the profit potential of specific sectors. Research on the food industry shows how CIPI helped to overcome supply constraints and political obstacles in decision-making. Research on the communications industry shows how CIPI helped Egypt to overcome initial barriers to entry and establish a new industry virtually from scratch. While the gains were sometimes appropriated by a few actors, the research shows that exclusive relationships can have inclusive effects, depending on how the private sector is organised.

Quantitative examination of whether CIPI had an enduring investment-enhancing effect was inconclusive. There is no doubt however that the CIPI was an effective transitional arrangement. It helped investors to overcome barriers to economic growth, it helped policymakers to overcome deficiencies in their own government agencies and it helped both sides to work together in establishing new sector-specific rules and improving the general regulatory framework. The general lesson from this research is that such transitional arrangements deserve more attention, both to gain a better understanding of the political economy of investment and growth and to make research more relevant for policy.

JEL classification: P16, 010.