Common Interest between Policy Makers and Key Investors (CIPI)

Transcription

1 Common Interest between Policy Makers and Key Investors (CIPI) Proposal for Research on the Politics of Productive Investment in Egypt Abla Abdel-Latif Professor of Economics American University of Cairo February 2007 Abstract Egypt has been at the receiving end of much donor advice on the investment climate and has carried out a number of policy reforms to improve the investment climate. The levels of private investment remain nevertheless disappointingly low. There are however some interesting exceptions, notably in the food industry (old sector) and the communication and information technology industry (new sector). This project seeks to explain the substantial intra-country differences, examining whether and how the construction of common interest between policy makers and investors makes a difference. This will be done through inter-sectoral comparisons of successful and unsuccessful sectors and inter-temporal comparisons of periods of high and low investment.

2 I. Objectives and Background This proposal falls under the new research programme of the Centre for the Future State, entitled Public Action and Private Investment (PAPI). The main question driving the research programme is: How can governments and other state actors achieve substantial increases in productive private investment? The policy relevance of this research cannot be overemphasized. Low levels of private sector productive investment appear to be a major obstacle to economic growth. Even though this issue has received much attention in the academic debate in the last 40 years, the expected -and hoped for- positive impact of the research findings and recommendations on developing countries practical ability to attract productive private investment has not taken place. While this is partly due to the difficulties involved in implementing the prescribed institutional changes in these countries, it is also -and more so- due to lack of understanding the forces which bring about increases in investment. There are indications that some countries have succeeded in initiating investment and growth without following the dominant policy recommendations. And in some countries some sectors and regions have been very successful and others have failed. It seems therefore that there are critical forces for attracting private investment that have not yet been explored. Early efforts towards unpacking and dissecting the connection between public action and private investment have revealed a common thread running through the success stories: the ability of policymakers and private investors to construct a relationship based on common interests. So far however, only fragments of evidence have been found. This proposal is meant to take this research further by investigating more systematically the relevance of this alignment of interests both at the conceptual and empirical levels, concentrating on the case of Egypt. The proposed project addresses the following research questions: Beyond the investment climate scenario, what explains the differences in success/failure in attracting private investment observe between regions and sectors within the same country? Is there a significant role played by common interest between policy makers and key investors (CIPI) in explaining these cases? Can the scattered evidence already pointing in that direction be confirmed in the Egyptian case? This proposal sets out: the justification for studying the case of Egypt (Section II), the main concepts and hypotheses (Section III), the methodology (Section IV), and finally the outputs and time schedule (Section v) and budget (Section V). II. The Case for Research on Egypt Despite Egypt s serious commitment to, and actions towards, improving its business environment in general and investment climate in particular, the inflows of both national and foreign investments are not only slow and limited but also exhibit considerable variability between sectors and over time, thus suggesting other factors -beyond the internationally prescribed recipe of improving the national investment climate- to be the driving hand/s behind the attraction of 1

3 investments to some sectors and not others. Egypt is thus a clear manifestation of the core of the dilemma to be explored in Programme 1 of the Future State DRC. In preparation of this project, research was carried out on investment levels and policy changes in Egypt. The findings were presented in the Annexes of the full proposal submitted to MANCOM in January This preparatory work helped to specify the reasons and focus for the proposed research. It showed that: Share of industry in private investment is very low indicating that Egypt generally fails to attract private investment in productive sectors (decreasing interest of private investment from 26% in the 1990s to only 11% in the period ). Private investment in productive sectors does not necessarily follow improvements in the general policy environmens for investment (for example, low private investments in 70s and 80s when most policy changes favoring investment took place). The recent positive increase in private industrial investment is clearly associated with a small number of specific sectors or even sub-sectors and not a general trend Observed increases in industrial investment in specific sectors in recent years, seem associated with a combination of unprecedented activity by members from the business community and Cabinet changes supporting the CIPI argument. The spurts in investment were particularly pronounced in some subsectors of the food industry (traditional sector) and in the communication and information technology sector (new sector). Recent policy changes aimed at improving the general investment climate cannot explain the increased in these two sectors. In a nutshell, the above observations do not support the emphasis on Improving the Investment Climate for Everyone (title of the 2005 World Development Report). While desirable in principle, it neither explains actual investment patterns nor does it seem to provide a realistic way forward. Preliminary research suggests that CIPI is a significant factor influencing success or failure in attracting investment. However, it is important to note that the emphasis on CIPI does not imply that it is the only factor of relevance to the complicated investment issue. It simply means that the observed positive response of investment at specific points in time and in particular sectors calls for detailed exploration. III. Concepts and Hypotheses CIPI is a central concept in this research. This common interest between policy makers and key investors is thought be critical for explaining investment patterns but it is hard to define. We can however specify its main features: a. It is based on trust between policy makers and key investors. It usually has its roots in a previous informal relationship at the education, social or business levels. b. There is common understanding of problems faced by the sector in question, especially impediments to new investment. c. There is a willingness on both sides to take action in favor of solving these problems. d. This willingness stems from the perception that such action is in the mutual interest. The latter is absolutely critical. Mutual interest means that the investor perceives that the policy maker has a stake in the investment, in the sense that making it happen and succeed would enhance the policy maker s reputation, career or power. In turn, the policy maker perceives that the investor needs his or her assurance that complementary action by the state (complementary infrastructure, 2

4 services, or policies) will take place. Both sides would lose if the investment does not occur or does not succeed. While the whole conceptual apparatus needs to be developed and refined in the course of the actual research, we can specify the assumptions on which the research is based and then set out the hypotheses that need to be empirically tested. The basic assumptions are that: Private investment is a highly heterogeneous variable clearly changing between sectors, time periods and geographical zones irrespective of the status of the investment climate. Productive private investment has a very special nature as it typically involves rooting of capital and difficulty of exit - more than investment in non- productive sectors. It is the most difficult to attract and, at the same time, the one most needed by LDCs to achieve growth and eradicate poverty. 1 2 a b c d MAIN HYPOTHESES Common interest between policy makers and key investors plays a critical role in the success or failure in attracting PPI Initial interactions are informal and then become institutionalized as the alignment of interest becomes clearer. SUB-HYPOTHESES Common interest between policy makers and key investors creates an atmosphere of trust between the two parties that tends to promote PPI even in the absence of an enabling environment. The dynamics of achieving CIPI typically goes through three phases: initial relation, common interest- building stage, common interest- maturity stage, with phase two being the most critical. CIPI does not develop where the private sector lacks leadership and organizational capacity. (The problem lies in the private, not the public sector.) The impact of CIPI on PPI is captured at a tipping point, a point in time which marks a sharp increase in local investment reflecting a new trend of higher investments. IV. Methodology The inter-sectoral and inter-temporal variations in the case of Egypt (summarized above) open up the space for new research. This section shows how the space will be used, specifying the design of the empirical project, in particular: the choice of sectors; the profile of the respondents in the public and private sectors, and the issues to be addressed in the interviews. The key features of the project design are as follows: against a background of generally low levels of investment, we will focus on two sectors which were able to achieve high investment, examining in particular the role of CIPI. This will include examining changes over time in both CIPI and investment, focusing in particular on sequences at tipping points. In order to make judgments on causal relationships, these successful sectors will be compared with two sectors which have failed to attract investment. Note that alternative explanations for explaining lack of or changes in investment will be considered throughout and constitute an important part of the interviews. 1. Sectors chosen for empirical analysis 3

5 The food industry (with a focus on agro industry) and ICT industry are the selected successful sectors. This means that we will have a both a traditional and a new industry in our sample. The food industry is the largest traditional sector in Egypt and the biggest employer in all industry. It is labor intensive in nature and is in general an industry of interest to most developing countries. ICT is important for other reasons. It is a high technology sector that many LDCs seek to enter as it is a step towards a future with higher incomes per capita. These two industries will be examined in greatest depth. The unsuccessful sectors will be selected from among the following: furniture, auto components, garment industry, and marble and granite. We have yet to decide whether we will examine two of these sectors in depth or examine four with less depth. 2. Planned list of interviews (minimum list) It is important to note that all interviews are planned to be personal one to one interviews with the key decision makers in the public and private sectors and not substitutes or second level employees. Policy makers (7 interviews) Investors in food industries particularly agro industry- (key investors plus others) (7 interviews) Interviews Minister of Trade and Industry Minister of Agriculture Minister of Communication and Information Technology Minister of Investment Chairman of Investment Authority Chairman of Federation of Egyptian Industries Chairman of Telecom Regulation Authority Chairman of Chamber of Food Industries Vice Chairman of Food Industries Chairman of Export Council for Food Industries Nestle Company in Egypt (foreign investor) Three other investors (to be identified) Investors in ICT- (key investors plus others) (9 interviews) Entrepreneurs from sectors with low investment (12 interviews) Total number of interviews: 35 (minimum) Chairman of IT Chamber Chairman of Vodaphone Egypt President of Mega Com Chairman of Microsoft in Egypt Chairman of Alcatel in Egypt Three Egyptian investors from IT services, computers and networks (to be identified) Ready made garment industry (three interviews) Auto components (three interviews) Marble and granite (three interviews) Wood and furniture (three interviews) In some cases there will be repeat interviews. There will also be the need to follow up specific issues with other respondents so as to fill information gaps or corroborate statements. Therefore the total number of interviews is expected to be higher than the above total. 4

6 3. Issues to be addressed in the interviews Background information and characteristics of the policy makers and key investors Perception of the status of the sector before and after policy makers came to office Informal and formal relationships between policy makers and key investors. Changes introduced to support sector in details and the adopted mechanism for handling it Impact of policy changes and timing of witnessing any improvements Perception of the role of private sector in introducing changes Comments on when recent increases in investment were first observed Future plans for upgrading the sector Perception by different parties of the evolution of the investment climate in Egypt Awareness of privileged status of key investors from their sector with policy makers Deduce the follower status of the other investors through explicitly asking why they started new investments and why at that specific time, what triggered them Also, in their opinion what are the factors behind the success or failure in attracting investments in general and to their sector specifically The extent to which new foreign investments are affected or influenced by boosts in local investments All stakeholders' perception of the evolution of the investment climate in Egypt and the extent to which it is responsible for increasing investment V. Output and Time Frame and Research Team 1. Outputs Present project and initial findings at the Annual Meeting of the DRC in June 2007 and at the subsequent PAPI workshop. Prepare paper which introduces project and shows initial findings on one sector by September and present at AFD conference in Paris in November Prepare draft paper with findings on all sectors by May 2008 and present at the Annual Meeting of the DRC in June 2008 Present conclusions at conferences and workshops in Egypt in the course of Prepare full Research Report for publication in IDS Research Report series by September Journal article distilling the key findings by November Policy briefing by December Time Schedule Start 1 April Completion 31 December Research Team Abla Abdel-Latif (AUC) and Research Assistant Hubert Schmitz (IDS) HelaYousfi, IDS Visiting Fellow from Tunisia, will be working on the construction of trust between policy makers and investors, and will be supervised by Hubert Schmitz during her stay at IDS and by Abla Abdel Latif during her stay in Egypt. 5