By Vin Weber
As the political crisis in Egypt continues to evolve, American and European investors are becoming increasingly troubled by what they see as a lack of legal and regulatory security. Two years ago, the theme was revolution as the heroes of Tahrir Square demonstrated that courage in the face of tyranny could produce societal change. Today, many are shying away from the term "revolution" as the fledgling democracy struggles to implement a new constitution and forge its institutions.Predictably, investors are taking notice of this unstable political climate. Egypt’s Central Bank recently announced that foreign investors withdrew $5 billion from the country within the last six months. When an Egyptian appeals court annulled the privatization of a textile company on the grounds that the government should never have sold it in the first place, alarms sounded throughout business communities around the world. Not only do investors believe private capital to be under assault but they also lack any clues as to when the country will yield more favorable conditions.
In January, ambassadors to Egypt from all 27 E.U. member states raised the issue of Egypt’s “deteriorating business environment” to President Morsi, saying in a letter that investment decisions are being delayed because of uncertainty over “legal, contractual and policy” frameworks governing foreign investment. At the heart of this fear are the courts’ decisions to renationalize foreign assets. From Mexican- and Greek-owned cement factories to an Italian-owned bank and the property holdings of a UAE-based developer, foreign investors are facing legal proceedings that could lead to asset forfeiture. The shadow of seizure, even if never realized, compounds the downward economic spiral, which makes the political transition to democracy all the more difficult.
Ironically, top government officials, as well as the Muslim Brotherhood, insist that the private sector is the key to the country’s economic future. Indeed, when I visited Cairo last fall, key leaders told me that a private sector-led economy was the only strategic possibility. But the reality clearly doesn’t match the rhetoric. The result is uncertainty, not only among private investors, but also among official creditors—including the U.S. and European governments. Despite the flow of some aid, most governments are waiting for evidence that President Morsi has a sensible economic stabilization plan and the political capacity to implement it.
The International Monetary Fund will be critical to this process. The Morsi government has restarted negotiations for a $4.8 billion loan that will inevitably include the usual austerity measures but might lack the kinds of protections the private sector needs to stay invested. This is a mistake. Without foreign investment, Egypt’s economy and its people will continue to suffer.
Ordinary Egyptians are frustrated that their lives have not improved since the revolution. They blame the government, they blame what they see as the legacy of corruption from the Mubarak era, and they blame foreigners. The blame game is likely to get louder as the economy continues to founder. This partly explains the judgments being reached in a number of local courts to renationalize companies that have been privately owned since the 1990s. The idea seems to be to force the government to rebuild Egypt’s notoriously inefficient public sector as the employer of last resort. This is more about politics than economics—and can only further undermine growth.
I know that the Morsi government doesn’t think nationalizations are a good idea, partly because the Muslim Brotherhood has always respected private capital. It would be folly to borrow from the IMF, or anyone else, to buy back companies that belong in the private sector, adding to the debt burden and scaring away the new investment that inevitably will be needed to refloat the economy.
Overwhelming evidence from other countries in transition shows that successful economies are rooted in the rule of law, transparency, and respect for contracts. That is the only way to attract private investors as well as the capital, technology and efficiencies that create jobs.
In a world where the Arab Spring has produced mixed results, and no clear winners, how Egypt copes with these challenges is critical to the future of the Middle East. It is also in the U.S. national interest: We need a stable, prosperous, and democratic Egypt. In practice that means we need to help the Egyptians—and perhaps the IMF as well—recognize that private investors, domestic and foreign, are critical to their future.
Vin Weber is a former Republican congressman from Minnesota and a member of the bipartisan Task Force on the Future of U.S.-Egypt Relations, which recently traveled to Egypt on a fact finding mission and made key recommendations to the Obama administration.
- Politics & Government