Foreign Direct Investment in Egypt: A cost-benefit critique of the Neoclassical view

Abstract

This paper evaluates the advantages and disadvantages of foreign direct investment (FDI) with respect to the Egyptian economy. The neoclassical theory of FDI forms the conceptual basis upon which these costs and benefits are analysed, given neoclassical principles have underpinned most economic reforms in Egypt since 1973. While the current literature has examined the effect of FDI on economic growth with the use of autoregressive heteroscedasticity models (given capital, labour and productivity estimates vary across the period in question), this paper situates the economic costs and benefits of FDI within a neoclassical framework that takes into account developmental and social factors. The main proposition is that Egypt’s political situation has significantly constrained the country in realising neoclassical theories of FDI.

Keywords: FDI, Egyptian economy, Egypt, Infitah, Neoclassical model of FDI, economic growth, Solow-Swan model.


Given its large population and rich history, it is a tragedy as much as it is a mystery of neoclassical economics that since liberalising its economy some four decades ago, Egypt has achieved—in material terms—so little. This lower-middle-income economy has been marked by significant yet ineffective inflows of foreign direct investment (FDI) since the country initiated the transition from the socialist vision of President Gamal Abdel Nasser to the pragmatic, US-leaning market-economy of Anwar Sadat. This paper examines the advantages and disadvantages that accompanied the rise of Egypt’s ill-conceived 1973 open-door policy (انفتاح or infitah) and its corollary, FDI. The neoclassical theory of FDI forms the conceptual basis upon which these advantages and disadvantages are evaluated. The main proposition is that Egypt’s political situation has placed significant limitations on the efficacy of FDI in meeting the neoclassical ideal. The result is that the disadvantages, in macroeconomic terms, have outweighed the advantages.

This paper begins by unravelling the failures underpinning Egypt’s timid GDP growth, before examining the implications for neoclassical modelling, given political and social circumstances are ‘held constant’. The economy’s failure to capitalise on innovations emerging from greater FDI is analysed. Egypt’s net export position is examined in turn, revealing deficiencies in government management of FDI. The economic costs and benefits are analysed in a social context prejudicial to full labour participation. The paper then explores the political factors underpinning the inefficacy of FDI, with particular reference to corruption, and inefficiency, before concluding that in the absence of political economic considerations, neoclassical modelling comes to overestimate the benefits of FDI.

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