The investment climate in Egypt : institutions or relationships as conditions for sustainable reform

Countries referred to as “developing” are being urged more and more to reform their “investment climate”. It is often said that a “good” investment climate leads to both increased economic growth and reduced poverty. In these countries, corrupt government, clientelism, a lack of transparency in political activities and authoritarianism are often seen as reasons behind unattractive investment climates for investors. International development agencies believe that by adopting institutional reforms based on the best practices that have proved effective elsewhere, these countries could take their places in the globalised economy. The implicit argument is that the only way to generate the necessary confidence to create a good investment climate is to substitute a system of cooperation between private investors and public actors based on personal relationships for an institutional system based on formal and impersonal rules. However, experience has shown that merely introducing the “right” institutions is not sufficient to bring improved economic performance to developing countries. Important issues are raised for societies operating under a mode of trust production based on personal relationships. Are they doomed to nepotism and corruption? Is the investment climate irretrievably entrenched in the fact that transaction costs become very high as soon as we move away from operations between networks of friends? Is it necessary, therefore, that these societies undergo some kind of cultural revolution which leads to the implementation of an institutional system based on the Rule of Law and the enforcement of property rights, in line with the theory developed by North? This would be necessary for creating an effective cooperation between individuals who have no particularistic relationships with each other. Based on a case study carried out in Egypt, we will argue by using an ethnographic approach that this thesis is not sustained. Our observations show that it is possible to improve the investment climate, achieve effective cooperation between private investors and political decision-makers, fight against corruption and make effective progress without waiting for radical institutional reform. In fact, improvements to the investment climate in Egypt are due to the novel combination of “clear rules” and “flexibility” to meet the needs of investors as they arise. In this case, the ability to “adjust the rules” to meet specific problems faced by investors improves the investment climate, rather than introducing undesirable uncertainty. In this way, we demonstrate that improving trust between private investors and public authorities is certainly a question of reforming institutions. However, the issue for developing countries is not to substitute particularist relationships for formal universal rules to improve the investment climate, but rather to have the capacity to establish institutional systems that reflect the local conception of a “good” cooperation.