The Egyptian Economy in Transition

Taking "transition" to mean a period leading to
substantial change, the Egyptian economy in its modern
history has passed through many transitional periods. The
first was that started by Mohamed Ali in the early years
of the nineteenth century. That period witnessed the
establishment of modern Egypt after a long period of dark-
ness under the Ottoman rule and the Mamelukes.

It was during that period that cotton was first in-
troduced into Egypt and eventually developed into a major
crop. That period also witnessed the establishment of the
Suez Canal and a limited effort towards industrialization
mainly dependent upon available agricultural materials such
as yarn, textiles, and sugar.

That period was also marked with concentration of
wealth and income resulting from feudal land ownership
which put 20% of the land in the hands of six per thousand
of the population. The country also suffered from a long

[LC]

- 2 -

occupation by the British and major economic activities
were controlled by foreigners and the few big land owners.
There was no conscious effort towards economic or social
development. A poverty stricken country with a national
income in 1952 of L.E.806 million and a per capita income
of L.E.37.1. The 1952 revolution had to cope with these
very serious economic problems. The first important and
natural step was land reform which was introduced success-
fully in late 1952.

In addition to land reform the new regime directed
its efforts towards development of economic resources as
well as social development. The early years of the revolution
witnessed the electrification of the oH Aswan Dam using the
power generated there from to feed the newly established
fertilizer industry at Aswan.

The development of mineral resources especially petroleum
(with the cooperation of international oil companies) was

[Lc]

started on a significant scale. Iron Ore, and Manganese deposits were developed and there was established the neucleus of the iron and steel industry at Helwan.

More care was awarded to land reclamation and more land was reclaimed in the first decade of the revolution than in the previous fifty years.

The first years of the revolution were those of a free and open economy. As a matter of fact there was complete conviction of the need for and the benefits of international cooperation to the extent that a law encouraging foreign investment was enacted in 1953.

However, the failure to acquire the badly needed financing of the High Dam from Western countries in 1955, which was followed by the nationalization of the Suez Canal company and the first Suez war, all these events coupled with a flow of cooperation from the socialist countries, had its impact on the economic thinking of the Egyptian government.

[c]

- 4 -

1957 witnessed the Egyptianization of banking and insurance and an important part of foreign trade.

The early sixties witnessed the greatest wave of nationalization ever to occur in Egypt, and the beginning of an era of closed economy during which the major partner in foreign economic relations was the socialist countries.

The main features of that era which labelled it as closed economy era were mainly as follows:

1. Nationalization of the banking and insurance system, and the prohibition of allowing any foreign banks and insurance companies and branches to operate in Egypt.

2. Nationalization of foreign trade with the exception of 25% of exports of non-traditional nature.

3. With the exception of petroleum, mining industries were not to be allowed for foreign operations.

4. Expropriation and sequestration of private property was often used as a political tool to punish or liquidate whoever

- 5 -

the regime considered as an enemy of the State.

5. Trade and economic cooperation was directed mainly to the Eastern bloc. Shortage of foreign exchange, the availability of convenient payments agreements with Eastern bloc countries (barter) and the reluctance of the Western bloc countries to extend aid and facilities encouraged this trend.

6. It was natural under such circumstances that with the exception of the petroleum industries, foreign Western investments were completely discouraged and no effort was made to encourage them.

7. It was also natural that national private investment shrink to a minimum level because of fear of nationalization, expropriation and sequestration.

Not one joint stock company (private) was established during that period. The capital markets in Cairo and Alexandria died out, and the stock exchange in both cities - the oldest in the Middle East became only skeletons without life.

- 6 -

Briefly speaking, the Egyptian economy during the sixties became a centralized closed door economy. The first Five-Year Plan (1960-1965) depended heavily on foreign borrowing and in spite of its achievements, (which included building the major part of the High Dam and broadening the industrial base) the general economic results were detrimental. The high foreign debt service resulted in a de facto moratorium requiring re-scheduling of debts. Inflationary pressures were generated by the plan and the seeds of the present subsidies system developed eventually into one of the major elements in the budget. As a matter of fact the difficulties were so great that following the 1960-1965 plan, it was deemed necessary to postpone the formation of another plan. It was only in 1977 that the second Five-Year Plan was formulated.

The manifestations of the 1976 war were that the economy got to be, if possible, more closed. Most efforts were directed towards defense. Growth slowed down in the late sixties and

[LC]

- 7 -

it became apparent that the deteriorating economic situation called for a basic change in strategy and policy.

The public sector which was charged with the economic development of the country was being run at a great loss. A large number of its managerial capacity left it to find more remunerative posts in other countries, and many of its sectors were running below capacity. On the other hand private investors were discouraged from participating in economic activities. Foreign investors had no incentives in addition to the fact that the political environment in the area was not encouraging.

The weakness of the external payment position was manifested in acute shortages of foreign exchange (reflected in idle capacities in various sectors for lack of raw materials, spare parts or replacements).

Concerning local financing the Government was unable to direct sufficient funds for investment since more than 25%

[Lc]

- 8 -

of the GNP was directed to defense and another large portion
was directed to subsidies required to stabilize prices to en-
able the poor to cope with inflationary pressures.

In addition the amount required for debt service (both for
civil and military purposes) exceeded the proceeds from the
commodity exports and the country depended more and more on
short-term credits to finance its import requirements, and arrears
of payments were accumulating. This situation reduced the countries
creditworthiness and made the acquisition of credit very expensive.

With all these adverse circumstances economic growth almost
came to a standstill, and was estimated in 1968 to be 1.6% at
constant price. At the same time population growth continued at
one of the highest rates in the world (about 2.6%) which by
definition made the poor, the majority of the country, poorer,
and living under intolerable circumstances and no light at the
end of the tunnel to look forward to and to give them a glimmer
of hope for a better life. When he assumed office in late 1970,

[Lc]

- 9 -

President Sadat was confronted with these deteriorating conditions.

President Sadat, fully supported by the Egyptian people, had the courage and the will to change the economic strategy to effect the badly needed reforms. The basic change took place in May, 1971 when the President removed from the centres of power those whose interest lay in keeping the country under suppression and who thrived under conditions of a closed economy.

The significance of this second revolution lies in the fact that the President realized that no improvement could be achieved without installing real democracy and the rule of law. To prepare the proper atmosphere for economic progress it was necessary to re-instate confidence and feeling of security to the people in general and to the business community in particular.

It was thus necessary to make it an established policy that property is not to be confiscated or sequestrated without due process of law, and that personal liberties are not to be touched

[Lc]

- 10 -

arbitrarily without resort to the judiciary procedures and
the country be ruled by law and not by personal whims.

These policies gave the green light to private initiative
to take part in the development of the country. However, it
was understandable that after a decade of mutual mistrust
there was no immediate rush from private business.

The signs of freedom and security on the other hand,
attracted the attention of Arab neighbours. With the surplus
generated from oil beginning to slow in the international market,
it was logical that Arabs would look to the Egyptian market for
investment and that the new atmosphere of security will attract
their attention. In this framework, the Egyptian government issued
Law No:65 of 1971, which provided incentives and privileges to
Arab investors, both in the internal market and in the free zones.
The results, however, were very limited. As a matter of fact the
incentives succeeded only in attracting some Arab investment in
the field of real estate. However, this law was a neuclous to
more substantial steps to be taken later (1974-1977).

[LC]

It was only after the October War of 1973 that the open door policy was fully adopted and became an integral part of the beliefs and practices at all levels of the community.

The 1973 War, the fourth major conflict in the Middle East, had far reaching effects. It was the immediate reason for the great leap in the price of oil, and on the other side of the coin, the great increase of the surplus accumulated by the oil exporting countries. Prices of manufactured products and raw materials were also affected. After the 1973 War the shape of international economic relations had changed and what is popularly known as the international monetary system had become un-recognizable compared with what we used to know in the sixties.

Egypt was, naturally, in the middle of this new world and its economic life was affected by all these changes and it would have been folly to close the door and pretend as if nothing was happening. This is especially true since Egypt depends heavily

[L]

- 12 -

for trade and development on the outside world. Anyhow, the
mood was there and the road was since 1971 already paved for
the implementation of the open door policy.

In 1974 great activities were taking place in the Suez
Canal area. Literally, the whole international community, in
un-precedented conditions was cooperating with Egypt in the
clearance of the Suez Canal, preparing for its reopening for
the benefit of Egypt and international trade on June 5, 1975
exactly eight years after its closure. In September of this
same year (1974) the serious foreign investment law (No.43,
1974) was enacted.

In spite of the enthusiasm for the open door policy and the
sincere welcome shown by the various strata of the Egyptian
people, the concept was not really clear and the meaning and
contents of the policy were not fully understood.

However, the targets were clear in the thinking of the
policy makers. The open door policy is not a target in itself

[Lc]

- 13 -

but a means to achieve the highest rate of growth and create
a continuous flow of job opportunities for meaningful employ-
ment under circumstances of external and internal economic
equilibrium.

With the targets being clear and the will to change present,
the policy makers concentrated their attention on making avail-
able the tools required to implement the policy and pave the
way for the new era of serious economic and social development.

The first among these tools was the encouragement of private
initiative. The old idea that economic development was dependent
completely upon the public sector alone was to be cast aside.

The encouragement of private initiative took many ways.
The most important was to reinstate confidence and dispel fear.
Real democratic rule was emerging. No arbitrary confiscation or
sequestration of private property. No threat to personal liberties
without due process of law and above all, no political arrests or
imprisonment.

[lc]

- 14 -

The time came to bring back to life the stock exchange as an important step to encourage investments and savings both by citizens and foreigners. Many restrictions and inhibiting trading in securities were lifted. A team formed in cooperation with IFC and an international merchant bank to study ways and means of reviving the stock exchange and the capital market in general. This team has been working now for some time and has come up with very constructive recommendations.

To encourage savings, the government exempted interest on deposits - whether in local or foreign currencies from taxation and the Central Bank has increased the bank rate substantially in recent months. In the field of foreign investment, my colleague, Mr. El-Nazer, Deputy Chairman of the Foreign Investment Authority, will no doubt be speaking about the foreign investment laws. However, I would like to point out certain points of investment in Egypt which might be useful to a potential foreign investor.

[Lc]

- 15 -

A strong public sector with a long history in business and valuable contacts could be a very useful partner and in some cases an eager one. Historical development has made the public sector in Egypt participate almost in all fields of activities - therefore, the foreign investor will not fail - if he so desires - to find a strong and useful partner.

Foreign banks that came to work in Egypt chose mostly to go in partnership with public sector banks.

On the other hand - some investors may shy away from public sector partners, in that case - and with the policy of encouraging private sector - there has already developed a sizeable group of dependable entrepeneurs who are willing and able to participate in joint ventures.

In addition to these willing Egyptian (public and private) partners there has been established in Egypt in the last few years a number of investment companies, many of which in participation with Arab funds. These institutions own and have access to large funds which are searching for investment

[Lc]

- 16 -

opportunities either in equity or as loans. A well studied project, with reasonable profitability will not fail to contract the proper financing in Egypt, whether foreign or local.

To complete the financial picture, it should be of interest to the U.S. investor to know that since the adoption of the new policy most of the major U.S. banks have opened for business in Egypt, either in the form of branches or in joint ventures with local banks. I am happy to report that these banking operations have already proved remunerative, which is natural with the great increase in economic activity. We are hoping that these new institutions will be participating still more actively in the development process.

It is recognized that the foreign investor alone cannot be depended upon for economic development.

For this reason, when the foreign investment law of 1974 was amended in 1977, the new law gave to the private Egyptian

[LC]

- 17 -

investor privileges similar to those provided to the foreign
investor when participating in economic development.

However, foreign investment will bring with it more advanced
technology and better and more effective ways of management.

In addition, there is no doubt that the participation of an
investor with an established reputation could act as a catalyst
able to attract suitable financing for both the project and
the host country.

New technology and improved management are not needed
only in new development projects. They are also needed to
improve the performance of the large public sector.

Some estimates put the capital of the public sector at
around $20 billion dollars and there is no doubt that the
improvement of the performance of such a large investment
can bring in large and badly needed additional earnings which
could increase the capacity to grow still further.

- 18 -

The problem of reforming the public sector has been a serious challenge to the Egyptian government for some time. Substantial progress is being achieved and the rate of return on public sector investment is on the increase. However, there is still room for more improvements and recent efforts are to insert private participation in some of the public sector companies through increasing their capital by public subscription, which will strengthen the financing of these companies and improve their management.

Towards the end of this resume, it is necessary to state that a proper atmosphere of development requires stable economic and political conditions and good financial management. Recent years have witnessed great and continuous efforts by the Egyptian government in this direction. The Egyptian government has strong and continuing support in its efforts to put in order its financial affairs by friendly countries especially the U.S.A and friendly Arab surplus countries, and by international organizations notably the World Bank group and the I.M.F.

[L]

- 19 -

We are grateful to all of them, and in particular the U.S.A. in providing sizeable and effective commodity projects and technical assistance.

Finally, we recognize that the development effort could be eaten up by the high rate of the population growth. Egypt has been suffering from such a high rate. However, during the past few years concentrated efforts and organized systematic programs have been in effect to cope with this problem, in an effort to reduce the rate of increase to reasonable proportions by the year 2000. This massive effort is being carried out with the cooperation of technical and other assistance from the U.S.A. funds and international organizations.

Conclusion

In conclusion I wish to thank Dr. David Abshire, Chairman of the Center for Strategic and International Studies for having organized this conference and to Dr. Sterling Slappey, Director of the Future of Business Programs for his efforts in arranging the details of this meeting. I also wish to thank all the participants in this conference especially the Honorable J. William Middendorf, Former U.S. Secretary of the Navy whose personal involvement in clearing the Suez Canal after the 1973 war will always be remembered and greatly appreciated.

Last but not least I wish to thank Father Timothy Healy the President of Georgetown University for his keen interest in the Countries of the Middle East.

CSIS EGYPTIAN MEETING

September 21-22

TAB 1 Scenario

TAB 2 List of Egyptian Participants

TAB 3 Brief statement of purpose of meetings

TAB 4 Briefing papers, including notes on US companies presently or planning investment in Egypt

TAB 5 Bios of participants

They would like you to comment informally for 10-12 minutes on Egypt's increasing reliance on Western private enterprise.

Suggested points you may wish to cover:

- the origins of the opening to the West

- Western private enterprise as a way to assist Egypt

- the effect of Camp David on the economic situation

Q&As could follow *if you wish*.

Middendorf will chair throughout.

EGYPTIAN MEETING

September 21-22

All Sessions in Conference Room, 3rd Floor

International Club Building, 18th and K Streets, N.W.

Washington, D.C. 20006

September 21, 1978

<table><tr><td>Sherry and Cocktails</td><td>6:30 PM</td></tr><tr><td>Dinner</td><td>7:00 PM</td></tr><tr><td>Welcome remarks by Dr. David Abshire, Chairman of the Center, who describes the Center and its objectives.</td><td>7:45 PM</td></tr><tr><td>Dr. Abshire introduces The Honorable J. William Middendorf, II, Chairman, Financial General Bankshares and member of the Center's Advisory Board who will be in the chair throughout the meeting.</td><td>7:55 PM</td></tr><tr><td>Ambassador Ashraf A. Ghorbal briefly welcomes participants on behalf of the Egyptian delegation and introduces the visitors from Cairo.</td><td>8:00 PM</td></tr><tr><td>Dr. Hamed El Sayeh, Minister of Economy and Economic Cooperation, speaks for about 20 minutes on "The Egyptian Economy in Transition."</td><td>8:10 PM</td></tr><tr><td>John J. Roberts, Chairman, American International Underwriters, gives his comments and observations as an American Chief Executive Officer.</td><td>8:30 PM</td></tr><tr><td>The entire Egyptian delegation acts as a panel for an exchange of views with the American participants for the remainder of the meeting.</td><td>8:45 PM</td></tr><tr><td>First session closes.</td><td>9:30 PM</td></tr></table>

September 22, 1978

Coffee 9:00 AM

Dr. Ibrahim Oweiss, Chief, Economic Mission of Egypt in New York and a Georgetown University professor (on leave), speaks for 10 minutes on changes in the Egyptian economy and how they affect foreign investments there. 9:15 AM

Mr. Robert N. Nooter, Deputy Administrator, AID, Department of State, speaks for 10 to 15 minutes on problems in Egypt with increasing population and food shortages. 9:25 AM

Mr. Middendorf will outline and judge economic relations between Egypt, the Sudan and Saudi Arabia. 9:40 AM

Recess for 15 minutes. 9:50 AM

During the morning session, Dr. Henry Kissinger, Counselor to the Center, will join the discussion.

During the morning session, Ambassador Ghorbal will join the discussion. He will follow Dr. Kissinger's remarks with comments on general Egyptian politics and strategy.

Dr. Gamal El Nazer, Deputy President of the Investment Corporation speaks for 15 minutes on economic developments in Egypt and the role of the private sector.

Professor Charles Issawi of Princeton University speaks for 10 minutes on how the Egyptian economy can be changed so as to attract more U.S. investments.

The entire Egyptian delegation acts as a panel for an exchange of views for the remainder of the meeting. 11:00 AM

Mr. Middendorf brings the meeting to a close. 12:00 Noon

THE EGYPTIAN DELEGATION FOR THE SEPTEMBER 21-22, 1978,
MEETING AT THE CENTER FOR STRATEGIC AND INTERNATIONAL
STUDIES ON CHANGES IN THE EGYPTIAN ECONOMY

FROM CAIRO

Dr. Hamed El Sayeh, Minister of Economics and Economic Cooperation

Mr. Mohamed Abdel Fatah, Governor of the Central Bank

Mr. Gamel El Nazar, Deputy President of the Investment Corporation

Dr. Fauad Hussein, Deputy Minister of Economics

Mr. Samier Korayem, Undersecretary of the Ministry of Economics

Dr. Mohamed Abou Shadi, President of Bank Ubaf

Dr. Abdel Mouneim Roushady, President of the National Bank of Egypt

Mr. Neyazy Moustapha, Private Egyptian Business Executive

FROM THE EGYPTIAN EMBASSY

His Excellency Dr. Ashraf A. Ghorbal, Ambassador E. and P.

Mr. Ahmed S. El-Nahal, Minister Counselor (Commercial Affairs)

Mr. Yousri El-Kouedi, First Secretary

FROM NEW YORK

[L]

PURPOSE OF FOB-EGYPT

The purpose of the meeting is to study the ways in
which Egypt has put increasing reliance on the private
sector, and to discuss future ramifications.

The group will explore what areas might be of prime
interest to Western investors and what will be the
effect of increased investment on the Egyptian
economy.

Areas where Western investment and technology are
seen potentially as having a major impact are:

-- telecommunications

-- transportation

-- distribution of goods

EXAMPLES OF INCREASING WESTERN ACTIVITIES IN EGYPT

In recent weeks, 26 foreign oil companies have been
exploring on-shore and off-shore for petroleum.

34 foreign banks are now in business in Egypt, with
many others having representative offices.

An average of 75 ships per day is transiting the
Suez Canal.

Coca-Cola is organizing to establish a $50 million,
15,000 acre citrus plantation in the desert between Cairo
and Ismailia. Additionally, Coca-Cola and several other
companies that left Egypt due to the Arab Boycott a decade
ago are returning.

Xerox, blocked by the boycott, is now back in business
in Egypt.

Ford Motor Co. plans a truck and engine plant near
Alexandria.

Seven-up is now back, producing and bottling in
Egypt.

Colgate-Palmolive plans a toothpaste factory in Cairo.

Private Western companies, including several from
Western Europe, are installing new telecommunications systems
for Cairo.

Tourism is increasing rapidly despite the fact
that proper facilities for transportation and distribution
are still not sufficient.

Egypt is the largest recipient of U.S. non-military

SUDAN, SAUDI ARABIA AND EGYPT

Sudan, Saudi Arabia and Egypt form a triangle of comp-
lementary characteristics that could lead to the dynamic growth
of the entire region.

It has often been crudely stated, that Sudan has the food
and Egypt has the population. However, some basic problems
exist in getting the food to the population. A necessary series
of first steps have been taken to solve the food/population
descrepancy. The rationalization of the flow of the Nile
River has been a top priority for the Egyptians and the
Sudanese. The Aswan High Dam and the recently begun Jonglei
Canal diverting significant parts of the Nile around the
Sudd reflect this. The solutions to the drainage problems of
the Nile River basin will lead to a maximization of agri-
cultural productivity in this area.

But these first steps are insufficient. Increased food
production alone without an effective and integrated processing
and distribution system simply complicates existing bottlenecks
without contributing to the growth of the economies.

The third side of this potential development triangle
is Saudi Arabia. Saudi capital is a double-edged sword. On
one side it helps to free scarce resources from non-productive
uses; i.e. external debt-servicing and military expenditures.
On the other it allows an opportunity for the creation of
foreign exchange producing sectors, that if not fully exploited,
will not likely arise again in the near future.

A significant development for foreign investors in Egypt was a set of recommendations made jointly by Egyptian and American business executives for changes in investment laws. A study edited by a senior executive of Chase Manhattan Bank, analysed the main investor complaints and then made recommendations.

Three important changes have been:

Removing the single largest obstacle to the importing of investment capital by permitting foreign companies to transfer funds at the parallel rate of exchange instead of the official rate.

Strengthening and clarifying provisions for tax holidays.

Making provisions for Egyptian private investors to benefit from new investment laws.

[LC]

# IMPORTANT POINTS ABOUT THE EGYPTIAN ECONOMY

1) Infrastructure Deficiencies

  - Telecommunications

  - Transportation

2) Burdens of the Bureaucracy

  - Complex trade and contracting regulations

  - Overlapping lines of authority among Ministries

  - Overstaffing

  - Slow

3) Saudi Arabian Assistance

  - Free scarce resources for investment in foreign exchange earning projects

  - Covers expenditures for foreign debt servicing

  - Covers most military expenditures

4) Government subsidies in purchasing of food imports and subsidies for the internal markets keep the agricultural products prices artificially low. However, efforts to lower the subsidies touched off serious domestic turmoil in 1977.

5) Increased agricultural productivity is a primary goal of the Egyptian government. However, effective and integrated processing and distribution systems are necessary to have significant impacts on the population/food discrepancies that exist in Egypt.

6) 25% to 30% of Egyptians are under or unemployed. Increased agricultural productivity would help to alleviate the tensions created by this situation because it is a predominantly agricultural country.

7) Access to Western administrative and technological expertise will probably be necessary if these interrelated problems of population, food and economic growth are to be solved.

Concerns of US Business in Egypt

Egypt is a country beset by serious administration, communication and transportation bottlenecks for business people operating there. The government has 32 formal ministries, whose lines of authority frequently overlap and conflict. Despite continuing efforts at centralizing authority, for instance in the investment area, numerous agencies and officials become involved in even a minor project. Related problems are created by the overstaffing of government offices resulting in painful slowness in obtaining even simple approvals and signatures.

Procedural requirements can also be a problem. For example, the expectations on the part of the Egyptian government for separate contracts for the consulting, designing and engineering, and construction phases of a project require lengthy negotiations and serious frustrations for businessmen accustomed to "package" contracts.

1980 ends the current planning period for the Egyptian government. There have been positive trends in efforts to solve deficiencies in the transportation and telecommunication infrastructures. Without continued efforts at correcting these problems and streamlining the bureaucracy, economic growth and expanded relations with American business will be difficult.

MR. J. WILLIAM MIDDENDORF, II, CHAIRMAN, FINANCIAL GENERAL BANKSHARES

Mr. Middendorf is by all counts, a distinguished Middle East hand. As Secretary of the Navy he gave orders to clear the Suez Canal. He has met with President Sadat on Egyptian-American matters of high importance. He has visited Egypt on several occasions for official work on governmental and financial levels.

And, this November, he will journey to Cairo as guest of President Sadat. He will then meet with Egyptian economic leaders.

Our chairman today is an old friend of Dr. Oweiss, another of our speakers, and with Ambassador Ghorbal who was a Middendorf classmate at Harvard.

Mr. Middendorf is a native of Baltimore and took degrees from Holy Cross, Harvard and NYU. He is an accomplished composer of music and has written symphonies and marches which have been played by leading American and foreign orchestras.

Besides serving as Under Secretary and Secretary of the Navy, he also was Ambassador to the Netherlands.

His firm, Financial General Bankshares, Inc., controls 15 banks.

[Lc]

AMBASSADOR ASHRAF A. GHORBAL

Ambassador Ghorbal is a member of a distinguished
Egyptian family. His father was a Supreme Court judge and
an uncle was a well-known Egyptian historian.

Dr. Ghorbal graduated from Cairo University and
took his Masters and Ph.D in Political Science from Harvard.

He has been in the diplomatic corps since 1945,
serving in Washington, New York, Geneva, Paris, London, Ottawa
and Cairo.

Dr. Ghorbal has served on numerous commissions
and delegations, one of which settled the aftermath of the
Suez War of 1956. In Washington in the late 1960s, he was
Head of Egyptian Interests. After this tour he returned
to Cairo where he was Assistant Advisor to the President
for National Security Affairs. He also has served President
Sadat as Press Advisor.

With resumption of diplomatic relations between
Egypt and the United States, Dr. Ghorbal returned to Washington
in December 1973 as Ambassador.

His son, Omar, is a student in Washington at
Catholic University.

DR. HAMED ABDEL LATIF EL SAYEH, MINISTER OF ECONOMY AND ECONOMIC COOPERATION

Hamed El Sayeh holds a Masters Degree from
Denver University and a Ph.D from the University of Kentucky.
He took his undergraduate degree from Cairo University.

His distinguished career has included lecturer
at Cairo University on economics and public finance; Directorship
of research in the Ministry of Finance and Economy; Director
General of Exchange Controls; Undersecretaryship at the
Ministry of Economy; Chairmanship of the National Bank of
Egypt and as Minister of Economy and Economic Cooperation.

He assumed his latest post in November 1976.

[L.C.]

MR. JOHN J. ROBERTS, CHAIRMAN, AMERICAN INTERNATIONAL UNDERWRITERS

Mr. Roberts became directly involved in Mediterranean and Middle Eastern affairs soon after the Second World War when he served in executive positions in Europe and the Mediterranean areas for American International Underwriters. Since then he has almost continuously concerned himself with the affairs of his company overseas.

Mr. Roberts was born in Montreal but he has spent most of his life in the United States. He graduated from Princeton, served in the Philippines during the Pacific War and joined his company in 1947.

He holds directorships in American International and several subsidiaries as well as in C.V. Starr and Company, Starr International and Starr Technical Risks Agency. He is also director for The Adams Express Co.

[L.C]

DR. IBRAHIM OWEISS, CHIEF, ECONOMIC MISSION TO THE UNITED STATES

Dr. Oweiss is one of our four Egyptian speakers who took advanced studies at American universities. After graduation from Alexandria University in Egypt, he took his Masters and Ph.D degrees in Economics from the University of Minnesota. He subsequently held teaching positions at Minnesota, the Johns Hopkins University and Georgetown.

At Georgetown, he has served as Professor of Economics and Director of the Institute of Arab Development.

His present post is with the Egyptian Mission in New York and he is First Undersecretary of State for Economic Affairs.

Dr. Oweiss is the author of several books and articles on Middle Eastern affairs and editor of three series of publications entitled, "Contemporary Arab Studies," which was published by Georgetown.

MR. ROBERT H. NOOTER, DEPUTY ADMINISTRATOR, AGENCY FOR
INTERNATIONAL DEVELOPMENT

Before assuming his present post in 1977,
Mr. Nooter was Assistant AID Administrator for the Bureau
for Near East. He helped to direct economic assistance
programs for 12 nations in the Middle East, North Africa
and southern Europe.

Mr. Nooter is an authority on the Middle East
and its needs after accumulating his information and background
during 16 years of service in the State Department.

In his present position he assists the AID
administrator in all aspects of managing the United States
Economic Assistance Program which totals approximately $3.4
billion.

Mr. Nooter is a native Missourian. He took a
B.S. degree in industrial engineering from the University
of California at Berkeley and graduate courses in engineering
administration from Washington University in St. Louis. He
took the Advanced Management Program at Harvard.

MR. GAMAL EL NAZER, DEPUTY PRESIDENT OF THE INVESTMENT CORPORATION

Gamal El Nazer graduated from Cairo University and then moved to the University of Pittsburgh where he took his masters.

He has since had a fine career in Cairo serving in these posts: Deputy Chairman of the Foreign Investment Authority of the Ministry of Economy, First Undersecretary for Economic Cooperation in the Economic Ministry, Undersecretary at the Ministry and Representative of the Arab Republic of Egypt in governmental economic agreements with all countries.

[lc]

PROFESSOR CHARLES ISSAWI, PRINCETON UNIVERSITY

Professor Issawi, who was born in Cairo, is one of the academic world's best known authorities on the Middle East and on Egypt in particular. He is now the Bayard Dodge Professor of Near Eastern Studies at Princeton after having served as an economics professor at Columbia.

He took two degrees from Oxford before moving to the United States.

Professor Issawi served in the Ministry of Finance of the Cairo government in 1937-1938 and with the National Bank of Egypt until 1943. Since then he has worked with the United Nations, American University in Beirut and Harvard.

He has been widely published in books and journals dealing with economics, the Middle East, energy and oil.

22 September 1978

Suzanne:

Dave and I think Dr. Kissinger and you should know that the
Egyptian meeting is going exceedingly well. Minister El Sayeh
is fluent in English (two American university degrees), urbane,
fast on his feet, outgoing. He certainly knows his subject.
The meeting is therefore relaxed.

Ambassador Ghorbal, who I told you insists on following
Dr. Kissinger's few comments with comments of his own during the
morning session, has been called to the States Department for a
11 AM meeting today.

Considering this, it would be most appreciated if Dr. Kissinger
can come down to the Conference Room on the third floor at about
10 AM.

Sterling

Here are the two papers which are part of the Washington Quarterly
White Paper on the Egyptian/Israeli Economies and the Future of
Business conference, for Dr. Kissinger's review. We hope to send
the copy to the printer by mid-week (about November 8th). The
usual copyright agreements will be observed.

# Future of Business and the Israeli Economy

By Dr. Henry Kissinger, Counselor of the Center for Strategic and International Studies.

> "In my dealings with the Middle East I have always been struck by the extraordinary abstract quality the notion of peace has in Israeli thinking."

Israel is in a curious position. It is in some respect a developing country but it does not belong to any groupings of such countries. It also is a high technology country. It could be a bridge to the surrounding area and participate, as a developed country, in the North-South dialogue, but it cannot do it because of the political circumstances.

It is located, geographically, in an area of many economic anomalies in the sense that it is surrounded by countries some of which are in the early stages of development, others are financially extremely powerful but as far as their governments are concerned, they are far from where they should be considering their financial strength. This disparity between levels of economic, political and military strength makes the Middle East one of the most complex areas to deal with. In addition there is the absence of any significant economic interchange between Israel and the others in the area in which Israel will have to live and on which it could make a significant impact.

We hear arguments about expanding growth, the need for the "expanding cake." This is the problem all advanced societies must face and in this respect Israel is a developed society.

But I would argue that there will be no "expanding cake" and this presents a political dilemma for almost all industrialized democracies. The political dilemmas that are now developing in Western Europe are precisely due to the fact that, for a variety of reasons, it is extremely difficult to reach the growth rates that characterized the 1950's and 1960's. Moreover,

2.

[Lc]

even if they could be attained, the countries involved would not be able to dispose of some of their fundamental problems like unemployment because most of the investment would go into not-labor-intensive areas.

One of the big political problems that exists in Western Europe and also in Israel is precisely the fact that while in the 1950's and 1960's additional resources for particular groups could be taken out from new areas of economic activity or from additional growth, now the position of one group could be improved significantly only to the detriment of other groups. Accordingly the political contest is going to be much sharper and if the growth is stagnant, it may not be possible to provide any dramatic improvement for any group.

This may be inherent in the nature of the modern industrial state, not only the democracies because the communist societies have an even worse problem.

One hears arguments about what will happen when peace returns to the Middle East and some contend that the precondition of economic progress is peace. Now in my dealings with the Middle East I have always been struck by the extraordinary abstract quality the notion of peace has in Israeli thinking. One reason could be that a state that has never known peace in its history would endow it with a legalistic quality for which history offers very little justification. Many argue that there is some millennial point at which peace breaks out and tensions disappear.

A historian must have his doubts. History tends to prove that almost all wars occur between countries that are at peace: India and Pakistan are legally at peace and yet they have managed to go to war against each other several times.

It is the peculiarity of the Middle East that wars break out between countries which already are at war. There the state of war continues during peace time,

3.

[10]

We need some analysis of just exactly what the operational definition of peace is. Is it that at one moment there is a sense of tension and hostility and after that they disappear and all the nations of the Middle East will live together, as our ambassador to the United Nations said, "in the spirit of Christian brotherhood?" Just exactly what is it we are talking about?

I am convinced what we really need is some understanding between the United States and Israel, not on the negotiating tactics, but on where we are trying to go? What exactly is it we are trying to bring about? There are a hundred ways of handling the negotiating tactics once you know what your are trying to achieve. In absence of such understanding every problem becomes unsolvable, every solution becomes the source of new contention, and the sense of insecurity, which has profound political and economic consequences, will not be removed.

In analyzing this, one has to understand not just what the solution is to a given problem, but also what the trends are which particular solution is likely to start. I do not believe, however sacrilegious this may sound, that in the Middle East we can have peace on one side of the dividing line, and war on the other. I think we should analyze the situation more realistically and study what effects peace will have on the political and economic situation. Only in that context can one sensibly talk about Israel's prospects both in the economic and political fields.

(Q: I AGREE THAT WHEN A COUNTRY BECOMES INDUSTRIALIZED, THE PROBLEMS OF GROWTH BECOME MORE COMPLICATED. I DON'T AGREE THAT ISRAEL HAS REACHED THIS POINT YET.)

DR. KISSINGER: AS A HISTORIAN I HAVE TO QUESTION THE PROPOSITION THAT ECONOMIC INTERCHANGE IS NECESSARILY CONDUCIVE TO PEACE. BEFORE WORLD WAR I TRADE WAS FREE IN EUROPE, FRONTIERS WERE OPEN, ONE DIDN'T EVEN NEED A PASSPORT AND YET THEY MANAGED TO PRODUCE ONE

OF THE MOST MURDEROUS WARS IN HISTORY. CONCERNING THE ECONOMY
OF THE WORLD AS A WHOLE, THERE IS A MAJOR PROBLEM: STAGNATION.
HEROIC EFFORTS WOULD BE NEEDED TO OVERCOME IT AND I SEE NO OVER-
WHELMING EVIDENCE OF SUCH EFFORTS: BUT THIS DOES NOT
NECESSARILY HAVE TO AFFECT ISRAEL. ISRAEL MIGHT BE IN THE CATE-
GORY OF KOREA, TAIWAN OR JAPAN, COUNTRIES OF EXTRAORDINARY GROWTH
WHILE THE REST OF THE INDUSTRIAL ECONOMIES ARE STAGNATING.}

(Q: I WOULD LIKE TO TAKE EXCEPTION TO DR.KISSINGER'S STAGNATION THEORY.
Israel indeed IS IN A PERIOD OF RELATIVELY LOWER RATES OF GROWTH
BUT THERE IS NO REASON TO BELIEVE THAT THIS IS A LONG TERM STAG-
NATION PROCESS. ON THE PEACE PROCESS: WHEN ISRAEL'S DEFENSE
BUDGET GETS BELOW TEN PER CENT OF THE GNP, THEN WE HAVE PEACE.
IF WARS DON'T BREAK OUT MORE FREQUENTLY THAN ONCE EVERY 20 YEARS
THEN WE HAVE PEACE.)

DR.KISSINGER: IT WOULD BE INTERESTING TO MAKE A STUDY DEALING WITH THE
QUESTION AT WHAT STAGE OF THE DIPLOMATIC PROCESS THE DEFENSE
BUDGET COULD GO DOWN BY WHAT PERCENTAGE.)

(marton, 10/25/78)

Future of Business and the Egyptian Economy

<table>
   <tr>
    <td>
     Box: "The curse of the Arab world is that very few Arabs know where reality begins and where poetry ends."
    </td>
   </tr>
  </table>

I have been insisting all along that foreign policy must be conducted
on the basis of an unsentimental assessment of the national interest, that
it must reflect national interests independent of personalities.

Having said that I must make an exception: I have tremendous admir-
ation for President Sadat, one of the great leaders of our period. His journey
to Jerusalem last year was so spectacular that it was beyond anybody's imagin-
ation. It did something fundamental: it started a sequence of events.

Where do we stand now in the Middle East? Before trying to answer
this question, I must say that the curse of the Arab world is that very few
Arabs know where reality begins and where poetry ends. This makes the Arab
people so attractive, but this romantic quality, preferring a great pose to
a realistic program, may be the source of many disasters.

President Sadat understands the essence of the problem, he is not
distracted by surface phenomena, and he knows how to cut to the heart of the
issue. I confess that I did not take him seriously until October 1973, but
then it became clear to me that he understood that some day he has to make
peace. And all this happened in the middle of a war when Egypt suffered, to
put it mildly, many provocations from us. Yet President Sadat did not do what
would have been very tempting, he did not mobilize popular emotions against us,
but, in the middle of the war, he began to build the construction of peace.

It is not the rhetoricians in the Arab world who succeed in regaining
Arab territory. It is President Sadat, and he, almost single-handedly, changed
the perception of Arabs in the United States.

When I was secretary of state, I was in favor of the step-by-step

2.

[lc]

peacemaking approach because it seemed to me that to tie up everything together and to get everybody together in the same room would make great poetry but would lead to no solution. But when the process, the perception of peace had started, the whole psychological situation has changed and the possibility opened for a much bigger step than we were able to take between 1973-1975. I am convinced that it will have dramatic consequences.

Egypt is gaining back its territory, Israel is achieving peace, and as far as the West Bank is concerned, a process began which, if pursued rationally, is bound to lead to the satisfaction of all significant Arab demands. Once there is an elected Arab government in the West Bank with civil authority, can there be any other final decision but one on the basis of the wishes of the population?

The Camp David accords should end the Israeli nightmare that they are surrounded by enemies, and the Israelis will need time to get used to a new situation: living in peace with their neighbors.

As an American, I am proud that we had a role in this peacemaking process, and, as a friend of President Sadat, I am also proud that he had the courage to take this tremendous step. I know that history will vindicate him, and even his critics in the Arab world will acknowledge that he remained loyal to his principles. While others supplied the rhetoric, President Sadat supplied the solution.

I have several skeptical friends in Europe who still are reluctant to believe that Camp David has happened. I keep telling them that this is going to work and that we should not pay too much attention to the noises coming from various parliaments because they will not determine the outcome.

But looking ahead, when the new relationship between Israel and the Arabs becomes a reality, everybody will have to recognize that there are many problems in the area that require cooperative solutions.

One of them is the Soviet geopolitical challenge which, incidentally,

President

3.

[lc]

President Sadat recognized already in 1972 when he had the courage to expell the Soviets from Egypt in return for absolutely nothing from *any* one. But he understood that the Soviets have used the area for their own imperial purposes. And now we are witnessing a systematic attempt to encircle the moderate elements in the Middle East: in Afghanistan, in South Yemen, in Ethiopia, and in the Soviet bases in *Lybia*. I feel sure that this Soviet attempt will influence the disposal of the remaining issues between moderate Arabs and the Israelis.

Meanwhile, my advice is that we should not read the newspapers with excessive nervousness because of what this or that Arab government is saying about the Camp David agreements. We should keep in mind that Egypt and the Sudan represent half the population of the entire Arab world and that Egypt has suffered three out of four Arab casualties in the various wars against Israel. More importantly, I do not believe that it is in the interest of moderate Arabs to see radical forces spread around the Middle East and therefore everybody should pay more attention to what we see in Afghanistan, South Yemen, and in Ethiopia.

Insofar as economic development plays a role at all, we face a historic reality: nowhere in the world was communist planned economy successful. Only areas which adopted some version of the market economy were successful. This is what Egypt is attempting to do and it *is needed* our support and encouragement.

Under conditions of peace there will be enormous possibilities: oil will in the Gulf and cooperation between Egypt, Saudi Arabia and Jordan which is inevitable and will develop.

I think there is an opportunity now in the Middle East if we address the fundamental problems, including the geopolitical challenge which affects the security and stability of all moderate regimes. Egypt *will* have to play, as it always had, a leading role in meeting this challenge. We simply

[Lc]

cannot permit troops from a little Caribbean island running around Africa as if nine million Cubans, 90 miles from our shores, should determine the fate of a continent. We cannot permit every problem to be solved by the introduction of Soviet arms and Cuban troops: that is a geopolitical necessity. We can cooperate now and solve this problem in a global framework, we can prove that free people can do more to fulfill the aspirations of their own societies, and all this we can do if we cooperate with the sensitivity and speed that is needed.

(Q: WHAT ARE THE POSSIBLE COUNTERFORCES IN AFRICA TO MEET THIS CHALLENGE?
DR. KISSINGER: I HAVE VERY SIMPLEMINDED IDEAS ON GEOPOLITICAL QUESTIONS: YOU CANNOT DEAL WITH SUCH PROBLEMS WITH WORDS. IN ANGOLA I TRIED TO RESIST WHEN I WAS IN OFFICE. WHAT IS THE PROBLEM IN AFRICA? THE WAY IN WHICH NATIONS DEVELOPED IN AFRICA DOES NOT FIT THE CLASSICAL PATTERNS: IN AFRICA THERE ARE NATIONS WITH NO COMMON HISTORY, SOMEONE'S LANGUAGE, COMMON CULTURE. ALL THEY HAVE IS A COMMON EXPERIENCE WITH COLONIAL RULE. THEIR BOUNDARIES HAVE BEEN DRAWN BY FOREIGN EMPIRES ON THE BASIS OF THEIR MILITARY CONVENIENCE. THIS IS NOT MEANT AS A CRITICISM OF THESE COUNTRIES BUT THERE IS NO NECESSARY ECONOMIC JUSTIFICATION FOR THEIR BOUNDARIES, NOR IS THERE A HISTORICAL LEGITIMACY. THAT IS THE REASON WHY THEIR GOVERNORS ARE SO ENORMOUSLY INSECURE, THEREFORE THE INTRODUCTION OF ARMS BY AN OUTSIDE POWER, BECAUSE THE MAIN HEADACHE OF THESE LEADERS IS TO REMAIN IN POWER. IT IS AN ABSOLUTE ILLUSION TO THINK THAT THIS IS SOMETHING ONE CAN FIGHT BY BACKING RADICAL FORCES AND THAT THIS CAN BE TERMINED BY WHO MAKES MORE NOISE. ONCE THE LEADERS IN AFRICA RECOGNIZE THAT THE CUBANS DO NOT DETERMINE THE OUTCOME OF THEIR STRUGGLE THEN WE HAVE THE POSSIBILITY FOR A FARSIGHTED POLICY. BUT THE CUBANS HAVE TO BE STOPPED, THIS IS A FACT. BUT IF WE DO NOT HAVE A POLICY, WE CAN HAVE THE GREATEST ECONOMIC AND SOCIAL PROGRAM, IT WILL BE IRRELEVANT. I HAVE GIVEN THE STRONGEST ENDORSEMENT TO WHAT HAS BEEN DONE AT CAMP DAVID ON THE OTHER HAND I AM NOT IN FAVOR OF WHAT IS DONE IN SOUTHERN AFRICA. I CANNOT STAND AMERICANS SAYING WE MUST DO THIS OR

THAT

[L.C.]

THAT IN AFRICA BECAUSE OTHERWISE THE CUBANS WILL APPEAR! WHO HAS EVER HEARD OF INVINCIBLE CUBANS? THAT MUST BE STOPPED. THERE MUST BE A SOLUTION IN RHODESIA AND NAMIBIA THAT MEETS THE ASPIRATIONS OF THE MAJORITY AND IS NOT IMPOSED BY OUTSIDE RADICAL FORCES. I CANNOT ACCEPT THE PROPOSITION THAT THE SOVIET UNION CAN CREATE AFGHANISTAN, SOUTH YEMEN OR ETHIOPIA, PUT PRESSURE ON THE SUDAN WITHOUT ANY OPPOSITION FROM US. IF THEY MAKE A GEOPOLITICAL CHALLENGE, IT CAN BE MET BECAUSE THE RESOURCES, IN EVERY OBJECTIVE TERM, ARE WITH THOSE WHO ACCEPT OUR CONCEPTIONS. BUT FIRST WE HAVE TO DEFINE THE PROBLEM AND THIS WILL NOT BE DONE BY PARROTING EVERY RADICAL SLOGAN AND SUPPORTING EVERY RADICAL THOUGHT. WHEN THE SOVIETS INTRODUCE A MASSIVE AIR-LIFT AND 25,000 CUBAN COMBAT TROOPS, AT THE MINIMUM THE UNITED STATES HAS THE OBLIGATION TO SHOW THAT THIS CANNOT BE DONE, AT THE MINIMUM WE SHOULD MAKE SURE THAT THE SOVIETS PAY A HEAVY PRICE FOR IT. I CANNOT BELIEVE THAT THE CONCERNED COUNTRIES: SAUDI ARABIA, EGYPT, IRAN, FRANCE, AND THE UNITED STATES CANNOT MOBILIZE FORCES AND RESOURCES TO MAKE THE CUBANS UNDERSTAND THE REALITIES OF THE SITUATION AND IF THEY HAVE TO PAY A HIGH PRICE, THEIR ENTHUSIASM FOR ADVENTURES WILL DIMINISH. HOW MANY CASUALTIES CAN THEY TAKE?

(Q: WHAT COULD BE THE SAUDI ROLE?)

DR. KISSINGER: THE SAUDIS HAVE A PARTICULAR PROBLEM: HERE IS A COUNTRY OF UNDETERMINED POPULATION, ANYTHING BETWEEN 40 AND 60 MILLION, WITH EXTRAORDINARY RESOURCES, A GREAT TEMPTATION FOR ITS NEIGHBORS, LIVING ON A PENINSULA WHERE THERE ARE ABOUT A MILLION PALESTINIANS. THEY HAVE A TRADITIONAL METHOD OF GOVERNMENT UNDER ENORMOUS PRESSURE OF INSECURITY. WE MUST NOT DEAL WITH IT AS IF IT WERE A WESTERN GOVERNMENT AND MUST NOT INSIST THAT IT MAKE A FORMAL DECLARATION ON EVERY CONCEIVABLE SUBJECT. PRESIDENT SADAT DID NOT ASK FOR IT, IT IS USUALLY WE WHO ASK THESE DECLARATIONS. I DID NOT FIND THAT WHAT THE SAUDIS SAID WAS SO BAD. THEY SAID THAT WHAT CAMP DAVID PRODUCED WAS NOT AN ACCEPTABLE FINAL SETTLEMENT. NOBODY SAID IT WAS A FINAL SETTLEMENT, ALSO PRESIDENT SADAT WOULD SAY IT WAS NOT AN ACCEPTABLE BASIS FOR FINAL SETTLEMENT.

6.

[LC]

BUT THEY ALSO SAID THEY WOULD NOT PRESCRIBE TO OTHER ARAB COUNTRIES HOW THEY SHOULD REGAIN THEIR TERRITORIES OR DISAGREE WITH THEM HOW THEY REGAIN THESE TERRITORIES. WELL, EGYPT HAS REGAINED ITS TERRITORIES, JORDAN CAN REGAIN IF NOT ALL OF THE WEST BANK. IT IS NOT IN OUR INTEREST TO ASK THE SAUDIS TO MAKE GRANDIOSE STATEMENTS. IF SAUDI ARABIA WOULD ACTIVELY WORK AGAINST PRE-SIDENT SADAT, I WOULD WORRY, BUT I WOULD BE VERY ASTONISHED IF THEY DID THAT. I WOULD EXPECT THEM TO MOVE VERY CAREFULLY, MODERATELY, KNOWING THAT THIS IS DONE IS IN THEIR LONG-TERM INTEREST. WE OUGHT TO UNDERSTAND THEIR POSITION AND SHOULD NOT PRESS THEM. I DO NOT THINK THAT WHAT THEY HAVE DONE THIS FAR IS SOMETHING WE MUST BE CONCERNED ABOUT. SAUDI ARABIA HAS A TERRIBLE PROBLEM, MODERNIZATION TENDS TO UNDERMINE THE TRADITIONAL BASIS OF RULE AND THEREFORE WE MUST BE VERY CAREFUL, ALMOST TENDERLY IN HANDLING THEM.

(Q: AND WHAT ABOUT JORDAN, DOES IT HAVE THE SAME PROBLEMS?

DR. KISSINGER: YES, IN A SLIGHTLY DIFFERENT CONTEXT. EIGHT YEARS AGO THERE WAS AN INVASION BY SYRIA, A KING HUSSEIN WAS ACCUSED OF BEING THE TRAITOR OF THE PALESTINIAN CAUSE. FOUR YEARS AGO IN RABAT HE WAS DECLARED INCOMPETENT OF DEALING WITH THE WEST BANK. SINCE THEN HE HAS WORKED HIS WAY BACK. I DO NOT THINK ONE SHOULD EXPECT HIM TO JUMP ONE DAY RIGHT INTO THE MIDDLE OF THE COMPLEX WEST BANK NEGOTIATIONS. IF PROPERLY HANDLED, AFTER A PERIOD OF TIME HE WILL JOIN THE FRAMEWORK THAT HAS BEEN AGREED TO. HE WILL DO IT AT A PACE THAT IS COMPATIBLE WITH HIS POSITION.)

(marton, 10/28/78)