17 - 23 February 2000
Issue No. 469
|Published in Cairo by Al-Ahram established in 1875|
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A Diwan of contemporary life (325)
An economic crisis gripped Egypt in the early 1920s as a result of a steep fall in the prices of cotton, the country's leading cash crop. Shortcomings in the fledgling industrial sector aggravated the problem. Various concerned groups issued statements analysing the situation, blaming all sides -- producers, consumers and the government -- for the difficulties. Al-Ahram not only gave prominence to these statements but also commissioned an economic expert to write a series of articles about the crisis in all its aspects and possible remedies. Dr Yunan Labib Rizk* reviews the problem from the articles and statements published by the newspaper
Grappling with dire straits
On 2 June 1922, Al-Ahram announced to its readers that it had commissioned Professor Charles Shidiaq, "whom the readers know for his economic expertise and ability to elucidate economic principles," to write a series of articles for the newspaper. Three months earlier the British had issued the Declaration of 28 February ending the protectorate and proclaiming Egypt an independent nation. With this in mind, Al-Ahram comments, "Egypt is at the threshold of a new era. Its independence does not rely on political factors alone. Indeed, independence derives its strength from the nation's economic life. For without the backbone of a strong, independent economy, political independence is at best frail and at worst vulnerable to total disintegration."
Al-Ahram's decision to feature Shidiaq's articles at that time was not without occasion: the country was in the grips of an economic crisis. Shortly before this series appeared, the newspaper published a statement issued by the General Agricultural Syndicate referring to the "general catastrophe" that arose due to the drop in Egyptian cotton prices. The statement goes on to contend that "the poor state of the economy" precipitated a frenzy of speculation on the plummeting price of cotton at a time when "there was no one in the exchange to uphold the true price of cotton." It concluded with an appeal to the government to intervene.
Aggravating the Egyptian cotton dilemma were the protectionist measures the US introduced to protect its own cotton industry. According to a communiqué issued by the Alexandria General Adjustment Board, the US government increased customs duties on Egyptian cotton imports. The communiqué charged that "behind this action lies a group of American financiers and bankers who have large outstanding debts by cotton growers in Arizona and who are, therefore, eager to facilitate the sale of their cotton on the American market."
Soon came the turn of the Higher Trade Club to express its anxieties over another side of the Egyptian economy. Its communiqué appeared over three successive Al-Ahram editions under the headline, "Ways to stimulate Egyptian industry." Egyptian industry was admittedly underdeveloped, the communiqué confessed. The fault for this lay firstly with the producers, secondly with the consumer and finally with the government. There followed a list of "12 flaws" that plagued Egyptian manufacturers. The first among these was poor education. Most Egyptian manufacturers were illiterate and they were ignorant of modern methods of production, and the many improvements introduced into the manufacturing system. In addition to a stubborn persistence in clinging to outmoded forms of production, Egyptian manufactures failed to accurately gauge the tastes of their consumers and gear their products accordingly. Additionally, they failed to meet deadlines, to produce in sufficient quantities and to maintain the standards of precision and quality. Since they refused to set fixed prices, their goods were always subject to the forces of bargaining leading to a distortion in the pricing system on the supply side. Simultaneously, they rarely advertised, leaving it up to the consumer to somehow divine their existence in order to buy from them directly or to buy through middlemen at highly inflated prices, thereby presenting the middlemen with a large percentage of their profits. Finally, in addition to a lack of business savvy, they lacked a sense of entrepreneurship and, perhaps, the confidence to invest capital in modern domestic industries.
But then, the Higher Trade Club article portrays the Egyptian consumer as a difficult ones for local industry to cater to. In their admiration for everything foreign, "from clothes to lifestyle," and their disdain for anything baladi, or locally produced, Egyptian consumers rush to acquire anything that is made abroad "regardless of how more expensive those foreign-made products are."
The government came in for a lengthy list of charges, the thrust of which was that it was actively working to debilitate Egyptian industry. "At times it does this by imposing exorbitant taxes on production , at others by introducing customs regulations that conflict with the interests of Egyptian industry and commerce and again at others it concludes trade pacts that undermine the nation's fundamental economic interests in every way."
After outlining how producers, consumers and the government were responsible for the sluggish economy, the Higher Trade Club communiqué proceeded to discuss what each party should do to mend its ways. Producers, it wrote, should "shake themselves from their long slumber" through the acquisition of such knowledge that would enable them "to introduce the appropriate modern methods of production into their industries." Consumers should alter their buying habits to conform with the interests of the newly independent nation. "It is shameful that Egyptians, who have been crying out to the world to support its plea for independence, should recoil from purchasing products manufactured by their Egyptian brethren simply on the grounds that they are somewhat crude or lacking in perfection. The best cure for remedying these alleged shortcomings in local manufactures is to motivate the producers through the purchase of their products. Such a sacrifice is only temporary, for with time and incentive the quality is certain to improve."
The Higher Trade Club reserved the greatest store of advice for the government. To assist manufacturers the government should expand the range of industrial and commercial training. It should reform the customs system through "the introduction of reasonable tariff barriers that will enable Egyptian industry to benefit from the same advantages as foreign industries." In addition, Egyptian industry should also be exempted from all domestic production taxes. The government should further build institutes for industrial research, assist in the construction of various types of production plants, subsidise the import of production machinery, grant temporary subsidies, loans and privileges to new industrial enterprises. As a further stimulus to local industry, the government should also give local manufactures preferential treatment in government tenders and offer reductions in the costs of railway freight. Finally, the government should collect and distribute "all information relevant to industrial and commercial matters, since the government has a large number of employees capable of compiling a large body of facts and figures concerning the various markets, commercial trends and new methods of production."
As part of its own drive to promote and encourage local industry, Al-Ahram presented its readers a portrait of a successful Egyptian business venture. "The most important Egyptian clothing industry -- the fez industry -- was founded in 1902," the newspaper relates. Its founder, Ismail Assem Pasha, started this industry by bringing over several experts in the manufacture of fezzes from Austria, from which Egypt had formerly imported most of Egyptian consumers' needs in this article of clothing. Also, over a period of time, he also brought over "30 labourers skilled in this manufacture and settled them in Qaha, the location of the factory, along with their wives and children, a process which entailed enormous expenses." Although Assem Pasha operated at a considerable loss at first, over time he was able to develop the appropriately skilled Egyptian staff he required. By the time of the outbreak of World War I, "production increased to 1,600 fezzes a day and the factory was operating uninterruptedly day and night."
Of course, in 1922, no industry regardless of its record of success would have been immune to the economic crisis generated by the drop in cotton prices. Against the general economic climate, some firms hit upon a rather cost effective way to advertise. Inspired by the communiqués submitted by the Higher Trade Club and Alexandria General Adjustments Board, these firms, too, submitted to the newspaper "economic analysis" articles, which were in reality thinly disguised means to promote their products. On 9 May, for example, a "Report on industrial and agricultural conditions" commenced: "In these days of plummeting prices of agricultural products we must explore every avenue that holds hope for the revival of our economy. Towards this end we urge you to visit the John Wills factories, widely reputed for the great service it performed for the government through its expansion in the fields of oil exploration, mines and ceramics."
Al-Ahram also relayed to its readers certain commentaries in the British press that conveyed the impression that British public opinion was rubbing its hands with malicious glee at Egypt's economic difficulties at the time. The Morning Star, for example, wrote, "Egyptians know as much about independence as they do about the difference between snow and ice." One imagines that, on top of the already critical economic situation, spiteful commentaries such as this would have goaded Al-Ahram chiefs into commissioning Shidiaq's series of articles.
"Our Economic Life: Where is our money going? -- Royalties paid abroad" was the weighty headline Shidiaq gave his series of articles. He opens with a definition of his subject matter. The function of any socio-economic system, he writes, is to fulfill the needs of the people "to the best of its ability." Towards this end, it must cater to two interests: that of the consumer and that of the nation as a whole. Where they diverge, he explains, resides in the fact that, whereas "the consumer in fulfilling his needs is driven solely by his personal desires and tastes in accordance with his available financial means," the nation in which the consumer lives "must consider the impact of the consumer's mode of consumption upon the country's economic life and in terms of how that pattern of consumption conforms with the diversity and volume of demand in society at large."
With this differentiation in mind, Shidiaq explains that the purpose of his articles is "to examine the potential impact of foreign economic intervention in supplying our society's material needs, whether in terms of its effect upon our modes of production, industrialisation or financial transactions."
Shidiaq turns first to financial matters, and specifically to what he termed "the demand for finance." In shopping around for sources of loans, he writes, the government should consider first, not the terms of the loan, but the source. "In the event that the creditor resides abroad or operates from abroad through a local agent," he cautions, "all interest payments on these loans are inevitably transferred abroad and, however insignificant the sums, that money is removed from circulation at home." On the other hand, he distinguishes between the departure of money for the purposes of paying loan and the outflow of money in the process of foreign trade. In the latter case, "it is the overall balance between export and import trade that determines the overall direction of the flow of money."
The ultimate objective of commercial and financial transactions, he continues, is to create a surplus. "No matter how small this surplus is, as it accumulates over the years it generates an important reservoir that can be tapped for investment. Then, when supply exceeds demand, interest rates will drop until they reach the levels where they stood in Europe before the war."
In light of this theory, he pauses to explain why he subtitled his articles "Royalties paid abroad." "Egypt has no money of its own in circulation," he writes. "By money of its own, I am referring to independent capital not tied to financial transactions. As a civilised commercial entity, Egypt's economic activities are founded upon credit, which in turn is inevitably dependent upon the capital of others. Credit is the lifeblood of all economic activities; without credit, whether from national or foreign sources, economic life reverts to its infancy."
But credit is a two-edged sword, especially when the primary source of credit resides abroad. In this context, Shidiaq lists three channels through which money flows out of the country. The first is through interests paid abroad on loans taken out by the government. The second is through private commitments to foreign agencies in the various fields of business activity. Added to this was "the outflow of the net profits of foreign-owned businesses in Egypt." The third is through "the royalties paid for goods and services dependent on foreign supplies, even through we are fully capable of providing the same goods and services locally on the same terms."
Shidiaq cites the sugar industry as the model of an enterprise that succeeded in freeing itself from "royalties." With the establishment of local sugar refineries, this industry no longer had to sustain the costs of processing raw sugar abroad. Considering that the sugar refinery processed an average of LE321,000 worth of refined sugar, one can easily imagine that the former dent in profits from having it processed abroad had been considerable. It was true, he admitted, that the sugar refinery plant was foreign owned, and, therefore, a percentage of its profits were distributed to its shareholders abroad. However, he adds, "that amount is insignificant in comparison to the greater volume of costs that pay for labour and other domestic expenses, all of which was money that remained in the country."
His counter example was the domestic flour milling industry, which he observed had suffered unwarranted deterioration. He could not understand why this industry was so ignored, considering that "we possess all the necessary machinery and equipment to produce every variety of flour of the calibre equal to if not surpassing that of imported flour." It dismayed him greatly that the government and the public displayed such little concern for this industry, which he considered far more vital to the national welfare than the sugar industry. Particularly distressing was "the deplorable waste due to inefficiency and mismanagement affecting local wheat production every step of the way from the harvest to the silo." On the other hand, he recognised that the deficiency in wheat production was also due to the limited area of cultivable land, which he placed at 31,000 square kilometres. Moreover, he noted that "this area cannot be expanded because the rest of the land in our country is not suitable for agriculture." Another reason for the deficiency in wheat production was population growth, which had begun its upward spiral at the beginning of this century. Shidiaq illustrated the gravity of the problem with the previous year's census figures, which listed more than a million and a half births that year and fewer than 500,000 deaths.
Regarding the actual production of flour in Egypt, a major problem was the continued widespread use of grinding stones. Not only was this antiquated process particularly slow, the flour it produced was "coarse and full of bran." Modern mills, in contrast, operated by means of "a series of steel rollers each of which pulverizes the grains to a certain degree before passing them on to the next, so that at the end the product is much finer and smoother in texture."
Because of the importance Shidiaq attributed to the flour industry he devoted two more articles to this subject. Of particular concern to him was the problem of subsidising flour, an issue which is still of considerable importance to Egyptians today.
With the outbreak of World War I, the Egyptian government introduced a pricing policy on grain in order to counter the increased consumption of grain products due to the influx of British troops. Within a short time, however, the pricing system proved ineffective and the government was forced to adopt different measures. On 26 September 1917, Sultan Hussein Kamel issued a decree forming the Supply Authority, whose remit was "to oversee all matters pertaining to the nation's supplies of food and fundamental necessities and to take all measures that it deems necessary to alleviate the difficulties of these times."
The primary concern of the new authority was to ensure the adequate provision and equitable distribution of wheat and flour. Its first measure was to order all inhabitants in Cairo and Giza who possessed a store of more than 240 kilos of wheat or flour to "submit a written declaration of the quantities the possess to the nearest precinct police station."
This measure, too, did not meet the hoped for success as the Supply Authority inspectors confessed in their report later that year. Although the wheat crop that year had been relatively abundant, the quantities that ended up in the market were still insufficient. To address this problem, the Supply Authority persuaded the Ministry of Agriculture to give it a certain percentage of the wheat yield for distribution to mills, bread bakeries and retail merchants. And, as Al-Ahram reported at the time, "the Ministry of Agriculture selected an enormous warehouse located next to the Railway Authority depot in Abul-Ela district for the purposes of storing and distributing the wheat."
When this measure also proved ineffective, the Supply Authority found itself forced to stop selling flour in residential areas whose residents could afford to purchase flour from the markets that were not subject to the government's pricing policy and restrict the sale of subsidised flour "to the crowded, poor quarters, and specifically Boulaq and Old Cairo." Eventually, the government found itself compelled to import wheat from abroad.
Even after the war ended, the Supply Authority continued to provide flour to the consumer until it was abolished in June 1922. Somewhat bitterly, Shidiaq observes that, "although this authority had purchased domestically produced corn, that quantity was negligible. The bulk of its activities was restricted to importing grain supplies from abroad and in re-exporting what it could." He was nevertheless forced to admit that, in sum, according to the statistics at his disposal, Egypt was one of the few countries whose "supplies of flour during that period were sufficient to meet the nation's essential needs."
The author of "Our Economic Life" still insisted that the Supply Authority should never have been created in the first place. His 11th article of this series, appearing on 22 July 1922, presented a study of those countries that also had to establish a supply authority similar to that which had been formed in Egypt. Among Europe's 21 nations, he wrote, only seven had been self-sufficient in their grain supplies. These were Russia, Hungary, Romania, Bulgaria, Sweden, Denmark and Holland. "All the rest, and we do not exclude France, were unable to meet their needs of grain without recourse to foreign imports." Egypt ultimately proved itself one of the self-sufficient nations. The prices of bread had also remained relatively stable during the existence of the Supply Authority. The only way the authority could maintain the low prices was to heavily subsidise flour, which cost the government approximately LE10 million, an extraordinary sum at the time. Moreover, Shidiaq argued, it was not the public who was the primary beneficiary of the subsidised flour but "the flour merchants, the bakers and the owners of public ovens." He concludes that "in the final analysis the efforts and financial sacrifices undertaken by the government led to one result: exorbitant profits for these groups of individuals." One suspects that Shidiaq would have been equally dismayed by the food industry's profiteering if he had lived on until today.
* The author is a professor of history
and head of Al-Ahram History Studies Centre.