28 Dec. 2000 - 3 Jan. 2001
Issue No.514
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Al-Ahram Weekly On-line 28 Dec. 2000 - 3 Jan. 2001 Issue No.514 |
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Not by exports alone
"Man shall not live by bread alone," and "not by exports alone shall a country live." This should not be construed to mean that exports are unimportant. On the contrary, exports are a must if the Egyptian economy is to grow. For one thing, exports are a component of the Gross National Product (GNP) of the country. An increase in that component will increase the whole pie. For another, exports will not only increase the GNP, but do so in a multiplier fashion. And thirdly, exports offer Egypt a huge market, freeing the country from the constraints of the domestic market.
The central purpose of this article is to discuss the important subject of exports in the context of the dawning of the 21st century. Policy makers must realise that trade can no longer be considered alone. It must be linked with Foreign Direct Investment (FDI).
In the past, economists argued about whether trade and FDI are substitutes for one another. We now argue that they are complements. Indeed, in the contemporary world the two are inseparable. To speak of trade alone misses the point; it may result in some static gains, but ultimately gets us nowhere.
Once this is understood, the policy implications become clear. A trade strategy must be linked to an investment strategy. And an investment strategy, in its turn, must be formulated in the context of the increased interdependence characteristic of the contemporary world. Some call this globalisation. I prefer the term "globalism" since it describes an economic state of affairs that emerged from economic forces and technological developments, not a deliberate act by somebody.
Central to all of this is the new focus on intra-industry trade, which is increasingly replacing the pattern of inter-industry trade. We now live in a world in which the question: "What is an American car?" cannot be answered. A car or an airplane is made in more than a dozen countries. This implies that countries trade "components." Egypt has no option but to scout out the niches in which it has a competitive edge. The correct path is to produce "parts" or "components" on a large scale for export.
In simple terms, Egypt will stand to lose if it assembles cars with the intention of selling only a few thousand on the local market. However, it will reap gains if it produces components, say, gearboxes, on a large scale and exports these. The issue of trade and FDI can be approached more precisely now by trying to attract investments that suit us best. Here, there is a role for the government in choosing among investments. The stark facts at the world level tell us that international production is now the most important means of serving foreign markets. This is, of course, the quid pro quo of the rise of multinationals, or rather transnationals as they are now called.
Internationally, FDI grew by 50 per cent from 1980 to 1985, but tripled between 1985 and 1995. This high growth rate for FDI applies to both developed and developing economies, although the share of developed countries is still some 70 per cent of the total. It is important to note that the flow of FDI into developing countries is still very high, reaching approximately $695 billion in 1995. China stands out, accounting for some 20 per cent of this figure. The figures show that Egypt has huge potential: currently FDI in Egypt is slightly over $1 billion, which leaves much to be desired. There are many lessons to learn from the Chinese experience.
To capitalise on these realities, Egypt must attempt to remove the obstacles to FDI. FDI is first and foremost interested in the predictability and transparency of government policy. It is no good to give, for example, tax holidays and then after a year or so a firm meets with institutional obstacles. Indeed, one can argue that tax holidays are not the real incentive for FDI. Firms do not mind being taxed, as long as they operate in a predictable and transparent investment climate.
The appealing aspect of intra-industry trade is that benefits can accrue to all countries -- whether developed or developing. The old talk of advanced countries selling manufactured goods and developing economies selling only primary goods no longer applies.
To give only one example, Egypt appears to have a potential comparative advantage in engaging in the production and sale of components. Within that broad category, systematic studies need to be carried out for the sectors in which the country can increase its value added. This is only a part of the story. The whole story would require the country to study the world's markets thoroughly. Enough of feasibility studies. Rather, we need establishments that gather information and, more importantly, synthesise that information.
It is clear from all of this that a new approach is needed. We have been too preoccupied with our successes in stabilisation. We continue to quote the percentages achieved (inflation, budget deficits, balance of payments, accumulation of reserves, etc.) to the point that these figures were almost endowed with sanctity. And, when the time came to shake these figures a little, so as to fine-tune the economy to be able to make dynamic gains, we were too timid to do so.
Today, we are making a similar error by speaking of the sale of this or that public enterprise, as if privatisation were a panacea -- an end in itself. Privatisation is not enough. What we must do is turn our attention to institutional reform. The current expansion of ports, the recent construction of refrigerated storage facilities at the airport, though belated, are most welcome. But unless investors and exporters see such requirements met, success will not be forthcoming. Commercial law and licensing legislation need to be sharpened. Monopoly elements need to be eradicated.
What I am calling for here is not a mere change in administrative decrees, here and there. I am calling for the launching of an "export culture" that includes an awareness of the intricacies of the issues involved and the links with FDI. It is a culture that realises that trade and foreign investment may be substitutes in terms of the final product, but complementary in terms of the demand for components and intermediates. It is a "culture" that also recognises that the links of investment with exports should not be confined solely to manufactured goods.
Agricultural goods can be produced for export. Egypt has tremendous potential in the export of some of the most expensive vegetables, such as asparagus and snowpeas. As such, we should not stick to our traditional export bracket. We must search for new venues.
We must take our time in inculcating this culture, doing so through workshops, conferences, discussions among government officials, businesses and within academia. This will not happen overnight, especially as many businesses here are interested in what Paul Baran called "QIQO" (quickly in; quickly out). Long-term gains should not be mortgaged for the sake of short-term expediency.
As I write this material, I recall what Britain did after World War II. Those who visited it then tell me that there were posters placed on some commodities saying: "For export immediately; for the home market after two years." Other posters read: "Fill the ships; we fill the shops." I leave the reader to ponder where we stand from all of this.
The writer is professor of international economics at the American University in Cairo.
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