21 - 27 February 2002
Issue No.574
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Al-Ahram Weekly Online 21 - 27 February 2002 Issue No.574 |
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Spinning the yarns overrated, overprotected
Our textile industry is in tatters, and getting the wrong stitches, argues Salah Al-Amrousy
Egypt's textile industry needs help. When you have to impose prohibitive duties to protect an industry that is nearly a century old, an industry once at the cutting edge of technology, things need a serious rethink.
At last aware that our fabrics and garments are unable to compete with foreign ones, either at home or abroad, the government has as good as smashed Port Said's free zone status. It has slapped a duty on garments (LE1,000 per suit, LE150 per shirt) in what is at best a feeble attempt to stem the reversal in our textile fortunes, and, at worst, a recipe for inflicting lasting misery upon the so- called free zone merchants (Port Said has never lived up to its promise of stimulating production or industry).
The government has so far acted in a fit of befuddled expediency. First, it shed the 60 per cent tax on garments, currently tolerated by the WTO, in favour of the fixed tax on garment imports. Then, aghast at the commercial havoc in Port Said, it allowed every traveller to take five duty-free items out of the city, five times a year. That will only do as a stop-gap. WTO trade regulations are expected to be fully introduced by 2005. So far, we have bought time, but precious little else. But worst of all, the measures taken (and later mitigated) are unlikely to do anything for the textile industry.
The country's unsold textile stock stands at about 60 per cent of annual production. Dozens of factories have closed in Shubra Al-Kheima and Al-Mehalla Al-Kobra; many more face imminent bankruptcy. The government has privatised six textile companies, but is sitting on 25 more -- which no one wants to buy.
The sad thing about the recent per-item duty is that it comes in reaction to the domestic market being flooded by imports from Third World countries. If the Chinese, Indians, or Syrians can haul their goods all the way to Al- Moski or Al-Ghouria, sell them to local Egyptians, and still drive Shubra Al-Kheima producers out of business, something is terribly wrong. This something can be papered over by protectionism, but that will only hide, not fix, the cracks -- and maybe not for long.
Government and business blame the textiles crisis on smuggling. In a bid to pass the buck, officials and producers have stooped to citing grossly inflated smuggling figures. The worth of smuggled goods is sometimes estimated at LE2 billion a year; sometimes they put the figure at US$2 billion. Well, if that were true, contraband is worth as much as all legitimate domestic textile production put together -- and law and order are entirely gone, and we should rejoice that we can produce anything at all.
At other times, they tell us that the import of used clothes is the cause of our woe. We are also told that our own factories, receiving tax holidays to export their goods, are cheating -- and selling their wares in the local market instead. Both accusations may be true to a degree: but how an LE1,000 tax on suits can solve either fault beggars understanding.
The true problem with our textile industry is this: it is outdated and uncompetitive. It has also been unable to take full advantage of Egypt's primary asset: long-fibre cotton. And until something is done about that, its problems will never go away.
Let's look at the ailments of the textile industry. For starters, the industry is woefully low-tech by international standards. From being at the cutting edge of technology in the 1930s, the industry has lapsed into technological senility. Attempts to modernise the industry in the 1960s and 1970s did little to sharpen its competitive edge, and by the 1980s and 1990s, the industry was in proverbial tatters.
Egyptian cotton, admittedly high quality, has also proved a mixed blessing for the industry. To protect local cotton from foreign pests, the government for a long time banned foreign cotton imports. As a result, Egypt's textile industry had to use high-quality, expensively-produced Egyptian long-fibre cotton to make cheap cotton goods, sabotaging its own competitive advantage. Egyptian low- quality fabrics would cost, on average, 15 to 20 per cent more than imported ones.
After the introduction of the open-door policy, the government allowed lower-quality short-fibre cotton to be imported. But bad habits die hard. The industry somehow missed the point, continuing to use quality domestic cotton to make thick, cheap yarn and fabrics. Egyptian factories use good local cotton to produce grade 30 yarn, the same yarn India and Sri Lanka produce from Egyptian cotton discards. Pakistan, with low-technology factories, uses Egyptian cotton to produce only grade 80 yarn, a far superior yarn to that churned out by our own manufacturers. Fabrics made of grade 80 fetch a price at least twice that of those made with grade 30 yarn.
There is also a structural problem. When the price of cotton rose following deregulation, layers of middlemen walked away with the profits, a situation that needs to be addressed. Direct exchanges between farmers and producers may allow the price of the final product to stay competitive.
Another weakness is that research and development have mostly been abandoned. The industry's supporting trades (dyeing, chemical treatment), are in a pitiful state. No machinery to mention is manufactured. These are ailments that must be addressed. Producers also complain about multi-layered taxation and high worker wages. Certainly, something must be done to reduce the burden of taxes and fees -- a common complaint of all business people in the country -- but less attention should be given to the bit about wages. Wages amount to a mere 15 per cent of the industry's total costs.
So, given this diagnosis, why have the recent draconian duties been introduced? Obviously, worries about the currency featured in policy-makers' thinking. But the notion, however tempting, that our citizens are knocking over the balance of payments by buying too many foreign shirts is absurd. Actually, consumer goods comprise only 17 to 20 per cent of total imports. Most of
these are basic food supplies. Ready-made garments make up at most one per cent of our total imports. Make that three per cent if you are hung up about smuggling. So, even if our annual trade deficit of $9.3 billion is helped, slightly and temporarily, by the crackdown on foreign garments, the problem runs much deeper.
The textile industry's total output now stands at $2 billion to $2.5 billion, a third of which is exported. To eliminate the trade deficit, action is needed on more than one industrial front. Socially, recent measures actually favour the rich. Used and smuggled clothes are bought by the poorest among us, those for whom the words "buy Egyptian" ring empty, as they desperately try to balance anaemic household budgets. For the rich, things go less hard. Under the previous tax regime, snappy dressers had to pay a 60 per cent tax to bring a new foreign suit through customs. That would have meant a charge of LE12,000 on a LE20,000 Gucci suit. But now the fee is a mere LE1,000. This may, of course, please the rich -- but it is as irrelevant to the balance of trade as it is to the disbanded workers of Shubra Al-Kheima.
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