|Al-Ahram Weekly Online
16 - 22 May 2002
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Exports: The five-piece puzzleIn the first of a two-part article, Talaat Abdel-Malek* argues that the unsatisfactory performance of the Egyptian export sector is the result of a complexity of political, social, cultural, as well as economic, factors
The setting: A country's export performance is a key barometre of the health of its economy. This is truer today than it has been for the past half century in view of the increased openness and complexity of our global economic environment. An internationally competitive economy is more capable of taking advantage of global trade and investment opportunities and of withstanding shocks that inevitably occur from time to time in this era of rapid change.
Before we get into the problems and potential of Egypt's export development, it is useful to get a perspective of where Egypt's exports stand relative to those of some other developing countries, especially countries that have done well in world markets. The figures used here are based on the latest World Bank and World Trade Organisation (WTO) data. The intent is not to bombard readers with statistics, but rather to give a clear comparative profile of Egypt's export situation instead of making unsupported statements and observations.
To start with, world exports have grown at 6 per cent per annum in the 1990s, with a growth rate of 12.5 per cent for the year 2000, almost the highest growth rate in five decades. The export growth rate for developing countries averaged 9 per cent in the 1990s, jumping to 24 per cent for the year 2000, thus outstripping earlier records. These rates have been consistently higher than national output (GDP) growth rates. Our analysis that follows should, therefore, be considered in the context of expanding export opportunities for developing countries.
Between 1980 and 1990, Egypt's total exports (merchandise and commercial services) did not register any increase, remaining at $7.0 billion. In contrast, China registered an increase of 287 per cent, Malaysia 133 per cent, Thailand 273 per cent and the Philippines 58 per cent. These countries had started, or continued, a rigorous reform programme in that period or earlier on. During 1990-2000, increases in total exports were 124 per cent for Egypt, 339 per cent for China, 243 per cent for Malaysia, 178 per cent for Thailand and 245 per cent for the Philippines.
Egypt's modest export performance becomes even more evident in merchandise export figures. Thus, during 1990-2000, Egypt had the lowest export growth rate (81 per cent), as compared to 302 per cent for China, 355 per cent for the Philippines, 234 per cent for Malaysia, 199 per cent for Thailand and 135 per cent for India. Per capita exports amounted to a mere $74 for Egypt (second lowest after India), $198 for China, $527 for the Philippines, $4215 for Malaysia, $1138 for Thailand and a whopping $19,725 for Singapore.
Another useful indicator is the ratio of total exports to the country's gross domestic product (GDP). This ratio has declined for Egypt from 30 per cent in 1980 to 16 per cent in 2000. For the other countries, the corresponding ratios all went up from 8 per cent to 26 per cent for China, from 11 per cent to 12 per cent for India, from 35 per cent to 39 per cent for Indonesia, from 33 per cent to 45 per cent for Korea, from 57 per cent to 125 per cent for Malaysia, from 24 per cent to 66 per cent for Thailand and from 24 per cent to 56 per cent for the Philippines.
Growth in the realm of manufactured exports has consistently been more rapid than exports of agricultural or mining products. The world export value index rose from 100 in 1990 to 194 for manufactures versus 135 for agricultural products and 169 for mining products in 2000. Longer-term trends show an even wider growth gap between manufactured exports and other exports. For Egypt and the countries listed above, the figures show a clear performance gap. In 2000, Egypt had the lowest ratio of manufactured exports, declining from 42 per cent in 1990 to 36 per cent in 2000; this is combined with an extremely low absolute dollar value of around $1.0 billion. In contrast, the ratio for the other countries all went up during that period, reaching from 56 per cent to 90 per cent of merchandise exports in 2000. As a result, Malaysia's manufactured exports for example reached $81 billion and those of Thailand $55 billion in that year.
A recent World Bank Social and Structural Review Report (June 2001) pointed out that two- thirds of Egypt's merchandise exports are petroleum-related and agricultural materials, indicating a fairly undiversified basket. The report added "the larger concern is that share of unskilled and skilled labour-intensive products fell during the 1990s" which indicates that exports are less labour-intensive than previously".
The above data focuses on exports only. The trade balance is of critical importance in any development context. All the countries listed except India have enjoyed a significant or substantial surplus in their trade account. Egypt, on the other hand, has been experiencing a widening trade deficit, escalating in the past two years. Alarm bells rang louder as sagging exports and rapidly rising imports threatened to run down international reserves and indeed actually chopped off one third of the more than $20 billion reserves in the span of less than a year.
Readers are probably familiar with the steps taken by the government and the Central Bank to deal with the deteriorating situation. These essentially consisted of tightening controls on imports and allowing the Egyptian pound to depreciate further against the US dollar and other leading currencies. The government is also stepping up its export promotion campaign, and attempting to resolve some of the problems exporters have repeatedly voiced.
The purpose of this article is not to detract from the value of these measures, though they invite, and indeed warrant, some rigorous analysis to assess their adequacy and appropriateness. The article aims to put Egypt's export development challenge in a proper longer-term perspective against the factual background laid above and to draw some conclusions for the consideration of policy makers.
In this regard, a final comment is in order. There are many developing countries with poor export performance; Egypt is by no means the only or worst case. But if Egypt is serious about improving export performance, we have to set our benchmarks based on the achievements of successful countries (most of which were behind us some 40 or 50 years ago) rather than to seek consolation in the fact that others are still lagging behind us.
A CHRONIC PROBLEM: It is worth recalling that Egypt's export development issues go back at least four decades to the early 1960s. An article I had written then, while on the staff of the National Institute of Management Development (now the Sadat Academy), dealt with export development in Egypt. The list of problems in that article represents less than one-third of the number of problems cited by industry and trade associations today.
A working paper prepared by the export section of the National Democratic Party's Economic Committee in 2001 listed 75 separate problems hampering export growth. The paper categorised these into six groups ranging from production technology problems to government bureaucracy. While one must not go by the number of problems alone, this substantial rise in numbers is indicative of how widespread export difficulties have become. As the analysis to follow will show, Egypt seems to have been caught in a vicious circle that has become self- perpetuating, not unlike a cancer that started very small somewhere in the human body. Unless detected and rigorously dealt with at an early stage, it spreads to other parts of the body, destroying healthy cells in its way until it renders the patient incapacitated or deals him a fatal blow. The more advanced the disease, the more drastic the required surgery and treatment.
Egypt must rank as one of the very few countries where export problems have become more serious over time. In my work at the International Trade Centre, I dealt with institutions and businesses in many developing countries in the export development field. I do not recall a single country whose export difficulties come close to those of Egypt in terms of range or magnitude. (Excluded are countries torn by civil war and similar unrest, such as some central African countries, for example).
Against this disconcerting yet factual profile, what hope is there for Egypt to join the increasing number of developing countries enjoying steady export growth?
THE FIVE PIECES OF THE PUZZLE: One way of summing up the analysis of export successes (as well as failures) is to say that export development is like a jigsaw puzzle made up of five inter-locking pieces. For these pieces to fit well together, each piece has to assume its shape and the space designated for it in the puzzle design. I will use this analogy because it helps to convey in a succinct manner what needs to be done, by whom, and how things can go wrong when one or more of the pieces do not fit.
The five pieces represent (in no particular order, for now) a-the business sector's export commitments and strategies as reflected in the actions and policies of individual enterprises; b-the work-related qualities of the individual Egyptian worker wherever he/she is situated in the work setting; c-the role of government policies in producing and maintaining an export-conducive environment; d-the support services provided for export activities by business associations and others; and e-fundamental modes of behaviour and values.
At the same time, these five pieces represent the five partners in the export business: management of individual companies, enterprise and institutional workers, business associations, government and the individual citizen. Whenever this partnership works well, the country in question is almost certain to perform well on a sustained basis in world markets, and vice versa.
THE BUSINESS SECTOR: Let us consider one piece of the puzzle at a time. Take the business sector's policies first. It is well known that less than 100 companies account for the bulk of Egypt's exports. Some estimates put the number of exporters at several thousand, but most of these are either occasional or marginal exporters or are companies on the export register that have never exported so far. Thus, Egypt's "front-line troops" are few and far between. Successful Asian countries, in contrast, have a much broader export base, with small and medium enterprises (SMEs) making a substantial and growing contribution to exports. SMEs have the advantage of flexibility and rapid response -- qualities that export markets require and reward.
Egypt's shortcomings in this area are caused by several factors. It has protected its domestic market for decades. With a growing population and some improvement in per capita income, domestic producers have done very well in the local market. They were encouraged to expand capacity in anticipation of a continuation of this trend. The limited choice of sources of supply inevitably led consumers to "buy national" even when quality was below standard. This dominant pattern of behaviour on the part of domestic producers and consumers alike was shaken by the trade liberalisation measures taken since the early 1990s.
But rather than adjust to changing global and local market conditions, most producers sought refuge in fresh government protection measures of one sort or another. Powerful lobbying, frequently using scare tactics like threats of job losses and factory closures, was often successful in persuading the government to impose such measures. Most of these are in violation of the spirit (if not also the letter) of WTO rules and Egypt's commitments under international trade treaties. Consumers, however, have become more disgruntled and less tolerant of the mediocrity of products, poor service and continued price escalations.
These deeply ingrained management attitudes and practices are still with us for the most part. Companies continue to seek protection to regain shares of the domestic market lost to better quality and lower-priced imports. Government enactment of protective measures has only reinforced these attitudes that -- as long as they persist -- pose the most serious single danger to the prospects of better export performance. Experience the world over shows that poor quality cannot be improved under protection; it requires a more competitive market, firm government actions to deal with imperfections and malpractices and transparency in government support if and where needed.
The continued significance of public sector enterprises in many industries tends to dampen the prospects of export growth through these companies. Neither their management attitudes nor their incentive systems bode well in this regard. They accommodate a culture that, to put it mildly, is indifferent if not hostile to export development. A telling recent incident is that reported in the press concerning the export of blankets to the UN Refugee Agency. On inspection, it was found that nearly one third of the shipment consisted of used army blankets, with the names of users written in ink. The press reported that the client has blacklisted Egyptian suppliers of blankets.
Such malpractices are not exclusive to the public sector. Two or three years ago, the press reported that a private company added black polish to its olives in order to obtain the higher export price for black olives destined to the French market. The client apparently produced lab tests to document his rejection of the shipment. Hopefully, these incidents are rare or exceptional occurrences, though this would be an optimistic assumption. Even if they were, the damage done by a few muddies the water for all, including those who have worked hard to put a foot in an export market. Such damage is also hard to overcome in the short run.
Management's focus on the domestic market is reinforced by the fact that export development requires market studies, product adaptation, improved packaging, acceptance of lower profit margins and facing a more uncertain future in markets not well known to local companies. The perceived risk is much higher as compared with a traditionally friendly and profitable domestic market.
Adding to this lacklustre export performance is that many multinational operations in Egypt cater mainly or exclusively to the domestic market. They are frequently restricted in their export activities by parent company strategies that typically allocate markets to different subsidiaries. This is in contrast to China's experience for example, where foreign companies that were established in the Special Economic Zones were required to direct all their production to foreign markets, thus contributing substantially to China's export growth and diversification.
Other attributes of the local corporate scene cannot be ignored. The shortage of entrepreneurial drive; the obsession with realising short-term profit motivated in part by the uncertain national climate and regional conflict; the production orientation mentality that focuses on what can be produced rather than what the market requires; the inadequate attention to quality in its various aspects (often contented to adopt a fancy wrapping); the lip service to ISO certification; the shortage of professional management cadre and reluctance of business owners to delegate responsibility even in areas where their knowledge is seriously deficient; the limited exposure to (and understanding of) the major changes in the global business setting and their impact on doing business abroad, and the pitifully meager research and development (R&D) expenditure in the overwhelming majority of industrial enterprises and government-sponsored research establishments.
This latter point deserves a brief elaboration. The weakness of R&D efforts and its non- existence in the majority of companies has led to continued (and in fact increased) dependence on foreign sources and intermediaries of technology. What kind of technology dependence?
An interesting recent article by Jeff Sach of Harvard University classifies countries into technology innovators (mostly the more developed countries), technology adaptors (most of Eastern Europe, and a few developing countries) and technologically-excluded. Of these, Egypt falls in the last category. Countries like India, Chile, and East Asian countries as well as the coastal zones of China have gone beyond buying technology; they are absorbing new technologies and adapting them to local usage, obviously in co- operation with foreign companies in possession.
Absorption and adaptation cannot occur unless a strong local R&D base exists and receives both government and corporate support. In time, technology adaptors reap the rewards of investing in R&D in many ways that accelerate modernisation and enhance their participation in the rapidly growing and more profitable international trade in technology-based products.
The World Bank has recently published data on high-technology exports. As a percentage of manufactured exports in 1996 and 1999, high- tech exports amounted to: 0.6 per cent and 0.3 per cent for Egypt; 1.6 per cent and 2.7 per cent for Tunisia; 29.2 per cent and 32.4 per cent for Thailand; 44.4 per cent and 58.9 per cent for Malaysia; and 58.5 per cent and 58.9 per cent for the Philippines. These figures speak for themselves. They clearly suggest the urgency of actions to stop the gap from getting wider and to reverse this trend.
Such is the big picture in the corporate sector. A ray of hope, though, shines in this dim picture. It is slowly gathering some momentum through the persistent efforts of a few private sector companies whose management has had the foresight and the commitment to become export-oriented. Much can and should be learned from the experiences of these companies. Their efforts deserve much support and recognition.
Egypt's extended recession is a factor pushing to expand this small circle of export-oriented companies. Recession has in fact forced some companies to seek export outlets in order to utilise capacity effectively and avoid accumulating inventories and incurring huge losses. Though it sounds cynical, the recession has been a potent force in redirecting the efforts of a number of companies to consider the export option seriously for the first time.
THE WORKFORCE: Let's now turn to the second piece of the puzzle: worker skills, habits and attitudes. The tragic truth about Egyptian workers in general, across levels of skills and professional specialties, is that they can be second to no one if properly trained, motivated and well managed. The proof is the consistently impressive record of Egyptians overseas, whether in other Arab countries, North America or Europe. It is true that those who migrate must meet criteria set by their host countries and by employers who require high skill and qualification levels. But this is only part of the story. Many competent people at various levels and specialisations are locally available, yet productivities in general are notoriously low.
What has gone wrong? To start with, there are a few local enclaves that have provided a more healthy work environment, thus overcoming most of the negative attributes characteristic of today's work settings. But these are exceptions. The media is not short of reports of incompetence, unprofessional behaviour and sheer indifference at work. Consulting work by the author and others in a large number of companies has revealed management dissatisfaction with workers' performance and indifference. These traits are, again, particularly evident in the public sector for reasons that are well known.
Three reasons shed much light on this highly disturbing phenomenon: economic and industrial illiteracy, lack of performance-based incentives and weak management of the labour force. Put together, these reasons have led to apathy and a lack of the sense of belonging and organisational loyalty among workers, and to strong feelings of frustration among managers. By economic and industrial illiteracy is meant the absence of the range of qualities a modern industrial worker usually possesses, in terms of specific skills and knowledge base, awareness of the workings of an industrial concern, and adherence to industrial discipline.
The deterioration in the quality of education is well recognised. Even more serious is the enormous shortage of technical skills in various trades; skills that any industrial society requires and promotes as a backbone of efficiency. Accomplishments of Korea, Taiwan, Singapore and many other newly industrialised economies would not have been possible without such skills. One has only to visit web sites on education and training in any of these countries to realise the professionalism and priority accorded human resource development.
Though the inadequate training facilities for technicians and tradesmen is not a recent phenomenon, Egypt at one time had good reason to boast about the work of its master craftsmen, whether these were carpenters, mechanics, masons, electricians or others. Thousands worked in the Arab countries, with teachers and doctors, leaving behind a legacy that speaks for itself today. Unfortunately, this group represents a fast disappearing breed. Most of those who have replaced them are of a lower calibre, having neither had the benefits of rigorous apprenticeship nor do they exhibit the old professional dedication and pride. Meanwhile, Egypt's demand for technical skills has increased substantially as a result of industrialisation and modernisation. One bright spot is the Kohl-Mubarak vocational training project that has been well received by employers. It is a facility that is producing good caliber graduates for which demand exceeds supply many times over.
Another difficulty has been the application of a traditional management approach to human resource matters. There is a curious mix of paternalism and distrust that tends to prevail in management labour relations. The distrust is sometimes fueled by undisciplined behaviour that has earned many workers the trait of unreliability. There is not much of significance that is shared between management and the labour force. Communications tend to be more one- way, coming from the top of the pyramid down, without much meaningful dialogue. One has only to contrast this pattern -- to go to the other extreme -- with Japanese style management labour relations to appreciate the enormous gap. This does not imply that we should imitate the Japanese; but we need to learn some lessons about how management in other countries has successfully mobilised the capabilities of its work force and motivated workers to buy into the enterprise's objectives, including export development.
Aggravating this situation is the way many workers are reported to take guaranteed rights to mean. While there is an understandable tendency to benefit fully from minimum wages, bonuses, annual vacation time, sick leave, medical and other benefits -- as indeed workers are entitled to -- responsibilities are often accorded a different treatment. As a result, a gap emerges between the exercise of rights and the discharge of responsibilities, leading to a drop in productivity and an increase in costs. (We ignore here the reported abuses of some of the above benefits such as sick leave for example).
We have not yet learned from a country like China in this regard. Until some 20 years ago, China applied the "iron rice bowl" policy, guaranteeing every worker access to essential services and meals at a set and highly subsidised price, regardless of his/her work situation, productivity, punctuality, etc. The onset of reform in the early 1980s drastically reduced the range of these services, putting price tags on some and requiring given levels of performance as a precondition for continued access to others. The impact of this change on productivity and overall efficiency (hardly a popular move) has been nothing short of dramatic and far from temporary. China's productivity record during the past two decades stands as a testimony to this change and others pushing in the same direction to speed up the modernisation of Chinese enterprises.
The above-noted shortcomings abound. Even in the private sector, where efforts have been made to apply a performance-based incentive system, the results have been less than what had been hoped for because for such a system to work well, it demands more literate and more committed work force. Incidents of absence without permission, of putting personal and family considerations well ahead of work commitments, and of sheer indifference to waste and misuse are not uncommon. We see evidence of these traits in the public's use of public facilities including transport, parks, schools, hospitals and the like. In many cases, it is willful damage rather than indifference.
Those who work in export enterprises come from the same pool and share similar traits and work habits. Because exporting has stringent requirements, the challenge of meeting these becomes doubly difficult and more costly. Ask any manager who runs an export operation what his main concerns are and he will cite labour-related problems at, or close to, the top of the list. Those managing public enterprises have the extra burden of dealing with excess employment over which they have little control, with all the attending costs.
The draft new unified labour legislation (being discussed in Maglis Al-Shaab at present) is a very significant step toward rectifying many of the problems referred to above. It is hoped that this will not turn out to be a premature conclusion. The final impact of such legislation will depend on two factors: the final shape of the law (and especially whether key clauses will be maintained or watered down) and -- even more important -- the extent to which it will be implemented. We all know that hundreds of first rate laws and regulations are on the books, many of which have not been put into effect due to implementation difficulties. Remember the environmental protection legislation of 1994? Or traffic regulations controlling noise and smoke emission pollution? We know that violations continue to occur on a daily basis under the (non-watchful) eyes of the authorities in charge of overseeing and enforcing the application of these laws.
Put together, the combination of management practices, shortage of worker skills and lack of positive attitudes has caused an absence of an 'export culture' in the total organisation. Public sector enterprises as a whole mirror these shortcomings more strongly than the private sector where the latter at least pursues the profit motive and pays more attention to workers' incentives to achieve its profit goal. Partly as a result, Egyptian companies suffer from a shortage of exportable products and services. How can our exports increase if the supply of what is exportable is limited in the first place?
The export culture cannot exist unless many of the attitudes and practices referred to earlier are replaced by more forward-looking, open and cooperative approaches that put international competitiveness of the enterprise at centre stage, ie it becomes everybody's concern rather than the few managers dealing directly with export business.
This is a tall order; meeting it will take time and serious efforts by the parties concerned. A practical beginning could take the form of publicising the few notable success stories of Egyptian companies that have made much progress along these lines, as suggested earlier. These examples will show that this is not a "mission impossible".
* The writer is professor of economics at The American University in Cairo and a former senior advisor to the International Trade Centre UNCTAD/GATT, Geneva
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