Issue No. 602
Economy
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5 - 11 September 2002 Issue No. 602 Economy |
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| Published in Cairo by AL-AHRAM established in 1875 | Recommend this page | ||
Rethinking industry
The boom in oil and tourism has blunted the Arab manufacturing industry. And neo-classical recipes are not taking us anywhere, writes Salah El-Amrousi
The topography of Arab economies is as rugged as a desert scene. The hilltops of oil and tourism contrast with the arid valleys of industry and the deep canyons of lop-sided trade. The oil boom of the last few decades has given Gulf states a veneer of wealth. This wealth has spilled over into labour exporting neighbours, such as Egypt. Tourism has also helped to raise the standards of living in a selected number of countries. But industry has lagged behind in almost all Arab countries, with ominous consequences for future development.
Arab manufacturing, as it stands today, consists mainly of light industry, such as textiles, furniture and food, as well as electronics and car assembly factories. In 1998, the per capita manufacturing value added in Egypt was a mere $260, compared with $290 for the developing world as a whole. This is higher than the Africa figure of $80, but much lower than some of the fast-track middle-income economies worldwide: $702 in Brazil, $1,274 in Malaysia, $2,720 in South Korea and $3,410 in Taiwan.
Despite the growth in income, the Arab industrial fabric is generally frail. Arab industry lags not just behind major industrial nations -- where the annual per capita value added in manufacturing is $4,880 -- but also behind members of their own peer group of middle-income developing countries. This did not happen because Arab countries lacked the means to achieve manufacturing competitiveness, but because they lacked the method and the mindset. The wealth generated by oil and tourism caused the Arabs to focus on consumption and real estate. The result is that they developed the kind of manufacturing industry that goes with this mindset; namely light industry and assembly shops.
Now, let us compare this with what happened in other parts of the so-called Third World. Some countries, such as Malaysia, Thailand and Indonesia, focused on attracting direct investment from trans-national companies, thus turning their economies into an auxiliary part of the international division of labour. Others, like South Korea, Taiwan, China, India, Brazil and Mexico, focused on attracting foreign funds or long-term loans to develop an advanced technological and industrial base. The two groups became vigorous players in the international industrial game, either by serving the trans-nationals or by trying to catch up with the more advanced economies. The Arabs made no serious attempt, either way.
The Third World is no longer a homogeneous bloc, economically speaking. As middle-income countries, such as Brazil, South Korea and Taiwan, surge ahead, others falter, or slide backwards. Where industrial stagnation is particularly acute, as in Bangladesh, Afghanistan and some African countries, a "fourth world" may be taking shape. Unless Arab countries move forward with sensible industrialisation policies, they may soon join the ranks of this fourth world.
It is well known that cross-trading among Arab countries is a mere seven or eight per cent of their total trade and that their collective share in international trade stands at a meagre three or four per cent -- a shockingly low figure compared with Asia's 25.6 per cent, or Europe's 41 per cent, or North America's 16.2 per cent.
Arab countries' scanty share in international trade is a measure of their industrial weakness. For this weakness to be reversed, the Arabs must build a competitive industrial base and integrate their economies to a greater level, something they have talked about for long and so far failed to accomplish.
While oil provided Arab countries with the capital necessary to stimulate industrial growth, it was also a curse in disguise. It encouraged a pattern of capital accumulation that is based on trade and real estate. The post-1973 oil boom spurred the Arabs to import food, clothes, furniture and durable consumer goods. Oil-generated capital was therefore used to finance trade and real estate activities and the urge to develop manufacturing industry was subdued.
This pattern of capital accumulation was not limited to Gulf states. Egypt, Syria and other labour-exporting countries developed similar tendencies. In the early 1970s, Egypt had an industrial base that was, to an extent, capable of meeting the increasing demand on consumer goods. Instead of developing this base, Egypt allowed it to be replaced by a smattering of assembly factories. To make matters worse, the new assembly shops grew behind a wall of protective tariffs and had little incentive to enhance their competitiveness -- one of the reasons for Egypt's trade deficit.
Meanwhile, Egyptian capitalism underwent a change in the post-1973 era. Egyptians who made their money in the Gulf came back with a real estate and trade investment mindset. They also formed business partnerships with Gulf investors who share this way of thinking. This Gulf-based mindset blended with the homegrown breed of bureaucratic bourgeoisie. The former provided the capital; the latter provided expertise and, more importantly, the ability to sort out (or bypass) the reams of messy red tape. The result was mostly profitable, but hardly conducive to industrial fortitude.
Meanwhile, the Egyptian government had abandoned its sixties-style role of owning and developing the industrial sector. The entire process of industrial growth was reversed -- with encouragement from the IMF and World Bank -- and market forces replaced state planning in guiding the course of investment. The government adopted many of the familiar Washington-inspired, neo-classical restructuring programmes. It privatised the state-owned sector, removed certain forms of trade protection, encouraged foreign direct investment, reduced taxes on businesses and reduced subsidies.
The formula was supposed to turn Egypt into a fast- growing emerging economy, along the style of the so-called Asian tigers. So far, however, it has not succeeded. The reason is simple. The Asian tigers did not follow the neo- classical pattern to the letter. Most flouted some of its most cherished rules. South Korea and Taiwan, for example, built their industrial policy on intensive state intervention, high protectionism and enforced pricing.
The South Korean government, in particular, imposed an artificially low interest rate, retained full ownership of a successful steel manufacturing company, decided the production quotas for various companies and supervised the creation of industrial conglomerates. In other words, it intervened at the microeconomic level -- at the level of individual businesses and investment decisions -- with the clear purpose of sponsoring heavy industry and advanced technology.
South Korea also purchased franchises and monitored the performance of foreign direct investment in the country. (Until the early 1990s, Egypt received more foreign direct investment than South Korea).
If a conclusion can be drawn from this all, it is that the industrial development formula may vary from one country to another, but intelligent, purposeful state supervision is indispensable. So far, this role of the state has been lacking, in Egypt as well as in other Arab countries.
Industry is not a luxury. The Arabs need a manufacturing comeback -- not just to stay ahead of the global economic game, not just to be able to provide their masses with a decent standard of living, but also to stay politically viable. An industrially competitive Arab world would keep Israel at bay, to say the least. For this to happen, the mindset governing Arab investment will have to change.
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