Supplying our export markets
To take better advantage of existing opportunities, Egypt needs to restructure the supply side of exports, argues Talaat Abdel-Malek*
In a two-part article entitled Exports: The Five-piece Puzzle, which appeared in Al-Ahram Weekly in May 2002, the author discussed several issues hampering the rapid, sustainable growth of Egyptian exports. The government has taken a number of positive measures to deal with some of the country's chronic export problems. Aside from the welcomed increase in oil and gas exports, other encouraging results are beginning to emerge as a function of different factors and market conditions. Examples of positive developments include the reported increase in exports to the US and a handful of other markets and the contracts signed during the ANUGA food fair totalling over $200 million. Add to these the projections made by ALEB (a USAID-funded agricultural export promotion project) suggesting a 20-fold increase (from $25m to $500m) in food products exports to the US during the next few years.
As positive as these announcements are, a number of concerns must be noted to avoid raising unrealistic expectations. I will focus on three key concerns. First, the impact of the depreciation of the Egyptian pound on export growth has been modest. This is despite the fact that manufactured exports (including food products) typically have a relatively high price elasticity of demand, implying that, nine months after the drop in the exchange rate, one would have expected a more tangible export increase. It is true that imported inputs that go into producing many of our manufactured exports have also gone up in cost, thus dampening the positive effects of depreciation. But the government must have taken into consideration this factor in deciding to float the currency.
Second, world markets are still showing healthy growth despite the events since 9/11 and the failure of Doha and subsequent trade meetings to resolve issues of strategic importance to developing countries. Egypt's textile quota entitlements in the US are not fully utilised and the same is true of many of our quotas of fruits and vegetables in EU markets. This is not to mention the forthcoming quota increases negotiated under the Association Agreement with the EU, soon to become a reality.
Third, Egypt has been signing more bilateral trade agreements, which give both sides easier access to each other's markets. In principle, this is a welcomed arrangement that is expected to be mutually beneficial, as it leads to more open trade and greater rationalisation of resource allocation. It has been observed, however, that many of these agreements either languish unimplemented or turn out to be more effectively used by our trade partners, who are only too pleased to increase their exports to us.
Do these factors mean that we do not need to worry about the demand side of exports? Definitely not. All that is meant here is that export opportunities have existed in many foreign markets to a much greater extent than we have been able to tap so far. The expanded export prospects in EU markets warrant that we examine how we can take fuller advantage of them.
So, where are the bottlenecks? We are left with the supply side to search for these. Calls for more attention to export supply issues are not new. Our purpose in what follows is to briefly highlight the principal difficulties yet to be tackled effectively. To start with, we sometimes mistakenly believe that top priorities should be given to production capacity expansion. At times, increasing capacity alone becomes more or less our sole preoccupation, as in the tourism sector where building more hotel rooms has apparently become the driving force. Such one-sided preoccupation has led us to disregard serious quality deficiencies in the services tourists expect and demand today. Unless these deficiencies are properly addressed, Egypt will be unable to attract the type of tourism that is capable of paying for quality, and will continue to earn lower than expected returns for our investments in that sector.
In manufacturing, production capacity is not the key issue, at least for the time being. Widespread capacity under-utilisation in recent years is well recognised. The crucial question is whether we are producing goods that export markets demand. And what about products that we do not produce at present but for which we have the resources necessary to meet foreign demand? Consider the galabeyas or Ramadan lanterns imported from China. While Chinese domestic demand for both of these products is basically non-existent, entrepreneurs have successfully produced and exported them en masse. This decision was based on studies of the Middle East markets that revealed a promising demand for products of the right quality, competitive prices and dependable delivery.
Many other examples can be cited. They serve to underline the principle that supply issues must address the question whether we are producing the right products for specific export markets. We should start from what the markets need and phase out our addiction to follow the traditional production-oriented approach that has lost its role in market-driven settings.
It is dismaying to think that a country as rich in agricultural resources as Egypt finds itself unable to fill its quota entitlements of agricultural products that are in high demand by affluent consumers in European markets. FAO has recently stated that Southern Mediterranean countries (including Egypt) can look forward to expanding export prospects in European markets in both organic and non-organic agricultural products, although Egypt's exports to Europe declined by 3.7 per cent from the previous year.
It is worth noting that more remote agricultural producers, like those in Chile, Kenya and Thailand, have overcome geographical difficulties to capture distant markets. We must ask ourselves what these countries have done that Egypt has not in terms of facilitating long-distance agricultural trade.
These factual examples suggest that a restructuring of agricultural output is necessary if we are to benefit from existing market opportunities and, equally importantly, from rapidly growing markets for agro-industry products. The latter products, of course, have the extra advantage of generating higher added values. Such restructuring requires, among other things, the adoption of commercially viable farming, in terms of scale, technology and professional management.
Our textile industry, which was thriving three or four decades ago, should also be a prime target for such restructuring. The "band-aid solutions" featured in so-called reform measures of recent years will not suffice. It is hoped that, with assistance from the Industrial Modernisation Programme and similar initiatives, meaningful restructuring will soon begin to stress specialisation, revamp production lines and technologies, liberalise input purchases, focus on products in which we have competitive advantages, establish sustainable linkages with major customers and distribution networks abroad and revitalise stagnant research and development. Much of this is unlikely to materialise until the private sector plays a greater role in that sector than at present, and the government takes firm measures to relieve the sector from supply restrictions and excessive transaction costs.
Other sectors, particularly those with the potential to serve as "feeder industries" to thriving international production networks managed by multinationals in such sectors as automotives, computer equipment and telecommunications need to take the measures enabling them to qualify as regular suppliers. These measures, to be successful, call for a shift in management orientation and some serious restructuring of production and procurement practices, as well as upgraded labour skills at various levels.
Supply side considerations also refer to our obvious lack of export market knowledge, and weak international marketing practices that continue to be driven primarily by short-term profit motives. The strategy of "market cultivation" is rarely practiced, and is often considered a luxury few can afford. Market cultivation today is a joint business-government responsibility since it often entails the upgrading of export infrastructure and sharing of market risks.
A promising example is the recent establishment of refrigerated storage facilities at the Cairo International Airport. The Toshka desert reclamation project might hold promise, but very little is known about cost and other factors that determine export competitiveness there. Another model, involving Italian assistance and sponsored by UNIDO, is the pilot project launched to apply the concept of traceability to food products destined for export. The aim is to establish a "green corridor" facilitating easier access of our food exports to European markets by ensuring compliance with EU regulations regarding all phases of production of any food product.
The latter example suggests that successful market cultivation is based on an integrated plan that attends to a whole range of market-driven requirements, from the type of product produced to its packaging, transport, delivery, promotion and customer service.
In organising for export, initial support might focus on the most promising exporters, ie those with the capabilities and commitment to lead the way. Their actions would illustrate what needs to be done and how. Our top concern should not be on the number of exporters as much as on those most likely to deliver good performance. We should also promote the practice of supply linkages, whereby smaller producers would supply exporters according to required specifications, thus mobilising production capacity to serve demand in specific markets.
Three more supply issues must be mentioned. First, the use of brands is of paramount importance in many products, especially those claiming distinct quality. But establishing and maintaining a brand is no easy task. Accordingly, producers in many developing countries have resorted to cooperative production/ marketing agreements with leading brands. This is not the place to dwell on the pros and cons of this option. Suffice it to say that it has become increasingly sought after due to the obvious benefits accruing to both sides, but also very demanding for a developing country producer to qualify. Often, the brand holder provides much technical and management assistance to ensure conformity and consistence and thus protect the brand's reputation.
Second, an attentive presence in export markets is an obvious asset if not a must. This may be achieved through effective agents, dealers and distributors, or branch offices. It is no longer sufficient to merely participate in trade fairs missions. Continued presence is necessary to monitor market developments, respond quickly to customer feedback and support promotional efforts.
Third, more forward-looking export policies are needed, to assume more (calculated) risks, seek alliances with foreign marketers, develop better negotiating skills, take a longer-term perspective in cultivating export markets and conform to the spirit as well as the letter of international agreements and contracts. Malpractice that has tarnished Egypt's reputation in recent years must be firmly and swiftly dealt with, regardless of who has committed these offences.
Thus, Egypt's future export performance will depend, as is the case in other countries, on the quality of management at the macro and enterprise levels. Essentially, both levels are jointly responsible for dealing with the supply issues outlined above. It has become a cliché to say that Egypt's export potential is enormous. However, realising such potential is still a challenge yet to be met.
* The writer is professor of economics at the American University in Cairo.
