Monday,18 December, 2017
Current issue | Issue 1343, (4 - 10 May 2017)
Monday,18 December, 2017
Issue 1343, (4 - 10 May 2017)

Ahram Weekly

Industrialisation and development in Egypt

Greater industrialisation is not only the only way to meet the demands of domestic consumption in Egypt, but also the best policy option for comprehensive development, writes Sayed Moawad

Since the inception of the Industrial Revolution in Britain around 1780, industrialisation has been and will continue to be the cornerstone of the structural transformation of any society as it leads to a high level of output and employment accompanied by unprecedentedly high rates of income resulting in increased demand for manufactured goods.

The Egyptian economy is a largely import-dependent economy, and Egypt is reordering its priorities to achieve the industrialisation that it is hoped will provide many advantages to the country’s economy. These include, first, backward and forward linkages with other main economic activities such as agriculture and services; second, new jobs, particularly in the labour-intensive industries; third, incentives for technology transfer and the attraction of foreign direct investment; and fourth, the further integration of the Egyptian economy into the global economy.

Through industrialisation, Egypt can meet the goals of development through increasing the availability and widening the distribution of basic goods such as food, shelter, healthcare and social protection, going beyond material well-being to paying greater attention to the cultural and humanistic values that generate both individual and national self-esteem, and expanding the scope of the economic and social choices of individuals, freeing them from ignorance and human misery and the country from its political dependency.

The government has taken brave decisions to create an environment conducive to industrialisation by, inter alia, introducing a draft law on industrial licences to dismantle the shackles that limit the movement of industry in Egypt. However, although this regulatory aspect is important, it is likely to be null and void unless other measures are taken in parallel. Among these was the government’s decision to float the Egyptian pound in November 2016, which is expected to provide additional advantages to Egypt’s exports through reducing prices and increasing demand.

The floating exchange rate has led to increases in the prices of imported inputs and other goods, but prices will take their normal course with improving conditions. This situation emphasises that industrialisation is not only the only way to meet the demands of domestic consumption, but also the best policy option for comprehensive development in Egypt.

This article shows why industrialisation is crucial for development, discussing its opportunities and challenges, the ways in which industries can be modernised, and the future of industrialisation in Egypt.

 

INDUSTRY AND DEVELOPMENT: There is a strong connection between industrialisation and development. Industrialisation is not only about building the capacity of society to process raw materials to produce consumable goods, but is also part and parcel of the social and economic development process.

Through industrialisation, an increasing share of national resources is mobilised to create a technically diversified and developed economic structure using the most recent technological techniques and having an effective industrial sector capable of achieving growth in producing not only consumable and capital goods, but also production goods. Therefore, industrialisation leads to a higher growth rate for the economy as a whole and accordingly social and economic development.

Successful industrialisation is the cornerstone of the future of the Egyptian economy and the guarantee of achieving successful development that is not restricted to mere increases in per capita income, but that also leads to the alleviation of poverty, the reduction of unemployment, and the elimination of the discrepancies between classes in society.

Economists believe that developed nations are necessarily those that are industrially advanced, and therefore Egypt should seek to meet the needs of its continually increasing population and gain a share of global markets in the light of harsh competition in the international marketplace. Here, the parties compete with each other while working under the strict rules of the multilateral trading system.

Traditionally, industrial policy has been strongly related to infant industries that incur high costs in their initial stages, making them unable to compete with foreign competition. Therefore, government intervention, whether direct or indirect, is imperative to enable these infant industries to reduce costs, to increase production, and to grow. This situation is very relevant to Egypt, where the government is now giving due attention to the development of small and medium-sized enterprises (SMEs). Furthermore, it is seriously seeking to integrate the informal sectors of the economy into the formal ones. Both the country’s SMEs and the informal sector need a well-prepared and well-focused industrial policy that will enable them to work more effectively.

The core criteria for such an industrial policy include the following. First, there should be a clear and stable vision in which the priorities of the policy should clearly focus on actual and measurable goals implemented according to strict time limits. Second, it should be customer-oriented, and the agencies implementing it should be fully aware of how private enterprise and markets work and should comprehend the language of industrialists. Third, there should be participation in formulating industrial policy in which experts, entrepreneurs and the government work together and consider it as a national project for both social and economic transformation and one that imposes obligations on all concerned.

Fourth, there should be proper evaluation of policy impacts, as follow-up and ongoing evaluation are crucial to introducing any enhancements needed and precautions against political direction. Fifth, there should be clear responsibilities. When many agencies are involved in implementing policy, the division of labour should be clearly defined in order to avoid the duplication of responsibilities.

Sixth, there should be non-discriminatory and effective tools, and interventions should be designed in order to encourage investors to innovate. Seventh, financial incentives should be designed to accommodate the changing environment, and beneficiaries should be aware that these are temporary and are not a permanent obligation to support inefficient industries seeking rents. Conditions need to be set out to terminate unsuccessful industrial experiences.

Eighth, priorities should be rationalised such that they are directed at specific industrial sectors having comparative advantages. Ninth, there should be a conducive investment climate in order to reduce public costs and investment risks.

Successful industrial experiences have proved that an effective industrial policy has certain features, including a legal framework protecting property rights and guaranteeing contract enforcement; an incentivised and skilled labour force; good information, communication and transportation infrastructure; an efficient financial system enabling investors to obtain capital and insurance at reasonable cost; the elimination of bureaucratic barriers and unnecessary regulations; transparent managerial decisions; a transparent taxation system; and free trade.

 

OPPORTUNITIES AND CHALLENGES: Greater industrialisation in Egypt can be encouraged by a proper legal framework, including laws to protect the national economy from injurious practices in international trade, to protect competition and prevent monopolistic practices, to give preference to domestic products and to promote a large domestic and regional market.

Challenges include the sometimes low level of quality of Egyptian products, the bias against manufactured exports, shortcomings in scientific research into developing technology and innovation in industrial applications, the lack of a skilled labour force and technical cadres, and the lack of subsidies on the inputs necessary for industry.

In addition, the country currently suffers from a low level of education and training and an absence of coordination and integration. Egypt lost its Most Favoured Nation status after the World Trade Organisation (WTO) Uruguay Round of trade negotiations when these privileges became available to all countries. Though Egypt has not yet ratified the market access agreement under this Round, once this is ratified the access of foreign products to the Egyptian market will add a further burden on domestic products.

Greater industrialisation can be achieved by modernising industry in Egypt. This has become imperative in order to raise competitiveness in respect of quality, cost and prices in cases where comparative advantage alone is not sufficient to access international markets. Egypt should adopt a strategy to modernise its industry in order to move from assembly to integration, with the focus on feeder industries that have the capacity to act as vehicles for development. Furthermore, there should be an overhaul of the industrial structure in order to increase the relative importance of capital goods and limit the export of raw materials to benefit the manufacture of semi-finished and finished goods.

This programme should be based on three pillars. First, it should create a climate conducive to building industrial efficiency, which includes providing the technical support necessary for the modernisation process and achieving industrial development goals by establishing a database on industry, promoting the capabilities of business associations and encouraging them to help private institutions through technical assistance, information and training, encouraging private and non-governmental organisations to perform an active role in implementing quality standards and technology transfer, encouraging non-profit organisations to help develop the managerial and skills capabilities of small industries, and finally ensuring that the finance system provides competitive financial tools.

Second, it should promote competitive capabilities and integration between firms. This pillar seeks to raise the efficiency and competitiveness of firms by developing their organisational, technological and human resources, supporting research and development activities, and promoting investment in environmental protection and the rationalisation of energy use and domestic resources.

Third, it should aim to bring about a gradual change in business behaviour. The idea is to change the mindset of businessmen to comply with the requirements of modernisation by adopting best practices used by firms in Egypt and abroad and spreading awareness of the reasons behind the productive efficiency of businessmen. It should support projects that show a high return on investment in respect of competitiveness, including quality of production, innovation, marketing and training.

Policy-makers should bear in mind that industrialisation is particularly important where there is a structural disconnect between population increases and increases in production. Industrialisation is no longer a means to meet the needs of the domestic market or to promote import-substitution, as was the case in the past, but is now a means towards comprehensive societal development that covers production and services and changes societal behaviour and the related values of society.

 

DELIVERABLES: This industrial modernisation programme is expected to achieve the following deliverables.

First, it should improve productivity and enhance the managerial and marketing skills of industrial firms. It should reduce production costs and increase industrial growth and the industrial value added. Second, it should increase domestic market share and enhance value chain linkages. Third, it should enhance export capabilities and increase cash inflows. Fourth, it should increase investment and the operations of firms benefiting from the industrial modernisation programme. Fifth, it should improve technical expertise through enhancing the capabilities of domestic experts and enhancing the technical skills of the providers of services in the field of industry.

Sixth, it should provide recommendations for new financing tools to modernise and promote SMEs, provide the explanation of policies and the business environment required for the establishment and support of SMEs, and enhance the institutional capabilities and management of the main stakeholders in the programme.

In general, the future of industrialisation in Egypt is subject to two conditions: first, understanding the rules of the international trading system; and second, dealing seriously with the internal challenges that hinder industrialisation in Egypt, including an inefficient education system, bureaucracy and the complexity of procedures, low productivity, and the weak performance of state-owned enterprises.

       Industrialisation has great importance for Egypt, and it has become imperative to eliminate the obstacles that impede the acceleration and deepening of industrialisation in the country. In order to develop industrialisation and achieve comprehensive development, it is necessary to control the ever-increasing population that puts pressure on resources and deprives the majority of the benefits of economic development. It is necessary to give attention to education in general, and technical education in particular, as in the absence of technical education there will be no skilled labour force and consequently there will be no industrialisation.

It is also necessary to adapt a strategy to increase the competitiveness of Egyptian industry based upon enhancing productivity through intensive investment in research and development and in particular in high technology that creates high value added. It is necessary, too, to pave the way to securing a conducive industrial investment climate through amending the legislation and regulations related to tax and customs policies, interest rates on industrial loans, investment incentives for high technology and intensive labour industries, and the charges for services provided.

Achieving high rates of industrial production can be done through increasing exports and attracting foreign direct investment where both contribute to the expansion of the economy regionally and internationally. Achieving enhanced industrial productivity can be done through programmes and policies designed to increase the competitiveness of industry.

There is a need to bring about the gradual transformation of the structure of industry from industries based on resources and simple technologies to industries based upon higher technology. There is also a need to focus on industries in which Egypt has a competitive advantage, and to reconsider the performance of public-sector companies either through injecting investment into them or putting them out for privatisation.

Finally, there is a need to learn from the successful experiences of other countries, including South Korea, in industrialisation and export development.

There is no doubt that industrialisation is the starting point for the Egyptian economy to overcome the chronic problems that have accumulated over the years, such that the percentage of industry in the national economy has dwindled by around 16 per cent of GDP since the middle of the last century.

Industrialisation is not only about targeting economic prosperity, but is also about national independence. In 1791, Alexander Hamilton, one of the Founding Fathers of the United States, proposed to the American Congress that “it is imperative to develop our manufactured products, not only for attaining prosperity, but also to achieve the independence of our nation.” In Egypt, we have to adopt this recommendation as a top priority in order to achieve our own prosperity and our country’s independence.


The writer is the manager of anti-dumping policy at the Ministry of Trade and Industry.

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