Industrial Policy in Egypt_Nihal El-Megharbel

8/8/2019 Industrial Policy in Egypt_Nihal El-Megharbel

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Industrial Policy in DevelopingCountries: The Case of Egypt

Bonn

19 November 2009

Nihal El-Megharbel

Ministry of Local Development


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Industrial Policy in Egypt

11/27/2009 Industrial Policy in Egypt 2

Egypt is a good example to analyze IP because, like

other developing countries, it:

adopted IP extensively in the 50s and 60s.

used almost all IP instruments, including trade, subsidies,

restrictions, etc.

The policy is now under review, with strongly held views onboth sides.


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Some Suggestions (1)

Section 1 provides a framework conditions for

industrial development in Egypt Start with some macro-economic and sectoral

indicators.



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Some Economic Indicators (1)

11/27/2009 4Industrial Policy in Egypt

Source: Ministry of Economic Development. 2009.


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Source: Ministry of Economic Development. 2009.


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Source: www.cbe.org.eg. 2009.


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Source: www.capmas.gov.eg. 2009.


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Some Recent Reforms


Liberalization of foreign trade through, reducing the average weighted tariff rate

to 5.9%, and establishing a network of FTAs including (Egypt-EU AA; QIZ;

PAFTA; Egypt-Turkey FTA; and the COMESA)

Strengthening bank balance sheets and banking supervision

Privatization of the 169 remaining public enterprises through 3 parallel

programs, namely Sales of assets and shareholdings in public enterprises and

joint venture entities; Restructuring of other public enterprises; and the

introduction of corporate governance principles and practices in state-owned-enterprise

Income tax rate was reduced to a maximum of 20% and tax administration was

simplified

The pricing system of energy was gradually liberalized towards international

prices.

The regulatory role of the Government was reinforced by establishing the

Competition, Consumer Protection, Fair Trade, and Food Safety authorities


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The reform outcomes were acknowledge by many

international organizations

9Source: www.doingbusiness.org and Credit Suisse Report. October 8, 2008

World Bank. Doing Business Report. 2008

Egypt, the top reformer in the region and worldwide.World Bank. Doing Business Report. 2009

Two of last years top reformers - Colombia and Egypt -

retained their top reformer status.

Credit Swiss Report. 2008

Egypt ranks third among the most attractive country forFDI, due to its low macro risk score


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Egypt is still a land of untapped opportunities

Competitive cost of production (cheap skilled labor,

low costs of energy and transportation). Friendly business environment.

Large domestic market (more than 80 millions) with

large propensity to consume.

Access to large size markets of a total population size

of 1.7 billion through FTAs. Proximity to main markets.

10


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Section 2 presents a history of IP in Egypt in achronological order, I suggest that you split it in

parts, according to changes in IP.

The 1950s-1960s: Active IP based on large

subsidies, import controls, etc..

The 1970s-1980s: First attempts to attract FDI, dual

system.

1991 2001: ERSAP

2001 2003: Liquidity crisis 2004 present: New generation of reforms



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Section 2 concentrates mainly on manufacturing

sector.

I think we need to either: talk about other sectors, or

implicitly explain that we are addressing IP in the

manufacturing sector



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Section 3 discusses the binding constraints forinvestment and growth in Egypt today.

today this section starts by reviewing growth pattern

during 1980 present.

We must be very cautious using WEF indicators.

ECES business barometer (1998-present). Analysis of IFC data is questionable, especially when

we talk about firms size.



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Some Suggestions (5) Section 5 presents Egypts industrial policy strategy papers.

Again, more emphasis on manufacturing.

IDS assumptions:

ICOR estimate for the industrial sector is 4 in the initial period till

2015. Starting 2016, the productivity of capital would improve in the

industrial sector, and hence the ICOR is assumed to decline to 3.5

Inflation rate is assumed to decline gradually from 8.9% in 2005 to

5.5% in 2006, 5% in 2007, 4.5% in 2008, 4% in 2009, 3.5% in 2010,

and stabilizes around 3% until 2025.

Investments by public sector enterprises in the industrial sector are

assumed to gradually decline from their current level of 32% to 20%

during 2006-2008, 15% during 2009-2012, 10% during 2013-2017, and

then stabilize at 5% during 2018-2025. FDI is arbitrarily set such that average for five year sub-periods seems

realistic with the Egyptian economys historical FDI records.



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A wide consultation was made before IDS was finalized (the

private sector, banks, academia, donors, etc..)

In general, I think section 5 is too long and needs more focus

instead of going through IDS components.

This section should talk about the informal sector and the

implications of IP on formalizing it.

On SMEs, issues such as promoting linkages with large firmsthrough clustering and value chains are very important.

SMEs should not be treated as the miniature version of larger

firms.

Localizing SMEs development.



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Last section the policy impact and quality of industrial policyin Egypt.

Analysis in this section is again based on WEF indicators and

on impressions of interviewers rather than facts. The issue of large firms influences on the government based

on their relations with the ruling party: Mainly rumors.

The large firms are by definition able to reach government

officials, who listen to them and try to solve problems.

We do need large producers, large exporters and large

employers, hence supporting them is not wrong provided that

the government does not discriminate against SMEs. This relationship is also reciprocal.



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Measuring Performance


Average TFPG in Egyptian Manufacturing Industries

0.30

0.67

1.04

0.97

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1980/81- 1984/85 1985/86- 1990/91 1991/92- 1995/96 1996/97- 2000/01

%

Period covered: 1980/81 2000/01

Sectors: 16 manufacturing industries

Source: Galal and El-Megharbel, 2005.


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Contribution of IP to Performance


The results, orally:

While capital intensity has a negative impact on TFP growth,

FDI has a positive but insignificant effect.

Trade protection and direct subsidies negatively affect TFP

growth, which suggests that IP has not been effective in

Egypt.

Public investment and market competition have a positive and

significant impact on TFP growth.


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Main conclusion of 2005 study


Three main conclusions can be made on the basis of the

analysis of the Egyptian case:

IP has had a positive impact on industrial diversification.

Without active IP, the industrial sector would have been

narrower and less deep.

However, the evidence does not support the view that IP was

effective in improving productivity. ERPs and subsidies may

have reduced the incentives to be more efficient. Where IP worked, the policy was temporary and performance

based (e.g., exports)


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Main conclusion of 2005 study


Targeting new activities rather than existing ones,

Rewarding entrepreneurs on the basis of measurable outcomes

rather than on prior convictions,

Providing support only for a pre-specified period of time rather

than make open ended commitments, and

Supporting activities with broad benefits rather than targetingspecific sectors.

The best institutional arrangements to carry them out in such a

way as to shield public officials from influence while engagingthe private sector in a constructive dialogue about the best

opportunities for a prosperous economy


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Thank you.

Documents

Industrial Policy in Egypt_Nihal El-Megharbel