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Industrial Policy in Egypt 2004–2011

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Industrial Policy in Egypt 2004–2011 Discussion Paper 13/2013 Industrial Policy in Egypt 2004–2011 Markus Loewe Industrial Policy in Egypt 2004–2011 Markus Loewe Bonn 2013 Discussion Paper / Deutsches Institut für Entwicklungspolitik ISSN 1860-0441 The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data is available in the Internet at http://dnb.d-nb.de. ISBN 978-3-88985-616-6 Markus Loewe, Department "Competitiveness and Social Development", German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE), Bonn E-Mail: [email protected] © Deutsches Institut für Entwicklungspolitik gGmbH Tulpenfeld 6, 53113 Bonn +49 (0)228 94927-0 +49 (0)228 94927-130 E-Mail: [email protected] www.die-gdi.de Contents Abbreviations Summary 1 1 Introduction 3 2 Industrial policies in developing countries – a conceptual framework 5 3 The context of industrial policy-making in Egypt from 2004 to 2011 9 3.1 Framework conditions for economic development 9 3.2 Main challenges for industrial transformation 13 3.3 The history of industrial policy from 1952 to 2004 17 3.4 The political constellation between 2004 and 2011 26 4 Strategies and instruments of industrial policies in Egypt from 2004 to 2011 30 4.1 General economic policy reforms 30 4.2 The ‘Egypt Industrial Development Strategy’ of the Ministry for Trade and Industry 31 4.3 Micro- and small enterprise promotion by the Social Fund for Development 39 4.4 The Ministry of Investment and the General Authority for Investment and Free Zones 40 4.5 Strengths and weaknesses of the strategies and instruments 43 5 Effects of industrial policies in Egypt from 2004 to 2011 46 5.1 Macro-level evidence 47 5.2 The instruments and their implementation 53 5.2.1 Effectiveness 54 5.2.2 Efficiency 60 5.2.3 Transparency and fairness 62 5.2.4 Relevance 65 5.3 Explanation for the strengths and weaknesses 74 5.4 Who benefited and who did not 76 6 After Mubarak … a new beginning 78 6.1 Political and economic developments since the revolution in 2011 78 6.2 Lessons learnt 80 6.3 Recommendations for the new government 81 6.3.1 Reforming the framework of industrial policies 81 6.3.2 Reorganising the making and management of industrial policies 83 6.3.3 Redesigning industrial policies 84 Bibliography 89 List of interviewees 97 Annex 101 Boxes: Box 1: Main deficits of the industrial policies implemented by the Nazif government (2004–2011) 53 Figures: Figure 1: Diversification of Egyptian exports (2004) 15 Figure 2: Egypt’s three growth spurts (1980–2010) 23 Figure 3: Egyptian industrial policy: The actors and their responsibilities 32 Figure 4: Main constraints for doing business in Egypt – according to the World Economic Forum Global Competitiveness Reports (GCRs) of 2003 and 2010 48 Figure 5: Main obstacles for SMEs in Egypt – according to a case study from 2012 50 Figure 6: Egypt’s ranking in 2006 and 2010 compared with Tunisia in 2010 – based on indicators of structural change in the WEF Global Competitiveness Reports 52 Tables in Text: Table 1: Non-hydrocarbon exports to world trade partners by technology content (1985–2005) (% of total exports) 16 Table 2: Nominal and effective protection of selected manufacturing sectors in Egypt (2004) 26 Tables in Annex: Table A1: Selected governance indicators related to industrial policy (2008) 103 Table A2: Quality of Egypt’s business climate – according to World Bank Doing Business Reports 105 Table A3: Most problematic factors for doing business in Egypt – according to World Economic Forum Global Competitiveness Reports 108 Table A4: Egypt’s global-competitiveness ranking – according to the World Economic Forum 109 Abbreviations BDS business development service BTI Bertelsmann Transformation Index CAPMAS Central Agency for Public Mobilization and Statistics CIDA Canadian International Development Agency CPI Corruption Perception Index of Transparency International DBI Doing Business Index DIE Deutsches Institut für Entwicklungspolitik / German Development Institute ECES Egyptian Center for Economic Studies EGP Egyptian pound EIDS Egypt Industrial Development Strategy EIU Economist Intelligence Unit ETTICs Egypt Technology Transfer and Innovation Centres EU European Union EUR Euro FDI foreign direct investment GAFI General Authority for Investment and Free Zones GAFTA Greater Arab Free Trade Area GCR Global Competitiveness Report GDP gross domestic product GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit GTZ Deutsche Gesellschaft für Technische Zusammenarbeit ICT information and communication technology IDA Industrial Development Agency IMC Industrial Modernisation Centre IMF International Monetary Fund ITDA Internal Trade Development Agency MENA Middle East and North Africa MFTI Ministry for Trade and Industry MOF Ministry of Finance MOI Ministry of Investment MSEs micro- and small enterprises NDP National Democratic Party NGO non-governmental organisation QIZ Qualifying Industrial Zone R&D research and development SCAF Supreme Council of the Armed Forces SFD Social Fund for Development SMEs small and medium-size enterprises TIEC Technology Innovation and Entrepreneurship Centre UNDP United Nations Development Programme US United States USD United States Dollar WEF World Economic Forum WGI World Bank Governance Indicators WTO World Trade Organization Industrial policy in Egypt 2004–2011 Summary Egypt experienced considerable economic growth during President Mubarak’s last term, with annual per-capita growth averaging 6 per cent from 2004 to 2008 and only dropping below 2 per cent after the January 25th revolution of 2011. However, this growth was nei- ther pro-poor nor sustainable. Because it was not labour-intensive, it did not reduce either poverty or unemployment. It was based on windfall profits (high oil prices and high receipts from tourism and the Suez Canal) rather than improvements in international competitive- ness. Although foreign direct investments (FDIs) and exports rose, almost all FDIs were in the extractive industries or service sectors rather than manufacturing or agriculture. Imports increased even faster than exports, creating a negative balance of trade – dropping from a surplus of United States Dollar (USD) 3 billion in 2004 to a deficit of USD 5 billion in 2008 that worsened in 2011 and 2012. Since Egypt has to import crude oil and its natural gas reserves are shrinking, it is unlikely that the country’s external position will improve. Moreover, current exports are undiversified and have low technological content, and only one-third of all exports are finished goods. The challenge for the Egyptian economy is to become more productive and diversified through the development of more knowledge-intensive industries and exploitation of inter- firm specialisation. But the question for Egypt and for other low- and middle-income coun- tries is how structural change can be achieved and what the state can do to facilitate it. In- creasingly there is a consensus that industrial policies can be decisive in solving market failures – especially regarding the provision of public goods (research and development, (R&D), workers’ training, market information, etc.) and the coordination of complementary investments. But uncertainty persists about how and how much a government should inter- vene, given the risk of government failure (misallocation of funds, political capture and the creation of perverse incentives for investors and bureaucrats). This is especially true for countries with weak political checks and balances – like the Egypt of Mubarak. Egypt has a long history of strong interventionist, top-down industrial policies. After the ‘Free Officers’ staged a coup d’état in 1952, the new regime embarked on a statist path of development to promote structural change and growth. It attempted to channel labour and capital into sectors that would help develop the country. But industrial policies were also used to channel privileges and resources to the regime’s clientele. A substantial reorientation took place in 2004 when President Mubarak appointed a new government, which included several former businessmen. It endorsed a new strategy for industrial policy that was considerably more market- and demand-oriented and less inter- ventionist. It was intended to address the market failures that were preventing structural change in Egypt and avoid vertical discrimination as much as possible. The question is whether the businessmen in Egypt’s government were more successful at facilitating structural change without political capture: How did they diversify the econo- my? What instruments did they use? Were they more effective and efficient than their statist predecessors? Were their policies fair and transparent – or did they serve their own busi- nessmen-minister interests and those of their clientele? What can Egypt’s new government, which came to power after the revolution and parliamentary and presidential elections, learn from the industrial policies of the businessmen-ministers? German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) 1 Markus Loewe This study demonstrates that Egypt’s post-2004 industrial policies have been comparatively effective in promoting investment and exports but much less so in facilitating structural change. While they have improved entrepreneurs’ access to finance, simplified tax rates and procedures and cut away red tape, they have not substantially improved the technology con- tent of exports, firms’ business sophistication and technology absorption, or
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