Egyptian Industry since the Early 1970s: A History of Thwarted Development by Agence Française de Développement

Agence Française de Développement

Working Paper

March 2008

Egyptian Industry since the Early 1970s: A History of Thwarted Development

Hélène Djoufelkit-Cottenet, Research Department, AFD (djoufelkith@afd.fr)

Département de la Recherche

Agence Française de Développement 5 rue Roland Barthes 75012 Paris - France Direction de la Stratégie www.afd.fr Département de la Recherche

Disclaimer The analyses and conclusions presented in this work are those of its authors. They do not necessarily reflect the official views of the Agence Française de Développement or its partner institutions.

Publications Director: Jean-Michel SEVERINO Editorial Director: Robert PECCOUD ISSN: 1954 -3131

CopyrightDeposit: 1st quarter, 2008

Keyboarding/layout: Anne-Elizabeth COLOMBIER

Contents

1.1

1.1.1 1.1.2

Introduction

Political will to promote industry through gradual liberalisation of the economy

The Sadat era

A timid attempt at a liberalisation policy: 1974-1990 The Mubarak era

1.2

Intensification of the reforms as from 1991 under pressure from the Bretton Woods institutions.

1.2.2

The new investment law

1.2.1 1.2.3 1.2.4 1.2.5

Privatisation of industry

5 6 7 7 8

Liberalisation of trade and exchange rate policy

Promotion of SMEs

Results of the reforms

1.3

2004: a new government for a new economic approach.

Relative size and performance of Egypt’s manufacturing sector

Structure of the manufacturing sector

Resource abundance: a heavy burden for the manufacturing sector

What economic theory tells us

2.1

2.2

2.3 3.

3.1

3.1.1 3.1.2 3.1.3 3.2

Share of the industrial sector in the Egyptian economy Performance of Egypt’s manufacturing sector

9 11

Rent resources and manufacturing sector performance

The institutional context, open door policy and rent resources combine to favour importers

and other “rent-based” activities

The credibility of the Nazif government’s reforms

Allocation of talent

Conclusion

Bibliographical references

Introduction

Throughout the 20th century, industrialisation was a central

stimulate the private sector and attract foreign capital, par-

Egypt. The scale of the challenge led the Egyptian govern-

the liberalisation policy, which in his view did not go far

political theme and an economic development objective in

ticularly petrodollars. President Mubarak tried to strengthen

ment to pursue active industrialisation policies. At the begin-

enough to meet the needs of industry, while at the same

ning of the century, industrialisation went hand in hand with

time reactivating and redefining the role of the state through

the rise of nationalist sentiments; the economic discourse

the reintroduction of five-year plans.

was reflected in an economic policy of Egyptianisation; and a

The political will to promote industry in Egypt has thus been

modern industrial sector emerged. From the 1930s to the

affirmed for many years, under a variety of strategies. To

early 1960s, the architects of Egypt’s industrialisation –

what extent has Egypt’s industrial performance matched

Talaat Harb, I.G. Levi and Ismail Sidqi – promoted private

the effort invested? Has not the country’s political commit-

local industry in a context of free competition.

ment to industrialisation run afoul of economic reality? This

When Nasser came to power, industry was still a central

paper attempts to answer these questions, focusing on the

economic issue, but the industrialisation strategy changed.

period from 1970 to the present.

In 1961, industry was nationalised, along with most of the

We begin by reviewing the industrialisation policies under

economy’s trade and production system. The country adop-

Sadat and Mubarak, placing them in their political and eco-

ted an import substitution industrialisation strategy aimed at

nomic context. Next, we analyse the performance of

achieving economic independence, the counterpart of

Egyptian industry as a driver of long-term growth. Lastly, we

Egypt’s political independence. Sadat’s arrival in power did

try to explain why the development of Egyptian industry,

not call into question the role of industry in economic deve-

and particularly manufacturing, has been thwarted since

lopment, but the industrialisation strategy changed once

the early 1970s, despite the government’s declared inten-

again: through a policy of economic opening, Sadat tried to

tion to promote this sector.

1. Political will to promote industry through gradual liberalisation of the economy

President Nasser’s (1956-1970) strategy of inward-looking

mers, with instructions from President Mubarak (in power

break down as early as 1964, when the appearance of

promote development led by exports and new technologies.

development and promotion of national industry began to

since 1981) to further accelerate the reform process and

major macroeconomic imbalances led to a shortage of

The various development strategies implemented since the

government resources. To deal with this situation, the

early 1970s have thus been aimed at economic liberalisa-

government in 1967 granted greater freedom for private

tion and promotion of the private sector in the economic

economic agents (mainly non-Egyptian) as regards indus-

growth process. The goal has been to achieve competitive

trial investment. The first law on foreign investment, enac-

growth that generates jobs and foreign exchange. Industrial

ted in 1971, granted tax facilities to investors, promised that

strategy has therefore shifted towards allowing the market

foreign capital would not be nationalised and created free

and the private sector to play a greater role, while maintai-

zones. The real change in industrial strategy did not start

ning strong government intervention in the industrial sector

until 1974, however, with President Sadat (1970-1981) and

through public subsidies (over part of the period) and sub-

the beginning of the “open door” policy (Infitah). At the time,

stantial public investment. Within the industrial sector,

Sadat wanted to give a new direction to public policy, and

manufacturing plays a vital role. According to economic

this desire was reflected on the economic front by an

theory, the manufacturing sector is a much stronger growth

attempt at a liberalisation policy. A second break with the

driver than are the other components of the industrial sec-

past occurred in 1991 when Egypt, under the aegis of the

tor (oil and gas, electric power, construction); it is supposed

IMF and World Bank, embarked on a structural adjustment

to be a source of innovation and technical progress, and

programme that accelerated the pace of economic liberali-

hence of sustainable long-term growth. We will therefore

sation. A third came in 2004 with the formation of Ahmed

give special attention to this component of the industrial

Nazif’s government and its “dream team” of economic refor-

1.1

sector.

A timid attempt at a liberalisation policy: 1974-1990

President Sadat took a different political and economic tack

Arabism: it merely sought to allow private investors to par-

USSR were growing worse, the country turned towards the

to introduce a radical break with the Nasser era, but rather

from that of his predecessor. As Egypt’s relations with the

ticipate in the existing system. The paper was intended not

Western bloc, hoping to benefit from its economic prosperi-

to address the errors and inefficiencies of the centralised

ty and to attract petrodollars. The economy was to be refor-

state management of the economy in the 1960s.

med, with liberalisation called for in all sectors. The ideolo-

1.1.1 The Sadat era

gical foundations of this new policy were set forth in the

October Paper, so called because it was drafted in the after-

With the Infitah policy, Sadat tried to redefine the economic

math of the October 1973 war. As Rivier (1981) points out,

role of the state from direct, centralised management of the

the October Paper rejected neither socialism nor pan-

economy to liberalised, non-interventionist management.

1. Political will to promote industry through gradual liberalisation of the economy

The new president wished to follow the South Korean eco-

the state by reintroducing five-year plans. As noted by

was the cornerstone of this policy. The first legislative mea-

rather than “parasitic”, as it had been during the Sadat era.

September 1971. It was superseded, however, by Law 43

infrastructure, while leaving the private sector more scope

nomic model, and encouragement of foreign investment

Roussillon (1988), he wanted the Infitah to be “productive”

sure to encourage foreign investment was Law 65 of

The state’s role would be to maintain economic and social

of June 1974, which was to play a fundamental role in the

for activity in the productive sectors. Mubarak wanted to

liberalisation policy, being concerned with the investment of

reduce Egypt’s dependence on foreign aid and to promote

Arab and other foreign capital and with free zones. Four

sustainable growth by developing the productive sectors

types of inducements to foreign investment were granted:

and exports. The main objective of the first five-year plan

privileged tax treatment, the possibility of repatriating capi-

(1982-1987) was to reallocate resources from consumption

tal and profits, a guarantee against nationalisation and

and imports towards investment, in order to reduce the cur-

favourable operating rules.

rent account deficit. The second five-year plan (1988-1992)

The open door policy also sought to reactivate the Egyptian

was focused on developing the private sector. Law 43 was

private sector. To this end, several series of measures were

amended and replaced in 1989 by Law 230, offering further

taken. First, the relationship between the public and private

inducements to the private sector. In particular, it permitted

sectors was reconfigured. Specifically, an executive decree

foreign investors to own 100% of a manufacturing firm in

in 1975 allowed the introduction of private capital in public

Egypt and to buy land in order to develop their business.

enterprises. Second, the operating rules governing the pri-

Throughout the period considered, the rules governing pri-

vate sector were relaxed, notably as regards import and

vate sector activities were made more flexible in terms of

export operations. Lastly, the government called for the

access to imports (relaxation of the multiple exchange rate

return of private Egyptian capital held abroad (consisting of

policy to help the private sector, particularly after the reform

capital invested abroad during the Nasser era and the

of 1987) and access to bank credit (particularly from com-

savings of emigrant workers); in 1975, it granted such capi-

mercial banks). The private sector’s share of bank credit therefore rose from 10% in 1973 to 30% in 19901.

tal the same advantages as those extended to Arab and

Here again, the effort to promote the private manufacturing

other foreign capital under Law 43. In 1977, certain provi-

sector met with only modest success. Competition between

sions of Law 43 were extended to Egyptian public enter-

the private and public sectors was not completely free and

prises by Law 32.

fair from 1975 to 1986, as the public manufacturing sector

The results of the Infitah were disappointing, particularly in

received large public subsidies while the private sector did

terms of promoting private sector involvement in manufac-

not. In industries considered to be strategic in terms of jobs

turing, despite strong incentives for such involvement. The

(agri-food and textiles) or of national interest (petrochemi-

reasons undoubtedly lie elsewhere than in the incentive

cals), subsidies amounted to as much as 10% of turnover.

measures themselves. The fact is that relaxing the invest-

Lastly, over the 1974-1990 period, the central government

ment laws does not suffice to attract private investors; the

channelled an average of 26% of its total investment to the

macroeconomic environment is an equally important factor.

industrial sector2. Thus, while the letter of the law strongly

The reforms were limited to foreign investment and were

encouraged the private sector to grow and develop, in fact

not extended to the administrative and legal frameworks.

the public sector retained its privileged and predominant

Moreover, the Egyptian economy was still largely protected

status. This situation is not surprising given the difficulty of

and strongly oriented towards the domestic market.

retraining employees of public enterprises.

1.1.2 The Mubarak era

In this context, President Mubarak set out with two aims: to

adopt stronger liberalisation measures, since in his view the liberalisation policy did not go far enough to boost industry;

and at the same time to reactivate and redefine the role of

Central Bank of Egypt, various years. Ibid.

1. Political will to promote industry through gradual liberalisation of the economy

Foreign direct investment (FDI) accounted for only 1.7% of

canal revenue, remissions from Egyptian workers abroad,

measures taken. What little FDI did come in went to the

iod, the average annual GDP growth rate was 8%, driven by

GDP in 1990 , a very low level considering the incentive

and considerable economic aid. Over the 1974-1986 per-

financial, oil and gas, and tourism sectors rather than to

strong domestic consumption. After 1986, the international

manufacturing. Moreover, private sector agents engaged

environment deteriorated sharply. Oil prices fell by 50% bet-

only in speculative transactions, without locking in their

ween January and June, while tourism revenue also decli-

capital. As a result, in 1990 the private sector’s share in

ned. Egypt’s foreign exchange reserves shrank to the point

value added (23%) and manufacturing employment (25%)4

where the country was nearly unable to service its debt. In

was still relatively low, though higher than before the open

this context, priority was given to restoring macroeconomic

door policy of 1974 (10% and 19% respectively).

balances. A stand-by agreement was signed with the IMF in

Up to 1985, the liberalisation policy enjoyed a very favou-

1987, so as to give Egypt some financial breathing room.

rable international environment. From 1974 to 1985, Egypt

The main wave of reforms was not implemented until 1991,

received a number of windfalls: oil and gas revenue, Suez

1.2

however.

Intensification of the reforms as from 1991 under pressure from the Bretton Woods

institutions.

The years of economic imbalance from 1986 to 1990

buted increasing importance to the role of small and

March 1990, the government introduced the economic

job creation.

brought Egypt’s economy to the brink of a financial crisis. In

medium-sized enterprises (SMEs) in economic growth and

reforms required in return for IMF financial support. A year

1.2.1 Privatisation of industry

later, it launched a stabilisation and structural adjustment

programme. In addition, as a reward for Egypt’s support for

Privatisation of public enterprises began in 1991. Initially,

the Western allies during the first Gulf war, much of the

the process was slow and focused on small agricultural

country’s debt was rescheduled on highly concessional

firms, but the government accelerated it during the year by

terms. The sweeping economic reforms demanded by the

enacting the Public Business Sector Law (Law 203). The

IMF and World Bank radically changed the structure of

aim was to restructure state-owned enterprises and impro-

manufacturing industry.

ve their business positioning and their operating proce-

The structural adjustment programme initiated in 1991 gave

dures. Under this law, the Public Enterprises Office restruc-

priority to creating an enabling environment for private sec-

tured 314 non-financial enterprises, grouped them under

tor development. This priority was included in the third five-

the control of 27 independent holding companies having full

year plan (1992-1997), which aimed to encourage the pro-

financial and decision-making autonomy, and transferred

ductive capacity of the economy and rationalisation of

them to the new public business sector. In 1992, the pro-

resource allocation by promoting market mechanisms and

cess forged ahead with the official announcement that the

privatisation of these firms would begin5. In preparation for

the private sector in both investment and production. The

this, the 27 public holding companies were restructured and

plan also aimed to reduce Egypt’s dependence on imports for essential goods and to develop exports so as to reduce

the trade deficit. To this end, more liberal economic policies were implemented. Many changes were made in industrial

policy. The state eased its grip on the economy, and two

major measures were adopted to accelerate private sec-

World Bank, World Development Indicators, 2006.

The industrial output statistics of the Central Agency for Public Mobilisation and Statistics (CAPMAS) cover only businesses with more than ten employees.

tor development: privatisation of public enterprises and

5 These privatisations were part of the structural adjustment programme. The terms of reference of the Enhanced Structural Adjustment Facility approved by the IMF in September 1993 stipulated that 25% of the portfolio of public enterprises was to be privatised before June 1995. The remaining public enterprises were to be restructured and prepared for privatisation.

continued investment liberalisation. Trade and exchange rate policies were also liberalised, and the government attri-

1. Political will to promote industry through gradual liberalisation of the economy

their number reduced to 16 in 1993. All enterprises in the

much more expensive for the private sector than for the

for those (notably some pharmaceutical companies) decla-

export, which were allowed to transact their business at the

public business sector were slated for privatisation except

public, except for private businesses producing solely for

red to be of national interest. Only 94 of the 314 enterprises

parallel rate. The exchange rate system was unified in

were privatised from 1991 to 1998, but the pace picked up

1991, ending the discrimination between the two sectors.

in the late 1990s: 109 more firms were sold off between

This measure contributed to private sector growth in the

1999 and 2003, for a total of 203. Divestment of these

1990s.

enterprises generated 17.3 billion Egyptian pounds (EGP)

Trade liberalisation was made a priority in the early 1990s

in revenue for the government. In 2003, the private sector

so as to promote Egypt’s integration into the world econo-

accounted for over 70% of value added and over 60% of

my. The country entered into regional and bilateral negotia-

manufacturing employment.

tions. The main regional agreements are the Greater Arab Free Trade Area (GAFTA, 1997), the Common Market for

1.2.2 The new investment law

Eastern and Southern Africa (COMESA, 2001), the Agadir

To improve the business climate and encourage invest-

Agreement (AFTA, 2004) and the Pan-Arab Free Trade

ment, the investment law governing firms in the so-called

Area (PAFTA, 2005). An association agreement with the

investment sector was reformed again6 : Law 230 was

European Union (EU) was signed in 2001 and came into

amended and replaced in 1997 by Law 8, as part of the libe-

effect in 2004. It calls for gradual dismantling of tariff bar-

ralisation programme. The new law was still more generous

riers by categories: 3 years for intermediate goods and

as regards exemptions from company tax: five years of

capital goods, 9 years for semi-finished goods, 12 years for

exemption for new firms, 10 years for those located in the

finished goods and 15 years for luxury goods and vehicles.

new industrial zones and 20 years for those located outside

In addition, the EU strengthened its ties with its

the Nile valley (i.e. in the New Valley and desert). The law

Mediterranean partners in 2003 by implementing the

also eliminated the unequal treatment of Egyptian and forei-

European Neighbourhood Policy (ENP), which reinforces

gn investments in terms of the incentives and guarantees

mutual commitments to trade liberalisation.

provided. It also defined clear eligibility criteria and establi-

Bilateral free trade agreements were signed with Algeria,

shed an automatic approval system, which considerably

Indonesia, Libya, Morocco, Tunisia, Turkey and the United

shortened the time required to start a new company and left

States. At the same time, as Egypt acceded to the World

little room for arbitrary bureaucratic decisions. Lastly, the

Trade Organisation (WTO) in 1995, it was eliminating non-

new law allowed companies to charge market prices, which

tariff barriers and lowering tariff barriers. Import prohibi-

was not always the case under Law 230.

tions, which still applied to 210 products, were almost enti-

rely removed7, although most of the products concerned are

1.2.3 Liberalisation of trade and exchange rate

now subject to strict quality control before entering the

policy

country. Between 1991 and 1998, the nominal rate of protection of manufacturing industry fell considerably, from

Over the 1973-1991 period, the manufacturing sector operated under a multiple exchange rate system, consisting of three distinct rates. Public sector enterprises producing

“strategic” goods – petrochemicals, textiles (cotton) and agri-food (flour, rice) – were subject to the higher “official”

rate, which favoured imports and hampered exports of

6 The private sector is divided into three sub-sectors. Firms belonging to the “structured” private sector are private corporations governed by Law 159 of 1981, the main law on companies. Firms that do not keep systematic accounts, most of which are SMEs, belong to the “unstructured” private sector. Firms belonging to the “investment” private sector were governed first by Law 43 of 1974, and subsequently by Law 230 of 1989. These laws cover private domestic and foreign investment, as well as free zones.

these products. Public enterprises’ other transactions were

subject to the lower “parallel” rate, which favours exports. Lastly, up to 1987 private sector transactions were made at

These prohibitions related among other things to poultry giblets, hazardous chemicals, certain pesticides, used telecommunications equipment for resale and used cars. Import bans on textiles and clothing were eliminated in 2004.

the “unofficial” rate, which was still lower and thus still more

favourable to exports. However, this rate made imports

1. Political will to promote industry through gradual liberalisation of the economy

42% to 14% (Cassing et al., 1998). The overall rate of effec-

development (31%). Despite favourable investment laws,

1998. All manufacturing activities except beverages, tobac-

of GDP in 2002.

tive protection fell from 51% to 32% between 1994 and

Egypt had the lowest level of FDI in the region, at only 0.7%

co and chemicals are affected by these reductions in pro-

In the late 1990s, this still somewhat inward-looking growth

tection.

model was put to the test again. As from 1997, but more markedly in 1999, macroeconomic performance began to

1.2.4 Promotion of SMEs

deteriorate, starting with the growth rate. This was due to a

Since 1997, the Egyptian government has been formulating

combination of economic policy factors and external factors

a strategy to promote growth and reduce unemployment. A

(including the terrorist attacks in Luxor) that reduced official

key element of this strategic vision is the expansion of

reserves, causing a reduction in credit to the economy,

SMEs, which are assumed to be the most fertile ground for

which in turn reduced the growth rate from 5.1% in 2000 to

job creation8. A dedicated unit has been formed within the

3.5% in 2001. Another factor detracting from performance

finance ministry to promote SMEs’ development and bring

was the decline in imports (essential inputs for the produc-

them into the formal sector. This support is provided in two

tive sector) by nearly 20% from 2000/2001 to 2003/2004

main forms, credit facilitation and capacity building (particu-

due to the shortage of foreign exchange. The growth rate

larly export capacity), and within the framework of the law

stayed at about 3% in 2002 and 2003, while investment fell

on SMEs adopted in June 2004.

to 16.5% of GDP in 2003. Moreover, these macroeconomic

problems were amplified by the fact that the Ateif Ebeid

1.2.5 Results of the reforms

government’s economic policy had lost all credibility in the

During the 1990s, the Egyptian economy resumed its grow-

eyes of economic agents. The shortage of foreign exchan-

th, due to reforms such as exchange rate unification and

ge and lack of confidence in the government increased the

trade regulation. The private sector’s share of the overall

rate of dollarisation of the economy (from 17.3% in 1999 to

economy (70% of GDP) and of the industrial sector in par-

28.4% in 2004) and induced Egyptians to send or keep their

ticular increased substantially. The export ratio (26% in

foreign exchange holdings abroad. The increasing risk that

2003), however, remained low compared to other countries

development would grind to a halt made extensive econo-

in the region (31%) and/or countries at a similar level of

1.3

mic reform a political necessity.

2004: a new government for a new economic approach.

The Egyptian authorities could no longer count on easing

nerability to external shocks and by becoming more compe-

done in 1991. The economy would thus have to generate

ral reforms that go beyond addressing price competitive-

the foreign exchange constraint through debt relief, as was

titive. Enhancing competitiveness will require major structu-

additional foreign exchange in other ways, principally by

ness, which was improved by the 25% depreciation of the

increasing exports. In this context, the need for a change in

Egyptian pound between 1999 and 2001. Egypt is in fact

Egypt’s development model became more urgent. To this

suffering from a strong anti-export bias due to high transac-

point, growth had been driven by domestic consumption,

tion costs, and reducing these costs is the main challenge

but high inflation (11% in 2004) and nominal wage stagna-

facing the reform. One of the chief difficulties, as in previous

tion reduced the purchasing power of the average Egyptian

reform attempts, will be to overcome resistance (see sec-

consumer. Outlets on the domestic market therefore narro-

tion 3).

wed, making it necessary to rely more heavily on external demand.

The Egyptian economy needs to increase and improve its

It is estimated that net annual creation of 600,000 jobs is needed to absorb new entrants to the labour market and reduce unemployment.

export performance by diversifying exports to reduce its vul-

1. Political will to promote industry through gradual liberalisation of the economy

The new government of Ahmed Nazif (formed in July 2004)

incentives to export. To this end, the new government deci-

through greater economic openness. This reforming

to 20% and accelerate the privatisation process (290 enter-

therefore plans to change Egypt’s development strategy

ded to further liberalise trade, reduce company tax from 42%

government has clearly expressed its intention to promote

prises had been privatised as of September 2006). It also

a model of growth and job creation based on exports and

opted for the development of a knowledge-based economy in

FDI. Attracting FDI will make it possible to increase the

which FDI and the technology transfer that it engenders are

investment rate – which is currently low (18.7% of GDP), as

to play a leading role. As part of this policy, administrative

domestic private investment is limited and public invest-

procedures concerning investment have been streamlined

ment is restricted by the fiscal deficit – and hence to gene-

considerably through the creation of a one-stop shop under

rate growth.

the General Authority for Investment and Free Zones (GAFI).

Export promotion and diversification should help Egypt

Further trade liberalisation – the most important reform after

meet two objectives: first, to increase its foreign exchange

that of exchange rate policy (establishment of an interbank

resources and diversify their sources, and second, to ensu-

foreign exchange market) – is being pursued through two essential components: customs and tariff reform9 and the

re that the economy can withstand international competi-

signature of a protocol on qualified industrial zones (QIZs)

tion, which is increasing with the signature of new trade

with Israel and the United States10.

agreements (West African Economic and Monetary Union [WAEMU], South Africa).

In the next section, we will consider whether the performan-

titiveness and create an economic environment offering

cies implemented to develop it.

ce of the manufacturing sector has measured up to the poli-

To increase export capacity, Egypt needs to enhance compe-

The customs and tariff reform, introduced by executive order in September 2004, streamlined customs procedures and reduced the average nominal rate of protection from 14.6% to 9% on some 6,500 imported products. In addition, the number of tariff lines was cut from 27 to 6. Lastly, all fees for customs services, which had ranged from 1% to 4%, were eliminated. The reform was intended to reduce the anti-export bias engendered by the tariff structure (which raised the cost of imported inputs). This bias was estimated at 14.4% in 2002 (16.6% in 1998) for the economy as a whole and at 19% (18% in 1998) for the manufacturing sector alone. It was highest in the clothing, footwear and furniture industries, at 593%, 41% and 35.4% respectively in 2002. Under these circumstances, producers preferred to sell their output on the domestic market, behind the shelter of tariff barriers, instead of exporting.

There are currently seven QIZs in Egypt: five in Cairo, one in Alexandria and one in the Suez Canal area. If at least 35% of value added is generated in Egypt and 11.7% of inputs are Israeli, then the output of these QIZs can be exported to the United States free of quotas and customs duty. In February 2005, 75% of the 397 enterprises located in the QIZs were in the textiles industry (the QIZs themselves are located near textile centres). In establishing these zones, the Egyptian government hopes to modernise industry by attracting FDI and increasing exports. The Ministry for Trade and Industry has set up a unit dedicated to the QIZs.

2. 2.1

Relative size and performance of Egypt’s manufacturing sector Share of the industrial sector in the Egyptian economy

The performance of Egypt’s manufacturing industry is inex-

The decline in the manufacturing sector’s GDP share (in

1974-1981 period, the average annual GDP growth rate

the inflow of imported products placed domestic industrial

tricably linked to the macroeconomic environment. Over the

favour of services) was due to two series of factors. First,

was 8%. At the time, the manufacturing sector was growing

products at a sudden competitive disadvantage, causing

at an annual average rate of 6%, boosted by trade liberali-

difficulties for Egyptian industry, which had long been

sation, which improved the supply of imported raw mate-

accustomed to protection and a near-monopoly situation.

rials and capital goods. The private sector grew at an ave-

These difficulties were reflected in bankruptcies, inventory

rage annual rate of 11% over the period, outperforming the

build-up and redundancies, particularly in small businesses.

public sector (5%). The average growth rate of manufactu-

In addition, the profitability of the public sector was in jeo-

ring was thus lower than that of the overall economy, and

pardy. The decline of industry was also indissociably linked

to the substantial revenue from “exogenous” resources11 –

despite a healthy rate of growth the sector’s GDP share

steadily declined, from 18% in 1974 to 13% in 1981. Its

oil, Suez Canal, remissions from Egyptian workers abroad

12.5% over the period. The relative size of the industrial

period (see below).

and substantial foreign aid – that Egypt enjoyed during this

share of the working population remained stable at about

The boom in exogenous resources that Egypt experienced

sector as a whole – comprising manufacturing, oil and oil

from 1974 to 1985 boosted consumption and, consequent-

products, water, power and construction – increased sub-

ly, imports; this led to an enormous imbalance in the exter-

stantially, fuelled by the boom in the oil and gas sector: its

nal accounts and Egypt was obliged to increase its external

GDP share rose from 25% in 1974 to 38% in 1981, and its

borrowing. Until 1986, however, growth was reasonably

share of employment from 17% to 19% over the same per-

satisfactory, fuelled by strong demand.

iod (Table 1). Table 1.

GDP shares of the industrial sector and its sub-sectors, 1970-2006

(Percentages) 1970-1973

1974-1990 1991-2003 2004-2006

Industry

Manufacturing sector

Oil and oil products

Water and power

Construction

29.6

15.1

8.4

1.1

5.0

27.0

33.3 37.0

18.7

18.5 18.1

2.2

8.0

1.8

13.0

1.9

4.3

5.0 4.0

Source: CAPMAS and World Bank data.

Resources are designated as “exogenous” if they are not linked to the productivity of Egyptian labour employed in agriculture, industry and services, and if they are not under the direct control of policymakers.

2. Relative size and performance of Egypt’s manufacturing sector

From 1981 to 1986, both GDP and manufacturing industry

14% from 1990 to 2002, whereas the public sector exhibi-

tor recording growth of 13% and the public sector 6%. The

year. The same holds true for employment, which grew by

grew at an average annual rate of 7%, with the private sec-

ted negative growth over the period, declining by 2% per

relative size of the manufacturing sector stabilised during

8% a year in the private sector and fell by 5% a year in the

this period at about 13% of GDP and 15% of the working

public sector. Although the private sector performed well in

population.

terms of growth, the overall performance of the manufactu-

Between 1987 and 1990 Egypt’s economic performance

ring sector since 1990 has been mixed: despite annual ave-

deteriorated. The annual average growth rate of GDP fell

rage growth of 5.4% from 1990 to 2006, the manufacturing

further to 3%, while that of the manufacturing sector fell

sector as a whole accounted for only 19% of GDP in 2006.

below 2%. Once again, the private sector (8% annual grow-

Its performance in terms of job creation has been even

th) outperformed the public sector (stagnation). In this situa-

weaker, as manufacturing employment increased by only

tion of latent crisis, the manufacturing sector paradoxically

0.7% per year over the same period. Manufacturing indus-

saw its GDP share increase to 18% in 1990, as it performed

try today accounts for 15% of total employment. The

less badly than other sectors. However, its share of the wor-

reforms initiated by the new government thus have not yet

king population stagnated at around 15%.

brought results in the case of the manufacturing sector.

As from 1991 and the economic reforms implemented in

Overall, the share of manufacturing in the Egyptian econo-

that year, the difference in performance between the public

my is very low, much lower than in other countries of the

and private sectors increased. Value added in the private

Middle East/North Africa region that have also pursued an

manufacturing sector grew at an annual average rate of

2.2

active industrial policy (e.g. Tunisia and Turkey).

Structure of the manufacturing sector

The textile industry has traditionally dominated the manu-

Egyptian economy. The number of firms registered under

has fallen considerably, dropping from 30% in the early

to 4,200 in 200512. The amount of FDI has rose ten-fold,

facturing sector, but its share in manufacturing value added

the investment laws (Laws 230 and 8) rose from 91 in 1995

from EGP 76 million in 1991 to EGP 770 million in 2004,

1970s to 15% in 1990. Other manufacturing activities, par-

though it remained very low as a percentage of GDP. In

ticularly agri-food (20% of GDP and of employment), remai-

2005, the private sector held the largest share in all major

ned stable over the period. The sub-sector that benefited

business sectors except chemicals and basic metals, which

was petrochemicals, whose share rose from 2% in the early

were still heavily dominated by the public sector. In Egypt’s

1970s to 30% in 1990. It should be noted that this period

three principal manufacturing activities (excluding petroche-

coincides with the discovery and development of oil and

micals), namely textiles, metal goods and agri-food, the pri-

gas deposits in Egypt. Other intermediate products remai-

vate sector generates over 50% of value added and

ned stable or declined. Thus, during this period, the

absorbs more than 30% of total employment. Promotion of

Egyptian economy benefited from a new asset: oil. Industry

the private sector, which has been government policy since

did not really diversify at all, however; it merely shifted from

the early 1990s, has thus been a success.

specialisation in a single activity (textiles) to specialisation in two activities (textiles and oil products).

During the 1990s, the manufacturing sector changed appreciably. The private sector’s shares in value added and employment rose respectively to 49% and 39% by 1997.

This increase was due not solely to privatisation, but also to a better economic environment. In particular, private inves-

tors seemed to be showing increasing interest in the

GAFI data.

2. Relative size and performance of Egypt’s manufacturing sector

The structure of output continues to follow past trends. The

has also expanded (9% of value added and 8% of manufac-

have fallen steadily and stand today at 14% and 30% res-

Overall, the structure of Egyptian industry has thus remai-

textile sector’s shares in value added and employment

turing employment), driven by cement production.

pectively, while those of the chemicals industry have increa-

ned more or less fixed, dominated by a few large sectors

sed to 32% and 14.5% respectively. The mineral industry

2.3

such as the chemicals industry.

Performance of Egypt’s manufacturing sector

The same observation holds true where manufactured

manufacturing sector to continue to grow, but in a sub-opti-

desired extent. In the early 1970s, textile products – mainly

various booms gave the Egyptian economy as a whole, and

exports are concerned. They have not diversified to the

mal way. Moreover, the foreign exchange generated by the

cotton thread and fabrics – accounted for over 60% of

manufacturing in particular, ample leeway to postpone the

manufactured exports; in 1990, their share had fallen to

needed adjustments. Many obstacles (other than the price

35%. The petrochemicals, plastic and rubber sector, in

factor) undermined the competitiveness of Egyptian indus-

contrast, saw its share in total manufactured exports rise

try during this period: excessive red tape at customs, the

from 14% in 1973 to 35% in 1990. In the late 1980s, howe-

problem of product quality, overvaluation of the Egyptian

ver, other exports began to emerge in the intermediate pro-

pound and developed-country protection against textile pro-

ducts and consumer durables sectors, such as basic metal

ducts (the Multi-fibre Agreement). As a result, the new

products (particularly aluminium) and aeronautical pro-

investment laws granting privileges to exporters did not

ducts. The export shares of these two activities rose from a

yield the expected results. The incentives they provided

negligible level in the early 1970s to nearly 10% each in

were not in themselves sufficient to promote Egyptian

1990. The agri-food industry, however, saw its exports col-

exports.

lapse over the period, from 12% in 1973 to 4% in 1990 and

Industrial performance remained disappointing after 1990,

less than 2% in 2005.

despite the reforms. From 1990 to 2003, the GDP share of

The 1974-1990 period saw an erosion of export performan-

manufactured exports fell sharply, reaching a low of 1.4% in

ce. The share of manufactured exports fell from 4% of GDP

2001 and stabilising at about 2% in 2003. Yet exports of

in 1974 to 1% in 1986, then rose again to 3.5% in 1990. At

manufactured goods made up approximately 33% of total

the same time, manufactured imports were rising, from 10%

goods exports in 2001, which indicates that exports of

of GDP in 1974 to 15% in 1990. As a result, the proportion

goods are very low. The GDP share of goods exports is

of imports covered by exports also fell over the period, from

lower than that of non-factor services exports. Until

37% in 1974 to 25% in 1990. This result was particularly

2001/2002, the share of the former was below 10% of GDP;

disappointing because at the time manufacturing industry

it rose to 14% in 2004, which is still a low figure. The main

was receiving over one-fourth of total public investment,

goods exports are oil products, which since 1999 have

which amounted to huge sums . These investments

accounted for 35% to 40% of total exports. In 2003/2004,

brought no productivity gains for Egyptian industry. In the

the main non-oil goods exported were metal products

manufacturing sector as a whole, productivity gains have

(49%), ready-to-wear clothing (4 %), cotton fabrics (3.2%),

declined steadily since 1970, including during the boom

pharmaceuticals (3.2%), cotton (3.1%), cotton thread

period (1974-1985), with average annual growth falling

(2.3%) and aluminium (2.3%). In more structural terms, the

from 1.2% before the boom period to 0.9% during the

four main groups of non-oil exports are metal products

booms and to 0.3% afterwards. These poor results were mainly due to the performance of the public sector

(Djoufelkit-Cottenet, 2003b). Heavy protection of the

13 According

to a World Bank (1986) estimate, the cumulative amount from 1975 to 1985 was EGP 10.5 billion.

Egyptian market against outside competition did enable the

2. Relative size and performance of Egypt’s manufacturing sector

(44% of total exports on average over the 2002-2004 per-

connection to the productivity of Egyptian labour and on

ducts (9%) and plant products (7.2 %).

from tourism15. Thus, rent resources and tourism, particular-

iod), followed by textiles (15.1%), manufactured metal pro-

which economic policy decisions have little effect – and

ly the latter, account for a very high proportion of total

Total productivity, in contrast, has improved since 1990, at

exports (including factor services), and this proportion is

least in the private sector. Indeed, private sector growth has

trending upwards. In 1998, these activities (excluding aid)

been partly due to productivity gains, which averaged 8%

generated 48% of Egypt’s foreign exchange; in 2005, they

per year over the period, whereas productivity in the public

generated 66%. The fact that the sources of foreign

sector fell by 4% a year. Real wages rose in both sectors,

exchange are concentrated in activities that can be only

by 3% per year in the public sector and 4% per year in the

partially influenced by economic policy makes the Egyptian

private. The latter therefore became more competitive,

economy highly vulnerable to external shocks.

whereas the former did not. The appreciation of the real

exchange rate14 from 1993 to 1999 may also have had a

Under these circumstances, the challenge facing the new

negative impact on export performance, but the deprecia-

government will be that of increasing exports from the pro-

tion since 2000 does not seem to have improved it. Factors

ductive sectors, particularly manufacturing, to reduce the

other than cost are probably responsible for this. Product

country’s vulnerability to external shocks and to reap the

quality, for example, continues to detract from Egypt’s

benefits of the productivity gains generated by a competiti-

export performance. Output is still intended mainly for the

ve, outward-looking industrial sector. This will require tho-

domestic market, and producers have not yet made the

rough-going reform addressing not only the purely econo-

effort needed to bring it up to international standards.

mic sphere but also the institutional aspect of economic

This is one of the major challenges for the reform and

performance.

industrial modernisation policies pursued since 2004 by the

All in all, the political will to promote industry has brought

new Egyptian government. Recent efforts to promote

disappointing results. The manufacturing sector accounts

exports seem to be bringing results. The export ratio has

for only a small share of the economy and is not playing

risen considerably, from 26% in 2003 to 33.5% in 2006. The

its role as a driver of growth and employment. It has long

share of goods exports rose by three percentage points

been geared to serve the domestic market, with little

over the period, reaching 26% of total exports in 2006.

exposure to international competition. Even today, manu-

Manufactures, however, account for only about 10% of total

factured exports are struggling. The Egyptian economy is

exports and less than 3% of GDP: manufacturing is still

still highly dependent on exogenous resources, which

strongly oriented towards the domestic market.

account for nearly 70% of export revenue. As we will see

Egypt’s sources of foreign exchange thus remain largely

in section 3, the existence of these resources explains to

undiversified. Foreign exchange still comes from activities

some extent the poor performance of the manufacturing

that generate “exogenous” resources – with little or no

sector.

14 Ratio between the prices of tradeable goods and non-tradeable goods. In certain contexts, as here, the real exchange rate is an indicator of competitiveness. 15 We do not consider tourism as an “exogenous” activity generating an economic rent, as it relies largely on Egyptian labour.

Resource abundance: a heavy burden for the manufacturing sector

Despite very heavy investment, particularly in the early

Egyptian economy, and this share has been trending up in

manufacturing sector led by the private sector, manufactu-

Suez Canal revenue and, indirectly, remissions from emi-

1980s, and strong political will to develop a powerful local

recent years due to skyrocketing oil prices, which also affect

ring performance has been disappointing.

grant workers (in the Gulf countries).

Our argument is as follows: in the recent history of Egyptian

The booms eased the strain on public resources and allo-

industry, development has been thwarted by the appearance

wed the state to continue its interventionist role in economic

of rent resources in the early 1970s. Egypt experienced four

development. A clear dichotomy thus exists between the

strongly positive external shocks stemming from the sudden

political declarations on aggressive promotion of competiti-

increase in exogenous resources: aid revenue, oil revenue,

ve domestic industry and the economic reality, in which

remissions from emigrant Egyptian workers and Suez Canal

implementation of reform has proved to be very slow. Rent

revenue. The average GDP share of the revenue from these

income also strengthened the position of vested interests

resources rose from 4.5% over the 1970-1974 period to 25%

capable of resisting the reforms. In this section, we will

in 1975-1985 (with a peak of nearly 40% from 1978 to 1980),

consider the connection between rent resources and poor

then fell back to 18% over the 1986-2005 period. Although

manufacturing sector performance in the past. We will then

the booms were concentrated in the period from 1974 to

discuss the credibility of the Nazif government’s reforms in

1985, these resources still account for a large share of the

3.1

the light of this connection.

Rent resources and manufacturing sector performance

3.1.1 What economic theory tells us

endogenous growth theory, that the sources of long-term

The economics literature recognises two channels of trans-

growth are generated by the tradeables sectors, notably

mission between a resource shock, manufacturing sector

manufacturing, then economic rent, which reduces these

performance and long-term economic growth. The first

sectors’ share of the economy, hampers long-term econo-

channel, which is purely economic in nature, acts through

mic growth, and does so irreversibly. According to this theo-

the impact of the windfall on the tradeables sector’s share

ry, the impact of the rent on the manufacturing sector and

of the economy via appreciation of the real exchange rate –

consequently on growth rests on two basic assumptions:

(i) the manufacturing sector is a tradeable goods sector16;

a phenomenon known generically as “Dutch disease”

(Corden and Neary, 1982). Through its effect on expenditure, the rent causes the real exchange rate to appreciate (a

16 Tradeability is a theoretical concept. Some authors define tradeable goods to be all goods except those relating to the construction sector, with services classified as non-tradeable. Others consider the proportion of output exported and set a tradeability threshold (generally 10%); this approach in fact consists in equating goods actually traded with tradeable goods, since the threshold is set arbitrarily. In the theoretical framework of the dependent economy, which includes the theory of Dutch disease, a tradeable good at the margin is strictly speaking a good whose price is set by the international market, however small the quantity traded. In contrast, the price of a non-tradeable good at the margin is determined by supply and demand on the domestic market.

relative increase in the price of non-tradeable goods with

respect to tradeables). This real appreciation causes resources to be reallocated towards the non-tradeables

sector (services) and away from tradeables (manufacturing

industry, agriculture). If we assume, in accordance with

3. Resource abundance: a heavy burden for the manufacturing sector

(ii) it generates the sources of long-term growth (externali-

genous resource booms, notably during the Sadat era and

holds true in the case of Egypt (Djoufelkit-Cottenet, 2003b).

Egypt has an authoritarian political system (Hinnebusch,

ties and economies of scale). Neither of these assumptions

the open door policy.

Owing to the high level of protection, the Egyptian manufac-

1981 and 1985; Waterbury, 1983) with power concentrated

turing sector behaves at the margin like a non-tradeable

in the hands of the president, who controls both social

sector (as we have seen, moreover, it grew strongly during

change and political affairs. Sadat transformed a socialist-

the boom period). In addition, it generates neither externa-

authoritarian state into a conservative-authoritarian state

lities nor economies of scale, and thus is not playing its role

(Hinnebusch, 1981 and 1985). As used here, the term

as the driver of long-term growth. Although the windfall

“socialist” applies to those wishing to redistribute wealth in

revenue caused the real exchange rate to appreciate, it did

favour of the poorest; “conservative” applies to those who

not lead to Dutch disease.

wish to maintain the privileges of the new state bourgeoisie.

The second channel is more indirect and calls on political-

These classes represent respectively the main constituen-

economy theory: it concerns the impact of the rent on the

cies of the two regimes. Mubarak, in turn, increased redis-

choices of economic agents, particularly elite groups, bet-

tribution to the poorest in his desire to restore the legitima-

ween rent-seeking activity and entrepreneurial activity (in

cy of the role played by the state, which had been discredi-

Schumpeter’s meaning of the term), as the latter generates

ted by the cronyism and corruption of the Sadat era.

the innovation required for long-term growth. In this context,

To accompany the open door policy, Sadat launched a drive

these two activities are assumed to be in competition rather

to modernise the political system. This effort brought a very

than complementary. Thus, a resource boom will foster

modest degree of political liberalisation that enabled certain

growth if it gives economic agents incentive to opt for entre-

social groups, notably the private bourgeoisie, to gain

preneurial activity, but will hamper growth if it encourages

access to the inner circle of power, which previously had

rent-seeking behaviour (Baumol, 1990; Tornell and Lane,

been the exclusive preserve of military officers. In contrast,

1999; Baland and Francois, 2000). Ultimately, the determi-

the masses were increasingly excluded from power, depri-

ning factor is the allocation of talent (Murphy et al., 1991).

ved of the political opportunities that a military career had

In rent-based economies, the main competitor of the entre-

offered under Nasser (many officers are from modest back-

preneur is the importer: when a country has sufficient

grounds) and poorly represented in parliament, as mem-

resources, there is less incentive to produce than to import,

bers were co-opted by the leadership from the outset ins-

as the presence of rent-derived resources fosters the emer-

tead of being vested in power by the grassroots. However,

gence of a powerful class of importers and gives the econo-

this state, which remained authoritarian despite some pro-

mic elite incentive to engage in this activity rather than in

gress in liberalisation, was “virtually autonomous”, in the

the less profitable manufacturing sector. Lacking entrepre-

words of Waterbury (1983), in the sense that no social class

neurs, the manufacturing sector cannot fulfil its role of deve-

had ever managed to secure a lasting hold on political

loping and disseminating technical progress.

power or economic resources. In addition, Sadat was a legi-

This transmission mechanism seems to have prevailed in

timate president, a former Free Officer, whose credentials

the case of Egyptian industry, as we will attempt to demons-

included the signing of the peace agreement with Israel and

trate.

recovery of the Sinai. He was nonetheless described by Hinnebusch (1981 and 1985) as a “presidential monarch”

3.1.2 The institutional context, open door

whose overriding goal was to remain in power, and to this

policy and rent resources combine to favour

end granted many privileges to his “court”, made up of a

importers and other “rent-based” activities

composite state bourgeoisie, stemming from and/or having

The political and institutional context in Egypt, which went

strong ties to the private sector. The open door policy, cou-

through no major changes from 1970 to 1990 (Roussillon,

pled with the booms, led to flagrant excesses in this redis-

1988), encouraged rent-seeking behaviour during the exo-

tribution of wealth to the president’s courtiers, referred to by

3. Resource abundance: a heavy burden for the manufacturing sector

many observers as a “parasitic bourgeoisie”17. The nature of

the duration of the privileges granted (exemption from cus-

encouraged clientelism and rent-seeking behaviour.

company tax, etc.) and by obliging foreign companies to

the Egyptian political system during the boom period thus

toms duty, no import licences required, exoneration from

What generated and sustained these attitudes was a combi-

take on Egyptian companies as partners in order to invest

nation of a partial opening-up policy and economic windfalls.

in the domestic economy (apart from the free zones). In

The partial nature of the liberalisation policy entailed both

practice, foreign companies had to enter into joint ventures

“over-regulation” and “under-regulation” (Handoussa, 1994)

with public enterprises and, to this end, had to submit to the

and opened the door to collusion between the public and pri-

exactions of the Egyptian bureaucracy. Lastly, in the case of

vate sectors, which fosters rent-seeking and corruption. The

Egyptian investment projects, considerable bribes could be

booms made these behaviours economically tenable for

paid to bureaucrats to have a given project classified under

such a long period by enabling Egypt to finance its macroe-

Law 43 rather than under the law on private companies

conomic imbalances, particularly the trade deficit.

(Law 26, and later Law 159), which grants many fewer pri-

The open door policy changed the institutional context,

vileges.

considerably strengthening the investment role of the priva-

The open door policy also eased somewhat the restrictions

te sector, both Egyptian and foreign. Until the structural

on trade and exchange rates, in order to facilitate access to

adjustment programme of 1991, however, the economy

the imports needed for local production. In June 1974, the

was only partially opened up, which left a considerable role

“own-exchange import system” was introduced, allowing

for the public sector. This made possible a lucrative allian-

the private sector to acquire or convert foreign exchange

ce between public and (domestic or foreign) private capital,

outside the Egyptian public banking system. Law 118 of

opening the floodgates for a spate of rent-seeking

1975 also broke up the state monopoly on import-export

(Waterbury, 1983; Zaalouk, 1989).

business. Law 63 of 1974 authorised Egyptian private sec-

New investment laws (Law 43 of 1974 and Law 32 of 1977)

tor businesspeople to represent foreign companies in

were adopted to try to attract foreign, and subsequently

Egypt. This highly profitable activity, long coveted by

Egyptian, private capital to the free zones and to all sectors

Egyptians, was reserved for non-Egyptians until the aboli-

of the domestic economy except the oil and gas sector, in

tion of the capitulation system in 1937, then wound up

order to promote exports and technology transfer. A new

almost exclusively in the hands of Levantine Jews until the

company law (Law 159) adopted in 1981 was more favou-

adoption of Law 24 (Egyptianisation) in 1957, and then in

rable to private enterprise than the law it replaced (Law 26

those of the central government from 1961 to 1974

of 1954).

(Zaalouk, 1989). This more liberal environment encouraged

The new investment laws had two main consequences.

imports, which exploded during the Infitah, rising from an

First, investors paid less attention to the productive sectors,

average of 19% of GDP over the 1970-1973 period to 39%

particularly agriculture, than to the financial services

between 1974 and 1985, falling back to 28% over the 1986-

(investment companies, banks), tourism and trade services

2005 period. The imports that increased the most were

sectors (Waterbury, 1983; Handoussa, 1990). Private

imports of consumer goods, and in particular luxury pro-

investment in the manufacturing sector went to highly pro-

ducts, which had been strictly controlled under Nasser18

(Waterbury, 1983; Zaalouk, 1989). Trade-related activities,

tected industries, such as textiles, construction materials

and engineering industries (Handoussa, 1990; Shafik, 2000). The new investment law of 1989 (Law 230) was intended to correct this distortion and encourage directly

17 It should be noted that the open door policy was not adopted under pressure from Egyptian private sector lobbies or from donors. As noted by Waterbury (1983, p. 123), the Infitah was a “policy of state”, based on the reversal of Egypt’s international alliances and aiming to open up the Egyptian economy to Western technology and capital through a three-way alliance between public capital, private Egyptian capital and foreign investment. It is clear that later on this policy strongly stimulated and satisfied private interests.

productive investment by more precise targeting of the sec-

tors eligible for this law. The financial, construction, consul-

ting and transport sectors were excluded. Second, the investment laws encouraged cronyism and corruption by

The share of consumer goods in total imports rose from 10% in the late 1960s to 28% in the 1970-1973 period and to 34% between 1974 and 1977 (Waterbury, 1983, p. 178).

providing in loose terms for many possibilities of extending

3. Resource abundance: a heavy burden for the manufacturing sector

particularly that of trade agents (exclusive importers), beca-

prices for housing and holidays, official cars, private clubs),

very early on by the openness policy as part of the effort to

market, many illicit commissions and opportunities to

me extremely lucrative. This group was in fact encouraged

facilitated access to imports, access to the “consulting”

promote the private sector; presidential decree no. 1906,

increase their incomes by investing in private activities,

dated 1974, stipulates that foreign firms wishing to export to

notably real estate (Waterbury, 1983; Hinnebusch, 1985).

the Egyptian market can do so only through Egyptian priva-

Far-reaching corruption scandals involving senior officials

te sector agents. Thus, from the outset of the economic

made the headlines of Egyptian newspapers in the 1970s,

reform, this activity had the highest level of participation by

and although Sadat dissolved the government in 1975, no

the private sector: in 1977, for example, 766 companies

action was taken against those involved (Waterbury, 1983;

were registered as trade agencies, as against 336 registe-

Hinnebusch, 1985; Zaalouk, 1989).

red as productive private firms (Zaalouk, 1989). The closer

It was one of the institutional characteristics of the Infitah

the trade agent was to the authorities, the more lucrative

that the borderline between political activities and the busi-

this activity became. Importers and commercial agents bent

ness

policy in favour of their interests so successfully that they

world

became

increasingly

tenuous.

Hinnebusch (1981 and 1985) tracked the occupational ori-

become the main recipients of rents under the Infitah

gins of Sadat’s ministers. At the beginning of his term, only

(Waterbury, 1983; Zaalouk, 1989). Thanks to their contacts

2.4% of ministers were from the business sector; from 1971

or their positions, the same people often served as interme-

to 1974, this share rose to 10%; and as from 1974, with the

diaries between foreign investors, government and the

Infitah, it reached 15%. Osman Ahmed Osman, the

Egyptian political sphere (Waterbury, 1983).

construction entrepreneur mentioned above, was also

Other important rent-seeking activities in the private sector

minister for housing and reconstruction, and one of Sadat’s

also involved collusion with the public sector, in order to

four éminences grises. He was also chairman of the engi-

obtain public procurement contracts, certain inputs at lower

neers’ union, one of the most powerful in Egypt (Moore,

prices, the abolition of customs duties on certain imports

1994). Even today, Osman remains a symbol of cronyism

(such as construction materials), tax exemption for certain

and corruption that conspicuously characterised the Sadat

activities (housing construction) and, in general, all sorts of

era and its “rentier” state (Beblawi and Luciani, 1987).

privileges (Waterbury, 1983; Zaalouk, 1989). The sectors

As not all businessmen had Osman’s stature, they tried to

mainly concerned were construction and real estate.

apply pressure through various interest groups: the

Banking, which finances all these activities, also became

Egyptian Businessmen’s Association, the Alexandria

extremely profitable (Waterbury, 1983; Hinnebusch, 1985;

Businessmen’s Association, the Federation of Egyptian

Zaalouk, 1989; Handoussa, 1990; Shafik, 1990) . Arbitrary

Industries, business unions, the General Federation of

awarding of public procurement contracts and of tax

Chambers of Commerce, the American-Egyptian Business

exemptions of all sorts to private companies whose execu-

Council, etc. In reality, these groups had only consultative

tives had privileged relationships with the authorities led to

powers. Practically speaking, the most direct means of

the mutual enrichment of businesspeople and technocrats.

defending one’s interests was to enter the ruling National

This crony system allowed the former to build veritable

Democratic Party (Gobe, 1999). In this way, the private

empires, notably that of Osman Ahmed Osman, Egypt’s

bourgeoisie often succeeded in influencing public policy. Its

biggest construction entrepreneur and, according to Hinnebusch (1985), the second most influential man in Egypt after Sadat.

The open door policy should have reduced the role of the

public sector, but in fact it remained very attractive for rentseekers, given the possibilities for collusion with the private

The rent-seekers engaged in the three main rent-seeking activities involving collusion between the public and private sectors – trade, real estate and construction – were referred to by a colourful nickname, sometimes not very flattering in Egyptian dialect, illustrating the consumerist, speculative image of the Infitah (Waterbury, 1983, pp. 171-187).

sector. Technocrats could receive many privileges in the form of benefits in kind (representation allowances, low

3. Resource abundance: a heavy burden for the manufacturing sector

task was facilitated the rather strong penchant of policyma-

the person concerned had a university degree or an equi-

1985). In this context, importers managed to have customs

ment was set at EGP 5,000 (Art. 2.1.f). Furthermore, a per-

kers under Sadat to favour private interests (Hinnebusch,

valent level of education, in which case the capital require-

duties lowered; in particular, those on consumer goods

iod of one year normally had to elapse between registration

were set lower than those on intermediate goods, which

and the beginning of trading (Art. 2.2.a), but if the registe-

handicapped local industrialists. The trade lobby was stron-

red capital was EGP 20,000 or more, or if the person

ger than the industrial lobby at the time.

concerned had a university degree, trading could begin at

The form of government and the institutional context during

once (Art. 2.2.a). In addition, acting as a trade agent, an

the boom period, which coincided with the Infitah, were thus

activity that became accessible to Egyptians with the

conducive to rent-seeking. The most lucrative activities

Infitah, was extremely lucrative and highly coveted. In the

were those offering possibilities for collusion with the autho-

early 1980s, under pressure from industrialists and public

rities, namely trade, particularly imports, intermediation for

opinion, new regulations were put into effect to try to limit

non-Egyptian firms, construction, real estate and banking.

imports by requiring importers to make a prior deposit in

Of all these activities, only construction was geared towards

Egyptian pounds and in an Egyptian bank, in an amount

production.

equivalent to 25% of the value of the goods imported for agri-food products, 40% for intermediate goods and 100%

3.1.3 Allocation of talent

for consumer and luxury goods. In the event, this measure

The Infitah period also had an impact on the allocation of

hurt small importers and enabled the largest ones to divide

talent, because incentives to engage in speculative rentseeking

activities

became

extremely

up the market, thus creating import monopolies for certain

strong.

goods and pushing up prices on the local market, to the

Waterbury (1983) noted that whereas entrepreneurs favou-

point where the government was forced to lower its price

ring a type of liberalisation that encourages productive acti-

ceilings. Waterbury (1983) notes that these activities were

vities represented the future of the Infitah, those known

so profitable that 22 former ministers and two former prime

pejoratively as the “open door people” (munfatihun), who

ministers were importers or trade agents. In a richly docu-

directed the opening-up process towards speculation and

mented study of Egyptian businesspeople, Gobe (1999)

trade, represented its present.

similarly points out that in the mid-1970s the two busi-

The fact is that a combination of factors made importing

nesses that attracted the greatest number of former govern-

extremely lucrative: the long period of restrictions on

ment officials and public sector executives were consulting

imports of consumer goods under Nasser and, consequent-

and import-export. The explosion of imports hurt the local

ly, the potentially very high elasticity of demand; modifica-

manufacturing sector, as potential or existing entrepreneurs

tion of the institutional context in favour of imports; the

were attracted instead by the lucrative prospects offered by

increase in incomes due to the resource booms; the well-

importing.

known preference of Egyptians for foreign brands, particu-

Incentives to enter the construction sector were also

larly luxury items; and lastly, the existence of competing

strong during the Infitah. The market flourished after

local import-substitution output that sold for high prices

1973, with the rehabilitation of towns located around the

while enjoying strong protection – a situation that offered

Suez Canal, construction of new cities in the desert,

importers margins that were all the higher because they

construction of ports and the boom in housing construc-

obtained tariff exemptions through cronyism, corruption or

tion, primarily for the middle and upper classes. The state

fraud. Moreover, there was an aspect of the institutional

contracted out many of these projects to the private sec-

context that gave special incentive to university graduates

tor, and profits were generally large, for two reasons:

to become importers. Law 121 of 1982, which governed the

a) the market outlet was assured and production cost

import business, favoured the holders of university

minimal, as the state provided the inputs needed; and

degrees: it set the minimum amount of capital to be deposi-

b) there were opportunities for contraband, i.e. selling

ted for registration as an importer at EGP 10,000, unless

these inputs illicitly to the rest of the private sector, which

3. Resource abundance: a heavy burden for the manufacturing sector

was less well supplied. This was particularly true for

the massive inflow of foreigners, real estate developers pro-

subsidised price on the black market until 1977, when the

building housing for the middle and upper classes for sub-

construction materials, which sold for several times their

liferated. They engaged in highly speculative operations,

private sector was authorised to import them freely and

sequent rental to non-Egyptians. Some buildings were sold

without customs duty. This contraband system was parti-

years before they were built, and it was not uncommon for

cularly widespread in the case of new housing, which had

them to be sold several times (Waterbury, 1983). The

several consequences: buildings sometimes collapsed

owners could also circumvent the rent control law by requi-

because part of the materials that were supposed to be

ring several months’ or several years’ rent in advance.

used to build them were sold on the black market, and

Lastly, the banking sector, which financed all these activi-

projects were often oversized.

ties, became extremely profitable. It attracted many people

The real estate market, particularly housing for the middle

who had been highly placed in the public sector, notably for-

and upper classes, also experienced a boom during the

mer finance ministers. President Sadat himself was the

Infitah. Rents for flats intended for Egyptians were control-

founder of the National Development Bank (Waterbury,

led by Law 46 of 1962, and thus had no connection to sup-

1983), and the prospect of fat profits induced many talented

ply and demand. Furnished flats, however, were not cove-

people to enter the banking business.

red by this legislation. With the Infitah, foreigners began to

The shift in incentive structure during the Infitah led to a

come to live in Cairo, and many owners furnished and

reallocation of talent towards rent-seeking activities, to the

sublet their flats. Given the housing shortage in Cairo and

Figure 1.

detriment of productive activities (Figure 1).

Allocation of engineers in the Egyptian economy, by sector

Source: CAPMAS censuses (several years).

3. Resource abundance: a heavy burden for the manufacturing sector

In the early 1970s, public services hired the largest propor-

reducing the power of the parasitic bourgeoisie and reorien-

turing sector (25%). The booms and the Infitah had a consi-

greater equity. He sought legitimacy through the rule of law

tion of engineers (35% in 1976), followed by the manufac-

ting the Infitah towards productive activities and towards

derable impact on the allocation of engineers among eco-

and reason (Hinnebusch, 1990). To this end, he decided to

nomic activities. The proportion hired by the construction

reintroduce five-year plans, which had been abandoned in

industry increased considerably, from 12% in 1976 to 18%

practice since the 1967 war. The role of the state was to

in 1986 and to 23% in 1996. The diversion of talent into

maintain economic and social infrastructure while leaving

speculative rent-seeking activities (finance, real estate,

more freedom for private enterprise in the productive sec-

etc.) is even more eloquent: the proportion of engineers in

tors. During the boom period, enough foreign exchange

these activities, which are not highly technical, rose from

entered the country to absorb the macroeconomic imba-

3% in 1976 to 16% in 1986, plateauing at 17% in 1996.

lances. and hence the institutional context changed very litt-

During the Infitah, many engineers used their experience as

le. Real institutional change did not come until the early

technocrats to become middlemen or consultants for forei-

1990s (Hinnebusch, 1993). As early as 1986, however, the

gn firms (Waterbury, 1983; Gobe, 1999), as these activities

end of the boom period pushed the Egyptian economy into

were regarded and classified as commercial services. In

recession, and the country was forced to reduce imports,

contrast, the proportion of engineers in public services

particularly of consumer goods. This measure increased

declined, though it still amounted to 21% in 1986 and 18%

domestic market outlets for local manufacturing industry.

in 1996. The sector that suffered the most from this reallo-

Reduced competition from imports, coupled with the redirec-

cation of talent was manufacturing, whose share of engi-

tion of investment towards productive sectors, had the effect

neers fell to 22% in 1986 and 20% in 1996. In contrast to

of increasing the share of manufacturing in the Egyptian

public services, this decline had a profound impact on

economy. Mubarak did not succeed in changing the structu-

manufacturing activity, and especially manufacturing perfor-

re of incentives, however, and, far from joining the manufac-

mance.

turing sector, talent continued to leave it (CAPMAS, 1996

Many spoke out against Sadat’s economic policy and weal-

census). Although interest groups have been more discreet

th redistribution policy. Too many favours were granted to

since Mubarak took power, they still exist, and importing is

the parasitical bourgeoisie. The conspicuous consumption

still a more profitable activity than that of being an entrepre-

indulged in by this class was considered excessive, and

neur and exporter. Moreover, the legislation governing the

even provocative for all those who derived no benefit from

importing business has not been changed.

the Infitah (junior civil servants, for example, whose real

The question now is whether the reforms initiated by the

wages fell). This discredited the regime, and the grassroots

new government will, as announced, truly provide incen-

revolt, which spilled over into the streets in 1977, provided

tives for the development of a powerful, competitive produc-

When Mubarak arrived in power after the assassination of

be taken far enough to give elite groups incentives to enga-

fertile ground for Islamic fundamentalist movements.

tive sector, or whether, as in the past, the reforms will not

Sadat in 1981, he wished to change the regime’s image by

3.2

ge in productive activities.

The credibility of the Nazif government’s reforms

After several years of immobility on the reform front,

who came from the private sector, appointed a number of

with Ahmed Nazif as prime minister and an agenda of eco-

ce, tourism and foreign trade, and industry portfolios.

President Mubarak formed a new government in July 2004,

reform-minded ministers, notably to the investment, finan-

nomic reform. The president apparently thought that, given

The success of the current reform effort will depend on a

the sluggishness of the economy, continuing with a cau-

pick-up in growth driven by exports and FDI. In the current

tious policy favouring the status quo would be riskier than

social context, it is difficult to boost growth through domes-

the alternative, namely reform. The new prime minister,

tic demand. In addition, the international context today is

3. Resource abundance: a heavy burden for the manufacturing sector

highly favourable to the Egyptian economy, making the

ment, which makes European products highly competitive,

The reform has a high political cost, as there is a good deal

Chinese products can be expected to increase in several

reform easier to implement.

came into force in June 2004. Moreover, the penetration of

of resistance. For the moment, however, this cost is not pro-

sectors, including textiles.

hibitive, as the current national context offers strong incen-

Purchasing power has declined considerably as a result of

tives. For example, the low purchasing power of Egyptians

three factors: the increased price of imported products

implies that producing for the domestic market and/or

since the Egyptian pound began to depreciate (it has lost

importing are less profitable than they once were. In addi-

40% of its value since 1999), the overall rise in the consu-

tion, the international context (abundant foreign exchange)

mer price index and the less than proportional increase

makes this reform easier to implement. But what would

(10% in the public sector) or stagnation of nominal wages

happen if the context changed (e.g. due to terrorist attacks,

and salaries. The restoration of certain food products (e.g.

which are a serious threat for the tourist industry)? The

lentils, tea and vegetable oil) to the list of subsidised pro-

question is whether the authorities will have the political will

ducts did not suffice to offset the loss of real income suffe-

to continue the reforms and resist pressure from those who

red by the poorest groups.

prefer importing and producing at the margin to producing

In this context, it has become less profitable for both

for export. By changing the incentive system, the reform

Egyptian businesspeople and FDI to focus on the domestic

can tackle vested interests that are decades old.

market. This change in incentive structure is supposed to

The recent economic history of Egypt shows that all

have had an impact already, reflected by a proportionally

attempts to liberalise the economy have failed to change

greater increase in the number of entrepreneurs than in the

the incentive system, leaving Egypt with an inward-looking

number of importers. Similarly, FDI, which hitherto was

production system geared to the domestic market. This

mainly directed towards the protected domestic market and

shows that the political will to introduce liberalising policies

took the form of licensing, seems to have shifted somewhat

is not sufficient to make these policies truly effective.

towards export sectors. Even if purchasing power

To what extent might the current reform be more success-

increases, activities aimed at satisfying local demand will

ful than its predecessors? In our view, everything depends

be less profitable in the new context of increased external

on a recent change in an important parameter: the size of

competition and lower trade barriers. In this new context,

the domestic market, which is shrinking due to increased

the forces resisting a reform that encourages local produc-

competition from foreign products and the decline in

tion and exports could be less strong than in the past, and

Egyptians’ purchasing power.

in that case, the new government could indeed pursue the

With regard to competition, Egypt has signed a number of

reform effort far enough to succeed in reorienting economic

regional trade agreements, and the EU association agree-

activity towards exports.

Conclusion

The recent history of Egyptian industry is one of thwarted

the incentive system and left Egypt in an inward-looking

sector, which is important for long-term growth. Although

ket. This proves, if proof were needed, that a government’s

development, particularly as regards the manufacturing

system where production is intended for the domestic mar-

promoting the development of a strong productive sector –

political will to implement liberalisation policies is not suffi-

by opening up the economy and promoting the private sec-

cient to make such policies effective.

tor – has been a declared objective of Egypt’s political elite

Egypt’s current economic situation, with a shrinking domes-

since the 1970s, the results have been disappointing.

tic market, may well change the incentive structure at last

Manufacturing industry today still accounts for less than

by making the business of importing less profitable than

20% of GDP and of the working population, a very low pro-

production and exporting. In this context, resistance to a

portion for a country that has adopted an industrial strategy.

reform that encourages local production and exports could

Moreover, manufacturing is still largely geared to serve the

be less strong than in the past.

domestic market and is not very competitive at the interna-

Two question marks remain, however, concerning the suc-

tional level.

cess of the current reform. The first relates to how long a

Our analysis links this disappointing performance to the

reformist government can last. The second concerns the

massive rent revenues that Egypt enjoyed from 1974 to

social aspect of the reform. In all the packages of measures

1985, and which are still considerable today. These

proposed, the social component receives the least atten-

resources encouraged the authorities to adopt and maintain

tion. Merely increasing subsidies on essential consumer

a policy of partial liberalisation, which, when combined with

goods does not constitute a social policy. Public sector

the institutional context, encouraged speculative rent-see-

wages are still too low, despite the recent increase. The

king activities, primarily in the import, finance, real estate

impoverishment of a large proportion of the population and

and trade services sectors. Talent, as proxied by engineers,

rising inequality may well make these policies untenable in

clearly left the manufacturing sector to enter these activi-

the long term and could swell the ranks of religious extre-

ties; this trend has been uninterrupted since the early

mist movements with political agendas. The social compo-

1970s, but was more marked during the boom period.

nent will thus be an important determinant of the long-term

Attempts to liberalise the economy have failed to change

success of the reform effort.

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La formation professionnelle en secteur informel Rapport sur l’enquête terrain en Ethiopie

Vocational Training in the Informal Sector - Report on the Ethiopia Field Survey Richard Walther, Consultant ITG - Novembre 2006.

La formation professionnelle en secteur informel Rapport sur l’enquête terrain en Angola

Vocational Training in the Informal Sector - Report on the Angola Field Survey Richard Walther, Consultant ITG - Novembre 2006.

Les accords de partenariat économique : des accompagnements nécessaires

Economic Partnerships Agreements: Accompanying Measures Are Needed Anna Lipchitz, département de la Recherche, AFD - Janvier 2007. Energie du Mali, ou les paradoxes d’un « échec retentissant »

Béatrice Hibou, CNRS - CERI, Olivier Vallée, Consultant, AFD - Janvier 2007. Public Private Partnerships in Water and Electricity in Africa

Emmanuelle Auriol, ARQADE and IDEI Toulouse Sciences Economiques, Aymeric Blanc, département de la Recherche, AFD - January 2007.

Economic Partnership Agreements and Regional Trade Flow Dynamics: The ECOWAS Case

Benoît Faivre Dupaigre, Vanessa Alby-Flores, Borgui Yerima, Ann Vourc’h, Anna Lipchitz, Philippe Chedanne - March 2007.

La Régie des eaux de Phnom Penh : un modèle de gestion publique efficace

Aymeric Blanc et Alain Riès, département de la Recherche, AFD - Mai 2007.

Série Documents de travail / Working Papers Series

N° 41 N° 42

Répartition des gains dans les partenariats public-privé : effets comparés des modalités d’assiette d’une redevance

de concession

Olivier Ratheaux, AFD - Juin 2007.

Potential Financial Frameworks for a Sustainable UNEO

Helle Husum, COWI, Erik Brander, COWI, Suzanne A.K. Steensen, COWI, et Emmanuelle Lachaussée, AFD - June 2007

N° 43 N° 44 N° 45 N° 46 N° 47 N° 48 N° 49 N° 50 N° 51 N° 52 N° 53 N° 54 N° 55 N° 56

La concession des aéroports de Madagascar : une privatisation en trompe-l’œil ?

Aymeric Blanc, département de la Recherche, AFD, et Olivier Gouirand, AFD - Août 2007. La concession du chemin de fer du Cameroun : les paradoxes d’une réussite impopulaire

Aymeric Blanc, département de la Recherche, AFD, et Olivier Gouirand, AFD - Août 2007. Analyse rétrospective de la crise alimentaire au Niger en 2005

Jean-Pierre Olivier de Sardan, LASDEL, avec la participation de M. Ali Bako, E. Guillermet, O. Hamani, Y. Issa, M. Koné et M. Moha - Septembre 2007.

Une nouvelle base de données institutionnelles : « Profils Institutionnels 2006 »

A new institutional database: « Institutional Profiles 2006 »

Nicolas Meisel, département de la Recherche, AFD et Jacques Ould Aoudia, DGTPE - Septembre 2007 Governance of Renewable Natural Resources: Concepts, Methods and Tools

Sheila Wertz-Kanounnikoff, Institut du développement durable et des relations internationales (Iddri) et Dominique Rojat, AFD - September 2007.

La crise de la filière coton : conséquences économiques et financières au Burkina Faso

François Xavier Bellocq et Arthur Silve, Département de la Recherche, AFD - Septembre 2007. Youth and labour market in Africa (DIAL)

Jean-Pierre Cling, Flore Gubert, Christophe J. Nordman, Anne-Sophie, DIAL - October 2007.

Culture and development: a review of literature. The continuing tension between modern standards and local contexts

Hèla Yousfi, Researcher at “Gestion et société”, CNRS, Paris - November 2007. Transferts et déséquilibres macroéconomiques des économies ultramarines

Philippe Jean-Pierre, université de la Réunion - Novembre 2007.

Eloignement, insularité et compétitivité dans les petites économies d’outre-mer

Bernard Poirine, maitre de conférences d’économie à l’université de la Polynésie française - Novembre 2007. Pourquoi s’ouvrir ? Contraintes et perspectives pour les économies ultramarines

Jean-Michel Salmon, maitre de conférences, CEREGMIA-faculté de droit et d’économie de la Martinique, université des Antilles et de la Guyane et consultant indépendant à STRADEVCO - Novembre 2007.

Regional Trade Agreements and Developing Countries: The Case of the Independent Pacific Island States Robert Scollay - November 2007.

Corporate Social Responsibility in Turkey: Overview and Perspectives

Naïg Cozannet, Agence Française de Développement, Helge Rieper, Frankfurt School of Management and FinanceYekbun Gurgoz, Agence Française de Développement - December 2007.

allocation geographique de l’apd francaise : Comparaison entre la sélectivité de l’APD française totaleet celle de

l’Agence Française de Développement

Jacky Amprou, AFD, Carl Bernadac, AFD, Pascaline Magnes, ministère des Affaires étrangères - Novembre 2007.

Série Documents de travail / Working Papers Series

N° 57 N° 58

L’aide au commerce dans les pays en développement : des articulations complexes pour une efficacité réelle

Marilyne Huchet-Bourdon, maître de conférences en économie, Agrocampus Rennes, Anna Lipchitz, économiste, département de la Recherche, AFD, Audrey Rousson, consultante, AFD - Janvier 2008. La « bonne gouvernance » est-elle une bonne stratégie de développement ?

Is “Good Governance” a Good Development Strategy?

Nicolas Meisel, département de la recherche, AFD, Jacques Ould Aoudia, Direction Générale du Trésor et de la Politique, Economique du Ministère de l’Economie, des Finances et de l’Emploi - Janvier 2008. N° 59 N° 60

Prospective et enjeux énergétiques mondiaux - Un nouveau paradigme

Bernard Laponche, consultant - Janvier 2008.

Cycle du crédit et vulnérabilités financières : évolutions récentes dans certains pays émergents

Matteo Mogliani, Ecole d’économie de Paris - Mars 2008.