Over the past year Egypt’s emerging economy has received accolades for strides in development rates. The World Bank-International Finance Corporation’s “Doing Business 2008 Report has described Egypt as the world’s top reformer of regulations for the ease of doing business, outpacing other reformers worldwide and in the region with improvements in five out of 10 areas.
With a GDP growth of 7.2 percent in 2007, up from less than three percent a few years ago, the picture looks bright, according to Minister of Trade and Industry Rachid Mohamed Rachid, the head of the Egyptian government’s World Economic Forum organizing committee.
Yet despite an annual foreign direct investment increase from less than $ 1 billion a few years ago to $ 11 billion last year, and expectations that this figure will be exceeded again in 2008, the slowdown in Western economies poses numerous challenges. This has also been exacerbated by triple global inflationary action in the energy, commodities and food sectors, that have grated on Egypt’s lower and middle income brackets, who have been increasingly vocal in expressing their frustration at the soaring prices and the fact that little of the fruits of the county’s booming economy has trickled down to them.
Earlier this month, the announcement of a package of measures aimed at combating prohibitive increases in food prices and to raise the 30 percent salary increase declared by President Hosni Mubarak for public sector employees and pensioners was a double-edged sword. The domino effect expected as a result of hikes in fuel prices, will, pundits say, render the 30 percent raise useless, since prices will effectively increase by at least 40 percent. Other measures, however, have been lauded as equitable means of “taking from the rich to give to the poor , such as the instatement of higher licensing fees on luxury vehicles and the taxation of energy-intensive industries operating in the free zone, among others.
Daily News Egypt sat down with Minister Rachid for a chat about his ministry’s performance since his tenure in 2004 and his vision for the future in light of the 2008 World Economic Forum’s meeting on the Middle East’s theme “Learning from the Future.
Daily News Egypt: What has been the main thrust of your strategy over the past four years? Do you feel you’ve been on target and what are your plans for the coming period?
Minister Rachid: To go back to the initial statement of our policy and what we had announced from day one about the role of the Ministry of Trade and Industry, it was articulated to be the generator of growth in terms of our ability to attract investment, to generate capacity, to improve competitiveness and productivity and to significantly increase export numbers in Egypt.
Through all that, we wanted to achieve what the government had committed itself to: First the creation of employment at the rate of no less than 650,000 jobs per year and consistently improving the income of the Egyptian population.
We set ourselves a very clear target to measure what we are doing. At the time when we started, the growth of industry was 2.3 percent. We had set the target in the next six years to reach 10 percent growth. And we also said that we want to maintain a 20 percent growth in exports every year. These two indicators have been feeding our plans and policies.
In all our three targets we have been significantly ahead of target. In terms of growth today, we’re running at 8.2 percent. Our plan for this year was to be at a rate of 6.5, so we are ahead of our plan. Last year we were at 7 percent, so we are expecting by 2009 to be at 10 percent, which was the target for 2011.
In terms of export growth, last year we grew by 45 percent, the year before by 27 percent and the last six months we grew by 35 percent, so our export growth is going up at a rate comfortably above 25 percent to the extent that last year was the first year in history where our non-oil exports exceeded our oil-exports, with $12 billion in non-oil exports. This was less than $3 billion three years ago.
In terms of industrial investment I set a target of LE 150 billion in six years. So far we’re already at LE 100 billion. Last year alone we hit LE 42 billion. So we’re comfortable that we’re capable of achieving the employment we want to create and the level of production, and it’s very clear that we are touching on all the important elements of our productivity: the development of human resources, of technology, of marketing, distribution and logistics. All these things have not yet reached the extent we are satisfied with, we still have a long way to go but we are improving the overall situation.
You have taken drastic measures recently like banning rice and cement exports. Would you say we’re going though an emergency phase? Are these measures temporary? How do they fit in with your overall policies? Will they hinder growth? Do you think such measures would make investors lose confidence in Egypt as an investment destination?
Are we in an emergency? Yes, because of what the world is now facing, not just Egypt, in terms of unprecedented inflation. The emergency is caused by three important areas: energy, with oil now in excess of $118 per barrel, only three years ago it was at less than $25; huge inflation in commodity prices, with every single commodity increasing at least 200 – 300 percent in the last two years, whether wood, steel, cement, aluminum; and the third and most important area for us, food inflation, with the price of food going up at least 70 percent last year, and it is not stopping.
This triple inflation nightmare of energy, commodities and food is putting every country in an emergency situation.
But why are there no bread strikes in vast quantities in every other country?
Because bread is heavily subsidized. We have the queues instead of the strikes. We have increased our subsidy from LE 6 billion to LE 16 billion for bread alone. Our subsidy and social expenditure bill went up from LE 20 billion to LE 100 billion in the past three years, that’s including the energy subsidy. We are in an emergency situation. It’s a very challenging time for any government and definitely for us. If it wasn’t for the reforms we instated in the past three to four years, we wouldn’t have been able to face the crisis we’re in today.
But some people are blaming the crisis on the reforms.
These people pretend that the world around us doesn’t exist and that what we are facing is created in Egypt, which we all know is not true. Anyone who reads any newspaper or watches television will understand that this is not an Egyptian problem. It’s a global problem and in reality all this inflation is imported. We didn’t create the crisis in energy, commodities or food. For instance, when I took the decision to ban rice exports, the world price of rice went up by 30 percent. This would not have happened if there was no global crisis. So Egypt today had impacted negatively on the price of rice because of the very serious situation for agricultural products all over the world.
The challenge we are facing is a very big challenge and if it wasn’t for the reforms we could not have afforded to pay LE 100 billion in subsidies today. Where would we have gotten the money? If it wasn’t for opening up and integration with the rest of the world, we would not have been able to find all the commodities we needed. I fully understand people screaming from the prices, but first of all there are no shortages in any commodities or products and still most of the cost of products here are below markets around us.
I got a call from Sudan because of our decision to stop cement export and they said that this has caused the price to go up from $300 to $450. In Egypt the price of cement is still at a rate of $60, so it is a difficult situation and difficult times require difficult decisions.
Whether the investors will understand that, yes, I think they will. I think we are still committed to full partnership with our investors and our producers.
We engage them in all the decisions. We tell them
what’s going on and we try as much as we can to ensure that we are totally in line with each others’ expectations on this. But as I said these are difficult times that need difficult measures.
So you’re saying there is no conflict between a certain amount of regulation and adherence to the rules of the free market?
Free markets also have rules and regulations to deal with some emergencies and we are not the only country in the world who is facing this and are not the only country in the world which has taken such measures. When we look at prices regulation of agricultural products, we know that the United States and Europe are the biggest two parts of the world interfering in crop prices. They’ve been doing that until today: they subsidize, they control and they give quotas. That’s the heart of the discussions in the Doha Rounds – that the Americans, the Japanese and the Europeans are doing it but expect us not to do it. It cannot work that way.
What about the role of anti-trust and consumer protection measures. How does it fit into your vision for industrial progress?
We committed ourselves to a free economy. A free economy is based on the freedom of competition and the freedom of consumers to choose between competitive suppliers. For that reason we needed to have measures, organizations and institutions in place to ensure, first of all, consumer protection rights and the protection of competition.
In the past three years we have been successfully putting in place the laws and legislation and organization to do that. They are still young. They are still in the early phases but they are extremely important to secure that the free economy and the market economy are running smoothly. And despite being young, the anti-trust and competition commission has taken a huge task starting with two very difficult cases, that is, steel and cement. It is challenging. And if you look at the records of any other country when they deal with such cases, you’ll find that these are complicated cases which could take two to three years and they are usually politically controversial.
But we have been very professional about this. We’ve made it very clear that this is about implementing the law, about setting the standards of competition that you want in the marketplace. The competition authority at the moment is taking on some additional very serious files like dairy products and meat products.
The recently established Industrial Training Council and the idea of filling the skills gap is very important to your vision, but wouldn’t you say this will create a more informed labor force that is more aware of its rights? How will that take away from Egypt’s edge as an investment destination offering cheap labor?
First of all I’m not trying to create an Egypt of cheap labor. I’m trying to create an Egypt with the most productive, profitable labor that we can get.
So this is not about giving an advantage to businesses at the expense of labor. On the contrary, I would take the opposite position – and I’m saying this with the full knowledge of how business people think. Good business people always understand that the best labor they have are those who have their rights in full and at the same time the pride and satisfaction of being in their job. You cannot get competitive output through labor that is dissatisfied.
But workers in Egypt have been consistently dissatisfied in the past two years, taking more industrial action than ever before.
Let’s not confuse two things: one, that we are at a time of change and so there are some hot topics for labor like privatization; and that most of the strikes we’ve heard about are coming from the public sector companies that are not necessarily well-managed, profitable or secure about their future.
It’s very understandable that such an environment with bad management could create some labor instability. Let’s not confuse that with the fact that this is only representing 350,000 public sector laborers out of a 22 million workforce. So let’s put that in the right context. The ratio would be 1 or 2 percent. And if we take it to the industrial level it would be less than 10 percent. So, this is not a true representation of the status of labor in Egypt.
This government, in the last three years, has created 2.5 million new jobs.
In which fields? Which areas are we encouraging industry and investment and how do we become self-sufficient in strategic areas? Do you have plans to encourage more investment in certain areas?
We are advocating a free economy. We are not advocating a planned economy. We are not telling people where they should invest.
But doesn’t the government carry the duty and responsibility to make sure that we are at least self-sufficient in certain strategic industries?
Self-sufficiency is the policy of the 60s. What we are trying to ensure now is that we have growth in our production and growth in our income in the areas where we are most competitive not necessarily in the areas where we consume the most. Self-sufficiency begins with the idea that we don’t want to deal with the rest of the world, and that we want to rely on ourselves.
That was the challenge with the policies of the 50s and 60s. If every country in the world becomes self-sufficient, then we don’t need trade. This is not about self-sufficiency, it’s about being competitive and productive in areas where you have real competitive advantage and an integration with the global economy and interdependence between communities around the world. That’s the model we are working on and, by the way, that’s the model that’s been making millions of people happy and satisfied around the world in the last 30 years or so.
But it hasn’t been making a lot of people happy in Egypt. So what do you think is the problem?What is the problem?
There is a problem. People are not satisfied. You only need to switch to any Egyptian TV channel to see it.
The televisions are not happy. That’s another story. If we talk about the satisfaction of the people . I’ll give you the example of Ireland that has been a huge success story over the past 30 years . with incomes reaching over $30,000. Today every single government in the past 20 years has been a coalition. No one party has been able to get the satisfaction of the people and people have been complaining more today than they used to before. So this is more of going into the philosophy of happiness.
Let’s get back to the new industrial zones we will be setting up. How will they work? How are they good for Egypt?
First we need more and more land for industry. Initially our plan was to allocate 10 million square meters for industry every year. Today this is not enough. We are running at a rate of 14 million square meters and we still have a queue. We have more factories under construction than we had planned. At the moment we have more than 2,400 factories in the works and a queue of about 1,000 demands for new factories. So we were under pressure to give more land for industry and one of the ways in which we are approaching this is to give the private sector the responsibility of setting up industrial zones.
This has a lot of advantages: it creates new businesses for the private sector and less financing demands on the government. We give them infrastructure on the head of the land and they do all the infrastructure inside with fixed price and no speculation on land.
The second advantage is the clustering. We dedicated certain zones to specific industries, whether it’s furniture or textiles or building material, for example.
Third, these companies will offer services that the government will not offer today, like ready-made buildings, buildings for rent, warehouses, training facilities for labor, maintenance, etc. . They also do a lot of marketing. They try to attract the best companies to invest in their zones because they want their zones to have the best talents. We already have in place eight private industrial zones, we’re going for another 18 and we plan for something like 30 in the next 2-3 years. Each will be allocated between 1-2 million square meters, which m
eans between 120-200 factories in each location.
What about something like the Chinese industrial zone? The Chinese already have much cheaper products, how do we protect Egyptian products from the onslaught of the Chinese? Are there certain stipulations as to how much raw material they should buy from Egypt, for instance?
Of course they will follow the law. But these products are Egyptian products and if they compete then this is what we want. We want them to compete.
We want better quality, better prices, Egyptian labor and management working with Chinese investment and know-how, that is good for us. But these are all marketing approaches. The Chinese zone is also allowed for Egyptians and so is the Turkish and German.
These are all approaches to marketing our industrial projects to different countries.