Catching Up with the Competition: Trade Opportunities and Challenges for Arab Countries

7. Enhancing Egypt's Exports

CHAPTER 7 Enhancing Egypt's Exports James H Cassing, Samiha Fawzy, Denis Gallagher, and Hanaa Kheir-El-Din The Government of Egypt (GOE) has set a target for GDP growth at an annual rate of 7 to 8 percent by the year 2000. An important part of the strategy for achieving this goal is policy reform aimed at enhancing export performance and attracting increased investment. Egypt currently has a unique opportunity to achieve its growth target by relying increasingly on the rapidly growing world economy and large amounts of international capital seeking productive investments. However, there are serious obstacles to the globalization strategy. These threaten to undermine export growth and investment as well as to entice new job entrants into less productive jobs and new investment into artificially protected , less productive industries. As it stands, Egypt has been marginalized in international trade with a mere $3.5 billion of merchandise exports concentrated in a handful of traditional exports and petroleum. (Nonfactor service receipts such as those from tourism and the Suez Canal are $10.6 billion.) Manufactured exports amount to only $ 1.3 billion, of which half are textiles (World Bank 1997a). Had Egyptian exports simply grown at the world average since 1983, exports would be about twice what they are now. Despite low labor costs, rich natural resources, and an advantageous location, Egypt's share of world exports and imports has declined, as has the openness of the economy (Subramanian 1997). Thus, there is cause for concern regarding the fragility of the necessary preconditions for an export boom and the direction and pace of Egypt's current economic reforms. Although it is clearly the 208 CatchingUp withthe Competition GOE's intention to create an exporter friendly business climate, good intentions are insufficient to deal with the taxes and stifling bureaucracy that block initiatives and lower efficiency and productivity. This chapter identifies and assesses the impact of several impediments to the globalization strategy. In particular, we focus on the structure of economic incentives resulting from the tariff/tax system, remaining NTBs to trade and investment, and problems with moving products through the ports and customs . These have an antitrade bias and discourage investment in the most productive sectors. Issues are illustrated by focusing on the impact of prevailing policies on five industries that have become the focus of some attention in Egypt. The Structure of Tariffs Egypt taxes corporations, individuals, commodities, and a number of other activities.1 As far as international trade flows and investment are concerned, import duties and surcharges are of primary concern. There are no export taxes or quotas. The average nominal rate of protection (NRP) in 1997 was 24.6 percent. The ERP, which is a measure of the extent to which value added is 2 protected, was 30.5 percent (table 7.1). ERPs are highly correlated with the NRP; the estimated rank correlation coefficient is 0.98. For agriculture, the ERP is somewhat higher than NRP on average, but both measures of protection are lower than 10 percent. Manufacturing also enjoyed an ERP higher than the NRP, and both are significantly higher than for agriculture, 34 percent and 27 percent, respectively. The implicit NRP on material inputs (INRP)-a measure of the tax paid explicitly for imports or implicitly for import substitutes on inputs for various activities~is much lower at 7 percent. The tariff structure tends to favor consumer goods activities and transport equipment. Both nominal tariffs (NRPs) and ERPs are highly dispersed. The standard deviation of nominal tariffs is 19.5 overall and 24.6 for manufacturing, with a range of 5 percent to 50 percent. ERPs are significantly more dispersed with a standard deviation of 34.2 in manufacturing and 26.9 overall. This indicates that some sectors are much more favored by the tariff structure than others and so are likely to attract resources away from sectors which are in fact more productive. Ironically, to the extent that capital and skilled labor are diverted to uses in less labor-intensive sectors, employment opportunities are suppressed and real wages, already lower due to high tariffs on consumer goods, are further reduced. Sectors that are particularly favored by the tariff structure at the expense of other sectors, and of exports generally, include final wear, footwear, furniture, rubber and plastic products, porcelain, china, and ceramics, and Enhancing Egypt's Exports 209 means of transport. As an extreme example of the...