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INCREASING OPENNESS & FRAGILE COMPETITIVENESS

This case study explores Egypt's three-phased reform process, focusing on the increased openness of the economy and the fragility of its competitiveness. It examines competitiveness indicators, supply and demand issues, signs of a turnaround, and the impact of the Egypt-EU Association Agreement. The paper concludes with recommendations for bridging the gap between Egypt and the Euro-Med region.

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INCREASING OPENNESS & FRAGILE COMPETITIVENESS

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  1. INCREASING OPENNESS & FRAGILE COMPETITIVENESS The Case of Egypt Talaat Abdel-Malek American University in Cairo

  2. Main Topics Addressed • Background to reforms • Reform in Three Phases • Increased Openness & Fragile Competitiveness • Competitiveness Indicators • Supply & Demand Issues • Signs of A Turnaround • Egypt-EU AA & ENP • Means of bridging the Gap

  3. Pre-reform Egypt: early to late 1980s Rentier economy Fall in oil prices Fiscal deficit B/P imbalances Rising inflation Background

  4. THREE-PHASED REFORMS • Phase I:ERSAP (1991-98) • Public sector deregulation/privatisation • Phasing out price & rent controls • Actively promoting FDI • Trade liberalisation • Containing fiscal deficit • Aid package & debt relief

  5. THREE-PHASED REFORMS • Phase II: (1999-2003) • Setbacks : tourist attacks, global recession, 9/11, regional instability • Overcautious govt. policies • Inconsistencies in policies • Recession, higher deficit, FDI down, reserves down, currency overvalued

  6. THREE-PHASED REFORMS • Phase III: (2004 – present) • Pressures to take corrective actions • New reform-minded cabinet & Central Bank management • Integrated approach to faster reforms • Private sector role • Substantial reduction in tariffs • Tighter monetary policy

  7. THREE-PHASED REFORMS • Phase III (cont): • New income tax laws, lower rates • Tighter rules & more transparency for stock market • Reviewing food & other subsidies • Accelerated privatisation pace

  8. THREE-PHASED REFORMS • Key Results: • Higher growth rate (close to 6%) • Single digit inflation rate • Export growth • Doubling of reserves ($22b) • Improved currency value • Trickle down effects still modest

  9. Increased openness & fragility of competitiveness • Legacy of prolonged protectionism • Public sector dominance • Predominance of SMEs • greater competition exposed weak competitiveness • Bankruptcies, mergers, extension of indirect support

  10. Increased openness & fragility of competitiveness • Fragility defined: • As the inability to compete or improve market position in a sustainable manner without government support

  11. Competitiveness indices • World Competitiveness Report: (2000>2004): • Growth Comp. Index (rank) 42 > 62 • Business Comp. Index 39 > 66 • Technological capabilities study: rank 101 out of 161 • Manufactured exports/goods exports: 42% > 36%

  12. Supply & Demand Issues • Supply Constraints: • Lack of market research & poor data bases • Inward orientation/limited int. exposure • Low quality standards • Limited technology transfers • Inadequate infrastructure • Rigid labour market and labour laws

  13. Supply & Demand Issues • Demand Constraints: • EU/US farm & export subsidies • Quotas • Tightening of product standards: env., labour, child, health, etc. • Limited success of ODA in capacity building & HRD (complex reasons)

  14. Signs of a Turnaround • Is competitive fragility here to stay? • Indicators of improved competitiveness: • Over 30% export growth (2004/05) • 16% growth in service exports • Current a/c turned into surplus • Qualified Industrial Zones (text/garmts) • Sharp decline in bankruptcies

  15. Egypt-EU Association Agreement • AA builds on MEDA I & II (ratified June 2004) • Essence: an FTA key goal - better access to EU markets immediately – gradual reduction of tariffs on EU products over 15-yrs – rule harmonisation by both sides - assistance package to cope with negative effect • Too early to assess impact • Static & dynamic effects of integration

  16. Egypt-EU Association Agreement (cont.) • Trade creating vs trade diverting effects • More FDI • Easier technology transfer • More competition • Net impact depends on institutional reform/sound macroeconomic policy & competitive climate

  17. Egypt-EU Trade • Highlights Egyt. Exp.Egyt. Imp.Bal. • To EU - 1995 $1.7 b $5.8 b - $4.1 b • US $1.4 b $3.9 b - $2.5 b • To EU - 2004 $5.1 b +200%*$7.8 b +35% - $2.7 b • US $4.6 b +228% $5.2 b +33% - $0.6 b • Total - 2004 $13.8 $24.2 b - $10.4 b ---------------------------------------------------------------- * % increases in 2004 figures relative to 1995 figures

  18. Some Issues in Egypt-EU Relations • Impact of expanded EU membership on future trade/FDI patterns • Effects of Doha Round outcome • Effectiveness of EU technical assistance • Pace of progress in rule harmonisation • Present differences under the ENP • Impact of a future Egypt-U.S. FTA

  19. Bridging the Euro-MED Gap?Some recommendations • Measures on Egypt’s Part: • keeping good pace of reform, including institutional/civil service reform • Safety net to shelter the poor/ultrapoor • Faster pace of political reform • More active civil society/grassroots • Priority to HRD (skills, knowledge)

  20. Bridging the Euro-MED Gap?Some recommendations • Measures on EU’s part: • Reducing trade barriers (agr./industrial) • Better ODA harmonisation & alignment with Egypt’s priorities • Promoting more technology transfers, through FDI, R&D centres • Further Support of South-South integration

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