Salah El-Amrousi argues that Egypt's economic problems are too big for QIZ to tackle alone Qualified Industrial Zones (QIZs) have been trumpeted as a panacea. We have been told that they will send exports soaring and catapulting the economy into unprecedented growth. The tariff protection which QIZ provides is supposed to help us boost not only the textiles industry but the entire economy. Is any of this true? I find it ironic that QIZ supporters are the same people who have long lectured us on how protectionism distorts Egyptian industry and how we need to be exposed to international competition to improve our performance. There is a difference between the type of protectionism that gives the economy a chance to re-group and live up to international standards, and the type of protectionism that is associated with long-term problems. QIZ, I would argue, belongs to the latter type of protectionism. In my opinion, the problem is not in the government's mishandling of policy, but in the policy itself that the government and liberal economists believe in. The government has liberalised the market almost fully. It has withdrawn from economic life, although it continues to own key economic enterprises, which it runs according to market forces, or fails to run until their sale is deemed profitable. But experience shows that market forces have not done the economy much good so far, and this is because our capitalist base is inadequate. We do not have the right macro or even micro- institutional structure to support a market economy. Ours is a case of "market failure", a fact our neo-liberal economists are reluctant to admit, preferring instead to borrow policy from advanced market economies. For example, we now offer tax and non-tax incentives to new investments. Yet domestic investment has not picked up, not even after we alleviated red-tape restrictions. Besides, our neo-liberal economists are keeping the interest rate high, therefore impeding investment, both local and foreign. Our problems are too big for QIZ to solve. If anything, QIZ may actually aggravate a desperate situation. The worst part of the current crisis is the technological backwardness of our textile and garments industry. According to reliable estimates, 72 per cent of cotton spinning machinery, 87 per cent of cotton preparation machinery, 100 per cent of wool spinning machinery, and 71 per cent of garment manufacturing machinery is over 25 years old (this in an industry where machines are typically replaced every 12 years or so). Spare parts are rare, maintenance is irregular, and wastage is high. If you find this surprising, just take a look at the level of our industrial investment. Our industrial investment stood at 7.5 per cent of gross domestic product in 2003/04. Compare this figure with 22 per cent in 1991, an average of 17 per cent over the past two decades, and an average of 30-40 per cent in Southeast Asia and you'll get some idea about what we're up against. The investment level for the textile and garments sector is even lower than the national average, mainly because of the way privatisation has affected this particular sector. According to the CEO of the Spinning and Textile Holding Company, Mohsen Al-Jilani, 13 years ago the government decided not to pump any new investment into public sector companies. "The aim of that decision was to let the private sector assume this role, while the government channeled its resources to other services. During that period, the situation of companies deteriorated and their debts increased. The companies slipped into further trouble and no one offered to buy them." In order to entice investors to buy textile companies, al-Jilani proposes that the outdated machinery be offered to potential buyers for free. Technical ineptness has negated the blessing of long-fibre Egyptian cotton. Our unprocessed cotton is of superior quality, but not when we process it into thick, low-quality yarn. According to industry expert Ali Habish, we are producing a grade-20 yarn, whereas we should be aiming for grade-80 yarn. No wonder then that our competitive edge has slipped. Textile exports dropped from $554 million in 1990 to $287 million in 2003, according to WTO figures. Even in the domestic market, our textiles are being overrun by Asian imports, which prompted the government to introduce protective customs in 2003 (later abolished in compliance with WTO regulations). Worse still, our garments industry is becoming increasingly dependent on Chinese and Indian yarn and fabrics. Our garments exports reached $233 million in 2003, up from $144 million in 1990. A 62 per cent increase in 13 years, let us admit, is hardly something to brag about. Egyptian exporters have not been able to fill up their quotas in the US market. According to the latest report by the Ministry of Foreign Trade and Industry, we have used 19.7 per cent of the yarn quota, 40.6 per cent of the combed yarn quota, 52 per cent of the towels quota, 64.9 per cent of the knitted garments quota, 13.3 per cent of the shirts quota, and 65.8 per cent of the women's wool trousers quota. Our failure to export is less due to import restrictions than to our lack of competitiveness, a problem QIZ is not designed to fix. There are two misconceptions about QIZ that need to be clarified. One is that the tariff exemption given to our textile products is not as high as many believe. The figure commonly cited, 36 per cent, is the maximum tax on US imports of textile, but the actual figure is significantly less. Another misconception is that QIZ would provide considerable protection to non-textile exports, which is not true. Without QIZ, our textile exports to the US would face an average duty tax of 8.3 per cent, and our garments an average duty tax of 17.4 per cent. Few types of products, such as sweaters and undershirts, would have incurred a 33-35 per cent tax. Let me add here that our garments industry is almost separate from our spinning and textile industry, for it depends on Asian fabrics and exports. The garment industry, therefore, is rather an assembly operation, with correspondingly limited benefit to the economy. The domestic value added through that industry is no more than 23.3 per cent of its total product (after deducting Israel's share). For QIZ to give us access to US markets commensurate with what we have had before the abolition of the quota system, or even boost our exports, it would have to provide us with protection surpassing the gap of price and value that exists between Egyptian and Asian exports. This is quite unlikely. Egyptian garment products barely compete with Chinese imports even in the protected Egyptian market. The ability of garments to compete depends on the quality of the product and its resonance with continually changing consumer tastes, all of which call for the constant research and adaptation which Egypt sorely lacks. Let's recall what happened when the EU removed quotas for Egyptian textile exports in January 2004. Egyptian exports had been performing poorly in the EU market, dropping by 35 per cent in 2001, by six per cent in 2002, then rising by eight per cent in 2003. Interestingly, Egyptian exports to the EU climbed by 23 per cent in the first half of 2004 -- after the quota system had been abolished. The increase was an indication that our export performance is more linked to quality than customs regulations. I believe that Egyptian exports could increase by 300-600 per cent if we raise our quality to meet international standards. How about our potential competitors on the international market? A recent report by the US international Trade Commission, says that China is expected to be the US main supplier of textiles and garments because of its ability to provide products of quality at competitive prices. Mexico and other Latin American countries also have a clear edge, for due to their proximity, familiarity with American consumer taste, and preferential trade agreements with the US. Some say that the removal of the quota system would allow China to increase its market share of garments in the US from 16 per cent to 50 per cent, while Mexico's share drops from 10 per cent to three per cent, but it's too early to tell. According to the US report, Jordanian exports may be adversely affected by the free trade agreements the US has signed with the countries of the Caribbean and Central America. Jordan, if you may recall, was our inspiration when we signed QIZ. US importers are predicting a fall in Egypt's importance as an exporter to the US market, but some of them say that they will continue to import Egyptian products that are high in quality and competitive in price, and some Egyptian factories are able to meet these requirements. As for non-textile exports, they fall under the Generalised System of Preferences (GSP) offered by industrial countries to developing economies under WTO regulations. GSP imposes a tax of less than two per cent on industrial exports, which means that QIZ can have little effect. To sum up, QIZ would only help us insofar as certain brands of garments are concerned. For other brands and for non-textile products, the benefit is minimal and shared with Israel. On the upside, QIZ can help us keep up our exports in certain garments to the US, but perpetuates a status quo that is not conducive for industrial growth. We should increase the quality of our products rather than to shop for preferential treatment.