More than two years since the outbreak of the 25 January Revolution, Egypt continues to have an unfavourable competitiveness outlook, with its 2012-2013 Global Competitiveness Index (GCI) rating slipping to 107th position out of 144 countries from its 2011-2012 position of 94th from 142. Underpinning this slippage are the poor quality of its institutions, manifested in a high incidence of crime and violence, rampant corruption, an inefficient legal framework and corporate governance that is in need of enhancement. These are compounded by an imbalanced macroeconomic situation, as well as significant infrastructure deficits. Moreover, much remains to be done to improve the quality of higher education and training, the efficiency of goods and labour markets, the development of the financial market, the level of business sophistication, and a strategy for greater innovation. All these have implications for the business environment and consequently for growth. Analysis of the GCI reveals that under the impact of mounting social pressures and civil unrest, Egypt has seen a high incidence of crime and violence. Not only have police services proven less reliable than before in enforcing law and order, but there has also been a general lack of confidence that just settlements could be reached through the equitable rule of law. Those exercising violence have used it as a means of pressuring the government for change. The analysis further reveals that the government needs to increase its efficiency in the provision of goods and services, thus working towards achieving greater transparency, as well as avoiding the irregularity of payments related to imports and exports, tax settlements, and the awarding of public contracts. Against this backdrop, as well as the red tape burden, businesses are being held back by what it takes them to comply with government regulations for starting a business, issuing a license or registering property. As much as the government needs to enhance its efficiency, so also does the legal framework, either when it comes to challenging government actions and regulations, or when it comes to settling private business disputes and protecting property rights. Part and parcel of the need for an efficient legal framework is the need for an independent judiciary that properly addresses grievances and puts in place the necessary checks and balances. This needs to be complemented with the existence of sound corporate governance practices that strengthen the rights of shareholders and guarantee a higher level of transparency in company transactions. Macroeconomic imbalances are reflected in a worsening government budget deficit, high inflation and several downgrades of the country's credit ratings, the most recent of which was on 21 March 2013. Increased government spending on wages, subsidies and interest payments has come at the expense of investment expenditure. Moreover, banking intermediation has been feeble under the impact of the excessive shouldering of the budget deficit. Egypt thus needs to strengthen the role of other financial intermediaries, among them mutual funds and the mortgage sector. It is equally important that expenditure be prioritised with special emphasis on infrastructure to address a serious competitiveness constraint and to improve health and education. Egypt further needs to raise additional revenues through a broader tax base and better tax compliance. Furthermore, sound labour-market policies that balance the flexibility of hiring and firing with the maintenance of adequate worker protection need to be in place. The independence of labour unions may help provide workers with viable venues for dispute settlement, thus letting off much steam that has so far culminated in frequent production stoppages. Labour policies need to be paired with an overhaul of primary and higher education and the advancement of vocational and technical training for the better matching of demand and supply of worker skills. Moreover, although Egypt has made strides in the direction of its competition policy with the increased autonomy of its Competition Authority, this has yet to bear fruit. Egypt has seen significant deterioration with respect to business sophistication factors, suggesting that it needs to derive its competitiveness not merely from low production costs and the availability of natural resources, but also from developing its products and processes. Cluster development for stronger inter-firm linkages and greater value chain engagement may be steps in that direction. Finally, better innovation calls for Egypt's firms to raise their spending on research and development (R&D). It also calls for the government to enforce a research strategy that addresses the modest quality of public research institutions and the absence of collaboration between universities and the business sector, and to ensure that public R&D agendas cater to contemporary research priorities and interests. Without such moves, greater competitiveness in today's knowledge-based economy will remain difficult. The authors are acting executive director and director of research at the Egyptian Centre for Economic Studies (ECES) and professor of economics at Cairo University, and a senior economist at the ECES, respectively.
