Half-hearted reform will not turn Egypt's under-performing economy around, writes Samia Farid Shihata* The striking success story of the tiny emirate of Dubai brings close to home how a truly business-friendly environment can be a powerful magnet for investments and how it can transform a relative backwater into a dynamic fast growing economy. Dubai's attractiveness as an investment destination goes beyond its minimal licensing requirements and tax-free status. Investors from all over the world are drawn to the totality of Dubai's investment climate which boasts simple, clear and stable regulations, a small and efficient civil service, the availability of a first class physical infrastructure and the capability of recruiting skilled workers and professionals from the region and beyond. How does the situation in Egypt compare with this example two decades into our transition to a private sector led economy? Unfortunately, we have yet to unleash the creative energies of our private sector and we have a long way to go in attracting foreign direct investment on the scale needed. Though we have been relatively successful at stabilising the economy, considerably less progress has been made in structural and institutional reforms essential to improving the investment climate. In too many areas, including the regulatory framework, reforms have been slow, piecemeal and incomplete. Our efforts to attract investments have for too long tended to focus on meeting the needs of large foreign investors and influential Egyptian businessmen, to the exclusion of small businesses. It was mostly large companies that were able to take advantage of the generous tax exemptions and free zone status offered in certain industries and geographic areas, and it was the large investors who benefited from audiences with prime ministers and cabinet ministers to make sure that obstacles were removed and that bureaucratic hurdles were surmounted. In the meantime, small and medium-sized local businessmen were generally left to fend for themselves (unless they were lucky to have their own connections) in their daily struggle through a maze of contradictory and cumbersome laws and regulations implemented by an inefficient, underpaid and corrupt bureaucracy. When the lack of accessibility to bank financing and the inconsistent application of laws are added to this mix, it is a wonder that any small business ever gets started or ventures into the formal economy at all! This is unfortunate since studies have shown that the highest proportion of jobs in most economies are generated by small and medium sized companies, and that a business environment favourable to domestic investors is a key indicator of the attractiveness of a country to foreign direct investment. The solution lies in focusing on institutional improvements that would facilitate investment for all businesses, be they large or small, domestic or foreign. The objective should be a system where no "connections" are needed to conduct business. This cannot be achieved by a few small measures here and there. It will require first, a meaningful comprehensive reform of the civil service which is entrusted with implementing all other reforms; second, a systematic review of all relevant laws and regulations to be followed by speedy action to make them clear and simple; third, a major upgrading and reform of our judicial system to ensure the speedy, efficient and effective application of law. In this connection, the World Bank report, "Doing Business in 2006", whose regional launch took place in Cairo last September, provides us with a useful tool in setting our agenda to eliminate obstacles to private sector investment. Based on 10 indicators measuring the ease of doing business in 155 countries, the report placed Egypt close to the bottom of the list with the rank of 141. All other Arab countries included in the study, except for Sudan, ranked higher than Egypt. Here are the key areas of business regulations covered in the report and Egypt's ranking in each of them: Ease of: Starting a Business 115 Dealing with Licenses 146 Hiring and Firing 140 Registering Property 129 Getting Credit 142 Protecting Investors 114 Paying Taxes 87 Trading Across Borders 70 Enforcing contracts 118 Closing a Business 106 While the above rankings are disturbing enough, a closer scrutiny of how we compare to the regional average in each one of them is even more troubling. With regards to business licenses, for example, we find that it takes 30 steps and 263 days for a business to complete licensing and permit requirements in Egypt, at a cost of 1067.1 per cent of per capita income. This compares to an average of 19.9 steps, 216 days, and a cost of 469.7 per cent of per capita income for the region. With regard to access to credit, a legal rights index ranging from 0- 10 (with higher scores indicating that laws are better designed to expand access to credit), grants Egypt a score of 1 compared to an average of 4.1 for the region. As to the ease of closing a business, the procedure to resolve bankruptcies in Egypt takes 4.2 years, costs 22 per cent of the estate value, and the recovery rate (expressed in terms of how many cents on the dollar claimants recover from insolvent firms) is 16.15 cents. This compares to the averages of 3.8 years, a cost of 13.4 per cent, and a recovery rate of 28.8 per cent for the region. It is worth noting here that the averages for industrialised countries are 1.5 years, a cost of 7.4 per cent and a recovery rate of 73 per cent. While these figures show that much remains to be done, it must be recognised, nonetheless, that several important reforms have been made to make the Egyptian economy more business friendly, particularly over the past year and a half. The broad customs reform that cut Egypt's tariff bands from 27 to 6 and streamlined customs procedures and trade documentation was a major step forward in improving the investment climate for all. This reform placed Egypt in sixth place among the top 12 reforming economies of 2004, according to the World Bank. The long-overdue comprehensive income tax reform introduced in 2005 is also a major improvement likely to have a large impact on investment over coming years. Another step forward was the restructuring of the General Authority for Investments and Free Zones (GAFI) and the establishment of its One Stop Shop for investors. Looking forward, the long awaited establishment of commercial courts with streamlined procedures is expected to be part of the current legislative agenda. Furthermore, at the government's request, the World Bank is close to completing a detailed investment climate assessment that will -- hopefully -- form the basis of a prioritised and time-bound agenda for reform in this area. Egyptian policymakers might also explore the idea of establishing an autonomous body to act as the institutional advocate for fundamental change in the regulatory framework. This idea was implemented in Mexico in response to the crisis of 1994 and the increased competitive pressures that resulted from trade liberalisation. Although Mexico already had the Economic Deregulation Unit (EDU) which had successfully reduced business start up procedures and simplified cumbersome commercial court proceedings, the new crisis situation led to the realisation that cutting red tape without tackling the underlying legal and regulatory framework was not enough. As a result, the EDU was transformed into the Deregulation Council and its private sector membership was widened. More importantly, its mandate was broadened to include reviewing all new regulations proposed by government agencies and, as opportunities arose, reviewing and recommending amendments to existing regulations of all levels of government. The Council, which was headed by a respected public figure, appears to have achieved noteworthy success, particularly in its review of new regulations, though the task was by no means smooth since it had to overcome much bureaucratic and political resistance. Egypt can learn from the experience of Mexico and other successful reformers in this area. So far we have tended to deal with regulatory reform in a somewhat ad hoc manner. By institutionalising the reform process we would have an ongoing mechanism for a continuous, systematic review of new and existing regulations. The institutional set up may consist of a similarly mandated autonomous body headed by a well-respected public figure. Alternatively, the mandate of the GAFI could be broadened and a similar council formed under its umbrella. We need to decide which alternative would be more effective in the Egyptian context. * The writer is an independent economic consultant. Doing Business in 2006 (World Bank) Ranking of countries in the Arab region Saudi Arabia 38 Kuwait 47 Oman 51 Tunisia 58 United Arab Emirates 69 Jordan 74 Yemen 90 Lebanon 95 Iraq 114 Syria 121 West Bank and Gaza 125 Mauritania 127 Algeria 128 Egypt 141 Sudan 151
