Salah El-Amrousi argues that boosting exports needs more than just a QIZ protocol The October 2005 report by the Egyptian Ministry of Foreign Trade and Industry shows that all the hype about on has been misleading. You may recall that the government promised us a miracle following the signing of the QIZ protocol by Egypt, Israel and the United States. It said the textile sector alone would attract LE5 billion ($1 billion) in foreign investment, create 250,000 new jobs, and export $4 billion to the US within two years. None of this has happened. According to the said report, Egypt exported $95.4 million of textiles to the US market in the first seven months of this year (January through July 2005), down by 27 per cent compared to last year. Some may argue that the drop may be nothing more than a market fluctuation, and it may be due to the termination of the quota system in January 2005. It is hard to draw conclusive evidence from available Egyptian figures, as they cover only five relevant months (QIZ went into agreement in March 2005). Things become clearer when we consult US data, which cover the first ten months of 2005. According to recent figures released by the US office of Textiles and Apparel, Egyptian exports of textiles and garments have increased by 7.45 per cent, but the increase in garments was a mere 2.95 per cent. Garments are at the heart of QIZ, for most Egyptian textiles, such as yarn, fabric, and linens include no Israeli components. According to the QIZ protocol, Egyptian garments would have a preferential treatment in the US only if 11.7 per cent or more of the components are Israeli. What do the existing figures say about that? Available data indicate that we have increased our exports of garments by 2.95 per cent but only after we incorporated Israeli input amounting to 11.7 per cent. With a simple calculation, you'd see that our exports have dropped by 8.75 per cent rather than increased, and that's assuming that all our exports have come from QIZ producers, which is not the case. Judging by the first 10 months of 2005, our level of exports under QIZ is low, even in comparison with the year before that. In 2004, we exported $215 million in textiles to the US. There are no grounds for assuming that this figure would climb to the $4 billion predicted earlier by the government in the remaining quarter of this year or in 2006. Some would say that the QIZ protocol has not brought us a miracle, but at least kept our textile exports to the US from declining. I disagree. Let's recall that in 1995 our textile exports to foreign markets stood at $956 million. By 2004, the same figure had declined by 60 per cent to $395 million. Our textile exports to the US followed the same downward trend, dropping from $305 million in 1998 to $215 in 2004. We need to do something to increase our exports in general. Textiles is one part of the problem, and not the worse one. We have run a trade deficit for decades. Our exports cover barely one-third or one-fourth of our imports. This leaves us with no cash to buy the capital goods we need, hampering our development and industrialisation. The problem is in the thinking that lies behind the QIZ protocol. The protocol was not signed from a position of power but from one of weakness. It was not signed because it gives us additional benefits, but because it protects us from losing the privileges we had under the quota system (terminated in January 2005). The QIZ protocol gives us protectionist privileges which waive the 8-32 per cent tariff imposed by the US on textile and garment products by other countries, including the much-feared and extremely competitive China. We have scrambled for protectionism because we lack competitiveness. We are not competitive, not in textiles and not in any other industry. Our yarn, textiles, and garment factories suffer without exception from outdated machinery. We have not been replacing our machinery in over 25 years, because we do not invest enough in industry in general. Our industrial investment has dropped from 22 per cent of gross domestic investment in the early 1990s to a mere 7.5 per cent in 2003/04. Our gross domestic investment has hovered around 18-20 per cent of the GDP for decades (compare this with 30-40 per cent in Southeast Asia). According to the chairman of the holding company for spinning and textiles we have not invested in the public sector since the privatisation started. The government hoped the private sector would step in and provide the long-needed investment. This didn't happen. As a result, most of the textile companies had a rough time, and no one wanted to buy them. Privately-owned textile companies are not in a great shape either. According to Ahmed Ezz, industrialist and senior member of the ruling National Democratic Party, textile factories established in the new cities over the past 20 years were equipped with outdated technology. Of every 10 new factories, six or seven started out with outmoded machinery. We all know that Third World countries often buy used machinery from the West. But this only works in conditions of protectionism. You cannot compete in the world market with old machinery. We have a technological crisis, one that has turned the blessing of long- and medium-fibre Egyptian cotton into a curse. We have the best cotton in the world, but we are using it to produce crude, low-quality yarn. This increases the cost of our textiles compared to the price. The increased cost undermines the interconnectedness of our production system. Our garment factories often use imported fabric and yarn because they're cheaper. We should have used our relative advantage in cotton to produce high-end material. But we can't do that unless we invest a lot first. Perhaps it's time we turn our spinning and textile industry from a labour-intensive to a capital-intensive affair. We can not resolve the problem of low exports and trade deficit unless we revitalise our entire industrial structure. We need to move on from producing consumer products to producing capital goods. We need to start making machines and intermediate goods. Right now, our industrial structure is geared to assembly rather than manufacturing. This has to change. We need to focus more on manufacturing and technological development. If we do that, we wouldn't need to rely that much on textiles. There is one catch, however. We cannot trust this kind of change to come about through the free play of market forces. The liberal approach has failed to mobilise savings and channel them into industry. Market policies have led to an immense increase in interest rates (currently 10-11.5 per cent) during the 1990s. According to the neo-liberal theorists, that should have led to an increase in savings, but it didn't. Our rate of gross domestic savings stands at 13-14 per cent, whereas our rate of gross national savings (a figure including expatriate transfers) is 17-18 per cent. As a result, our investment rate cannot exceed 18-20 per cent of GDP. With interest rates being so high, investors cannot be expected to venture into advanced lines of industry. The same goes for foreign capital, which has so far stuck to lucrative activities, such as oil exploration. In conclusion, QIZ is a protective formula that does not help industry. If anything, it deprives investors from the motive to become competitive. If we really want to increase exports and create jobs, we must start updating our entire industrial structure.
