Salah El-Amrousi wonders just how much trade liberalisation can help exports Not one of the recent NDP Congress's working papers addresses export strategy, although we have been told for years that this strategy is a matter of "life or death". Not one addresses investment policies, even though we're constantly told that increased domestic and foreign investment is the only way to alleviate unemployment. This is hardly surprising, since the neo-liberals currently in charge of our economy see free trade as the panacea for all economic woes: we're told that by liberalising trade, deregulating the local market, and privatising state-run companies, everything will be fine. The NDP policy papers focus on the details of liberalisation: tax and tariff reform; banking reform; privatisation; and competitiveness. One paper dealt with the "lateral" effects of deregulation; namely, poverty. Its main focus, however, was on the reduction of subsidies. The NDP does not want to endorse anything that may seem interventionist. This is not to say that the neo-liberals are oblivious to the export problem. NDP-affiliated research centres are chockfull of studies on exports, all of which boil down to the simple assumption that free trade can take care of everything. One NDP paper on tax and tariff reform mentions, in passing, that such reform would boost our economic competitiveness and put the economy on the global investment map. In other words, reductions in tariff rates and taxes on investment companies would encourage exports and attract direct foreign investment. Ahmed Galal, executive director of the Egyptian Centre for Research, is a leading neo-liberal with close ties to NDP decision-makers. According to him, "the tariff cuts are the most important thing the government did in the past five years, aside from the freeing of exchange rates. Their importance for the economy surpasses all investment incentives put together." Galal expects other reforms to follow. "Opening up the economy reduces bias against exports, which boosts exports and employment. External demand is much bigger and more important than internal demand." Exactly how do tariff cuts boost exports? The neo-liberals have the answer. Protectionism, they argue, achieves exactly the opposite of its goals, by harming exports, or at least exacerbating the balance of payments deficit. The logic is simple. When you tax imports of raw materials and intermediate and capital goods, you increase the cost of production, and consequently undermine the competitiveness of your products on the international market. Also, when you protect the final product, prices in the local market outstrip those in the international market, and producers lose their motivation to export. Import taxes, the neo-liberals argue, are implicit export taxes. When your cost of production increases, your currency becomes overvalued, which reduces export earnings. Does this make sense? Those who cite the anti-export bias of tariffs are using the same logic of the protectionists, only upside-down. The entire case is presented in a static framework, as if time has come to a standstill. Protectionists would argue that incipient local industry can only operate at high cost and with low competitiveness, and thus needs to sell at higher prices and under tariff protection. Protectionism, therefore, makes it more profitable to produce for the local market than for exports. As a result, local producers would not be able to compete in the international market so long as their costs are high. Let's look at this argument again. To start with, protectionism in the local market does not need to hamper exports, as the neo-liberals claim. It is possible to boost exports by giving them the same rate of assistance given to local production. This assistance should be more comprehensive than the drawback system that reimburses exporters for the tariffs paid on production inputs. This kind of export incentives system has been applied in South Korea and several Asian countries. It is also possible to stimulate exports while protecting the local market against imports. The protectionists think that high local prices (which are due to low productivity and high costs) call for tariff barriers. The neo-liberals, reversing the logic, claim that tariff barriers cause high local prices. What the neo- liberals fail to see, in their enthusiasm for free economy and trade, is that a dynamic process is at work. The neo-liberals think in abstract terms. The right approach to incipient industry, I believe, is to help it along, through the transfer of technology, until it becomes internationally competitive. Let me also state that protectionism, without a policy aimed at improving local industry, is pointless. Unfortunately, this is the case in many developing countries. The effort to protect incipient industries clashes with the premise of free trade. Galal and Samiha Fawzi discuss this matter in a National Planning Institute article entitled "The Mystery of Exports in Egypt". They argue that Egyptian industry's poor performance is due to poor management and outdated technology, and that even price incentives to exporters wouldn't boost exports. Only deregulation, which makes the local market less attractive to producers, would motivate exporters. I fail to see how this could happen. Egypt is an underdeveloped country. We would not be discussing this problem had we achieved any significant progress in industry. The claim that liberalisation would automatically force Egyptian industry to modernise is simplistic to say the least. Let's take a look at the technological status of Egyptian industry. Geared towards consumer products with a high level of foreign inputs, our industry relies exclusively on foreign machinery, most of which is outdated. This situation creates an endemic trade deficit and the deficit, in turn, hampers efforts to modernise the industry. Our textile and garment industry, which amounts to one-third of our entire industrial product, uses outdated machinery. About 72 per cent of spinning machinery, 87 per cent of cotton preparation machines, 100 per cent of wool spinning machines, and 71 per cent of garments machinery are over 25 years old. Our textile industry needs more than new machinery. We are producing thick fabrics (targeting the lower end of the market) from medium-fibre cotton, which are inferior to products from the southeast (although the latter are made of short-fibre cotton). It needs a structural change geared towards the production of fine and luxury fabrics. Similar problems exist across the board of Egyptian industry. Even industries dating back to the 1970s now suffer from the same fate. According to industrialist Ahmed Ezz, at least 50 per cent of factories based in new cities are using 20-year-old equipment. Six or seven of every 10 factories in new cities have started operations with old machinery. What would happen if we fully liberalise trade? (By the way, WTO regulations do not call for complete liberalisation of trade; Egypt is allowed a maximum tariff of 60 per cent). Most probably, Egyptian industry would not be able to compete abroad, or even at home. A process of de- industrialisation may set in. Liberalisation is not going to resolve the problem of old machinery, not when foreign currency is scarce and the local technological base is in such poor shape. The NDP's neo-liberal policies have a pragmatic side that does not fully accord with free trade. A certain degree of protection is given to consumer goods, which means that anti-export bias is less than completely removed. Maximum tariffs have been set at 40 per cent and may soon be reduced further. Tariffs are highest on final products and lowest on production inputs not made locally; they range between 22-40 per cent for final products, five-12 per cent for intermediate goods, and two-five per cent on raw materials and machinery. Note that tariffs are at 40 per cent for garments, which means that the government is aware of the sorry state of this industry. But durable consumer goods have also been given high protection (40 per cent at present, due to be slashed to 25 per cent later), although these are mostly assembly shops that require a minimum of domestic input. The remaining sectors of industry enjoy tariff protection ranging between 22-32 per cent (to be reduced later to 12-22 per cent). Does this protection sufficiently compensate for the technological gap between local and foreign industry? The future will answer this question. For the moment, I have my doubts. Let's get structural: while the current policies are of a passive nature, what we need are active efforts to restructure our industry and decrease our reliance on the outside world. We need to find a radical solution to trade deficit and the paucity of foreign currency. We need more than technology transfer and import substitution. We need to develop a local technology and produce products other than consumer goods; that is, intermediate and capital goods. This is not a call for self-reliance. On the contrary, we need to combine import substitution with a strategy for exports. Our excessive reliance on the outside world has created a paucity of foreign currency that is now hampering the renovation of our factories. We need an industrial structure that stands on its own feet, that can eliminate that paucity, and that interacts positively with the world. We need favourable conditions for the transfer and domestication of technology. This is the best way to increase productivity and competitiveness. In their obsession with the outside world, and their exclusive focus on export strategy, the neo-liberals are undermining the export cause itself. South Korea, Taiwan, and China all have policies that combine two endeavours: export incentives and import substitution. Both endeavours are complementary. Ignoring one, which is what the neo-liberals are doing, can be detrimental.
