For economic reform to succeed, a major mental shift needs to take place, argues Taher Helmy* Recent economic developments -- the substantial cut in customs tariffs and the reduction of tariff bands to just six, coupled with the proposed revolutionary tax reforms -- reflect the new cabinet's commitment to improving our business environment. These are great steps in the right direction; the first, it is hoped, of many bold moves designed to put Egypt back on track. It is worth recalling another set of steps taken some 30 years ago, which were also dramatic at the time. I am referring to Investment Law 43/ 1974, which signalled a major shift in mindset since it called on private sector business to lead the economy. Prior to the mid-l970s, business was almost entirely government- controlled; Egypt had a small private sector and it was virtually impossible under the central planning regime at the time for a new and vibrant private sector to emerge. Indeed, the very concepts of privatisation and capital market mechanisms were practically taboo. Law 43 marked a courageous departure from this mindset; aimed at facilitating business, it became the centrepiece of the so-called Open Door Policy initiated during the Sadat era. The law, which is still in force, allowed tax holidays and provided exemptions to existing legislation in order to encourage investment. At the time, Law 43 was enough to bring Egypt in line with developing economies in Latin America and the Far East, to enable us to begin to compete in attracting investments. And it worked. I was living in the US at the time and witnessed the interest the new law inspired. One of the significant early outcomes was that Citibank, Chase and the First National Bank of Chicago all established an Egyptian presence. This was followed by similar moves by numerous companies of all nationalities and all sectors of the economy. People were excited because Egypt had moved decisively away from government control towards private participation in the economy. Privatisation began in the early 1990s, another dramatic departure from the past. By the mid-1990s, the private sector was even involved in infrastructure and utilities, traditionally state-dominated sectors. But global competitiveness has meanwhile grown more lethal. While some countries have completely transformed since the 1970s Egypt lags behind. The new cabinet has mobilised to reverse this trend, but it cannot do it alone. The seeds planted in 1974 have certainly grown; the private sector now contributes over 90 per cent of GDP to Egypt's economy. But I believe that today we are entering a new phase, one that can extend the possibility of participation to enterprising individuals on every level of society. We also have an opportunity to do away with the central- planning mindset that still prevails within the bureaucracy. For this new phase to take hold, another shift in mentality is required. The new phase in economic reform relies on public support and participation -- a partnership between government, private sector and civil society based on mutual confidence and trust. Only if people feel the benefits of reform will they believe decision- makers worthy of their trust. Only if shown the rationale for the new directions will they support them with the necessary patience. Now that tariffs have been reduced, the private sector must pass those cost savings on to the consumer in the form of lower prices. If they do not, people will rightly perceive the new policies as benefiting those already in a privileged position, and the ground we've gained will be undermined. We should not allow this to happen. It is up to the private sector to act responsibly to ensure the success of the bold policies adopted by the new cabinet. Likewise, government has the responsibility of proper planning and transparency. Items such as reduced tariff bands, a flat tax, the restructuring of ministries, deregulation in general and the cooperation of civil society and organisations such as the American Chamber of Commerce in Egypt with government -- are all important. But these will only work in the context of a master plan, a map that tells us where we're going, and provides a time frame for getting there. A master plan is by definition, comprehension, taking everything into consideration, including institutional, educational, health, labour, judiciary and monetary policy reform. Without such a map, using only piecemeal tactics, we will lose our way. What's more, Egypt's directions, in terms of policy reform, must be communicated, so that people can understand the process and take part in it. Likewise, the private sector must be appraised of new policies that will directly effect its projects, in terms of investment, hiring, marketing, etc. Predictability and consistency in policies will be key to success. I believe that we are capable of devising such a plan, and of producing a balanced legislative and economic framework. I believe we can make the shift in mindset away from avoidance (in terms of tax evasion and extralegal business) and towards participation; away from mistrust between government and people towards mutual respect and responsibility. Furthermore I believe the proof of our success will come on the day that Law 43 is abolished. Law 43 basically provided a legal way to circumvent a legislative system that was not conducive to attracting investment and encouraging private sector growth. It didn't change the system; it only offered a means of getting around it, a legal crutch that allows businesses to operate. If Egypt charts an intelligent course and follows it consistently, we will need no crutches: the economy will be able to walk, indeed to run on its own. * The author is partner at Helmy, Hamza & Partners (Baker & McKenzie) and the president of the American Chamber of Commerce in Egypt.
