Sherine Nasr investigates the challenges Egypt must face in order to have a fair share of the international market In 1975, Egypt launched its first modern reform programme, based on a move to privatisation and the implementation of currency controls, funded by the use of foreign aid. Twenty-seven years later, Egypt's economic reform programme is still lack-lustre. The same reform methods are still talked about with great enthusiasm, yet there has been little concrete change. "Egypt has always had the political will for reform but it has dragged on for decades," said Heba Handoussa, managing director of the Economic Research Forum (ERF), during a conference organized by the Centre for Economic and Financial Research at Cairo University, addressing the "Institutional and Policy Challenges Facing the Egyptian Economy". The conference was held in cooperation with the US Agency for International Development (USAID). "Exchange rate volatility, the low quality of local products, inadequate training and education and a lack of qualified management, are all factors that are preventing Egypt from being another growing tiger," she said. However, the government never tires of talking about the multitude of challenges that it faces. "Keeping the trade balance in check has always been a challenge. How to manage a smooth demand and supply in that market without interference is another challenge," said Atef Ebeid, the prime minister. Referring to other impediments which keep the government from moving ahead, Ebeid stressed the difficulty of selling off loss-making concerns to the private sector. "The management of the privatisation process has never been an easy task. Economically, it is not acceptable to make quick sales at a loss. At the same time, implementing drastic reforms to these loss- making concerns in order to make them more attractive has also been frustrating," said Ebeid. According to Ebeid, the government does not have a free hand to speed up the process of lifting duties on foreign products. "We need to think about those industries and businesses that wouldn't be able to compete in an unregulated market. They would almost certainly go under once subjected to the fierce competition that such a market would create," said Ebeid. He added that much still remains to be done in the field of enhancing human resource development and creating the necessary technical and technological infrastructure for small businesses to be significant contributors to the national economy. According to Arnold Harberger, a professor of economics, who has also held consulting positions with eight international organisations, it is hard to isolate the factors that make an economy successful. "The entire economic system must work harmoniously and efficiently in order to create a success story," said Harberger. Harberger believes that Egypt has to make a real choice with respect to foreign trade. "A situation of high imports and low exports is problematic. Sustainable free trade implies both high imports and exports," said Harberger. While the first thing that comes to mind when discussing an open market economy would be surviving international competition, Harberger believes that a free market leads to the discovery of new, parallel, and often unexpected advantages in areas nobody would have guessed. "Take India for example. India's recent boom has been based on computer industry, development of software and trade of technology, not on traditional products," he said. Countries obtain hard currency by exporting and exploiting their comparative advantages. "Egypt has the Suez Canal, oil and natural gas, sources of revenue in good times and bad. There is also the issue of foreign aid. These are all sources of hard currency and are comparative advantages that Egypt must exploit," Harberger said. Removing restrictions on exports is a major step that must be taken on by the government. "It is imperative that public policy does not hinder or impede exports," Harberger said. He added that import restrictions are an obstacle to economic growth. Bureaucratic restrictions are particularly prevalent in developing countries. Because small and medium sized enterprises (SMEs) play a vital role in the national economy, it is also important to reconsider economic policies that govern this sector and allow SMEs to prosper. "In the United States, for example, one can start a private enterprise within 24 hours. In other countries, it may take up to a year before all papers are signed and approvals ready. Thus, if 100 enterprises are trying to get started, only 10 may manage to become fully operational," he said. Harberger challenged the traditional view of public authorities to private businesses. "It is strange to see that some public authorities deal with profitable private enterprises as if they are stealing money from their customers. Economists do not think that way. Profitability for them represents a high return on capital, hence more growth from a given investment," he said. Harberger stressed the importance of applying a rigorous cost-benefit analysis to both private businesses and major government sectors. "In order to get approval for capital investment projects, a cost-benefit analysis must first be conducted to determine the profitability of the project," Harberger said. In order for this to be successful, a whole cadre of specially qualified people will be required, he added. This is easier said than done. The introduction of a new generation of professional cost-benefit analysts would cost millions. "Moreover, there is usually someone very powerful behind any given project who will object to the introduction of drastic changes, irrespective of the project's economic viability," commented Harberger. Harberger referred to the cost-benefit analysis as a very effective tool for controlling and monitoring government expenditure. "This is why it is very hard to see anything happening unless it comes from within the government and at the highest levels," he said. Introducing effective cost reduction methods has also been stressed by Harberger as the defining feature that distinguishes fast growing economies from slow growing ones. "Reducing real costs not only increases net profits, but also tends to generate more capital that can then be used to enlarge the project," Harberger said. "This has nothing to do with using the latest advances in technology. It can be done through very simple means and it pays off very well," Harberger said. He added that a key obstacle to cost reduction involves unnecessary regulations and laws. These make it difficult for any enterprise to concentrate on increasing and improving productivity. According to Ahmed Galal, executive director of the Egyptian Centre for Economic Studies (ECES), Egypt is in need of a second round of reform. This must involve the collective effort of the government, business communities and wider society. "Without a massive package of reform, things will continue to be the way they have been for the last ten years," he said. This reform should not be dictated solely by government. "Egypt should build a consensus with regards to the economic decisions that need to be taken. What is more difficult, however, is selecting the kind of institutional changes that need to be adopted to carry out this collective and massive reform," he said. International experts believe the government has managed to introduce significant improvements to the economy. "However, Egypt is still no China, Singapore or Malaysia. Often, reforms are associated with crises. I hope that in Egypt, it does not take a crisis to initiate reforms," Galal said.
