Leaner ... but is it meaner?

The Egyptian currency has performed a somersault, and received some applause, but are we paying for the right show? Salah El-Amrusi* rounds the usual suspects, and claims some are innocent
The Egyptian pound is moving from one crisis to another, from one devaluation to another. Throughout, officials have been telling us that things are under control, but are they? The language officials used in connection with the recent devaluation was noticeably restrained, at least less upbeat than that of World Bank and International Monetary Fund (IMF) officials, who had for years called for devaluing the Egyptian pound by almost as much as the authorities have recently done.
One optimistic view was that offered on 6 August, just one day after the devaluation was announced, by Horst Köhler, managing director of the IMF, who predicted that the devaluation will boost the competitiveness of Egyptian exports and stimulate economic growth. One cannot help having doubts about reassurances of that type, based, as they are, on theoretical generalisations and assumptions about foreign trade that history has repeatedly failed to vindicate, particularly in developing countries.
Egypt's open-door policy is now more than 25 years old, and despite the many devaluations that were introduced in this period, Egyptian exports are not doing much better than before. The gap between exports and imports has, in fact, exhibited a tendency to grow. This does not mean that the devaluations are pointless. They are useful in bridging brief shortfalls of foreign currency. But they cannot resolve deep- seated problems or tackle the roots of our currency crisis. I will focus here on analysing the roots of this crisis. My aim is to show why devaluation has, so often and for so long, failed to fulfil its promise.
The recent crisis was blamed on speculation against the pound and excessive demand for foreign currency due to the rise of consumer and even luxury imports. Cheap imports from south-east Asia were also cited. All of which may have caused fluctuations in the currency market, but the real cause of the problem is elsewhere. The current crisis is rooted in the structure of the Egyptian economy and its inherent dependence on imports. It is rooted in the poor performance of the export sector, particularly in manufacturing, and the attending deficit in the balance of trade.
The Egyptian economy is favoured by a host of traits that enable it to gloss over its structural weaknesses. The downside of these characteristics is that they tempt those in charge to seek short-term monetary solutions. The original problem is often clouded, shelved, and left to fester, while economic policy makers scramble for quick fixes. Egypt has sources of foreign currency that have nothing, or at best little, to do with trade. The Suez Canal, tourism, expatriate remittances, and foreign -- primarily US -- aid. These sources, mostly service- related, support the majority of Egyptian imports. The rest, only one- fourth or one-third of imports, is funded by visible exports.
The result is that Egypt has been able to push its economic problems under the carpet. The economy can plod on merrily, even when exports are faring badly. Somehow, we get by. The currency gap is filled by an assortment of services, aid, and expatriate money. The structural failures remain unplugged, papered over, and comfortably ignored. The roots of the crisis keep festering, meanwhile, until it is time for the next round of devaluations, the next round of upbeat reassurances.
Egypt's modern industry was structured for import substitution. This is usually done by importing the components of the final product and putting them together locally. No serious attempts have been made to strengthen Egyptian industry, by producing capital goods or machines, or by creating a technological base. No adequate effort has been made to bring the quality of products to international levels, to achieve world-standard competitiveness.
Trade barriers, therefore, had to be defended, and only removed with much trepidation -- an implicit admission of our lack of manufacturing and technological prowess. Exports lagged miserably behind imports, as the latter surged with economic growth, and would continue to do so, unless a far-fetched Utopia of self-sufficiency becomes our objective.
Egyptian industry comprises, for the most part, conventional consumer manufacturing industries, and an assortment of assembly plants, mostly targeting the local market. Some intermediate manufacturing also exists, but there is virtually no production of capital goods or machinery in the country. In 1999, the production of capital goods hovered at just over five per cent of Egypt's overall industrial production. We are talking, then, of an economy that buys basically all the machines it needs from abroad, as well as most of the intermediate goods and raw materials it uses.
Imports of raw materials and intermediate and capital goods have accounted for three quarters of our total imports during the last decade. Consumer goods make up the remaining quarter. Of these, luxury consumer goods -- the favourite whipping boy in times of currency woes -- account for 10 to 20 per cent of imports, even if we include durable consumer goods such as television sets, cars, refrigerators and washing machines in our figures. Food, that is, wheat, flour, tea, sugar, dairy products and other items account for the bulk of our imported consumer items.
Given the existing industrial structure, devaluation can hardly do what it is billed to: namely, boost exports and reduce imports. What it can do, or fail to do, is this:
- Imports, as I said, are mostly production-related (75 per cent or so) or food-related (20 per cent or so), and therefore inherently inflexible. A drop in the value of the pound would only increase their cost, making life more difficult for an industry dependent on raw materials and components bought abroad. The working class is also going to suffer, because expensive food would mean a lower standard of living and, I hate to say, productivity.
- Luxury goods, meanwhile, are not likely to be dented by the devaluation. Affluent Egyptians either have deposits in foreign currency or sufficient sources of wealth that would buffer them from the aftershocks of devaluation. Considering the existing disparities of income and wealth, neither devaluations nor higher customs are likely to curb the consumption patterns of the rich. Perhaps import quotas would, but this is prohibited ground, if we are to stay chummy with the World Trade Organisation.
-To go back a little: In 1973, the pound stood at 0.40 to the US dollar. Creeping devaluation set in when the government allowed importers to do business without going to the bank. The import-with-no- transfer, as the system was called, occasioned a black-market boom in the dollar. In 1979, the government devalued the pound to 0.70 to the dollar. Still, throughout the 1970s, imports grew at an annual rate of 25 per cent, exports by almost half as much, despite the oil boom.
In the 1980s, devaluations continued, but imports grew at an annual rate of 1.4 per cent. Exports actually dropped in the early part of the 1980s. In the 1990s, despite the significant devaluation of the pound, imports grew by 6 per cent annually; exports by 4 per cent. All in all, exports failed to cover more than one-fourth to one-third of imports over the past few decades.
-As for exports, their historic growth has not been linked to the successive devaluations of the pound, but to the rise in oil prices. Whenever oil prices dropped, our export figures were down. Manufactured exports have achieved only minor growth and are hardly helped by devaluations, since the items we export contain a significant portion of imported components.
There are other barriers to the growth of Egyptian exports, such as the non-tariff protection they encounter in European and US markets. But even if all the internal and external barriers are removed, the problem will remain. The only solution is to improve Egypt's industrial structure and diversify its exports.
To sum up, there are two approaches to the problem of Egyptian exports. One is that in place since the open-door policies were introduced in the 1970s. This approach believes, optimistically, that free trade, on its own, will effect an increase in exports. It has failed. And only blind faith can make anyone believe it would, one day, work.
The second approach is to introduce an interventionist industrial policy. The government has to redirect resources to create a local industrial base capable of international competition. This approach goes beyond nationalist-style protectionism and liberal-style free trade. It is what Ajit Singh, a prominent Indian economist, calls strategic integration into the international market. In other words, our local industrial structure, in its current form, is incapable of competing internationally, and it is crying out for help.
* The writer is a researcher with the Cairo-based Arab Research Centre.
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