Egypt, like other middle-income countries of various segments, suffers from a chronic deficit in its trade balance, which means that its imports usually exceed its exports by a large percentage, and since imports are financed in hard currencies (mostly the US dollar) the trade balance deficit often leads to chronic pressure on national currencies and the consequent inflationary waves, in addition to repeated episodes of hard currency deficits leading to stagnation in the productive sectors. Although Egypt is no exception to this, this article will focus on it as a case study.
Intermediate goods problem
Production inputs represent about two-thirds of what Egypt imported between 2005 and 2020, distributed between raw materials that have to be imported because they are not available locally, and capital goods that usually contain a high-tech component such as appliances and machinery, and intermediate goods .
What is remarkable is the large relative weight of intermediate goods, which are semi-finished goods that go into the production of other goods and services, and become part of the final product – unlike capital goods -.
Intermediate goods represented 31% of the total import account in 2019/2020, the majority of which are organic and inorganic chemical compounds, with a third of the imported intermediate goods being included in most industrial products and related services. What might distinguish intermediate commodities is that some of them do not require a high-tech component, which provides the opportunity to produce them locally, especially if the necessary raw materials are available for this, as is the case with natural gas with chemicals.
The chronic trade deficit in the Egyptian case is exacerbated by the fact that the manufacturing sector is mostly focused on the local market instead of exports, which means that many of these industries depend on importing hard currency inputs to produce goods or services. for the local market, which in turn does not generate dollars. This creates a large degree of dependence in the generation of growth and job creation on the availability of hard currency, which translates into structural weakness in the economy, as it constantly makes it vulnerable to severe currency deficit crises and the automatic subsequent stagnation and inflation. simultaneous. time.
Deepening the industry?
The way out of this dilemma is the adoption of a long-term strategy by state agencies in partnership with the private sector, in order to deepen the industry to enable the production of intermediate goods that have locally available raw materials and do not require complicated technology. or skills content for their production.
Of course, some may be in a hurry to link this proposal to the import-replacement policies that were widely accepted in the third world from the 1940s to the 1970s, and which generally – and almost without exception – ended in failure. , which caused major debt crises that were the justification for adopting measures to liberate these economies and adopting supportive export strategies since the 1980s.
This is entirely true of Egypt, as it is known to economic historians that the strategy of import substitution adopted with the first five-year plan in 1960 failed because it did not meet the requirement to deepen the industry, which means that it succeeded had to replace imports with consumer goods and then failed to find a manufacturing base for capital goods.It continued to depend on imports from abroad, which exacerbated the trade balance deficit in a way that contradicted its initial objective. It was not limited to Egypt, but was repeated in Brazil, Mexico, Yugoslavia, India and Argentina.
Acknowledging and acknowledging the shortcomings and shortcomings of import substitution models, the proposal here is to adopt a strategy to deepen the industry that enjoys a degree of flexibility and intelligence in planning and implementation, and to its compilers in the state keep in mind to kill two. birds with a stone: increasing the range of higher value-added industrial activities by producing commodities in a competitive way, while at the same time easing financial pressure on the hard currency, thus providing a long-term and structural solution to the problem of trade and current account balances and current account deficits.
Is this possible in the current context? The initial answer is yes – note that the article does not offer a final solution as much as it opens up a discussion for those in charge of manufacturing and trade policies and private sector producers who dominate most of the manufactured goods -. To provide broad lines for a smart and flexible policy to deepen the industry, we can talk about four primary axes:
First: To deepen the industry in a competitive way, which means that the efforts to deepen the production of intermediate goods are in the presence of competition of imported goods within the local market, which is achieved in the light of Egypt’s obligations under the umbrella of the World Trade Organization and dozens of free trade agreements that connect Egypt to the various economies of the world.
This means that efforts to deepen industrialization will take place in a competitive way, either in collaboration with large industrial facilities by adding production lines within it – or what is known as horizontal integration – and through sectoral policies between different companies linked together is through agreements and supply networks.
Indeed, there are temporary protections and incentives available for local industries represented by the large and successive declines of the Egyptian pound, and measures to reduce imports in order to preserve reserves and the value of the local currency, which actually allow for periods of grace for intensive state intervention in collaboration with the private sector to deepen the industry competitively.
Second: It actually adds a temporary period to efforts to deepen the industry with the aim of investing materially, humanly and technologically for periods, enabling competition with imported intermediate goods at later stages in the medium term. These are called “sunset clauses”, which means that producers involved in efforts to deepen the industry know that the state’s obligation to assist them is subject to a time limit. In addition to this and that, the form of state aid for deepening the industry will be among Egypt’s international commitments in areas such as scientific research and technology transfer, which is, so to speak, a useful constraint.
Third, deepening the industry in this way is not necessarily anti-export, because building local capabilities to produce intermediate goods in the presence of competition from imported goods is something that facilitates the construction of a local industrial base that simultaneously can be used to export in foreign exports. markets. Which will later possibly allow them to export, or at least retain their shares in the local market in respect of imported goods, thus bringing about a reduction in dependence on imports without the usual side effects of stagflation.
Fourthly and lastly, the industry-level strategy is sectoral par excellence in the sense that it must be flexible target sectors without others, and industries within sectors without others. The starting point may be intermediate commodities that have an abundance of their raw materials – and here is the view of imported petrochemicals in light of the major natural gas discoveries recently – and intermediate commodities that do not require a high content of skill or technology.
(Prepared by: Amr Adly, an economist with an Arab angle and assistant professor at the American University of Cairo, Department of Political Science)
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