1. INCREASING OPENNESS & FRAGILE COMPETITIVENESS The Case of Egypt Talaat Abdel-Malek American University in Cairo

2. 2 Main Topics Addressed Background to reforms Reform in Three Phases Increased Openness & Fragile Competitiveness Competitiveness Indicators Supply & Demand Issues Signs of A Turnaround Egypt-EU AA & ENP Means of bridging the Gap

3. 3 Background Pre-reform Egypt: early to late 1980s Rentier economy Fall in oil prices Fiscal deficit B/P imbalances Rising inflation

4. 4 THREE-PHASED REFORMS Phase I:ERSAP (1991-98) Public sector deregulation/privatisation Phasing out price & rent controls Actively promoting FDI Trade liberalisation Containing fiscal deficit Aid package & debt relief

5. 5 THREE-PHASED REFORMS Phase II: (1999-2003) Setbacks : tourist attacks, global recession, 9/11, regional instability Overcautious govt. policies Inconsistencies in policies Recession, higher deficit, FDI down, reserves down, currency overvalued

6. 6 THREE-PHASED REFORMS Phase III: (2004 – present) Pressures to take corrective actions New reform-minded cabinet & Central Bank management Integrated approach to faster reforms Private sector role Substantial reduction in tariffs Tighter monetary policy

7. 7 THREE-PHASED REFORMS Phase III (cont): New income tax laws, lower rates Tighter rules & more transparency for stock market Reviewing food & other subsidies Accelerated privatisation pace

8. 8 THREE-PHASED REFORMS Key Results: Higher growth rate (close to 6%) Single digit inflation rate Export growth Doubling of reserves ($22b) Improved currency value Trickle down effects still modest

9. 9 Increased openness & fragility of competitiveness Legacy of prolonged protectionism Public sector dominance Predominance of SMEs greater competition exposed weak competitiveness Bankruptcies, mergers, extension of indirect support

10. 10 Increased openness & fragility of competitiveness Fragility defined: As the inability to compete or improve market position in a sustainable manner without government support

11. 11 Competitiveness indices World Competitiveness Report: (2000>2004): Growth Comp. Index (rank) 42 > 62 Business Comp. Index 39 > 66 Technological capabilities study: rank 101 out of 161 Manufactured exports/goods exports: 42% > 36%

12. 12 Supply & Demand Issues Supply Constraints: Lack of market research & poor data bases Inward orientation/limited int. exposure Low quality standards Limited technology transfers Inadequate infrastructure Rigid labour market and labour laws

13. 13 Supply & Demand Issues Demand Constraints: EU/US farm & export subsidies Quotas Tightening of product standards: env., labour, child, health, etc. Limited success of ODA in capacity building & HRD (complex reasons)

14. 14 Signs of a Turnaround Is competitive fragility here to stay? Indicators of improved competitiveness: Over 30% export growth (2004/05) 16% growth in service exports Current a/c turned into surplus Qualified Industrial Zones (text/garmts) Sharp decline in bankruptcies

15. 15 Egypt-EU Association Agreement AA builds on MEDA I & II (ratified June 2004) Essence: an FTA key goal - better access to EU markets immediately – gradual reduction of tariffs on EU products over 15-yrs – rule harmonisation by both sides - assistance package to cope with negative effect Too early to assess impact Static & dynamic effects of integration

16. 16 Egypt-EU Association Agreement (cont.) Trade creating vs trade diverting effects More FDI Easier technology transfer More competition Net impact depends on institutional reform/sound macroeconomic policy & competitive climate

17. 17 Egypt-EU Trade Highlights Egyt. Exp. Egyt. Imp. Bal. To EU - 1995 $1.7 b $5.8 b - $4.1 b US $1.4 b $3.9 b - $2.5 b To EU - 2004 $5.1 b +200%* $7.8 b +35% - $2.7 b US $4.6 b +228% $5.2 b +33% - $0.6 b Total - 2004 $13.8 $24.2 b - $10.4 b ---------------------------------------------------------------- * % increases in 2004 figures relative to 1995 figures

18. 18 Some Issues in Egypt-EU Relations Impact of expanded EU membership on future trade/FDI patterns Effects of Doha Round outcome Effectiveness of EU technical assistance Pace of progress in rule harmonisation Present differences under the ENP Impact of a future Egypt-U.S. FTA

19. 19 Bridging the Euro-MED Gap? Some recommendations Measures on Egypt’s Part: keeping good pace of reform, including institutional/civil service reform Safety net to shelter the poor/ultrapoor Faster pace of political reform More active civil society/grassroots Priority to HRD (skills, knowledge)

20. 20 Bridging the Euro-MED Gap? Some recommendations Measures on EU’s part: Reducing trade barriers (agr./industrial) Better ODA harmonisation & alignment with Egypt’s priorities Promoting more technology transfers, through FDI, R&D centres Further Support of South-South integration