International Business Management
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This paper attempts to shed some light on Egypt’s development challenges by examining relevant economic data for the past twenty years, organized into three main categories: First, it outlines the impact of Egypt’s weak domestic production at the individual citizen’s level (e.g. per capita income) and then analyzes regional and historical production trends. Next, it presents Egypt’s international trade performance and examines the structure of Egypt’s domestic production. This category, which illustrates how Egypt makes its money, illustrates an excessive dependence on natural resources and the relative simplicity of its production value. Finally, it evaluates the potential role of small businesses in altering these negative trends and assesses Egypt’s performance in promoting their development.
Introduction to Egypt’s Economy:
I. A. Egypt’s Domestic Production and the Individual:
Egypt’s GNI/capita vs. World GNI/capita
I. B. Regional and Historical Production Trends:
Egypt’s GDP growth vs. World GDP growth
II. A. Trade Performance and Composition:
Total Trade Volume, Exports & Imports
II B. Structure of Production and Progress:
Egypt’s Specific Branch Trends
III. Small and Medium Sized Enterprises (SMEs)
Strategy Needed for International Expansion
Challenges to Small Businesses in Egypt
Egypt’s Strengths and Reason for Optimism
Introduction to Egypt ’s Economy:
This paper evaluates Egypt’s relative inability to compete in the world economy. With 61 million inhabitants, its recent rapid population growth has neutralized the benefits to be derived from increases in national income during that same period. Comprising roughly 1% of the world’s population of 5.9 billion, this country fails to come even close to one percent of its total production. Consequently, much of the country suffers from poverty and high unemployment, despite some genuine effort to expand the domestic economy in order to reduce these challenges to domestic stability.
In analyzing Egypt’s economic performance, this paper places special emphasis on domestic production, based on Michael Porter’s notion of The Competitive Advantage of Nations. In this significant book, Porter stated that a country’s competitiveness, which is a crucial factor for economic growth, must be “created and sustained through a highly localized process. Differences in national economic structures, values, cultures, institutions, and histories contribute profoundly to competitive success.” This paper discusses the interaction of many of these factors in terms of how they ultimately provide growth.
Relying too much on oil and other unsustainable growth strategies, Egypt, like many developing countries, has struggled to keep pace with the rapidly evolving world economy. Amidst the backdrop of continued expectations for population growth and resource scarcity, these economic challenges are likely to become more acute in the near future. In order to reverse this trend, the structure of the Egyptian economy and its relevant development patterns need attention.
This paper attempts to shed some light on Egypt’s development challenges by examining relevant economic data for the past twenty years, organized into three main categories: First, it outlines the impact of Egypt’s weak domestic production at the individual citizen’s level (e.g. per capita income) and then analyzes regional and historical production trends. Next, it presents Egypt’s international trade performance and examines the structure of Egypt’s domestic production. This category, which illustrates how Egypt makes its money, illustrates an excessive dependence on natural resources and the relative simplicity of its production value. Finally, it evaluates the potential role of small businesses in altering these negative trends and assesses Egypt’s recent performance in promoting their development.
I. A. Egypt’s Domestic Production and the Individual:
Egypt’s poor economic performance is best illustrated by its paltry Gross National Income (GNI) performance of US $3,940 per person in 2003, measured at individual purchasing power (PPP). Unfortunately, this is only a slight increase from the 1998 per capita Gross National Product of US $3,130, also measured at PPP. While GNI figures can be misleading due to domestic price differences for consumer products, Purchasing Power Parity (PPP) normalizes data for all countries based on the cost of a basic bundle of goods. Because of the relatively inexpensive cost of living in Egypt, the difference is significant, as GNI per capita in 2003 was only US $1,390. PPP figures provide a more accurate indication of a population’s standard of living, relative to everyone else. Nevertheless, with a purchasing power of just over US $3000 per year, the individual encounters great difficulty satisfying basic needs.
Egypt’s GNI/capita vs. World GNI/capita
This low level of national productivity ranks Egypt among the relatively poor, both regionally and worldwide. In terms of PPP, Egypt actually ranked 132 nd out of the 208 countries that reported their data in 1998 and 2003. It also ranked 4 th from last among its 17 reporting neighbors in the Middle East and North Africa (MENA). While the top ten high-income countries posted average PPP incomes greater than US $30,000, the bottom ten worldwide possessed tragically low incomes, less than US $820 per person. Egypt finds itself in the lower-middle-income bracket, although its performance was still 28% lower than the category’s average of US $5510 in 2003. Not only does Egypt earn less than half of the world’s average GNI per capita of US $8180, it also lags far behind its MENA neighbors, who reported an average of US $5700. While Egypt outperforms most of Africa and the poorest Asian and Latin American countries, there is no question that immediate attention should be paid to improving the economy in order for it to attain global competitiveness.
These per capita income statistics illustrate the extent of Egypt’s poverty, an economic challenge that the country’s relatively equitable distribution of wealth does little to mitigate. Realistically, this good performance is most likely the consequence of drastic redistribution efforts that played a major role in the political agendas of the nation’s past leadership.
An analysis of available manufacturing jobs and corresponding salaries helps illustrate the problem. For example, two of the highest-paying manufacturing jobs are in components for electrical motors and electricity distribution, where employees can expect to make over US $3000 per year. However, these areas make up less than 1% of total manufacturing employment, while roughly 40% of all manufacturing jobs are involved with food and textiles, areas where salaries range between US $1000 and US $2000 per year. Such problems could be exacerbated in the future, as the highest-paying manufacturing jobs involve refined petroleum products, a non-renewable and rapidly depleting resource.
Furthermore, an examination of worldwide income-distribution standards illustrates disturbingly unfair disparities. In general, countries in Latin America and Africa represent the most disproportionate income allocations worldwide. For example, 6 Latin American countries report that the highest 1/5 th of their population receives over 60% of national income. This means that the large majority of the population (80%) is left with a mere 40% of the money, a reality that is impossible to justify.
Meanwhile, the lowest 40% of income groups in Egypt share over 21% of total income and the upper 1/5 th of the population receives ‘only’ 41.1% of available income, much like Australia, Estonia, Moldova, and Spain. While the inequality in Egypt is still apparent, it is worth noting that by worldwide standards, Egypt has performed quite well; in fact, money is shared as equitably in Egypt as it is in Europe and the former Soviet states, countries with the best records in this regard. Clearly Egypt does enjoy a reasonably equitable distribution of income, but as we have learned, that this is an exercise in sharing poverty, not in promoting philanthropy and justice.
While the economy of Egypt has certainly suffered, the government has done an adequate, but not spectacular, job of providing for and improving the population’s access to water, health care, and education. Of course, much of the public expenditure toward improving infrastructure has been to the detriment of Egypt’s deficit and long-term interests; however, the impact of subsidies and state intervention do not belong in this analysis.
Egypt ranks slightly ahead of its income bracket in terms of providing access to safe water and sanitation. While still only 84% of the population could get clean water in 1995, that still ranks better than average among all regions with low and middle incomes, another disconcerting reality. Egypt also does reasonably well in terms of providing sanitation, with 95% of the population reported to enjoy this basic right in urban areas in 1995. While Albania (97%) and Moldova (96%) are slightly ahead, Botswana (91%), Guatemala (91%), and Honduras (91%) are slightly behind, and Chile manages to provide 95% of its urban populations with access to sanitation as well.
Meanwhile, Egypt performs poorly in terms of providing adequate education and it falls well short of 1997 worldwide illiteracy rates: 18% among males and 33% among females. Adult illiteracy in Egypt is quite high, as 35% of males and a disturbingly high 60% of females did not know how to read and write. The Egyptian rate of secondary school enrollment is 68%, which is outranked by European countries, but comparable to other MENA countries, who managed to provide secondary school access to only 61% of their youth.
Not surprisingly, Egypt also boasts few technical specialists, as is illustrated by the relative scarcity of engineers and research scientists. Of the countries reporting, 36 have over 1000 scientists and engineers per 1 million people, while Egypt only has 458. This ranks Egypt ahead of Bolivia (250), Tunisia (388), and Vietnam (308) but behind Iran (521), Peru (625), and Uruguay (688). Not only literacy, but also advanced educational opportunities are necessary for the country to compete with technological innovation and productivity, and the lack thereof presents a significant impediment to development.
I. B. Regional and Historical Production Trends:
Egypt’s GDP grew fairly consistently during the last two decades although its rate of growth has decreased slightly during that period and annual growth rate fell further after 2000 to roughly 3%. The decade of the 80’s was the strongest, with output growing on an average pace of 5.4% per year. Meanwhile, the average pace dropped slightly over the latter half of the 80s and into the mid 90s, to roughly 4.5% per year. In the latter half of the 90s, output growth increased slightly, again averaging just over 5% for that period. However, growth fell again after the millennium and averaged around 3% the last three years, with 2003 data showing 3.2% growth.
As a consequence of this sustained growth, Egypt’s GDP more than tripled during that time period. In 1980, total GDP was roughly US $23 billion, while it grew to US $47 billion in 1993, and to US $78.1 billion by 1998. Meanwhile, as we discussed earlier, the rate of growth dropped off slightly and Egypt recorded total GDP of US $82.4 billion in 2003. While it is important to recognize that Egypt’s GDP grew consistently in the past two decades, it is important to view where this growth has positioned them in terms of Egypt’s share in world GDP.
Egypt’s GDP growth vs. World GDP growth
In order to place Egypt’s average annual GDP growth in context, we will compare its rates for the period 1980-2002 (5.4% then 4.5%) to world GDP growth, members of Egypt’s income bracket, and Egypt’s MENA neighbors. World GDP grew at an average rate of approximately 3% over the 22 years, while the Low-Middle Income bracket saw much better performance of 4% in the 80s and then 3.2% until 2002.
While Egypt outperformed the regional averages for most developing countries, it is worth noting that it was still close. In the 11 years from 1990 to 2001, Egypt’s 4.5% growth outpaced the average for most other regions but was still lower than Asia’s explosive rate 5.8% growth during the period. Meanwhile, the strong performance in the latter part of the 90s helped propel Egypt’s annual growth past that of competing regions, as Asia’s growth dropped to 4.6% annually, partly as a result of their great financial crisis during this period. Looking regionally, it is noteworthy that GDP growth in the MENA region was significantly weaker than in Egypt and most other regions, averaging 1.4% annual growth in the 80s and an improved, but still sluggish annual growth of 3.2% from 1990 to 2002. Meanwhile, while Egypt’s growth has fallen back in the past few years, Africa actually saw its GDP grow more quickly than them from 2000 to 2001, an indicator of serious problems during this period.
As we have seen, with GDP growth hovering around 5%, Egypt outperformed world averages by roughly 2% as well as low-middle income averages by a little over 1%. Also, its average annual growth doubled that of its MENA neighbors, an indicator of reasonably good performance. Meanwhile, the past few years of performance have been quite disappointing and it raises red flags that we will discuss in the coming two sections.
As we have discussed, Egypt’s population of 61 million makes up roughly 1% of the world’s population but is not able to produce at nearly the same proportion. 1980, Egypt’s GDP of US $22.9 billion made up only .21% of the world total, which was US $10,939.5 billion. Because of Egypt’s strong growth relative to the world over the next two decades, its GDP grew to US $78.1 billion, which, as expected, accounts for a slightly larger portion of the world total GDP. However, world GDP reached US $28,854 billion and Egypt’s share in it is still a relatively insignificant .27%. Consequently, after twenty years of strong growth and efforts to increase the competitiveness of its economy, Egypt’s GDP still accounts for less than .3% of world production. The next two sections will highlight possible sources of this productivity shortfall.
II. A. Trade Performance and Composition:
International trade has recently undergone a remarkable transformation in total volume, as “international trade in goods and services has expanded from $200 billion to more than $7.6 trillion.” In order for countries to remain competitive in this increasingly rapid transfer of goods and services, states have become aware that they must guide their economies to remain competitive. Egypt, like most African and Middle Eastern countries, is relatively inactive in international trade, relative to the world economic powers.
Total Trade Volume, Exports & Imports
Over the past few decades, Egypt has more than doubled its activity in world trade while it continues to import more than it exports. In 1980, it exported US $6.2 billion worth of goods and services while importing US $9.2 billion. By 1997, both categories had increased significantly, with exports reaching US $16.2 billion while imports had risen to US $18.3 billion. While the increase in exports slightly outpaced additional imports, it is important to understand the role that the two components of trade, merchandise and services, play in impacting Egypt’s trade statistics.
Despite the apparent healthy growth in the total volume of exports, the vast majority of this growth was in the services sector, rather than in merchandise trade. While merchandise accounted for US $3.2 billion, compared to US $2.9 billion in services in 1983, this balance underwent a significant shift in the subsequent two decades.
When compared to services, the lack of merchandise growth is most apparent. On one hand, merchandise exports did grow to reach US $3.5 billion by 1986, and then continued upward, to reach US $4.4 billion by 2002, a 38% increase in 20 years. However, within an even shorter period, exports of services had reached US $9.1 billion, a remarkable growth of 208%. As a consequence, the services sector saw its role in Egypt’s total exports catapult to constitute nearly 2/3 of all Egyptian exports.
The problem with Egypt exporting more than twice as much value in services as merchandise begins to surface when one takes into account that global trade in services is roughly ¼ that of merchandise. Later, we will get closer to understanding this merchandise export shortfall.
Meanwhile, it is important to understand more clearly the extent of disproportionate international involvement in trade and consequently, the relatively minor role that Egypt plays in the worldwide trade of goods and services. In terms of merchandise exports, Western Europe, North America, and Asia account for over eighty-four percent (84%) of the world market while the rest of the world lags far behind. Then, the decline is steep, with Latin America being the next largest contributor with only a five percent share. Combined, Africa and the Middle East only constitute six percent (6%) of total merchandise exports, although they are comprised of some sixty-six (66) different countries and Egypt is no exception.
In fact, Egypt accounted for less than one percent (1%) of merchandise exports in 2002 with a total export value of roughly four billion dollars. Although this total export value has increased in the past ten years (from three billion to four and a half), Egypt’s share of trade in the world merchandise market has actually fallen during that same period. In 1992, Egypt accounted for .08% share. Their position fell to .066% in 1996 and then further, to .057% two years later. By 2002, Egypt's relative participation had risen to .068% but this growth is still only moderate.
The scarcity of exported merchandise is perhaps the most illustrative indicator of Egypt’s failure to contribute to the world economy in a manner that is proportionate to its 1% of the world population. Meanwhile, it does manage to provide .7% of world commercial service exports, one of the most significant areas of opportunity for future growth. While Egypt does perform relatively strong in exporting commercial services, this trend tends to mask underlying problems in Egypt’s overall trade participation which include a competitive disadvantage for its products in international markets.
In 1980, the Egyptian balance of payments was also problematic as it imported almost US $3 billion more than it exported, a difference that was valued at almost half of its US $6.2 billion export total. Egypt’s balance of trade has improved somewhat but as of 1997, it still imported more than US $2 billion more than it exported. Meanwhile, the relative success of Egyptian commercial services and the strength that it gives to Egyptian export totals masks the serious imbalance between exports and imports of merchandise. In 1998, Egypt imported US $13.6 billion dollars of goods, or almost 3.5 times the amount of goods it sells to the world, a further indicator of its lackluster economic performance.
Based on an analysis of UNCTAD’s 7 categories of trade, it becomes evident that Egyptian exports are limited to a couple of categories of commodities while imports are more evenly distributed among certain necessities.
A well diversified economy is most capable of resisting economic shocks and maintaining economic growth but an analysis of the composition of Egyptian exports in 1999 and 2000 illustrate that Egypt does not enjoy such diversification.
While many other products play relatively insignificant roles in Egypt’s exports, there are three basic types of goods I will highlight as playing a significant role in Egyptian exports: petroleum, textiles, and metals. These three groupings of commodities together constitute over 65% of Egyptian exports. Based on UNIDO’s extensive reporting on specific traded goods, Petroleum products (25.1%), petroleum (17.1), cotton (2.8), woven cotton fabrics (2.7%), textile yarn and threat (7.3%), clothing, excluding leather (6.9%), and aluminum (3.8%) dominated Egyptians exports in 2000 and are an indicator of where its individual actors and businesses have identified a competitive advantage.
It is also useful to observe what classifications of manufactured products tend to see a significant percentage of their total production allocated for export. In 1998, for example, there were six types of manufactured goods reported to have nearly half of their supply exported. These included made-up textile articles, except apparel (71.7%), cordage, rope, twin and netting (48%), knitted and crocheted fabrics (57.1%), publishing of books and other publications (59.7%), man-made fibres ( 47.2%), and pottery, china and earthenware (47.7%). By analyzing the sources of these products, it becomes clear that Egypt manufacturing for export is concentrated in textiles and other limited technology production.
As discussed previously, Egypt suffers from a general lack of technological expertise that, not surprisingly, limits the proportion of its high-technology exports. Another important indicator of technological advancement is the role that high technology exports play as a percentage of total exported manufactured goods. Of 88 countries reporting in 1997, 44% of them could boast that the high tech industry constituted more than 20% of their total. Meanwhile, only 7% of Egyptian exports were high tech, ranking it behind Bolivia, Kenya, Turkey, and Uruguay, hardly a Who’s Who List of advanced industry. This lack of high tech production helps explain why so much of Egypt’s exports are concentrated in crafts and fabrics, in which production techniques are simple and the products’ outcome adds little value, relative to the high value added in producing equipment such as optical instruments or electric generators.
It is especially detrimental for petroleum products and metals to play such a prominent role in Egypt’s economic wellbeing because they are non-renewable resources and their supply, especially oil, is being consumed at an inherently unsustainable rate. Meanwhile, the water that is consumed to sustain Egypt’s agriculture is becoming increasingly scarce and will eventually limit Egypt’s capacity to produce the raw materials needed for textiles.
Therefore, it is tremendously important to recognize that much of Egypt’s contribution to world trade is in non-renewable resources and consequently, much of its development progress is unsustainable in its current form. Essentially, Egypt sells petroleum, metal, and some fabric to the world and then it buys back from the world most everything else that is required to sustain a mostly urban population of over 60 million people.
Whereas much of Egypt’s exports are concentrated in a few major categories of goods, there are numerous small categories of goods that make up a relatively significant percentage (>2%) of total Egyptian purchases. According to UNCTAD’s data on trade structure, Egypt buys a wide variety of commodities as imports are distributed more evenly. While 26% of imports are food items, 22% are machinery and transport equipment, another 20% are manufactured goods, and almost 12% are chemical products.
More specifically, it received a relatively large volume of the following products from abroad in 2000: fixed vegetable oils (3.4%), organic chemicals (2.2%), medicinal and pharmaceutical products (2.4%), plastics, cellulose and artificial resins (4.5%), wood and paper products (6.5%), ingots (2.5%), electrical power machinery (2.4%), and commercial road vehicles (2.9%).
There is nothing intrinsically wrong with importing all of these goods but a lack of substantial domestic production for export makes this a problem. Not only does Egypt fail to produce enough goods that the rest of the world wants, but it also fails to satisfy domestic demand for daily provisions. In the next section, we will look at the structure of Egypt’s GDP in order to shed some light on this trend.
II B. Structure of Production and Progress:
In order to understand Egypt’s economic difficulties and lack of competitive levels of GDP growth and trade performance, it is necessary to examine the structure of its GDP and the relative success of its production efforts. Domestic production has four primary sources: Agriculture, Industry, Manufacturing, and Services and each category plays a different role in economic growth. In 2003, Egypt derived 16.1% of its GDP from Agriculture, 34.6% from Industry, 18.9% from Manufacturing, and 49.2% from services. It is important to analyze Egypt’s performance in these areas, its level of diversification into high value added modes of production, and its relative success compares with other world regions. This will help to explain the weaknesses in Egypt’s economy that we have discussed so far.
Based on regional data collected from 1990 to 2002, there is a statistical correlation between growth in Manufacturing Value Added and growth in GDP. China, for example, showed the highest rates of growth in both categories during this period, experiencing annual MVA growth averaging more than 11% per year for the first 7 years. Meanwhile, they also enjoyed impressive economic growth rates, exceeding 9% GDP growth per year. However, as the MVA dropped to 7.1% during the period from 1997 to 2002, GDP growth results were also lower, averaging 6.1% per year. In other words, a drop in MVA from roughly 11% to 7% coincided with a drop in GDP from approximately 9% to 6%.
During this same twelve year period, North Africa showed a similar correlation, as it experienced moderate growth in both MVA (2.2% to 5.1%) and GDP (2.2% to 3.9%) with concurrent fluctuations. Meanwhile, this GDP performance places the region behind both South and East Asia and the Developing Regions, both of which providing MVA growth of 4% to 9%, which fueled GDP growth between 3% and 7%. These data suggest that North Africa has not enjoyed the same consistently rapid GDP growth as other regions because their economies did not generate the same rates of MVA growth. We will identify a similar trend in the Egyptian economy.
Data also suggest that countries that derive a higher percentage of their MVA from high value added industries such as metal products and equipment also tend to enjoy better economic success. For this reason, many of the developing countries have sought growth in these high MVA areas in their lengthy structural readjustment programs of the last few decades.
For all of their efforts, developing countries did gain an increased share of world MVA during the period from 1992 to 2002, but it was a disappointingly moderate increase. In textiles, where the developing countries are most prominent relative to other branches of production, their share of world MVA grew from 28.4% to 35.4%, an increased world market share of 7%. They also enjoyed market share growth in the other branches were the developing regions typically play an important role, such as food and beverages, mineral products, and chemicals, petroleum, rubber, and plastics.
However, with world market share growth ranging from 2% to 5% in these categories, the developing countries are still primarily succeeding in raw material intensive branches. Furthermore, they maintain only about ¼ of world market share of value added, even in these categories where they are strongest. Meanwhile, the developed market economies hold a 70% to 80% share in MVA in all categories except one: textiles, apparel, leather and footwear. We will look closely at the sources of this MVA in the next section in order to illustrate some competitive challenges Egypt’s industrial base faces.
As we mentioned, the specific structure of MVA is also an important indicator of relative regional focus on certain branches of industry and is useful for comparing regions to ascertain who places a particular emphasis on the different branches. Developed market economies, for example, derive an increasing amount of MVA from their production in metal goods, machinery, and equipment. This growing branch already comprises 51% of their total MVA, which is a larger percentage than either the transition economies (38.3%) or developing countries (31.9%) gain from this area. Meanwhile, the latter two groups gain a relatively larger share of their MVA from food, beverages, and tobacco (roughly 16%) than do the developed market economies (10%).
Many developing countries get more of their MVA out of agriculture, which is considered the lowest phase of production, than the world’s developed economies, an important and adverse trend. For example, in 1980, MVA from agriculture accounted for only 7% of world GDP and this figure fell to 5% by 1998. The high income countries earn even less MVA from agriculture as a percentage of their GDP than the world average, showing a decrease from 3% to 2% in the same time period. Low and middle income groups also saw a decreasing role of agriculture as a percentage of their total output, as it generally fell by 1/3 rd during this same eighteen year period. Meanwhile, MVA from agricultural output was valued at 18% of Egypt’s GDP and this figure only fell by 1% during the same span, an indication that either agriculture increased dramatically, other sources of GDP did not, or a little of both. In either case, Egypt has a lot of work to do before its GDP is large enough that its agriculture plays as small a role in domestic production as it does in the highly competitive world economies.
The second phase of economic restructuring is growth in the industrial sector and there is less of a disparity between high and low income countries in the emphasis that high value added production from this sector plays in the world economy. As in most regions and income groups, industrial value added accounts for between 30% and 45% of total GDP. The obvious exception to this rule is the Middle East, where the extremely profitable oil production drives industry MVA as a percentage of total GDP above 50%. Egypt’s industrial value added accounted for 37% of GDP in 1980 and fell to 33% in 1998, an impact of its depleting oil supply. This is also an indication of future economic challenges, considering Egypt’s recent historical reliance on energy exports for infrastructure and basic needs.
On the other hand, value added from manufacturing and services both showed an increasingly important role in the Egyptian economy. On the surface, Egypt’s performance in manufacturing promotion was sensational, as MVA jumped from a value of 12% of total GDP to 26% by 1998. Meanwhile, a closer analysis in the next section illustrates the components of this manufacturing growth and illustrates why Egypt could be doing better. Suffice it to say that Egypt is still producing a tremendous amount of low value added merchandise and not nearly enough robots and lasers.
Finally, world MVA from services, which constitute the largest percent of global GDP, rose in value to equal 61% of the total worldwide, GDP. Egypt has followed in this trend, increasing its emphasis on services, and its total value added in this sector went from 46% to 50% of Egyptian GDP. Meanwhile, high income countries generate an even higher % of GDP from services, reaching 65% in 1998. Here, it is important to make the distinction that much of the richer countries high value added comes from areas like banking and insurance, areas that are based on global competitive advantages, not convenient geographic and historical ones.
Meanwhile, much of Egypt’s services result from its exploitation of tourism and Suez canal revenues, rather than some of the advanced and lucrative forms of service found elsewhere. Nevertheless, Egypt does have advantages like these historical attractions that it should take advantage of in order to improve its overall competitiveness in the global economy. At the same time, it must also find creative and diverse avenues through which to generate greater value added and economic growth.
Egypt’s Specific Branch Trends
Of eight major categories that UNIDO uses for analyzing branches of production, four branches in particular provided a significant (>15%) of the Egypt’s MVA in 2002. These are food, beverages and tobacco (17.1%), chemicals, petroleum, rubber and plastic products (23.1%), non-metallic mineral products (17.1%), and metal products, machinery, and equipment (21.5%). The sector that is conspicuously missing from this list is that of textiles, wearing apparel, leather, and footwear. As we discussed earlier, a significant portion (roughly 20%) of Egyptian production for export is in textile areas and yet they constitute a small percentage relatively small portion of MVA share (10.4%).
In fact, Egypt’s dependence on food products, tobacco, and textiles for MVA is actually lower than that of its North African neighbors, an indicator of why those countries’ economies have suffered even slower GDP growth than Egypt. For North Africa to earn roughly 34% of their MVA from food products, textiles, and other types of low value added production, it is clear that they lack the high MVA industrial infrastructure that helps fuel economic growth. For a country to have a high concentration of its share in MVA from areas that are inherently low value added, we must conclude that they must produce an impressive quantity of low value added merchandise and consequently, should place far more emphasis on high MVA branches, in order to improve their economic standing.
Egypt did implement a prudent structural reform efforts in the early 1990s which made a positive impact on value added production, helping the economy to reverse its course. Meanwhile, like all of North Africa, rapid population growth has limited the impacts of total MVA growth on per-capita income. On a positive note, Egypt’s average annual MVA growth rate during the 90s outpaced that of its North African neighbors, who also enjoyed growth in this regard. For Egypt, the greatest growth occurring in the areas of basic metals (7.5%), food, beverage and tobacco (7%), and metal products, machinery and equipment (6.9%).
Meanwhile, North Africa as a whole enjoyed only modest growth in per-capita MVA, from US $154 to US $190, stymied by rapid population growth. The region has seen limited MVA growth relative to the rest of the world and still only outranks Sub-Saharan Africa in this regard. In 1990, China and N. Africa were at the same level of per-capita MVA, roughly US $160, China’s double digit MVA growth over much of the period helped them to surge ahead. Now, China’s per-capita MVA of US $418 is more than double that of North Africa. Meanwhile, neither China nor any other region even approaches the remarkable per-capita MVA of the developed market economies, which reached US $5,726 in 2002, and placed them at over 9 times that of their nearest competitor, Latin America and Caribbean. Egypt’s relatively low per capita MVA growth is just another indicator of its limited productive contribution to the world economy and is consequently, another factor leading to low levels of income in the region.
As we have discussed, the Egyptian economy could face acute economic problems in the coming decades. A primary reason for this is the inability of its export market to compete internationally because it does not have a diverse industrial base nor does it add significant value to what it does produce. Although Egypt has exerted itself to promote economic development and a reasonably equitable standard of living, these efforts have failed to produce sufficient growth in competitive domestic production. As a result, high poverty levels remain a pressing burden.
Much of the problem as well as the solution can be found in the predominance of small to medium sized enterprises in the economy. Obstacles posed by large numbers of new entrants into the labor market, low levels of high value added production, and a relative inability to compete in international trade are the most significant threat to intensifying economic development and lowering the country’s poverty levels. The following section sheds some light on why the proactive development of Small and Medium Enterprises (SMEs) can play a vital role in mitigating the harmful effects of these anticipated trends.
III. Small and Medium Sized Enterprises (SMEs)
Egypt has an especially high number of small businesses and assisting them to engage in the international economy would make a significant impact on national economic development efforts. Most Egyptians work for mini-firms as 99.7% of its non-agricultural enterprises have fewer than 50 employees. Because many of these small businesses lack the requisite skills to compete internationally, face relatively restrictive government involvement, and have difficulty with financing, they are less successful in competing in international markets. In Egypt’s case, the prevalence of small businesses makes this process especially crucial for national economic development.
SMEs have the potential to be a driving force in economic development and consequently, governments should commit to facilitating a support structure for innovation and SMEs. The following discusses the benefits of internationally competitive SME development, outlines some primary means of encouraging their growth, and focuses on the challenges faced by the many small businesses in Egypt in order to shed light on structural changes required to accomplish these goals. Finally, it mentions some areas in which Egypt shows promise and highlights specific areas of opportunity.
Small and medium sized enterprises (SMEs) are crucial to economic development because they are a viable solution to the weaknesses of many developing economies today, e.g. high unemployment and failure to meet the demands of the international economy. By stimulating innovation to achieve international competitiveness, filling gaps in employment, and strengthening national exports, SMEs help to diversify the national economy and solve precisely the problems that a country like Egypt struggles with. In order to address the many challenges to economic development, it is important to evaluate effective methods of creating profitable small businesses and generating productive forms of employment.
Strategy Needed for International Expansion
The internationalization of SMEs, as presented by the United Nations Economic Commission for Europe (UNECE), is not simply a matter of emphasizing exports and foreign investment. Instead, international strategy is a group of maneuvers conducted by the firm to penetrate other markets and establish itself, despite a highly competitive climate and intrinsically risky circumstances.
Because of the rapidly changing global competitive climate, it is essential for small companies to quickly adapt to market demands not only to avoid being swallowed by competition, but more importantly, to identify new opportunities and fulfill them. This, according to the UNECE approach, requires SMEs to improve quality, cost competitiveness, and management practices. In order to accomplish this in a rapidly evolving economic system, an enterprise must gain knowledge and confidence in a planned, incremental process.
Rather than attempting to jump from a local handicrafts operation to a worldwide production facility, the Uppsala Internationalization Model suggests a sustainable progression from stage 1 to 4. Assuming the SME has no regular exportation activities, its next should be exportation by independent representatives, then establishment of foreign sales affiliates, and finally, the installation of foreign production facilities.
In addition to an incremental learning process, SMEs are also encouraged to follow certain best practices in order to help them compete internationally and remain flexible. For example, some emphasize the need for increased emphasis on R&D in order to stay ahead of new technologies while others stress the need for the firm to develop strategic alliances to provide greater access to strategic resources and open more doors in the foreign market.
Challenges to Small Businesses in Egypt
The numerous small businesses in the Egyptian economy, like that of many developing countries, lack the skills and flexibility that are necessary to promote these activities on a competitive level. In order to develop high value added production that succeeds in world markets, firms must not only possess strong entrepreneurial inclinations and foreign language skills, but also the ability to manage innovation, strategic planning, cash-flow, and information technology. Unfortunately, Egypt’s bureaucracy has historically been extremely restrictive and its entrepreneurs have not have the institutional support, sources of funding, or the ease of access to information on how to conduct international expansion.
One of the most commonly cited challenges to conducting business is the crippling bureaucracy and red tape that inhibits new entrants in various ways. In fact, Egypt compares unfavorably to both the regional and OECD average in various related categories. According to World Bank benchmarking, the processes are more complicated to start a business, hire and fire workers, register property, and get credit in Egypt, all of which contributes to deterring potential investors. For example, in order to launch a business in Egypt, the investor must undergo twice the number of procedures (13) as the average OECD country (6) and it requires an average of 43 days to get the paperwork approved. Meanwhile, it takes over three times the number of days to register property in Egypt (193) than the regional average (54). This process takes almost six times as long as in the average OECD country, where the process takes only 34 days.
Especially critical to the economy’s failure to generate innovation is Egypt’s inability of individuals to acquire loans. One indicator proposed by the World Bank is the Legal Rights Index, which measures how well collateral and bankruptcy laws facilitate lending, and is measured on a scale of 0 to 10. Egypt scores a 0 compared to the OECD average of 3.9. In fact, a recent report by the Ministry of Economy suggested that programs to provide financial assistance to small businesses only reaches 5% of potential beneficiaries. This inability of potential businesses to secure investment capital is especially critical in Egypt because it places particular stress on SMEs, which are generally perceived as riskier investments anyway. This is exacerbated by the fact that most Egyptian businesses are quite small, have a single owner, and likely do not have access to wealthy private lenders.
Egypt’s Strengths and Reason for Optimism
Nevertheless, there is room for improvement and the Egyptian government has shown signs of willingness to support needed changes. As we have discussed, Egypt’s structural reform efforts in the early 1990s helped it to generate increased GDP growth to 5%. A focus on communications technology and infrastructure throughout the last two decades will also play a role in the future growth of its international business efforts. While the economy slowed after 2000, the recent appointment of young and reform-minded leaders gives reason to have optimism for a return to increased economic growth. Now we will look at the role of donor institutions and ecommerce in generating such growth in Egypt’s international competitiveness.
International donors have played a role with initiatives such as the Social Development Fund, which was created in the early 1990s to provide reasonable credit for individuals and generate employment opportunities by funding public projects such as infrastructure development. Although relatively limited in its scope, such an effort is a step in the right direction in a state that has failed to generate substantial small business growth.
Much of the recent discussion of international economic growth has centered on the unprecedented opportunities that the Internet offers for SMEs to expand their scope. Since 1985, Egypt has invested in an improved communication infrastructure, an important part of a greater effort to transform itself into a market based economy. As a result of government efforts to expand technology infrastructure and specifically, e-commerce development, these applications have been diffused among much of the business community. There has been a similar growth in the number of individual Internet users, which has risen from 2,000 in 1993 to 600,000 by 2001, a large percentage of which are found in the business community (75%).
Not surprisingly, there are already many examples of sites dedicated to e-commerce and electronic communities such as otlob.com, an online food delivery service that covers hundreds of restaurants throughout Cairo. While the continued expansion of e-commerce will require further developments such as secure electronic payment systems, more extensive Arabic language web sites, and greater trust in the internet, these are obstacles which the nation is certain to overcome.
Although younger generations are adapting quickly to Internet applications, most worldwide businesses still do not keep computerized records or promote their activities on the web. These specific obstacles are indicative of the reality that the developing world is still a few decades away from having everything available on the Internet. An increase in available capital and the expansion of ecommerce can provide an outstanding opportunity for entrepreneurs to create new business channels and reach significantly more customers, if they are educated on how to harness these opportunities.
On the balance, Egypt has shown progress in improving quality of life over the past few decades but many of these surface improvements have done little to address the nation’s economic weaknesses. According to our findings, the Egyptian economy did struggle during much of the 1980s but it managed to grow at a relatively high rate throughout much of the 90s, reaching annual rates of over 5%. Meanwhile the country’s population growth and volume of new entrants into the labor force will make even greater economic growth imperative. In fact, the World Bank has estimated that Egypt will need to grow at a rate of at least 5.5% annually in order to absorb the expected labor force growth of about 3 percent, which means roughly 550,000 additional jobseekers.
In order to develop economically, Michael Porter argued, the government’s policies must help deploy a nation’s capital resources in order to increase technical and managerial skills among the workforce. The influx of capital, combined with an increase in skills must then generate productivity increases, which ultimately goes full circle by providing opportunity to generate more capital. Egypt has not enjoyed the conditions in which this synergistic process can flourish and generate adequate economic growth and, as Porter would likely argue, its country competitiveness has suffered.
Egypt’s negative economic outlook is exacerbated by its reliance on non-renewable resources for export and its inability to provide competitive levels of value added to its domestic production. The government has made frequently effective efforts to address issues relating to its citizens’ quality of life and equitable income distribution over the past few decades. However, it is evident that its brand of government interference in economic activity has not contributed to sufficient levels of competitiveness in the global economy. In order to not be outpaced by population growth, the multitude of small businesses in the Egyptian economy will have to find a way to contribute more productive and tangible value to the rest of the world.
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Table C: Average annual real growth rates and structure of MVA at the 2-digit level of ISIC
Table D: Value added and related indicators by industry, at current prices, selected years
Table E: Employment, wages, and related indicators by industry, at current prices, selected years
Table F: Selected indicators of demand-supply relations by manufacturing industry according to ISIC at current prices
Table G: Composition of value of trade in 1999 and 2000
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Table J: Average annual real growth rate of MVA and GDP (in %)
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Table 5. Distribution of income or consumption
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