Local Economy’s Challenges and its relationship with the Egyptian national security, PART II.

This paper provides a future vision handling the Egyptian local economy’s challenges affecting directly the Egyptian national security. PART II.

Author: Amr Essam Sukkar

First part of this paper can be found here.

A Future vision to deal with Domestic economy’s challenges:

First: A clear plan of economic development:
Bear in mind several national objectives, including the goal of national security, the goal of meeting the urgent needs of citizens, and the goal of sustainable growth, namely the plan that creates the difficult balance between the three special elements of defense, consumption and investment. And we have to be cautious and do not attempt to portray economic development as it is the "economic independence" or Manufacturing or retention of old assets. The economic development plan is mainly determined by accomplishing number of “datum of modernization” such as increasing productivity, achieving a proportion of economic and social equality, consolidating modern knowledge and developing productive institutions and service institutions. And it’s prevalent to translate the development plan into number of other secondary objectives such as the number of citizens under the poverty line, minimum consumption, maximum unemployment, income distribution, forms of consumption and diversification in the national economy, and  the plan policies have to try "creating and sustaining" high rates of growth without high rates of inflation, It must strike a delicate balance between the benefits of integration into the global economy and the risks of this openness to the potentials of national industry.

Second: Configuring Egyptian production:
It has become necessary to evaluate the Egyptian industry and the structure of its production not only on the basis of the comparative advantages of traditional factors of production (land / currency / capital) but also on the competitive advantages based on knowledge and technology. Comparative advantages can no longer achieve competitive abilities at the rates of the 1960s and 1970s. As the competition fundamentals are gradually formed from the creation and the absorbing of knowledge. And when preparing a map for the Egyptian industry, we must bear in mind the set of facts that were established at the end of this century.  Most important of it is that the global economy is a global cross border economy. Investments have overcome geographical and political borders, and financial markets organized by an active accurate information network throughout the whole day, and the environmental component has acquired a global dimension, and change and development in technology and management have become the decisive factor in the battle of production at the global level. And the Egyptian industry agenda should first identify industries with comparative advantage in the basic factors of production. This is the starting point, but it does not guarantee continuity or progress, as these industries must be transformed into the innovation stage without going through the investment stage. This makes the choice restricted by a group of industries that do not rely heavily on economies of scale (lather industries-fabrics- furniture- food- subcontracting industries).Then the agenda moves where it can continue and transform into innovation by acquiring the best available technology, after that identifying the industries to be entered through global alliances to enable global means of investment, management and marketing.

Third: Exploitation of unemployment
It is a great surprise to learn that Japan - the great economic power - did not have an economic policy in the past 50 years. But it is puzzling now the Japanese political leaders by developing for the first time a modern economic policy that is incompatible with traditional Japanese wisdom. Japan over the period of the Second World War followed mainly a "social policy" from which the economic restructuring derived. The Japanese individual and society both were the target, and Egypt itself could not put the problem of employing millions of unemployed and new job seekers in a secondary order, it’s the most important challenge not only for the Economic policy maker but also for the society as whole, and it demands a classical economic thought .The expansion and the promotion of services projects come first of the policies to absorb unemployment, followed by small industries and handicraft. The new technology will have an impact on the business patterns and skills required from the workforce, where many professions will be abolished and many others will be created In various fields particularly in the services sector, which will continue to expand to accommodate the expected growth in the labor force, but the transition to a communications and information society will require an unprecedented set of professions and skills so new technology shouldn’t be resist because this will result on the long-term to deterioration of domestic industry and losing ability to compete which means rising unemployment.

Fourth: Specialization
A) we have two elements that can’t be ignored in the specialization program: the element of management and the element of capitalism. It will be useless to only transfer the ownership of factories from countries to individuals because the crucial element in capitalism is management. And we should realize that the Egyptian industrial capitalism is all new and it doesn’t happen after high capital accumulation, therefore the acceleration of allocation of industrial facilities, and foreign capital is required, especially in the field of technology and administrative expertise and opening foreign markets, but to the extent that does not eliminate the Egyptian capitalism in the cradle.

B) The focus of the dialogue of specialization on the "problematic management" will transfer us from ideology to reality, where the advantages and disadvantages of specialization in each case is measured by the standards of impartial administration, and some economists believe that the specialization program should first go to the disassembling of public monopolies in the areas of distribution, transportation and communication networks, Aviation, electricity, gas, postal and other services..etc, and transfer them to the private sector (which in this case is capable of managing them better on one condition that there is no monopoly) and this before presenting the large industrial projects, so that achieving tangible quick results in these service sectors when specialized will create confident in the whole process of specialization and thus revive the money market transactions quickly which will never be with the same amount in the case of industry.

Fifth: Legislation supporting the market economy
The next stage of economic reform requires deep understanding of the mechanisms of market economy, as this stage requires new controls and legislations that ensure the proper transition towards capitalism, and protecting the Egyptian economy from the negative aspects of the experiment, which its’ consequences may lead to the failure of the reform as a whole. Thus the regulations of anti-monopoly and competion protection are in the lead of these legislation, this legislation are numerous to include consumer protection, the protection of the small shareholder and illegal practices in stock , the participation rates of foreigners and international companies in Egyptian enterprises, facilitating the conditions for liquidation, protection of innovation rights and individual property, Economic crimes, ..etc.

Sixth: The Economic Entity of Local Government:
The role and the responsibility of upgrading the standard of living of individuals is mainly rely on the private sector and local government, which are two faces of the same coin in the process of modern development. The market economy is based on two main pillars: the private sector and decentralized system of local government. So the efficiency of the private sector role in development can’t be achieved without the development of the central government system, including the sectors of education and health and also some types of taxes and exemptions in the fields of water, electricity and sanitation services.

Seventh: Intermediate institutions between the state and the market:
The role of the state is essential in the promotion and continuation of economic development. This role involves adopting a transitional industrial policy for projects that suffer from high start-up costs ,for export projects and projects that leads to creation of more other industries, and the issue we face is not a simple matter that pits the "market" against "State” but it is the creation of" intermediary institutions "whose absence leads to the failure of the components of the economic system, as the exchanges between these institutions lead us to behave in a rational and collective manner. As the economy that best suits Egypt is an" institutional economy "based on the balance between institutions. And market is considered as one of these Institutions and it will have an obvious important role in this institutional economy that also parallelized with some amount of planning. Institutional economics consider a broader view of the economy more than a mechanism for market.

Eighth: Communications and Information Structure:
Competition fierce in technological field not only from an economic perspective but also politically and strategically, and a new international system started to excavate in Science and technology which would re-divide the cake of the world economy by which invention, innovation and creativity are the main weapon of economic leadership, and knowledge are controlling the economy not the economy control the knowledge, and that can only be through "electronic structure" of the state, which is the communications and information system that connects its various organs and institutions and linked it also to the outer world and the banks of international information, which is termed "Super highways "where the communications and information network in any state acting as highway networks in the era of the industrial revolution and represent " electronic nervous system "of the economy of the twenty-first century.

Ninth: International Trade and Export:
The East Asian model can’t be followed in its export-oriented primary strategies as it was conducted under global constants in the 1960s, while trade exchange scenarios currently take on different and conflicting forms, represented as the role of the GATT and the increasing share of manufacturing products in global exports that means the back off all other exports. And that the future is for industrial manufacturing products, especially those based on technology, which are high added value products, and it is necessary to increase the ability of our engineers in the field of "industrial design", as It is an unavailable experience to us so far as well as also “Fashion Design” So that our exports of manufactured and textile products can take an increasing share in world exports. Egypt can also play an important role in the international trade of soft products because of the availability of qualified human resources in this field. The emerging factors in international trade require new agreements with global blocs and strategic alliances with international companies, especially the major marketing and distribution ones, and studying the possibility of participation on the land of the bloc countries to overcome the protection on it.

Tenth: Administrative elite:
Human history has never witnessed an evolution of institutional form as quickly as the institution of administration in the modern world has grown, in less than 150 years, management has changed the social and economic fabric of the world, as no institution has ever done before. It created a global pattern for Economy and has set a new rules for the countries want to participate, these is the truth of the nineties. We live in the age of “capitalism of management” And now we must go through new institutions, attitudes and concepts that provide us with the ability to negotiate pear-to-pear with our counterpart business leaders around the world. As the era of support and tariff protection has gradually lift, and the government are moving from taking control to support, which push the business sector to self reliance instead of dependency, and so the Egyptian government is facing a huge challenge in restructuring its mentality and reorienting its process to keep up with the thought and dynamism of the World Market. That management is a practice of high-level intellectual activity, and the confrontation between business leaders in the world is in the first place "a clash of cultural abilities." Those who manage enterprises are skilled with comprehending complex issues, analyzing problems, handling ideas and evaluating solutions, So business management in Egypt should be assigned to privileged elite from the society and the Egyptians working abroad, and our social and educational system must ensure providing the business sector and the governmental sector with the best minds alike, and that is bureaucracy slim down.

This sever deterioration in the economic growth rate was due to the events and developments that accompanied the revolution of 25 January 2011, resulting in a negative growth rate of 4.2% during the third quarter of the financial year (January / March 2011). And so the unemployment rate has boosted to reach 11.8% according to the Central Agency for Public Mobilization and Statistics (CAPMAS) report at the end of June 2011. While the economic conditions have been slightly improved during the following fiscal year 2011/2012, where the growth rate increased slightly, the real growth rate was about 2.2%, but this rate remains much lower than what is required to accommodate new entrants to the labor market, not to mention the reduction in current unemployment rate. So the unemployment rate rose from 11.8% in June 2011 to 12.6% in June 2012. And with the Continuing decline of the economic growth rate during the last fiscal year 2012/2013, where it is estimated to be 2.2%, the unemployment rate continued to rise to 13% at the end In 2012 and then 13.2% at the end of March 2013, and the rate may have reached about 13.5% at the end of the financial year in June 2013. And in order to recruit all new entrants to the labor market, who are more than 700 thousand people annually, it is necessary to achieve a rate of growth in the gross domestic product (GDP) around 7% annually, which requires investments ranging between 25% -28% of GDP. That is, based on a level of output about $ 244 billion in 2011/2012, investments should have ranged from $ 61 billion to $ 68 billion, increasing annually by growth in GDP, And that’s only to absorb the new entrants to the labor market, without taking into consideration the current balance of the unemployed, which amounted to be about 3.6 million at the end of March 2013 as mentioned above. While in real terms the investment rate during the fiscal year 2011/2012 was $ 49.7 billion (about 20.4% of GDP) and a real growth rate of 2.2% was achieved with only 262,000 job opportunities, while the increase In the labor force during this year is 549 thousand individuals, which means that 287 thousand unemployed were added to the outstanding unemployment balance at the end of June 2012.

Eleventh: Investment as an engine for economic growth:
The previous approach collides with several aspects, foremost is that the legislative system related to the investment climate and related to its procedures needs a comprehensive review process starting from the need to work on the electronic establishment for companies and reduce the establishment’s period and compress its procedures through modifying the establishment’s  legislation of the of companies and its procedures and controls of corporate governance, and steps to complete contracts with them and land’s allocation mechanism And the connection of utilities to  the correction of tax system and reset the exit from the market system and bankruptcy laws and the creation of a mechanism that resolve the dispute of investment in a timely manner. The current investment law remains the most important legislative amendment required to be reviewed, as it reflects the state’s future vision of investment avoiding the defects that emerged in the implementation of the amendments that took place in March 2015, which didn’t come up with the expected effects so far, especially in the light of the lack of a clear map of investment in Egypt.

It should be took into consideration that the limited growth of Foreign Direct Investments (FDI) rates in Egypt isn’t only due to the geopolitical factors in the region or to the looming global financial crisis, but also to internal factors related to managing the investment climate, handling its constraints, and getting rid of the managerial complexity and the long time of the procedures for licenses and approvals despite the reform efforts that taking place at this level later.

According to data from the Ministry of Planning, the total volume of investments during the 2015/2016 fiscal year amounted to 407.5 billion pounds with a growth rate of 16.7%.

On the other hand, the small and medium enterprise system, responsible for raising the objectives of economic growth in the first place, needs a radical treatment including investments’ development in this sector and raising its efficiency through the establishment of an integrated institutional entity in accordance to the best international practices which represent the first model in the Middle East for adopting entrepreneurship and small and medium-sized projects’ development, which emphasize their role in economic development and create job opportunities and increase exports, which are the steps that the government announced it seeks to set them in a law to regulate the small and medium enterprise sector within the modifications package including the licensing system,  land allocation and incentives for those projects with the establishment of an integrated system technology infrastructure for the establishment and management of these projects, which are ongoing preparation after the President’s initiative to finance this sector by about 200 billion pounds over four years.

The extractive activities sector headed the total implemented investments by 15.4%, followed by construction and real estate activities increased by 12.9%, in the light of the above the depth of the problem which the industry and investment sector are suffering from as a growth engine of the economy, as it’s mainly relied on consumption, as well as the nature of the sectors leading now the growth in Egypt which are affected more with the interest rates change and exchange rates change obviously.

Twelfth: Export Development
Promoting exports effectively must be done through an integrated image of the export system starting from setting export targets, working on opening new markets in an integrated manner and taking serious steps to facilitate the steps of goods transportation through the establishment of roads and river network systems and launching a systematic shipping lines and air lines, and the establishment of logistics centers represents the main core of the development of economic and trade relations, as well as building a platform that holds the slogan "export first" it includes an integrated system to support exports contribute for real in export promotion, in addition to healing the problems found in the tax refund processes as well as improving the Egyptian standards specification in the export markets, while seeking to increase services exports, as well as commodity exports, which Egypt is focusing on export during the last period.

On another level In light of the recent actions, whether the governmental or taken by the Central Bank of Egypt, it has become necessary to conduct a comprehensive sensitivity analysis about the effect of the exchange rates changes on the investment indicators, on the export, and import costs, which did not fully appear so far, especially as it is likely that the recent exchange rate changes will improve commercial competitiveness of Egypt, as well as the removal of restrictions on foreign currency deposit for individuals and importers will support the revival of economic activity and investment.

Thirteenth: The exigencies of dealing with the growing public debt in Egypt
A) The public debt will not stop growing as long as there is a budget deficit, and this deficit will not reach an end except if the tax receipts increased more than the public spending with more than interest payments on the existing debt, In general, the larger the public debt, the greater the interest payments, and with keeping the rest as they are, the greater the budget deficit.

By this logic we find that the public debt feeds itself, and the larger its sized, the more it gets difficult and painful to lower the volume of public expenditure and the increase of tax receipts required to control and stop the growth of this debt, until it reaches a rapid growth in a way that can’t be regulated or Controlled.

Domestic debt tools represent an increasing proportion of bank deposits, while loan-to-deposit ratios have declined at the sector level as a whole, which is a key role for banks as a financial intermediary to invest their deposits in projects bring added value to the country's economy.

B) Although the Ministry of Finance continue to increase medium term debentures against short-term Treasury bills and building a yield curve for government issuances through a regular issuance of reference periods (1.5, 3, 5, 7, 10 years) and reopening them to provide liquidity On the debentures supply; however, The secondary market activity of treasury bonds remains weak with activity at 1.1% of total issuance, even with oversupply of issuance as well as investors focus on treasury bonds.

C) One of the most important problems in the budget preparation process is that it does not include setting limits for spending for different sectors submitting budgets to the Ministry of Finance, which causes the lack of identification of expenditure categories and its priorities. We note that the budget publication distributed to the budget authorities does not include any financial rules for the current state of the maximum balance and budget deficit, or government borrowing, which results in adopting negotiation of the budget preparation process to with the Ministry of Finance to determine the allocations and budgets proposed by the various parties.

Recommendations:

1. Priorities should be focused on targeting inflation to increase competitiveness and contain expected inflation.

Concerned parties: The Government with the Central Bank of Egypt
Time aspect: Medium term
Recommendation’s benefit: Assistance in Economic Development
Cost: at the discretion of the concerned party

2. The exchange rate policy should be managed according to economic fundamentals to maintain economic growth, reduce the cost of imports and reduce the risks of supply shocks to the economy.

Concerned parties: The Central Bank of Egypt
Time aspect: short term
Recommendation’s benefit: exchange rate stability
Cost: at the discretion of the concerned party

3. Laws and regulations should aim at eliminate the distortions in economic growth returns’ allocation with the imposition of censorship.

Concerned parties: Government with the Parliament.
Time aspect: Medium term
Recommendation’s benefit: the Egyptian citizen's sense of growth returns and the reduction of corruption
Cost: at the discretion of the concerned party

4. Set Priorities to steer credit into the private sector, especially small and medium enterprises, and propose tax incentives for businesses associated with the operating agenda.

Concerned parties: The Government with the Central Bank of Egypt
Time aspect: Medium term
Recommendation’s benefit: Assistance in Economic Development
Cost: at the discretion of the concerned party

5.Efforts should be continued to improve the performance of the public sector, especially state-owned enterprises.

Concerned parties: Government (Ministry of Business Sector)
Time aspect: Medium term
Recommendation’s benefit: Assistance in Economic Development
Cost: at the discretion of the concerned party

6. It is important to move forward with the plan to activate the public-private partnership to reduce pressure on the public budget and involve the private sector in infrastructure and capacity building.

Concerned parties: Government with the private sector
Time aspect: Medium term
Recommendation’s benefit: Assistance in Economic Development
Cost: at the discretion of the concerned party

7. The overall strategy should evaluate state-owned enterprises and set a plan to reform or privatize troubled enterprises while ensuring transparency and law enforcement to avoid past problems and sustain the productive capacity of privatized companies to protect workers' rights.

Concerned parties: Government (Ministry of Public Works Sector, Ministry of Planning and Ministry of Finance)
Time aspect: Medium term
Recommendation’s benefit: Assistance in Economic Development
Cost: at the discretion of the concerned party

Conclusion:

Social inequality and insufficient human development in Egypt, in addition to the delay in political reform, have contributed to risks despite of major achievements in economic liberalization and high economic growth. However, reform efforts have faced the challenge of political stalemate and corruption, which deprived poor segments of Egyptian society of benefiting the growth.  Therefore, in the near term, social priorities should involve rationalizing governmental spending, including the reform of the support system so that it is directed to the deserving, thereby eliminating wasteful expenditures and better achieving justice. At the same time, the priorities must include the tax system reform to mobilize additional revenue and increase the efficiency of tax collection and compliance. And create more job opportunities to support productive activity in order to help low-income individuals not rely on support continuously and increase the motivations to create job opportunities and steer to more credit to small and medium enterprises and handle the bottlenecks to bridge the gap between Supply and demand and increased investment in education and training, in addition to harmonizing the qualifications and available jobs and applying regulations and laws that would give greater flexibility to the labor market, thus stimulate creating job opportunities in the official sector within the private sector. Current political reform efforts will have a positive impact on the efficiency of institutions, applying good governance, transparency, law enforcement, combating bureaucracy and corruption, to increase investor confidence and ensure sustainable and equitable growth for the well-being of the growing population of Egypt.

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