Egypt drops 11 places in competitiveness ranking

The ranking of the competitiveness of the Egyptian economy relative to other countries has declined from 52nd in 2005 to 63rd in 2006, says “The Egyptian National Competitiveness Report,” released this month.The same report points out that the Ministry of Agriculture alone has over 300,000 regulations compared with a total number of regulations in the whole of South Korea standing at 11,125.

In chapter four, “The Regulatory Guillotine,” there is a proposal for the removal of the regulations that are not needed, inconsistent with international commitments — with the World Trade Organization for example — and are not business friendly.

Samir Radwan, executive director of the Egyptian National Competitiveness Council, believes that 50 percent of these regulations could be easily eliminated.

According to the 2007 annual World Bank “Doing Business” report, excessive regulations for starting up, operating and closing a business erode a country’s competitiveness and its capacity to benefit from globalization.

Ahmed Galal, director of the Economic Research Forum for the Arab Countries, Iran and Turkey, explained that “ranking of countries on the competitiveness index matters for at least two reasons.

“Countries like Egypt need foreign capital because their domestic savings and Investment are too low to bring about sufficient growth, and foreign capital moves to countries that are most competitive.”

The decline in competitiveness of Egypt seems to contradict the fact that Egypt was able to attract close to $10 billion in foreign investment last year.

Explaining this paradox, Galal gives two reasons. “Firstly, Egypt made deals related to specific sectors such as gas and banking due to the sale of Bank of Alexandria and the sale of large tourist sites, such as the one on the north coast. Secondly, the flow of foreign capital has not gone to diverse activities across all sectors of the economy, which would have been evidence of a significant improvement in competitiveness.”

Radwan attributes the decline in competitiveness of the Egyptian economy to three primary reasons: budget deficit, public debt and inflation.

“The budget deficit has shown slight improvement, but that is because the Minister of Finance, Youssef Boutros Ghali, has opted for a clearer way of showing the state budget making the deficit look quite large,” said Radwan.

“The public debt remains large because the government is facing a very hard social choice. Public debt is mainly due to expenditure on subsidies reaching almost LE 100 billion, salaries of the civil service of about 5.7 million people, and infrastructure. It is very difficult for the government to reduce spending on these items.

“The way out, according to the Minister of Finance, is to increase revenue,” said Radwan.

As for inflation, “we have seen an increase from 4 percent in 2005 to 7 percent in 2006 to 12.6 percent at the end of 2006. This is largely due to a steep increase in the price of energy and the impact avian flu has had on food prices,” added Radwan.
 
Galal pointed out another factor for Egypt’s low competitiveness, stating that “policy predictability is important for investors because if they are unsure of stability in the long run they will be discouraged from investing. Uncertainty about the political transition and slow democratization are not helping Egypt much.”

According to Radwan, the government has been doing two things: “Trying to achieve high economic growth following an expansionary rather than deflationary policy, and reducing taxes on income, registration fees for real estate transactions and, later this year, sales tax. By reducing tax rates, the government can increase revenue and will be able to spend more.”

The most important issues the government needs to address according to Radwan are human resource development, employment, labor market development and training in technology.

According to Eng. Salah Diab, chief executive officer of Pico Company, “there has been a significant improvement in the business environment. The government is more or less handling things in a business-like manner and has a better understanding of the possible roles the private sector can have.”

Diab stresses that “the main problem hindering further privatization and encouraging transparency is the culture and mentality within Egyptian society that is leftist and totally against capitalism.”

“This is a result of years of the government preaching socialism and it is very hard to change. Nobody has educated society about the advantages of capitalism. It is like always convincing people to go left, then saying left is bad and to go right,” explained Diab.

“One example of this is that state-ownership has always been used as the best solution when it comes to newspapers and banks. This is why the nationalization of Bank du Caire has caused such uproar in the People’s Assembly as the masses have not been prepared for it. The negative attitude towards privatization discourages the government from being more transparent,” elaborated Diab.

“To remedy this mentality and educate people about the benefits of capitalism, the government must preach through TV and newspapers. A lot of effort was made to put the old software in place. Now it is more difficult to change, because people are already set in their ways,” said Diab.

Regarding deregulation, Diab explained that “even though this would improve the business environment, people need to be prepared for it. Imposing a different business environment will cause havoc and mutiny.”

Beyond the need to change the culture, Galal asserts that improving the business environment will require advances on several fronts.

“On the macroeconomic front, attention needs to be given to reducing the budget deficit and curbing inflation. In parallel, the government needs to improve conflict resolution mechanisms and exit policies and carry out serious deregulation. Egypt could also benefit from becoming more democratic.”