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THE ALCHEMIST
BY REHAB EL BAKRY
Rachid Mohamed Rachid’s hushed voice and calm demeanor contradict his hurried nature. He is, in every sense of the word, a man who wants to cut through the red tape, and get straight down to business. And with three decades of private sector experience, including 16 years as president of Unilever Mashreq, a joint venture between international consumer goods giant Unilever Group and Egypt’s Fine Foods, he knows what it takes. Egypt is playing catch up, he says. The country is burdened by a legacy of public sector domination that has kept it for decades in the economic slow lane. And if it doesn’t act fast, it risks being stuck there.
As minister of trade and industry, Rachid is having his turn in the driver’s seat – and he’s got his eye on the passing lane. Three years since his appointment, the reform-minded minister has silenced critics who argued that running a successful company was one thing, managing a cabinet post another. His predecessors – career politicians, finance gurus and economic theorists – had flaunted figures, but in the big scheme of things made little headway in developing Egypt’s industry or economic competitiveness. Rachid – as the point man for the Nazif government’s crack team of business-savvy cabinet ministers – has managed to do both.
But it hasn’t been easy. The envisioned reforms required seismic shifts, liberalizing and modernizing public sector-dominated industries, and opening Egypt’s heavily protected markets to fierce foreign competition. “From day one, it was clear that the essence of the whole economic reforms would be based on our ability to increase our international competitiveness to be able to compete in a way that would enable us to deliver the gross number of investments, exports and quality jobs that we would like to aspire to,” he recalls. “And in that respect, we needed to make sure that we were taking into consideration the global scene.”
To put things in context, he notes that, three years ago, Egypt’s total trade amounted to a mere $30 billion. This year, it topped $60 billion. “So in three years, we have doubled [our trade]. In my numbers and plans, we will double it again in the next three years, so we will reach $120 billion in total trade,” Rachid says.
Equally impressive is the growth of investment – both local and foreign – in the country’s industry, having grown from LE 6 billion in FY 2003-04 to LE 42 billion in FY 2006-07, exceeding even Rachid’s optimistic projections. “Today, out of all the FDI coming into Egypt, 50 percent of it is in industry. So we are confident that we are moving on the right track and there is a lot of confidence from the local and foreign investors here in Egypt.”
Economic reforms and new trade agreements have pushed Egypt’s global integration indicator (GII), a measure of a country’s total trade as a percentage of its GDP, up from 22 percent in 2004 to reach 50 percent today, passing the service-oriented economies of the UK, US and Russia en route.
But Rachid isn’t satisfied. Even with his foot firmly on the pedal, he’s always got one eye on the competition ahead of him, and the other watching the rear view mirror to see who’s catching up. Egypt is about to overtake Turkey, which has a GII of 55 percent, but still has a long way to reach Malaysia, the Asian economic tiger whose trade/GDP has reached a stunning 195 percent. Most other countries in the industrial growth phase average around 100 percent – where trade is equal to GDP. “The entire set of reforms that have been adopted over the past few years have been designed to bring Egyptian trade and industry in line with the global trends that have been unfolding for the past few years because we had fallen behind and had some [serious] catching up to do,” he says.
Size matters
Initially, in charting the course of Egypt’s trade and industrial policies, Rachid put deliberate focus on large industries. His logic, as he explains, was that by focusing energy on upgrading the production capacity and competitiveness of Egypt’s biggest factories, the nation’s industrial complex could be retrofitted. “If we are really serious about expanding our trade with increased imports and exports, we have to be capable of being at a competitive level. And that is where the size issue becomes important,” he says.
Critics were quick to point out that most respected international economists argue that small and medium enterprises (SMEs) are the engine for economic growth. Rachid himself agrees, citing Italy’s experience as an example. “Almost 93 percent of Italian industry [is built on] SMEs and [Italy is] among the top 10 economies of the world. So it’s not that you cannot have big economies with SMEs. But [the problem was with] our definition of SMEs.”
He notes that what Egyptians commonly define as SMEs are, by comparison in terms of revenue, the size of micro enterprises in most developed countries. “When you talk about small [enterprises] in the US, this is anything less than $100 million. In Egypt, this is not just big, this is giant,” he explains. “Small in Egypt is less than LE 500,000, which is micro [elsewhere].”
This does not mean that Egypt’s SMEs have no role in the country’s economic growth, Rachid stresses. Rather, the priority was on larger industries because their expansion has a bigger short-term impact on the economy, while at the same time creating opportunities to boost the performance of SMEs. “I’m not saying that we don’t need [SMEs]. We do. But it was important in the beginning of our reform program to balance this perception between small, medium and large because there was a bit of hostility against large. And there was a perception that only SMEs will make things work,” he says. “In reality you need all the different animals – you need the small, the medium and the large – and we also need the right calibration. And that is what happened.”
In the first phase of the reforms, lasting about 12-18 months, the goal was to create an environment where large companies were encouraged to lead the economy. As these large companies succeeded, they carried SMEs along with them – the smaller companies filling the role of sub-suppliers, service providers and feed industries for components needed by their larger counterparts.
And the Ministry of Trade & Industry (MTI) began to develop programs designed to achieve this goal, including the National Supplier Developer Program, launched in November 2005. The EU-funded program, carried out through the Industrial Modernization Center (IMC), allows the top 100 manufacturing companies working in Egypt to select up to 20 of their local suppliers for support. The nominated suppliers receive up to LE 1 million that can be allocated to anything from training staff to retaining international management consultants as agreed upon by the manufacturer that nominated them, which stands to benefit from the supplier’s development.
The industry of trade
Rachid is a master planner, always managing a half dozen projects at any given time. Often they seem at opposite ends of the spectrum: tariff negotiations with a visiting Kazakh trade delegation might follow a meeting with the heads of local industrial councils to discuss energy subsidies. Yet he’s never doubted the Nazif government’s decision in 2004 to merge the ministries of foreign trade and industry. “Because of my experience in industry, I honestly see a complete synergy [between trade and industry],” he says. “It is really difficult to make a decision on industry that will not influence trade and vice versa.”
Prior to the merger, Egypt’s economic policies suffered every time the decision of one ministry failed to adequately consider the capacity of the other. As such, a huge gap emerged between the country’s trade policies and international trade agreements on one side and its industrial capabilities on the other. “That was a fundamental weakness in the past,” Rachid says. “We had a Ministry of Foreign Trade that was engaged in trying to make the best deals it could for Egypt, but these [commitments] were not necessarily in line with the plans made by the Ministry of Industry. They were opening up [foreign] markets where we were not ready to compete, or opening our [local] markets to [international competition] that our domestic industries and markets were not ready to compete with. Today, this has changed.”
The merger, while tedious from an administrative point of view, created a unified economic policy that aligned trade strategy and industrial capacity. The first test came just months after Rachid’s appointment, when he landed his first major trade deal. The Qualifying Industrial Zones (QIZ) agreement, signed in December 2004, allows Egyptian goods containing the required content of Israeli inputs (initially 11.7 percent, now 10.5 percent) duty- and quota-free access to the US market. The agreement, which now encompasses 17 Egyptian QIZs in four geographic clusters with nearly 700 registered companies, has played an essential role in improving Egypt’s trade balance with US.
But with a free trade agreement (FTA) between the US and Egypt looking remote, Rachid has sought to diversify the country’s trade partners – though he often denies the connection between the two. In the past three years, he has maximized Egypt’s implementation of the EU-Egypt Association Agreement, signed in 2001 and put into effect in June 2004; activated the Greater Arab Free Trade Agreement (GAFTA), which abolished duties on trade between 17 Arab League member states; and signed FTAs with Turkey and the European Free Trade Association (EFTA). Rachid has also inked cooperation agreements aimed at greatly enhancing trade with China and Russia.
“All these [trade thrusts] might seem like lack of focus, but in essence they are opening new markets to boost exports and production, and create jobs,” he says. The numbers seem to support his assertion. Exports grew by 45 percent in FY 2006-07, reaching a record $12 billion, with non-oil exports taking the lead for the first time. “This is also the first time that we have ever had a 45 percent growth [rate], so [diversification is] working.”
And while some will argue that diversification of trade partners might cause Egyptian industry to spread itself too thin, Rachid disagrees. On the contrary, he points out that diversification makes Egypt’s trade and industry less vulnerable to the volatility affecting any one particular trading partner. “Just to give you an example, the significant drop of the US dollar in comparison to the euro and other major currencies would have hurt us badly if we had only been focused on the US-currency based markets.”
Moreover, diversification of production and trade partners is a defining characteristic of today’s global economy. “I don’t honestly think that we’re doing too much in terms of trade agreements and commitments,” he says. “I think that there’s a lot of benefit in this diversification. We have seen the shift more and more into Europe. So a trade agreement with Europe was exactly what we needed. The fact is that we are seeing now different levels of economic performance in different places. So yes, the US is growing, but China, India and others in Asia are growing faster and faster. The Arab and Gulf countries are experiencing the boom because of increased liquidity. So there are a lot of variations on the global scene, both short-term and long-term shifts.”
Consolidating roles
In the merger of portfolios that created what is now the MTI, a number of industrial bodies, including all 10 programs under the umbrella of the Industrial Modernization Center (IMC), were appended to the trade ministry, the idea being that boosting trade and industry went hand in hand. “Let’s remember that we are in a transformation phase. The challenge is that we had an economy that was centrally managed for decades [evolving into a] market-oriented economy. And for that reason, we are going through a transformation within the structure and the role of the ministry itself,” Rachid explains.
Over the past three years, the ministry has also created a number of specialized agencies, including the Industrial Development Authority (IDA), Egyptian Competition Authority (ECA) and Consumer Protection Authority (CPA), to boost competitiveness of the Egyptian market and improve the quality of the goods produced. The underlying goal is to shift industries away from the production and command planning model, and towards a capitalist and consumer-oriented one.
“We have to push the management of trade and industry [to think from] the perspective of the consumer. It’s only the consumer who will make trade and industry more profitable and more competitive. We have to learn that the consumer – local or foreign – always comes first,” Rachid says. “If I could change the mindset of all the stakeholders – the producers, the traders, the exporters, the legislators and the media – and get them to understand that the consumer comes first, that’s when we’re really going to see a jump in both our trade and industry.”
Meanwhile, Rachid sees a strong synergy between foreign trade, domestic trade and industry. The linkage made the government’s decision to put domestic and foreign trade under a single command pretty much inevitable. The appendage of the domestic trade portfolio, previously part of the Ministry of Supply & Domestic Trade, to Rachid’s ministry in early 2006 aimed at upgrading the local retail market to accommodate the country’s rising industrial output. “For our factories to be able to compete and grow, we need proper retailing industries and outlets. The better outlets you have, the better your domestic trade; you [would then] be able to increase the productivity of your factories,” he says.
While the ministry’s efforts on the domestic trade front have not made big headlines, this has a lot to do with the nature of the work being done. Initiatives are still in the planning stage, Rachid admits. “The challenge we face is huge and nobody is underestimating it... We’re talking about a complete overhaul of our wholesale business across Egypt. We want to make logistics centers for trade in different areas and to ensure that the infrastructure [is in place for] communication between the factory and the markets.”
Local goods stand to benefit from the improvement in the quality of export goods, as factories divert a portion of their production to the domestic market. Better quality products means less reliance on imports and has made Egyptian factories more attractive to investors. Rachid’s confidence in industry’s potential is clear in his push to phase out all energy subsidies for industry according to a graduated schedule. Industrial energy subsidies, conceived as an investor incentive, proved a burden to the state budget, costing taxpayers LE 4 billion last year. “This decision [to remove the subsidies] reflects the [level] of confidence we have in the performance of the Egyptian economy and the country’s position as an investment destination,” he says. “We adopted this decision with transparency and told investors exactly how this was going to take place.”
This type of clear and direct communication with industry is new to the Egyptian market, and Rachid believes it will bring Egyptian industrial and trade policies in line with international standards of policy transparency and partnership. While industry is already playing a constructive role in setting policy, this does not mean the government will relinquish its regulatory role. The MTI is prepared to step in whenever needed, Rachid stresses. “We do our best not to interfere in the market. Our role is to regulate. However, this means that if the actions taking place in the market are monopolistic or are designed to drown the market, then we step in. This is what we did with cement and steel.”
Last February, Rachid imposed an export duty on cement and steel after rising domestic prices, responding to increases in overseas markets, showed no signs of cooling down. He says in doing so the government acted as a regulator to correct distortions in the market that could have led to a sudden collapse of Egypt’s building sector. “It was so distorted that... everyone was just exporting and ignoring the local market... Nobody wanted to compete [locally] and it was my responsibility to make sure that this happened. Obviously, it was not the kind of decision that I would have liked to have made, nor is it the kind of decision that local players would have liked me to make.”
Ultimately, however, Rachid believes the reforms of the past few years are creating a better business environment. While it may take years to wean trade and industry off the crutch of subsidized energy and age-old protectionist measures, he is confident the difficult decisions being made now will make Egypt more competitive in the long run. And the initial results show he may be right.
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