Guest blog by Ghada Abuzaid, LEG’23
Cities and countries can create vibrant economies out of the blues, putting in place the right ingredients, driven by the right people and institutions, using the right tools. But it takes a steep climb. It takes action, learning, agility and patience, trust and legitimacy to pursue higher scale the right of change/reforms. There is no one blueprint for nations’ building. On the contrary, growth has a specific DNA: the mix of the know-how, the way it relates and mixes with one another other, the way it is coordinated and orchestrated is unique to that specific place at that specific time.
Growth is not only how better a country/region/city has fared in a number of economic indicators. It is beyond the length of paved roads and infrastructure put in place; average years of schooling; improved investment climate, available financial resources. Growth is manifested in the country’s growing repertoire of collective know-how to create and produce more and better compared to competitors. It is more accurately measured looking at a country’s progress in its economic complexity, given the positive relationship between countries’ economic complexity and income per capita (Source, CID).
Winning in the future happens when growth is sustained and prosperity is inclusive. It happens when growth is built based on developing a wide range of capabilities following a vision and a tailored approach based on the specificities, historical and political preoccupations, opportunities or weaknesses presented by the geographical location, available resources and skills and the lack thereof. Growth is the result of diversifying the economy and transforming the productive structures from ubiquitous to complex production that needs incrementally greater capabilities and better coordination leading a complex and unique system. (Diagrams referenced in Riocardo’s PPTs)
How the know-how can increase the country’s productive capacity when more of that individual know how is linked up with the right complementary mix of know how to grow the diversification and complexity of the country’s production and produce higher value and higher technology products creating more wealth to the country together. (Diagram produced to depict the concepts)
Taking the example of Singapore, 1965, Rwanda post the Genocide, and currently NEOM in KSA, growth can take the shape of sparking new economies. Initiating new sectors happens with rallying international investors around a new scheme and frontier where they will thrive. Singapore provided a western manufacturing technology oasis in the middle of Asia leveraging its culture and labour advantages. Rwanda is marketing itself as Africa’s economic heaven and open business destination for African and international investors. NEOM is the KSA at its best where successful Gulf states experiences are poised to be surpassed in every measure. In hindsight, these new economic destinies put in place the right visions, installed political, economic and financial stability, attracted cutting edge technology, prepared the government to function effectively to be agile and ready to identify and provide the needed public goods, opened local and external markets, laid modern infrastructure and developed the coordination capabilities to work with all stakeholders in implementing this scheme.
How can Egypt win in the future?
Egypt has to develop the capacity to identify the challenge effectively, the binding constraint, and devise corrective measures to address it, how the leadership and institutional coordination capabilities to drive and implement change.
First: develop the ability and realism to identify the growth challenge effectively.
The country is at a critical phase of its development. From zero international debt in 1970 to USD164 billion in 2023. The past 10 years have witnessed high investments in building modern infrastructure, new cities increasing urban habitats to 13% of its area from only 7%. Eradicating hepatitis C and 100 million health schemes. Increasing agriculture land by 15 million hectares. The country boasts a huge market of 105 million population (adding 9 million immigrants from neigbouring countries – Libya, Syria, Yemen and Sudan), one of the youngest in the world, relatively good education and capacity, historical high influx of FDIs, and a legacy and culture of agricultural and industrial private sector and family businesses. It has become easier to do business in Egypt with better competition laws, faster investment procedures, relatively water, electricity and other utilities.
Egypt has not gone through comprehensive structural transformation yet. Its growth pattern is static. Lack of foreign currency is placing considerable pressure on the government’s accounts to pay debts and services of 30 billion every year. The government is selling strategic assets as a source of foreign currency to stabilize the Pound. It has already generated USD 5.8 billion after privatizing 5 large companies out of a total of 34.
This is the time for Egypt to reverse the equation from expenditures to revenue generation especially through diversifying its product basket and exports. This is to improve productivity, increase prosperity, improve the living standards and promote equality. Its growth challenge is to unleash manufacturing sector’s potential, increase industrial diversification and complexity to create new quality jobs and sustainably generate foreign currency from exports. With an economic complexity index higher than its growth as in the diagram above, Egypt stands a good chance to grow faster using its current capabilities.
Yet, it is still relying on low complexity products such as mineral and agriculture products. In fact, it is a top exporter of fruits and crops to the EU, Middle East and Asia. There are efforts to leverage this into food processing to connect Egypt to the global value chains; for example, currently the food industry is the third largest exporting sector accounting for 14% of exports, 24.5% of GDP. Travel and tourism will continue to account for a high share of the country’s foreign currency and industrial output. The government’s 2030 vision targets a leap into higher productivity sectors starting with pharmaceuticals, to machinery, automotive and other frontier industries.
It has several trade agreements and access to markets within Africa, COMESA, SADC, Maghreb countries, EU and CIS region, and it has recently been invited to join the BRICS in January 2024. However, it suffers from high inflation, currency devaluation, low quality of regulations, which all demotivate local and foreign investors to invest heavily. There is no action or implementation plan for Egypt’s transformation. This is key to the sustainable economic growth of the country, its stability and that of the region.
Second. Ability to identify the binding constraint.
It has several advantages (in the scabble game metaphor – letters), strategic geographic location, sea, river, ports, Suez canal where 10% of the world’s trade passes, relatively cheap labor, relatively quality infrastructure – water, energy, roads, transport, reasonable education and higher educated youth, fertile land and large land, relative political stability, financial stability (Gulf states support and foreign deposits), why has it not grown at aspired levels, why has its growth of 3.7% been accompanied with higher rates of poverty? Manufacturing output is stuck, more than 1000 factories were closed in the past 10 years. Its growth was based on construction and real estate sectors – flushed a lot of resources more than $100 billion building new cities and a new administrative capital, more than 17K kilometers of paved roads, electric rail system, etc.
Unlike conducting a benchmarking exercise to copy how other countries solved their particular problems relative to their particular set of environments and available resources, a more yielding approach would be using problem driven iterative approach to identifying the binding constraint. Fishbone illustration below was used in Assignments 5 and 6.
Manufacturing activities are currently geographically concentrated in 10 governorates out of 20 in Egypt, with more than 80% in only 6 governorates. This could be the result of limited available industrial infrastructure and free zones across the country. This could be the result of limited public funding to build such infrastructure and uncertainty of investors’ appetite. Limited industrial infrastructure could be a binding constraint because despite the availability of finance, skills and investors’ appetite, industrial investment has been limited to a few free economic zones and industrial complexes, thus setting a limit to the Egyptian industrial development and diversification journey.
High cost of finance could be a cause of low new investments. Local banks charge high interest rates of 17-20% on local currency lending. Egyptian investors avoid borrowing in foreign currency due to high pound devaluation in the past 5 years. This constraint leads to lack of investment in new high technology sectors that need high liquidity, cheap funding and longer loan maturity periods. Special SME programs that provide non-financial support in addition financial support may help in developing critical pools of high technology manufacturers.
Lack of requisite know how and skills due to low supply of technical assistance and advisory services to SMEs and limited number of industrial schools and programs. The government is targeting to add 100 programs.
Low investments by local and foreign firms due to uncertain investment climate and low quality of regulations (takes time to put laws into force; and laws undergo several iterations of changes).
However, in Egypt, the most binding constraint seems to be in the area of low appropriability due to government failures emanating from financial, monetary and fiscal instability. The government has made attempts to restore financial and fiscal stability however, this has a high price i.e. paying off services of US$3billion/month on its external debts and restore its balance of payments and foreign reserves that have dwindled to approximately US$35billion today. This requires injection of foreign deposits that used to come from the Gulf states and recently stopped. Egypt’s exports have not increased beyond US$62billion and it is undergoing trade deficit due to higher imports of US$ 108 billion.
Entrepreneurship limited, incentives to do business, no competition, why export since there is a large domestic market. The export market is dominated by low complexity products – agriculture produce, oil, textiles, a small scale of pharmaceutical Fill & Finish products. It has ample opportunities in cement, fertilizers, and pharma higher technology products.
Third: Ability to identify corrective measures and innovative solutions.
It has more letters now, how could these letters be mixed with other letters to leapfrog into higher economic complexity?
The letters that are available need to be mixed in the right way attracting the right type of investors, collaborators to develop higher level products. Egypt’s export basket is relatively diversified. According to the Growth Lab, sectors with major contribution in 2022, were Travel and Tourism at 14.21%; Transport at 13.65%; Petroleum oils, refined at 7.10%; ICT at 6.14%; Petroleum gases at 5.53%; Petroleum oils, crude at 4.98%. Egypt has relatively high education, vocational training rates and it is investing heavily in technological and fourth industrial revolution applications. Agriculture, manufacturing and construction sectors are heavily mechanized. The country is at an opportune point to leverage its existing know-how to advance into a more diversified economy in new more productive sectors.
In the pharma sector, innovative financing from development finance institutions to develop Egypt as a pharmaceutical drug substance hub for Africa. Big pharma companies will need to find the incentives to produce in Egypt – economic and financial stability, infrastructure, ownership laws, fluent flow of cash into and outside Egypt, financial stability and stable pound.
In automotives, move up from being a home to assembly to develop capabilities in machinery, steel sheets and the manufacturing of electric cars.
The textiles industry has thrived since 1970s in al mahala and Gharbia regions. Cotton products are exported globally from an agglomeration of textile complexes in regions where the economy revolves around textile supply, training, and collaboration.
Suez Canal industrial free zone close by the port has attracted hundreds of international companies to produce for the global export markets. This is one of the main government incomes.
Fourth: Who leads it?
The vision should be promoted and protected by higher levels of leadership and implemented by public sector and private sector including line Ministries, export promotion ecosystem, regulatory agencies, education and training establishments through coordination and collaboration. Classical bureaucratic institutions are often not able to see the opportunities or identify systemic issues. They lack mainly the coordination capabilities that High bandwidth organizations may possess to orchestrate and coordinate implementation of solutions convening multidisciplinary teams, institutions, and support in sparking new sectors, new ideas through complementary thinking and extraordinary financial support.
Egypt lacks a dedicated agency that orchestrates and coordinators its structural transformation. The Supreme Investment Council, Supreme Export Council, or the Industrial Modernization Centre stand have requisite capabilities to become effective high bandwidth organizations by expanding their mandates to support higher productivity and diversification of the industrial sector in line with the government’s goals.
If we take the case of a new sector such as machinery, they will convene the relevant organizations to identify the issues (regulatory, legislative, incentives, logistics, infrastructure, skills, etc) collectively with the private sector and other stakeholders, analyze possible solution options, and recommend an implementation roadmap for the development of the machinery sector with clear mandates for each organization (what to contribute in terms of legislation, infrastructure, trained labor, export promotion of the sector, government guarantees, how it will be measured, accountability measures etc), determine the financing needs and ally with potential investors and financiers to provide the right financing tools.
Finally, collaborating institutions may need to adapt themselves to contribute effectively. For example, the African Development Bank may re-organize development institutions’ interventions to support capability building and higher sustainable growth in Egypt and other African countries as follows: (Diagram shows my ideas of how development operations should be aligned to leading growth)
Previous approach: Growth cannot be derived through accomplishing a long list of to dos and scattered projects in the various economic sectors in isolation. The nature of economic activity is far from being limited to any one sector at any moment in time. Results can only be tracked at the project output level.
Current approach: Development interventions targeting one-sector-focused project-based approach do not span the sector, but through driving change by financing one-sector focused projects in agriculture, health, power, or industrial development either public sector or private sector financed projects with the hope that such interventions will be aligned and complemented by other projects or development partners. State capability and capacity building are being implemented as standalone projects. Results in the form of project outputs and sector outcomes may be possible.
Going forward: The institution should develop the ability to coordinate its complementary capabilities to promote, design and achieve a sustainable development impact from game changing interventions on the continent. This is required to design and finance and support government and private sector to implement collaborative programmatic multi-sector solutions involving public private collaborations, financial and non-financial support to local, regional and international investors, institutional capacity building, convening and orchestrating problem solving and innovative finance and operations.
This is a blog series written by the alumni of the Leading Economic Growth Executive Education Program at the Harvard Kennedy School. 58 Participants successfully completed this 10-week online course in December 2023. These are their learning journey stories.