€¦ · technical support and co-sponsorship were provided by technical as-sistance for policy...

Technical Support and co-sponsorship were provided by Technical As-sistance for Policy Reform II (TAPRII) – a project of the U.S. Agency for International Development (USAID), under the terms of contract no. 263-C-00-05-000063-00. This Report does not necessarily reflect the views of the U. S. Agency for International Development.

The Report has been prepared in advance of the World Economic Forum on the Middle East, convened in Sharm El sheikh in May 2008, with the intent of stimulating discussion among policy-makers and leaders about the issues it raises and the policies it recommends. The support of the World Economic Forum in establishing the ENCC is especially acknowledged.

ACkNoWlEDgMENTS

CoNTACT INFoRMATIoN

P.o. Box 2834, El Horrreya, Helipolis, Cairo, Egypt

Tel: +202 26564125 Fax: +202 26564123

Web Site: [email protected]. eg E-mail: www.encc.org.eg

Contact Person: Mr. Sobhy El Saadany

MISSIoN STATEMENT

The mission of the Egyptian National Competitiveness council is to spur efforts to improve the competitiveness of Egypt and to incite the public opinion and the business sector to give priority to such efforts in all domains.

EgYPTIAN NATIoNAl CoMPETITIVENESS CoUNCIl (ENCC)At the Egyptian National Competitiveness Council (ENCC), leaders from the business sector, academia, civil society and government collaborate to increase awareness of competitiveness and its implications for the economy and society.

ENCC BoARD MEMBERS

Prof. Hossam Badrawi M.D. Cairo University

Member of The Supreme Council For Human Rights In Egypt

Honorary Chair

Helmy Abouleish Managing Director, Sekem Chair

Seifallah Fahmy Chair, Al Mona general Secretary

Aladdin Saba Chair, Beltone Treasurer

Shafik Gabar Chair, Artoc Member

Alaa Hashim Chief Operating Officer, Mac Member

Taher Helmy Managing Partner of Helmy,Hamza And Partners(Baker And Mckenzie)

Member

Iman El kaffas Executive Director, Scholarships & global Development – The In-stitute of International Education

Member

Nehad Ragab Chair, Siac Member

ENCC TECHNICAl CoMMITTEE

Samir Radwan Ex – International labour organization

lead Editor - Director of the Report

Amina ghanem Senior Advisor to the Minister of Finance

Member

Nihal El Megharbel Principal Economist, The Egyptian Center for Economic Studies (ECES)

Member

Prof.Dr.Hossam Badrawi M.D Cairo University - Member of Supreme Council for Human Rights in Egypt

Mr.Helmy Abouleish Managing Director – Sekem group

Dr.Ahmed galal Managing Director - ERF

Mr. Alaa Hashem Chief Operating Officer - MAC

Mr.Aladdin Saba Chair - Beltone

Mrs. Amina ghanem Advisor to the Minister of Finance

Mr.Hassan Abdallah Vice Chair & Managing Director Arab African Bank

Mr.Hisham Ezz El Arab Chair & Managing Director Commercial International Bank

Dr.Iman El kaffass Director of outreach MEA Region

Dr.Mahmoud khattab Vice Chair - olympic group

Mr. Magdy kamel Executive Partner - Deloitte

Mr. Moataz Al Alfi Chair - Americana group

Ms. Mona Zulfikar Managing Partner - Shalany Low Office

Dr.Mounir Abdel Nour Chair - Vitrac

Mr.Mustafa Abdel Wadood Chief Executive Office - EFG-Hermes UAE

Eng.Nehad Ragab Chair - SIAC

Dr. Nihal El Megharbel Principal Economist, The Egyptian Center for Economic Studies (ECES).

Mr.Saeed El Alfi Chair Economic Committee

Dr.Samir Radwan Ex – International labour organization

Mr.Seif Fahmy Chair - Al Mona

Mr.Shafik Gabr Chair - Artoc group

Dr.Sherif Wally Member of El Shoura Council & Executive Manager Future generation Association

Dr.Taher Helmy Managing Partner of Helmy, Hamza & Partners (Baker & Mckenzie)

Mr. Tarek Nour Chair - Tarek Nour Communication

Mr.Yasser Zaki Hashem Managing Partner - Zaki Hashem Office Attorneys at Law

ENCC MEMBERS

ENCC TRAVEl AND ToURISM CoUNCIl

STEERINg CoMMITTEE

Ahmed Sabbour Managing Director Alahly Real Estate Development Co.

Ali Sedky President Touring Club of Egypt

Amr Sedki Chairman Creative Tour

geoffrey kent CEo Abercrombie and kent

Hamed El Chiaty Chairman Travco Travel Company of Egypt

Hesham Shoukry CEo RooYA group

Husein Badran Advisor Egyptian Tourism Federation

Manfredi lefevbre CEo Silverseas Cruises

Nader El Biblawi President gezira Travel

Robert Webb, legal Council British Airways

Thomas Pritzker, CEo global Hyatt

Ulrich Huth general Manager Cairo Marriott Hotel & omar khayyam Casino

DIRECToR AND lEAD EDIToR Samir Radwan, Ex – International labour organization

TECHNICAl ADVISoRS kevin X. Murphy, CEo, J.E. Austin Associates Jennifer lynch, Project Manager J.E. Austin Associates

AUTHoRS Executive Summary Samir Radwan

Chapter 1 Nihal El-Megharbel, Principal Economist, ECES

Chapter 2 Amina ghanem, Senior Advisor to the Minister of Finance

Chapter 3 Samir Makary, Professor of Economics, American University in Cairo and Economic Consultant

Adla Ragab, Associate Professor of Economics, Faculty of Economics and Political Science, Cairo University

Chapter 4 Helmy Abouleish, Managing Director, Sekem

kevin X. Murphy, CEo, J.E. Austin Associates

Chapter 5 Samir Radwan

kevin X. Murphy, CEo, J.E. Austin Associates

ENCC STAFFHeba Zayed Deputy Executive Director - Research

Dalia Tadros Manager - Business Association Development

STYlISTIC EDIToRNoha Mohamed

DESIgNER Mohammad Maher Mansour

PRINTER IPH–International Printing House

CoNTRIBUTIoNS

TABlE F CoNTENTS

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

CHAPTER 1 EgYPT’S CoMPETITIVENESS INDICAToRS . . . . . . . . . . . . . . . . . . . . . . . 35

. . . .1.1 Egypt’s competitiveness scores have been fairly consistent . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

. . . .1.2 Egypt’s decline is not explained by the addition of new countries or

. . . . changes in survey methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

. . . .1.3 Egypt dropped in the basic requirements’ and efficiency enhancers’

. . . . rankings while it improved regarding innovation and sophistication factors . . . . . . . . . 38

. . . . A. Basic Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

. . . . Pillar 1: Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

. . . . Pillar 2: Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

. . . . Pillar 3: Macroeconomic Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

. . . . Pillar 4: Health and Primary Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

. . . . B. Efficiency Enhancers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

. . . . Pillar 5: Higher Education and Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

. . . . Pillar 6: Goods Market Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

. . . . Pillar 7: Labor Market Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

. . . . Pillar 8: Financial Market Sophistication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

. . . . Pillar 9: Technological Readiness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

ACRoNYMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

MINISTERIAl TESTIMoNIAlS

The Minister of Finance Dr. Youssef Boutros-ghali . . . . . . . . . . . . . . . . . . . . . . . . .21

The Minister of Trade and Industry Eng. Rachid Mohamed Rachid . . . . . . . . . . . . . . . . . . . . . .22

The Minister of Investment Dr. Mahmoud Mohieldin . . . . . . . . . . . . . . . . . . . . . . . . . .23

The Minister of State for Administrative Development, Dr. Ahmed Darwish . . . . . . . . . . . . . . . . . .25

The Minister of Tourism Mr. Zoheir garranah . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

PREFACE by the Honorary Chair of the Egyptian National Competitivenss Council, Dr. Hossam Badrawi . . . . . . . . .27

PREFACE by the Chair of the Egyptian National Competitivenss Council, Mr. Helmy Abouleish . . . . . . . . .28

. . . . Pillar 10: Market Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

. . . . C. Innovation And Sophistication Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

. . . . Pillar 11: Business Sophistication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

. . . . Pillar 12: Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

. . . .1.4 Egypt’s rank in the factors determining Doing Businesss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

. . . .1.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

CHAPTER 2 MACRoECoNoMIC PERIlS To CoMPETITIVENESS . . . . . . . . . . . . . . . 53

. . . .2.1 Bold Reforms Have led To Rapid and Robust growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

. . . . 2.1.1 gDP growth rose to 7.1% in the year ending June 2007,

. . . . led by strong domestic demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

. . . . 2.1.2 Two main features of the growth are a surge in

. . . . investment spending and private sector participation . . . . . . . . . . . . . . . . . . . . . . . . . . 55

. . . . 2.1.3 The external sector: exports still growing and debt has been reduced . . . . . . . . . . . . 57

. . . . 2.1.4 The Stock Exchange experienced a boom year posting 51% growth in 2007 . . . . . . . . 58

. . . .2.2 High Inflation, Continued Budget Deficits and Unbalanced Growth are

. . . . The Major Macroeconomic Challenges To Sustainable growth . . . . . . . . . . . . . . . . . . . . . . . . 59

. . . . 2.2.1 Inflation has recently risen to 14% and poses a serious risk to

. . . . growth and poverty reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

. . . . 2.2.2 The budget deficit has improved but remains the highest in

. . . . the region at 7.5 percent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

. . . . 2.2.3 Unbalanced growth poses a major risk to

. . . . competitiveness and economic stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

. . . .2.3 Sound Macroeconomic Management: Social Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

. . . .2.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

CHAPTER 3 THE ToURISM SECToR IN EgYPT: REAlIZINg THE gREAT PoTENTIAl . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

. . . .3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

A – CURRENT STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

. . . .3.2 Competitiveness Rankings, 2007-2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

. . . .3.3 Egypt’s Performance: An overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

. . . .3.4 Egypt’s Performance in Comparison to other Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

TABlE F CoNTENTS

TABlE F CoNTENTS

B – FUTURE PoTENTAl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

. . . .3.5 The Value Proposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

. . . . 3.5.1 Demand Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

. . . . 3.5.2 Basic Investment Requirements for

. . . . Sustainable Development of the Tourism Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

. . . .3.6 Reform Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

. . . . 3.6.1 key Preconditions for Sustainable Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

. . . . 3.6.2 Proposed Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

. . . .3.7 Economic Impact of the Proposed Tourism Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

. . . . 3.7.1 Economic Contribution of the Tourism Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

. . . . 3.7.2 Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

. . . . 3.7.3 Results and Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

CHAPTER 4 EMERgINg gloBAl CHAllENgES To SUSTAINABlE CoMPETITIVENESS: gloBAl WARMINg, ENERgY AND WATER . . . . . 95

. . . .4.1 Climate Change and Its Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

. . . .4.2 Depletion of Non-Renewable Energy Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

. . . .4.3 Decline of Fresh Water Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

. . . .4.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

CHAPTER 5 ToWARDS A CoMPREHENSIVE NATIoNAl CoMPETITIVENESS STRATEgY FoR EgYPT . . . . . . . . . . . . . . . . . . . . . 109

. . . .5.1 Broad lines of a National Competitiveness Strategy (NCS) for Egypt . . . . . . . . . . . . . . . . . 110

. . . .5.2 The Framework for a National Competitiveness Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

. . . .5.3 Implementing Competitiveness Through Institutions: The Role of the ENCC . . . . . . . . . . . . 120

. . . .5.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

ANNEXES

. . . .Annex I.1 other Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

. . . .Annex 3.1 Detailed Ranking of Egypt’s Competitiveness in T&T . . . . . . . . . . . . . . . . . . . . . . . . . 86

. . . . A.3.1.1 Policy Rules and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

. . . . A.3.1.2 Environmental Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

. . . . A.3.1.3 Safety and Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

TABlE F CoNTENTS

. . . . A.3.1.4 Health and Hygiene . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

. . . . A.3.1.5 Prioritization of Travel and Tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

. . . . A.3.1.6 Air Transport Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

. . . . A.3.1.7 ground Transport Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

. . . . A.3.1.8 Tourism Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

. . . . A.3.1.9 ICT Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

. . . . A.3.1.10 Price Competitiveness in the T&T Industry . . . . . . . . . . . . . . . . . . . . . . . . . 89

. . . . A.3.1.11 Human Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

. . . . A.3.1.12 Affinity for T&T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

. . . . A.3.1.13 Natural Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

. . . . A.3.1.14 Cultural Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

. . . .Annex 3.2 Measuring the Performance and Efficiency of the Sector . . . . . . . . . . . . . . . . . . . . . . 91

. . . .Annex 3.3 Measuring the Impact on the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

lIST oF FIgURES Figure 1.1: Egypt’s Ranks on the 12 Pillars of the gCI 2008 ......................................................................... 37 Figure 1.2: Egypt’s Ranking on the Components of the Institutions Pillar 2006-2007 & 2007-2008 ............................................................................. 38 Figure 1.3: Egypt’s Ranking on the Components of the Infrastucture Pillar 2006-2007 & 2007-2008 ................................................................................. 39 Figure 1.4: Egypt’s Ranking on the Components of the Macroeconomic Stability Pillar 2006-2007 and 2007-2008 .................................................. 39 Figure 1.5: Egypt’s Ranking on the Components of the Health and Primary Education Pillar 2006-2007 and 2007-2008 ...................................... 40 Figure 1.6: Egypt’s Ranking on the Components of the Higher Education and Training Pillar 2006-2007 and 2007-2008 ............................................... 41 Figure 1.7: Egypt’s Ranking on the Components of the Goods Market Efficiency Pillar 2006-2007 and 2007-2008 ................................................ 41 Figure 1.8 a: Egypt’s Ranking on the Components of the Labor Market Efficiency Pillar 2006-2007 and 2007-2008 ................................................... 42 Figure 1.8 b: Egypt’s Ranking on the Components of the Labor Market Efficiency Pillar 2006-2007 and 2007-2008 .................................................. 42 Figure 1.9: Egypt’s Ranking on the Financial Market Sophistication Pillar 2006-2007 and 2007-2008 ........................................................................... 42 Figure 1.10: Egypt’s Score according to the Components of the Economic Freedom Index ............................................................................................................ 43 Figure 1.11: Egypt’s Ranking on the Technological Readiness Pillar 2006-2007 and 2007-2008 ...................................................................................................... 43

Figure 1.12: Egypt’s Ranking on the Market Size Pillar 2006-2007 and 2007-2008 ...................................... 44 Figure 1.13: Egypt’s Ranking on the Business Sophistication Pillar 2006-2007 and 2007-2008 ........................................................................... 45 Figure 1.14: Egypt’s Ranking on the Innovation Pillar 2006-2007 and 2007-2008 ................................................................................................................ 45 Figure 1.15: The Most Problematic Factors for Doing Business in Egypt (% of respondents identifying each factor) ......................................................................... 46

Figure 2.1: Real gDP growth Rates ................................................................................................................... 54 Figure 2.2: The Contribution of Consumption, Investment and the External Demand to Real gDP ................................................................................................. 54 Figure 2.3: Annual FDI Inflows in Petroleum and Non-Petroleum Sectors ................................................ 55 Figure 2.4: Annual growth Rates for Export Proceeds and Import Payments ......................................... 57 Figure 2.5: Annual External Debt as Percent of gDP ..................................................................................... 58 Figure 2.6: Net International Reserves ............................................................................................................... 58 Figure 2.7: Annual CASE-30 Performance ......................................................................................................... 59 Figure 2.8: Overall fiscal balance, excl. grants .................................................................................................... 61 Figure 2.9: Private Contribution to Real gDP growth in 2006/2007 ......................................................... 63

Figure 3.1: Evolution of the Tourism Sector ................................................................................................ 72 Figure 3.2: Share of the World Market in 2006 .......................................................................................... 72 Figure 3.3: Main sub-indices in 2007-2008 .................................................................................................. 73 Figure 3.4: T&T Regulatory Framework ...................................................................................................... 74 Figure 3.5: T&T Business Environment& Infrastructure ........................................................................... 74 Figure 3.6: T&T Human, Cultural and Natural Resources ....................................................................... 74 Figure 3.7a: Tourist evaluation for the best provided services levels ....................................................... 75 Figure 3.7b: Tourist evaluation for the worst provided services levels .................................................... 75 Figure 3.8: Ranking of Selected MENA Countries in 2007-2008 ............................................................ 75 Figure 3.9: Main subindexes in Peers group 2008 .................................................................................... 77

Figure 5.1: Building Egypt’s Competitiveness ............................................................................................ 112

Figure A.3.1.1: Main Variables in Policy Rules and Regulations ................................................................... 86 Figure A.3.1.2: Main Variables in Environmental Sustainability ......................................................................... 86 Figure A.3.1.3: Safety and Security ....................................................................................................................... 87 Figure A.3.1.4: Health and Hygiene ...................................................................................................................... 87 Figure A.3.1.5: Prioritization of Travel & Tourism .............................................................................................. 87 Figure A.3.1.6: Air Transport Infrastructure ....................................................................................................... 88 Figure A.3.1.7: ground Transport Infrastructure .............................................................................................. 88 Figure A.3.1.8: Tourism Infrastructure ................................................................................................................. 88 Figure A.3.1.9: ICT Infrastructure ........................................................................................................................ 88 Figure A.3.1.10: Price Competitiveness in the T&T Industry ........................................................................... 89 Figure A.3.1.11: Human Resources ........................................................................................................................ 89 Figure A.3.1.12: Affinity for Travel and Tourism ................................................................................................... 89 Figure A.3.1.13: Natural Resources ........................................................................................................................ 90 Figure A.3.1.14: Cultural Resources ....................................................................................................................... 90

TABlE F CoNTENTS

lIST oF TABlES

Table 1.1: Egypt’s Historical Performance on the global Competitiveness Index ............................ 36 Table 1.2: Egypt’s Historical Performance on the global Competitiveness Index Compared to other Arab Countries ......................................................................................... 36 Table 1.3: Stages of development: Weights of the main pillars ............................................................... 37 Table 1.4: Egypt’s rank in the factors determining Doing Business ....................................................... 46 Table 1.5: Business Constraints Reported by Firms over the last Ten Years ..................................... 47

Table 2.1: gDP growth Rate in Egypt and other Middle Eastern Countries ..................................... 55 Table 2.2: Private and Public Sector Contributions to Real gDP growth in 2004/2005 to 2006/2007 ......................................................................................................... 57 Table 2.3: Annual Average Inflation Rate in Egypt ..................................................................................... 59 Table 2.4: Fuel Prices, June 2006 ................................................................................................................... 61 Table 2.5: Rigidity and Flexibility in the Budget ......................................................................................... 62 Table 2.6: Functional Composition of Public Expenditures .................................................................... 62 Table 2.7: Percentage of Poor and Near Poor by Region 1995-2005 .................................................. 63

Table 3.1: Performance of Selected MENA Countries in TTC 2008 .................................................... 76 Table 3.2: Projected Foreign Tourist Arrivals and Tourist Nights 2007-2020 ...................................... 78 Table 3.3: Projected Tourist Demand 2008-2020 ...................................................................................... 79 Table 3.4: Prevailing Norms by Star level .................................................................................................. 79 Table 3.5: Required Hotel Rooms by Star level ....................................................................................... 79 Table 3.6: Projected Additional Rooms by Star level 2008-2020 ......................................................... 79 Table 3.7: Cost Per Room by Star level ..................................................................................................... 80 Table 3.8: Cost of External Infrastructure and of other Related Activities Per Room ................... 80 Table 3.9: Investment Requirements By star level ................................................................................... 80 Table 3.10: Investment Requirements ............................................................................................................ 81 Table 3.11: Investment Cost ............................................................................................................................. 81 Table 3.12: Proposed Tourist Activities by location ................................................................................... 82

Table A.1.1.1: Performance of Egypt and the Comparators on the Most Problematic Factors of Doing Business ................................................................. 49 Table A.1.1.2: 2007 E-Readiness Rankings ......................................................................................................... 50 Table A.1.1.3: Performance of Arab Countries on the 2008 gCI and on Different Pillars .................... 51

Table A.3.2.1: Egypt/World Coefficient (2002-2006) ...................................................................................... 91 Table A.3.2.2: Economic Indicators at the National level 2008-2020 ......................................................... 91 Table A.3.2.3: Economic Indicators 2008-2020 ................................................................................................ 92 Table A.3.3.1: National Value Added and Present Value of National Value Added .................................................................................................................... 93 Table A.3.3.2: Annual Direct Employment and Indirect Employment ......................................................... 93 Table A.3.3.3: Annual Net Foreign Exchange Earning and Present Value of Net Foreign Exchange Earning .................................................................................................... 93

TABlE F CoNTENTS

lIST oF BoXES

Box 1.1: The Heritage Foundation Index of Economic Freedom ............................................................. 43

Box 3.1: Evaluation of Tourist Services in Egypt ........................................................................................... 75

Box 4.1: How do we use fresh water .......................................................................................................... 105

Box 5.1: ERRADA = Better Business Regulation ....................................................................................... 117 Box 5.2: Example of Industry Competitiveness Initiatives: The Travel and Tourism Council ............ 119

lIST oF EXHIBITS

Exhibit 4.1: Carbon emissions are going up dramatically ................................................................................. 96 Exhibit 4.2: Earth temperature is rising and will rise further .......................................................................... 97 Exhibit 4.3: global warming is reducing glaciers ................................................................................................ 98 Exhibit 4.4: global warming increases the sea level but estimates vary by how much? ........................... 99 Exhibit 4.5: Threats to the Nile Delta with 0.5 meter rise in sea level ...................................................... 100 Exhibit 4.6: Threats to the Nile Delta with 1.0 meter rise in sea level ...................................................... 100 Exhibit 4.7: Impact on Egypt’s gDP .................................................................................................................... 101 Exhibit 4.8: Is oil Production Ready to Peak? Experts provide varied estimates on the peak year for energy production ...................................................................................... 103 Exhibit 4.9: Wind Energy Resources Assessment ............................................................................................ 104 Exhibit 4.10: Solar Energy Resource Assessment ............................................................................................... 104 Exhibit 4.11: Trends that will affect fresh water use ......................................................................................... 106 Exhibit 4.12: Egypt Needs Fresh Water: Per capita use of water for selected countries ......................... 107

TABlE F CoNTENTS

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ACRoNYMS

AfDB African Development BankATMs Automated Teller MachinesBAC Business Advisory CommitteeBB Business BarometerBCI Business Competitiveness IndexBDS Business Development ServicesBRC Business Resource CenterBTA Bilateral Trade AgreementCBI Caribbean Basin InitiativeCAPMAS Central Agency for Public Mobilization and StatisticsCASE Cairo and Alexandria Stock ExchangesCIDA Canadian International Development AgencyCoMESA Common Market for Eastern and Southern AfricaCPI Corruption Perception IndexCSR Corporate Social ResponsibilityDBR Doing Business ReportECES Egyptian Center for Economic StudiesECR Egyptian Competitiveness ReportElMS Egyptian labor Market SurveyENCC Egyptian National Competitiveness CouncilEoS Executive opinion SurveyERF Economic Research ForumERRADA Egyptian Regulatory Reform and Development ActivityETA Egyptian Tourism AuthorityEU European UnionFDI Foreign Direct InvestmentFTSE Financial Times and the london Stock ExchangeFY Fiscal Year (Egypt’s fiscal year starts on July 1 and ends on June 30 of the

following year).gAFI general Authority for Investment & Free ZonesgAFTA greater Arab Free Trade AreagCI global Competitiveness IndexgCR global Competitiveness ReportgDP gross Domestic ProductHIV/Aids Human Immuno Virus / Acquired Immunity Deficiency SyndromeICT Information and Communications TechnologyIDSC Information and Decision Support CenterIFC International Finance CorporationIIF Institute for International FinanceIlo International labor organizationIMF International Monetary FundIMP Industrial Modernization ProgramIPCC Intergovernmental Panel on Climate ChangeIPo Initial Public offering

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ACRoNYMS

IPRs Intellectual Property RightsIT Information TechnologylE livre Egyptienne (Egyptian Pound)lPg Liquefied Petroleum GasMENA Middle East North AfricaMgPC Ministerial group of the Production CommitteeMoE Ministry of EnvironmentMoF Ministry of FinanceMoMM Ministry of Manpower and MigrationMoT Ministry of TourismMSME Micro, Small and Medium Enterprises NAFTA North American Free Trade AgreementNAP National Action PlanNCS National Competitiveness StrategyNgo Non governmental organizationNIB National Investment BankNIRs Net International ReservesNREA National Renewable Energy AuthorityoECD organization for Economic Cooperation and DevelopmentoSS one Stop ShopPER Price Earnings RatioPM Prime MinisterPPP Public-Private PartnershipPR Public RelationsQIZs Qualified Industrial ZonesR&D Research & DevelopmentS & P’s Standard and Poor’sSBIR Small Business Innovation ResearchSFD Social Fund for DevelopmentSME Small and Medium EnterpriseSMEPol Small and Medium Enterprise Policies SSBC Smart Service Business CenterTFP Total Factor ProductivityTRIPS Trade Related Intellectual Property RightsT&T Travel and TourismTTCI Travel and Tourism Competitiveness IndexUAE United Arab EmiratesUNDP United Nations Development ProgrammeUNESCo United Nations Educational, Scientific and Cultural OrganizationUNWTo United Nations World Trade organizationWEF World Economic ForumWEo World Economic outlookWTo World Trade organizationYEN Youth Employment Network

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MINISTERIAL TESTIMONIALS

The Minister of Finance

DR. YoUSSEF BoUTRoS-gHAlI

I always appreciate the opportunity to comment on the Annual Report of the Egyptian National Competitiveness Council (ENCC). The Egyp-tian Competitiveness Report has come a long way since 2004.

In its early reports, ENCC contributed to the evaluation of govern-ment policies and strategies, and to the enrichment of dialogue between

the government, the private sector and other stakeholders. It also made an attempt at building consensus around the long term challenges facing Egypt’s competitiveness. Subsequent issues became bolder as they re-thought policies, proposed initiatives and pushed the government to adopt them. As leaders and policy makers, it is our responsibility to align our efforts with our partners around shared and strategic goals that address competitiveness, growth and employment issues. This story is developed through various chapters of this report.

The report is not a comprehensive study of Egypt’s competitiveness, but it does provide an over-view of a number of broad priorities and risks ahead. A whole chapter (Chapter Two) is devoted to the discussion of the risks associated with macroeconomic growth imbalances, employment and skills-gap issues, imported inflation and the high cost of pro-poor policies, thus providing a re-flection on the issue of the social aspects of reform. Another chapter (Chapter Three) is devoted to an examination of the potential of the tourism sector and how it could contribute to Egypt’s growth and competitiveness.

The reforms described in the report show how the lives of all Egyptians have been transformed tremendously over the past decades. Egypt’s economy has blossomed into a diverse and dynamic economy. We have achieved this by garnering a collective will to pursue tough reforms.

looking down the road, it is our job as leaders and policymakers to put Egypt at the forefront of world competitiveness. Many reforms have been completed by the government; improving the competitiveness of the Egyptian economy has now taken on a critical role for a sustainable growth that creates employment opportunities. Strategies that address issues of competitiveness must move forward in a comprehensive and coherent way that harnesses synergies. This would be key to maximizing the two objectives of long term growth and job creation.

one of the many learning lessons in the report is that our educational system must be geared towards developing a strong and dynamic human capital that matches the pace of the economic expansion. To reap the benefits of higher growth, all Egyptians must be able first to participate in the journey towards competitiveness.

Youssef Boutros-ghaliMinister of Finance

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The Minister of Trade and Industry

ENg. RACHID MoHAMED RACHID

Welcoming the fifth issue of the Egyptian Competitiveness report, it is satisfying to note that the year 2007 was a year of continued success and international recognition for the Egyptian economy. As predicted by the third report, the industrial sector has emerged as the engine of growth. our commitment to the achievement of the goals that we had set for ourselves led to the unprecedented growth of the industrial sector measured by both output and exports. Aspirations have become reality, but the road ahead is not without challenges.

Economic reform has been paying off at the macro level with the rate of gDP growth reaching 7.1% in 2007, and unemployment continued to fall (from 10.5% in 2004 to 9% at present). A November 2007 IMF report recognized Egypt’s “sustained and bold reforms [and] prudent macroeconomic management”.

In fulfilling the Presidential Election Program, the contribution of the manufacturing sector con-tinued to increase. The “1000-factory” program” has scored a total of 616 factories that started production, in addition to 781 existing factories expanding their capacity, totaling 1,397 factories varying between large, medium and small-sized, with total investments of l.E 27.11 billion, and creating 142.844 thousand job opportunities. And on the international front, total exports grew by 20% from US $ 17,921 million in 2006 to US $ 21,457 million in 2007.

A special effort was made to solve the paradox that dominates the Egyptian labor market: the existence of unemployment together with an increase in demand for skilled labor. Responding to this, and believing that achieving positive results and success towards our goals, is a direct result of having a well trained labor force with the needed skills, the Industrial Training Council (ITC) was established to coordinate and supervise all vocational and technical training activities in order to raise labour force efficiency and link them with the real needs of the different in-dustrial sectors, and thus maximize the utilization of available human resources and contribute to reducing unemployment.

Despite the successes Egypt has achieved, the challenge is to increase our ranking through sus-taining the reform momentum in the coming years for Egypt to fulfill its huge potential.

The regulatory reform initiative (ERRADA) called for by the ENCC will definitely have great impact on improving investment climate, and thus enhancing growth in the near future. Review-ing economic laws and integrating them in a more comprehensive, homogeneous and business-friendly regulatory framework will definitely have its multiplied positive impact on investment and consequently on trade, job creation and income levels.

Rachid Mohamed RachidMinister of Trade and Industry


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The Minister of Investment

DR. MAHMoUD MoHIElDIN

Four years ago, when the present government took office, regional as well as international rankings, and the outlook for the Egyptian economy have not been favorable. Many of the key economic indicators have been going through a downturn. Real gDP growth decelerated to reach 3.1 percent in 2002/03; private investment decreased to 7.6 percent of gDP in 2003/04 (compared to 9.9 percent in 1998/99; and inflows of foreign direct investment (FDI) were a meager USD 0.7 billion (2002/03). This modest economic performance placed the Egyptian economy - with all its potential - at a disadvantage vis-à-vis other regional as well as global com-parators, and it was high time for policy interventions to reverse this situation.

The reform agenda adopted by the government which took office in July 2004 presented an opportune chance to capitalize on the potential of the Egyptian economy, with investment pro-motion being placed as a top priority.

The payoff has been rewarding. On the FDI front, inflows have reached an unprecedented level of USD 11.1 billion in 2006/07, compared to USD 2.1 billion in 2003/04, the year after which the reform agenda was set in place. The issued capital by newly established companies tripled from lE 10.8 billion in 2003/04 to reach lE 36.8 billion in 2006/07. The stock of established compa-nies currently stands at roughly 43,935 with total issued capital of lE 434 billion. Expansions undertaken by companies already in operation - which constitute one of the most important indicators of investor confidence in the Egyptian economy - have also increased from LE 14.1 billion in 2003/04 to reach almost lE 45 billion in 2006/07.

In recognition of impressive progress in reforming investment policies in recent years, the organization for Economic Cooperation and Development (oECD) invited Egypt in July 2007 to adhere to the Declaration on International Investment and Multilateral Enterprises. Accord-ingly, Egypt has become the first Arab and African country to join the Investment Committee of the oECD as a participant. on the same front, Egypt has been ranked as the top reformer worldwide in the IFC/World Bank 2008 ‘Doing Business’ report, and the World Investment Report of the United Nations Conference on Trade and Development (UNCTAD) has cited Egypt as the top recipient of FDI in the African continent during 2006.

Today, Egypt is at a turning point. Policy makers are expected to shoulder new responsibilities that primarily aim at striking the right balance between economic progress and social welfare. It is important to highlight that policy reforms implemented in Egypt have successfully cut across many layers. It is expected that all social groups and strata within the society will be benefi-ciaries of the reforms. With this vision clearly expressed, the government has already taken a number of steps that aim at providing a better platform for small and medium enterprises to actively participate in economic activity. To this end, the Nilex was established as the first stock exchange for small and medium enterprises in order to provide investors with a convenient way to invest in Egypt’s highly active SME sector. The minimum capital requirement for limited liability companies has also been reduced to lE 200, in order to encourage the establishment of a greater number of relatively smaller size companies.

Requests for increasing the levels of corporate social responsibility have been also voiced to allow investors and civil society to take part in improving the quality of social services provided in their communities. The government has initiated programs to ensure geographic and gender equality. Investments in Upper Egypt are now gaining momentum and an expanding number of investors are expressing increased interest in investing in this region. Expanding investments in Upper Egypt should reverse the historical pattern of unequal distribution of investments between various regions of the country. Policy makers are also working on enhancing the participation of women in the labor market, in order to redress the visible gender imbalance currently characterizing the Egyptian labor market, and increase the scope of opportunities for women. last but not least, several government programs are addressing skill disparities charac-terizing the labor force. By ensuring that appropriate policies help promote the right kind of

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skills needed by investors , we should be able to see much lower levels of unemployment accompanied by improved wages and incomes.

I wish to conclude that reform is not a destination. It is a continuous process, com-prised of phases, each leading to the next, and while a lot has been achieved in terms of policy reform, more is to be done in the future. The government has been relentlessly pushing the reform process, and due credit has to be given to the private sector, both national and foreign, which has responded in a positive manner to the enabling environment currently presented by our thriving economy. The road ahead is very promising, and the stamina of both the government and investors to seek further progress is equally so.

Mahmoud MohieldinMinister of Investment


The Minister of Investment

DR. MAHMoUD MoHIElDIN (cont.)

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The Minister of State for Administrative Development

DR. AHMED M. DARWISH

Since the foundation of the Egyptian National Competitiveness Council in 2004, it is playing a considerable role in helping to benchmark the country’s major indicators to international standards, and to promote the culture of competitiveness. The issuance of its annual reports has undoubtedly contributed significantly to raising the awareness and triggering debates on Egypt’s competitiveness and its role in ensuring a broad- based distribution of the outcomes of growth.

With the presence of economic and environmental challenges to a market- based economy, institutional development is essential to maintain competitiveness.

The current Egyptian government’s Institutional Development Program (IDP) is an integrated framework that covers not only new organizational structures but also a whole span of mea-sures that highly affect competitiveness including, but not limited to:

redefining the roles of different government entities to concentrate on core business, ��

specifically the move towards policy, strategy and regulatory functions;

introducing new dynamic structures that map functionality; ��

introducing new management schemes; ��

capacity building and human resource development;��

providing support tools that will help modernize the enterprise resource planning; and ��

introducing new channels for service provision.��

Needless to mention that the last two points, specifically the review of work-cycles and the elimination of unnecessary steps will definitely reduce time and cost for tasks and will hence be reflected both at the micro and macro levels, and increase competitiveness.

The IDP modernization carried out by the Ministry of State of Administrative Development has been focusing on different public service sectors; such as education; health; social solidarity; justice; transportation; agriculture and trade and industry.

While no one denies that Egypt has taken bold steps in its reform path, the critical factor for the average citizen is to perform not to reform. Reform is guaranteed to take us along the road to prosperity; meanwhile special attention should be given to social safety nets. In this regard, a priority should be given to the establishment and linking of national databases to target each of the 17 million Egyptian families with the right package based on their socio-economic profiles and patterns of income and expenditure. This package should not only include subsidy and cash payments but also educational support and job skill building. In this way, a larger proportion of the society can faster harvest the fruits of economic growth and be assured of a fair distribu-tion of returns.

In conclusion, the equilibrium should be maintained between economic reform that fosters competitiveness in a market-based economy, and social responsibilities towards middle class and poor families.

Ahmed M. DarwishMinister of State for Administrative Development

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The Minister of Tourism

Mr. Zoheir garranah

The 5th Egyptian Competitiveness Report hosts this year for the first time a new chapter on a cornerstone of the Egyptian Economy: “Travel and Tourism”. No one can deny the im-portance of the tourism sector to the economy for being not only one of the largest foreign currency earners, but also a driver of growth, and a leading job-creator.

In the light of such strategic importance, the Ministry of Tourism has been working relentlessly to design policies within the framework of a “Tourism Strategy” which places Egypt where it belongs on the tourism competitiveness map. This strategy aims at achieving a short term objective of attracting 14 million tourists by 2011, and a long term vision targeting 27 million tourists by 2022.

To realize the desired objectives, the tourism sector has been an active partner in the reform vision of the government, and has thus benefited from major improvements in other sectors such as: airports, aviation, transportation, telecommunications, customs and tax reforms, and the easing of investment regulations both for domestic and foreign.

As this report shows, the tourism sector has grown over the past few years, and this was reflected in the number of tourists’ arrivals, length of stay, tourist’s expenditure, investment projects and improvement of services.

Despite these achievements, we should not be contented with our ranking on the Travel & Tour-ism Indicator, and we can definitely do better. While we should not take these indicators at face value, we need to reflect on the reasons for these scores, and try to workout how to improve them in the future.

In this context, the 5th Competitiveness Report highlights areas that need further focus, per-haps more changes or even recognizing areas that may have gone unnoticed altogether. It tells us where the world is heading, so that we can better allocate our resources.

In sum, the new chapter on travel and tourism added to this year’s report will highlight the com-petitive advantages and disadvantages facing the sector, and will define the areas where Egypt has its great potential for growth and can improve its competitiveness in the years to come.

Zoheir garranahMinister of Tourism


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PREFACE BYThe Honorary Chair of

the Egyptian National Competitiveness Council

Dr. HoSSAM BADRAWI M.D.

Seeking competitiveness of any nation has its particular implications for the reform of its edu-cational system, since the competitiveness of any national economy depends primarily on the quality of its human resources and their qualifications as growth enablers.

In its fifth edition, the Egyptian Competitiveness Report continues to provide a thorough analy-sis of education and training indicators included in the global Competitiveness Index, giving recommendations for aiming at developing a flexible, demand-driven training system, respond-ing to labor market needs with a wider range of partnership between the private sector and civil society.

It is my belief that education, and better quality education, is the key factor for progress in-cluding combating poverty, improving quality of life, participating effectively in political life, and ultimately, benefiting from the fruits of economic growth.

It goes without saying that education influences competitiveness, and it is the key to the transi-tion from a resource-based to a knowledge-based economy. This is the striking and common lesson that we learn from the historical experience of advanced countries as well as that of the late comers “The Asian Tigers”.

Education is the key to the individual`s empowerment. It is a valuable asset that allows them to improve their material position and quality of life. This is related to the increasing need for a better quality of education on one hand, and the ability of each individual to acquire this quality of the education on the other. This is not limited to the “entry” of a given educational institution, but also to the process of knowledge accumulation, development of skills, means of impacting values and attitudes.

In view of this, human resources development through quality education and demand-driven training linked to market needs, represent an integral part of a comprehensive competitiveness strategy. This entails emphasis on reviewing the content of education as well as its tools and methodologies, in light of international trends.

Realizing an educational system that serves as a competitiveness enabler can only be achieved through identifying needs, and encouraging partnerships for the optimum use of resources. To make this a reality, I believe there are three principles we must broadly embrace:

First, access : providing access to educational opportunities; ��

Second, affordability : making education a reality by reducing financial barriers; ��

And third, accountability: that we are teaching what is relevant and delivering good value ��

for the set standards.

Finally, I will not be exaggerating if I state that the future of competitiveness, in fact, the future of Egypt depends on a thorough reform of the educational system, a system based on the belief that the role of education is not to fill the individual`s head but to free it instead.

Hossam BadrawiHonorary Chair of the Egyptian National Competitveness Council

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PREFACE BYThe Chair of the Egyptian National Competitiveness Council

HElMY ABoUlEISH

The issue of the fifth edition of the Egyptian Competitiveness Report signals the renewed confidence in the report, and the credibility it has been increasingly gaining from the business community, decision mak-ers, academics and practitioners.

In addition to its annual analysis of the competitiveness scoring as ranked in particu-lar by the World Competitiveness Report, the report has two important dimensions of competitiveness, namely the sectoral focus on tourism and the elaboration of a Comprehensive Competiveness Strategy. Tourism has been chosen in view of the promising potential of the sector to the future of Egypt. Similarly, the question of a coherent strategy has become a top priority.

The report emphasizes that such a strategy should focus on both enhanced productivity and that all members of the society are equally reaping the gains from growth achieved at the macro level. Challenges exist due to the slow “trickle down” of wealth derived from increased growth, and that might jeopardize public support for economic reforms. Public support for the government’s reform program may waver if it is not seen as delivering better living standards to ordinary people.

This year`s report takes recognition of the crucial changes that influence the global economy. Three such changes will have serious implications for the economy in general and competitive-ness in particular. These are; peak oil, water scarcity, and climate change.

Egypt is stepping up its program of developing renewable energy sources as part of its plan to reduce reliance on fossil fuels, with wind energy being one of the favored options. With Egypt’s electricity demands rising by 7% annually and the country’s fossil fuel reserves having a limited life span, we need to plan for a future without oil and gas on tap to feed our energy needs. The National Renewable Energy Authority (NREA), a division of the Ministry of Electricity and En-ergy established in 1986, has the task of identifying and developing potential alternative energy sources. Studies undertaken by the NREA have shown that Egypt’s Suez gulf region is one of the most advantaged in the world for the production of wind electricity. While the NREA is the lead agency for wind energy, there is room for private enterprises to get into action. In addition, Egypt’s alternative electricity program does not just consist of wind power, with solar energy being another option.

Concerning water scarcity, it seems that mankind’s most serious challenge in the 21st century might not be war or hunger or disease, but it may be the lack of fresh water. Population growth and climate change, all accelerating, are likely to combine to produce a drastic decline in water supply in the coming decades, according to the World Water Development Report. This is in addition to that supply is already problematic for up to a third of the world’s population. Around 1.1 billion people already lack access to clean water and 2.4 billion lack access to proper sanita-tion, nearly all of them in the developing countries. In spite the fact that these figures are likely to worsen remorselessly, and widely available evidence of the crisis, political commitment to reverse these trends has been lacking or at best very limited.

Climate change due to global warming and its consequences on land area is expected to be reflected on the area of agricultural land in Egypt, thus negatively impacting a large portion of the population making their living from the agricultural sector, as well as its impact on gDP.

Efforts continue to launch reforms that enhance Egypt`s competitiveness. Prominent among these is the progress that has been taking place under the regulatory reform initiative ERRADA initiative that aims at doing away with the unnecessary regulations that have been burdening the Egyptian economy and constraining its ability to take off.

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Finally, I would like to extend thanks for all efforts exerted to finalize this report, and its closing suggested comprehensive strategy for enhancing competitiveness in Egypt. We will remain committed to save no effort to achieve this target, through ENCC activities and its initiative for regulatory reform, and other ini-tiatives to follow as needed.

Helmy AbouleishChair of the Egyptian National Competitveness Council

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EXECUTIVE SUMMARY

ECONOMIC REFORM IN EGYPT IS PAYING OFF DESPITE MAJOR GLOBAL CHANGES.

The positive results of reform initiated in 2004 have provided the Egyptian economy with solid resilience that enabled it to minimize the impact of the global increase in food prices as well as the fall-off effect of global recession.

The prompt response by the government to the sudden shock of price increase - triggered by imported inflation - reflected the balanced approach to crisis–management. Financial policies were used to further the objective of fair distribution while not compromising with the pace of reform. The rich debate in country is focusing on the appropriate policies and strategies that can sustain this approach.

It is against this backdrop that the 5th Egyptian Competitiveness Report (ECR 2008) is issued. As the title suggests, all efforts should be mobilized to achieve one objective, that is building a “Competitive Egypt: Where Everybody Wins”. The implication of such an ori-entation is that a major challenge is now facing the country; how to enhance competitive-ness, and how can this contribute to a better spread of the fruits of growth. This report presents a powerful argument that Egypt has no choice but to improve its competitive position in the world despite the daunting challenges that confront any developing country at this stage.

EGYPT`S COMPETITIVENESS SCORES HAVE BEEN FAIRLY CON-SISTENT

The global Competitiveness Index (gCI) is the established measure for comparative com-petitiveness among the different countries in the world. The methodology of building this index has been a subject of controversy since its inception. In the particular case of Egypt, the present report did not stop at reproducing the results of the gCI, but attempted to point out some of the methodological concerns especially those related to the timeliness of the data used to construct the gCI and its components, and the fact that the opinion survey is based on subjective perceptions of the respondents. It is argued that the gCI may, therefore, not capture the most recent reforms and their impact, and that the indices may have a large measure of value judgments rather than hard data. Be that as it may, the report does not fall in the trap of defensiveness and denial, but takes the methodology on which the rankings are based as being the same for all the countries of the world. What is impor-tant is to take these rankings seriously, use them to benchmark the performance of the country, and regard them as pointers to the reforms that must be introduced to improve the situation. Nevertheless, an attempt was made to check the rankings against available data from national, regional and international sources to ensure their credibility.

Egypt`s score on the gCI this year and its rank among countries dropped to 77th place compared to 71st the previous year, if the same methodology is applied. (It was placed 63rd accord-ing to the old methodology.) The main causes were related to human recourses with weak scores on basic education and labor markets. Survey results gave very poor marks to primary education quality with the country ranking 126th out of 131 countries according to this indicator. Furthermore, Egypt was placed 130th out of 131 countries on labor market efficiency, indicating the need to address labor market rigidities. This is the lowest ranking for Egypt. Perceptions of Egyptian worker productivity fell during the same period. All this points to the need for a thorough reform of the educational system and a balanced labor market policy to ensure increased productivity without sacrificing the ob-jective of employment creation and increase in real wages.

Samir Radwan

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This decline in Egypt`s ranking contrasts with the positive scores the country registered in other reports. The World Bank Doing Business Report 2008 placed Egypt 126th out of 178 countries compared to 152nd out of 175 countries in the previous year. In fact, Egypt was chosen as the fast reformer by that report. Moreover, the World Investment Report 2008 published by the UNCTAD, put Egypt as the first country in Africa in attracting FDI, and the second, after Saudi Arabia, in the MENA region.

This apparent paradox is resolved when we realize that Egypt`s historical performance on the gCI has been fairly consistent since 2004; with this score averaging around 4.00. This is due to the persistence of structural shortcomings especially the underperformance of education and labor market, while the other indicators, such as Doing Business, reflect the positive impact of reform in making Egypt an easier place to do business. It is precisely the resolution of the tension between the structural and the contingent, where the country`s efforts should be directed.

BOLD REFORMS HAVE LED TO RAPID AND ROBUST GROWTH, BUT DAUNTING CHALLENGES LINGER

Economic growth has been robust since 2004, making Egypt one of the fastest growing economies in the region. Egypt has implemented a number of bold reforms over the past four years that were supported by a favorable external environment. As a result, growth ac-celerated to over 7 percent in 2006/2007. All indicators suggest that the Egyptian economy will continue to perform well. A major characteristic of this growth is the impressive con-tribution of the private sector (contributing over 72 percent of the 7.2 percent real gDP growth), and the continuing expansion of the manufacturing sector (accounting for 1.23 percentage points of a total growth rate of 7.2 percent). Nevertheless Egypt’s competitive-ness ranking has deteriorated as mentioned earlier, implying that we are entering a period of more challenging economic conditions. Egypt`s ranking on the Macroeconomic Stability component of the gCI was 124th (out of 131 countries). Three main factors continue to pose a challenge to the improvement of Egypt`s performance: inflation, a persistently large budget deficit and unbalanced growth.

An important point raised in this year`s report is that unbalanced growth poses a major risk to competitiveness and to economic stability. The macroeconomic pattern of growth has not been succeeding to generate the required job opportunities. In other words, growth is not employment-led. Two reasons account for this: the faster growing sectors are not necessarily employment-intensive, and the regional distribution of growth remains highly concentrated in the capital areas and neglecting rural ones, especially in Upper Egypt (where poverty incidence is above 65 percent of the population). More important perhaps is the mismatch between skill supply and the demand of the labor market. The report rec-ommends the urgent need for a balanced growth strategy.

THE TOURISM SECTOR IN EGYPT HAS A GREAT POTENTIAL THAT NEEDS TO BE REALIZED

Emphasizing the need to diversify the sectoral sources of growth, ECR 2008 focuses on the tourism sector. Two reasons explain this choice: the sector has a tremendous potential rep-resented by the possibility to increase the number of tourists from 9.7 million in 2006/2007 to 30 million by 2020; and this sector has a built-in capacity for broad based distribution of returns on its activities. The Report analyzes Egypt`s ranking according to the Travel & Tourism Competitiveness Index (TTCI) published for the second year by the World Eco-nomic Forum, which shows that Egypt’s rank is relatively modest (66 out of 130 countries), and has in fact declined in comparison to last year (58 out of 124 countries). This Report delves into the details of competitiveness in an attempt to identify the strengths as well as the weaknesses of Egypt’s tourism sector.

EXECUTIVE SUMMARY

33

ECR 2008 provides an innovative approach to the evaluation of the tourism sector’s per-formance. Drawing on the TTCI coefficients, a measure of efficiency is developed to gauge the contribution of the sector to gDP and employment and estimate the investment nec-essary to realize the potential of the sector. This chapter also looks at the likely possibil-ity of the evolution of tourism and travel at the global level and Egypt’s potential share. Estimates indicate that by 2020, Egypt will have the capacity to attract 30 million tourists providing that necessary investments are made and reform of various factors constraining the sector are implemented.

EGYPT HAS TO ENAHNCE ITS COMPETITIVENESS DESPITE MA-JOR GLOBAL CHALLENGES

Three global challenges will affect the competitiveness of all countries including Egypt: global warming, climate change and peak oil. These factors combine together to provide external shocks to emerging open economies in particular as they lead to unprecedented increase in the price of energy and of food. The impact of these factors has been aggra-vated by mismanagement and the price impact magnified by speculation in the commodity markets. In designing any strategy for enhancing competitiveness, Egypt must factor-in the impact of these changes at the national level, and devise plans to hedge against their nega-tive effects.

A NATIONAL COMPETITIVENESS STRATEGY IS NEEDED TO ACHIEVE SUSTAINABLE AND BALANCED GROWTH

Egypt is at a tipping point. A decisive move has to be taken towards achieving a quantum leap in the country`s productivity. In last year’s report, the statement was made that “look-ing to the future, Meeting the challenge of improving Egypt’s competitiveness requires movements on several fronts, but this movement has to be comprehensive, decisive and internally consistent ……. The reforms that have been undertaken are paying off, but it is time to have a comprehensive competitiveness strategy”. In this year`s report, we are advancing towards achieving these goals by proposing the broad lines of a comprehensive national competitiveness strategy, and a framework of the process that leads to the formu-lation of such a strategy.

The thrust of the proposed strategy is that Egypt should build upon the achievements of its reform in order to achieve a quantum leap in the productivity of its economy and its popu-lation. What is being proposed is not simply a discrete movement along the same curve, but a pronounced spurt to a totally different trajec-tory which aims at sustained growth based on enhanced productivity. This strategy, also inspired by the experience of others, will have a number of high level objectives notably: sustaining the present economic growth rate of 7 percent at least until 2012, and maintaining the momentum through 2020; reducing open unemployment below 5 percent as indicated by the Five-Year Plan (2007/2011); and halv-ing poverty by the year 2012 as declared by the millennium development goals. This will require the choice of leading sectors; an aggressive attack on the constraints on productiv-ity increase especially bureaucratic regulations; and enshrining job creation as an intrinsic objective of growth thus ensuring a borad-based distribution of the fruits of this growth.

A framework presenting ten major areas of effort is proposed to guide the process of formulating this strategy. In carrying out this process, the ENCC has to take the lead in playing the role of a catalyst bringing together the relevant actors in the society. Through the coordination of public-private dialogue, the ENCC will be able to eventually develop a comprehensive competitiveness strategy which is owned by those stakeholders.

EXECUTIVE SUMMARY

1.1 EgYPT’S CoMPETITIVENESS SCoRES HAVE BEEN FAIRlY CoNSISTENT

This year, Egypt’s performance was mixed. This chapter will review trends in key indicators over time, and test the validity of these results by cross-referencing the scores with independent data and the results of other studies. In the Global Competitiveness Index’s (GCI) early years, its rankings for Egypt

provoked a degree of defensiveness and denial. Despite these initial reservations, there is growing recognition that GCI results represent an important and informative input that can help Egyptian decision-makers design and implement a coherent strategy to improve Egypt’s competitiveness with attendant benefits throughout society.

While the ECR has provided a critical appraisal of the gCI in a constructive tone, it adopted a stance of non-defensive learning. The GCI forms the core of the report because it is the most comprehensive approach for evaluating the largest number of countries over many years. The gCR has been maintained for over a generation. Its competitiveness index looks at roughly 130 countries, utilizing the same hard data and survey methodology. With hundreds of indicators assembled into 12 categories, or pillars, it is one of the most comprehensive measures of a country’s economic performance. However, the gCI does have its limitations. The methodology is still in flux and changes slightly from year to year as its

architects continually seek to improve it. There is a time lag in the availability of data for all countries which may not reflect an up-to-the-minute picture of recent improvements in Egypt. A good portion of the results are based on survey data which can be subjective across countries. The survey is applied to a very small subset of Egypt’s population—senior executives of large companies that compete in international markets. Their views and their realities may differ from those trying to operate small and medium enterprises in domestic markets. Therefore, the gCI seeks to cross-reference and validate gCR scores with other data and indices to see whether they support or contradict GCR findings.

1 Egypt’s Competitiveness Indicators

Nihal El-Megharbel

Egypt’s score on the Global Competitiveness Index (GCI) fell this year and its rank among countries dropped to 77th place compared to 71st the

previous year, if the same methodology is applied. (It was placed 63rd accord-ing to the old methodology.) The main causes were related to human recourses with weak scores on basic education and labor markets . Also dragging down Egypt’s position were macroeconomic factors related to the Government budget deficit and the national debt, both of which are among the highest in the world. Survey results gave very poor marks to primary education quality. Egypt was placed 130th out of 131 countries on labor market efficiency, indicating the need to address labor market rigidities. Financial market sophistication also needs to be addressed. Despite recent high GDP growth and some notable achievements related to tax reform, tariff reduction and investment mobilization, Egypt’s overall competitiveness scores have not been improving rapidly, although certain recent advancements may not have shown up yet in the latest data on which the rankings were based. Although Egypt is improving in some areas, it is falling behind in oth-ers. The results are largely confirmed by other indices and indicate the need for a deeper and more comprehensive approach to building Egypt’s competitiveness.

36

Improvement in Egypt’s competitiveness rank-ing is intricately linked to poverty reduction. Egypt’s recent gDP growth has had only limited im-pact on poverty reduction and unemployment levels. The same factors which have decoupled growth and poverty reduction continue to hold back Egypt’s gCR ranking, especially regarding human capital invest-ment.

Since the inception of the GCI, Egypt’s scores have been relatively consistent (between 3.95 and 4.10). This lack of improvement has caused Egypt’s status to decline relative to other countries. Although notable reforms have been implemented, other areas are falling behind. Therefore, economic reforms must be comprehensive and the pace of change must accelerate.

Table 1.1 Egypt’s Historical Performance on the Global Competitiveness Index

Year Score Rank# of

countries

Percentile Ranking Among Countries

1=best 100=best

2004-05 3.95 47 104 0.45 0.55

2005-06 4.1 52 117 0.44 0.56

2006-07 4.07 63 125 0.5 0.5

2007-08 3.96 77 131 0.59 0.41

Source: World Economic Forum (WEF), The Global Competitiveness Report, 2007 – 2008, Geneva, 2007. Here-after referred to as “WEF 2007”.

Egypt trails behind all the Gulf States, as well as Jordan, Morocco, and Tunisia in the 2008 GCI rankings. While Egypt is losing ground in the gCI, this may be part of a region-wide trend. only kuwait and Qatar have steadfastly improved their gCI rankings.

Between 2007 and 2008 Egypt tumbled six rungs on the Global Competitiveness Index to 77th place out of 131 countries (down from 71st place out of 125 countries) using 2008 methodology.

The raw score also fell slightly from 4.02 in 2007 to 3.96 in 2008. As a reference point, the highest-scoring country (USA) received 5.67 and the lowest-scoring country (Chad) received 2.78.

Table 1.2 Egypt’s Historical Performance on the Global Competitiveness Index Compared to other Arab Countries

Country

Year (number of countries)

2004-05 (104)

2005-06 (117)

2006-07 (125)

2007-08 (131)

Score Rank Score Rank Score Rank Score Rank

Egypt 3.95 47 4.1 52 4.07 63 3.96 77

Tunisia 4.25 30 4.48 37 4.71 30 4.59 32

Morocco 3.97 45 3.83 76 4.01 70 4.08 64

Jordan 4.32 28 4.38 42 4.25 52 4.32 49

Kuwait 4.24 49 4.41 44 4.66 30

Qatar 4.31 46 4.55 38 4.63 31

Saudi Arabia

4.55 35

UAE 4.21 31 4.59 32 4.66 32 4.5 37

Oman 4.43 42

Bahrain 4.39 25 4.19 50 4.28 49 4.42 43

Syria 3.91 80

Algeria 3.68 62 3.75 82 3.9 76 3.91 81

Libya 3.85 88

Mauritania 3.17 114 3.26 125

Source: WEF, 2007.

In both absolute and relative performance ranking, Egypt declined modestly, with the actual drop due in part to several recent changes in the gCI.

This outcome seems counter-intuitive at first for those familiar with Egypt. With a high gDP growth rate, markedly increasing investment and specific improvements in the business environment, one would have expected an increase in the gCI. The 2008 results, as such, merit in-depth analysis.

37

1.2 EgYPT’S DEClINE IS NoT EXPlAINED BY THE ADDITIoN oF NEW CoUNTRIES oR CHANgES IN SURVEY METHoDol-ogY

Over the GCI’s four-year history, Egypt’s raw score has seen subtle falls and rises while its relative ranking has slowly declined. To some extent this can be explained by the ap-

pearance of new entrants on the GCR. However, Egypt’s raw scores resulted in a relative decline even without the entrance of aggressive new countries such as Saudi Arabia who, just prior to their ranking, launched a “10 by 10” reform initiative to review antiquated laws and decrees related to competitiveness. Of the ten countries immediately trailing Egypt in the 2006-2007 GCR rankings, seven overtook Egypt this year.1

1 Those seven countries are Azerbaijan, Colombia, Brazil, Romania, Morocco, Philip-pines and Uruguay.

Moreover, Egypt’s decline is not strongly linked to methodological changes in the gCI. The gCI has changed its methodology to further emphasize com-petitive factors such as institutions, macroeconomic policy and basic education in weighting of lower-in-come or “factor-driven” countries including Egypt. The underlying assumption behind this shift is that high-income countries rely more on innovation and business sophistication as sources of competitive-ness because other factors such as education and infrastructure are already well developed. Middle-income countries tend to focus on improvements in efficiency while low-income countries rely more on “basic requirements.” Egypt’s raw score has in fact seen a slight boost related to new methodologies.

Table 1.3 Stages of development: Weights of the main pillars

Pillar group

Stages of development and weights assigned

Factor driven

Efficiency driven

Innovation driven

2007 2008 2007 2008 2007 2008

Basic requirements

50 60 40 40 30 20

Efficiency enhancers

40 35 50 50 40 50

Innovation and sophistication factors

10 5 10 10 30 30

Source: WEF, 2007.

What Are Egypt’s Strengths? Where Did Egypt Improve?

In 2008, Egypt’s relative strengths were in private and public institutions, infrastructure, market size, business sophistication and innovation. Institution rankings have not shown any appreciable trend over the past four years. Year after year Egypt improved in institutions, business sophistication and innovation

What Causes Continued Low Scores?Poor ratings in macroeconomic stability and hu-man resources brought down Egypt’s competi-

tiveness ranking. Between 2007 and 2008 Egypt re-tained its macroeconomic stability score of 3.7. That cost the country 16 places relative to other ranked countries. In terms of human resources, business leaders reported that they had little freedom to hire and fire poorly trained workers. Egypt’s labor market efficiency is the second lowest in the GCR rankings. The country also received low marks for health and primary education as well as higher education and training. low scores related to basic education and the macroeconomy have been consistent features of Egypt’s poor performance in recent gCIs.

FIGURE 1.1: EGYPT’S RANKS ON THE 12 PILLARS OF THE GCI 2008(HIGHEST=1; LOWEST=131)

EfficiencyEnhancers

(85)

Higher Educationand Training

(80)

Goods MarketEfficiency

(76)

Labor MarketEfficiency

(130)

Financial MarketSophistication

(113)

TechnologicalReadiness

(87)

Market Size(31)

Innovation &Sophistication

Factors

(63)

BusinessSophistication

(67)

Innovation(67)

BasicRequirements

(79)

Institutions(51)

Infrastructure(62)

MacroeconomicStability(124)

Health & PrimaryEducation

(83)

Source: WEF, 2007.

Need to Focus on Human Resources: Education and Labor Markets

Abysmal perceptions of the quality of educa-tion contributed heavily to the overall drop in basic health and education. While the 2008 gCR’s hard data on primary school enrollment recorded a fall from 95.39 percent to 93.74 percent, the country ranked 126th out of 131 in education quality. This new indicator was the primary reason for Egypt’s poor education score. Unskilled or poorly trained work-ers are ill suited not only to contribute to economic growth but also to reap its benefits, and the private

38

sector has long maintained that the Egyptian educa-tional system is not preparing young people to meet market demands. To address the disparity, the Ministry of Education has formulated a National Strategic Plan for Pre-University Reform in Egypt, 2007/08-2011/12. one can only hope that the Ministry succeeds in mak-ing timely and effective improvements to the educa-tional system. The ECR perennially returns to the theme of human resources and education and will continue to do so because of its importance, the lack of progress, and the need to hold the government ac-countable to the people for this most basic of servic-es. Interestingly, Egypt did not score poorly on overall educational expenditure.

Egypt ranked 130th out of 131 countries in terms of labor market efficiency (trailed only by Libya). Hard data related to non-wage labor costs and rigidity of employment (Egypt placed 97th in both) supported the weak scores from the survey data with regard to the costs of firing, hiring and firing prac-tices, the linkage between pay and productivity and

brain drain (115th place). Female participation in the labor force was also low at 28 percent, placing Egypt in 129th position.

Despite evident gains, macroeconomic scores are anemic in a global context

Egypt’s national debt and government budget deficits are among the largest in the world as a percentage of GDP. While the gCR did not cap-ture notable recent improvements in deficit reduc-tion, it also failed to include recent inflation, using a benchmark rate of only 4.2%. Egypt’s poor fiscal per-formance outweighed recent gDP growth, increased investment, and relatively high foreign reserves in the gCI. In the aggregate, the country’s raw macroeco-nomic score remained unchanged from 2007. How-ever, the world average score improved relative to Egypt. The challenges involved in reducing the budget deficit and national debt in a socially responsible man-ner will be discussed in Chapter 2. We shall now turn to an in-depth discussion of Egypt’s performance, pil-lar by pillar.

1.3 EgYPT DRoPPED IN THE BASIC REQUIREMENTS’ AND EFFI-CIENCY ENHANCERS’ RANkINgS WHIlE IT IMPRoVED RE-gARDINg INNoVATIoN AND SoPHISTICATIoN FACToRS

Egypt’s performance on each of the 12 pillars of the GCI will be discussed in depth in this section. The 12 pillars are consolidated into three main sub-indices: basic requirements, efficiency enhancers, and innovation

and sophistication factors. The basic requirements’ ranking declined from 72/125 in 2007 to 79/131 in 2008 and the efficiency enhancers’ ranking slipped down from 80/125 in 2007 to 85/131 in 2008. Only the ranking for innovation and sophistication factors picked up from 71/125 in 2007 to 63/131 in 2008. The rankings of these sub-indices can be explained by examining the different pillars used to compute these sub-indices.

A. BASIC REQUIREMENTS

Institutions, Infrastructure, Macroeconomic Stability, and Health and Primary EducationgRC’s basic requirements are meant to describe the foundations on which competitive businesses are grown. These pillars represent 60 percent of Egypt’s overall score.

Pillar 1: Institutions

Small gains in perceived public efficiency and the security of property rights matched unease regarding the accountability of private institutions.

The perceived efficacy of corporate boards plummet-ed (from 64 to 87). Rankings fell for squandering of government spending, reliability of police services, and diversion of public funds to 23rd, 15th and 13th ranks respectively. These losses matched modest progress in some of Egypt’s historically weak indicators. The transparency of government policy-making (part of

the government inefficiency component) improved eight ranks but remains low (92).

FIGURE 1.2: EGYPT’S RANKING ON THE COMPONENTS OFTHE INSTITUTIONS PILLAR 2006-2007 & 2007-2008

80 70 60 50 40 30

2007-2008 2006-2007

Accountability

Corporate ethics

Security

Governmentinefficiency

Undue influence

Ethics &corruption

Property rights59

55

4651

4043

6462

5556

5653

6573

Publ

ic in

stitu

tions

Priva

te in

stitu

tions

Source: WEF, 2007.

39

The business costs of crime and violence as well as terrorism fell (part of the security component), while respondents felt more secure in their property rights (part of the property rights component), and the perceived burden of government regulation lifted (part of the government inefficiency component).

Pillar 2: Infrastructure

Egypt’s infrastructure rank declined slightly (from 57 to 60) because of poor ratings in port infrastructure and growth in mobile penetration below the average of other ranked countries.

The port infrastructure ranking fell from 53 in 2007 to 79 in 2008. Egypt’s telecom infrastructure was also a liability. The number of Egyptian mobile phone subscribers rose from 18 million to 30 million within the space of a year, but other gCR countries are also adopting this technology at a faster pace. Next year’s rank may yet benefit from recent government invest-ments in infrastructure. During the first six months of FY 2007/2008, 42 percent of government investment, amounting to lE 5.1 billion, was allocated to water and electricity projects (lE 2.3 billion) and sanitation (lE 2.8 billion). An additional 30 and 24 percent of total investment was assigned to transportation and energy projects respectively.

FIGURE 1.3: EGYPT’S RANKING ON THE COMPONENTS OF THE INFRASTUCTURE PILLAR 2006-2007 & 2007-2008

80 70 60 50 40 30

2007-20082006-2007

Telephonelines (hard data)

Quality ofelectricity supply

Available seatkilometers

(hard data)

Quality ofair transport

infrastructure

Quality ofport infrastructure

Quality ofrailroad

infrastructure

Quality of roads

Quality ofoverall

infrastructure

5760

6471

4957

5379

6059

3834

5755

7568

Source: WEF, 2007.

Pillar 3: Macroeconomic Stability

Macroeconomic stability is a chronic problem for Egypt and is the single biggest drag on the country’s competitiveness.

Between 2007 and 2008, interest rate spreads widened (64 to 78). Already low government debt and deficit rankings fell further (106 to 116 for debt and 119 to

127 for deficit), and a relatively high national savings rate fell (65 to 71). Egypt was rewarded for low in-flation in 2006 (the GCI used a rate of 4.2 percent). Not included in the 2008 index, average inflation for 2007 increased to 9.6 percent. Inflation hit 14.1 per-cent in April 20082 and will likely hold down macro-economic stability in next year’s index.

The implications of the macroeconomic instability the Egyptian economy is witnessing will be discussed in depth in Chapter 2 of the report. Nevertheless, it should be emphasized that the high budget deficit and public debt have negative repercussions on the coun-try’s competitiveness, and more importantly these fis-cal imbalances hinder all socioeconomic development efforts.

FIGURE 1.4: EGYPT’S RANKING ON THE COMPONENTS OF THE MACROECONOMIC STABILITY PILLAR2006-2007 AND 2007-2008

140

130

120

110

100 90 80 70 60

2007-20082006-2007

Government debt(hard data)

Interest ratespread (hard data)

Inflation(hard data)

National savingsrate (hard data)

Governmentsurplus/deficit

(hard data)

119

127

65

71

109

61

64

78

106

116

Source: WEF, 2007.

Pillar 4: Health and Primary Education

Declines in Egypt’s education ranking were led by poor assessments of primary school quality. Egypt’s basic education ranking dropped 65 positions from 39th to 94th place, due mainly to poor primary school quality. In particular, Egypt ranked among the survey’s worst (126 of 131 total countries) in a new indicator: the quality of primary education. This indicator was the primary reason behind the country’s precipitous rank decline.While an improved enrollment score would not offset the perceived poor quality of Egyptian primary educa-tion, it is worth noting that survey data included a drop in primary enrollment from 95.39 in 2007 to 93.74 in 2008. These numbers did not reflect the more recent developments in Egypt’s education system. The total number of students enrolled in all education levels increased from 19.7 million in 2005/06 to 20.5 mil-lion in 2006/07. The net enrollment rate in primary

2 Data obtained from www.mof.gov.eg

40

education increased from 92.9 percent in 2000 to 100 percent in 2005. In addition, the literacy rate reached 71.4 percent for adults. The number of illiterate males, 15 years and older, declined from 3.2 million in 2005/2006, to 2.9 million in 2006/2007, and from 7.9 million to 7.7 million for females in the same age group.

A government initiative launched in 2005 and due to be completed by 2011, aims to build 3000 schools. In addition, the government set in motion a program to upgrade 100 schools with the participation of the private sector and Ngos in Egypt. In March 2008, the second phase of this initiative started with the target of developing another 100 schools. The development process includes refurbishing buildings and classes, training teachers and headmasters, and providing ac-cess to IT facilities in schools.

The drop in health ranking was relatively small (9 ranks) but spread out over 5 of 8 indicators. Infant mortality and life expectancy rates did not change be-tween 2008 and 2007; nevertheless the rank of both indicators fell by 7 positions as other countries are developing and improving in this area. However, the hard data used for these two indicators correspond to 2004. While the report declared that infant mor-tality was 26.0 in 2004, more recent data revealed that the rate declined from 26.1 in 2000 to 20.5 in 2005. Furthermore, life expectancy at birth was 68 in 2004 survey data but increased to 69.9 by 2008.3

FIGURE 1.5: EGYPT’S RANKING ON THE COMPONENTS OF THE HEALTH AND PRIMARY EDUCATION PILLAR 2006-2007 AND 2007-2008

130

120

110

100 90 80 70 60 50 40 30 20 10 0

2007-20082006-2007

Education expenditure(hard data)

Primary enrollment(hard data)

Quality ofprimary education

Life expectancy(hard data)

Infant mortality(hard data)

HIV prevalence(hard data)

Business impactof HIV/AIDS

Tuberculosisincidence (hard data)

Business impactof tuberculosis

Malaria incidence(hard data)

Business impactof malaria

5260

11

5064

4342

3041

11

7481

7885

126

4157

4951

A. H

ealth

B. P

rimar

y ed

ucat

ion

Source: WEF, 2007.

B. EFFICIENCY ENHANCERS

Higher Education and Training, Goods Market Efficiency, Labor Market Efficiency, Financial Market Sophistication, Technological Readiness and Market Size

3 This and the following data is obtained from http://www.idsc.gov.eg/

This section analyzes the six pillars of the efficiency enhancers. These criteria represent 35 percent of Egypt’s gCI.

Pillar 5: Higher Education and Training

Quality is also a weakness in Egyptian higher education.

Egypt lost ground in rankings for quality and quan-tity of higher education as well as on-the-job training. As with primary education, quality was the greatest perceived weakness, dropping 22 ranks to 102. The quantity of education also fell relative to the world as Egypt dropped 11 ranks, tumbling from 69 in 2007 to 80 in 2008. The on-the-job training index declined from 68 to 82 during the same period.

These indices may not mirror the latest improvements in the education system. The hard data used to evalu-ate the quantity of education is the latest available, though it does not showcase recent developments such as an increase in the ratio of females to males in pre-university education from 63 percent in 2006 to 68.1 percent in 2007. The number of students in post-secondary and university education increased from 2.5 million in 2006 to 3.3 million in 2007. The num-ber of public universities reached 18 in 2007 while the number of private universities increased from 9 in 2006 to 15 in 2007. The ratio of government expen-diture on education increased slightly, as a percentage of total government expenditure, from 12.3 percent to 12.5 percent during the same period.

These recent reforms speak more directly to the cov-erage of secondary and tertiary education rather than Egypt’s primary weakness, quality. In this respect, sev-eral studies emphasized the importance of adopting effective engineering reforms to determine the right mix of inputs to produce the desired outcome, align-ing incentives with outcomes and involving students, parents and different stakeholders in forming educa-tion policies. Such reform measures offer significant synergies with needed labor market reforms as sur-veys citing poor quality, identify a perceived discon-nect between labor market needs and educational capabilities.

Connecting Egypt’s large informal workforce with complete and current training is an ongoing challenge. The private sector is increasingly involved in the de-sign and delivery of training but these efforts are still in their infancy. The Mubarak-kohl initiative, where private sector firms offered training materials and facilities to match government-provided instructors and finance, serves as an example of how private sec-tor firms could contribute to increasing and improv-ing workers’ training as part of their Corporate Social Responsibility (CSR) agendas.

41

130

120

110

100 90 80 70 60 50 40

2007-20082006-2007

Extent ofstaff training

Local availability ofspecialized research &

training services

Internet accessin schools

Quality ofmanagement schools

Quality of math &science education

Quality ofthe educational system

Education expenditure(hard data)

Tertiary enrollment(hard data)

Secondary enrollment(hard data)

FIGURE 1.6: EGYPT’S RANKING ON THE COMPONENTS OF THE HIGHER EDUCATION AND TRAINING PILLAR2006-2007 AND 2007-2008

5965

5559

4951

101119

87106

87100

66

71

82

83

6881

A. Q

uant

ity o

f edu

catio

nB.

Qua

lity

of e

duca

tion

C. O

n-th

e-jo

b tr

aini

ng

Source: WEF, 2007.

Pillar 6: Goods Market Efficiency

Egypt’s strengths in goods markets include the time it takes to start a business and the perceived lack of distortionary taxation. In the 2008 GCI, these were outweighed by a perceived lack of sophisticated consumer demand.

Egypt’s rank on goods market efficiency declined slightly from 71 in 2007 to 76 in 2008. The country lost 14 slots on the quality of demand conditions, can-celing out its 11-rank gain in competition (domestic and foreign). All domestic competition indicators improved, except for the cost of agriculture policy and the number of procedures required for starting a business. The efforts on this front, which won Egypt the title of fastest reformer in the World Bank Doing Business Report 2008, will have a positive impact on future gCI rankings.

FIGURE 1.7: EGYPT’S RANKING ON THE COMPONENTS OF THE GOODS MARKET EFFICIENCY PILLAR 2006-2007 AND 2007-2008

130

120

110

100 90 80 70 60

2007-20082006-2007

Quality ofdemand

conditions

Foreigncompetition

Domesticcompetition

66

60

115

111

86

72

Com

petit

ion

Qua

lity

ofde

man

d co

nditi

ons

Source: WEF, 2007.

Egypt also lost 13 and 23 ranks respectively in cus-tomer orientation and buyer sophistication indices. However, it is worth mentioning the potential impact of Egypt’s recent Consumer Protection and Competi-tion laws. These laws and the Consumer Protection Agency and the Egyptian Competition Authority; the two agencies responsible for implementing them are supporting consumers’ rights and changing business norms to be increasingly customer-oriented. These ef-forts have yet to come to fruition.

Pillar 7: Labor Market Efficiency

Egypt’s lowest ranking is in labor market efficiency

Egypt’s labor market efficiency rank is the country’s weakest and, save libya, is worst among all the gCR’s 131 indexed countries. This poor showing spanned both hard data indicators and survey responses. As shown in figure 1.8, all indicators related to this index deteriorated in 2008 compared to 2007, except for the extent and effect of taxation and the total tax rates, which reflected the major positive impact of the new tax law that was adopted in 2005. It is worth mentioning that tax revenues on individuals and on corporations increased by 49.8 and 54 percent re-spectively during the July 2007 to February 2008 peri-od.4 Additionally, the National Council for Wages, es-tablished in 2003, is currently reviewing the minimum wage policy with the objective of aligning it with the cost of living and with current inflation rates. There are some concerns that setting the minimum wage too high could have negative implications on employ-ment and on fueling inflation. In 2007, several public as well as private sector firms suffered from strikes organized by workers demanding higher salaries and the regular payment of their allowances.

The country’s greatest single weakness is in firing costs. Ranking among the GCI’s worst, Egyptian fir-ing costs constitute a powerful disincentive for busi-nesses to take on full-time workers.

Perceptions of Egyptian worker productivity fell precipitously since the last gCI ranking. Addressing this issue may involve politically sensitive trade-offs in the short-term. There are always concerns about the trade-off between raising productivity and reduc-ing employment as a result of applying more capital-intensive technologies. Increasing productivity with-out losing employment entails improving education, training systems, and work conditions. This issue was discussed in greater detail in Egypt’s Competitiveness Report 2004-2005.

4 Ministry of Finance, the Financial Monthly, March 2008.

42

FIGURE 1.8 a: EGYPT’S RANKING ON THE COMPONENTS OFTHE LABOR MARKET EFFICIENCY PILLAR2006-2007 AND 2007-2008

130

120

110

100 90 80 70 60 50 40 30 20 10

2007-20082006 -2007

Firing costs(hard data)

Total tax rate(hard data)

Extent andeffect of taxation

Hiring andfiring practices

Rigidity ofemployment (hard data)

Non-wagelabor costs (hard data)

Flexibility ofwage determination

Cooperation inlabor-employer relations

7272

1128

8897

9397

82106

4633

8878

115123

Source: WEF, 2007.

As a leading member country of the Youth Employ-ment Network (YEN)5 , the Ministry of Manpower and Migration (MoMM) recently prepared a National Action Plan (NAP) for Youth Employment in Egypt.6 The plan, which covers the period 2008-2012, aims at increasing youth employability by developing techni-cal and vocational training and improving basic skills; providing more job opportunities by encouraging self-employment and entrepreneurship; and developing labor market policies and programs.

FIGURE 1.8 b: EGYPT’S RANKING ON THE COMPONENTS OF THE LABOR MARKET EFFICIENCY PILLAR 2006-2007 AND 2007-2008

150

140

130

120

110

100 90 80 70 60 50 40

2007-20082006-2007

Female participation inlabor force (hard data)

Brain drain

Reliance on professionalmanagement

Pay andproductivity

41

82

101

122

79

94

115

129

Source: WEF, 2007.

5 YEN is a partnership between the United Nations, the World Bank and the Ilo.6 The Plan will be discussed with the Steering Committee in the next couple of

months.

Pillar 8: Financial Market Sophistication

Survey respondents do not believe that Egypt’s private or public financial institutions are trustworthy.

The efficiency of Egyptian financial markets is low (113 out of 131) and trending downward. All indicators of financial market efficiency deteriorated, especially the ease of access to loans, financing through the lo-cal equity market and market sophistication. Its single greatest weakness is the legal rights index (based on hard data).

Other indices measuring Egypt’s financial health paint an uneven picture. While the 2008 Index of Economic Freedom (see Box 1.1) agreed with gCI’s gloomy as-sessment, the recent Egyptian Center for Economic Studies (ECES) Business Barometer Surveys indicates that access to bank finance is no longer a primary constraint on business growth in Egypt. According to the ECES survey, firms are suffering more from lack of skilled labor and difficulty of dealing with govern-ment laws and regulations. Not captured by the latest gCI are recent public bank privatizations and the es-tablishment of NIlEX, a capital market for small and medium enterprises (SMEs) , which will play a major role in promoting SMEs in Egypt.

150

140

130

120

110

100 90 80 70 60 50 40 30 20 10 0

2007-20082006-2007

Legal rightsindex (hard data)

Regulation ofsecurities exchanges

Soundness ofbanks

Strength of investorprotection (hard data)

Restrictionon capital flows

Venturecapital availability

Ease ofaccess to loans

Financing throughlocal equity market

Financial marketsophistication

FIGURE 1.9: EGYPT’S RANKING ON THE FINANCIAL MARKETSOPHISTICATION PILLAR 2006-2007 AND 2007-2008

7786

6162

7595

7879

099

7887

99106

095

115123

A. E

fficie

ncy

B. Tr

ustw

orth

ines

s &

con

fiden

ce

Source: WEF, 2007.

43

Pillar 9: Technological Readiness

The CGI technological readiness indicators may be out of date.

Egypt’s rank declined from 77 in 2007 to 87 in 2008. The major indicators that witnessed a sharp drop included firm-level technology absorption, foreign di-rect investment (FDI) and technology transfer, per-sonal computers and internet users.

The gCI rankings are at odds with the seventh annual Global Information Technology Report by the geneva-based World Economic Forum (WEF) and French management school INSEAD, released April 9, 2008. Climbing 17 places, Egypt recorded the biggest year on year jump in that index which covered 127 na-tions.

Egypt’s attempts to improve technology transfer may not be reflected in the GCI rankings. The Egyptian Ministry of Trade and Industry recently established 12 new technology centers, raised the efficiency of 13 existing ones, and initiated 4 programs to enhance technological capabilities. The main objective of these centers is to transfer technology by partnering with other international technology transfer centers and

According to the Heritage Foundation 2008 Index of Economic Freedom, Egypt was the world’s 85th freest economy out of 162 ranked countries. Its overall score was 4 percentage points higher than 2007, the largest improvement of any country. Improvements in business, financial, and trade freedom were significant. Despite this improvement, Egypt ranked 11th out of the 17 Middle East and North African (MENA) countries, scoring above average only in fiscal freedom, government size, monetary freedom, and labor freedom. In-come tax rates are very low, and govern-ment tax revenue relative to GDP is not high. Total government expenditures are moderately low.

The Index of Economic Freedom was cre-ated by the Heritage Foundation and the Wall Street Journal in 1995 to explain the basic institutions that protect the liberty of individuals to pursue their own economic interests. The 2008 Index of Economic Freedom ranks 162 countries on 10 specific freedoms such as trade, business, and investment freedom, and property rights, which are averaged equally into the total score. Hong Kong has been the top-performing economy since the Index was created in 1995.

BOX 1.1: The Heritage Foundation Index of Economic Freedom

FIGURE 1.10: EGYPT’S SCORE ACCORDING TOTHE COMPONENTS OF THE ECONOMICFREEDOM INDEX

0 10 20 30 40 50 60 70 80 90 100

Year 2007 Year 2008

Labor freedom

Freedom fromcorruption

Property rights

Financial freedom

Investment freedom

Monetary freedom

Government size

Fiscal freedom

Trade freedom

Business freedom60

41

6657

9190

7373

7067

5050

4030

4040

3334

6969

Maximum freedom = 100

Source: Heritage Foundation, 2008.

to introduce best practices to the Egyptian industries. More importantly these centers function as demand-driven private sector entities that are supported by the Ministry of Trade and Industry. They target self-finance and sustainability and could play a major role in raising the competitiveness of Egyptian exports.

FIGURE 1.11: EGYPT’S RANKING ON THE TECHNOLOGICALREADINESS PILLAR 2006-2007 AND 2007-2008

110 100 90 80 70 60 50 40 30

2007-20082006-2007

Broadband internetsubscribers (hard data)

Personalcomputers (hard data)

Internet users(hard data)

Mobile telephonesubscribers (hard data)

FDI andtechnology transfer

Laws relating to ICT

Firm-leveltechnology absorption

Availability oflatest technologies

6365

5668

8281

36

84

49

9895

88

82

82

91

86

Source: WEF. 2007.

44

Egypt may see future gains from its e-government ini-tiatives aimed at providing services to the public in an accessible, relevant and timely format, and allowing the public to share in the decision-making process. The e-government initiative also endeavors to pro-mote modern management practices in government with the hope of increasing efficiency and reducing expenditure. The Egyptian government Services Por-tal (Bawaba) aims to include all appropriate govern-ment services by the year 2012. The services provided through the portal include national ID card replace-ment, water bill enquiry services, large taxpayer taxa-tion services, sales tax services, e-ticketing, vehicle licensing services, phone bills, a legal gateway, and so on.

Recent developments in the private Egyptian technol-ogy sector bode well for the future. Net FDI inflows increased from US$ 6.1 billion in 2005/2006 to US$ 11.1 billion in 2006/2007. The net increase boosted Egypt to 12th rank in the 2007 A.T. kearney Foreign Direct Investment Confidence Index which ranked Egypt among first-time investment destinations. FDI inflows also demonstrated rising interest from diverse investors. The United States and the EU were main investors, with Britain showing keen interest in Egypt. Arab countries invested US$ 3.3 billion in 2006/2007.7 In addition to increasing foreign exchange reserves, FDI inflows had a positive impact on technology transfers and innovation.

Pillar 10: Market Size

Egypt’ has a large domestic market but modest exports.

Companies want to do business in Egypt because of the domestic market’s considerable size. However, imports and exports are disproportionately small relative to gDP. Despite an 8.8 percent increase in exports during April 2007 (when the survey was car-ried out) compared to April 2006, this number does not reflect a smooth system of exportation. More-over, the rank of Egypt’s imports as a percentage of gDP declined from 83 in 2007 to 88 in 2008, despite a 50.6 percent increase in imports during April 2007 compared to April 2006. A large domestic market will ameliorate the domestic economy; however, with fur-ther developments in market efficiency and financial sophistication, market size alone is not an effective lever for change.8

7 Data obtained from www.cbe.gov.eg and A.T. kearney. The 2007 A. T. kearney Foreign Direct Investment Confidence Index.

8 Data for imports and exports in 2006, 2007 and 2008 obtained from www.cap-mas.gov.eg

100 90 80 70 60 50 40 30 20

2007-20082006-2007

Foreign marketsize index (hard data)

Exports asa percentage of GDP

(hard data)

Imports asa percentage of GDP

(hard data)

GDP valuedat PPP (hard data)

Domestic marketsize index (hard data)

FIGURE 1.12: EGYPT’S RANKING ON THE MARKET SIZE PILLAR2006-2007 AND 2007-2008

29

29

30

30

83

88

80

88

40

39

A. D

omes

tic m

arke

t siz

eB.

For

eign

mar

ket s

ize

Source: WEF. 2007.

C. INNOVATION AND SOPHISTICATION FACTORS

Business Sophistication and Innovation

This section discusses the two pillars that explain the level of innovation and sophistication factors. These two pillars represent 5 percent of Egypt’s gCI score.

Pillar 11: Business Sophistication

According to surveys, Egyptian businesses are relying more heavily on local firms but not local talent.

The level of business sophistication in Egypt hardly changed in 2008. Egypt is slowly improving its business networks and supporting industries. The country’s businesses are more confident than in the past and can today source from other local firms. However, the reported sophistication of firms’ operations and strategy lost 6 spots in the gCI. Firms reported seri-ous reservations about delegating authority. Perhaps this is linked to a lack of capable middle management. The lack of employer confidence underscores the re-percussions of a perceived lack of quality in Egypt’s human capital development.

45

110

100 90 80 70 60 50 40 30 20

2007-20082006-2007

Reliance onprofessional management

Willingness todelegate authority

Extent ofmarketing

Production processsophistication

Control ofinternational distribution

Value chainbreadth

Nature ofcompetitive advantage

State ofcluster development

Local supplierquality

Local supplierquantity

FIGURE 1.13: EGYPT’S RANKING ON THE BUSINESSSOPHISTICATION PILLAR 2006-2007 AND 2007-2008

5237

7169

6061

7277

4854

4028

6767

8589

6884

8294

A. N

etw

orks

&su

ppor

ting

indu

strie

sB.

Sop

hist

icatio

n of

firm

s’op

erat

ions

and

str

ateg

y

Source: WEF. 2007.

Pillar 12: Innovation

Egyptian innovation recovered in the most recent GCI.

Egypt improved its innovation rank moving from 75 in 2007 to 67 in 2008, nearly matching its high in 2006 of 66. The recent gain was pioneered by government procurement of advanced technology products and an increase in private companies’ spending on R&D. Indicators involving utility patents, intellectual prop-erty rights (IPR) and the quality of scientific research institutions declined modestly.

FIGURE 1.14: EGYPT’S RANKING ON THE INNOVATION PILLAR2006-2007 AND 2007-2008

110

100 90 80 70 60 50 40 30 20

2007-20082006-2007

Intellectual propertyprotection

Utility patents(hard data)

Availability ofscientists & engineers

Governmentprocurement of advanced

technology products

University-industryresearch collaboration

Company spendingon R&D

Quality of scientificresearch institutions

Capacityfor innovation

7878

88

88

90

88

35

71

59

92

70

85

58

29

84

64

Source: WEF. 2007.

Greater business sophistication boosted Egypt’s performance on the Business Competitiveness Index in 2008.

Egypt’s rank on the Business Competitiveness Index (BCI) increased from 76 out of 121 countries in 2007 to 70 out of 127 countries in 2008. This improvement is mainly due to the progress of the sophistication of companies’ operations and strategies, which went up from 76 to 69. This came alongside modest improve-ments in the national business environment. Egypt’s surge in the World Bank’s Doing Business Report 2008 will likely translate into gains in future BCIs.

46

1.4 EgYPT’S RANk IN THE FACToRS DETERMININg DoINg BUSINESSS

Egypt’s rank increased from 152 out of 175 countries to 126 out of 178 countries in the lat-est Doing Business Report. Egypt was selected as the top world reformer for 2007. Egypt made remarkable improvements in 6 of the 10 areas studied by the report. Market effi-

ciency ratings improved, with citizens having an easier time starting businesses, getting credit and exercis-ing investor rights. Areas showing slow improvement include licensing, paying taxes, and enforcing contracts (see Table 1.4). Hopefully Egypt can build on this momentum to improve its ranking in future Doing Business Reports.

Table 1.4 Egypt’s rank in the factors determining Doing Business

Factor

Doing Business Rank

2008 (out of 178 countries)

2007 (out of 175 countries)

Change

Dealing with licenses

163 165 2

Paying taxes 150 152 2

Enforcing contracts

145 146 1

Doing business 126 152 26

Closing a business

125 124 -1

Getting credit 115 156 41

Employing workers

108 106 -2

Registering property

101 147 46

Protecting investors

83 105 22

Starting a business

55 126 71

Trading across borders

26 86 60

Source: World Bank. 2007. Doing Business Report 2008.*Note: Doing Business 2007 rankings have been recalculated to reflect changes to the methodology and the addition of three new countries.

The Doing Business results are in line with the re-sults of the gCR’s Executive opinion Survey (EoS) meant to address problems impacting businesses in Egypt. The EOS indicated that inefficient government bureaucracy is a constraint for large and small firms alike.9

9 The EOS deals mainly with large domestic and international firms, while Doing Business focuses on small and medium enterprises (SMEs).

FIGURE 1.15: THE MOST PROBLEMATIC FACTORSFOR DOING BUSINESS IN EGYPT(% of respondents identifying each factor)

0.0 2.5 5.0 7.5 10.0

12.5

15.0

17.5

20.0

22.5

25.0

Year 2007 Year 2008

Inefficient governmentbureaucracy

Access to financing

Inadequately educatedworkforce

Inadequate supply ofinfrastructure

Policy instability

Tax regulations

Corruption

Inflation

Poor work ethicin national labor force

Restrictive labor regulations

Tax rates

Foreign currency regulations

Government instability/coups

Crime and theft 1.1

01.61.37

2.91.49

3.13.36

3.92.74

5.74.6

6.76.22

9.58

7.47.34

7.78.21

22.51

15.0516.9

14.711.07

12.8

8.36.47

7.2

Source: WEF. 2007.

According to the April 2008 edition of the ECES Busi-ness Barometer (BB) survey, the majority of firms worry about government bureaucracy, insufficient skilled workers and the difficulty of legal procedures. over the past ten years, these same themes have dominated the survey. Accordingly, it is imperative that workforce development and the streamlining of legal procedures remain a focus in order to improve business in Egypt.

Access to finance and bank credit is a chronic prob-lem but has fallen in recent surveys. In 2007, domestic credit increased by 12.3 percent to both the private and household sectors while it declined by 8.3 per-cent to the government. The earlier adoption of a floating exchange rate regime resulted in a 5 percent appreciation of the Egyptian Pound in 2007, and in-creased imports. Hopefully further banking reforms will feature prominently in Egypt’s national competi-tiveness strategy.

47

Table 1.5 Business Constraints Reported by Firms over the Last Ten Years Issue # Surveyed Period Date of Issue Constraints in Order of Severity

IB1 April-June 1998 -----Lack of skilled labor force• Poor demand• Limited access to credit•

IB2 October-December 1998 Jan-99 Weak market demand• IB3 January-June 1999 Jul-99 Weak market demand•

IB4 July-December 1999 Jan-00Weak market demand• Lack of skilled labor• Insufficient credit (private sector)•

BB5 January-June 2000 Jul-00Weak market demand• Lack of skilled labor (public sector)• Insufficient credit (private sector)•

BB6 July- December 2000 Jan-01Access to credit• Market demand• Lack of capital•

BB7 January-June 2001 Jul-01

Weak market demand• Lack of capital• Access to imports• Lack of skilled labor•

BB8 July- December 2001 Jan-02

Lack of capital• Weak market demand• Access to imports• Limited access to credit• Lack of skilled labor•


Access to credit• Lack of skilled workforce• Access to imports• Market demand•


Access to imports• Market demand• Access to credit and capital• Lack of skilled workforce•


Access to imports• Market demand• Access to credit and capital• Lack of skilled workforce•


Access to finance• Access to imports• Weak market demand• Lack of skilled workforce•






Access to finance• Weak market demand• Access to imports• Lack of skilled workforce•


Weak market demand• Access to finance• Access to imports• Lack of skilled labor force•

BB17 January-June 2006 Jul-06Weak market demand• Lack of skilled labor force• Access to finance and imports.•

BB18 July- December 2006 Jan-07Weak market demand• Inadequate access to credit.•

BB19 January-June 2007 Jul-07Difficulty in dealing with government and legal • proceduresLack of skilled labor•


High input prices• Difficulty in dealing with government and legal • proceduresLack of skilled labor•

Source: The Egyptian Center for Economic Studies, January 2008, Business Barometer, Issue no. 20.

48

The burden of inefficient laws and regulations on businesses is also visible in the Corruption Perception Index (CPI) issued by Transparency International.10 The 2007 CPI ranks Egypt 105th in the world and 17th out of 55 African countries. Having acknowledged the deficiencies of the regulatory and legal system in Egypt, the government is currently implementing a bold Economic Regulatory Reform (ERRADA)

10 The Corruption Perception Index (CPI) defines corruption as the abuse of public office for private gain. It is a composite index, drawing on 14 polls and surveys from 12 independent institutions, which gather the opinions of businesspeople and country analysts. CPI ranks countries with scores ranging from 0 (highly corrupt) to 10 (highly clean).

legislation and administrative procedures by rapidly program. The main objective of ERRADA is to simplify reviewing all laws and regulations and promptly elimi-nating those not needed. A business Advisory Com-mittee (BAC) will coordinate business sector input to ERRADA, undertake quality checks, inventorize and review laws and regulations, monitor progress, and build a communication campaign.

1.5 CoNClUSIoN Macroeconomic instability and poor human resources are the primary constraints to Egyptian competitiveness. The national debt and Government budget deficit are still among the most pronounced in the world. Inflation rates, briefly tamed, are again on the rise. There needs to be a comprehensive approach to address these problems so that Egypt does not lurch from crisis to crisis

indefinitely, and continues in the direction of sustained growth. Given the need for social solidarity and the protection of the poor during periods of energy and food price increases, doing so will not be easy, and this report will address the problem in greater detail later.

Macroeconomic stability must be matched by a commitment to quality education. While Egypt may have made strategic investments to expand the coverage of education since the publication of the gCI, perceptions of quality will not change in a single year. The Ministry of Education should seek to include the private sector as Egypt begins to address its perennial human capital problems so as to avoid the danger of making costly investments in the workforce only to find that workers still do not possess the specific skills required by the market.

Improvements in education create natural synergies that improve labor market efficiency. Egypt received a labor market efficiency score of 3.21, placing it 130th out of 131 countries on the gCI ladder. Consequently, policy makers can reasonably expect great marginal returns to their efforts at reform. The efforts need to address labor market rigidities, non-wage labor costs, and ways to stem the “brain drain” while supporting culturally appropriate integration of women into the labor force.

Financial market sophistication needs to be addressed. Although important efforts are underway to make the banking sector more competitive, much more needs to be done. There is a need for a rich ecology of financial institutions and instruments able to fuel a thriving private sector and respond to the needs of the majority of people for financial services (including savings and mortgage instruments).

Expansion of loan products, equity possibilities and venture capital can be expected in future years.

Egypt’s competitiveness scores have been consistent over time and are echoed in other indices. Responses to early years of the ECR were often characterized by defensiveness, disbelief or de-nial. Some reviewers sought to question the valid-ity of the methodology or the timeliness of the data. However, Egypt’s scores have been roughly consistent over time. They paint a picture of a country whose ranking in the world is lagging as other nations are added to the race or improve their performance at a faster pace. Egypt has sought to improve its competi-tiveness in piecemeal ways but has also delayed many of the hard decisions. government ministries are be-ginning to show more openness to dialogue with the larger public over their priorities, and this dialogue should lead to a quickening pace of change. The re-sults shared in this chapter can stimulate produc-tive dialogue, non-defensive learning and teamwork among private, public and educational sectors in ad-dressing these problems. There is less and less toler-ance for criticizing the mirror. Thus, combined indices present a fair picture of Egypt that is confirmed by both hard data and qualitative inputs from surveys and focus groups.

Ultimately, the point is not to judge Egypt’s perfor-mance, but to improve it.

49

ANNEX I.1: oTHER INDICAToRS

Table A.1.1.1 Performance of Egypt and the Comparators on the Most Problematic Factors of Doing Business

Egypt Jordan Morocco Mexico Chile Hungary TurkeyCzech Rep.

Poland Thailand Malaysia Indonesia

Access to Financing

Strengths of Legal Rights Index (0-10)

1 5 3 3 4 6 3 6 4 5 8 5

Depth of Credit Information Index (0-6)

4 2 1 6 5 5 5 5 4 5 6 3

Tax Regs. Payments (Number) 36 26 28 27 10 24 15 12 41 35 35 51

Time (Hours per Year)

711 101 358 552 316 340 223 930 418 264 166 266

Tax Rates Total Tax Pay-able (% of Gross Profit)

47.9 31.1 53.1 51.2 25.9 55.1 45.1 48.6 38.4 37.7 36 37.3

Inefficient Bureacracy

Procedures to Start a Busi-ness (Number)

7 10 6 8 9 6 6 10 10 8 9 12

Time to Start a Business (Days) 9 14 12 27 27 16 6 17 31 33 24 105

Procedures to Obtain a Liscence (Num-ber)

28 18 19 11 18 31 25 36 30 11 25 19

Time to Obtain a Liscence (Days)

249 122 163 131 155 211 188 180 308 156 285 196

Procedures to Register Prop-erty (Number)

7 8 8 5 6 4 6 4 6 2 5 7

Time to Reg-ister Property (Days)

193 22 47 74 31 63 6 123 197 2 144 42

Source: World Bank, Doing Business Report 2008

50

Table A.1.1.2 2007 E-Readiness Rankings

Country Rank (of 69) Score (of 10)

Korea, Republic of 16 8.08

Israel 23 7.58

Taiwan, China 17 4.43

Chile 30 6.47

Poland 40 5.80

South Africa 35 6.10

Malaysia 36 5.97

Brazil 43 5.45

Turkey 42 5.61

Venezuela 50 4.89

Colombia 53 4.69

Russian Federation 57 4.27

India 54 4.66

Jordan 52 4.77

Egypt 58 4.26

Philippines 54 4.66

China 56 4.43

Indonesia 67 3.39

Pakistan 63 3.79

Mexico 38 5.86

Argentina 44 5.40

Thailand 49 4.91

Source: The Economist Intelligence Unit, London, 2008. Global Technology Forum.

51

Table A.1.1.3 Performance of Arab Countries on the 2008 GCI and on Different Pillars

CountryGCI Among

Arab CountriesRank Among all

131 countriesBasic

RequirementsEfficiency Enhancers

Innovation & Sophistication

Factors

Kuwait 1 30 28 49 49

Qatar 2 31 24 44 46

Tunisia 3 32 34 47 29

Saudi Arabia 4 35 39 52 45

United Arab Emirates 5 37 25 35 42

Oman 6 42 38 70 40

Bahrain 7 43 32 46 74

Jordan 8 49 46 64 54

Morocco 9 64 70 80 70

Egypt 10 77 79 85 63

Syria 11 80 71 100 82

Algeria 12 81 49 97 102

Libya 13 88 67 123 105

Mauritania 14 125 121 128 109

Source: World Economic Forum, World Competitiveness Report 2007-2008, Geneva, 2007.

2 Macroeconomic Perils to Competitiveness

Amina Ghanem1

Economic growth has been robust since 2004, making Egypt one of the fastest growing economies in the region. Egypt has implemented a

number of bold reforms over the past four years that were supported by a favorable external environment. As a result, growth accelerated to over 7 percent in 2006/2007. All indicators suggest that the Egyptian economy will continue to perform well. Nevertheless Egypt’s ranking in macroeconomic stability and human resources has deteriorated as we saw in Chapter 1, implying that we are entering a period of more challenging economic conditions.This chapter attempts to identify potential weaknesses in three macroeconomic areas: inflation, a persistently large budget deficit and unbalanced growth. If not addressed promptly these challenges could compromise Egypt’s long term growth trend, with implications for the competitiveness of the economy. In particular, the importance of a more balanced growth that generates employment opportunities is discussed.The chapter recommends that the competitiveness issue be approached with a high sense of urgency by developing a competitiveness strategy that adopts balanced growth and focuses on improving education and empowering the labor force with the skills it needs to participate in all growing sectors of the economy.

1 Special thanks to omar ghoz for his input in the Chapter. Thanks are also due to Abdel Moneim lotfy and Azza Reda.

54

2.1 BolD REFoRMS HAVE lED To RAPID AND RoBUST gRoWTH

2.1.1 GDP growth rose to 7.1% in the year ending June 2007, led by strong domestic demand

Despite signs of a slowdown in the US, EU and Japan, the Egyptian economy continues to perform strongly at the fastest pace in more than a decade. The momentum of growth remains strong and steady, with growth at 7.1 percent in June 2007. Eco-nomic data indicate that the strong momentum has carried into the fiscal year 2007/2008, with economic growth reaching 7.2 percent in the first half of FY 2007/2008 ending December 2007 (Figure 1). The robust performance can be attributed to the bold “homemade” changes implemented by a Government with a “big appetite for reform” (Merrill Lynch, 2008).

FIGURE 2.1: REAL GDP GROWTH RATES(1999/2000 - H1 2007/2008)

0

1

2

3

4

5

6

7

8

9

10

11

12

H1

2007

/08

2006

/07

2005

/06

2004

/05

2003

/04

2002

/03

2001

/02

2000

/01

1999

/00

Source: Ministry of Economic Development (MOED)

The main drivers of high gDP growth rates are a buoyant domestic demand, reflected in robust con-sumption and investment demand levels, while exter-nal demand remains strong. looking ahead, the ex-ternal sector could slow down in the face of cooling global demand and trade spillovers. According to the IMF’s World Economic outlook (WEo, April 2008), the US growth standstill, accompanied by a housing correction and deteriorating financial markets condi-tions, will cause global growth to decelerate. Emerging economies are likely to be less affected but are not completely insulated from the slowdown. Data for the first half of FY 2007/2008 indicate a slight moderation in Egypt’s external sector in real terms (Figure 2).

Domestic demand continues to display strength in 2007/2008; together, consumption and investment spending account for the bulk of gDP (total uses). Consumption remains strong in the first half of 2007/2008 (ending June 2008), despite high inflation (Figure 2). The main advantage of strong domestic demand-led growth is that it helps reduce suscepti-

bility to cyclical swings in the external sector. As a result, growth has to date been resilient in the face of worsening market conditions and the global down-turn in economic activity. Therefore gDP growth in the neighborhood of 7.1 percent seems within reach in 2008.

FIGURE 2.2: THE CONTRIBUTION OF CONSUMPTION,INVESTMENT AND THE EXTERNAL DEMAND TOREAL GDP (TOTAL USES) 1999/2000 - H1 2007/2008 (1999/2000 - H1 2007/2008)

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

External Demand Total Consumption Total Investment

H1

2007

/2008

2006

/2007

2005

/2006

2004

/2005

2003

/2004

2002

/2003

2001

/2002

2000

/2001

1999

/2000

In L

E bi

llions

%70.1 %70 %70.5 %70.4 %67.6 %64.8 %62.3 %58.6 %59.6

%14.5 %14.4

%15 %16.6%19.5

%21.6

%23.7

%26

%25

%15.4 %15.6 %14.5 %13 %12.9 %13.6 %14 %15.4%15.4

Source: Ministry of Economic Development (MOED)

It is worthy to note here two observations regarding the recent growth. First, compared to other countries in the Middle East, Egypt shows rapid and steadfast growth, despite a varied pace (World Bank, 2008a). Table 1 indicates that between 1980 and 2006 Egypt grew on average by 4.6 percent, faster than any other country in the region. More important, this growth became relatively stable between 2000 and 2006 (Shepherd, 2008), and has been bolstered by the many structural changes implemented. Second, according to a recent World Bank report (2008a), growth in Egypt now seems to correlate with growth in oECD countries; for every one percentage point increase in growth in oECD countries, there is a 1.25 percentage point increase in Egypt’s output.

55

Table 2.1: GDP Growth Rate in Egypt and other Middle Eastern Countries.

Country

Average annual growth (%)

Standard deviation

1980- 2006

1980- 1989

1990- 1999

2000- 2006

1980-2006

1980- 1989

1990- 1999

2000- 2006

Egypt 4.6 5.3 4.1 4.4 2.1 2.4 2.2 1.3

Jordan 4.4 3.3 4.3 5.9 5.3 7.8 4 1.6

Libya 0.4 -1.8 -0.5 4.8 6.7 5.9 8.5 1.8

Morocco 3.8 3.9 2.8 4.9 4.9 4.8 6.4 2.5

Syria 4 2.7 5.7 3.4 5.3 7 5.1 1.5

Tunisia 4.4 3.6 5 4.6 2.4 3.2 2 1.4

Middle East

3.4 1.3 4.3 5.1 2.6 2.3 2.5 1.2

World 3.5 3.3 3.2 4.3 1.1 1.2 0.9 1.1

Source : IMF (Shepherd, 2008)

2.1.2 Two main features of the growth are a surge in investment spending and private sector participation

Available data on private and public contributions to gDP growth by sector show two fundamental changes in the economy: record increases in invest-ment spending and in private sector participation in the economy.

There has been a surge in investment and ��

foreign direct investment (FDI) nearly tri-pled from 2004/5 to 2006/7 with half of this being new or “greenfield” investment.

In response to the improving business climate and other reforms implemented, foreign direct invest-ment inflows have grown exponentially over the past years, jumping from a mere 3 percent of gDP in June 2004 to 4.4 percent (US$3.9 billion) in June 2005, to 5.7 percent ($5.7 billion) in June 2006, followed by a sharp increase in June 2007 at 8.6 percent (US$11 bil-lion). By September 2007, FDI reached 9.2 percent of GDP (US$14 billion). FDI inflows are being dispersed throughout the sectors of the economy, with nearly 73 percent going for non-oil sectors (Figure 3).

The magnitude of FDI flows markedly distinguishes Egypt from its peers (Philippines, India, Turkey and Morocco, surpassed only by Jordan). Egypt ranks 33 out of 141 countries on FDI performance, a marked improvement from a rank of 102 two years ago. Egypt ranks second in the Arab World and first in Africa, attracting one third of total FDI to Africa (S&P’s, 20082).

2 Citing UNCTAD World Investment Report (2007).

FIGURE 2.3: ANNUAL FDI INFLOWS IN PETROLEUM ANDNON-PETROLEUM SECTORS(2004/2005-2006/2007)

US$

Milli

ons

929

3,348

5,200

420906

2,8002,540

0

2000

4000

6000

8000

10000

120002006/072005/062004/05

Total FDI InflowsNet FDI Inflows inPetroleum Sectors

Sales of Assets &Productive Line to

Non-Residents

New Establishment &Capital Increase

1,832

3,014

3,902

6,111

11,053

Source: CBE

Major Greenfield investment has also been on the rise. The composition of FDI marks a clear departure from the past where privatization and oil and gas invest-ment contributed the bulk of FDI. ‘Greenfields’ and non-hydrocarbon investments have doubled to 47 percent of total FDI flows over the past three years. In addition sales of assets to non-residents contrib-uted in June 2007 some 25.3 percent of total flows compared to 11 percent in June 2005. This is an indi-cation that foreign capital is being attracted to Egypt by virtue of its friendly business environment and the improving potential for the country, and not by the temporary effect of privatization.

Increases in FDI are closely related to government of Egypt efforts related to both consciously attract-ing this investment while simultaneously improving the business environment. The World Bank’s 2008 Doing Business Report placed Egypt as the world’s top reformer, moving its ranking from 165th (among 178 countries) to 126th, in two years. The main drivers of this improvement were a friendlier business envi-ronment reflected in easier regulations that enabled easier entry of firms. Thus an increasingly larger num-ber of firms registered in GAFI. There are also fewer exits, coupled with a steady decline in bankruptcy rul-ings after a change in the Bankruptcy law that allowed financial reorganization and liquidation (World Bank 2008). Strong progress was made in starting business-es. The establishment of one-stop-shops has cut pro-cessing time to 9 days, compared to 11 days in Tunisia, 12 days in Morocco, and 15 days in Saudi Arabia and

56

35 days in kuwait. The number of procedures has also fallen from 10 to 7, approaching the oECD average of 6 procedures. The minimum capital required to start a business was slashed from l.E. 50,000 to l.E. 1,000 (World Bank, 2007).

As economic reforms continue to broaden and deepen, FDI to Egypt is expected to increase further. Buoyed by the current boom in oil-related commod-ity prices, gulf countries are continuously looking for investment opportunities, especially in the construc-tion, pharmaceuticals and communications sectors. European and Asian investment has contributed to the clothing and car assembly sectors. Financial sec-tors are also attracting substantial FDI inflows, both through the privatization of Egyptian banks and as for-eign banks expand their branch networks (IIF, 2008). With rising FDI and strong competition from firms to exploit the local market, technology transfers from these firms will improve Egypt’s competitiveness in all of these sectors.

In the meantime, privatization proceeds have risen impressively, totaling l.E. 33.5 billion between June 2004 and June 2007. Privatization has extended to the banking sector, to telecommunications (landline and new cellular licenses) as part of a broader financial sector restructuring plan. gAFI is intent on improving conditions for existing investors in order to attract new inflows. Also, the overall reformist stance of the Government, and the confidence of international in-vestors in the economy, continue to catalyze the surge in FDI. If sustained, this will have positive implications for employment and living standards in Egypt.

The increase in domestic investment is another success story. The period between the fiscal years 2003/2004 and 2006/2007 witnessed a surge in do-mestic investment spending levels compared to con-sumption. In real terms, domestic investment demand grew by more than 9 percent in 2006/2007 compared to 1 percent in FY 2002/2003. Between 2005/2006 and 2006/2007, investment demand grew strongly (Figure 2). The rise in domestic demand levels owes to a series of structural reforms, trade and tax reforms that increased incomes, making the economy more buoyant and providing a better business environ-ment that facilitated domestic and foreign investment. Growth in investment demand reflected positively on the labor market by creating around 2.5 million new employment opportunities during the period 2003/2004 to 2006/2007 which in turn helped reduce unemployment levels, from 9.6 percent in 2005/2006 to 9.1 percent during 2006/2007 (IMF, 2007).

The private sector has become the engine of ��

growth for the Egyptian economy

The private sector has contributed the most to the re-cent strong economic growth rates. Since 2004/2005,

the private sector’s contribution to real gDP has steadily increased over public sector contribution; the private sector contributed in real terms some 5.2 percentage points of the 2006/2007 growth rate of 7.2 percent; or 72.2 percent of real growth. This com-pares to 63.3 percent of growth in 2004/2005 and 60.3 percent in 2005/2006 (Table 2). The increased role of the private sector in the economy has increased pro-ductivity substantially: the rise in total factor produc-tivity is greater in the sectors that have higher private sector participation (World Bank, 2008a).

Much of the private sector’s response was boosted by measures and incentives undertaken by the gov-ernment since taking office in 2004. These measures aimed to improve and facilitate the business environ-ment. September 2004 saw significant tariff reductions that were followed by a second round of cuts in De-cember. other measures included ongoing customs reforms and a new tax code that was passed in June 2005. The new law reduced personal and corporate taxes by 50 percent. These cuts not only served to raise income, but also reinstated market confidence in the economy, which helped boost investment spend-ing, in particular private investment.

Manufacturing explains most of the growth momentum of the private sector

From a sectoral perspective, the main engine of pri-vate growth in the three years was manufacturing (1.23 percentage points of a total growth rate of 7.2 percent in 2006/2007), explaining alone close to a quarter of the growth of the private sector. Recent discoveries of natural gas fields and subsidized energy prices explain some of the strong growth in the man-ufacturing sector. growth in the export of textiles to the United States was facilitated by the QIZ agree-ment which granted Egyptian textile exports duty free access to the US (assuming an 11 percent element of Israeli input into the manufacturing process). The QIZ agreement helped protect Egyptian textiles exports from Asian competition after the Multi Fiber Agree-ment was dismantled in 2005 (IIF, 2008).

The remaining 75 percent of private sector growth are explained by wholesale and retail, construction and buildings, transportation, tourism (restaurants and hotels), agriculture, real estate activities and other miscellaneous services. Between 2004/2005 and 2006/2007 the fastest growing sectors were con-struction and buildings (253 percent); wholesale and retail (163 percent) and transportation and communi-cation (132 percent). During the same period, agricul-ture has grown much slower than these sectors—by 7.6 percent—and contributes a mere 0.57 percentage points (11 percent) of the growth of the private sec-tor, compared to 0.53 percentage points in 2004/2005 (Table 2).

57

Table 2.2: Private and Public Sector Contributions to Real GDP Growth in 2004/2005 to 2006/2007

2004/2005 2005/2006 2006/2007

Private Public Private Public Private Public

Agriculture, Woodlands & Hunting 0.53 0.00 0.532 (0.01) 0.57 0.00

Extractions 0.07 0.48 0.278 1.35 0.08 0.26

Manufacturing Industries 0.74 0.11 0.989 0.12 1.23 0.14

Electricity 0.01 0.11 0.015 0.14 0.01 0.10

Water 0.00 0.02 0.000 0.03 0.00 0.03

Construction & Buildings 0.19 0.03 0.542 0.07 0.67 0.07

Transportation & Communication 0.42 0.07 0.519 0.08 0.62 0.09

Suez Canal 0.00 0.47 0.000 0.31 0.00 0.50

Whole Sale & Retail 0.35 0.02 0.731 0.02 0.92 0.04

Financial Intermediaries & Supporting Services

0.09 0.15 0.106 0.20 0.15 0.26

Insurance & Social Insurance 0.00 0.10 0.003 0.13 0.00 0.16

Restaurants & Hotels 0.61 0.01 0.146 0.00 0.44 0.01

Real Estate Activities 0.11 0.01 0.137 0.01 0.15 0.01

Public Government 0.00 0.30 0.000 0.33 0.00 0.32

Education, health, social, cultural, entertainment & personal services

0.12 0.00 0.151 0.01 0.21 0.01

Other Services 0.069 0.00 0.12 0.00

Sub-Total of Sectors 3.24 1.88 4.219 2.78 5.18 1.99

Total Real GDP Growth Rate 5.12 7.00 7.17

Source: Ministry of Economic Development

2.1.3 The external sector: exports still growing and debt has been reduced

Egypt’s external balances are strong. In June 2006 ex-ports grew by 34 percent compared to 16.6 percent in June 2003. This was prompted by two important factors: the devaluation of the pound in 2003 and the recent net real depreciation of the pound3 ; and trade reforms that included two rounds of tariff reduc-tions4. During the same period imports grew at much slower pace: 25.6 percent in June 2006 compared to 1.4 percent in June 2003.

In June 2007, the nominal growth rate of exports slowed down to 19 percent but picked up again to 23 percent during the first half of FY 2007/2008 (end-ing December 2007) (Figure 4). Merchandize exports have been increasing strongly; growing by 45 per-cent in June 2007, compared to 30 percent in June 2004. Growth dampened however during first half of 2007/2008 to 27 percent. As a percent of gDP, mer-chandize exports have increased from 7 percent in June 2005 to 9.3 percent in June 2007 to 10.1 percent in December 2007.

3 Since 2005, the Egyptian pound has appreciated by only 8 percent in nominal terms against the US dollar. Given continued high inflation, this implies a signifi-cant real depreciation

4 The average weighted tariff rate has declined from 14.9 percent to 8.9 percent in September 2004, to less than 7 percent in January 2007.

FIGURE 2.4: ANNUAL GROWTH RATES FOR EXPORTPROCEEDS ANDIMPORT PAYMENTS (1991/1992 - 2006/2007)

Gro

wth

Rat

es %

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

50

55Exports ReceiptsImports Payments

1999

/00

1998

/99

1997

/98

1996

/97

1995

/96

1994

/95

1993

/94

1992

/93

1991

/92

Source: CBE

In the meantime imports grew briskly by 24 percent in June 2007 and 41 percent during the first half of FY 2007/2008. This growth reflects strong domestic de-mand (consumption and investment spending). So far the trade deficit has only slightly widened (Figure 4).

58

Data for the first half of the FY 2007/2008 (MOF 2008) indicate that the current account is expected to go to a slight deficit. This should not be an issue to finance with strong Suez Canal receipts (3.2 percent of gDP), tourism (6.3 percent of gDP) and other transfers. The overall balance of payments position in 2007/2008 remains sound, and, unusually for a lower middle income country, Egypt is a net external credi-tor to the rest of the world (IIF, 2008).

Egypt’s external debt position continues to ��

be strong

Egypt’s external finances are healthy and pose little risk to its credit standing. The external balance sheet, reflected in high reserves and decline in external debt relative to gDP lower the external risks associ-ated with Egypt’s fiscal vulnerability emanating form a wide budget deficit (S & P’s, 2007). Total external debt ratios remain manageable and are narrowing. In terms of net present value, external debt has declined from US$29.9 billions in 1991 to US$25.9 billions in June 2007. Its maturity structure is favorable, with short term constituting less than 5.9 percent of total external debt. As a percentage of gDP, foreign debt stood at 21 percent in September 2007 compared to 23.3 percent in June 2007 (Figure 5).

FIGURE 2.5: ANNUAL EXTERNAL DEBT AS PERCENT OF GDP(1990/1991 - DECEMBER 2007)

% o

f GD

P

0 20 40 60 80 100

120

H1-2007/08

2006/07

2005/06

2004/05

2003/04

2002/03

2001/02

2000/01

1999/00

1998/99

1997/98

1996/97

1995/96

1994/95

1993/94

1992/93

1991/92

1990/91

Source: CBE

Debt service, as a percent of current account receipts and of exports of goods and services, was 4.6 percent and 5.5 percent respectively in June 2007, down from 7.3 percent and 8.5 percent a year earlier.

Net international reserves (NIRs) have climbed to US$33 billion in February 2008 from US$ 26.2 bil-lion in February 2007 2004 (Figure 6). This was largely due to regained confidence in the economy, strong Suez Canal revenues and hydrocarbon exports. Re-mittances and foreign direct investment have also di-rectly contributed in boosting the country’s foreign reserves.

FIGURE 2.6: NET INTERNATIONAL RESERVES (NIRS)(1991/1992 - FEBRUARY 2008)

US$

Billi

ons

0 5 10 15 20 25 30 35

Feb-08

2006/07

2005/06

2004/05

2003/04

2002/03

2001/02

2000/01

1999/00

1998/99

1997/98

1996/97

1995/96

1994/95

1993/94

1992/93

1991/92

Source: CBE

2.1.4 The Stock Exchange experienced a boom year posting 51% growth in 2007

The Stock Market saw a particularly active year in 2007. The main CASE 30 index performed very well last year, gaining 51 percent. The bullish performance occurred despite the retreat by many stock markets in the world in the face of the global credit crunch and successive write-downs by major banks following the collapse of the US sub-prime lending market.

A number of factors contributed to the upbeat per-formance of the market: (i) recent economic growth; (ii) a feeling among some traders that the country’s stocks are a good bet (iiii) confidence in the economy owing to the government’s pro-business reforms, rap-id privatization, an expansionary fiscal policy (through tariff and tax cuts) (Figure 7) (oBg, March 13, 2008); and (iv) banking stocks and the booming textiles sec-tor have also helped drive the activity in the market. In addition, gulf investors are attracted by the trans-parent regulatory environment of the Egyptian Stock Market and the low PER ratios (IIF, 2007).

59

FIGURE 2.7: ANNUAL CASE-30 PERFORMANCE(JANUARY 2007 - DECEMBER 2007)

Inde

x Le

vel o

f Poi

nts

6300

6800

7300

7800

8300

8800

9300

9800

10300

10800

3 Jan

07

4 Feb

07

4 Mar

07

2 Apr

07

6 May

07

3 Jun

07

3 Jan

07

2 Jul

07

31 Ju

l 07

28 Au

g 07

25 Se

p 07

23 D

ec 07

Source: Egyptian Stock Market

Despite the buoyancy, valuations remained reason-able. According to Bloomberg, the Hermes index av-erage price/earnings (PE) ratio was 17.66 in Decem-ber of 2007, compared to 21.86 and 23.19 for the indices Saudi Arabia and Dubai respectively. Moreover Egypt’s PE ratio was some 8 percent lower than in December 2006, reflecting strong corporate earnings performance during 2007 (IIF, 2007).

looking ahead, Egypt’s Cairo and Alexandria Stock Ex-change (CASEs) look set to secure and build upon last year’s gains and could rival major world markets. High demand for initial public offerings (IPos) in Egypt re-flects that international investors are always look-ing for good growth stories. But while demand for IPos has been high, liquidity on the exchange remains relatively low. However the healthy economic growth rate of 7 percent will give companies the opportunity to use the CASE to raise capital to expand, allowing investors more opportunities to tap into the growth (oBg, March 13, 2008).

2.2 HIgH INFlATIoN, CoNTINUED BUDgET DEFICITS AND UNBAlANCED gRoWTH ARE THE MAJoR MACRoECo-NoMIC CHAllENgES To SUSTAINABlE gRoWTH

Egypt’s bold and wide ranging reforms, relatively favorable external conditions and regained investor con-fidence have supported fast economic growth over the past four years. However, Egypt faces a number of

macroeconomic challenges that pose a risk to sustainable growth and the creation of employment opportunities for the growing labor force. The main macroeconomic risks include persistent inflation and a deteriorating external environment, a stubborn budget deficit, and unbalanced growth among sectors.

2.2.1 Inflation has recently risen to 14% and poses a serious risk to growth and poverty reduction

Inflation has become a serious global concern. Head-line inflation (total inflation including food and en-ergy) has increased throughout the world and core inflation (excluding food and energy prices) is also rising (WEO, April 2008). Inflation in Egypt has on av-erage been high (Shepherd, 2008), with implications for unsustainable growth, weak competitiveness and ineffective pro-poor policies. Table 3 shows that the inflation rate in Egypt has been one of the highest in the region (second only to Syria) with high volatility. Continued high inflation rates could hurt private con-sumption which accounted for around 71 percent of gDP in June 2007 (MoF, 2008). A slowdown in con-sumer spending growth could have a marked impact on overall gDP growth. Coupled with a persistent US slowdown and credit crunch, as well as recent turmoil in global markets, Egypt’s growth momentum could lose steam.

Table 2.3: Annual Average Inflation Rate in Egypt

Country

CPI inflation, annual average (%)

Standard deviation

1980- 2006

1980- 1989

1990- 1999

2000- 2006

1980- 2006

1980- 1989

1990- 1999

2000- 2006

Egypt 11.7 17.5 10.8 4.6 6.9 4.8 6.3 2.7

Jordan 5.2 7 5.1 2.7 5.2 7.4 4.4 1.9

Libya 4.8 8.9 6.2 -2.9 6.5 4.6 3.8 5

Morocco 4.9 7.6 4.4 1.8 3.5 3.8 2.6 1

Syria 12.5 23.7 7.3 3.8 14.4 19 6.3 4.7

Tunisia 5.7 8.7 4.8 2.8 2.9 2 1.6 0.9

Middle East

10 12 11 5.8 4.1 4.1 3.8 1.5

World 13.6 15.5 18.6 3.7 9.7 3.8 12.2 0.3


Inflation is rising even more markedly in all developing countries owing to soaring food and energy prices, reflecting the high weight of these two items in the consumption basket (WEO, April 2008). High inflation is thus a big challenge (14.4 percent in March 2008) in

60

Egypt, in particular as the economy continues to grow at a very rapid pace and is still thirsty for growth. Sus-taining high growth rates will inevitably create more inflationary pressures: the strong import growth is fed by strong domestic demand and helps fuel price increases. Inflation is compounded by high energy and commodities prices all over the world, particularly in food and energy prices.

Inflationary pressures from food have spread all over the Egyptian economy. Food and beverages make up 44 percent of the urban CPI basket which saw a 35 percent increase for bread prices compared to Janu-ary 2007. Food prices rose by 20.5 percent in March 2008, up from 16.8 percent in February 2008. Corn prices have also been affected by the poultry indus-try, which uses the grain as feedstock. grain prices in Egypt rose by 48.1 percent in March 2008, up from 27 percent in February 2008, and food oil by 45.2 per-cent (MoF, 2008). Corn bread is one of the main food items subsidized to feed poor Egyptians.

Faced with rising food prices, rice exports were banned for six months starting April 2008, and the Minister of Agriculture announced that the area allo-cated to rice crops would be reduced while corn pro-duction would be increased. Egypt is Africa’s largest rice exporter. However, the biggest challenge to local consumers is not the availability of rice but its ris-ing price as a percentage of the consumer basket. The problems with bread distribution have been exagger-ated by increases in the international price of wheat and a very high inflation rate that. Egypt is one of the world’s biggest importers of wheat, and buys some 50 percent of its annual consumption from international markets (oBg, April 24, 2008).

overall, the different measures taken by Egyptian of-ficials regarding food production and distribution are part of a strategy to fight rising food prices within the local market while reducing dependency on ex-ternal food markets (oBg, April 24, 2008).The recent elimination of tariffs on a number of food products, combined with reduced food exports, is expected to increase domestic supply and fight inflationary pres-sures. But ultimately, addressing the macroeconomic imbalances of growth (as will be discussed in Section 2.2.3 below) and enhancing agricultural production is the only measure that can help the country become self-sufficient.

The government has also announced that it will freeze exports of cement until october, in another effort to stabilize prices and increase the supply available for local construction. A number of export duties imposed in February and August 2007 failed to stop the domestic rise in prices because of increased con-struction activities. Cement prices in Egypt increased by some 27 percent in April 2008. This is largely due to the boom in Egypt’s construction sector as dis-

cussed (Table 2 and Figure 9), and to the increase in international prices which has made it more lucrative to export cement than to sell it domestically. Cement is not the only product to have witnessed a surge in prices. Recently, Egypt increased export duties on steel. Duties applied in 2007 had reduced steel ex-ports by 50 percent (oBg, April 11, 2008).

Macroeconomic policies must address the downside risks to growth in a way that does not lead to higher inflation, while remaining alert to the risks of a slow-down. (WEO, April 2008). This might prove difficult. While the monetary policy framework has improved as the authorities move towards inflation targeting, the Central Bank still faces some challenges. The monetary transmission mechanism is relatively weak and the pound has been appreciating with a view to dampen the spike in prices, but inflation has remained high. In addition, demand side pressures for skilled labor have added half a percentage point to inflation since September 2007 (S & P’s, 2007).

2.2.2 The budget deficit has improved but remains the highest in the region at 7.5 percent

Key weaknesses in Egypt’s fiscal profile are a high budget deficit, large public debt ratios and budget ri-gidities. The budget deficit and domestic debt ratios are high both in absolute terms and relative to other developing countries. Despite recent progress, Egypt still has one of the worst fiscal ratios in the world (Fitch, 2007).

First, although Egypt’s fiscal deficit has eased from 9.5 percent in 2003/2004 to 7.5 percent in 2006/2007, it remains high and is still the largest among other countries in the region such as Morocco, Tunisia, lib-ya, Algeria, Syria, Turkey and Saudi Arabia, (Figure 8).

Second, domestic debt has been falling for some years driven by stronger growth. Net domestic bud-get sector debt has declined from 72.5 percent in June 2005 to 65.4 percent in June 2007. However it is twice the gross debt ratios for countries such as India, Morocco, Brazil, Mexico and Tunisia (Fitch Rat-ings, 2007).

Third, there are significant budget rigidities that minimize the fiscal space available to make the much needed improvements in the health and education sectors — two sectors crucial for the empowerment of Egypt’s labor force. A healthier population empow-ered with the education and skills that enable it to become active and productive will increase the com-petitiveness of the economy

Egypt’s budget is currently inflexible in several areas that constrain the fiscal space of the budget. Fiscal

61

space is the availability of budgetary room for the gov-ernment to spend resources on priority sectors with-out jeopardizing its financial position (Heller, 2005).

FIGURE 2.8: OVERALL FISCAL BALANCE, EXCL. GRANTS(% OF GDP)

-15 -10 -5 0 5 10 15 20 25 30 35 40

Year 2006Year 2005Year 2004Year 2003Year 2002

Egypt

Saudi Arabia

Turkey

Syria

Algeria

Libya

Tunisia

Morocco

Source: IMF

Meanwhile peer countries are moving ahead. Turkey in particular has shown improved fiscal discipline reflected in large primary surpluses in recent years. Morocco has been addressing structural weakness in government expenditures by rationalizing civil service employment practices (S & P’s, 2007).

The three main elements of the fiscal budget rigidity are expenditures related to subsidies, interest pay-ments and public sector wages (including salaries). Total subsidies were 8 percent5 of gDP in 2006/2007. Energy subsidies alone represented 6 percent of gDP in June 2007 (MoF, 2008), and given the high rise in in-ternational oil prices the energy subsidy bill could go up to between 6.5 - 7 percent of gDP in 2008. If we look at fuel prices (Table 4), high octane in Egypt costs US$ 0.23 cents per liter, compared to US$ 0.79 cents for Tunis and a high of US$ 1.78 for the Uk. Diesel prices in Egypt are even more distorted (Shepherd, 2008). Because Egypt has had the benefit of revenues from state oil companies, there has been no urgency to address the negative linkage between rising oil prices, energy subsidies and unsustainable expendi-tures (S & P’s, 2008).

As the Government views it to be extremely difficult to phase out subsidies at this juncture, the fiscal bur-den of subsidies will continue to put a strain on the budget, causing an expansion in the Egyptian fiscal def-icit in FY 2007/2008, with potential consequences for

5 other reports estimate food and energy subsidies to reach l.E. 82 billion or 9.8 percent of gDP in 2007/2008 (IIF, 2008). Please note that The 5th Egyptian Com-petitiveness Report went to print on the day the new energy price adjustments were made. The impact on the energy subsidy bill was not readily available.

producer and consumer prices. Moreover, subsidized energy prices have caused the energy-intensive manu-facturing sector to grow disproportionately faster than the other sectors of the economy. Fiscal imbal-ance (represented by a high energy subsidy) can easily create macroeconomic imbalances that can threaten growth and competitiveness as will be discussed later in this chapter.

Table 2.4: Fuel Prices, June 2006 (In US$ per liter)

High Octane Diesel

UK 1.78 1.82

EU-15 1.68 1.44

France 1.64 1.40

Spain 1.39 1.26

Morocco 1.21 1.08

Jordan 0.90 0.53

USA 0.81 0.76

Tunisia 0.79 0.52

Egypt 0.23 0.10


The other two budget rigidities are interest payments and public sector wages (Table 5). As a percent of total expenditures, interest payments stand at 21.2 percent compared to wages at 22.9 percent. If we add subsidies to these components we find that 73 percent of total fiscal expenditures are rigid, and un-der the current social constraints cannot be re-pri-oritized. If we add another 8.1 percent6 of defense expenditures, 7.1 percent of procurement and 10.6 percent of fixed investment, total inflexible expendi-tures come to 99 percent of the budget, leaving one percent as “fiscal space” to be spent on social expen-ditures such as health and education. With only one percent only of total expenditures available in fiscal space, the burden of creating more resources will fall upon the fiscal instruments such as borrowing or overseas development assistance (oDA) as the lion share of expenditures cannot be re-prioritized. Bor-rowing will increase public debt, while oDA has been declining. Economic assistance from the United States (Egypt’s biggest donor) has been on a downward path over the last ten years.

A series of one-time structural reforms were imple-mented during 2006/2007 and with impressive results that created substantial fiscal space. Examples of such reforms were reductions in the income tax rate while broadening the base and improving compliance (in-creasing tax collections by l.E. 10.8 billion); tariff rate cuts (raising Customs collections by l.E. 1.7 billion); implementation of the treasury single account law (yielding l.E. 2.7 billion in interest payment savings);

6 Already below many other countries in the region.

62

restructuring the interrelationship between the Na-tional Investment Bank (NIB), and the Social Insurance Funds (yielding l.E. 7 billion in interest payment sav-ings); and reductions in energy subsidies, creating sav-ings of l.E. 6 billion (MoF, 2007)7.

Table 2.5: Rigidity and Flexibility in the Budget

% of Total % of GDP

2003 2006p 2003 2006p

Rigid Component

Debt Service 26.3 24.3 8.9 7.5

Amortization 7.9 3.1 2.6 1.0

Interest 19.4 21.2 6.3 6.5

Wages and salaries

23.5 22.9 7.7 7.0

Subsidies and transfers

15.6 26.0 5.1 8.0

Non-Rigid Component

Inertial Expenditures

Goods and services

5.9 7.1 1.9 2.2

Fixed investments

14.4 10.6 4.7 3.3

Flexible Expenditures (“Others”)

Defense special funds

11.8 8.1 3.8 2.7

Fiscal space 1.5 0.9 0.5 0.3

Total Expendiures

100 100 32.6 30.7

Source: IMF (Shepherd, 2008)

More recently the government has been less active (S & P’s, 2007) in creating the needed fiscal space in the budget. The announced increases in budgeted spending on wages and subsidies (especially energy subsidies) in 2008/2009 indicate that the budget will not see any structural reforms to address important weaknesses that can provide more fiscal space. Further structural reforms are needed to create more fiscal space in order not to jeopardize the much needed im-provements in the health and education sectors. Egypt will not be able to implement long term strategies to develop these two sectors, unless it creates or finds additional resources. Egypt’s expenditure on health and education are relatively low. As a percent of total expenditures, health and education are only 5.5 and 15.5 percent respectively. As a percent of gDP they are 1.3 and 3.8 percent respectively (Table 6).

Egypt’s spending on education is far below other countries and below the MENA mean of 5.3 percent

7 See also Chapter 2 in The Fourth Egyptian Competitiveness Report (2007).

of gDP. For example, Algeria spends 6.1 percent of gDP, Djibouti 5.7 percent, and Tunisia 6.8 percent. The mean of Asia is 3.6 percent and the mean for South America is 3.9 percent (World Bank, 2008c).

Table 2.6: Functional Composition of Public Expenditures

Function(% of total) (% of GDP)

2003 2006p 2003 2006p

General services, including financial

31.0 33.7 9.3 10.0

Defense and national security

10.0 8.0 3.0 2.4

Police and public order

5.2 4.4 1.6 1.3

Economic affairs (infrastructure)

7.7 5.4 2.3 1.6

Environmental protection

0.3 0.4 0.1 0.1

Housing & community affairs

4.0 2.6 1.2 0.8

Health 5.5 4.3 1.7 1.3

Recreation, culture & religious affairs

4.5 3.6 1.4 1.1

Education 15.5 12.6 4.7 3.8

Social protection 16.1 25.0 4.8 7.4

Total 100 100 30.1 29.8

Source: IMF (Shepherd, 2008)

Fiscal space can partially be created for spending on education through Public Private Partnerships (PPPs). PPPs constitute a mechanism for inducing the private sector to finance infrastructure investment that nor-mal budgetary ceilings would not permit. This is par-ticularly true if the private sector is more efficient than the public sector in creating and operating in-frastructure services. Resulting efficiency gains would free fiscal space in the short term. The Ministry of Finance has undertaken a PPP initiative in the edu-cation sector, but more incentives must be given to the private sector to facilitate greater involvement in infrastructure projects. In the longer term the govern-ment needs to ensure its capacity to absorb the high-er expenditure costs in future years (Heller, 2005). So, in short, continued fiscal adjustment is crucial in order to raise national savings to finance higher and sustain-able levels of investment needed to promote strong gDP growth rates and improved competitiveness.

2.2.3 Unbalanced growth poses a major risk to competitiveness and economic stability

In addition to the challenges of inflation and a large budget deficit discussed above, the macroeconomic pattern of growth is failing to generate job opportuni-ties. In other words growth is not led by employment.

63

Egypt is facing an important challenge that will set the framework of reform for the coming years.

Despite record high gDP growth rates achieved by the Egyptian economy, there is the perception that the benefits and fruits of growth have failed to reach the under privileged sections of the Egyptian society. However, the GINI coefficient of income distribu-tion for Egypt is 0.32, putting Egypt in the middle of the world inequality distribution of coefficients (with 0.26 being very equal and 0.56 being very unequal). Poverty indicators have improved very slowly since 1995/96 (Table 7), and disparities across regions re-main -- in many governorates poverty has remained consistently lower than in other governorates (World Bank, 2008a). Compared to peer countries such as Jordan, Philippines, India, Turkey, Tunisia and Moroc-co, Egypt’s per capita income, at US$1,700, makes it among the poorest, second only to India (per capita income of US$ 935). Forty-four percent of Egypt’s population lives on less than US$2 per day, compared to 6.6 percent for Tunisia and 18.7 percent for Turkey (S & P’s, 2007).

A slow reduction in poverty despite strong economic growth could undermine Egypt’s labor force: house-holds with low incomes will not be able to provide even basic education or healthcare to their children, only serving to marginalize future generations. With-out a well educated and highly skilled workforce, Egypt will not be able to address the tough global competi-tiveness challenges that lie ahead.

Table 2.7: Percentage of Poor and Near Poor by Region 1995-2005

1995/96 1999/00 2004/05

Metropolitan 35.6 19.6 18

Lower Egypt (Urban)

33.5 27.7 27.2

Lower Egypt (Rural)

57.1 42 41.1

Upper Egypt (Urban)

44 48.9 28

Upper Egypt (Rural)

65.3 63.5 64.6

All Egypt 51.4 42.6 40.5

Source: World Bank (2008a)

Upon analyzing the components of GDP, we find that most of the economic growth is explained by the private sector in sectors that require high skills and technology such as manufacturing or services, or in capital intensive sectors that do not generate sufficient employment opportunities while requiring mainly skilled labor. As mentioned earlier, the private sector contributed around 63 percent of the growth rate for the fiscal year 2005/2006 rising to 72 percent for the fiscal year 2006/2007. The main engine of pri-

vate growth in the three years was manufacturing, ex-plaining alone close to a quarter of the growth of the private sector. The remaining 75 percent of private sector growth came from wholesale and retail trade, construction and buildings, transportation, tourism (restaurants and hotels), agriculture, real estate activi-ties and other miscellaneous services (Figure 9). Be-tween 2004/2005 and 2006/2007 the fastest growing sectors were construction and buildings; wholesale and retail trade; and transportation and communica-tion (Table 2). Tourism demand has contributed to the boom in construction and is central to Egypt’s eco-nomic prospects (S & P’s, 2007).

The agriculture sector, upon which many unskilled and low skilled people depend, continues to under-per-form; growing much slower than the other sectors, contributing a mere 0.57 percentage points (11 per-cent) of the growth of the private sector, compared to 0.53 percentage points in 2004/2005 (Figure 9).

FIGURE 2.9: PRIVATE CONTRIBUTION TO REAL GDP GROWTHIN 2006/2007 (BY SECTORS)

11%Agriculture,Woodlands &Hunting

2%Extractions

23%ManufacturingIndustries

0.2%Electricity

13%Construction &Buildings

12%Transportation &Communication

18%Whole Sale &Retail

FinancialIntermediaries &SupportingServices

9%Restaurants &Hotels

3%Real Estate Activities

3.8%Education, health, social,cultural, entertainment &personal services

2%Other Services

Source: Ministry of Economic Development

The private sector’s role remains key to the sustain-ability of high growth rates; and it is expected that private sector growth in manufacturing, wholesale and retail, construction and buildings, transportation, tourism, and real estate activities will continue to ex-plain most of the expected healthy growth levels of 7-8 percent. The manufacturing sector in particular will continue to grow, drawing upon low/subsidized energy prices, which are still significantly lower than international prices as discussed earlier (Table 4).

Despite the rising share of the private sector in the growth of all areas of the economy, two thirds of to-tal employment remains in agriculture and education; two areas where the formal private sector contribu-tion to growth is very small (World Bank, 2008a). Thus with the current pattern of growth, only one

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third of the new entrants into the labor market are able to benefit from employment in the fast growing and dynamic sectors. This has implications for income redistribution and poverty: only those who are able to find jobs in the sectors enjoying a strong expansion — one third of the labor force — are able to partake in the growth of the economy and increase their in-comes. The majority of other entrants, if they can find opportunities, are absorbed by two sectors that do not have a significant weight in growth, and hence do not get to benefit from the incomes generated in the dynamic sectors.

Further data and analyses support the conclusion that the strong growth of the economy is not creating suffi-cient employment opportunities, although 2004-2008 proved to be a better period in terms of gDP growth than previous past years. Analyzing contribution to Egypt’s economic growth by capital, labor and total factor productivity we find that labor’s role has de-clined. Between 1991 and 2000, labor contributed 1.5 percentage points of an average growth rate of 4 percent, or roughly 37 percent of the growth momen-tum. Between 2001 and 2006 labor contributed 1.4 percentage points of an average growth rate of 4.14 percent or roughly 34 percent of the growth rate. In other words despite the higher rate of growth, there has been lower labor utilization (World Bank, 2008a). Although total factor productivity (TFP) has increased markedly from 0.93 percent to 1.64 percent over the two comparison periods (World Bank, 2008a), the input of labor to growth is the more important con-tributor to sustainable growth, as will be discussed below.

The low role of labor in growth is also supported by slowly declining levels of unemployment. Despite the 7 percent growth rate of the past years, the un-employment rate has declined only marginally, going down from 9.55 percent in June 2006 to 9.08 percent in June 2007 (MoF, 2008). In addition there are capac-ity constraints reflected in high labor prices in all the fast growing sectors, including construction, textiles, banking, and even agriculture (EFg-Hermes, 2008).

Evidence from the growth experience of industrial countries supports the argument that growth is stron-ger when the input of labor is higher. According to the European Competitiveness Report (2001), strong employment has contributed to US growth over the past decades. The EU has always lagged behind the US in terms of economic growth. In the first half of the nineties the labor contribution to per capita gDP growth was negative; it turned positive in the second half of the 1990’s but was only one third of that in the US. At the same time, Ireland, luxembourg, Finland, the Netherlands and Spain have registered the highest

gDP growth rates in the EU and enjoy employment rates comparable to the US. growth in the Nether-lands and Spain in particular was based on a robust growth in employment, even though their productivity levels are below the EU average.

Equally important to the increase in employment was the rising quality of labor, reflecting strong investments in the education and re-training of labor, especially in information and computer technology. This finding is in accordance with Mankiw, Romer, and Weil’s (1992) finding that education or “human attainment” explains cross-country differences in gDP growth. Technologi-cal progress and globalization have put an even great-er emphasis on the importance of human skills in our economies.

A sustained improvement in the competitiveness of the Egyptian economy will thus require more utiliza-tion of labor, especially skilled labor, in the economic expansion. Understanding the forces that will support better utilization of labor is crucial for guiding policy towards improving Egypt’s competitiveness.

There are three explanations for the weak contribu-tion of labor in economic growth. The first explana-tion is that development policies are not friendly to private sector development (World Bank, 2008c). The second explanation is that the increase in the demand for highly skilled labor is not matched by a commen-surate increase in the quality output from the educa-tion system. The third explanation is the composition of Egypt’s macroeconomic growth: the sources of economic growth are not balanced between produc-tivity growth and employment. As we saw, growth is dependent on the creation of jobs in sectors of the economy that do not absorb the majority of the labor force.

With regards to policies aimed at promoting private sector development, credit, subsidies, and other fiscal policies may have worked together to lower the employment-creating capacity of growth. Private sector activity is still concentrated in a small number of firms. Micro-enterprises that account for the bulk of employment have little access to formal fi-nance, markets or government support programs. The business environment for these businesses still pro-motes informalization. Informal small businesses do not attract employment. only those excluded from the public and private sectors will work in the informal sector in subsistence activities (World Bank, 2008c).

Concerning the quality of the labor force, the increase in the demand for highly skilled labor is not matched by a commensurate increase in the quality output from the education system, which in general does not provide a payoff to the investment in the

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human capital.8 Hence there are no externalities of human capital to generate additional growth. In coun-tries with a literacy rate of 70 percent, these external-ities could generate 1.75 percent of additional growth every year. More important, the capacity to innovate and adopt new technologies is not high. During the 1990’s there were no European or American patents registration by Egyptian scientists. High technology achievements and activities such as micro-processing are rare (World Bank, 2008c). As a result only a small proportion of the product of the education system is equipped to participate in the fast growing sectors of the economy or add to economic growth.

Shortages in skilled labor in Egypt are evidenced by capacity constraints reflected in scarcity of labor and high wages in all the fast growing sectors (EFg-Hermes, 2008). Skills shortages are likely to remain a problem in the economy. The manufacturing sector has been contributing the lion’s share of the growth in gDP. By nature, productivity increases in this sec-tor are driven by high technology and innovations. Innovation tends to increase the overall demand for labor, but lowers the demand for unskilled labor (leo and Steiner, 1995). The educational curricula and sys-tems in Egypt do not capture the new skills needed in the workplace. The World Economic Forum’s global Competitiveness Report highlights that education is an important area of weakness in Egypt’s competitive-ness. The quality of Egypt’s educational system got poor marks on the Executive opinion Survey (Por-ter; Sala-i-Martin, Xavier; and Schwab, 2008). As a re-sult, growth in the manufacturing sector is associated with rapid skill upgrading, resulting in increasing wage inequality and growing educational wage differentials among the labor force.

While a long term education strategy may be the solution in the medium to longer term, short-term skill shortages should be met by measures such as targeted training and re-qualification activities to increase the supply of labor. The education system should be geared towards creating a labor force that is able to participate in the fast growing knowledge-based, innovation-driven sectors of the economy such as manufacturing.

As for the imbalances in the growth of the various sectors of the economy, the current trend of expo-nential growth in some sectors, and much slower growth in other sectors are creating two problems. First, it perpetuates the skills shortage because in the short term the education system will not be able to fulfill the fast growing demand for new skills. Second,

8 Egypt and the MENA region have however made significant progress on the qual-ity of education. As a result, literacy rates have increased and student scores are in the same range of latin American countries. In addition, fertility rates have fallen considerably and life expectancy has risen. In relative terms, the quality of education in Egypt and the MENA region is far below other developing countries (World Bank, 2008c).

the growing disparities in growth across sectors mean that “lack of improvements in any important area can lead to a plateau in productivity and stalled economic growth” (Porter, Sachs, and MCarthur, p. 17). Should overall growth fail to accelerate, the creation of job opportunities would be further jeopardized as strong employment growth is linked to sustainable growth.

Baumol (1997) makes a similar argument that when there is an unbalanced economic expansion, progres-sive sectors will eventually absorb less and less of the workforce, and more of the labor force must be trans-ferred to the non-progressive sector. He defines pro-gressive sectors as technologically advanced sectors, involving innovative activities, capital accumulation and economies of scale. Non-progressive sectors are sectors that permit sporadic increases in productivity. An example of a progressive sector is manufacturing, and an example of a non-progressive sector is educa-tion or any labor intensive sector such as agriculture, in the case of Egypt.

In the progressive sector, productivity grows cumula-tively because of innovation and technological advanc-es, while it remains constant in the non-progressive sector. Thus cost per unit of output in the first sec-tor will remain constant or go down, while costs in the second sector will go up without limit. Productiv-ity increases in the progressive sectors offset rising wages in those sectors. However wages in all sectors rise, even those that do not see any change in pro-ductivity, increasing costs in those sectors. In addition to the rising cost of the non-progressive sectors, the progressive sectors absorb less and less of the labor force, but the non-progressive sectors do not provide attractive employment opportunities. Thus the very progress of the technologically progressive sectors could drive the output of the non-progressive sec-tor from the market. The rate of growth of the whole economy will inevitably slow down.

If we apply this analysis to the Egyptian economy, we find that the agriculture sector is very labor in-tensive and non-progressive. According to Baumol’s model, the strong growth in the hi-tech sectors of the economy and the lagging growth in agriculture should ultimately slow down the whole economy. However Baumol differentiates between two cases of the non-progressive sector: There is the non-progressive sec-tor where the nature of the service does not allow for constant and cumulative increases in productivity through capital accumulation, innovation or econo-mies of scale. There is also the non-progressive sector that does not grow because of mismanagement and lack of ingenuity. Some of the non-progressive sectors in Egypt still have scope to grow through better poli-

66

cies, innovation and better management. Without a strategy to develop these sectors, the current pattern of growth could be detrimental to Egypt’s growth and competitiveness.

Manufacturing, one of Egypt’s progressive sectors, is likely to continue to grow at a strong rate largely due to the decline in relative costs, primarily energy costs that are highly subsidized, and technological innova-tions. However, these sectors at the moment possess limited capacity to absorb a large amount of the Egyp-tian workforce; high skills and adequate training are prerequisites to getting work in those sectors.

on the other hand, non-progressive sectors offer very limited scope for increases in productivity for reasons relating to outdated technologies and mismanage-ment. As the productivity of the progressive sectors increases, the relative cost of providing the service in the lagging sector increases because this sector has little or no opportunity to increase its productivity.

Egypt’s competitive potential could thus remain un-der-utilized due to the inability of some sectors to benefit from the current growth momentum coupled with the handicap of an inadequately educated work-force. Strong growth complemented by a strategy to-wards balanced growth and a market-driven education system geared towards improving the skills needed would thus be an integral driver towards enhancing the competitiveness of the Egyptian economy.

In summary, despite robust economic growth since 2004, Egypt is facing a period of more challenging economic conditions that are potential threats to the competitiveness of the economy. Three main areas of concern are inflation, a large budget deficit and un-balanced macroeconomic growth. If not addressed promptly these challenges could compromise Egypt’s long term growth trend, with implications for the competitiveness of the economy. In particular, the im-

portance of a more balanced growth that generates employment opportunities was emphasized. growth patterns have changed in recent years; manufactur-ing alone explains around 25 percent of private sec-tor growth. The remaining 75 percent is split among construction and buildings; whole sale and retail; and transportation and communication. Agriculture and education lag considerably behind the other sectors.

The growth in the education system has not matched the dynamic performance in the fast growing sectors. As a result, only a third of the labor force is employable in the robust sectors, and two thirds of the workforce is still working in the lagging sectors, with implications for income generation and poverty. Furthermore, the current pattern of growth characterized by fast growing (progressive) and lagging (non-progressive sectors) risks creating a plateau in productivity and stalling economic growth.

These issues – balanced growth, education policy and skills development – are urgent areas for Egypt’s policy makers to develop a competitiveness strategy. The change in the macroeconomic growth pattern has implications for drafting Egypt’s growth strategy. Concerning education, the education strategy should include policies for making education responsive to market needs, and for training, and re-training, in or-der to provide the nation’s workforce with better ca-reer options, opportunities for advancement, and the ability to compete in a global economy. Structural re-forms that support innovation are also essential. The empowerment of the labor force with high tech skills would improve its contribution to growth on a more sustainable basis. In a hi-tech highly globalized world, a skilled workforce would increase the competitive-ness of the economy. While the selection of superior technologies may be left for the market to determine – given a favorable environment for entrepreneurship and investment – public policy must make sure that the education system delivers the skills needed by the market.

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2.3 SoUND MACRoECoNoMIC MANAgEMENT: SoCIAl IMPlI-CATIoNS

The following section presents a few observations on the social implications of sound macroeconomic man-agement and on the relationship of competitiveness to poverty reduction and social solidarity.

2.4 CoNClUSIoN Overall economic growth, investment and trade results have been excellent recently. However, astute macro-economic management will be required to manage fiscal deficits and inflation and to make a stronger reduc-tion in unemployment and poverty. Continued reform at the microeconomic level will have macroeconomic impacts while contributing to socially positive outcomes.

The reforms that have led to rapid and robust growth mentioned at the beginning of this chapter will make it easier for the government to reduce poverty and address the macroeconomic challenges currently fac-ing the economy from increased global prices for food and energy. These reforms should be continued, broadened and deepened so that this growth will be sustainable. Reforms at the microeconomic level, that improve productivity and efficiency at the firm level, can have an impact at the macroeconomic level.

The upsurge in private investment and in foreign di-rect investment, especially greenfield investment, is about ready to have an impact in sectors such as light manufacturing that can produce jobs and this too will trickle through the economy.

The strength in the external sector, including man-ageable external debt and very high net international reserves, means that Egypt will not face any problems for the time being with regard to imports.

However, inflation has become a concern not only in Egypt but worldwide and inflation’s effects are felt

most acutely by the poor or near-poor. Macroeco-nomic policies must address inflation while not chok-ing off or unduly restraining economic growth.

Although the fiscal deficit has come down in recent years, it continues to be high. This in turn reduces the “fiscal space” which limits the ability to address the needs of the poor through investments in infrastruc-ture and services like health and education.

It is important to ensure that government policy, including fiscal policy and pricing policy, enables the economy to achieve balanced economic growth that provides opportunities for unskilled and low-skilled people. Specifically, it is important that Government policy does not favor capital intensive industry at the expense of labor-intensive light manufacturing and that obstacles to such employment-generating manu-facturing are eased. Balanced growth among Egypt’s regions and sectors is also important including invest-ments that facilitate linkages between the poorer agri-cultural regions of Upper Egypt and markets.

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REFERENCES

Baumol, William J. (1997). Macroeconomics of Unbalanced growth: The Anatomy of Urban Crisis. In Dick Netzer and Matthew P. Drennan (eds.) Readings in State and local Public Finance. Cambridge, Mass: Blackwell Publishers Inc.

EFg-Hermes. (2008). Egypt Economics: Inflation threatens Strong growth Story.

European Competitiveness Report. (2001). Chapter 2: Economic growth and standards of living.

Fitch Ratings. (June 2007). Arab Republic of Egypt.

ghanem, Amina. (2007). The Egyptian Economy Three Years Later: Is it Underperforming? In The 4th Egyptian Competitiveness Re-port: Taking the Next Big Step, Chapter 2. Cairo: Egyptian National Competitiveness Council (ENCC).

Heller, Peter. (2005). Back to basics -- fiscal space: What it is and how to get it. Finance and Development, 42: 2. International Mon-etary Fund.

------------------. (2005). Understanding fiscal space. IMF Policy Dis-cussion Paper.

IIF (Institute for International Finance). (2008). Arab Republic of Egypt: Country Report.

IMF (International Monetary Fund). (2007). Staff Report for the 2007 Article IV Consultation.

leo, H.; and Steiner, V. (1995). Innovation and Employment at the Firm level. Vienna: WIFo.

Mankiw, g., Romer, D. and Weil, D. (1992). A contribution to the em-pirics of economic growth, Quarterly Journal of Economics, 107 (May).

Merrill lynch. (2008). Egypt: A Never Ending growth Story.

MoF (Ministry of Finance). (2008). Egyptian Economic Monitor. www.mof.gov.eg

--------------------------------------. (2007). The 2007/2008 Budget and Fiscal Sustainability. www.mof.gov.eg

oBg (oxford Business group). (March 13, 2008). Egypt: Broaden-ing and Strengthening Market.

-------------------------------------------. (April 11, 2008). Egypt: Cutting Exports to Curb Inflation.

-------------------------------------------. (April 24, 2008). Egypt: Food Challenges.

Porter, Michael; Sachs, Jeffrey; and MCarthur, John W. (2002). Execu-tive summary: Competitiveness and stages of economic devel-opment. In The global Competitiveness Report. geneva: World Economic Forum.

----------------------; Sala-i-Martin, Xavier; and Schwab, klaus. (2008). Highlights of the global Competitiveness Report. World Economic Forum.

S & P’s (Standard and Poor’s). (December 2007). Ratings Direct: Egypt.

Shepherd, Jorge A. (2008). Enabling Fiscal Discipline for Poverty Reduction in Egypt: Key Policy Reforms at a Turning Point. TAPR II (Technical Assistance for Policy Reform). Unpub-lished Document.

World Bank (2007). Doing Business in Egypt 2008.

World Bank. (2008a). Arab Republic of Egypt: Transforming Egypt: A Development Policy Review. Washington, D.C.

World Bank. (2008b). Doing Business Report.

World Bank (2008c). The Road not Traveled: Education Reform in the Middle East and Africa. Washington, D.C.

WEo (World Economic outlook). (April 2008). International Mon-etary Fund. http://www.imf.org/external/pubs/ft/survey/so/2008/RES040808A.htm

3 The Tourism Sector in Egypt: Realizing the Great Potential

Samir Makary Adla Ragab

The tourism sector holds great promise for Egypt. However despite improvement in the sector’s performance over the last few years, evidence

suggests that the present number of tourists (9.7 million in 2006-2007) can triple to reach 30 million by 2020. Still, the Travel and Tourism Competitiveness Index (TTCI), published for the second year by the World Economic Forum, shows that Egypt’s rank is relatively modest (66 out of 130 countries), and has in fact declined in comparison to last year (58 out of 124 countries). This chapter delves into the details of competitiveness in an attempt to identify the strengths as well as the weaknesses of Egypt’s tourism sector.The present analysis provides an innovative approach to the evaluation of the tourism sector’s performance. Drawing on the TTCI coefficients, a measure of efficiency is developed to gauge the contribution of the sector to GDP and employment and estimate the investment necessary to realize the potential of the sector. This chapter also looks at the likely possibility of the evolution of tourism and travel at the global level and Egypt’s potential share. Estimates indicate that by 2020, Egypt will have the capacity to attract 30 million tourists (compared to the present level of 9.7 million)–providing necessary investments are made and reform of various factors constraining the sector are implemented.

72

3.1 INTRoDUCTIoN Two compelling reasons make the choice of tourism as the sectoral focus for this year’s competitiveness report a must. First, the potential of the sector is immense by all stan-dards, and this potential is yet to be tapped. Secondly, the tourism sector, in Egypt as anywhere else, has the specific advantage of having a built-in mechanism for broader distribution of earnings. Tourism is

therefore a key industry in the Egyptian economy, contributing-directly and indirectly-an estimated 11.3% of GDP. It accounts for around 40% of exported services` receipts and generates approximately 19.3% of foreign exchange. The sector is a significant provider of employment, contributing 12.6% of direct and indirect job creation. Finally, tourism accounts for some 4% of total investment with the private sector providing 73% of the total.

FIGURE 3.1: EVOLUTION OF THE TOURISM SECTOR

0

2

4

6

8

10

12

Number of Tourists (Million) Tourism Revenues (US$ Billion)

2006

/07

2005

/06

2004

/05

2003

/04

2002

/03

5.2

7.5

8.6 8.6

9.7

8.2

7.27.3

6.2

2.8

Source: IDSC, December 2007.

Egypt’s comparative advantage in tourism is evident and has been reflected in the rapid growth of the sec-tor which recorded a rate of growth of over 15% a year during the period 2002-2006; more than three-times the rate of growth of international tourism dur-ing the same period. This performance accelerated in 2007 with an impressive 20% growth rate. Three distinct periods where the performance of the sec-tor varied significantly can be identified: (a) stagnant growth period (1982-1986) where the annual growth rate in the number of tourists was only 1.8% and that

of tourist nights 3.7%; (b) fluctuating growth period (1987-2000) where the growth rate reached 8.9% on average, but with sharp fluctuations; and (c) rapid growth period (2002/03-2006/07) where the annual growth rate in tourist arrivals amounted to 17% and that of tourist revenues to 30% (Fig.3.1).

All these developments explain Egypt’s global ranking. The country’s share of the tourist market is about 25% in the Middle East region, 58% of North Africa, and 1% of the global market (Fig.3.2).

FIGURE 3.2: SHARE OF THE WORLD MARKET IN 2006

0 1 2 3 4 5 6 7 8

UAE*

Greece

Jordan

Morocco

Tunisia

Egypt

Turkey

Spain 6.9

2.2

1.03

0.7

0.8

0.4

1.9

0.7

Source: UNWTO, 2008* Arrivals of 2003

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3.2 CoMPETITIVENESS RANkINgS, 2007-2008 The 2008 report placed Egypt 66th out of 130 countries compared to 58th out of 124 countries in 2007. Egypt ranked among the first half of countries in 2007 TTCI, but has since fallen into the second half, swapping positions with Morocco (which trailed Egypt in 2008) and remaining in the 6th position among Arab countries. Despite the difficulty of comparing the 2007 and 2008 reports, due to changes in

methodology adopted to calculate the scores for many pillars and the introduction of more indicators, a detailed comparison of Egypt’s performance as reflected in those indicators would be necessary to identify the points of strength and weakness.

3.3 EgYPT’S PERFoRMANCE: AN oVERVIEW As figure 3.3 indicates, Egypt had not improved its rankings in 2008 compared to 2007. It emerged very clearly that the most significant reason for the fall of Egypt’s overall score is the drop in factors related to T&T Business Environment and Infrastructure where the quality of air transport, ground transport, and ICT showed a great decline - concerns covered in more detail in Annex 3.1. This drop was also

caused by a tumble in scores of sub-indices related to the Regulatory Framework and Human, Cultural and Natural Resources.

A – CURRENT STATUS

In order to put Egypt’s ranking into perspective, an analytical look must be taken at the methodology on which the (TTCI) is based. First, while some of the data reported in 2007-2008 is based on the Executive opinion Survey (EoS) conducted in 2006 and early 2007, other data goes back to 2002. Some indicators, such as the number of automated teller machines (ATMs), may work against countries with larger popu-lations. Similarly, the data related to visa requirements may be misleading. Notwithstanding these caveats, we shall take the TTCI’s rankings at face value, arguing

0 10 20 30 40 50 60 70 80

T&T Human, Culture & Natural Resource

T&T Business Environmental & Infrastructure

T&T Regulatory Framework

Year 2007

Year 2008

FIGURE 3.3: MAIN SUB-INDICES IN 2007-2008

58

69

60

68

70

50

Source: T&T 2008.

that the methodology applies equally to all the coun-tries covered by the report, and that the merit of these rankings is to guide policy-makers by identifying key points of strength as well as the problem areas in need of reform.

We shall now provide a summary of Egypt’s ranking according to the three pillars of the TTCI, followed by a comparison of Egypt to peer countries, relegat-ing the detailed description of the sub-indices to Annex 3.1.

A detailed look at Egypt’s performance under each of the three pillars indicates that Egypt’s major strength in tourism attraction is its price competitiveness, rank-ing 2nd after Indonesia as a result of very low ticket taxes and airport charges. It is generally low when it comes to fuel price levels 3rd, just after Saudi Arabia and comes 5th on the hotel price index, right after Malaysia. A national prioritization of the sector puts Egypt at 12th place after Indonesia, with the govern-ment ensuring both relatively high spending on travel and tourism (20) and fair attendance (Egypt ranked 1st overall on this pillar followed by Spain). In addi-tion, the country is perceived as relatively safe from HIV/Aids prevalence and ranked 1st as it had in the 2007 report. Egypt also does relatively well with re-gard to improving the sustainability of the travel and tourism sector (ranked 38), and had a better position in affinity for T&T with progress in tourism openness as reflected in tourism receipts and expenditure as a percentage of gDP (24). The latter is also boosted by an improvement in extension of business trips to leisure vacations (41).

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By contrast, Egypt’s score is negatively affected due to the less developed air and ground transport net-works. Safety and Security continue to be of serious concern, where the country is ranked 84th overall, just after Burkina Faso and Algeria. The country also suffers from a lack of human resources (82), attrib-utable in part to the quality of the educational sys-tem. More generally, the overall policy environment is not particularly conducive to the development of the sector, ranked (70), with prevalence of foreign own-ership (93) and lack of transparency of government policies (92).

The following is a more detailed comparison of Egypt’s performance in each sub-index.

Sub-index 1: T&T Regulatory Framework: Egypt’s ranking has slipped on all the factors in this category (from 50 to 58). Policy rules and Regulations, Envi-ronmental Sustainability, Safety and Security, Health and Hygiene have declined, while only the country’s overall ranking in Prioritization of Travel and Tourism remained the same as last year (Fig.3.4).

FIGURE 3.4: T&T REGULATORY FRAMEWORK

0 20 40 60 80 100

Prioritization of T&T

Health &Hygiene

Safety & Security

Environmental Sustainability

Policy Rules & Regulation

Year 2007

Year 2008

68

70

75

81

64

84

69

86

12

12

Source: T&T 2008.

Sub-index 2: T&T Business Environment & Infra-structure: this sub-index has also declined (from 60 to 69). With the exception of Price Competitiveness, all the other indicators dropped compared to the pre-vious year (Fig.3.5).

0 20 40 60 80 100

Price Competitiveness

ICT Infrastructure

Tourism Infrastructure

Ground Transport Infrastructure

Air Transport Infrastructure

Year 2007

Year 2008

FIGURE 3.5: T&T BUSINESS ENVIRONMENT& INFRASTRUCTURE

49

62

58

75

85

79

74

86

5

2

Source: T&T 2008.

Sub-index 3: T&T Human, Cultural and Natural Resources: These registered a slight decline (from 68 to 72) mainly due to the drop in the score for Hu-man Resources. Despite a good score in the number of world heritage and natural and cultural sites, there was a decline in the quality of natural environment and availability of sports facilities (Fig.3.6).

0 20 40 60 80 100

Cultural Resources

Natural Resources

Affinity for T&T

Human Resources

Year 2007

Year 2008

FIGURE 3.6: T&T HUMAN, CULTURAL AND NATURAL RESOURCES

82

69

31

85

86

55

58

55

Source: T&T 2008.

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Friendly attitude and public feelings towards foreigners, followed by services in ho-tels and security were ranked highest according to the Tourism Expenditure Survey in 2006, which solicited tourists’ evaluation of the quality of services provided. By contrast, the main complaints related to the shortage of restrooms in public areas, treatment by taxi drivers and bad traffic conditions.

BOX 3.1: Evaluation of Tourist Services in Egypt

FIGURE 3.7a: TOURIST EVALUATION FOR THE BESTPROVIDED SERVICES LEVELS

0 10 20 30 40 50

Beach & seacleanliness

Customs

Immigrations

Monuments

Floating hotels

Airport facilities

Tourist guides

Security

Hotels / Touristsresorts

Puplic feelingstowards foreigners

FIGURE 3.7b: TOURIST EVALUATION FOR THE WORSTPROVIDED SERVICES LEVELS

0 5 10 15 20 25 30

Naturalenvironment

Furnished flatsfor rent

Rented vehicles

Health services

Youth hotels

Railroad

Road network

Pedestrian complianceto traffic rules

Taxi

Public Facilities

Source: CAPMAS & Ministry of Tourism, 2008.Source: CAPMAS & Ministry of Tourism, 2008.

3.4 EgYPT’S PERFoRMANCE IN CoMPARISoN To oTHER CoUNTRIES

To place Egypt’s competitiveness ranking in perspec-tive, it may be useful to compare it with other coun-tries, especially competitors from the region and else-where. The following table sums up the results of such a comparison according to TTCI (Fig.3.8).

0 20 40 60 80 100

120

Year 2007 Year 2008

Turkey

Israel

Libya

Algeria

Syria

Saudi Arabia

Kuwait

Oman

Morocco

Bahrain

Jordan

Qatar

Tunisia

UAE

Egypt

FIGURE 3.8: RANKING OF SELECTED MENA COUNTRIESIN 2007-2008

6658

40

3934

3736

534648

4767

5776

8567

82

94

93104

3532

5452

102

18

Source: T&T 2008.

76

Table 3.1 Performance of Selected MENA Countries in TTC 2008

CountryRank in 2007 out

of 124

Rank in 2008 out

of 130Strongest Performance Weakest Performance

Qatar 36 37

Safety and Security, Health and Hygiene, Prioritization of T&T, Air Transport, Ground Transport, Tourism and ICT Infrastructure, Affinity for T&T, Human Resources, Cultural Resources

Policy Rules and Regulations, Environmental Sustainability, Price Competitiveness, Natural Resources

Tunisia 34 39

Policy Rules and Regulations, Environmental Sustainability, Safety and Security, Prioritiza-tion of T&T, Ground Transport and Tour-ism Infrastructure, Price Competitiveness, Affinity for T&T, Human Resources, Cultural Resources

Health and Hygiene, Air Transport and ICT Infrastructure, Natural Resources

UAE 18 40

Safety and Security, Prioritization of T&T, Air Transport , Ground Transport , Tourism and ICT Infrastructure, Price Competitiveness, Affinity for T&T, Human Resources

Policy Rules and Regulations, Environmental Sustainability, Health and Hygiene, Natural& Cultural Resources

Bahrain 47 48

Safety and Security, Air Transport, Ground Transport, Tourism, and ICT Infrastructure, Price Competitiveness, Affinity for T&T, Cul-tural Resources

Policy Rules and Regulations, Environmental Sustainability, Health and Hygiene, Prioritiza-tion of T&T, Human & Natural Resources

Jordan 46 53

Environmental Sustainability, Safety and Se-curity, Prioritization of T&T, Price Competi-tiveness, Affinity for T&T

Policy Rules and Regulations, Health and Hygiene, Air Transport, Ground Transport, Tourism and ICT Infrastructure, Human, Natural &Cultural Resources

EGYPT 58 66

Prioritization of T&T, Price Competitive-ness, Air Transport, Affinity for T&T, Cultural Resources

Policy Rules and Regulations, Environment Sustainability, Safety and Security, Health and Hygiene, Ground Transport, Tourism and ICT Infrastructure, Human& Natural Resources

Morocco 57 67

Policy Rules and Regulations, Environmental Sustainability, Prioritization of T&T, Affinity for T&T, Cultural Resources

Safety and Security, Health and Hygiene, Air transport and Ground Transport, Tourism and ICT Infrastructure, Price Competitiveness, Human &Natural Resources

Oman - 76

Safety and Security, Price Competitiveness Policy Rules and Regulations, Environmental Sustainability, Health and Hygiene, Pri-oritization of T&T, Air Transport, Ground Transport, Tourism and ICT Infrastructure, Human Resources, Affinity for T&T, Natural &Cultural Resources

Saudi Arabia

- 82

Air Transport Infrastructure, Price Competi-tiveness, Natural Resources

Policy Rules and Regulations, Environmental Sustainability, Safety and Security, Health and Hygiene, Prioritization of T&T, Ground Transport, Tourism and ICT Infrastructure, Human Resources, Affinity for T&T, Cultural Resources

Kuwait 67 85

Safety and Security, Ground Transport, Hu-man Resources

Policy Rules and Regulations, Environmental Sustainability, Health and Hygiene, Prioritiza-tion of T&T, Air Transport, Tourism and ICT Infrastructure, Price Competitiveness, Affinity for T&T, Natural& Cultural Resources

Syria - 94

Health and Hygiene, Safety and Security, Af-finity for T&T, Natural Resources

Policy Rules and Regulations, Environmen-tal Sustainability, Prioritization of T&T, Air Transport, Ground Transport, Tourism and ICT Infrastructure, Price Competitiveness, Human & Cultural Resources

Algeria 93 102

Price Competitiveness Policy Rules and Regulations, Environmental Sustainability, Safety and Security, Health and Hygiene, Prioritization of T&T, Air Trans-port, Ground Transport, Tourism and ICT Infrastructure, Human Resources, Affinity for T&T, Natural & Cultural Resources

Libya - 104

Safety and Security, Health and Hygiene Policy Rules and Regulations, Environmental Sustainability, Air Transport, Ground Trans-port, Tourism and ICT Infrastructure, Price Competitiveness, Human Resources, Affinity for T&T, Natural &Cultural Resources

Israel 32 35

Policy Rules and Regulations, Health and Hygiene, Air Transport, Ground Transporta-tion, Tourism and ICT Infrastructure, Human Resources

Environmental Sustainability, Safety and Security, Prioritization and Price Competi-tiveness, Affinity for T&T, Natural & Cultural Resources

Turkey 52 54

Policy Rules and Regulations, Prioritization of T&T, Air Transport and Tourism Infrastruc-ture, Affinity for T&T, Cultural Resources

Environmental Sustainability, Health and Hy-giene, Safety and Security, Ground Transport and ICT Infrastructure, Price Competitive-ness, Human &Natural Resources

Source: World Economic Forum,Travel and Tourism Report 2008, Geneva,2008. Here-after referred to as “T & T 2008”.

77

A comparison with peer groups at a similar level of development as measured by gDP per capita as low middle income countries (indicated in brackets) re-veals the following as low middle income countries (Fig.3.9):

Ukraine (US$ 2,315) ranked 77th with 18.9 million ��

international tourist arrivals and US$ 3.5 billion tourism receipts

Indonesia (US$1,617) ranked 80th with 4.8 million ��

international tourist arrivals and US$ 4.5 billion tourism receipts

The Philippines (US$1,391) ranked 81st with 2.8 ��

million international tourist arrivals and US$2.5 billion tourism receipts.

While the peer group shares the common character-istic of being relatively low on the T&T competitive-ness ranking as it is situated in the bottom half of the countries included in the report, some of the players have improved their ranking since last year.

FIGURE 3.9: MAIN SUBINDEXES IN PEERS GROUP 2008

0 20 40 60 80 100

120

Ukraine

Indonesia

Philippines

Egypt

T&T Human,Natural &

CulturalResources

T&TBusiness.

Envi. &Infrastructure

T&TRegulatoryFramework

58

69

83

86

53

108

59

78

100

84

78

70

Source: T&T 2008.

78

B – FUTURE POTENTAL

3.5 THE VAlUE PRoPoSITIoN In this section, the issue of tourism sector competitiveness will be discussed at two levels:First, we shall asses the performance of the sector in terms of its efficiency as measured by its contribution to net value added in the economy. This enables us to gauge the efficiency of resource use in the tourism sector. Secondly, we shall attempt to take a forward look between now and 2020 to predict the potential

of expansion in this sector, its investment requirements, and its impact on growth and employment. We shall end with a number of suggested recommendations on how to turn the potential into reality.

3.5.1 Demand Projections

The approach adopted is to project tourist demand during the period 2008-2020 within the context of world tourism growth, taking into consideration the preference towards Egypt, i.e. Egypt/World coefficient as a reflection of preference coefficient.

In this respect, average annual growth rates of tourism at the national and international levels are measured during the period 2002-2006. The selected period is a recent timeframe with a five-year duration starting 2002 and ending 2006 with normal years at both local and international levels.

A preference coefficient is therefore derived and ap-plied to the expected growth rate of international tourism during the period 2008-2011, as projected by WTo (Tourism 2020 vision), in order to estimate the expected growth rate of foreign tourist in Egypt during the period 2008-2011, i.e. annual growth rate of 15%.

It is assumed that tourism in Egypt during the period 2011-2015 will match Turkey’s tourism growth rate be-tween 2002 and 2006, i.e. annual growth rate will drop to 7% during the period 2011-2015. Hence, Egypt is expected to reach maturity stage by the end of 2015, whereby, starting 2015, tourism in Egypt is expected to grow annually at the same rate at which interna-tional tourism is growing, i.e. 4.5%. Tourist nights are estimated at an average duration of 9.5 days.

Based on the derived coefficients and assumptions, foreign tourist demand and tourist nights in Egypt are projected as shown in the following table:

Table 3.2 Projected Foreign Tourist Arrivals and Tourist Nights 2007-2020

YearTourist Arrivals(’000 tourists)

Tourist Nights(’000 nights)

2007 11,100 105,450

2008 12,765 121,268

2009 14,680 139,458

2010 16,882 160,376

2011 19,414 184,433

2012 20,773 197,343

2013 22,227 211,157

2014 23,783 225,938

2015 25,448 241,754

2016 26,593 252,633

2017 27,790 264,001

2018 29,040 275,881

2019 30,347 288,296

2020 31,713 301,269

Source: T&T 2008.

The above table reveals that Egypt can attract up to 20 million tourist arrivals by 2012 and more than 30 million tourist arrivals by 2020, i.e. equivalent to 300 thousand nights. It should be noted that the target set by the Ministry of Tourism is 25 million foreign tourist arrivals by 2020.

Projected foreign tourist nights are converted into rooms on the following basis:

The prevailing room density in hotels in Egypt ��

is 1.8

Acceptable occupancy rate is 70%, i.e. the rate at ��

which hotels can realize fair returns of capital in-vested.

79

It should be noted that the projected demand in terms of rooms is confined to foreign tourists (these do not include rooms catering for domestic tourism).

Foreign tourist demand measured in rooms equivalent over the period 2008-2020 is projected as follows:

Table 3.3 Projected Tourist Demand 2008-2020 (’000 Rooms)

Year (’000 Rooms)

2008 264

2009 303

2010 349

2011 401

2012 429

2013 459

2014 491

2015 526

2016 549

2017 574

2018 600

2019 627

2020 655

Source: T&T 2008.

Rooms are classified by star level on the basis of pre-vailing norms in Egypt as follows:

Table 3.4 Prevailing Norms by Star Level

Star level Percentage

5 Stars 42

4 Stars 31

3 Stars 18

2 Stars 7

1 Star 2

Source: T&T 2008.

Required hotel rooms to meet expected foreign tour-ist nights are therefore projected by star level as fol-lows:

Table 3.5 Required Hotel Rooms by Star Level * (’000 rooms)Year 5 Stars 4 Stars 3 Stars 2 Stars 1 Star Total

2008 111 82 47 18 5 264

2009 127 94 55 21 6 303

2010 146 108 63 24 7 349

2011 168 124 72 28 8 401

2012 180 133 77 30 9 429

2013 193 142 83 32 9 459

2014 206 152 88 34 10 491

2015 221 163 95 37 11 526

2016 231 170 99 38 11 549

2017 241 178 103 40 11 574

2018 252 186 108 42 12 600

2019 263 194 113 44 13 627

2020 275 203 118 46 13 655

Source: T&T 2008.

*It reflects expected touristic demand in terms of number of rooms by star level.

Taking into consideration existing room capacities, ad-ditional rooms required by star level are projected as follows:

Table 3.6 Projected Additional Rooms by Star Level 2008-2020 * (’000 Rooms)Year 5 Stars 4 Stars 3 Stars 2 Stars 1 Star Total

2008 14 11 6 2 1 34

2009 17 12 7 3 1 40

2010 19 14 8 3 1 45

2011 22 16 9 4 1 52

2012 12 9 5 2 1 28

2013 13 9 5 2 1 30

2014 13 10 6 2 1 32

2015 14 11 6 2 1 34

2016 10 7 4 2 0 24

2017 10 8 4 2 0 25

2018 11 8 5 2 1 26

2019 11 8 5 2 1 27

2020 12 9 5 2 1 28

Source: T&T 2008.

* It should be noted that there exist 130 thou-sand rooms under construction in 2006, of which around 50 thousand rooms are expected to start operation in 2007, giving room capacity of 230 thousand rooms including floating hotels in 2007.

80

Table 3.9 Investment Requirements By star Level (LE ,000)

Year 5 Stars 4 Stars 3 Stars 2 Stars 1 StarInfrastruc-

ture

Other Related

ActivitiesTotal Cost

2008 10,328,322 4,691,252 1,021,482 198,622 37,833 945,817 1,891,634 19,114,962

2009 11,877,570 5,394,940 1,174,705 228,415 43,508 1,087,690 2,175,379 21,982,206

2010 13,659,206 6,204,181 1,350,910 262,677 50,034 1,250,843 2,501,686 25,279,537

2011 15,708,087 7,134,809 1,553,547 302,079 57,539 1,438,469 2,876,939 29,071,468

2012 8,430,006 3,829,014 833,737 162,116 30,879 771,979 1,543,957 15,601,688

2013 9,020,107 4,097,045 892,098 173,464 33,041 826,017 1,652,034 16,693,806

2014 9,651,514 4,383,838 954,545 185,606 35,354 883,838 1,767,677 17,862,372

2015 10,327,120 4,690,707 1,021,364 198,598 37,828 945,707 1,891,414 19,112,738

2016 7,103,584 3,226,536 702,552 136,607 26,020 650,511 1,301,023 13,146,834

2017 7,423,245 3,371,730 734,167 142,755 27,191 679,784 1,359,569 13,738,441

2018 7,757,291 3,523,458 767,205 149,179 28,415 710,375 1,420,749 14,356,671

2019 8,106,369 3,682,014 801,729 155,892 29,694 742,341 1,484,683 15,002,721

2020 8,471,156 3,847,704 837,807 162,907 31,030 775,747 1,551,494 15,677,844

Source: T&T 2008.

3.5.2 Basic Investment Requirements for Sustainable Development of the Tourism Sector

Investment requirements are estimated on the following basis:

Number of rooms to be added, on the basis of ��

projected tourist demand;

Cost per room, on the basis of prevailing norms in ��

the tourism sector.

Cost per room covering all components including land value and internal infrastructure by star level is estimated according to the prevailing market prices in 2008 as fol-lows:

Table 3.7 Cost Per Room by Star Level

Star LevelCost Per Room

(US$)*Cost Per Room

(LE)

5 Stars 130,000 715,000

4 Stars 80,000 440,000

3 Stars 30,000 165,000

2 Stars 15,000 82,500

1 Star 10,000 55,000

Source: T&T 2008.

* This is in addition to external infrastructure and cost of other related activities, i.e. restaurants, shops etc. They are estimated as follows:

Table 3.8 Cost of External Infrastruc-ture and of Other Related Activities Per Room

Item Cost

External Infrastructure $ 5,000 per room

Share of Other Related Activities

$ 10,000 per room

Source: T&T 2008.

It should be noted that all prices are based on con-stant values of 2008.

Investment requirements are therefore estimated on the basis of the projected room requirements and prevailing costs as follows:

81

Based on the prevailing norms, hotel construction takes three years with the following implementation rates:

Table 3.10 Investment Requirements

Year Percentage

Year -3 20%

Year -2 40%

Year -1 40%

Source: T&T 2008.

Investment cost according to cash outflow is there-fore estimated as follows:

Table 3.11 Investment Cost (LE Million)

Year Cost

2005 * 3,822,992

2006 * 12,042,426

2007 * 21,494,775

2008 24,718,991

2009 24,860,740

2010 21,208,023

2011 16,490,672

2012 17,645,019

2013 17,419,411

2014 15,651,517

2015 13,625,444

2016 14,238,589

2017 14,879,326

2018 12,272,226

2019 6,271,137

Source: T&T 2008.

* Years 2005, 2006 and 2007 reflect cost of rooms under construction.

82

3.6 REFoRM ISSUES

3.6.1 Key Preconditions for Sustainable Development

IRaising the funds required to develop activities is necessary but not sufficient to ensure sustainable growth of the tourism sector. A number of preconditions should be ensured in order to realize potential

tourist demand.

Regular coordination and support should be main-��

tained between the Ministry of Tourism and rel-evant authorities, specifically the Ministry of Civil Aviation; the Ministry of Housing and Infrastruc-ture; the Ministry of Transportation; the Ministry of Environment; and the Ministry of Culture.

Despite the fact that Egypt could viably develop a ��

variety of new tourism products in culture, busi-ness, religious, health, shopping, entertainment, and cruise and desert tourism—as well as specific elite tourism such as golf and bird watching—it still re-lies on beach and cultural tourism, where services are focused in a very few areas.

Indeed, diversification of both tourism activities and location is a necessary condition for sustainable growth and would reduce the element of risk. The proposed tourist activities by location are identified as follows:

Table 3.12 Proposed Tourist Activities by Location

AreaRed Sea & South

Sinai

North Coast &

Alexandria

Greater Cairo

Luxor & Aswan

Summer Sun X

Winter Sun X

Soft Culture X X

Diving X

Residential Tourism

X X

Business Tourism

X

MICT X X X X

Leisure Tourism

X X X

Special Entertainments

X X X X

Source: T&T 2008.

A clean and attractive environment is of prime im-��

portance to tourism development. Protection of the environment must be taken into account on all levels of tourism planning. Developments must meet planning requirements relating to environ-mental and visual impacts. Environmental manage-ment plans should be undertaken in coordina-tion with tourism strategy to be in place ahead of tourism developments. larger developments should also be subject to an environmental im-

pact assessment. The Ministry of Tourism (MoT) along with the Ministry of Environment (MoE) should decide on the determination of the rela-tive dimensional threshold for these activities. In this respect, all developments must conform to directions and guidelines expressed in legislation and directorates which collectively constitute the government’s environmental policy. Where ap-plicable, they must also conform to appropriate regulations of municipalities.

Cultural/heritage sites must be protected and pre-��

served to optimize their touristic value. The MoT should support the efforts of the Supreme Coun-cil of Antiquities in developing and implementing site management plans conforming to UNESCo guidelines and ensuring, among others, appropri-ate visitor access and high-quality service up to international standards.

Developments should be undertaken in a way that ��

local communities can benefit directly from the earnings resulting from tourism.

Tourism should offer opportunities to achieve ��

economic and social development for communi-ties throughout the country, while at the same time helping to conserve the nation’s unique cul-ture and natural environment.

Planning decisions should be taken in a transpar-��

ent manner on the basis of land use that includes clear zoning and takes into account environmental sensitivity and the potential for tourism develop-ment. land use and local plans should identify par-ticularly vulnerable areas and limit developments to those of a low-impact nature. It is essential that development decisions are made with consider-ation to the value of export tourism and the op-portunity costs incurred by the misuse of areas with high tourism potential and incompatible or inappropriate activities.

The human factor is of prime importance in tour-��

ism. The quality of service provided needs to be of a standard that meets the requirements of in-ternational tourism. Along with employment cre-ation — a major attraction for tourism develop-ment labor-intensive operations are encouraged. Availability of well-trained and qualified guides flu-ent in languages spoken by visitors must be made a priority. guides operating in Egypt are required to be appropriately qualified and registered with the Egyptian Tourist Authority (ETA).

83

Quality of services offered by the tourism estab-��

lishment should be enhanced and developed to comply with international standards.

Marketing and promotion campaigns should be ��

supported and developed so that local tour op-erators can confidently compete with their inter-national counterparts.

A proper pricing policy of tourist services should ��

be enforced to support sustainable growth and stability of the sector.

A good quality trunk route network is of particu-��

lar importance in the development of tourism. Ef-ficient access to attractions and facilities is also necessary. given the scale of the country, the cur-rent quality of these is reasonably fair but accident rates remain unacceptably high.

The principle of sustainable tourism implies that ��

tourist activities should be planned in a way that visitor satisfaction is retained, the industry is prof-itable, the fragile environment is protected, and natural resources are used sparingly for the ben-efit of current and future generations.

3.6.2 Proposed Strategy1

The government considers tourism a key sector in realizing the goals of its national agenda, and thus mer-its a coherent strategy. Conditions will be created to boost growth, ensure broad sharing of benefits, and achieve the sustainable utilization of Egypt’s main tourism assets; the natural environment and cultural sites.

Tourism needs to be competitive. Attracting invest-ment and successful marketing requires positive inter-ventions by the government to create the necessary friendly business environment.

As a general rule, the role of government in the de-velopment of tourism should be limited to that of a facilitator and regulator rather than an operator. Its role in encouraging development is limited to the pro-vision of infrastructure, making available development areas, programming and planning, general promotion and education/skills development. As a facilitator, it identifies and removes strategic barriers to develop-ment and creates an enabling and equitable business environment in which the private sector can operate competitively. As a regulator the government should be involved in conservation (of the culture/heritage and the environment), maintenance of quality stan-dards and development of favorable fiscal policies. There are few if any areas in the world where govern-ments can profitably and efficiently manage commer-cial tourism businesses.

1 It is based on a policy paper submitted to the Ministry of Tourism within the National Sustainable Tourism Strategic Plan.

The private sector should take the lead in achieving the objectives of the proposed strategy and, there-fore, it should be enabled to operate and compete effectively in global markets.

It is vital to ensure that the general public appreciates the importance of tourism in raising living standards and its role in the economic, social and environmental development of the nation.

Effective marketing is a key element to expanding tourism earnings. An appealing tourism product is not enough in itself; it needs to be promoted. Marketing will focus on increasing tourist arrivals and maximizing foreign earnings in a sustainable manner so as not to adversely impact the environment, local cultures and heritage. It should address the need to spread occu-pancy throughout the year, distribute demand around the country and encourage demand for socially and economically beneficial products.

The MoT is responsible for setting marketing targets and developing policies for the ETA. The ETA is re-sponsible for devising and implementing marketing strategies to achieve the Ministry’s targets.

The government recognizes the need to adequately fund the ETA so the country can be effectively mar-keted abroad; it will continue to provide sufficient re-sources for successful promotion on condition that spending is monitored and shown to be effective. In addition, incentives will be considered to encourage tourism operators to promote the destination such as non-discriminatory subventions for the develop-ment of new routes.

The Supreme Council of Tourism (SCT) has been es-tablished to bring about coordination between minis-tries and the bodies concerned with tourist activity. Members include the ministers of irrigation, environ-ment, local government, transportation and planning, as well as the heads of the Supreme Council of Antiq-uities, Egypt Air, Cairo Airport, the Egyptian Authority for Civil Aviation, the Egyptian Tourist Authority, the Immigration Authority, the Customs Authority, the Egyptian Federation of Tourist Chambers, the Hotels Chamber and the Travel Agencies Chamber. A further five members are selected by the Minister of Tourism. The Council is charged with finding ways to remove obstacles hindering tourism, coordinating between different ministries to implement development plans and specifying the role of each ministry in tourist pro-motion. The SCT aims to encourage both the pro-duction and services sectors to implement tourism development plans.

84

3.7 ECoNoMIC IMPACT oF THE PRoPoSED ToURISM DEVEloP-MENT

3.7.1 Economic Contribution of the Tourism Sector

Although the tourism sector makes a limited contribution to national income considering only hotels and restaurants, i.e. 3.6% of GDP or L.E. 24.5 billion (2006), (Ministry of Finance, “The Financial Monthly”, Various

Issues), it is closely connected to other sectors, including food and beverages, the textile industry, real estate, retail, transportation, and commercial and service sectors. This magnifies the role of the tourism sector (hotels and restaurants) in the Egyptian economy and induces a significant multiplier effect.

Indeed generating foreign exchange is one of the key potentialities of the tourism sector in Egypt. Tourism is the largest foreign exchange earner in the country. It accounted for 25 percent of foreign exchange earn-ings during the period 2001-2006 with receipts reach-ing a value of US$7.6 billion in 2006. In this respect, tourism is considered one of the most important forms of export and can lead to a continuous flow of foreign currency to the country.

In addition to generating foreign exchange, tourism contributes both directly and indirectly to employ-ment opportunities. Foreign tourist spending directly supports 370 thousand jobs in the hotels and restau-rants and about one and a half million jobs in other travel and tourism related sectors.

Tax revenue from foreign tourist spending is estimated at lE 6 billion, representing 5 percent of total direct and indirect tax revenue in Egypt (2006) (Ministry of Finance,” The Financial Monthly,” Various Issues).

In 2006, investment in tourism exceeded US$4.1 bil-lion, representing 2.7% of gross investment in 2006. Investment opportunities in tourism are promising specifically in the Red Sea, Aqaba Bay, Ein El Sokhna, and Ras El Hekma areas. This is in addition to signifi-cant investment potentialities in greater Cairo.

It is likely that the national accounts data understates the true economic impact of tourism even with the consideration of the multiplier effect. This is due to the fact that income and expenditure data of tour-ism is only available for hotels and restaurants. Tour-ist expenditures on other services and goods, such as retailing, transportation, housing, etc, are not reflected in tourism data; i.e. the national accounts data is not a reflection of true economic impact of the tourism sec-tor as a whole. Based on various studies on tourism expenditure, foreign tourists spend an average 40–50 percent of their total spending in hotels and restau-rants (tourism sector). The remaining 50–60 percent filters into other related sectors such as transporta-tion, recreational services, retail and other services.

As such, an in-depth analysis of the tourism sector in Egypt should rely – in addition to national accounts data – on primary data based on market research at both the macro and regional levels, and previous eco-nomic and market studies on tourism in Egypt. Indeed, financial statements of hotels and other unpublished tourism data, as well as the educated guess of experts and practitioners in the field are very useful sources of information and could be – if properly tapped – highly effective tools of measurement.

3.7.2 Approach

An attempt is therefore made to estimate the eco-nomic impact of the proposed tourism investment utilizing indicators that reflect an accurate approxi-mation of the reality of the economic contribution of the tourism sector in Egypt.

The three key economic indicators utilized are:

Relative Efficiency Test i.e. productivity of capital a. invested, through relating gross National Value Added to capital invested:

Capital invested is estimated on the basis of ��

prevailing norms of room cost.

gross National Value Added is measured as:��

gross revenue – (input bought from other ��

sectors + repatriated payments).

(Inputs bought from other sectors include ��

goods and services which are not processed within the touristic unit (hotel) and repatriated payments are those to labor and management that would be transferred abroad.)

Employment effect i.e. capability of capital invested b. in creating jobs is measured by dividing no. of jobs by capital invested.

Foreign Exchange Effect i.e. capability of capital in-c. vested in generating foreign exchange earnings is measured by dividing net foreign exchange earn-ings by capital invested.

85

The above economic indicators are estimated using 2008 prices. However, due to lack of accurate detailed comprehensive information on tourist activities by area, the indicators are measured for hotels only and adjusted to reflect the contribution of the other tour-ist activities through applying coefficients that reflect the prevailing norms in the sector. It should be noted that some of these coefficients are based on value judgment and educated approximations of experts.

Investment cost and corresponding national value added and net foreign exchange earnings are dis-counted at Social opportunity Cost of Capital in Egypt (10%) in order to estimate the present value of investment cost, national value added and net for-eign exchange respectively, and therefore to measure both Relative Efficiency Test, i.e. Marginal Productivity of Capital invested and cost of generating foreign ex-change, taking into consideration opportunity cost of capital invested.

National value added and its present value as well as net foreign exchange earnings and its present value are shown in Annex 3.3.

Cost of creating jobs both directly and indirectly is estimated by dividing created jobs by capital invested.

3.7.3 Results and Interpretation

Detailed results of the analysis of economic impact of the proposed tourism investment are reported in Annex 3.3, and the following is a summary of these results:

The present value of national value added exceeds ��

investment cost, i.e. positive absolute efficiency in that investment in tourism sector is economically viable.

Each pound invested generates 2.27 pound value ��

added over the expected life of the investment, taking into consideration Social opportunity Cost of Capital invested, i.e. high Relative Efficiency.

The cost of creating a job in hotels is roughly esti-��

mated at US$55 thousand, i.e. each million dollars (or EgP 300 thousand) generates 18 jobs.

A further 12 jobs will be indirectly created for ��

each million dollar invested in hotels, giving 30 di-rect and indirect jobs per million US dollar.

Each pound invested in the tourism sector gener-��

ates more than lE 4 in foreign currency, i.e. US $ 0.75. Indeed the tourism sector is the largest foreign exchange earner in Egypt.

In conclusion, the tourism sector is highly competitive in terms of value added generator, foreign exchange earner, and employment creator. Each million pounds invested would generate value added of lE 2.27 mil-lion, create 3.3 direct jobs, and 2.2 indirect jobs, and earn foreign currency of lE 4 million.

Indeed the tourism sector is highly lucrative given that the productivity of capital invested in tourism ex-ceeds the productivity of capital invested in the whole economy on the other hand the tourism sector is a key sector in generating foreign currency, in that each pound invested in the tourism sector generates 4 pounds in foreign currency, i.e. twelve times the for-eign exchange that would be generated at the national level. However the cost of creating a job in tourism is nearly three times the average cost of creating a job at the national level. Nevertheless, the tourism sector has a significant impact in generating indirect jobs. The cost of creating a job in tourism, including both, direct and indirect, is lE 180,000.

86

ANNEX 3.1: DETAIlED RANkINg oF EgYPT’S CoMPETITIVE-NESS IN T&T

A.3.1.1 Policy Rules and Regulations:

This year’s TTC report divided this pillar into 8 vari-ables and introduced 4 new parameters to measure the competitiveness in policy rules and regulations that facilitate the attraction of tourists and investors. Such regulations include the business impact of rules on FDI, transparency of government policy making, time required to set up a business and cost to start up a business. While the pillar has declined slightly (68 to 70), with Egypt doing very well in time required to start a business (16) and property rights (up from 57 to 51), the country showed weakness in the new variables mentioned above.

Visa requirements declined sharply (from 15 to 101), openness of bilateral air services agreements (ASAs) moved down from 64 to 66, and business impact of rules on FDI governing investment fell from 96 to 98 (Figure A.3.1.1). Such drops in easiness in Egypt’s en-try and arrivals and in regulating FDI do not reflect the figures of tourist arrivals during the same period of analysis which indicate Egypt is encouraging invest-ment and applying a liberal visa regime, open bilateral ASAs and an open skies policies in all airports except Cairo International Airport.

FIGURE A.3.1.1: MAIN VARIABLES IN POLICY RULES AND REGULATIONS

0 20 40 60 80 100

120

Openness of Bilateral ASA

Visa Requirements

Business Impact of Rules on FDI

Property Rights

Year 2007

Year 2008

66

51

98

101

64

57

96

15

A.3.1.2 Environmental Sustainability:

Most of the variables of this pillar—such as enforce-ment of environmental regulation sustainability of T&T development, carbon dioxide emission, particu-late matter concentration (calculated as hard data for urban population weighted per cubic meter), threat-ened species and environmental treaty ratification— were not in the 2007 report. Egypt showed weakness in many of these variables, declining from 75 to 81), while there has been marginal improvement in strin-gency of environmental regulation (up from 92 to 85). Moreover, the necessary steps taken by the govern-ment to ensure the development of the T&T sector are reflected in Egypt’s ranking in sustainability of T&T development (38) and environmental treaty ratifica-tion (28) (Figure A.3.1.2).

0 20 40 60 80 100

120

Particulate Matter Concentration

Environmental Treaty Ratification

Sustainability of T&T development

Enforcement of Envi. Regulations

Stringency of Envi. Regulations

Year 2007

Year 2008

FIGURE A.3.1.2: MAIN VARIABLES IN ENVIRONMENTALSUSTAINABILITY

28

85

102

117

38

92

A.3.1.3 Safety and Security:

No one can deny the importance of a safe and secure environment in improving competitiveness in T&T. Egypt shows a drop in its rank (from 64 to 84), largely because of the variable of road traffic accidents which place Egypt very low (108), the decline in business costs of terrorism (down from 102 to 106), and the reliability of police service down (from 45 to 57) (Figure A.3.1.3).

87

0 20 40 60 80 100

120

Road Traffic Accidents

Business Costs of Crime & Violence

Reliability of Police Service

Business Cost of Terrorism

Enforcement of Envi. Regulations

Stringency of Envi.Regulations

Year 2007

Year 2008

FIGURE A.3.1.3: SAFETY AND SECURITY

85

92

57

45

108

102

106

102

49

48

A.3.1.4 Health and Hygiene:

In this pillar, competitiveness has slumped sharply (from 69 to 86) due to an overall decline in physician density per 1000 of population (despite the fact that Egypt actually suffers from an oversupply of physicians and medical school graduates) and access to improved sanitation and water. Such a drop has naturally had a negative impact on competitiveness, ultimately leading to loss of tourism and investment potential. (Figure A.3.1.4).

0 20 40 60 80 100

Hospital Beds

Access to Improved Sanitation

Access to Improved Water

Physician Density

Year 2007

Year 2008

FIGURE A.3.1.4: HEALTH AND HYGIENE

73

97

78

44

91

66

38

A.3.1.5 Prioritization of Travel and Tour-ism:

By far one of the most significant factors behind Egypt’s improvement in this pillar (Egypt this year held on to its number 12 ranking) is travel and tourism fair attendance where Egypt ranked 1st overall. This was a direct outcome of the government’s initiative to develop the country’s presence at major tourism fairs and was reflected in ranking of prioritization of T&T. The government has worked hard to priori-tize the sector with relatively high spending on T&T (around US$100 m, according to oxford Business group, 2008) and by promoting the country’s pres-ence worldwide. The rest of the variables in this pillar showed a slump even though Egypt’s performance in this particular pillar is considered one of the nation’s greatest improvements and could be considered a competitive advantage (Figure A.3.1.5).

0 10 20 30 40 50

T&T Fair Attendance

Effectiveness of Marketing and Branding

T&T Government Expenditure

Government prioritization

Year 2007

Year 2008

FIGURE A.3.1.5: PRIORITIZATION OF TRAVEL & TOURISM

1

4

31

30

20

19

42

36

A.3.1.6 Air Transport Infrastructure:

Egypt’s overall air transport infrastructure fell from 49 to 62, mainly due to the decline in departures per 1000 population (100) and airport density which went down from 111 to 117. This despite the fact that air travel is not the main mode of transportation in Egypt and the country possesses only 22 airports. on the other hand, the available seat kilometers (35), number of operating airlines (26) remained the same and an improvement could be seen in international air trans-port network (up from 68 to 63) (Figure A.3.1.6)

88

0 20 40 60 80 100

120

Number of air Transport Network

Number of Operating Airlines

Airport Density

Departures per 1000 Population

Available Seat Kilometers

Quality of Air Transport Infrastructure

Year 2007

Year 2008

FIGURE A.3.1.6: AIR TRANSPORT INFRASTRUCTURE

59

117

63

35

100

26

56

111

68

35

26

A.3.1.7 Ground Transport Infrastructure:

Everyone agrees that Egypt suffers from a low qual-ity of roads, railroads, ports infrastructure and a high number of accidents on its roads. These concerns were well reflected in the significant decline of this pillar (down from 58 to 75). An upgrading in the qual-ity of domestic transport network (up from 44 to 37) is considered an advantage that should be better ana-lyzed (Figure A.3.1.7).

0 20 40 60 80 100

Road Density

Quality of Domestic Transport Network

Quality of Port Infrastructure

Quality of Railroad Infrastructure

Quality of Roads

Year 2007

Year 2008

FIGURE A.3.1.7: GROUND TRANSPORT INFRASTRUCTURE

71

95

56

47

79

37

44

A.3.1.8 Tourism Infrastructure:

Egypt has improved its tourism infrastructure ranking from 85 to 79 primarily due to its better development in existing number of hotel rooms and the presence of major car rentals (68th and 56th respectively). In the ATM’s accepting visa cards indicator, the country’s

performance is still underdeveloped despite the in-creasing number of ATMs in hotels, airports, major tourist areas and main cities (see Figure A.3.1.8).

0 20 40 60 80 100

ATM's Machine per million of Population

Presence of Major Car Rental Co.

Hotel Room

Year 2007

Year 2008

FIGURE A.3.1.8: TOURISM INFRASTRUCTURE

68

56

96

70

66

87

A.3.1.9 ICT Infrastructure:

Egypt dropped from 74 to 87 in ICT infrastructure, driven by a low ranking in mobile telephone subscrib-ers per 100 of population (104) after Syria and fol-lowed by Pakistan, despite the increasing numbers of subscribers (around 11 million, according to the Min-istry of Communication and Information Technology MCIT, 2008). other indicators have also revealed that the slipping broadband internet subscription per 100 population is still underdeveloped (82) except for the extent of business internet use which has shown im-provement (up from 65 to 58) (Figure A.3.1.9).

FIGURE A.3.1.9: ICT INFRASTRUCTURE

0 20 40 60 80 100

120

Mobile Telephone subscribers

Broadband Internet Subscribers

Telephone Lines

Internet users

Extent of Business Internet Use

Year 2007

Year 2008

82

58

89

104

75

65

82

69

89

A.3.1.10 Price Competitiveness in the T&T Industry:

Egypt has done very well in this category, moving up from 5th to 2nd place after Malaysia and before In-donesia. This achievement is a direct result of Egypt’s significant ranking in the hotel price index (5th), fuel price level (3rd), the improvement in purchasing pow-er parity (up from 28 to 26) and the extent and effect of taxation, up from 36 to 33 (Figure A.3.1.10).

0 5 10 15 20 25 30 35 40

Hotel price index

Fuel price levels

Extent and effect of taxation

Purchasing power parity

Ticket taxes and airport charges

Year 2007

Year 2008

FIGURE A.3.1.10: PRICE COMPETITIVENESS IN THE T&T INDUSTRY

3

2

32

26

5

33

30

28

36

A.3.1.11 Human Resources:

Variables reflecting this pillar declined from 69 to 82 due to the increasing number of students enrolling in primary and secondary levels (56) and (65), respec-tively, and poor availability of research and training (83) according to hard data collected. The data re-flects the quality of the educational system and its impact on competitive economy in case of decline (this year’s survey saw a decline from 104 to119). In addition to education, the country showed weakness in hiring and firing practices (down from 97 to 105), while hiring foreign labor seemed to be an advantage (34). Egypt is ahead of many countries such as Spain, the United States and Morocco in that its labor regu-lations don’t prevent the employment of foreigners. But the greatest comparative strength is related to the health of the workforce. Egypt is ranked 1st in low HIV prevalence rate among all other countries covered in the report, with a score less than 0.1 for adults aged 15-49 years. An improvement in life ex-pectancy boosts Egypt’s ranking up (from 79 to 73). However, an upgrading of the quality of Egypt’s human resources available to work in the sector would also improve the country’s overall T&T competitiveness (Figure A.3.1.11).

FIGURE A.3.1.11: HUMAN RESOURCES

0 20 40 60 80 100

120

Year 2007 Year 2008

Life Expectancy

HIV Prevalence

Ease ofHiring Foreign Labor

Hiring andFiring Practices

Extent of Staff Training

Local Availability ofResearch & Training

Quality ofEducational System

Secondary Education

Primary Education56

65

119

83

105

34

73

81

1

60

104

97

27

79

11

79

83

A.3.1.12 Affinity for T&T:

Egypt showed a significant improvement in all indica-tors reflecting the affinity for T&T, placing 31st and recording an improvement from its previous 85th po-sition with a score of 5.28 after Tunisia and before Bahrain. This was a result to a sharp improvement in tourism openness (up from 46 to 24), a change in the attitude toward foreign travelers and in particular on the way tourists are welcomed in the country. Favor-able government efforts in these areas have boosted Egypt’s ranking from 106 to 91 and in the extension for business trip category, have translated in a marked improvement (from 79 to 41) (Figure A.3.1.12).

0 20 40 60 80 100

120

Extension of business trips recommended

Attitude toward tourists

Tourism openness

Year 2007

Year 2008

FIGURE A.3.1.12: AFFINITY FOR TRAVEL AND TOURISM

24

91

41

46

106

79

90

A.3.1.13 Natural Resources:

Natural and cultural resources cited in the 2007 report were based solely on the number of World Heritage sites, nationally protected areas, carbon di-oxide damage (moved to the pillar of environmental sustainability and in which Egypt showed an excellent improvement, moving down from 100 to 50) and busi-ness concern for ecosystems.

The 2008 report introduces a new set of parameters and indicators, and the pillar has been divided into two separate categories. These modifications affect the position of Egypt in Natural Resources, seeing it drop from 55 to 86. The ranking is based on survey data placing Egypt 128th, with only a handful of pro-tected areas. (Figure A.3.1.13)

0 30 60 90 120

150

Total Known Species

Quality of the Natural Environment

Protected Areas

Number of World Heritage Natural sites

Year 2007

Year 2008

FIGURE A.3.1.13: NATURAL RESOURCES

65

39

48

46

128

A.3.1.14 Cultural Resources:

Egypt is a country rich in cultural heritage, placing 58th out of a total 130 countries. The nation’s rank in number of World Heritage cultural sites remained the same (30th) with a score of 6 of World Heritage sites, placing Egypt on par with Canada, after Tunisia (7) and before Israel (5). on the other hand, in the new categories of sports stadiums and international fairs and exhibitions, Egypt received a weak evaluation for its sports stadium capacity per million of popula-tion, being ranked low (108th), and placing 54th de-spite several fairs and exhibitions held during the year (Figure A.3.1.14).

0 20 40 60 80 100 120

Number of International Fairs &Exhibition

Sports Staduim

Number of World HeritageCultural sites

Year 2007

Year 2008

FIGURE A3.1.14: CULTURAL RESOURCES

108

54

30

30

91

ANNEX 3.2: MEASURINg THE PERFoRMANCE ANDEFFICIENCY oF THE SECToREgypt’s average annual tourism growth rate is compared to the world average annual growth rate during the period to 2002-2006, in order to arrive at Egypt/world tourism coefficient as shown

below;

Table A.3.2.1 Egypt/World Coefficient (2002-2006)

Item Value

Annual growth Rate World (%)

4.50%

Annual growth Rate Egypt

15.00%

Average Egypt/World Coefficient

3.41

The table above indicates that during the period 2002-2006, Egypt witnessed a growth rate much higher than the growth rate of world tourism, result-ing in a coefficient amounting to 3.41, i.e. growth rate of tourism in Egypt is 3.41 times the growth rate of world tourism.

on the other hand, the growth rate of tourism in Egypt is superseded by the growth rates of key rival countries such as Turkey, with its annual growth of 7%, Tunisia, with its annual growth rate of 3.8%, and Mo-rocco, with its annual growth rate of 7.8% over the same period (2002-2006).

The Potential of the Egyptian Economy

Egypt’s economy potential can be measured by esti-mating three key economic indicators: productivity of capital, employment effect, and foreign exchange ef-fect over the period 2008-2020. Relative efficiency, or productivity, of capital invested is estimated as are the employment effect (the potential of capital invested to create jobs) and foreign exchange effect, which is potential of capital invested in generating foreign ex-change over the period 2008-2020.

The Relative Efficiency Test measures productivity of capital invested by relating the change in gDP to the capital invested. Both gross investment and gross Do-mestic Product are based on constant prices of 2007 and discounted at the social Discount Rate (10%). Es-timates of both gross investment and change in gDP are based on the past performance of the Egyptian economy during the period 2005-2007 as follows:

gross Investment represents 21.5% of gDP;��

Incremental Capital-output ratio is 4.8;��

Expected annual growth rate of gDP is as fol-��

lows:

2008-2012 7%�

2012-2017 6%�

2017-2020, 5% Employment effect, i.e. the poten-��

tial of capital invested in creating jobs, measures the number of jobs per million pounds invested;

Foreign exchange effect, measures the potential ��

of capital invested in generating foreign exchange. Estimates of foreign exchange earnings are based on the balance of payment results over the pe-riod (2005-2007). Both gross investment and net foreign exchange earnings are based on constant prices of 2007 and discounted at the social dis-count rate (10%);

The following table illustrates the derived economic indicators at the national level:

Table A.3.2.2 Economic Indicators at the National Level 2008-2020

Relative Efficiency Test

L.E. 1.95Per one pound

invested

Employment Effect

9 jobsPer one million

pounds

Foreign Exchange Effect

L.E. 0.33 in foreign currency

Per one pound invested

92

Analysis of macroeconomic indicators reveals the fol-lowing:

The present value of gDP exceeds the present ��

value of capital invested, i.e. positive absolute ef-ficiency, in that the investment in Egypt is rather productive, i.e. economically viable;

Each pound invested is expected to result in an ��

increase of gDP by l.E 1.95 over the expected life of investment, taking into consideration the social opportunity cost of capital invested;

The cost of creating a job in Egypt is roughly es-��

timated at l.E. 110 thousand, in that each million pounds invested would create 9 jobs;

Each pound invested would generate around l.E. ��

0.33 in foreign currency (equivalent to US$0.07) over the expected life of the investment, taking into consideration the social opportunity cost of capital.

Comparison between the tourism sector and national economy are shown below:

Table A.3.2.3 Economic Indicators 2008-2020

ItemTourism Sector

National Economy

Relative Efficiency Test (per one Egyptian pound)

L.E. 2.27 L.E. 1.95

Employment Effect(jobs per L.E. million)

3.5 jobs 9 jobs

Foreign Exchange Effect(per one Egyptian pound)

US $ 0.75 US $ 0.07

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ANNEX 3.3: MEASURINg THE IMPACT oN THE ECoNoMY

Table A.3.3.1 (National Value Added and Present Value of National Value Added) (LE ’000)

Year NVA PV (NVA)

2008 4,149,818 35,329,738

2009 4,772,290 40,629,199

2010 5,488,134 46,723,579

2011 6,311,354 53,732,116

2012 3,387,093 28,836,235

2013 3,624,190 30,854,772

2014 3,877,883 33,014,606

2015 4,149,335 35,325,628

2016 2,854,150 24,298,986

2017 2,982,586 25,392,440

2018 3,116,803 26,535,100

2019 3,257,059 27,729,179

2020 3,403,627 28,976,992

Table A.3.3.2 Annual Direct Employment and Indirect Employment (’000 Employee)

YearDirect

EmploymentIndirect

EmploymentTotal

2008 63 42 104

2009 72 48 120

2010 83 55 138

2011 95 63 159

2012 51 34 85

2013 55 36 91

2014 58 39 97

2015 63 42 104

2016 43 29 72

2017 45 30 75

2018 47 31 78

2019 49 33 82

2020 51 34 86

Table A.3.3.3 Annual Net Foreign Exchange Earning and Present Value of Net Foreign Exchange Earning (LE ’000)

YearAnnual Net

Foreign Exchange Earning

PV of Net Foreign Exchange Earning

2008 9,340,497 63,033,210

2009 10,741,572 72,488,192

2010 12,352,808 83,361,420

2011 14,205,729 95,865,634

2012 7,623,741 51,447,890

2013 8,157,403 55,049,242

2014 8,728,421 58,902,689

2015 9,339,411 63,025,877

2016 6,424,180 43,352,800

2017 6,713,269 45,303,676

2018 7,015,366 47,342,341

2019 7,331,057 49,472,747

2020 7,660,955 51,699,020

Three Major Challenges: Global Warming, Oil and Gas Depletion and Reduction of Fresh Waterglobal food prices increased 83 percent between 2005 and 2008. At the time of publication of this report, oil prices were well above $100 a barrel, at prices few had ever predicted. Meanwhile, the proof of global warming has become irrefutable and its consequences are being felt around the globe.

The rise in food prices has triggered economic hardship across the globe and in Egypt in particular as families experience a decline in their real incomes. Firms are forced to raise prices. There are increased labor tensions as pressures build to increase wages that in turn will further fuel the inflationary spiral. Finance ministers are being distracted from looking after the long term economic health of their nations as they deal with short term crises.

The causes of the current crises are complex and intertwined. With the USA and Brazil utilizing more and more cropland for biofuels, land and crops have been diverted from food production, resulting in a diminished supply. The rising cost of energy is directly related to rising food prices in many ways. global warming seems to be causing droughts and

floods, radically disrupting some crop patterns. In Australia, drought has forced rice and wheat prices to skyrocket. In the arid Murray River Basin, Australia’s main agricultural region, rising levels of salt are quickly eroding the country’s main source of fresh water. Although there are cyclical factors at work behind the increase in commodity prices, these may also be symptoms of three long-term emerging mega-trends: climate change, deteriorating fresh water resources, and energy insecurity. These trends are set to be the backdrop to the 21st century and will have major implications for the competitiveness of nations looking to develop or progress.

Climate change, deteriorating fresh water resources and energy insecurity can no longer be ignored and threaten other efforts to improve the livelihood of Egyptians. Consequently, a comprehensive competi-tiveness strategy would be incomplete and ineffective were it not to take these emerging mega-trends into account. These trends will threaten business, but they will also provide new opportunities for those who can deliver solutions. Egypt’s government, business and academic communities, and civil society all have an important role to play in formulating solutions to these global challenges.

4 Emerging Global Challenges to Sustainable Competitiveness:Global Warming, Energy and Water

Helmy AbouleishKevin Murphy

Three global challenges have emerged in recent years that will have impli-cations for the design of a competitive strategy in Egypt. These are: global

climate change, the deterioration of fresh water resources, and diminishing oil and natural gas supplies which resulted in unprecedented increase in food prices. Ex-perts predict that these major trends will affect the competitiveness of all countries and will have serious consequences for Egypt. It stands to reason, then, that any competitiveness strategy must take these challenges into account and accordingly develop an effective plan of action. A number of factors have combined together to contribute to this state of affairs: global warming; climate change; the impact of the latter on cropping patterns; the depletion of oil reserves; the imbalance between supply and demand for oil and the consequent increase in the price of energy; and the shortage of fresh water emerging as a threat in many parts of the world, notably in the Middle East. The impact of these factors has been aggravated by mismanagement and the price impact magnified by speculation in the commodity markets. As such they remain important challenges that provide the backdrop to the proposed national competi-tiveness strategy

96

4.1 ClIMATE CHANgE AND ITS IMPACT Carbon dioxide (CO2) emissions are causing temperature to rise and weather patterns to change. According to the UN’s Intergovernmental Panel on Climate Change (IPCC), “Global atmospheric concentrations of carbon dioxide, methane and nitrous oxide have increased markedly as a result of human activities since 1750 and now far exceed pre-industrial values determined from ice cores

spanning many thousands of years.” These emissions have risen sharply and are projected to rise even more dramatically in years to come (see Exhibit 1). The IPCC further concludes with “very high confidence” that an observed rise in the global average surface temperature is linked to these emissions. Temperatures have climbed notably in recent years. And while experts may differ over the rates of future increases in temperature because of these emissions; nearly all projections show that we will observe a significant rise in temperature (Exhibit 2). This warming will cause weather pat-terns to change across the globe and may initiate feedback loops with other climate-related phenomena such as ocean salinity, currents and the melting of continental glaciers to further increase the rate of climate change.

Source: http://www.ipcc.ch/graphics/graphics/2001syr/ppt/02.21.ppt

Exhibit 4.1: Carbon emissions are going up dramatically

Egypt is certainly threatened by a rise in global sea levels resulting from global warming. The global sea level will rise as continental glaciers melt due to increases in the Earth’s average surface tem-perature. Major glaciers have already receded as have parts of greenland and Antarctica, with stark results (see Exhibit 3 for examples of the disappearance of glaciers in Sweden and Austria). global warming will cause the sea level to rise, although the magnitude

of the increase is still being assessed. Projections by the IPCC have run six scenarios taking into account various uncertainties (see Exhibit 4). Even modest in-creases in sea level are potentially devastating to many coastal areas, including the Nile Delta. Indeed IPCC scenarios indicate that if sea levels do rise, a major portion of the Nile Delta could be lost to a com-bination of inundation and erosion, with consequent loss of agricultural land and urban areas. An increase

97

Sources: http://www.ipcc.ch/graphics/graphics/2001syr/ppt/05.24.ppt

Exhibit 4.2: Earth temperature is rising and will rise further

in soil salinity would result in further loss of valuable agricultural land.

The beaches and lowlands of Alexandria and the Delta are especially vulnerable to a rise in sea level. According to the IPCC’s initial estimates, the old city center of Alexandria is prone to inun-dation and water logging, which will undermine the foundations of historic buildings and leave the city more vulnerable to extreme weather events. Under a conservatively estimated rise in the sea level of 0.5 meters, the city will lose USD$30 billion in real es-tate and tourism as its two remaining beaches are flooded. Businesses located within 200-300 meters of the shoreline will experience an average annual loss of

USD$127 million including unrealized tourism reve-nue. Assuming existing population levels, a one-meter rise in sea level would displace or significantly affect the economic welfare of an estimated 8 million Nile Delta residents. Images of potential impacts on the Nile Delta are found in Exhibits 5 and 6.

Rising sea levels will drastically reshape the nature of Egyptian business and government. Egypt may be forced to contemplate expensive invest-ments in engineering. one scenario for the Nile Delta is similar to that of Bangladesh, where annual flooding displaces or kills thousands. Another scenario, like the Netherlands, would involve engineering projects cost-ing tens of billions of dollars. While solutions to rising

98

The Uppsala glacier (Sweden) in 1928 and 2004��

Source: http://www.greenpeace.org/india/news/climate-change-is-happening-g

Exhibit 4.3: Global warming is reducing glaciers

The Pasterze glacier (Austria) ��in 1875 and 2004

Source: http://www.worldviewofglobal-warming.org/pages/glaciers.html

sea levels will prove costly for urban settlements, the agrarian communities along the Nile may not be able to count on engineered projects to save their soils from salt intrusion related to rising sea levels. Even with a modest one-meter rise in average sea level, ap-proximately 12.5 percent of Egypt’s agricultural lands

would be negatively affected. With a five-meter rise, this percentage skyrockets to 35 percent. The impact on national wealth of such a loss would be significant; with an estimated US$750 million in flood damage alone (Exhibit 7).

99

Can Egypt be at the forefront in responding to global warming? With the salt water of the Mediter-ranean already pushing farther into the Nile Delta, Egypt can today see the consequences of global cli-mate change. Effective responses will require the ap-plication of engineering skills, agricultural science, and water and land management. Climate change should motivate important reforms in existing water, land and energy policies. The government can also exploit economic opportunities linked to climate change such as profitable engagement with European greenhouse gas trading schemes. Finally, the government should begin thinking about how to attract insurance and re-insurance markets to cover climate change.

Private Egyptian firms, particularly in the en-gineering sector, can position themselves to

provide services related to climate change. Egypt will need to construct or retrofit critical infra-structure to mitigate sea level rise. Whether those contracts are awarded to local or international firms will be determined by the investments that Egyptian companies make today. Businesses must think criti-cally about which assets are at risk of climate-related damage and demand reasonably priced insurance to cover those potential losses. Conversely, insurance companies must begin refining predictive models to ensure that their premiums cover events related to climate change.

Civil society will have an important role to play in designing solutions, raising public consciousness, representing the public interest and helping to imple-ment new initiatives.

Source: http://www.ipcc.ch/graphics/graphics/2001wg1/ppt/04.03.ppt

Exhibit 4.4: Global warming increases the sea level but estimates vary by how much?

100

Source: Otto simonett, UNEP/GRID Geneva; Prof. G. Sestini, Florence; Remote Sensing Center, Cairo; DIERCKE Weltwirtschaftsatlas.

Exhibit 4.5: Threats to the Nile Delta with 0.5 meter rise in sea level

Source: Otto simonett, UNEP/GRID Geneva; Prof. G. Sestini, Florence; Remote Sensing Center, Cairo; DIERCKE Weltwirtschaftsatlas.

Exhibit 4.6: Threats to the Nile Delta with 1.0 meter rise in sea level

101

Source: World Bank Policy Research Working Paper 4136, February 2007

Egypt’s gDP would be severely affected by a rise in the sea level

Exhibit 4.7: Impact on Egypt’s GDP

102

4.2 DEPlETIoN oF NoN-RENEWABlE ENERgY RESoURCES Oil and gas resources are being depleted and renewable energy is urgently needed. The second major trend is the depletion of non-renewable sources of energy, especially oil and gas. Experts disagree as to when the demand for oil and gas will surpass supply from new sources, but many pundits are predicting this to occur sometime in the foreseeable future (see Exhibit 8 for various forecasts).

What is not debatable is that growing population and increasing standards of living create greater and greater demand for traditional non-renewable energy as well as non-traditional and renewable energy. Bar-ring any reverses to the notable recent economic growth, current energy demand is likely to outstrip supply for the foreseeable future even as higher prices promote greater conservation and encourage more efficient use of energy. Consequently, it is quite likely that energy security will further deteriorate before it improves.

Egypt’s electrical energy demands have been in-creasing by as much as 10 percent a year for the last decade and show no signs of slowing.1 This increase is due in part to longstanding market distor-tions. Official figures estimate the value of Egyptian energy subsidies at approximately EgP 22.1 billion in FY20062. Revenues from fuel sales taxes are lower than anywhere else in the world outside of Yemen. This further inflates the Government’s budget deficit.3 The government of Egypt is subsidizing the use of energy resources and therefore unintentionally and inadver-tently subsidizing global warming and the depletion of oil and gas resources. Another indirect consequence of low prices for fossil fuels is the discouragement of investment in alternative forms of energy production which might be attractive using current global market prices for energy consumption.

Egypt has many powerful policy options for in-creasing energy security. A large proportion of en-ergy consumed by Egypt’s industrial economy is used by cement, steel, and fertilizer companies. Reducing these subsidies will save the government more than EgP 15 billion over the next three years, according to the Minister of Trade and Industry. 4 The government is already in the process of eliminating subsidies for energy-intensive industries as part of a plan to wean the country off hydrocarbon-intensive growth and re-duce massive budget deficits.

Changes in energy policy require careful con-sideration to social consequences. While subsi-dies for energy-intensive industries disproportion-ately benefit Egypt’s upper class on a per capita basis,

1 Economist, Egypt’s Nuclear Push, 2 November 2007 http://www.economist.com/agenda/displaystory.cfm?story_id=10085431

2 Herald Tribune, Prime Minister: Egypt to scrap antiquated subsidies program despite opposition criticism, http://www.iht.com/articles/ap/2007/12/06/africa/ME-gEN-Egypt-Economy.php

3 gTZ, International Fuel Prices 2007 http://www.gtz.de/de/dokumente/en_Interna-tional_Fuel_Prices_2005.pdf

4 Reuters, Egypt says to end subsidies over 3 years, 14 August 2007 http://africa.reu-ters.com/business/news/usnBAN437328.html

abrupt changes to these pricing schemes would have serious socio-economic consequences. For example, taxi drivers will not easily accept increased gasoline prices without consequent hikes in taxi fares which in turn affect the daily expenditures of countless oth-ers. Shippers will want to pass on to consumers the increased cost of transportation if fuel prices increase and this would have inflationary consequences at a time when inflation is of great concern and many Egyptians are feeling the pinch of an increase in the cost of living.

Can Egypt aggressively invest in far-sighted programs of alternative energy?Although Egypt’s petroleum production has fallen since 1995, there has been successful identification and exploitation of natural gas production. Can Egypt complement this with aggressive investment or in-centives for renewable energy? one barrier is the high subsidy provided for gasoline, oil and energy in general. In the long term, Egypt will have to diversify its energy portfolio through exploring the viability of different sources of renewable energy. Egypt has ex-cellent wind energy potential, particularly in the Suez gulf area (see Exhibit 9). one recent study identi-fied Egypt as a prime location for the development of solar power because it not only has ideal sunlight conditions but also the ability to link solar energy locations to its existing energy grid (Exhibit 10). In the meantime, the incentives for alternative energies provided by other governments will continue to fuel speculation in commodity markets and increase the volatility of Egyptian incomes. Egypt can hedge against that volatility by making significant and well-chosen in-vestments in renewable energy resources that are at-tractive given likely scenarios for global energy prices.

Energy security will become a critical factor in the competitiveness of individual firms. Some firms will develop faresighted policies so as not to be caught unaware. Others will learn how to profit by developing alternative energy or technologies that are related to energy conservation. The government of Egypt must now factor into its energy policy the need to avoid perverse incentives that foster waste. If Egyptian firms wish to be world class, they will have to adopt globally competitive strategies related to ener-

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Source: (EIA Monthly) and various forecasts (2000-2020)

Exhibit 4.8: Is Oil Production Ready to Peak? Experts provide varied estimates on the peak year for energy production

gy and demonstrate that they too are environmentally friendly and as “green” as the firms with which they compete. For example, tourism companies may com-pete in the future by offering a “low carbon footprint.” They can also use scenario planning techniques and develop contingency plans for their business strate-

gies and operations given various alternative domestic and international ranges of energy prices. Nonethe-less, the fact remains that businesses do hesitate to make long-term investments in alternative energy when energy prices for non-renewable sources of en-ergy are kept artificially low.

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Egypt lies within the sun belt area. In 1991, ��

Solar Atlas for Egypt was issued, conclud-ing that:

Direct Normal Irradiation ranges between 2000 1. kWh/m2/y in the North and 3200 kWh/m2/y in the South.

The sun shine duration ranges between 9-11 h/day 2. from North to South, with very few cloudy days.

Source: Wind Atlas for Egypt, measurements and Modeling 1991- 2005, Dec. 2005

Exhibit 4.10: Solar Energy Resource Assessment

Egypt has excellent wind capacity, particu-��

larly in the Suez Gulf where the wind speed reaches 10.8 m/sec.

The Wind Atlas for the Suez Gulf Coast ��

shows that the region can host about 20,000 MW of wind farms.

Source: Wind Atlas for Egypt, measurements and Modeling 1991- 2005, Dec. 2005

Exhibit 4.9: Wind Energy Resources Assessment

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Regardless of climate change, growing con-sumption of fresh water will cause further environmental change. A booming population is putting pressure on fresh water supplies worldwide (see Exhibit 11) as the global population continues to increase and per capita consumption of fresh water also increases relative to stable and in some cases declining sources of fresh water supply. Meanwhile, Egypt has one of the highest per capita consumption rates of water in the region (Exhibit 12). The country’s growing consumption of fresh water is largely depen-dent on the Nile River. Although other underground sources of fresh water may be available, the Nile cur-rently supplies 95 percent of fresh water to the coun-try. To date the largest factor affecting water demand has been population growth resulting in the highest per capita water consumption in the region. Divert-ing river water to agriculture, industrial, and munici-pal use has resulted in saltwater intrusion in the Nile Delta up to a distance of about 63.0 km measured from the shoreline along the bottom boundary of the aquifer. The river’s water has been diverted to impor-tant development projects such as the New Valley land reclamation project in the Western Desert. The New Valley project has created urban areas and irrigates over 200,000 hectares of desert (see box 4.1).

Water demand is closely linked to economic growth. The growth of such extensive projects is vi-tal to the country’s economic health, but in the future the environmental pressures of population growth compounded with a rise in sea level, will exacerbate soil salinity problems. Unchecked, this could erode the competitiveness of agribusiness at a time when the sector is competing for water resources with growing municipal and industrial demand.

Long-term sustainability demands that both the private and public sectors begin to decouple demand and economic growth. As water resourc-es become scarcer, the Egyptian government will be forced to analyze development projects not in terms of their overall contribution to economic growth but in terms of their return per unit of water invested. In neighboring countries similar transitions have en-hanced overall competitiveness, turning farmers to-ward value-added and export-oriented crops. These cropping alternatives will be enhanced by the simul-

taneous development of new agricultural systems, soil drainage and conservation, and land management. In neighboring countries the challenge of harmonizing multiple water uses has also nurtured local engineer-ing firms. Egypt’s private companies can find opportu-nities in water-saving technologies.

4.3 DEClINE oF FRESH WATER RESoURCES The impact of climate change on the River Nile, while uncertain, merits further of-ficial investigation. One Egyptian expert associated with the National Water Research Centre in Cairo has noted some views that there will be an increase of rain in the Ethiopian plateau resulting in greater water flow in the Nile. Others maintain there will be a decrease because of water evaporation. Until now,

no specific research has definitively indicated what the impact of climate change will be on the water avail-ability of the Nile. Current models show impacts that range from a flow decrease of 70 percent to a flow increase of 25 percent. In 2004, the Organization for Economic Co-operation and Development (OECD) estimated that a modest rise in global temperature would indeed result in significantly reduced Nile flows.

How much water do we consume:

On average people in rich countries ��

“eat” about 3000 liters of water per day. They drink between two and five liters per day. It takes:

800 to 4000 liters to grow a kilo-��

gram of wheat

2000 to 16000 liters of water to ��

grow a kilogram of beef

2000 to 8700 liters of water to grow ��

a kilogram of cotton

The world health organization sug-��

gests 20 liters per person per day is the minimum amount to keep us clean and healthy.

How much water do we use for goods and services:

Up to 300 liters for every car wash.��

About 2700 liters of water to make ��

one cotton t- shirt.

About 1- 2.5 liters of water to pro-��

cess one liter of gasoline.

About 2400 liters of water to pro-��

duce one liter of maize based etha-nol in china because ethanol pro-duction is dependent on heavily irrigated sugar cane.

Source: Aquastat- FAO’s information

System on water and agriculture 2003

BOX 4.1: How do we use fresh water

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The economies of regions that have failed to ad-dress similar problems have collapsed. Egypt can see extreme contemporary examples of the impact of saline soils on society. As consumption increases and irrigation works expand, it is only natural that the flow of fresh water will decrease and the salt water inflow from the Mediterranean will increase. The salty soils of the Nile Delta may come to resemble the Aral Sea in the former Soviet Union, where a once-thriving cotton sector has entirely disappeared. Alternatively, the Delta could look like Southern Australia where salinity quotas are highly regulated.

Reforming water use is a politically sensitive is-sue linked to poverty reduction.

Egypt offers its farmers significant water subsidies. As with its energy subsidies, any rationalization of the current regime must proceed slowly and with great care to avoid undue economic hardship for the coun-

try’s poor. According to one study, pricing water at its marginal cost will result in a 25 percent decline in Egyptian farming incomes. Consequently, it is un-likely that pricing policy alone is a viable solution to the emerging fresh water challenge. Instead, Egypt can transition its prevailing system of water quotas into a market-based trading scheme as have other arid farm-ing regions in the American West and Southern Aus-tralia. looking to Southern Australia as a model, one sees that private firms and state governments spend tens of billions of dollars on salinity permits and water desalination schemes. Many farmers currently make more money selling their fresh water than they do using it to farm. Southern Australia proves that water permit trading schemes can provide powerful motiva-tion for farmers to switch to value-added crops and allows for water resources to be shared fairly and ef-ficiently between municipal, industrial and agricultural users.

Source: UN DESA, World urbanization prospects :2003 revision

Population growth: Projected to reach over 8 billion in 2030 and to level off at 9 billion by 2050

Exhibit 4.11: Trends that will affect fresh water use

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4.4 CoNClUSIoN Egypt’s development does not take place in a vacuum. Competitiveness is a dynamic concept and requires constant strategic readjustment. Climate change, a decline in fresh water resources and energy insecurity are long-term trends that will require realignment by companies and by the Government. Egyptians have already begun thinking strategically about these issues. If that thinking is valued by the business com-

munity and translated into action, Egypt has the unique opportunity to become a regional or global leader and set itself on a course toward sustainable competitiveness in the 21st century, positioning itself as a global leader in providing solutions. This brief description of the major global challenges presents national players with a new set of parameters that must be taken into account in rethinking their development strategies and the priorities that such strategies set for a national plan of action. These challenges influence the context for the development of appropriate competitiveness policies and strategies. To this task we shall now turn.

Source: Data from Aquastat- FAO’s information System on Water and Agriculture 2003 - Graphic by GTZ

Exhibit 4.12: Egypt Needs Fresh Water: Per capita use of water for selected countries

5 Towards a Comprehensive National Competitiveness Strategy for Egypt

Samir RadwanKevin Murphy

A comprehensive competitiveness strategy is particularly critical to Egypt’s prosperity at this point in time. Egypt is vulnerable to external economic

shocks stemming from global climate change, the deterioration of fresh water resources, and diminishing supplies of oil and natural gas, not to mention the un-precedented increase in the price of food. Experts predict that these major trends will affect the competitiveness of all countries and will have serious consequences for Egypt. Any competitiveness strategy must take them into account and develop plans to respond. Countries that have successfully confronted competitiveness challenges and achieved sustainably high levels of economic growth first mobilized political will, without which the rest of the strategy cannot succeed. These countries then ensured access to global markets on favorable terms, mobilized investment to serve these markets, provided the supporting infrastructure, educated, trained and productive workforce and ensured that competitive forces were at work not just in their export sectors but throughout their economies. They did this by having stable macroeconomic policies, creating a modern financial sector, encouraging the adoption of science, technology and innovation, making it easy to do business in ways that responded to market forces and encouraging industry clusters to constantly improve. The ENCC can play a role in this by structuring a public-private dialogue resulting in a National Competitiveness Strategy that officials and business leaders subse-quently implement, and by fostering broad public understanding and support. This chapter presents a framework for a comprehensive national competitiveness strat-egy for Egypt, based on the best available economic thinking, informed by the latest economic trends in the global economy and guided by actual strategies of countries that have achieved high standards of living through accelerated economic growth. The framework presented here provides a point of departure for this effort which will surely be changed and adapted as the dialogue gathers momentum.

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5.1 BRoAD lINES oF A NATIoNAl CoMPETITIVENESSSTRATEgY (NCS) FoR EgYPT In last year’s report, the statement was made that “Looking to the future, meeting the challenge of improving Egypt’s competitiveness requires movements on several fronts, but this movement has to be comprehensive, decisive and internally consistent…….The reforms that has been undertaken are paying off, but it is time to

have a comprehensive competitiveness strategy”. In this report, we are advancing towards achieving these goals by proposing the broad lines of a comprehensive national competitiveness strategy.

The thrust of the proposed strategy is that Egypt should build upon the achievements of its reform in order to achieve a quantum leap in the productivity of its economy and its popu-lation. What is being proposed is not simply a discrete movement along the same curve, but a pronounced spurt to a totally different trajec-tory which aims at sustained growth based on enhanced productivity.

In this, we have been inspired by the experience of others. The Vision 2020 for Malaysia recognizes pro-ductivity enhancement as the vehicle for the country to reach oECD-member level. For Indonesia, the pro-ductivity represented the basis for a three-pronged strategy including stability, diversification and innova-tion (government of Indonesia, Ministry of industry and Trade, 2006). Similarly, the United kingdom de-clared productivity as its road to a knowledge-driven economy (Peter Mandelson, Department of Trade and Industry, 2004). The Competitiveness policy council of the USA presented its “framework for action” to the president in 1992 which highlighted the role of productivity in getting the US economy out of recession (First annual Report to the Presi-dent and Congress, Building a Competitive America, March 1, 1992). The report “partnering for investment in Canada’s prosperity prepared by the Institute for Competiveness and Prosperity recommended that the “government reorient their spending patterns and their taxation policies; that business invest more in productivity, enhancing machinery, equipment and worker training; and that individuals invest more in their own education and knowledge” (A report pre-sented at the World Economic Forum, Davos, Janu-ary 2004). The National Competitiveness Council of Ireland advocated productivity as “the key long-term determinant of a nation’s living standards and com-petitiveness. Productivity is not about working harder, but about working smarter through better manage-ment practices, organizational design, better use of ICT and other technologies, and through better levels of education and skills. By making wage growth consis-tent with enterprise competiveness and profitability, productivity growth allows growing returns to all sec-tions of society” (Ireland Foras, The Competiveness Challenge 2005). Finally, the European competiveness report for 2004 emphasized the role of public policy

in enhancing growth and productivity. It argued that “the effects of public policies on productivity come about both via productivity growth in the public sec-tor and via the effects of public policies-taxation, pub-lic spending and regulations on the private sector”.

The proposed strategy will have the following objectives:

Sustained the present economic growth of 7 per-��

cent at least until 2012, and maintain the momen-tum throw 2020. 1

open unemployment rates below 5 percent as ��

suggested by the Five-Year Plan, 2007/2011. The problem of under employment and low produc-tivity especially in the informal sector greatly re-duced.

Halving poverty by the year 2015 as declared by ��

the Millennium Development goals.

Strengthening public policies including financial, ��

monetary and regulatory policies to achieve this sustained growth, mainly through support for a strong private sector.

Declaring quantitative goals for the different sec-��

tors of the economy, and identifying the leading sector(s).

launching an aggressive attack on the constraints ��

on productivity increase especially bureaucratic regulations.

Enshrining job creation as an intrinsic objective of ��

growth thus ensuring a broad-based distribution of the fruits of this growth.

Braod-based sharing of the fruits of growth is the best guarantee to create support for this strategy. The lessons of experience of fast growth in Egypt as well as elsewhere points to the fact that growth is a necessary, but not a suffucient condition for shared prosperity. one of the main arguments of the aver-age citizen in Egypt is that they do not feel the im-pact of the excellent performance at the macro level. A comprehensive competitiveness strategy should confront this issue by understanding its root causes and devising and implementing policies that deal with them. A number of structural factors reduce the en-titlements of the bottom 40 percent of the population and therefore reduce their share of growth. In Egypt,

1 A 7 percent rate of growth is the rate sufficient to absorb the new entrants to the labor market and reduce unemployment gradually.

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20 percent of the population are below the poverty line and 20 more are “near poor” in the language of the World Bank. The first group is largely excluded from sharing in growth and the second is always threatened by internal and external shocks especially sudden price increases. Moreover, poverty is region-specific. The incidence of poverty in Upper Egypt is much higher than the national average and it’s primar-ily concentrated in the rural areas.

More important perhaps is the quality of the labor force. In Egypt, 44 percent of the working population is either illiterate or near illiterate. This curtails their access to the labor market and certainly lowers the return to their labor. Similarly, 7 million out of the 20 million or 35 percent of the labor force try to find a living in the so called informal sector which is of lower productivity and lower wages. All these fac-tors point to the need for radical reform of the labor market.

The competiveness strategy has also to address some macro issues if the objective of broader distribution is to be achieved. Two such objectives are crucial. First, the questions of the sources of growth which was raised in chapter 2 is of utmost importance. The sectoral contribution to gDP growth should be such as to favor the creation of good jobs i.e., jobs that have high productivity and high returns. Secondly, the financial policy, especially the distribution of public spending can be an effective mechanism for achiev-ing social justice. Public spending on health, education, infrastructure and knowledge creation has been iden-tified as an efficient way of increasing the entitlement of the poor.

The goal of the proposed strategy is that it must walk on two legs: productivity enhance-ment and better distribution of the fruits of growth.

The implementation of this strategy will re-quire a carefully thought out process to achieve these objectives. What is being proposed here is a framework for a Comprehensive National Com-

petitiveness Strategy (NCS) based on the experience gained in over 115 countries. While the framework is universally applicable, it has been tailored specifically for Egypt.

The Framework serves only as a point of depar-ture. It will focus on the essential goals Egypt must achieve if it is to make a quantum leap in its competi-tiveness and productivity and make a sustainable and irreversible shift in its economic trajectory.

The proposed framework is far from being rig-id. Egypt must develop its own strategy tailored to its specific situation. The framework will focus attention and effort on developing Egypt’s national competitive-ness strategy. The overall framework is a useful tool for Egypt. It is a way to get things started.

The (NCS) is premised on a number of princi-ples:

It should address the social as well as the econom-��

ic dimension by focusing on the daunting problem of poverty. 2

It should also propel Egypt to become a fully mod-��

ern economy while preserving its cultural heritage and promoting social solidarity.

The (NCS) will involve a coordinated effort among ��

government decision makers, private sector lead-ers, and representative of the civil society.

The NCS will build upon the achievements reached so far especially as a result of the program of reform initiated and implemented over the last four years. Moreover, it will also be conditioned by the major global challenges that will influence national decision making. global warming, depletion of oil and the con-sequent increase in its price, and the decline in fresh water supply, all these changes have been reflected in an unprecedented increase in food prices (by 83 per-cent between 2005-2008). A quantum leap in Egypt’s productivity based on enhanced competitiveness is the only way that will enable the country to confront these challenges.

2 The World Bank using Household Income and Expenditure Survey Results for 2005 estimated that approximately 20percent of Egyptians live in poverty and an-other 20percent are at near-poverty levels. Despite growth, the latest figures do not show rapid declines in poverty levels. It is assumed that the recent increase in inflation will have had a further negative impact on poverty reduction. See World Bank, Arab Republic of Egypt Poverty assessment Update, September 16th, 2007.

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5.2 THE FRAMEWoRk FoR A NATIoNAl CoMPETITIVENESS STRATEgY 3

The following framework presents 10 major areas of effort (fig 1). While there is logic to the order in which they are presented, they are not necessarily sequential. This chapter will argue that the Government of Egypt has actually begun to implement many of the elements of a coherent competitiveness strategy but

that these are not well understood, not entirely supported and not yet comprehensive in scope.

FIGURE 5.1: BUILDING EGYPT’S COMPETITIVENESS

1 Mobilize Political Will

2 Gain Access to AttractiveMarkets on Favorable Terms

3 Mobilizo Investment toExploit Those Markets

4 Build SupportingInfrastructure

5 Educate HighlyProductive People

Launch Regional and Industry 10Competitiveness Initiatives

Facilitate Technology 9Acquisition and Innovation

Ensure Modorn. Efficient 8Financial Sector

Strengthen Institutions and 7Make it Easy to Do Business

Provide Stable Political, Macro 6Economic and Social Conditions

World ClassBusiness

Environment

ProductivePeople

CompetitiveCompanies

Egypt has plans that are addressing several of the areas presented in this framework, but lacks an overall na-tional competitiveness strategy with a strong mandate from the top that would hold all government minis-tries responsible for results. Building competitiveness is not conceptually that complicated. However, there is a widespread lack of understanding of the process, competing ideas and contrary economic and political interests. government ministries are not all moving at the same pace in the same direction. Hampering prog-ress are old mindsets that have not kept up with the times, attitudes of isolation, self-sufficiency and out-moded economic models. Hampering progress is the belief that rising food and energy prices and social in-stability require retrenching into familiar supports and freezing new thinking and new initiatives. Hampering progress are other worldviews that threaten the very fabric of Egyptian society. These in turn provoke a preoccupation with security that overrides the focus on economic dynamism. Hampering progress is an in-stitutionalized mechanism for private-public dialogue around these important issues, a gap that the ENCC is seeking to help fill.

In the following, we shall detail the elements of the process of building up the NCS:

3 This framework is based on kevin X. Murphy, “Framework for National Competi-tiveness Strategies”, JAA Review, May 2008.

1. Sustain and Mobilize Political Will

The first step is to mobilize political will. A de-clared political will at the highest level in Egypt is a crucial perquisite for successful implementation. Egypt has been implementing important reform initiatives related to investment environment, tax policy, tariffs, business over-regulation and other areas, and this political will should continue to inspire the success-ful implementation of a comprehensive national com-petitiveness strategy. This is the only way to provide opportunity, hope and productive livelihoods for all Egyptians. The economic, political and social benefits must be identified and the relative roles and responsi-bilities of the champions in the government, the pri-vate sector, the educational sector and civil society need to be defined.

Successful countries are the ones that mobilized political will. The economic success stories of the last 50 years differ from country to county, but they all share one important thing – they successfully mo-bilized political will. Whether guided by a heavy hand at the top (China, Chile, Vietnam) or harnessing a frac-tious democracy (Ireland) or something in between (Singapore, Hong kong, Taiwan, South korea, Malaysia and Dubai), every successful country has found the

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political will to focus on national competitiveness. National security concerns drove South korea and Taiwan to make economic growth a national crusade. Japan and germany were motivated by the desperate need to recover from the shock of defeat and devas-tation. It took Ireland 40 years of economic failure and the sad loss of many thousands of sons and daughters to economic migration to finally make the 180 degree change in their economic policy. The impending loss of oil revenues focused the attention of Dubai’s leader on repositioning the country. It took 20 years of lack-luster productivity in the USA for Congress to estab-lish the bi-partisan Competitiveness Policy Council in the early 1990s to introduce a series of productivity-enhancing reforms.

The biggest obstacle to competitiveness is the mindset of people. Mobilizing political will requires generating popular understanding and support for competitiveness-related initiatives. As has been dem-onstrated in various countries, changing mindsets in a condensed period of time is challenging, but feasible.4 A NCS can help set the right tone of non-defensive learning, informed dialogue, transparency and inclu-siveness. A media-mindset program with compelling messages would do much to communicate and gather support for a coherent economic strategy.

2. Gain Access to Attractive Markets on Favorable Terms

Gaining access to attractive markets on favor-able terms is critical to competitiveness. The lesson of economic success stories points to the im-portance of export-oriented growth based on access to attractive markets. The first priority in Ireland’s successful strategy was to reposition itself in world markets. It did this by focusing on entering the Euro-pean Union which gave it access to the largest collec-tive market in the world. Without this step, Ireland would never have been able to attract so much foreign investment to serve the small Irish market. gaining access to EU markets by joining the EU was the es-sential first step for the “Celtic Tiger.” Ireland’s sub-sequent success in investment promotion, export de-velopment, infrastructure and education were in large part enabled by this first key decision.

Eastern European countries are also growing rapidly now because they are able to sell to the rest of the EU. After decades of Communist isolation, China similarly focused on exports to Western markets. It fought consistently and tenaciously for years to be-come a member of the World Trade organization

4 The National Competitiveness Council of Croatia played a key role in changing the terms of the debate in that country from “nationalist” versus “Europeanist” to a debate on which political party had the right approach to building Croatia’s competitiveness. Ireland also created a social compact which reduced the inci-dence of strikes at a critical period and focused the nation on a new economic strategy.

(WTo) so that it could count on market access more permanently and on more favorable terms. Japan and the four “Asian Tigers” – korea, Taiwan, Singapore and Hong kong – enjoyed access to the US and Western markets and used that access quite effectively to boost their standards of living. The Dominican Republic and Honduras gained access to the US market under the Caribbean Basin Initiative (CBI). More recently, Viet-nam focused tenaciously on achieving its Bilateral Trade Agreement (BTA) with the USA. The opposite lesson of closed economies confirms the point.

The Government of Egypt has achieved notable success gaining market access. Egypt has favored access to EU markets and the Barcelona Process is de-veloping a “Euro-Mediterranean Partnership.” Egypt also has access to the US market through its Quali-fied Industrial Zones. Egypt is part of the Greater Arab Free Trade Area (gAFTA), which theoretically gives it access to important markets in the region al-though many countries have kept important exemp-tions. Egypt has important access to many African markets through CoMESA. As a result of these nego-tiations, Egypt has access to markets to the east, west, north and south. It is difficult to overestimate the importance of this achievement. While pursuing fur-ther market access, the public should be made aware of the success of the Egyptian government and the important future impact that this market access will bring. There is strong evidence that this policy has al-ready begun to generate initial results. In this respect, the efforts of the Ministry of Trade and Industry in ne-gotiating favorable terms for market access are highly commended.

3. Mobilize Investment

In Egypt, the Ministry of Investment and the General Authority for Free Zones and Invest-ment (GAFI) should be commended for the re-cent successes in mobilizing record levels of in-vestment, especially “Greenfield Investment”. Total private investment is now above 18 percent of gDP–a remarkable achievement. This kind of invest-ment builds new capacity in Egypt rather than just transferring ownership of existing assets. Continu-ous efforts to improve the investment climate and the pro-active approach of preparing portfolios of viable projects have been matched with an aggressive policy of attracting investment to Egypt. The result has been an increase in FDI from US$400 million in 2003 to US$11.1 billion or 9 percent of gDP in 2007. Rela-tive to other countries, Egypt’s performance last year is quite remarkable. If such levels of investment can

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be sustained, Egypt will be well on the path to a new economic era. The investment boom, resulting from economic reforms and sound investment attraction strategy, may also be occasioned by the current asset boom in the gulf region. The investment mobilization strategy must be balanced and include both domes-tic and international sources, with the latter being diverse.

4. Build Supporting Infrastructure

Egypt has made another dramatic decision that is helping turn the corner on its global com-petitiveness: it has recently sanctioned the for-mation of private sector-led industrial parks. Private sector-led industrial parks will create approxi-mately 200,000 additional jobs in the coming years, mostly in light manufactured goods destined for ex-port, and this may only be the beginning. The regime of “ Investment Zones’ launched by the Ministry of In-vestment and gAFI represents an initiative to general-ize this modality. Private operators tend to be more efficient and focus on attracting globally competitive companies. This decision will help mobilize additional investment in the coming months and years.

Egypt needs to create specialized infrastructure for specific activities. A qualitative change in the country’s infrastructure must include the expansion of the network of roads, ports, airports and river transport. Moreover, both the agricultural and retail-ing sectors would benefit greatly from a new logisti-cal infrastructure based on storage facilities, efficient transportation, linkages and warehoused. Such infra-structure is also crucial to unlocking the potential of hitherto undeveloped regions such as Sinai and Upper Egypt.

Investment in cold chain transportation and storage could be especially beneficial in Upper Egypt, where the majority of Egypt’s poorer population groups re-side. Not all infrastructure necessarily needs to be built and maintained by the government. As men-tioned in Chapter 2, Private-Public Partnerships (PPP) may provide a way to build such infrastructure with-out further taxing the budget deficit.

5. Educate Highly Productive People

Countries become competitive by educating their population. It is no accident that Japan, with a highly literate population, became the most pro-ductive economy in Asia in the 20th century. India’s success in information technology was based on the excellence of its Indian Institutes of Technology and Indian Institutes of Management along with other less

well-known engineering and business schools.5 After they achieved market access and high levels of private investment, Ireland completely revamped its educa-tional system to make it responsive to the needs of the industries it was attracting to the country. Sin-gapore has focused on providing its people access to higher and higher average levels of education with high numbers of young people now attending univer-sity. Yet countries that focus on health and education without regard to their international competitiveness and market realities do not always succeed.

Egypt’s low scores on educational coverage and especially educational quality must be ad-dressed. The government of Egypt has a plan encom-passing early childhood education, basic education, secondary education, community-based education and special needs. It focuses on school-based reform, curriculum and instructional technology and human resource development. It even mentions reducing the need for “private tutoring” which has unfortunately become a form of income support for teachers. Such efforts deserve to be supported and also monitored for effect and feedback. Moreover, technical education must be completely reformed to respond to the de-mand of the labor market. A national project for train-ing must be initiated so that labor supply can easily match the requirements of rapid growth and competi-tiveness. Educational reform must be closely linked to the evolving needs of the private sector.

6. Provide Stable Political, Macro-Economic and Social Conditions

One of the most important functions of Gov-ernment is to provide stable political, macro-economic and social conditions. Suffering from inflation and constant labor strikes in the 1970s and early 1980s, Ireland had to create a “social partner-ship” that lowered taxes, increased take-home pay, reduced school fees and elicited wage restraint and social peace among labor unions after severe unrest. Workers agreed not to go on strike for several years knowing their standard of living would be protected.

In Egypt, the cost of living, social tensions and the threat of extremism form the backdrop for political and social stability. It is important to make the transition to a modern and efficient econo-my while managing the sources of social tension. The backdrop of social tension needs to be recognized as an important constraint but should not impede prog-ress towards solving the three major and inter-con-nected macroeconomic issues of the day: the deficit, the subsidies and the civil service.

5 India’s lack of investment in general education is now being addressed with plans to attain 100percent primary enrollment in coming years. Its historical lack of at-tention to universal primary education has greatly hampered balanced economic development.

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The three largest categories of Government expenditure are subsidies, civil service wages and interest payments which together comprise over 70 percent of the government budget. The official Government position for some time has been that that it is very difficult to consider either cutting subsidies or laying off government workers because of the social implications and the adverse consequences for the poor.

A comprehensive competitiveness strategy must include a socially responsible and politi-cally feasible strategy for reducing the deficit and national debt. Egypt has one of the largest bud-get deficits in the world, which brings down its com-petitiveness score and has other deleterious effects on the economy. Even if Egypt brought its budget deficit down to 5 percent, it would still be among the worst dozen or so countries that reported data to the gCI in 2006. overall Egyptian debt also places the country among nations with the worst performance on this score. As a result, interest payments have be-come a huge burden taking up over 20 percent of the government budget, pushing up real interest rates and crowding out private sector borrowing. The magni-tude of the problem is daunting, especially in light of commodity price increases that have increased the costs of subsidies to the government. A resolution of the subsidies issue is necessary, and it should fol-low two principles: that subsidies must be directed to those who deserve them, and that subsidies should target people and not products.

Egypt must begin the transition to subsidize people rather than products. Indiscriminate sub-sidies often end up favoring the rich whose per capita energy consumption is generally higher than the poor. Is it time to consider income supports for the poor or highly targeted subsidies using needs-based criteria? Are there other ways to provide a social safety net? The government of Egypt Ministry of Social Solidar-ity has plans underway to implement an income sup-port program with a means-tested social safety net. Most of the poor live in very specifically identifiable regions, especially in Upper Egypt. Experience has shown that for a cash transfer income support pro-gram to be successfully implemented, great care must be taken in the selection and training of those people who will administer and deliver these cash transfers. A pilot program to do this should begin immediately and the Ministry should be encouraged to effectively implement its plans. If income transfers to very poor regions were supplemented by a strategic investment program in these regions, it would go far to help the poorest of the poor.

Egypt needs a modern social safety net. The current subsidy scheme involves a vicious circle that needs to be corrected with modern policies to assist the poor. Providing product subsidies under a regime

of controls strains the government budget and also leads to inflationary pressure which in turn harms the poor, requiring ever-greater subsidies. A modern social safety net will a) identify the poor; and b) provide direct and tangible assistance including cash transfers. Some say that this is not feasible in Egypt and yet it has been successfully implemented in other countries where such change was seen as similarly difficult to implement.

It is time to make the civil service both civil and of service. There are numerous effective, dedicat-ed and professional government employees, military personnel and civil servants without whom the state could not function effectively. Their efforts should be commended. But with millions of people currently on the government payroll, it may appear that the civil service is viewed as a government employment pro-gram. Many employees are not as productive as they could be. Some reportedly interfere at times with the productivity of others. Is there no way to create a service-oriented mindset in the civil service? Is there a way to encourage early retirement or provide de-cent packages for those who might be able to make the transition to more gainful employment? If there were more SMEs in Egypt, would there be attractive opportunities outside of government that might en-tice some people to take these jobs?

7. Strengthen Institutions and Make it Easy to Do Business

Sustainable economic growth requires excellent institutions that make it easy to do business. The world’s leading economists, business thinkers and development institutions are now converging in their focus on the importance of institutions, the business environment and the implications of micro-economic factors in economic growth. 6

Countries like Sweden, Switzerland, Norway and Denmark receive very high marks for the quality of their institutions and it is no mystery that these countries enjoy the highest standards of living in the world. Similarly, the institutions in Singa-pore and Hong kong also enjoy good reputations and these are the countries that leapfrogged most rapidly to the highest standards of living in mainland Asia. The failure of institutions to keep up with the evolution of

6 The Nobel Prize winning economists Ronald Coase (1991) and Douglass North (1993) drew attention to the importance of institutions in economic growth and how “transaction costs” play a role in the operations of the firm. Other leading economists such as Nobel laureate Robert Solow and Paul Romer have pointed to the importance of microeconomic factors such as technology and innova-tion in boosting economic growth. The famous management expert and business historian Peter Drucker pointed to organizational and social innovations, such as the introduction of farm extension services, in boosting productivity. James Austin first pinpointed the perverse impacts of distorted government policies on firm-level operations by showing policy impacts on the marketing, finance, control, production and human resource functions of the enterprise. His colleague at Har-vard, Michael Porter, has focused major global attention on the micro-economic dimensions of competitiveness. Institutions may be government or private, but they need to be functional and effective. The 2007-08 gCI includes a pillar solely devoted to institutions.

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financial products in the USA has caused the major recent sub-prime financial crisis. Institutions are im-portant to national success or failure.

To provide the right business environment, a country must have the institutions that guarantee public order and safety, relative freedom from crime and extortion and the sense of security that keeps or attracts people to the country. It also requires strong and respected judicial institutions that establish the rule of law, pro-vide judicial recourse, allow efficient arbitration, and ensure the enforcement of contracts. The civil service should impose only a modest burden to the economy while providing necessary public services. Consumer protection, labor safety and environmental protection insti-tutions should enable a country to meet relatively high international standards both to safeguard its exports and for the good of its own people. Educational institu-tions need to keep up with the times and be staffed with capable and highly motivated people. Health care institutions are critical for ensuring a productive popu-lation. Institutions that safeguard against graft and cor-ruption are needed as are agencies that enforce and audit government procurements. The tax authorities, including customs houses should be impartial in their application and conscious of lowering the costs of compliance through service orientation. Administra-tive barriers to creating businesses, employing people and conducting productive activities should be kept to a minimum and the tax regime should reward produc-tive investment.

The government budget can be an active tool for reform. Rather than discussing and approving a comprehensive budget, the People’s Assembly discusses the investment budget separately from the recurrent expenditures budget. The budget process is said to focus mainly on “who gets what” rather than “what are the priorities and what will be done with the money.” Ministries should be given more flexibility in managing their budgets with appropriate accountability for the results.

The recent dramatic improvements in the business environment should be deepened and extended now that initial bold moves in that area have been validated. Egypt has recently begun simplifying the business environment and was the top reformer in the World Bank Doing Business Report, 2007. However, Egypt still ranked relatively low indicating much more work must be done to deepen and extend these excellent beginnings. Some 12 ministries have agreed, for the first time in Egypt’s history, to make an inventory of laws and regulations and rationalize these in a process of consultation with the private sector and civil society. This will lead to drastic simplification and rationalization of the rule of law for business in Egypt. Success can then be

measured by tangible figures on business start-ups, employment generation and productivity. The burden of over-regulation falls far more heavily on SMEs, severely dampening the dynamism of this sector. Regulatory burdens often act as a barrier to entry and an inhibitor of competition.

Egypt needs a modern and efficient system of commercial law. This includes the ability to start a business quickly, enforce contracts, obtain access to business services, comply with reasonable tax requirements, utilize alternative arbitration services and if necessary declare bankruptcy. Economic Courts can become effective ways to speed up commercial disputes.

Egypt created a Consumer Protection Agency under the Ministry of Trade in 2006 which has created a call center for the Cairo area, to be expanded later to other areas. Although it is a young agency, it has achieved a high percentage of resolutions, said to be about 80 percent of cases brought to its attention. It has a reputation for being a group of motivated people with a private sector mentality using clever strategies such as a media campaign telling people they need to get receipts and warranties so as to be able to claim their rights. For one of the first times in Egypt, Ngos are actually on the Board of a government Agency and Ngos are being trained to serve as the first line of complaint to be able to resolve routine issues. Another unprecedented first is the right to bring a class action suit in Egypt related to Consumer Protection. The Agency recently enforced quality standards on bottled water of various plants leading to the publication of its laboratory findings with negative consequences for firms that did not meet these standards.

As a signatory to the World Trade Organization (WTO), Egypt needs an institution that can enforce intellectual property rights under the TRIPS Agreement (Trade Related Intellectual Property Rights). given a 10-year grace period in 1995, Egypt has treaty obligations to fulfill and therefore established a new IPR law in 2002 that was fairly comprehensive. However, Egypt still ranks quite low in the number of internationally registered patents per capita. Egypt is now working to enable its agricultural research stations to protect new varieties of plants and will join with the international community in the common standards for the protection of new varieties. Improved IPR protection will help boost Egypt as a center of innovation and as place where both international and Egyptian companies can do more research and development.

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Firms respond quickly when price signals are appropriate. Competitiveness, efficiency and pro-ductivity are enhanced when markets function well. Price controls and product subsidies, on the other hand create distortions. Monopolies and oligopolies (whether private or public), without appropriate reg-ulatory oversight, will abuse their positions and will not have the same pressure to enhance their com-petitiveness as firms facing stiff competition. This has implications for the institutions implementing com-petition policy. Tariff and non-tariff barriers to trade may impede value creation including re-exports. This has implications for tariff policy and institutions like customs.

labor markets can be distorted if the incentives favor investments in capital intensive enterprises. If there are high costs associated with laying off workers, firms will be reluctant to hire them in the first place and fewer jobs will be created. Building a flexible and resilient labor force is not easy but there are many examples of lifelong learning and worker retraining. Continental Europe is said to have labor market distortions which keep unemployment at higher levels than they ought to be. Yet, Denmark has low levels of unemployment even with a generous unemployment insurance program because it has a world-class program for retraining people and helping them locate new jobs. Flexible labor markets do not imply poor social safety nets.

The origins of the ERRADA initiative lie in groundbreaking work by the Egyptian National Competitiveness Council which held a series of discussion forums and a roundtable of interested parties in March 2007 to assess the regulatory burden on business. An outcome of these discus-sions was the elaboration of the concept and principles of rapid regulatory reform - which was a major theme addressed in the previous Egyptian Competitiveness Report of May 2007.

12 ministries of the Government of Egypt* have agreed to implement what is known as the “ERRADA” Process. Their aim is to modernize the business regulatory system in Egypt and estab-lish an open and transparent process of consultation regarding laws, rules, de-crees and regulations affecting business. This will have a major positive impact on the business environment leading to in-creased investment and jobs.

ERRADA will cut through red tape, elim-inating hundreds of existing regulations which are either obsolete, duplicative or redundant. The overall goal is to build an Egyptian regulatory management sys-tem with effective public-private dia-logue that facilitates openness, fairness

* The Government ministries so far involved are: Ministry of Trade & Industry; Ministry of Investment; Ministry of Fi-nance; Ministry of State for Administrative Development Ministry of State for Local Development; Ministry of Electric-ity and Energy; Ministry of Agriculture and Land Reclama-tion; Ministry of Transport; Ministry of Health and Popula-tion; Ministry of Petroleum; Ministry of Tourism; Ministry of Housing, Utilities, and Urban Communities.

and promotes competitiveness by im-proving the quality of current and new business regulation.

The straightforward steps of the ER-RADA process include; first inventoriza-tion then review and filtration of exist-ing regulations, to be followed later by improved future regulation based on im-pact assessment.

For the first time, inventories are now being made of all business-related leg-islation, decrees and regulations- some dating from the Ottoman period and many of which are mutually inconsistent. Following the inventorization stage, ex-perts at the ministries will review and eliminate unnecessary or contradictory rules and regulations. A second review by the private sector and civil society representatives will then be made to recommend further elimination or ra-tionalization.

“ERRADA” roughly translates as will or determination, and the ERRADA reform initiative is the latest demonstration of the Egyptian Government’s will and de-termination to establish an encouraging investment environment in Egypt.

BOX 5.1: ERRADA = Better Business Regulation

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Dissemination of market information also helps produce greater efficiency and equity, whether it is helping the unemployed learn about job openings or whether it is helping farmers to engage in price discovery with cell phone technology. Improved information flows tend to help the disadvantaged. Egypt can review each of its major markets with a view to making market information available, improving the lubrication in these markets and eliminating the policies that actively distort markets.

8. Ensure a Modern Well-Functioning Financial Sector

Competitive countries are characterized by a rich ecology of financial services efficiently meeting a variety of needs for most of its citizens. Bank lending to the private sector as a percentage of gDP tends to be quite high. Institutions of financial supervision function and reduce risk in the system, balancing the need for constant development of new financial products. The risk of the financial system can be greatly reduced through universal credit reporting and credit scoring of companies and individuals. Continued US competitiveness in high technology is based in part on a thriving venture capital industry. Japan and germany ensured that their export industries received finance from banks which were at times closely intertwined with industry groups. China has ensured that financial resources are available at relatively low interest. In Uruguay, nearly everyone who can use credit responsibly has access to credit because the country has one of the highest densities of credit reporting in latin America.

Egypt is in the process of modernizing its bank-ing sector by allowing some competition by interna-tional banks. This is already having an effect. Further development of Egypt’s financial industry will be nec-essary as the economy grows to avoid a “crowding out” effect. More competition in the financial sector, with good supervision and appropriate regulation, will help provide universal access to financial services.

Financial modernization is consistent with pov-erty reduction and social solidarity. Financial market development has enormous social impact. For emerging economies, extending financial services to the broader population often means micro-finance development and ensuring popular access to savings vehicles. The poor and middle class greatly benefit when they are able to get long-term mortgages and micro-finance loans. Introduction and availability of ATMs can help people receive wire transfers from family members working abroad. Insurance products, especially for farmers, can be extremely important as safeguards against catastrophic and short-term re-verses related to health or harvests. land and prop-

erty registries can boost the assets of the poor while improving their access to finance. The efficiency of the banking sector can be measured by the spread be-tween deposit rates and loan rates. Universal access to finance is a blessing for a nation. Facilitating and enabling a modern credit reporting industry can give even the poor man and poor woman the “collateral” of a good credit history.

9. Facilitate Technology Acquisition and Innovation

Competitiveness in the 21st century is about mov-ing to a knowledge-based economy. Policies leading to high penetration of cell phones, computers and broadband Internet access are important. IT parks, smart cities, knowledge parks and smart buildings can help develop high-tech clusters in geographically proximate areas. The promotion of incubators near engineering and IT faculties can have a salutary affect on both businesses and universities. licensing of for-eign technology is an important means for emerging economies to catch up with productivity. Intellectual property protection can encourage the transfer of more research jobs. The efficiency of the patent sys-tem and support to those seeking to file international patents can encourage commercially useful research. Fostering productive linkages between industry and universities and between industries and related re-search labs can do much to encourage and sometimes even fund commercially useful research. Progress can be measured by looking at the percentage of gDP devoted to R&D. Egypt scores well for its level of development in this dimension and Egyptian compa-nies seem to have been able to license international technology.

10. Launch Regional and Industry Competitiveness Initiatives

Industry competitiveness initiatives are efforts by an industry cluster to reposition itself in world markets and improve its competitiveness. Such initiatives fo-cus not only on operational productivity (doing things better) but on strategic productivity (doing better things). Applying rigorous benchmarking and other diagnostic tools, industry competitiveness initiatives first benchmark their industries and then move quick-ly to implement strategic initiatives such as market linkage initiatives, workforce development initiatives, supply chain improvements, R&D alliances, university-industry cooperation programs and industry partici-pation in trade negotiations.

Industry clusters should ideally be involved in a coun-try’s investment attraction strategy as they may know what parts of the value chain, now missing, could help

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improve industry cluster development. Public-Private export promotion schemes can also go a long way to help reposition industries in world markets. An example of this is the highly successful “Cooperators Program” that co-funded market development in the US agro-export industry starting in 1954.

Outside the capital city, specific regions can be chal-lenged to gather their business, government and edu-cational leaders and to form regional competitive-ness councils that can design and implement regional economic development initiatives. This can lead to informed input into infrastructure planning, tax allo-cation, industry-education partnerships and regional investment attraction programs. The National Com-petitiveness Strategy should implement a Regional Competitiveness Index for Egypt’s governorates.

As family businesses grow and are passed on to later generations, the issue of professional management becomes increasingly important. Encouraging busi-ness schools with short-term executive programs as well as long-term programs can help support busi-nesses in their efforts to develop professional man-agement, improve business strategies and upgrade their operations.

It may be important to implement cluster mapping methodologies to monitor the state of industry

cluster development. These have been successfully implemented in the USA, EU, and China and now cover about 80 percent of the world’s economies.

The government can play a role in fostering industry competitiveness initiatives by convening industries and challenging them to come up with their own ambitious competitiveness strategies with specific action initiatives. Each of Egypt’s major industries can be challenged to develop its own plan to improve its competitiveness. This can be encouraged by the Government and some limited co-financing. It is the industry clusters themselves that should take the lead, but they also need to be informed by global best practices and by the best information and analysis on the state of their industry in Egypt. Benchmarking their performance versus the best-in-class internationally can also be revealing. The Industrial Strategy developed by the Ministry of Trade and Industry in this respect, is being put into action with emphasis on working out the details of the strategy in terms of policies, programs and projects. This has already been paying off in terms of increased investment and exports. Several other initiatives are under way notably the work by the Ministry of Agriculture to develop a strategy for the sector as well as agricultural exports, efforts by the Ministry of Communications and Information Technology to promote a state-of-the-art strategy for the 21st century.

The Egyptian tourism industry has been growing at about 2.3 times the growth of the global tourism industry, indicating that it is gaining market share. It has also diversified its markets attracting tourists from more places. The ENCC in conjunction with the Tourism industry has prepared a vision, goals and strategy for achieving impressive growth over the next 20 years. The projections for growth, employment, and market share

and value creation have been presented in Chapter 3. If the industry can come together to implement this ambitious plan and if Government provides the appropriate policy context, this “repositioning” of the industry can be an example for other Egyptian industries. By making a solid “value proposition” the industry can be an example to others. This can be the model for other industry councils.

BOX 5.2: Example of Industry Competitiveness Initiatives: The Travel and Tourism Council

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5.3 IMPlEMENTINg CoMPETITIVENESS THRoUgH INSTITUTIoNS: THE RolE oF THE ENCC

The framework detailed above can serve to stimulate dialogue among leadership groups in Egypt, brokered by the ENCC. To develop this strategy, it will be necessary to convene round tables on some or all of the areas mentioned above so as to develop specific components that can feed into the National Competitive-

ness Strategy.

Round Tables on Key Components of National Competitiveness Strategy

The ENCC should convene round tables to address some or all of the issues raised above. Round tables will take place during the year. The approach will be to call in or contract with the leading Egyptian experts in each area who will assemble the best information and analysis existing for Egypt and make a briefing to Egyptian leaders. In addition, an international expert in each area will be commissioned to provide “best practices” from other countries. Each session will result in those participating being among the best informed people in Egypt on the particular subject being discussed. Recommendations will be formed, which will be broadly disseminated through press releases, websites and other media. The priorities will be determined as a result of the input of a broad consultation with industry and government leaders. The agreed priorities may well include some or all of the following:

Education1.

labor productivity and workforce development2.

The ERRADA process and comprehensive regula-3. tory reform

Investment promotion and industrial policy4.

SME development5.

Modernizing the financial sector 6.

Fostering innovation and the knowledge econo-7. my

Industry competitiveness working groups (Tour-8. ism Council, etc.)

Export development9.

Anti-corruption10.

Research and Development11.

Civil Service reform12.

Decentralization13.

Customs efficiency 14.

The review of the recommendations coming out of these areas will be channeled to enhance productivity of the country and its competitiveness in the global economy.

Development of Egypt’s National Competitive-ness Strategy

These activities will provide the inputs for Egypt’s Comprehensive Competitiveness Strat-egy. The point is not to undertake more studies but to assemble the decision makers and focus on iden-tifying specific strategic action initiatives by industry, policy initiatives by government and education and training initiatives by the education sector. This com-prehensive competitiveness strategy will build on the good work to date that has been done developing a Vision 2030 strategy and various specific strategies for education, industrial development, investment promotion, industrial zone development, etc..

Coordinating Private-Public Dialogue and Mon-itoring Results

The ENCC, working with other private industry leadership groups, can help establish the right tone and context for NCS and can play a signifi-cant role in monitoring and evaluating imple-mentation and progress towards results. Effec-tive competitiveness initiatives gather private, public and civic leaders around the same table working on common challenges seeing the threats as external. Unsuccessful efforts have fallen into the trap of unin-formed criticism on the one hand and defensiveness on the other, sabotaging the prospects for success. Those proposing new thinking must be willing to ad-mit they may not be able to see the whole picture. Incumbents must be open to non-defensive learning. In Egypt, there has been a tendency on the part of some Government officials to react defensively to criticism. There has also been a tendency to blame rather than to be informed. By setting the right tone and introducing constructive methods of private-pub-lic dialogue, the ENCC can contribute to the success of this endeavor.

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5.4 CoNClUSIoN An attempt has been made here to provide the broad lines of a comprehensive competitiveness strategy for Egypt and spell out a process spanning ten key areas of focus. If taken as a point of departure, it can stimulate productive dialogue leading to the launch of such a strategy. If implemented well, it can lead to a broad understanding and support for a comprehensive approach to making a quantum leap in Egypt’s

economy; a leap that will achieve the twin objectives of sustained growth and broad-based sharing of the fruits of this growth. The ENCC can play the role of catalyst in developing the strategy and rallying the major actors around its implementation.

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