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Egypt: Privatizing the Cabinet

Privatizing the Cabinet

Business Monthly

March 2005

Cam McGrath

Who says you can’t run government as a business? Minister of Foreign Trade and Investment Rachid Mohamed Rachid is bringing three decades of private sector experience to his post, taking on the twin challenge of modernizing industry and expanding foreign trade. He’s not advocating simply a change in policy, he wants to change the thinking.

By his own admission, Rachid Mohamed Rachid was an unusual choice for the job. By tapping the prominent Alexandrian businessman for the newly merged foreign trade and industry portfolios last July, the Nazif government was sending a clear message that it wanted a new model of thinking for its economic policies.

The former chairman of Unilever Egypt feels business was traditionally under-represented in the cabinet. The influx of fresh blood is helping to give the government "more clarity of direction" vis-à-vis the private sector. After all, he points out, the business mindset is not something one simply abandons upon taking office. "You don’t leave your background. The way you deal with issues, team building and building a consensus... is very much influenced by your business background."

The minister confidently asserts that it’s time to outsource some of the roles traditionally filled by the public sector. "Basically, what we’re doing now as a government is withdrawing from certain areas," he says. "We want the business community to take the lead in setting the agenda of economic development, industrial organization and export promotion." His ministry, meanwhile, will focus instead on the legislative framework, bilateral trade agreements and customs reforms that allow the private sector to operate.

Just eight months since taking office, Rachid has left his mark - enforcing international industrial standards, lowering protective trade barriers that discourage competition and securing a new agreement that gives select Egyptian goods unprecedented access to US markets. The onus is now on the business community, which Rachid sees as a vital component to Egypt’s industrial growth and economic development. "We can only create the environment, help get the tools and encourage [private enterprise], but somebody has to take the lead," he says, adding that local business organizations will play a central role in the changes ahead.

While Egypt’s past year has been characterized by change, last November’s US presidential elections may usher in more of the same. Egyptians are now waiting to see what George W. Bush has in store for the region in his second term. "The biggest question mark in the minds of the people in Egypt when it comes to the US administration is not really related to Egypt," says Rachid. "It is more related to what will happen in Iraq and the Palestinian-Israeli situation."

People are more concerned with issues beyond their borders, he argues, because they are confident in Egypt’s historic ties with the US. "We’re talking about a strategic relationship [that goes] back 25-30 years. I don’t think people are thinking there is really any sense of threat or lack of commitment from either side to continue this relationship."

Nor have post-9/11 realities dampened Egypt’s resolve to maintain strong economic ties with the US. Europe is on Egypt’s doorstep and the Asian market is experiencing exponential growth, but trade policy remains firmly geared towards the American market. "At the end of the day, we’re talking about the biggest market in the world, which is the US," says Rachid. "So it’s very important that we have a strong and forward-looking relationship with the US both trade-wise and investment-wise."

A strong Egyptian pound, however, could put the brakes on exports. The US dollar has fallen 8 percent against the pound since December, making products manufactured in Egypt more expensive for American consumers. It might also tempt local exporters to look to other markets. The change in the value of the currency "might make other markets more attractive for the short term," he admits, but exporters need to see the bigger picture. "Nobody looks at the dollar as a value. The value is more the attraction of the American market, which I think will continue to push up those numbers in the coming few months."


A big push could come from Egypt’s new qualifying industrial zone (QIZ) agreement. Signed last December, the six-article agreement gives Egyptian products duty- and quota-free access to the US market provided they contain a minimum 11.7 percent Israeli content. Rumors of clandestine meetings between government cabalists have proven far more intriguing to the masses than Rachid’s version of the story.

"There are no secrets," he insists. The Clinton administration offered the QIZ model to Egypt in 1996, but the Egyptian business community showed no interest at the time. "Unless the business community was interested and willing to be part of the arrangement there was no reason for the government to start engaging itself. In the mid-1990s, the business community was not interested. Now [it is]."

According to Rachid, the initiation to launch QIZ negotiations came from the local business sector nearly two years ago after industrialists realized Egypt’s textile sector, which accounts for 11 percent of manufacturing GDP and employs approximately one million workers, was facing a critical deadline. The Multi-Fiber Agreement (MFA), which imposed quotas on textile exports that served to protect Egypt’s share of the US market, was due to expire on January 1, 2005, opening the floodgates of cheaper Asian products. Following the success of Jordan, which saw its textile industry jump from a paltry $26 million before signing the QIZ agreement in 1998 to some $1 billion seven years later, local factory owners decided they wanted in.

Rachid admits the negotiations were tough. After all, Jordan was initially granted just one QIZ. Egypt was seeking 10. But patience, Alexandrian tenacity and three decades of business savvy helped Rachid seal the deal. The US granted Egypt an initial seven QIZs in three geographic districts: Cairo, Alexandria and Port Said.

Reaction to the trilateral agreement has been mixed. Some praised it, others condemned it. Opposition newspapers accused the government of bypassing due parliamentary procedure to prevent detractors from blocking it, an allegation Rachid flatly denies. "I was in parliament for over three hours and I stood there with different parties - members of the opposition and independent parties, and the National Democratic Party," he says. "At the end of the session, there was a clear acceptance by the majority of the parliament."

In any case, Rachid maintains, the QIZ agreement did not require parliamentary approval because company participation is optional and the Egyptian side does not have to give up anything to reap its benefits. "Nowhere in this arrangement is there any sort of obligation on the Egyptian part," he stresses.

Egypt’s peace treaty with Israel, signed in 1979, provides an outline for economic cooperation between the two countries. Despite this, bilateral trade barely exceeded $42 million in 2003. Israel’s policies in the region - particularly since the outbreak of the Palestinian intifada in September 2000 - have made dealings with the Israeli government extremely unpopular with the Egyptian masses.

Regardless of the popular sentiment, Rachid says the government can neither stop people from importing from Israel, nor hide the origin of these products. "There is no law in Egypt that forbids importing products from Israel and there is nothing in Egypt that would stop somebody from asking me to give him a certificate-of-origin proving that a product is of Israeli origin."

That’s just the type of statement that infuriates the Egyptian public, but Rachid says people need to see the bigger picture. "I understand the emotion of the people, but from a commercial trade point of view, I think our agreement... is bringing stability and benefits to the region," says Rachid. "The [point of the QIZ agreement] was to get the business community the best trade agreement I could. This is not about religion; this is about what I could get for Egypt."

Somewhat unexpectedly, many Egyptians see the logic in the minister’s words. Some have publicly complained - at times even taking to the streets - because their factories were not included in the QIZ agreement. Rachid says a concerted effort is now under way to expand the agreement, as was done in Jordan, which now has 13 QIZs. "We have the right to apply for new zones and we’re hoping new zones will be added in the next phase of the process," he says.

Eyes on the prize

The QIZ option might never have been exercised if the US had granted Egypt a free trade agreement (FTA). Hopes for an FTA evaporated in mid-2003 shortly after - coincidentally or not - Egypt refused to back the US in its WTO suit against the EU ban on genetically modified foods. Pundits have accused outgoing US trade representative (USTR) Robert Zoellick of holding a grudge over the snubbing.

"I’m sure there was nothing personal," asserts Rachid. "It was more really the position of the US and Egypt vis-à-vis an FTA discussion. We were both not ready to get into that discussion. I think that has changed completely for both sides."

Yet not everybody is convinced the time is right. A report issued last November by the US House of Representatives’ Ways & Means Committee said Egypt was far from ready. It cited a number of obstacles, including what it deemed as inadequate protection of intellectual property and import barriers on frozen chicken.

Frozen chicken a stumbling block to an FTA? Rachid writes it off as an example of the power that lobby groups wield. "There are people interested in exporting and they are, of course, bringing their case to members of US Congress [as is the case] here in Egypt. This is the nature of the game."

The minister argues that the congressional report is somewhat misleading in that it reflects the situation in Egypt before the July 2004 cabinet shuffle. "Some of the problems have been resolved, some are on the way to being resolved and some will not be resolved," he says. "The reforms we made to customs, taxes, banking and privatization... all those things we not just talked about but actually implemented in the first few months [of the new government] went beyond what was put as prerequisites for [FTA] negotiations."

In hindsight, Rachid is convinced that the QIZ was the right decision. Even if the US grants Egypt an FTA tomorrow, it will not take effect overnight. FTAs are gradually phased in over a period of up to 10 years. Egypt needed a working model in the interim, he says. The QIZ will give Egyptian industries a competitive advantage "until we get the full benefit of an FTA. But, in the very long term, we don’t need both agreements."

Size matters

Rachid is unapologetic about his support for big business. It’s a philosophy that goes against the grain, as western economists say small- and medium-sized enterprises (SMEs) - which require less start-up capital and are more adaptable than giant corporations - are the key to economic growth. "People have said that SMEs are good and big companies are bad. That’s not true. Big companies are also extremely important for economic development," he says.

After all, only industry giants are capable of the economies-of-scale that Egyptian products need to be globally competitive. "I want to make sure that the big companies are labeled as good companies and we should support them. We need them. They’ll be the ones carrying the flag. They are the IBMs, the Boeings and the Microsofts that you need for Egypt."

But size is relative. Rachid points out that Egypt’s handful of "big" companies, with annual turnover exceeding $100 million, are considered "small" companies by US standards. In this age of global integration, the two are now battling for the same markets. "I need some strong and big companies to compete."

That’s not to say he’s giving up on SMEs. Support is needed across the spectrum, he argues, emphasizing that "SMEs are going to be the big companies of tomorrow." But making these companies competitive will require solving the same problems that afflict big companies, namely inadequate marketing, low production capacity and product quality issues.

"The specification of products is a big issue," says Rachid. "Almost 80 percent of all problems [revolve around] specification standards." The ministry’s strategy is to align Egyptian standards with international ones so that products can have open access to global markets. But adopting world standards should not be limited to manufactured goods, he says, they should be applied to inspection procedures, customs policies and IPR issues.

Looking to the future, Rachid sees room to grow. His ministry is laying the groundwork for Egyptian industry to become more competitive in both the domestic and international markets. But to get there his ministry still has a long list of problems to solve. It’s an ambitious task, but he’s certain of one thing: "By the time we finish it, someone will find other problems."

 source: Business Monthly