Al-Ahram Weekly, Egypt

5-11 May 2005

Changing minds

Rachid Mohamed Rachid, appointed to the industry and foreign trade portfolio last July, brought with him two decades of international business experience. He immediately set about attempting to change what he identifies as the prevalent "mindset". He speaks to Al-Ahram Weekly about his efforts to reinvigorate the industrial sector and to integrate Egypt more fully into the global economy

The Al-Ahram delegation that recently toured Latin America was amazed at the level of regional integration and the interest in interregional integration. They are looking to our own region, as a market of 150 million people. Where are we from that?

We are among the last in terms of establishing an effective regional market. We lived for 50 years with the vision, dream and ambition that we would have an Arab Common Market. And we are always saying that we were talking about regional integration before everyone else. But the reality is that we have approached the issues emotionally and have failed to institute actual, effective steps.

The ambition is there. What is lacking is what I would call the infrastructure of integration — transport, rules of origin, specifications, all basic to creating trade on a regional level. We are also lacking the proper mindset.

To move from a local to a regional market you need an acceptance and understanding that the move is positive, for people, for industry and for the market. But there is a price to pay. Some units will be shut down, and authority will be delegated from individual states to the region. This means that ministers will have to defer their own authority to that of a regional body.

Unfortunately such a mindset does not yet exist. Ministers are not yet willing to give up their authority. And the business community has to come to terms with the fact that if there are 100 units currently producing one commodity, then probably half of them will be forced to close in a regional market.

Yet every time we begin to implement regional free trade agreements, the minute factories start to suffer everyone calls for their protection. The consumers, who would be the main beneficiaries, are never taken into account, and the real benefits that would accrue from a regional market are ignored. We have a sentimental attachment to establishing a regional market, which is no bad thing, but we are unwilling to accept the price. We need to work on altering this mindset as much as on building the necessary infrastructure.

Levels of industrialisation in the region are low. How is this affecting regional integration?

The perception that industry in Egypt, or across the region, is immature is false. Today we are a global player in a variety of industries, in cement, steel, petrochemicals, vehicles, building materials and carpets.

The general perception is that our traditional strength is in the production of textiles, ready- made garments, furniture and leather goods. But this is not true — indeed, these are the very industries where we are struggling. It is other areas that are really growing and the same applies to other Arab countries.

In today’s world you attract major players only if you have a regional market. No company is willing to invest in a single, national market. The biggest market in the region in terms of population is Egypt. But it is not a big enough market to tempt major corporations. They want access to 200 million people or more.

For the last 20 years the big corporations have been closing down factories in Europe, Asia and Latin America. They do not want to repeat that in the Middle East. They don’t want to come here and build 15 factories. They will only come when we have established a regional market.

Some suggest that the similarity between Arab industrial structures lies behind the failure to implement a common market, that Arabs have not been able to integrate because of the negative lists they impose on each others manufactured goods. What is your comment?

The negative list comes back to ’mindset’. People want a regional market and they want to protect their industries. But it does not work like that. It is like wanting to swim without getting wet.

In pursuing a regional market you must accept that some weaker units will have to close, and you off-set this against a stronger economy, bigger units and more employment opportunities.

The idea that Arabs must have complementary industries grows out of the notion that regional integration can somehow be a no pain exercise. But regional markets are not about complementing each other, they are about competition and scale.

When can we expect a breakthrough?

The real problem facing the creation of a regional market comes from the business community, not government. All the models show that regional markets are led by business and not by government. When governments back off from integration it is because businesses complain that they are being hurt.

The good sign is that businesses in the Middle East are starting to mature. Twenty years ago there was no real business community to speak of. Economies in the region were centrally managed and business communities were very small, immature and fragile. Size is one of the prerequisites of a regional market — you need companies that can serve hundreds of millions, that have the ability to compete beyond the region and that can lead certain sectors. This is starting to happen.

We have Orascom in Egypt, development companies in the Gulf, mining companies in Morocco. In Lebanon there are fast growing financial groups. You can compile a list of around 50 companies that are going to become regional and global players. What is important, though, is not the companies themselves but the model they provide. Many businesses are trying to emulate them. People are now beginning to think regionally because they have these models before them. Companies know that to compete globally they need a regional springboard.

Another good sign is that there is a conversion in the Middle East in terms of economic models. Nobody is talking about socialism or communism anymore. Everybody is talking about open economies and WTO membership. With everybody joining the WTO, and with the Euro-Mediterranean agreement as well as the GCC model, we are at last on the threshold of a regional market.

Going back to the idea of a mindset, how far has the mindset of the group known as the reformers, of which you are a leading member, come to permeate government?

Even in a medium sized company it can take two years between the time the chairman initiates a change and its implementation by everyone. It takes so much time for people to really absorb a new vision and act on it.

It is an illusion to suppose that the attitude of 5.6 million government employees can be changed in a year.

But isn’t it easier to change attitudes in business than in government? How frustrating has your experience of the past eight months been?

Frankly, I am not frustrated. There are two phases to any process. First you must agree on what you want to do and then you must do it. The first phase is the challenge because what is needed is a change in attitudes across the community, and this is a political, and not a business, issue.

People fear what they do not know, and in effecting change there are rules that must be played by. Rule number one is that the fear of change should be less than the fear of staying where you are. If you cannot break that cycle people will never move.

How can this mindset seep through to the whole structure of government?

I keep telling the business community not to give up on us. ’When we take a decision do not expect it to be implemented the following week. It will happen, but only if we keep up the pressure.’

Citizens should be demanding of their rights. We are passing through a period of change and we must apply pressure from all directions. The change will trickle down if everyone is pushing in the same direction. Businessmen need to come back to me and say when something is not working and then we can see what can be done about it.

With the deadline for the Doha Round of multilateral trade talks approaching, what progress has been made?

This is a critical year for the WTO. There is a strong commitment among the leading economies to make sure the Doha round succeeds. Everybody is hoping an agreement will be reached at the ministerial meeting in Hong Kong so we can finalise the Doha Round as planned.

The last few months have been positive. Egypt has been playing a very active role through its membership of the G20. Nobody is guaranteed anything at this stage but there is a lot of good will.

How responsive are industrial countries to the demands of developing countries?

They took a bold step in July 2004 when they said they are willing to remove all their agricultural subsidies over a period of time.

For the first time they have agreed, in principle, to stop distorting agricultural markets. How long this will take, though, and what they will want in return, is still being negotiated.

How committed is Egypt to the G20, and how committed are they to each other?

I have always believed the real success of the G20 will be judged in terms of its ability to pressure the US and Europe on agricultural liberalisation. The G20 should not try to harmonise its position on other issues — members have widely different agendas in other areas. If we start trying to make the G20 agree on everything, we will destroy it.

Dividing lines [in the WTO] are unclear. In reality the competition about which we should worry most comes not from the advanced industrial countries but from other developing countries — from China, India, Brazil. Dividing lines are not between developing and developed but vary according to whatever issue is being discussed.

Is liberalising agricultural markets really beneficial for Egypt, a net food importer?

In the long term we have competitive advantages in agriculture and should move towards exporting high value added agricultural products to Europe. Today we are limited by quotas and other restrictions. Yes, we are net food importers but Egypt is not unique in this. Many countries will have to manage the same transition.

Egypt has fertile land, available water. It has the necessary labour force and its location to make it a big agricultural player.

To what extent do Egypt’s bilateral and regional agreements contradict its WTO commitments?

Regional and bilateral agreements are not in opposition to the direction we are following in the WTO. They are part of the same equation, part of a strategy to enhance the competitiveness of our products. There is a gap between what the WTO gives and what can be gained by bilateral agreements, and it is a gap we must utilise given our positon as an emerging country and our political weight.

We have to focus on the markets that are important to us. And we have to do so in a manner that complements our industrial strategy. That was the thinking behind the joint trade and industry portfolio.

Where are our potential markets?

Anybody will say the whole world should be a potential market. The challenge for policy makers, though, is where to focus. Some people criticise the agreements we have made. But we make agreements to open up markets for those who want to export.

We should focus on the European, Arab, African and US markets. I am not saying that the rest are unimportant but we have limited resources and we have to focus.

The European market is the closest, the largest in terms of purchasing power, and we already have an association agreement. In the Arab and African market we have a traditional presence on which to build. But the potential of these two markets is not equal to that of Europe. And we cannot ignore the US, as world’s biggest single market.

What products have export potential?

I do not have a long term list and do not want one. The old strategy of defining areas in which you seek to excel is no longer valid. The world is too dynamic, and the degree of global integration too advanced to mean it is anything other than dangerous to fix yourself on narrow goals. Six years ago nobody could have dreamed that Egypt would be a big player in cement, steel or telecommunications.

We need to focus on those areas that need support in the short term, for five years, say, those areas where we think we have an advantage or that can positively impact on our economic objectives. That is why I am interested in textiles and garments. Today we are at a very low base. Egypt’s total exports of textile products are $1 billion, compared to $6 billion in Morocco, $1.2 billion in Jordan and $16 billion in Turkey.

But we have the expertise to make serious money in the next ten years if we do it right. The advantage of the sector is that is labour intensive and we need to create jobs. That is one of the reasons we signed the QIZ agreement and why we are putting a lot of money behind it.

Other areas we are pursuing include furniture, marble and granite, petrochemicals, building materials and food processing.

Why did the textile industry fail, and how can it be turned around now?

The problem was that we did not notice that the world had changed. We were working on the assumption, a hangover from the 1950s and 60s, that we had to prcess everything that we cultivated.

We had to process all the cotton that we produced. Yet in the meantime our local and export markets no longer needed long staple cotton. Yet we forced our factories to buy expensive long- staple cotton to produce cheap products. It was a waste. Most of the cotton we produce should be marketed abroad. And we should not hesitate to import other types of cotton to produce the type of goods that we need locally, and that we export.

Eighty seven per cent of what we export in terms of garments are made from imported cotton or textiles.

What is your strategy for Egyptian industry?

What we are concentrating on are strategies for specific sectors. This covers the creation of the necessary infrastructures, specifications, standards, Research and development, finance.

We are implementing these strategies for furniture manufacture, the car industry, fertilizers, sugar and pharmaceutical products.

The idea is not to have something that covers everything. We want every sector to move in such a way as suits it.

How is the Free Trade Area with the US progressing?

We are getting there. We had a successful Trade and Investment Framework Agreement meeting in January during which we assessed where each side stands on an FTA. The outcome was positive. The meeting ended with technical teams being formed.

The FTA covers many areas, not just market access but finance, intellectual property rights, labour laws and the environment. We formed technical teams to work on each of these.

Hopefully, in the near future, we will start negotiating formally for an FTA.

Critics of the QIZ agreement argue it is more political than economic, that the economic benefits are not really substantial.

The reason we signed the QIZ was to access the American market. The multi-fibre agreement was coming to an end and we wanted to emulate what had happened in Jordan. Our motive was to secure trade benefits. The reason the US accepted it was because of the political benefits they thought would accrue. This is no secret.

The president launched the scheme in 1996. But no trade agreement can survive unless it brings benefits. If it is not beneficial you will not have anybody shipping under the agreement.

You are currently working on an FTA with Turkey. How are Egypt’s textile producers reacting to this given the strength of Turkey’s textile industry?

It is part of the Euro-Mediterranean process. We have FTAs with all the countries involved in the Euro-Mediterranean process except Turkey.

It will be a challenge to find a formula that works for both of us. We still have to negotiate and we will not be opening our market tomorrow. Negotiations are about creating an environment for cooperation.

One thing we have done is establish a business council. We have created a negotiation committee for textiles and both sides will work together in terms of technology transfer, investment and cooperation under the umbrella of the FTA.

What about the FTA with Russia?

President Mubarak and President Putin during his recent visit, made it clear they want an FTA. I will visit Russia in the coming months to follow-up on this. Russia is not the Russia of the past. It is a free market and it is growing.

Interview by Hani Shukrallah and Niveen Wahish