Steven A. Cook of the Council on Foreign Relations wrote an
article that appeared in several publications around the middle of November,
2016. It was published originally under the title: “Egypt 's Economic Reform” and the
subtitle: “The Good and the Bad”.
The article is composed under several rubrics, one being:
“Making Egypt
competitive again?” Note the question mark. It indicates that there is doubt
the devaluation of the currency will help make Egypt competitive. Why is that?
Well, Cook writes a long paragraph (160 words) to explain it. The crucial part
of the explanation comes near the end of the paragraph. It says this:
“Egypt
has to import the intermediary components of the few goods it exports. The high
price of intermediate goods may erase the export advantages of devaluation … Egypt does not
manufacture substitutes for the components it imports. The net effect on
economic growth could be limited”.
It is obvious that Cook is here discussing only the
manufactured goods that Egypt
exports. He then makes two mistakes that show he had bad advice. He began by
saying that Egypt
exports only few goods. You may ask compared to what? Well, a good answer would
be: compared to the size of the economy. In fact, that's what he had in mind
because he ends the paragraph like this: “The effect on economic growth could
be limited”.
We now look at the two mistakes. One is this: “Egypt does not
manufacture substitutes for the components it imports.” Of course, you silly
whatever! It goes without saying that Egypt wouldn't import them if it
manufactured them. By the way, this is the negative effect of globalization; if
someone has an advantage in something, you buy it from him cheaper than you can
make it. As to the other mistake; it is this: “The high price of intermediate
goods may erase the export advantages of devaluation.” Much can be said about
that, so let's give it a shot. The best way to illustrate what's involved here
is to take an example.
Think of two comparable economies in Europe ... France and Italy for example. A French
manufacturer of tires that has been selling to French car makers receives an
order from an Italian car maker. The tire maker sells to the Italian at the
price he sells to the French. But what does the French car maker do normally?
Well, he adds a markup on the tires to cover “handling” when computing the
price of the complete car before he sells it. And so will the Italian car
maker. All things being equal, neither gains something that the other doesn't.
Now think of an Egyptian car manufacturer who – to begin
with – is mandated by law to have at least 45% Egyptian content in the car
(soon to be 60%.) That would be his value-added which is also Egypt 's
value-added. Thus, when the currency is devalued, he gains an advantage on that
portion of the finished product. But does he gain something from paying more in
local currency to buy the tires and then sell them also for more when they are
added to the car? The answer is yes, he gains something because the “handling”
part is an additional Egyptian value-added that benefits just as well from the
devaluation of the currency.
Now, when the Egyptian pound was pegged at a high value, you
could say that the Central Bank of Egypt practiced currency
manipulation. The thing is, nobody complained because the pound was manipulated
upward, not downward. When the Bank decided to let the pound float – which
caused it to devalue – it legitimately did what the currency manipulators do to
gain advantage over everyone else. Thus, for Steven Cook to say that the
devaluation of the currency will not help export, says that he may get a thank
you note from the cheating manipulators because that's the false argument they
have been putting forward.
We now look at the last sentence in that paragraph: “The
effect on economic growth could be limited.” This requires that we look at the
structure of the Egyptian economy to see what's happening. Because the
Egyptians have so far relied on their large population to grow the economy,
you'll find that it is structured differently from the Asian tigers that rely
on export to grow. Whereas industry (mostly manufacturing) represents 25% to
35% of these economies, that of Egypt hovers around 15%, a high value compared
to where it was when a purely agrarian economy. So how did it get there?
As the standard of living began to rise in Egypt at the
end of the 1973 war, people began to purchase cars, appliances and home
entertainment units in such quantities that the local manufacturers could not
meet the demand. The fastest way to increase their production was to team up
with foreign manufacturers. The latter responded by building factories in Egypt , and
producing locally for the local market. Shortly thereafter, they started to
export when the supply exceeded the demand. After that, the foreign
manufacturers started to build factories in Egypt that were large enough to
satisfy both the local and export markets.
It is important to understand that when a manufacturer
begins an operation in a foreign country, he brings-in the components – called
intermediate goods – from the home country, and assembles them where they are
consumed. He gradually manufactures more and more of the components locally or
buys them from local suppliers. If he does not do so voluntarily, the
government mandates a minimum level of local content.
These developments are the norm in Egypt at this
time. There are literally thousands of large international corporations
building factories in the industrial zones that the government has prepared for
them. Right now, the bulk of the country's exports is made of textiles,
furniture, raw and processed foods, pharmaceuticals, building materials and
petrochemicals – most of which are produced with indigenous raw materials.
While the plan is to expand on these industries, the next
phase (already underway to fully industrialize the country) consists of forging
ahead with the production and export of home appliances, electronics, hi-tech
industries, precision instruments, transport machinery, as well as
construction, farm and mining equipment.