December 2009
Position Paper
The case for Government Support for Exports
Minister Rashid recently announced a 4 year plan, starting 2010, to double non-oil exports from 95 billion LE to 200 billion, increase investment by LE 60 billion, create 200,000 jobs, and upgrade the skills of 600,000 workers to the best international standard. Though doubling exports is only one objective of the Ministry of Trade and Industry's (MTI) plan, achieving this objective will result in the realization of all others as export growth leads to increased investment, job creation and skills upgrading.
In this position paper, AmCham/TRAC provides a clear view of the centrality of exports to achieving the stated objectives of the MTI's plan, and the importance of government supported export incentives to facilitating export growth and competitiveness. In the face of the global financial crisis, we call on the Egyptian government to increase export incentives programs. Assured and anticipated governmental support in the coming period is unequivocal, if Egyptian exporters are to remain competitive in the global market. As exiting from the markets mean a no return in the near future.
EXPORTS ARE GOOD FOR ECONOMIC GROWTH
The rationale behind government strategies to support exports is that their growth not only benefits business but also increases employment and stimulates the economy as a whole. Turkey's and most East Asian countries' experiences are striking examples of the critical role of exports as a driving force of economic growth and broader development. As in the case of the Asian Tigers, we have witnessed in Brazil, Turkey, Malaysia, India and China, how export growth has swept these countries over the development threshold. Today, we see countries like Malaysia, Brazil, Thailand, India, and Turkey ranking among the top 20 out of the 50 leading developing country exporters in trade in goods with export value of $176.2, $160.6, $153.1, $145.3, and $107.2 billions respectively. Egypt, however, ranked 46 with exports reaching $16.2 billion (including oil and gas), constituting a mere 0.2% share of world exports in 2007. Excluding oil and gas, Egypt’s exports would reach $14.1 billion, thus slipping further down the scale to rank 50 with only 0.1% of export share to be surpassed by Tunisia and Morocco whose exports have reached $15 and $14.7 billion respectively (see Table 1).[1]
Success stories of leading developing country exporters have been driven by government supported export incentive regimes (see table 2). For example, in Brazil, exported goods and services are exempted from roughly 30% of product price in the internal market as industrial product and sales taxes are not levied. In Malaysia, the government offers low-cost (subsidized) export credit schemes to assist countries to import Malaysian palm oil, disbursing approximately $180 million to date only for its palm oil exports. In China, the government provides support in the form of tax rebates on over 3, 200 export products, discounted interest rates and funds for research. China also offers export-oriented tax incentives, where taxes are reduced by as much as 50% for export-oriented enterprises exporting 70% or more of their total annual output, as well as full refund of customs duties and VAT on capital equipment used to produce export products. In addition, all the above countries offer in general export-supportive currency exchange regimes and interest rates.
As seen, the significance of exports to development is reflected in the abundance of government supported export incentive programs across the world and across sectors. The pervasive and long-term use of export incentives by developed and developing countries' in agriculture as well as in industry has been instrumental in growing exports and facilitating the economic development of these countries. Today, with fierce international competition and mounting protectionism as a result of the global crisis, governments support is all the more pertinent to boost exports. Long-term policy reforms and direct intervention are necessary to enable exporters to maintain their market niches and establish new ones.
In order to double exports to facilitate economic development, the GOE will have to follow the path of the overwhelming majority of countries, which have not saved on efforts and funds to support their exports in whatever way they found fit. In this context it is worth noting that developed countries by far outspent the developing countries in their subsidy outlays.[2] Developing peers by enacting aggressive export strategies have also directed sufficient funds to export incentive programs. The overwhelming propensity of countries to incentivize their exports compels Egypt to do the same, simply to remain competitive.
EGYPT'S EXPORTS ARE NOT DOING WELL
The role of exports in stimulating development and growth is a fact, yet in Egypt, there remain significant barriers to exporting. Distortions in the Egyptian economy, administrative hurdles and ancillary costs are a significant handicap to exporters and render them less competitive in the international market. The devaluation of peer country currencies is an added element handicapping Egyptian exports and putting them at a disadvantage. Governments have rushed into enormous devaluations of their currencies the 6 first months of the crisis (June 08-Febr 09). Countries like Brazil, India, Pakistan and Turkey have devalued their currencies by -42%, -15%, -19%, and -35% respectively to help them maintain their exports. Egypt devalued its currency by a mere -2.9%, thus losing a formidable edge relative to these other emerging economies. It is true that exchange rates have relatively regained some of their strength in the following period, but the gap between the leading exporting countries and Egypt’s currency remain large; handicapping Egypt’s exports vis-à-vis those countries and in the international market (see Table 3).
In spite of the sweeping reforms Egypt has undertaken, its exports remain -as seen- only a fraction of those of its developing country peers. Though it has been impressive to see Egypt’s exports growing by as much as 15% in 2007, this should not be regarded as an outstanding achievement as its developing counterparts have also exerted strenuous effort to reform and compete. In comparison to Egypt's 15% growth, Tunisia and Morocco have reached an increase of over 31% and 19% respectively for their exports in 2007. For the same period, China increased exports by 26% to reach $1217.6 billion, Brazil by 17%, India by 22% and Turkey by 25% (see also table 1).
Egypt also lags behind its peers in moving to more sophisticated export production. Egypt ranks relatively poorly under the “innovation” pillar in the World Economic Forum’s global competitiveness index (GCI), both compared to its own overall GCI ranking and relative to its peers. The relative success of Egypt's developing country counterparts in respect of export growth in general and "innovation" in particular signifies not only the importance of government support to foster export growth but also the inextricable link between export growth and competitiveness and skills development.
EXPORT INCENTIVES HAVE HELPED EGYPTIAN EXPORTS IMPROVE
As a part of reforms and liberalization, Egypt has shifted its attention to export development, adopted a strategy and established institutions to implement it. The GOE established the Exports Promotion and Development Fund (EDF) in 2002, which currently works with over 26 sectors. The program has been effective generating 5 times the value of its investment and tremendously expanding Egypt's export capacity.
With over 70.000 requests on a yearly basis, nearly 1900 companies and factories out of a total of 20.000 are benefiting to date from export incentives in Egypt (see Appendix). Export incentives have proven to be the most sustainable subsidy investment made by the government. For every 1 LE invested, there was a $1 increase in exports in 2008/09, i.e. the "profit" for the Egyptian economy was 5 times more than the initial investment.[3] The growth of exports receiving incentives has outpaced that of non-incentivized exports; since the start of the incentives program in 2002/2003, incentivized exports have increased 5 fold, as compared to non-incentivized (See figure 1). In fact non-incentivized exports, as shown in figure 1, have decreased due to the crisis from $8.3 billion to $8 billion, which signifies a possible future further slow down in non-incentivized exports. Of the $14.5 billion total exports in 2008/2009 (excluding oil and gas), $6.5 billion received export incentives (See Table 4).
To date, incentive programs have focused on companies and sectors that are labor intensive—agriculture, ready made-garments, textiles and fabric, engineering, furniture—in order to stimulate employment. In these sectors, a mere 1,316 companies receiving export incentives support the employment of 5,780,000 individuals. Between 2008 and 2009, when incentives reached their peak, employment in the agriculture and textiles, the top 2 sectors receiving incentives, rose by 500,000 and 225,000 respectively (see Table 5).[4] A substantial increase in employment in these sectors and the stability of employment in other incentivized sectors throughout the financial crisis is a testament to the importance of export incentives to export growth and to help fight Egypt’s unemployment problem. In addition to increasing employment, these sectors have also displayed growth in investment as well as labor-force skills development as reflected in the steady rise in wages across the period of incentive provision.[5]
Yet, while Egypt appears to be on par with the developing countries group in terms of the subsidies envelope, it is critical to note that only 4.1 billion LE, or 3.2% is directed to export incentives out of Egypt's total cash subsidies budget of 132.0 billion LE,[6] the bulk of subsidies are geared toward domestic consumption (See table 6/figure 2). This figure has declined for the financial year (2009/10) to 3.7 billion LE.
At this time of global financial crisis, when competition has become increasingly fierce and protectionism is on the rise; support to exporters is a must to help them weather the storm, maintain market niches, and expand market reach. While incentives have facilitated Egypt's total export growth over time, they have also provided necessary insulation to absorb the blow of market shocks. Incentive recipients did not experience losses in the 2007-2009 period, rather they increased exports by 62%; due in no small part to a boost in the incentive package, while non incentivized exports declined by 4% of the same period.
Given the successful outcomes of export incentives in general and the provision of additional incentives to mitigate the financial crisis, the incentive package should be applied as the key strategy to overcome other key barriers at the national level. Funds provided to the EDF have already declined for the year 2009/10 to LE 3.7 billion from a peak of 4.2 billion in 2008/09. However in the first 3 months of the budget year, 1.5 billion has already been spent and at this rate, the entire budget will be gone in 9 months. Therefore an injection of minimum 6 billion is needed to merely maintain the current level of exports. However, if the target is to double our exports, then the amount of 10 to 12 billion LE would be the right figure to be earmarked to export incentives. At any rate, current subsidies should be maintained at the 50% increase introduced at the beginning of the crises. It is only natural to say that keeping the momentum is much cheaper than creating it anew. As illustrated in Figure 1, a period of time must elapse in order for export incentives to take effect and materialize into real export growth. Hardly any export growth had taken place in the first 3-4 years of export incentives. Following this period, export incentives manifest in a considerable export increase.
CRITERIA FOR ASSESSING EXPORT INCENTIVES AND SAFEGUARD MEASURES
1. Given the statistics, export incentives are clearly an important tool for the government to increase exports thereby stimulating the economy through attracting further investments which will yield higher employment and work force skill development rates and also average wage increases, which is the key force that can reduce reliance on all other counter growth social policies (Exchange rate, interest rates, other consumption subsidies). While it is important that incentives are targeted, time bound and conditioned in terms of labor requirements, proven export growth, opening new markets, and meeting environment and labor standards; it is equally important that the government makes these conditions and the temporal boundaries of the incentive programs transparent and stable so that exporters can plan ahead, build market niches, and make the best use of incentives whilst reducing macro policy risks.
2. To reduce abuse of the programs and ensure that export incentives serve their intended purpose, the impact of incentives should be assessed through a streamlined bi-annual or quarterly procedure.
3. Such programs should not be held hostage to political considerations, but should be designed with the goal of doubling Egypt’s exports in mind. To do so, the government could collaborate with the private sector to determine clear guidelines for export incentives such as:
i. Prioritizing labor intensive industry
ii. Eliminate industries that are receiving other types of subsidies (energy intensive)
iii. Eligibility based on minimum percentage of exports and a gradual annual rise as well as conditions for companies to graduate
iv. Offsetting higher costs and leveling production costs with neighboring and competing countries, such as Saudi Arabia, Jordan, etc. (China, US, India, Turkey…)