MADE in EGYPT - MIT Industrial Performance Center … in Egypt... · MADE in EGYPT Challenges of ... • Industrial Landscape- Current Situaon ... Key Lessons Learned from Egypt’s

MADEinEGYPTChallengesofIndustrialDevelopment

inanEmergingEconomy

TarekH.SelimIPCVisiDngResearcher

MITNovember16th,2016

Fall2016SeminarSeriesonEmergingEconomies

IndustrialPerformanceCenterMassachuseNsInsDtuteofTechnology

Objec'veofResearch

Theobjec'veofthisresearchistoexaminetheindustrialdevelopmentofanemergingeconomy,i.e.Egypt,usinghistorical'melineaswellascompara'veperformancewithBRICS+emergingeconomieswithrecommendedstrategiestowardsasustainablefuture.

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Outline

•  HistoricalMilestones–Poli'calEconomy•  IndustrialLandscape-CurrentSitua'on•  IndustrialPerformanceComparisonwithBRICS+EmergingEconomies

•  StrategiesforIndustrialDevelopment•  ConcludingRemarks•  FutureWork

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HISTORICALMILESTONES&ECONOMICPOLICY

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AncientEgyp'anEconomy(3000BC–30BC)

•  Core:SolidIns.tu.onalframeworkwithminimumtransac.oncosts•  Industries:stone,jewelry/poNery,woodenproducts/furniture,

glass(fromsilica),texDles&linens,paper(“papyrus”),bronzeweapons,logisDcs

•  Industriala8ributes:specializedlabor,mechanicalropes,standards•  Economy-wideFeatures:

o  Tradespecializa'onwithhighvalue-addedproductso  Silverasarisk-freeuniversalmediumofexchangeo  Impor'ngrawmaterialswhileexpor'nghighervalueoutput

Source:BrianMuhs(2016),UniversityofChicago,“TheAncientEgyp'anEconomy”,Published

byCambridgeUniversityPress.

“Value chain management with efficient utilization of resources”

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MehmetAliPasha(1805-1848)

•  CreditedasthefounderofmodernEgypt•  EndedO_omanruletomakeEgyptindependent•  Core:Highlyplannedeconomywith4xproduc.vityincrease•  Industries:armsweaponry,ship-building,texDlesDVC•  Economy-wideFeatureswithmassivereformin:

o  Agriculture:Co_oncashcropsystemo  Educa'onreformespeciallyreligiouseduca'ono  Culturalchangetowardswomeno  Statetaxcollec'onwithefficientcentraladministra'onSource:H.H.Dodwell,TheFounderofModernEgypt(1977)andA.Marsot,EgyptintheReignofMuhammadAli(1984);ColumbiaUniversityPress.

“European import substitution”

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KhedeviIsmail(1863-1879)

•  GrandsonofMehmetAli•  Core:MegaProjectswithHighDebt•  MegaProjectsinclude:

o  TheSuezCanalo  Na'onalRailwaysystemo  Egyp'anPostOfficeo  AlexandriaPort

•  Economyfeatures:•  Na'onalDebtincreasedsubstan'ally(300%ofGDP)•  WorldCo_onBoom•  HisplanswereLogis'cs-basedtradeposi'oning

Source:HelenChapin,Egypt:ACountryStudy,Washington,LibraryofCongressGPO,1990. 8

“Geo-political logistics”

TheFirstRepublic1952-2011

NASSER SADAT MUBARAK

1952-1970 1970-1981 1981-2011

DiversifiedState-ledIndustrializaDon

Open-doortradepolicy PrivaDzaDonleadingtocronyindustrialcapitalists

Tex'les,WhiteGoods,Electronics,Steel,Cement,Militaryproduc'on

Tradedeficitinmanufacturedgoods,andhighconsump'onofimports;Oilsurplus

Wealthconcentra'onofindustrialac'vitybyfamilybusiness,'eswithpoli'calregime;NewCairo

Importsubs'tu'on Opentrade Exportpromo'on

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TheSecondRepublic(2013-today)

•  MegaProjectso  SuezCanalExpansion(doubling)o  EgyptasLogis'cstradecentero  Infrastructure

•  Economyfeatures:o  Poli'calStabilityisKeyo  Relianceonforeignaidforeconomystabiliza'ono  Exchangeratefloa'ngshock&Debtconcerns

•  Industries:Steel&Cement;FurnitureCluster(Damie_a);Gold&Marble;Automo've;NaturalGas(newdiscoveries)

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“Sustainable Development”

KeyLessonsLearnedfromEgypt’shistory①   StronginsDtuDonswithminimumtransacDoncostscreatesustainabilityand

higherVAàneedforfacilita<ngins<tu<ons②   LeadershipwithgoodplanningcreatesunprecedentedlaborproducDvity

increasesàneedforservantleadership③   ConcentraDngonlyonmegaprojectscreatesdebtanddeficitàneedforSMEsindustrialupgrading④   PosiDoningEgyptasatradelogisDcscenterisnotenoughàneedforGVCposi<oning⑤   State-ledindustrializaDoncanbeaniniDalbigpushbutisnotsustainableàneedforcri<calgovernment-ledplanningefforts⑥   Open-doortradepolicymustbecomplementedwithindustryspecializaDonàneedforauniquecompara<veadvantagewithintheglobalindustriallandscape⑦   PrivaDzaDonofSOEscanulDmatelyleadtonon-innovaDveprivatemonopoliesàneedforrelaxingbarrierstoentryandincen<vesforinnova<on

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INDUSTRIALLANDSCAPEEgypt’sCurrentStatusQuo

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RecentEconomicDataandWhatitmeansforIndustry…

13Source:Abovedataisbasedon2015figuresfromUNIDO,WorldBank,WorldFactbook,

WorldEconomicForum,CentralBankofEgypt.

EconomyFactor EconomyFeatures WhatitMeanstoIndustry...

GDP $1.1trillioneconomyRanked23rdworldwide

MarketSize

Growth RealGDPGrowthis4.2%(+duringrecession)

DiversiFicationactsasashieldtoexternalshocks

Savings 10.7%SavingsrateHighprivateMPC=0.84

Consumption-driveneconomyinneedofforeigninvestments

Unemployment 13% Labor-intensiveindustry

InFlation 11% InFlationarycostpressures

Tax 20%

FavorabletaxforMNEs

Currency ExchangeRateShockLE8.9/$toLE17.5/$

Exportorientedindustrypotential

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agriculture11%

industry36%

services53%

Industry-GDPValueContribuDon

agriculture29%

industry24%

services47%

Industry-LaborForceContribuDon

GDP/Sector

RelaDveSectorEfficiency(Value-to-Labor)

Agriculture 0.4

INDUSTRY 1.5

Services 1.1

RelaDveSectorEfficiency

MadeinEgypt-Prospects

•  So,ontheposi.vesidemarketsize,availableskills,favorabletax,

exportpoten'al,rela'vesectorefficiency•  Andonthenega.vesideinfla'onarycostpressure,needfordiversifica'on

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Egypt’sLeadingIndustries…

16Source:COMTRADE(UN)2013-2015,andMinistryofIndustryReports,OfficeoftheMinister,2016

Industry ResourceBased?

LeadFirm

ScaleEffects Exportordomestic? AdditionalInfo

NaturalGas Yes No High Export(Surplus) 15thWorldwideRankinReserves

Gold Yes Yes Moderate Export GoldenTriangleinEastEgypt

Cement Yes Yes-Export High Both(LeadingMfgExport) LeadingMfgExport,MNEs

Steel Yes Yes High Domestic LocalleadFirm,Highlyenergydependent

ConsumerElectronics No Yes Moderate Export(CableTelcom) JointVentures,LeadFirm

Textiles Yes No Low Both(Segmented) Fragmented/VerticalSupplyChain,TechnologyIssues

Chemicals&Fertilizers No Yes Moderate Domestic StateMonopoly

FoodProcessing Yes No Moderate Both LocalDemandDriven

Pharmaceuticals No No High Domestic MNEsvs.SOEs(dualmarketschemes)

Automotive No No Moderate Domestic Assembly(German),Trucks

Furniture No No Low Domestic DamiettaIndustrialCluster(Governorate)

Ceramics No Yes High Export(Africa)

LeadingMfgExporttoAfrica

WhiteGoods&HomeAppliances

No Yes Moderate Domestic FamilyBusiness

LeatherProducts Yes No Low Domestic RobeikyCityCluster

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BUYERSOPHISTICATION

-  PriceSensi've-  Bandwagoneffect-  Brandloyalty

(resistancetochange)

PRODUCT/TECHNOLOGY

-  Marketsize-  Lowvalue-added-  Laborintensive-  LimitedR&D-  Slowtech.diffusion-  Entrepreneurship

capabili'es

ENTRY&EXIT-  CountryRiskisBstable-  ImportanceofScaleon

entry-  Assetapprecia'onon

exit

COMPETITIONAND

STRUCTURE-  Diversified-  Monopolis'c/

Oligopoly-  FamilyBusiness-  Importrestric'ons-  Leadfirmdrio-  NoleadMfgindustries

SUPPLIERSANDINPUTS-  Laborunions-  Socialperspec've-  Equipmentimports-  Supplychain

fragmenta'on

“MADEinEGYPT”ForcesandFactors

EGYPT’SCOMPARATIVEPOSITIONRELATIVETOOTHEREMERGINGECONOMIES

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WorldEconomyMap,GDP(PPP)percapita,IMF2016

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EmergingEconomies,GDPGrowth2016

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“BRICSPlus”Economies:BRICS,MINT,Jordan&TunisiaBRICS,Mexico,Indonesia,Nigeria,Turkey,Jordan,Tunisia

Egypt’sComparaDvePerformance

llllllllllllll

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Size ProducDvity CompeDDveness InnovaDon

(Rank) (Value) (Rank) (Rank)EGYPT 25 $10,249 115 122BRICS 12 $13,974 48 50

BRICSPlus 24 $12,937 61 60RelativePerformance

Egypt/BRICS 48% 73% 42% 41%Egypt/BRICSPlus 96% 78% 53% 49%

Notes:-Sizeisaweightedaverageofdomes'candforeignmarketsize,GDPPPP,andExportsas%ofGDP.-  Produc'vityisanindexofGDPPPPpercapita.-  Compe''venessisbasedon12pillars:Ins'tu'ons,Infrastructure,MacroEnvironment,Health,Educa'on,GoodsMarketEfficiency,LaborMarketEfficiency,FinancialMarketDevelopment,MarketSize,Technology,Innova'on,andBusinessSophis'ca'on.-  Innova'onisbasedonCapacityforInnova'on,Qualityofscien'ficresearchins'tu'ons,CompanyspendingonR&D,University-industryR&Dcoopera'on,Gov.procurementofadvancedtech.products,Talentavailability,andpatentapplica'onspermillionpopula'on.Sources:WorldBank,IMF,UNDP,WorldEconomicForum,TradingEconomics.com

Egypt’sRelaDvePerformancetoBRICS

Egypt’sRelaDvePerformanceHighlights

WhatEgyptactuallyperformswellin?•  Marketsize•  Produc'vity•  Highereduca'on•  Talentavailability•  Logis'csportsandair

transportquality•  Breadthofvaluechain

suppliers

WhatEgyptneedscriDcalimprovementsin?•  AppliedR&D•  University-industry

coopera'on•  Technologicaldiffusion•  Roadsandrailways•  Qualityofbasiceduca'on•  Voca'onal/technical

ins'tutes

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Egypt’sRelaDvePerformance-IndustrialPerformanceIndex

IPI

MfgCapacity“INSERTION”

MVApercapita,MfgExportpercapita

Technologicaldeepeningandindustrialupgrading

“UPGRADING”MediumandhightechMVAshare,

MediumandhightechMfgExportshare

MfgTradeShare“GLOBALIMPACT”

CountryshareinworldMVA,CountryshareinworldMfgExports

Source:UNIDO,UNCOMTRADE

I1

I3

I2 π

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EgyptBrazil

Russia

India

China

S.Africa

Mexico

Indonesia

Nigeria

TurkeyJordan Tunisia

0.0

0.5

1.0

1.5

2.0

0.0 0.5 1.0 1.5 2.0 2.5

I1 Capacity/Inser'on

I 2

Techn

ology/

Upgrading

I3 GlobalImpact=BubbleSizeAllCountriesrela'vetoBRICS+

SourcedataextractedfromUNIDO,UNCOMRTRADE,&WorldBank,2015forallcountries

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Egypt’sPerformanceRelaDvetoBRICSPlusSub-Index

Descrip<on/Factor

Rela<veRa<ng

I1 InserDon/IndustrialCapacity 25%I2 Technological&IndustrialUpgrading 84%I3 GlobalImpact 7%

IPIIndex IndustrialPerformancerelaDvetoBRICSPlus 0.65IPICategory

RankMiddle-IncomeEmergingEconomies 7th

IPIGeneralRank

AllCountries 71st

TopFiveIPIs1.Germany2.Japan3.Korea4.UnitedStates5.China

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GoodI2,lowI1:GoodtechnologythatlacksexpansionarycapacityOnonehand,Egyptisdoingwellincompara'vetermsregardingindustrialtechnologyandupgrading,butlackstheinser'oncapabilitytoexpanditsproduc'oncapacity.Enactpoliciestarge'ngbiggerscaleviamorelocal(andMNEs)expansionaryinvestments.LowI3givenI2:Smallglobalimpactgivenadequatetechnology&skillsOntheotherhand,Egypt‘sglobalimpactissmallcomparedtoitsexis'nglevelofproduc'ontechnologyduetolackofspecializa'onShiofocusfromadiversifiedindustrymixtowardsadeeperdegreeofspecializa'ontoestablishauniquecompara'veadvantageglobally.

Egypt’sRelaDvePerformanceImportantInsights

STRATEGIESFORINDUSTRIALDEVELOPMENT

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LongTermVisionforEgypt’sIndustrialDevelopment

“AchieveaUniqueGlobalAdvantage”i.e.ShiwfocusfromdiversificaDontowardsspecializaDontoachieve

globaladvantageandscale

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STRATEGY1of5:AchieveBiggerScalewithCountrySpecializaDon§  "ThinkBigger"onscalebeyonddomes.cdemand...towards

globaldemand§  Governmentplanningtowardsefficiency-basedindustry

specializa.on(shorttomediumterm)&innova.on-based(longerterm)

StrategiesforEgypt’sIndustrialDevelopment

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StrategiesforEgypt’sIndustrialDevelopment

STRATEGY2OF5:CapitalizeonTechnologyBase§  Enforceinterna.onalqualitystandards§  Achievefastertechnologicaldiffusionbeyondtheexis.nglocalleadfirmsusingopen-accesstechnologyasmuchaspossible

§  EstablishUniversity-industryappliedR&Dcoopera.on§  Launchhighqualityvoca.onal/professionaltrainingandeduca.onins.tutes

§  Reformindustryregulatoryins.tu.onstobefacilita.ngratherthanauthoritarian

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StrategiesforEgypt’sIndustrialDevelopment

STRATEGY3OF5:MapLocalProducDonNetworkswithGlobalValueChains§  Breadthoflocalvaluechainsuppliersisagoodbasefor

feedingGVCs§  Maplocaldomes.ctechnologiestoGVCstoachievedepthof

globalpenetra.onandscale§  Financesub-componentSMEstoestablishstrongerdomes.c

produc.onlinkages

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StrategiesforEgypt’sIndustrialDevelopment

STRATEGY4of5:IntensifyInvestmentsinManufacturing§  Promoteinvestmentsinmanufacturingbeyondresource-basedindustriese.g.automo.ve,furniture,whitegoods

§  A8ractlaborintensiveFDIsforexportmanufacturing§  Relaxbarrierstoentryindomes.cmonopolis.cmanufacturingindustries

§  Containinfla.onviainterestratepolicy...beyondthecurrencyfloatshock

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StrategiesforEgypt’sIndustrialDevelopment

STRATEGY5OF5:PosiDonEgyptinrelaDontoOtherEmergingMarkets§  LearnfromBrazilandMexico...localinnova.onins.tutes(Brazil)andbiggermanufacturingscale(Mexico)

§  Capitalizeoncountrystability...Egyptispoli.callystablerela.vetoitsregion,andhasfinanciallystableBra.ngsoutlook

§  Geographicaladvantageinlogis.csisnotenough

CONCLUDINGREMARK

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Egypt’spathofindustrialdevelopmentcanachieveauniqueglobaladvantagewithbiggerproduc.onscaleusingefficiency-drivencapabili.esapproachofindustryspecializa.onwithamorefocusedanddeeperglobalimpactforthecountry’sfuture

InConclusion…

NEXTSTEPS…FUTUREWORK

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FUTUREWORK

•  TimelineStrategies•  StakeholderImpactAssessment•  On-SiteInterviews•  GVCMapping•  CaseStudies•  IPCWorkingPaper

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[email protected]

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