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Egypt 's reform strategy addresses multiple challenges

Editor's Note: Rachid Mohammed Rachid became Egypt's Minister of Foreign Trade and Industry four months ago, leaving behind a successful career in business. He spoke last week at the Saban Center for Middle East Policy at the Brookings Institutions in Washington, D.C. about the economic pressures Egypt now faces, and outlined the Cabinet's plan for economic reform. As one of the first members of the private sector to be brought into the Egyptian Cabinet in many decades, he said, he embodies the government's recognition of a need for change.

Rachid's appointment to the Egyptian Cabinet came as part of what has been termed the "new wave" of economic reform in the country, following the stalled reforms of the 1990s. Rachid expressed his confidence that the political will of the country's leadership was firmly behind the current reform efforts, noting that Egyptian President Hosni Mubarak had personally expressed to Rachid his desire to see the necessary, long-discussed reforms implemented. The objective is reform, "in all directions," he said, including educational and political change, as well as economic change.

Egypt's economic reform strategy is designed to address three main domestic challenges, Rachid asserted: the lack of job opportunities, a lower than desirable standard of living, and poor international competitiveness. To deal with these economic issues as well as Egypt's political and social challenges, there is a need for a full partnership between the private sector and the government. While the recent reforms have already met with positive responses from the private sector, including a significant increase in the stock market, the primary question is whether Egyptian businesses will take profits from the reforms or use their newly freed capital to invest in domestic production and create new jobs.

Only 128 days-old, the government is currently in its "honeymoon period," a fact which Rachid and his colleagues have taken advantage of, he said, to initiate several bold new economic reform programs.

The bold steps were meant, Rachid related, to send a signal that the new Cabinet is there to make serious, sustainable changes and is intent on implementing its decisions.

The first initiative of the new government in economic reform, Rachid said, was a customs and tariff reform to address one of the biggest problems facing Egyptian businesses: the obstacles to importation of goods needed for domestic production.

The government has simplified the tariff structure significantly and reduced the average tariff by 60 percent. The government has also announced plans to reduce taxes by an average of 50 percent, initiating a flat tax of 20 percent for most taxpayers. In banking, Rachid asserted, the government intends to address the problem of credit by resolving the bad loans held by many national banks, through reducing the number of banks in the country, and by privatizing the largest state-owned bank in 2005.

The overall effect of this and other reforms, he noted, will be to redefine the relationship between state and society, reducing the influence of the government in the economy.

Minister Rachid recognized that the new Cabinet, despite its bold agenda, begins with a credibility deficit both domestically and internationally, because of the failures of past reform efforts. Rachid cited the Egyptian media, in particular, as deeply skeptical and critical of government decision-making.

Moreover, the minister noted that the reforms necessary for long-term success will inevitably carry short-term costs. To deal with this, he noted, the government will focus on job creation in sectors different from those that are contracting. For example, he noted, his colleague in the Tourism Ministry (another former businessman in the new government) is committed to increasing tourism significantly as a means of creating new jobs. Another way of dealing with adjustment problems will be through social programs that focus on with unemployment. These programs are in place, Rachid noted, but not fully developed.

In response to a question regarding the role of political opposition in the reform process, Rachid stated that the Egyptian government intends to fully engage with all sectors of society in promoting economic reform. He explained that the business sector, which is working closely with the government to identify and implement needed reforms, is not politically homogeneous but includes a number of opposition party members. He maintained that there is a very active and open debate within Egypt over the proposed economic reforms, one he thought necessary in order for reforms to proceed.

Beyond domestic economic growth and global integration, Egypt also faces the challenge of increasing intra-regional trade. Rachid noted that it is currently easier and cheaper to move goods from Egypt to Europe than it is to truck goods to Libya, Egypt's next-door neighbor.

In Rachid's assessment, the obstacles to intra-regional trade are largely historical, as many Arab countries had a state-led development model with a strong protectionist mindset. As a result, he noted, the business communities in many Arab countries overlap significantly rather than enjoying complementarity, and they lack the courage to open up to intra-regional competition. Because of the attitudes of these local business communities and the lack of an intra-regional trade infrastructure (in transportation and other areas), it is virtually impossible for countries in the region to do more business with one another.

The United States can play a large role in encouraging Egyptian reform, Rachid held, primarily through increasing bilateral trade. Rachid argued that there is still unrealized potential for increased trade, and that he hoped for U.S. government support to enhance trade relations. He noted that U.S. economic assistance has been instrumental in other reform initiatives in Egypt, such as education reform, and can do the same for economic reform by promoting the private-public partnership that is necessary for reform efforts to succeed.

Rachid emphasized two issues on which U.S. trade policy could assist his government's efforts: qualified industrial zones (QIZs) and negotiations toward a free trade agreement (FTA). While Egyptian businesses had been ambivalent about QIZs in the past, Rachid cited two factors leading to significant new interest.

First, the effect of the U.S.-Jordan-Israel QIZs on foreign investment and employment in Jordan was noticeably positive. Second, he noted, the upcoming expiration of the GATT (General Agreement on Tariffs and Trade) fibre quotas in January 2005 meant that Egyptian businesses were seeking new means of preferential access to the U.S. market. After concluding good discussions with the Israeli government, he said, Egypt is hoping for a positive response from the U.S. government to its request for a number of QIZs to be established.

The idea of a U.S.-Egyptian FTA, Rachid noted, has been on the table for some time. The Trade and Investment Framework Agreement has been positive for bilateral trade ties, he said, but the hope of the new Egyptian Cabinet is that a stronger U.S.-Egyptian relationship can be cultivated that will allow the FTA process to move forward. He suggested that his meetings with the U.S. Trade Representative's office were very positive on both the QIZ issue and the question of progress toward opening FTA negotiations.

Rachid argued that the Egyptian partnership agreement with the European Union would not provide much in the way of a model for U.S.-Egyptian trade agreements, because U.S.-Egyptian relations were unique.

The EU-Egyptian partnership agreement signed in June 2004 can teach the United States lessons on how to further its relationship with Egypt, but should not be used as a model, he cautioned.

Rachid concluded with his wish that American companies would come to see in Egypt as a good, strong investment environment. In particular, he hoped that, as Egyptian economic reforms progress, Egypt will attract more information technology, manufacturing, and services business from the United States.

Beirut,11 29 2004
Rachid Mohammed Rachid
The Daily Star
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