Sunday, July 08, 2012

Focus on the Suez Canal

Steven Lee argues that transforming the Suez Canal to an integrated industry and services zone would deliver accelerated and more equitable growth for the Egyptian economy and help it become a G20 member.

Today Egypt sits at a crossroads in its long history. The people have spoken and established their right to practised democracy. However the pay-off to this freedom to elect a president and parliament means delivery to the people of a more equitable economic system, which creates more income with fairer distribution.

Even before 2004, the government’s socio-economic objective was to ensure the economy could absorb the annual 600,000 to 800,000 new job market. This is a vital objective; however it does not reflect a high-level vision for the country’s development or its economic future.

A new high-level vision is proposed that by 2050 Egypt become a member of the G20, the expanded “Rich club of nations”. Egypt’s population is projected at 120 million by 2050; however the size of Egypt’s economy by 2050 will largely depend upon the decisions taken by this government.

It will compete for membership with Nigeria and Vietnam; both shared with Egypt a GDP of of approximately 1 per cent of the USA’s in 2009. Nigeria’s and Vietnam’s average projected growth rates until 2050 are respectively, 7.9 per cent and 8.8 per cent. Egypt must surpass its economic growth average of 7 per cent which it recorded between 2006 and 2009.

To deliver a G20 vision of Egypt’s economic future, policy makers must be realistic about Egypt’s previous levels of international competitiveness. On the positive side tourism receipts, Suez Canal fees, overseas remittances and foreign direct investment (FDI) have all experienced unprecedented levels. But although manufacturing exports doubled from 2006 to 2010, imports grew at a much faster rate, too often displacing domestically manufactured products.

One important reason for this trade imbalance is that the international competitiveness of Egyptian enterprises is too often dependant on an export model of trade preferences and government transfer payments. This distorts the flow of investment.

Although international competitiveness policy reforms were targeted, such as those found in the World Bank’s, Doing Business survey, this was not prioritized in all decision making. Nor was there a transparent framework to coordinate macroeconomic reforms with individual economic sectors.

Today Egypt and its people are looking for reliable economic outcomes including more productive jobs, at improved wage levels. For this reason Egypt should move ahead promptly to establish an integrated industry and services zone able to deliver accelerated economic growth: the much spoken of Suez Economic Corridor. Located to the East and the West of the Suez Canal it would, incorporate existing ports of East and West Port Said in the North and North West of Suez to the Canal’s South, as well as agricultural and industrial zones and all physical infrastructure.

Whilst the Canal’s contribution to Egypt’s GDP recently peaked at four per cent in 2007/08 it has since fallen to 2.3 per cent of GDP in 2010/11, despite near record levels of transit fee income of US$ 5.1 billion. There are, however, many additional services that could be delivered to ships in transit, which could translate into significant new income for Egypt.

The Republic of Panama already has a long-term plan to leverage its Canal traffic to add substantially to overall economic growth from value-adding logistics. It has estimated that the contribution of logistics alone would add an average of 19 per cent to economic growth between 2014 and 2020.

It is proposed that a first step for the new President would be to establish the Suez Economic Corridor Commission. This agency would implement this platform for accelerated economic development, adding value to the Suez Canal’s maritime traffic with impact on the rest of Egypt through linkages and multiplier effects.

The Corridor’s regulatory environment would deliver streamlined regulations favourable to employment, investment and social development, avoiding Egypt’s historical bureaucracy and stifling regulations which have too often hindered investment. At the heart of the process will be a 20-year strategy to create value-adding employment and lift the Corridor’s economic contribution to national GDP to 10 per cent in ten years, targeting the creation of 1.5 million new jobs within the first 5-year phase.

It is also proposed that the Commission would coordinate strategies for the economic sectors of agriculture, finance, industry and services, with enterprises in Egypt. They would simultaneously create accountable new agencies for enterprise development, exports, innovation, investment, quality and standards, and skills Building.

This streamlined environment for employment and business would encourage investors to transform their enterprise model, delivering sustainable international competitiveness, dependent on domestic factors of production. The Corridor would prioritise the attraction of a skilled workforce able to deliver productivity increases matched by higher per capita levels of investment. Enterprises would replace imported inputs with investments that deliver connected supply chains. This would enable Egyptian manufacturers to be more competitive with higher levels of domestic value-added and faster delivery times, targeting both domestic and export markets.

The government must also play its role and ensure that state enterprises do not allow primary inputs to leave the country as raw materials, but are fed into domestic supply chains to manufacture finished products or components.

This tumultuous period in Egypt’s history is a unique opportunity to forge a new economic contract recognizing the people’s ambition for better incomes and improved social conditions. Targeting Egypt’s G20 membership by 2050 gives the country a long-term vision through which to guide economic and social decision making. Launching the Suez Economic Corridor Commission to oversee a unified economic zone to the East and West of the Suez Canal creates a zone for accelerated economic growth. Using the Canal’s existing operations supported by favourable employment and business regulations creates an environment favourable to high levels of investment. These policy reforms would deliver an acceleration of economic growth, impacting development throughout Egypt.

The writer is a marketing and economic strategy consultant who has worked extensively in Egypt for donor programmes.