# Effects of the Global Crisis on the Egyptian Textiles and Clothing Sector: A Blessing in Disguise?

Authors: Amirah El-Haddad
Journal: ISRN Economics
 (2012)

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## Abstract

The textile and clothing (TC) sector has not escaped the slowdown in Egypt in response to the crisis. But it has been in decline since 2001 in response to a changing global environment. Exports, which have been surviving on account of the Qualifying Industrial Zones (QIZ) and Euro-Mediterranean Partnership agreements, have been hit hard by the crisis. Domestic sales are in decline as a result of liberalization, and non-QIZ exporter—unprotected by the agreement—have been turning to the domestic market in competition with non-exporters. If domestic sales continue to decline, without being offset by growth in exports, the industry will continue to decline. To deal with the crisis, short-run mitigation policies can be considered as ensuring banks credit, and paying social insurance for workers in distressed firms. But the sector is suffering from inherent structural problems resulting in high costs. In other words, the crisis has exacerbated the shrinkage of an already struggling industry, so a longer run strategy is needed beyond the crisis response, comprising moving up the clothing industry value chain, conditional export incentives, skills upgrading and undergoing comprehensive institutional reform.


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## Body

## 1. Introduction

Having developed behind protective barriers, the textiles and clothing industry (TC) has been of particular importance to Egypt, notably its contribution to employment, value added, and foreign exchange earnings. In 2008, the industry accounted for 26.4 percent of industrial production, total value added of LE 33.5 billion [1], and close to 10 percent of the country’s exports [2]. Finally, textile and clothing enterprises account for a fifth of all industrial sector firms, being the largest single employer with over 400,000 workers, that is almost a quarter of the industrial labor force [3]. The government has long utilized this sector to absorb Egypt’s growing labor force and help tackle unemployment problems.This paper presents the findings from a survey of TC firms and workers collected in September, 20091 to assess the effects of the global and financial crisis on this vital sector. The sector has not escaped the slowdown in the Egyptian economy in response to the crisis but it had already been in decline earlier. Can, and should, the sector be helped to weather the current crisis, and/or is it an opportunity to accelerate much needed restructuring of inefficient enterprises?The paper is divided into five sections. The second highlights the main historical events and circumstances that shaped the TC industry before the crisis. The third briefly describes the survey instrument. Major survey findings about the implications of the crisis, particularly pertaining to social dialogue and employment as well as the restructuring of the sector, are presented in the fourth section of the paper. Finally short, medium- and long-term policy recommendations are discussed in the final section.


## 2. Background of the Textiles and Clothing Industry before the Crisis

### 2.1. Production under Protection

The history of Egyptian textiles falls into two periods: protectionism from the thirties to the seventies and gradual liberalization thereafter. During the 1930s and 1940s, the production of cotton textiles was increasing at a modest rate, growing more rapidly in the following two decades. Exports, mainly cotton yarns and fabrics, were directed to the Eastern European Bloc through bilateral barter agreements [7–9].Growth was maintained throughout the nineteen seventies, as part of Egypt’s public-sector-led, inward-looking import substitution development strategy (1952–1971) based on centralized ownership and a command economy. Most notable was the tight control of the cotton market for over twenty years. Until the late nineteen eighties, the government-run textile industry was the sole purchaser of Egyptian cotton. Much of what was purchased was generally secured at lower than international prices, to be spun by local mills, in order to be used in the production of largely subsidized fabrics and clothes sold at “social prices”2 [10, 11]3. This fact, along with the protection of the clothing industry, contributed to a massive misallocation of Egyptian high quality cotton4, which was wasted on the production of low-quality fabrics and clothing. The inefficiency in allocation on account of distorted market signals and direct government control persisted for years: the few clothing exporting firms resorted to producing their own fabrics to attain the required quality [12, 13]5.


### 2.2. Liberalization and Privatization under the ERSAP

The industry began to change with the reversal of the state-led development strategy beginning with the open door policy in the early 1970s, but more so in the early 1980s when the government terminated the earlier subsidy to clothing sold to the mass domestic market, which represented about 80 percent of public sector weaving companies’ production [17]. In addition, cotton trade was liberalized in 1994 as part of the Economic Reform and Structural Adjustment Program (ERSAP) of 1991. These two events have created problems for the industry, namely, a rise in production costs due to the price rise of cotton. Furthermore, combined with continued protection of the clothing industry, liberalization of cotton trade created a structural setting whereby an increasing share of Egyptian cotton has been exported (especially in the form of lint) rather than entering into the country’s own clothing value added chain, a situation which left domestic mills idle. Italy and Japan were the major importers of Egyptian cotton up until 2002. More recently, Asian manufacturers, India, Pakistan, and South Korea, have taken this position [11]6. At the same time, after the collapse of the Soviet Union, exports of textiles and textile articles fell from nearly 50 percent of Egypt’s total export earnings during the 1950s to the 1970s to 33 per cent in 1991-92 [7].On the other hand, the pace of privatization has been very slow. Public, vertically integrated, large-size firms dominated the manufacture of the textile group over a long period of time, their share slowly shrinking in favor of the private sector. In 2006, the public sector accounted for 73 percent of cotton ginning and pressing and for 31 percent of fabric production and a negligible amount of garment production. This trend has halved the public sector’s share in TC from 39 percent in 1997 to about 20 percent in 2006 (Table1). Currently, there is just one holding company, the Holding Company for Spinning, Weaving, Cotton and Ready-made Garments, with 33 affiliated public companies7,8. However, the privatization program9 and the general neglect for these companies by the government have resulted in a scaling down of publicly owned textile companies which has not been offset by comparable growth of private companies [18].Table 1
Public sector share in TC production (1997, 2006)*.
1997
2006
Cotton ginning and pressing
87%
73%
Manufacture of textiles except cotton ginning and pressing**
43%
31%
Manufacture of wearing apparel; dressing and dyeing of fur***
18%
0%
Gross TC public sector production
39%
22%
Source: Author’s calculation based on central agency for public mobilization and statistics (CAPMAS), annual statistical book, various issues.  *Original data are available for fiscal years. Calendar years are used as an approximation. Year 1997, for example, is originally 1996/1997, where the fiscal year runs from July 1st to June 30th. **International Standard Industrial Classification (ISIC) Revision 3 code 17. ***ISIC code 18.


### 2.3. The Changing Global Environment : Egypt’s Accession to WTO and the End of the Multi-Fibre Agreement (MFA)

Two more major events have shaped the current status and structure of the Egyptian TC industry, namely, Egypt’s accession to the WTO in 1995 and the end of the Multi-Fibre Agreement a decade later.Egypt’s accession to the WTO initiated further liberalization of the sector. Egypt lifted a 30-year import ban on TC in 1998 for textiles and in 2002 for clothing, both in compliance with its WTO commitments. Nevertheless, the ban was initially replaced by prohibitive tariffs10. Only later—in 2000, 2004, and 2007—were substantial tariff reductions introduced [19]. Currently, most favored nation rates (MFN) are 0–5 percent on yarns, 0–10 percent on fabrics, and generally in the neighbourhood of 30 percent on carpets and other textile floor coverings, clothes, and home textiles [19]. Indeed, in most cases, these rates are below their WTO-bound rates. The phase-out of the Multi-Fibre Agreement has gradually subjected textiles and clothing to normal WTO rules. Hence exporters have faced increased competition from previously quota constrained, more competitive countries.


### 2.4. Precrisis Trends

Successive tariff reductions, the phasing out of the MFA, and the downsizing of public sector firms have jointly driven the trends shown in Figure1. Most remarkable has been a sharp decline in the production of TC since the year 2000. In 2004, production fell to its lowest value since 1997 to only 60 percent its value 4 years earlier, falling from just under $8 billion in 2000 to around $5 billion in 2004. As a result of tariff reductions, the country has experienced a surge of imported textiles and clothing after 2002 and again after 2007 (Figure 1).Figure 1
TC Evolution (1997–2008).Source: Production: IDA [4]; Exports and Imports: International Trade Center [21]. Data based on the partner reported data (mirror data). Note: data are only for companies registered at IDA. Each registered company updates its data at IDA every 5 years, which explains why for some categories values of indicators remain unchanged from one year to the other.Egyptian producers are unable to compete with lower cost overseas producers, especially those in China, losing market share at home, shown by the dramatic decline in domestic TC sales. Domestic producers’ sales have halved in the four years between 2000 and 2004 falling from $6 billion to $3 billion reflecting the fact that foreign competitors are driving Egyptian TC firms out of the domestic market11,12. The substantial growth of TC imports is not the sole cause for production and domestic sale decline, there is also the effects of privatization and government’s neglect of public spinning and weaving companies13.The end of the quota system since January 2005 could have had severe consequences for Egypt’s ability to penetrate export markets, since the country is brought into direct competition with China, India, Pakistan, Bangladesh, Indonesia, and even Turkey, which were quota constrained under the former MFA. But the effects have been moderated by the Qualifying Industrial Zone (QIZ) protocol (December, 2004) with the US and Israel, and by the Euro-Mediterranean Partnership agreement (as of 2005) with the European Union (EU) both of which allow Egyptian textile products duty—and quota-free access to these markets conditional on rules of origin14. Hence Egypt is benefiting from the fact that other previous beneficiaries of the MFA are losing market share. These two markets account for more than three quarters of all TC exports.TC exports have been growing rapidly: by 23 percent during 2000–2004 as input prices fell following yarn and fabric tariff reductions and double that growth rate (41 percent) between 2004 and 2007 on account of these major agreements (Table2, see also Figure 1). Egyptian export market shares have remained more or less stable between the two periods 1995–2004 and 2005–2007 in response to quota termination with the minor exceptions of cotton exports (chapter 52) and carpets and other floor coverings (chapter 57)15.Table 2
TC production, imports, and exports (2000–2008).
2000
2004
2007
2008
Level (US$ millions)
TC production
7659
4900
6520
#N/A
TC exports
1435
1768
2489
2634
TC imports
807
1365
2595
4642
Growth rate (%)
TC production
-
36
%
33%
#N/A
TC exports
23%
41%
6%
TC imports
69%
90%
79%
Ratio of imports to exports
0.6
0.8
1.0
1.8
Source: Production: IDA [4]; same note as in Figure 1.But as shown by Figure1, imports have been massively growing since 2000 reaching a growth rate of about 80 percent in just one year, between 2007 and 2008 (Table 2). Whilst in 2000 the value of imports was half that for exports (0.6), by 2008 it has nearly doubled (1.8). The industry has become a drain on Egypt’s foreign exchange resources rather than the earner the country has been counting on. Since the substantial increase in imports has not been matched by an equal rise in exports, the obvious result is a negative overall trade balance (Figure 2), for which the textiles sector (as opposed to clothing) is largely to blame. But it is the clothing sector, which imports textiles as inputs for its production. This is because products of the sector’s supporting industries (mainly textiles but also dyeing and printing) are not at the required standards16. Yet that is to be expected since tariffs on clothing, despite the large reductions, are still relatively high compared to those on textiles. Thus, with further tariff reductions a similar effect on the clothing trade balance can be expected.Figure 2
TC Trade Balance (Exports minus Imports, 1997–2008).Source: International Trade Center [21]. Data is based on the partner reported data (Mirror data).


### 2.5. Egypt's Unfavorable Cost Structure

Why are Egyptian producers losing domestic market share? Why are the sector’s imports double its exports? The sector is “relatively” uncompetitive. The lack of competitiveness arises from several sources, which can be divided into production or direct costs and transaction cost.


#### 2.5.1. Production Cost Structure of the Industry

Labor
Private firms have been opening up since liberalization and are more likely to be exporters. But the country’s cost structure is not favorable. Wage costs, which account for about 30 percent of a garment’s FOB price, are higher than in competitor countries (Table3), whilst productivity is lower. As a middle-income country, costs per operator hour in Egypt ($0.82) are above one and a half times those in mainland China ($0.48) and Sri Lanka ($0.46), and about three times those in Vietnam and Bangladesh ($0.28).
Despite greater flexibility around employment practices such as the facilitation of the firing process afforded by the unified labor law of 200317, some still argue that labor practices are not flexible enough, for example, firing costs are high, at an average 132 weeks of wages [23]. Moreover, working hours are short. In fact, Egypt has the fewest firm operating days per year compared to a group of 20 competitors: 281 compared to for example, 351 days in Pakistan [5].Table 3
Unfavorable cost structure: labor cost.
Wage per hour in US$
Equivalent to LE
Egypt
0.82
4.5
China (mainland)
0.48
2.6
Sri Lanka
0.46
2.0
Pakistan
0.37
1.5
Bangladesh
0.28
1.5
Vietnam
0.28
1.5
Source: Adapted from World Bank [5]. Exchange rate used is LE 5.5 to the $.Other Direct Inputs
Second is the inefficiency of the state-owned sector. Having enjoyed high levels of protection, firms in this sector produce high-cost, low-quality products. Continued public sector dominance of the spinning and weaving industry limited the extent to which producers were responsive to consumer preferences and burdened that sector with overemployment, inferior technology, operational inefficiencies, and low levels of capital utilization. Substantial public investments have not been made in the spinning and weaving sector for many years. For example, most machinery used by public sector firms is more than 15 years old [24].
As a result of these distortions and inefficiencies, other direct costs such as fabric costs are also relatively higher for Egypt than any of its competitors [5], which is the reason why most inputs of fabrics are imported rather than produced internally. The sector’s productivity is amongst the lowest in Egypt: productivity per Egyptian pound is LE 10 compared to LE 73 for manufacture of coke, refined petroleum products, and nuclear fuel (Figure 3). With respect to other direct input costs, Egypt has a relatively high power outage rate (reported at 17 days a year in 2004) compared to 3 days only in Turkey and 7 in Romania. In fact, power outages result in 1–5 percent losses of total sales for 70 percent of Egyptian firms [5].Figure 3
Labor productivity for manufacturing activities: given in Egyptian pounds for each pound spent in annual wages.Source: CAPMAS [29].Transaction Costs of the Industry
Three factors have eased transaction costs in Egypt: (1) recent Ministry of Finance reforms facilitating and streamlining customs and investment18 procedures, (2) the large investments in Egyptian ports, and (3) the general trend for mega carriers and international ship owners to serve Mediterranean ports. This has in turn set a downward pressure on prices. The World Bank [5] reports that prices have halved during the last five years in eastern Mediterranean locations and were reduced by a third in western ones. As a result, Egypt’s rank in the trading across borders indicator of the Doing Business Report [25] has been favorable: 24 out of 181 countries and 4th of all 24 Arab Countries.
Nevertheless, private companies still face high transaction costs, through lengthy import and export procedures, customs and low port transparency and inefficiencies, handling costs and port charges, and other nontariff barriers (NTBs). For example, handling costs are higher in the port of Alexandria than in Haifa, Israel, or even Izmir, Turkey. Port charges are also higher in Alexandria than Turkey [5, 26]. Poor port services stem from low traffic volumes and poor port management in addition to an inadequate regulatory framework. More recently, Egypt ranks 131 and 114 of 133 countries in terms of tariff barriers and prevalence of trade barriers, respectively [27].
Additionally, formal channels for dispute resolution mechanisms between firms in the industry are limited and inefficient [28]. Other competitiveness indicators of the Egyptian business environment have also been low. Egypt’s overall ranking in the more recent 2009 Doing Business Report is 106 out of 183 economies [23]; on a number of subindicators Egypt’s performance is far below other MENA countries.


## 2.1. Production under Protection

The history of Egyptian textiles falls into two periods: protectionism from the thirties to the seventies and gradual liberalization thereafter. During the 1930s and 1940s, the production of cotton textiles was increasing at a modest rate, growing more rapidly in the following two decades. Exports, mainly cotton yarns and fabrics, were directed to the Eastern European Bloc through bilateral barter agreements [7–9].Growth was maintained throughout the nineteen seventies, as part of Egypt’s public-sector-led, inward-looking import substitution development strategy (1952–1971) based on centralized ownership and a command economy. Most notable was the tight control of the cotton market for over twenty years. Until the late nineteen eighties, the government-run textile industry was the sole purchaser of Egyptian cotton. Much of what was purchased was generally secured at lower than international prices, to be spun by local mills, in order to be used in the production of largely subsidized fabrics and clothes sold at “social prices”2 [10, 11]3. This fact, along with the protection of the clothing industry, contributed to a massive misallocation of Egyptian high quality cotton4, which was wasted on the production of low-quality fabrics and clothing. The inefficiency in allocation on account of distorted market signals and direct government control persisted for years: the few clothing exporting firms resorted to producing their own fabrics to attain the required quality [12, 13]5.


## 2.2. Liberalization and Privatization under the ERSAP

The industry began to change with the reversal of the state-led development strategy beginning with the open door policy in the early 1970s, but more so in the early 1980s when the government terminated the earlier subsidy to clothing sold to the mass domestic market, which represented about 80 percent of public sector weaving companies’ production [17]. In addition, cotton trade was liberalized in 1994 as part of the Economic Reform and Structural Adjustment Program (ERSAP) of 1991. These two events have created problems for the industry, namely, a rise in production costs due to the price rise of cotton. Furthermore, combined with continued protection of the clothing industry, liberalization of cotton trade created a structural setting whereby an increasing share of Egyptian cotton has been exported (especially in the form of lint) rather than entering into the country’s own clothing value added chain, a situation which left domestic mills idle. Italy and Japan were the major importers of Egyptian cotton up until 2002. More recently, Asian manufacturers, India, Pakistan, and South Korea, have taken this position [11]6. At the same time, after the collapse of the Soviet Union, exports of textiles and textile articles fell from nearly 50 percent of Egypt’s total export earnings during the 1950s to the 1970s to 33 per cent in 1991-92 [7].On the other hand, the pace of privatization has been very slow. Public, vertically integrated, large-size firms dominated the manufacture of the textile group over a long period of time, their share slowly shrinking in favor of the private sector. In 2006, the public sector accounted for 73 percent of cotton ginning and pressing and for 31 percent of fabric production and a negligible amount of garment production. This trend has halved the public sector’s share in TC from 39 percent in 1997 to about 20 percent in 2006 (Table1). Currently, there is just one holding company, the Holding Company for Spinning, Weaving, Cotton and Ready-made Garments, with 33 affiliated public companies7,8. However, the privatization program9 and the general neglect for these companies by the government have resulted in a scaling down of publicly owned textile companies which has not been offset by comparable growth of private companies [18].Table 1
Public sector share in TC production (1997, 2006)*.
1997
2006
Cotton ginning and pressing
87%
73%
Manufacture of textiles except cotton ginning and pressing**
43%
31%
Manufacture of wearing apparel; dressing and dyeing of fur***
18%
0%
Gross TC public sector production
39%
22%
Source: Author’s calculation based on central agency for public mobilization and statistics (CAPMAS), annual statistical book, various issues.  *Original data are available for fiscal years. Calendar years are used as an approximation. Year 1997, for example, is originally 1996/1997, where the fiscal year runs from July 1st to June 30th. **International Standard Industrial Classification (ISIC) Revision 3 code 17. ***ISIC code 18.


## 2.3. The Changing Global Environment : Egypt’s Accession to WTO and the End of the Multi-Fibre Agreement (MFA)

Two more major events have shaped the current status and structure of the Egyptian TC industry, namely, Egypt’s accession to the WTO in 1995 and the end of the Multi-Fibre Agreement a decade later.Egypt’s accession to the WTO initiated further liberalization of the sector. Egypt lifted a 30-year import ban on TC in 1998 for textiles and in 2002 for clothing, both in compliance with its WTO commitments. Nevertheless, the ban was initially replaced by prohibitive tariffs10. Only later—in 2000, 2004, and 2007—were substantial tariff reductions introduced [19]. Currently, most favored nation rates (MFN) are 0–5 percent on yarns, 0–10 percent on fabrics, and generally in the neighbourhood of 30 percent on carpets and other textile floor coverings, clothes, and home textiles [19]. Indeed, in most cases, these rates are below their WTO-bound rates. The phase-out of the Multi-Fibre Agreement has gradually subjected textiles and clothing to normal WTO rules. Hence exporters have faced increased competition from previously quota constrained, more competitive countries.


## 2.4. Precrisis Trends

Successive tariff reductions, the phasing out of the MFA, and the downsizing of public sector firms have jointly driven the trends shown in Figure1. Most remarkable has been a sharp decline in the production of TC since the year 2000. In 2004, production fell to its lowest value since 1997 to only 60 percent its value 4 years earlier, falling from just under $8 billion in 2000 to around $5 billion in 2004. As a result of tariff reductions, the country has experienced a surge of imported textiles and clothing after 2002 and again after 2007 (Figure 1).Figure 1
TC Evolution (1997–2008).Source: Production: IDA [4]; Exports and Imports: International Trade Center [21]. Data based on the partner reported data (mirror data). Note: data are only for companies registered at IDA. Each registered company updates its data at IDA every 5 years, which explains why for some categories values of indicators remain unchanged from one year to the other.Egyptian producers are unable to compete with lower cost overseas producers, especially those in China, losing market share at home, shown by the dramatic decline in domestic TC sales. Domestic producers’ sales have halved in the four years between 2000 and 2004 falling from $6 billion to $3 billion reflecting the fact that foreign competitors are driving Egyptian TC firms out of the domestic market11,12. The substantial growth of TC imports is not the sole cause for production and domestic sale decline, there is also the effects of privatization and government’s neglect of public spinning and weaving companies13.The end of the quota system since January 2005 could have had severe consequences for Egypt’s ability to penetrate export markets, since the country is brought into direct competition with China, India, Pakistan, Bangladesh, Indonesia, and even Turkey, which were quota constrained under the former MFA. But the effects have been moderated by the Qualifying Industrial Zone (QIZ) protocol (December, 2004) with the US and Israel, and by the Euro-Mediterranean Partnership agreement (as of 2005) with the European Union (EU) both of which allow Egyptian textile products duty—and quota-free access to these markets conditional on rules of origin14. Hence Egypt is benefiting from the fact that other previous beneficiaries of the MFA are losing market share. These two markets account for more than three quarters of all TC exports.TC exports have been growing rapidly: by 23 percent during 2000–2004 as input prices fell following yarn and fabric tariff reductions and double that growth rate (41 percent) between 2004 and 2007 on account of these major agreements (Table2, see also Figure 1). Egyptian export market shares have remained more or less stable between the two periods 1995–2004 and 2005–2007 in response to quota termination with the minor exceptions of cotton exports (chapter 52) and carpets and other floor coverings (chapter 57)15.Table 2
TC production, imports, and exports (2000–2008).
2000
2004
2007
2008
Level (US$ millions)
TC production
7659
4900
6520
#N/A
TC exports
1435
1768
2489
2634
TC imports
807
1365
2595
4642
Growth rate (%)
TC production
-
36
%
33%
#N/A
TC exports
23%
41%
6%
TC imports
69%
90%
79%
Ratio of imports to exports
0.6
0.8
1.0
1.8
Source: Production: IDA [4]; same note as in Figure 1.But as shown by Figure1, imports have been massively growing since 2000 reaching a growth rate of about 80 percent in just one year, between 2007 and 2008 (Table 2). Whilst in 2000 the value of imports was half that for exports (0.6), by 2008 it has nearly doubled (1.8). The industry has become a drain on Egypt’s foreign exchange resources rather than the earner the country has been counting on. Since the substantial increase in imports has not been matched by an equal rise in exports, the obvious result is a negative overall trade balance (Figure 2), for which the textiles sector (as opposed to clothing) is largely to blame. But it is the clothing sector, which imports textiles as inputs for its production. This is because products of the sector’s supporting industries (mainly textiles but also dyeing and printing) are not at the required standards16. Yet that is to be expected since tariffs on clothing, despite the large reductions, are still relatively high compared to those on textiles. Thus, with further tariff reductions a similar effect on the clothing trade balance can be expected.Figure 2
TC Trade Balance (Exports minus Imports, 1997–2008).Source: International Trade Center [21]. Data is based on the partner reported data (Mirror data).


## 2.5. Egypt's Unfavorable Cost Structure

Why are Egyptian producers losing domestic market share? Why are the sector’s imports double its exports? The sector is “relatively” uncompetitive. The lack of competitiveness arises from several sources, which can be divided into production or direct costs and transaction cost.


### 2.5.1. Production Cost Structure of the Industry

Labor
Private firms have been opening up since liberalization and are more likely to be exporters. But the country’s cost structure is not favorable. Wage costs, which account for about 30 percent of a garment’s FOB price, are higher than in competitor countries (Table3), whilst productivity is lower. As a middle-income country, costs per operator hour in Egypt ($0.82) are above one and a half times those in mainland China ($0.48) and Sri Lanka ($0.46), and about three times those in Vietnam and Bangladesh ($0.28).
Despite greater flexibility around employment practices such as the facilitation of the firing process afforded by the unified labor law of 200317, some still argue that labor practices are not flexible enough, for example, firing costs are high, at an average 132 weeks of wages [23]. Moreover, working hours are short. In fact, Egypt has the fewest firm operating days per year compared to a group of 20 competitors: 281 compared to for example, 351 days in Pakistan [5].Table 3
Unfavorable cost structure: labor cost.
Wage per hour in US$
Equivalent to LE
Egypt
0.82
4.5
China (mainland)
0.48
2.6
Sri Lanka
0.46
2.0
Pakistan
0.37
1.5
Bangladesh
0.28
1.5
Vietnam
0.28
1.5
Source: Adapted from World Bank [5]. Exchange rate used is LE 5.5 to the $.Other Direct Inputs
Second is the inefficiency of the state-owned sector. Having enjoyed high levels of protection, firms in this sector produce high-cost, low-quality products. Continued public sector dominance of the spinning and weaving industry limited the extent to which producers were responsive to consumer preferences and burdened that sector with overemployment, inferior technology, operational inefficiencies, and low levels of capital utilization. Substantial public investments have not been made in the spinning and weaving sector for many years. For example, most machinery used by public sector firms is more than 15 years old [24].
As a result of these distortions and inefficiencies, other direct costs such as fabric costs are also relatively higher for Egypt than any of its competitors [5], which is the reason why most inputs of fabrics are imported rather than produced internally. The sector’s productivity is amongst the lowest in Egypt: productivity per Egyptian pound is LE 10 compared to LE 73 for manufacture of coke, refined petroleum products, and nuclear fuel (Figure 3). With respect to other direct input costs, Egypt has a relatively high power outage rate (reported at 17 days a year in 2004) compared to 3 days only in Turkey and 7 in Romania. In fact, power outages result in 1–5 percent losses of total sales for 70 percent of Egyptian firms [5].Figure 3
Labor productivity for manufacturing activities: given in Egyptian pounds for each pound spent in annual wages.Source: CAPMAS [29].Transaction Costs of the Industry
Three factors have eased transaction costs in Egypt: (1) recent Ministry of Finance reforms facilitating and streamlining customs and investment18 procedures, (2) the large investments in Egyptian ports, and (3) the general trend for mega carriers and international ship owners to serve Mediterranean ports. This has in turn set a downward pressure on prices. The World Bank [5] reports that prices have halved during the last five years in eastern Mediterranean locations and were reduced by a third in western ones. As a result, Egypt’s rank in the trading across borders indicator of the Doing Business Report [25] has been favorable: 24 out of 181 countries and 4th of all 24 Arab Countries.
Nevertheless, private companies still face high transaction costs, through lengthy import and export procedures, customs and low port transparency and inefficiencies, handling costs and port charges, and other nontariff barriers (NTBs). For example, handling costs are higher in the port of Alexandria than in Haifa, Israel, or even Izmir, Turkey. Port charges are also higher in Alexandria than Turkey [5, 26]. Poor port services stem from low traffic volumes and poor port management in addition to an inadequate regulatory framework. More recently, Egypt ranks 131 and 114 of 133 countries in terms of tariff barriers and prevalence of trade barriers, respectively [27].
Additionally, formal channels for dispute resolution mechanisms between firms in the industry are limited and inefficient [28]. Other competitiveness indicators of the Egyptian business environment have also been low. Egypt’s overall ranking in the more recent 2009 Doing Business Report is 106 out of 183 economies [23]; on a number of subindicators Egypt’s performance is far below other MENA countries.


## 2.5.1. Production Cost Structure of the Industry

Labor
Private firms have been opening up since liberalization and are more likely to be exporters. But the country’s cost structure is not favorable. Wage costs, which account for about 30 percent of a garment’s FOB price, are higher than in competitor countries (Table3), whilst productivity is lower. As a middle-income country, costs per operator hour in Egypt ($0.82) are above one and a half times those in mainland China ($0.48) and Sri Lanka ($0.46), and about three times those in Vietnam and Bangladesh ($0.28).
Despite greater flexibility around employment practices such as the facilitation of the firing process afforded by the unified labor law of 200317, some still argue that labor practices are not flexible enough, for example, firing costs are high, at an average 132 weeks of wages [23]. Moreover, working hours are short. In fact, Egypt has the fewest firm operating days per year compared to a group of 20 competitors: 281 compared to for example, 351 days in Pakistan [5].Table 3
Unfavorable cost structure: labor cost.
Wage per hour in US$
Equivalent to LE
Egypt
0.82
4.5
China (mainland)
0.48
2.6
Sri Lanka
0.46
2.0
Pakistan
0.37
1.5
Bangladesh
0.28
1.5
Vietnam
0.28
1.5
Source: Adapted from World Bank [5]. Exchange rate used is LE 5.5 to the $.Other Direct Inputs
Second is the inefficiency of the state-owned sector. Having enjoyed high levels of protection, firms in this sector produce high-cost, low-quality products. Continued public sector dominance of the spinning and weaving industry limited the extent to which producers were responsive to consumer preferences and burdened that sector with overemployment, inferior technology, operational inefficiencies, and low levels of capital utilization. Substantial public investments have not been made in the spinning and weaving sector for many years. For example, most machinery used by public sector firms is more than 15 years old [24].
As a result of these distortions and inefficiencies, other direct costs such as fabric costs are also relatively higher for Egypt than any of its competitors [5], which is the reason why most inputs of fabrics are imported rather than produced internally. The sector’s productivity is amongst the lowest in Egypt: productivity per Egyptian pound is LE 10 compared to LE 73 for manufacture of coke, refined petroleum products, and nuclear fuel (Figure 3). With respect to other direct input costs, Egypt has a relatively high power outage rate (reported at 17 days a year in 2004) compared to 3 days only in Turkey and 7 in Romania. In fact, power outages result in 1–5 percent losses of total sales for 70 percent of Egyptian firms [5].Figure 3
Labor productivity for manufacturing activities: given in Egyptian pounds for each pound spent in annual wages.Source: CAPMAS [29].Transaction Costs of the Industry
Three factors have eased transaction costs in Egypt: (1) recent Ministry of Finance reforms facilitating and streamlining customs and investment18 procedures, (2) the large investments in Egyptian ports, and (3) the general trend for mega carriers and international ship owners to serve Mediterranean ports. This has in turn set a downward pressure on prices. The World Bank [5] reports that prices have halved during the last five years in eastern Mediterranean locations and were reduced by a third in western ones. As a result, Egypt’s rank in the trading across borders indicator of the Doing Business Report [25] has been favorable: 24 out of 181 countries and 4th of all 24 Arab Countries.
Nevertheless, private companies still face high transaction costs, through lengthy import and export procedures, customs and low port transparency and inefficiencies, handling costs and port charges, and other nontariff barriers (NTBs). For example, handling costs are higher in the port of Alexandria than in Haifa, Israel, or even Izmir, Turkey. Port charges are also higher in Alexandria than Turkey [5, 26]. Poor port services stem from low traffic volumes and poor port management in addition to an inadequate regulatory framework. More recently, Egypt ranks 131 and 114 of 133 countries in terms of tariff barriers and prevalence of trade barriers, respectively [27].
Additionally, formal channels for dispute resolution mechanisms between firms in the industry are limited and inefficient [28]. Other competitiveness indicators of the Egyptian business environment have also been low. Egypt’s overall ranking in the more recent 2009 Doing Business Report is 106 out of 183 economies [23]; on a number of subindicators Egypt’s performance is far below other MENA countries.


## 3. A Note on the Survey

Two new data sets—a firm questionnaire covering 275 TC firms and a worker questionnaire covering 5,383 TC workers—were collected in September, 2009. The following two sections briefly describe the questionnaires and sampling design.


### 3.1. Firm Level Survey

The firm survey comprised six modules: basic firm data, firm activity, production, sales, exports and employment; trends after the crisis; job opportunities, and future plans. Table1 gives a breakdown of sampled firms.Firms were sampled based on a combination of two sample frames provided by the Egyptian Federation of Industries19. Unfortunately, the final frame does not reflect the true number of firms in the TC industry in Egypt. There simply is not any comprehensive, accurate and detailed frame that includes basic firm level data to ensure a representative sample20. The 275 firms covered the governorates of Greater Cairo, Alexandria, and El-Sharkyia; these three include more than 90 percent of Egypt’s TC firms. Greater Cairo comprises the governorates of Cairo, Giza, 6th of October, Helwan, and El-Qalyubia.Stratified sampling was used to ensure sufficient large sized and exporting firms. The resulting geographical distribution of sampled firms was very similar to that in the sample frame (Table4). Tables 5 and 6 give a breakdown of sampled firms by activity, market orientation, ownership, and firm size.Table 4
Sample firm distribution by location.
No. and % of firms in the sample
No. and % of firms in sample frame
Greater Cairo
181
66%
820
70%
Alexandria
60
22%
253
22%
El-Sharkyia
34
12%
99
8%
275
100%
1172
100%
Source: Author’s calculation based on Egyptian federation of industries sample frame and IDSC sampling design.Table 5
Sample firm distribution by activity, market orientation, and ownership.
Activity
Market orientation
Ownership
Total
Textiles
Clothing
Exporting
Nonexporting
Public sector
Private sector
QIZ
Non-QIZ
No. of firms
97
178
53
40
182
6
169
275
%
35%
65%
19%
15%
66%
2%
98%
100%
Source: IDSC TC firm questionnaire [6].Table 6
Sample firm distribution by firm size*.
Small
Medium
Large
Total
No. of firms in the sample
125
115
35
275
%
45%
42%
13%
100%
Share in real weighted production
5%
10%
85%
100%
Source: IDSC TC firm questionnaire [6].  *Small firms: up to 50 workers, medium: greater than 50 and up to 500 workers, and large: over 500 workers.


### 3.2. Worker Survey

The worker questionnaire was divided into five modules: basic characteristics, work conditions, skills and training, job satisfaction; and crisis effects. The sample was stratified by four size categories: less than 10 workers, from 10 to 100, from 100 to 1000, and larger than 1000 workers (Table7); 5,590 workers were to be surveyed however, due to practical problems in the field, only 5383 questionnaires were completed.Table 7
Sample worker distribution.
Firm category (no. of workers)
No. of sampled firms (1)
No. of workers sampled from each firm in category (2)
No. of sampled workers in category (3) = (1)*(2)
Less than 10
100
5
500
10–100
101
20
2020
Greater than100–1000
63
40
2520
More than 1000
11
50
550
Total
275
5590
Source: IDSC worker survey sampling note [14].


## 3.1. Firm Level Survey

The firm survey comprised six modules: basic firm data, firm activity, production, sales, exports and employment; trends after the crisis; job opportunities, and future plans. Table1 gives a breakdown of sampled firms.Firms were sampled based on a combination of two sample frames provided by the Egyptian Federation of Industries19. Unfortunately, the final frame does not reflect the true number of firms in the TC industry in Egypt. There simply is not any comprehensive, accurate and detailed frame that includes basic firm level data to ensure a representative sample20. The 275 firms covered the governorates of Greater Cairo, Alexandria, and El-Sharkyia; these three include more than 90 percent of Egypt’s TC firms. Greater Cairo comprises the governorates of Cairo, Giza, 6th of October, Helwan, and El-Qalyubia.Stratified sampling was used to ensure sufficient large sized and exporting firms. The resulting geographical distribution of sampled firms was very similar to that in the sample frame (Table4). Tables 5 and 6 give a breakdown of sampled firms by activity, market orientation, ownership, and firm size.Table 4
Sample firm distribution by location.
No. and % of firms in the sample
No. and % of firms in sample frame
Greater Cairo
181
66%
820
70%
Alexandria
60
22%
253
22%
El-Sharkyia
34
12%
99
8%
275
100%
1172
100%
Source: Author’s calculation based on Egyptian federation of industries sample frame and IDSC sampling design.Table 5
Sample firm distribution by activity, market orientation, and ownership.
Activity
Market orientation
Ownership
Total
Textiles
Clothing
Exporting
Nonexporting
Public sector
Private sector
QIZ
Non-QIZ
No. of firms
97
178
53
40
182
6
169
275
%
35%
65%
19%
15%
66%
2%
98%
100%
Source: IDSC TC firm questionnaire [6].Table 6
Sample firm distribution by firm size*.
Small
Medium
Large
Total
No. of firms in the sample
125
115
35
275
%
45%
42%
13%
100%
Share in real weighted production
5%
10%
85%
100%
Source: IDSC TC firm questionnaire [6].  *Small firms: up to 50 workers, medium: greater than 50 and up to 500 workers, and large: over 500 workers.


## 3.2. Worker Survey

The worker questionnaire was divided into five modules: basic characteristics, work conditions, skills and training, job satisfaction; and crisis effects. The sample was stratified by four size categories: less than 10 workers, from 10 to 100, from 100 to 1000, and larger than 1000 workers (Table7); 5,590 workers were to be surveyed however, due to practical problems in the field, only 5383 questionnaires were completed.Table 7
Sample worker distribution.
Firm category (no. of workers)
No. of sampled firms (1)
No. of workers sampled from each firm in category (2)
No. of sampled workers in category (3) = (1)*(2)
Less than 10
100
5
500
10–100
101
20
2020
Greater than100–1000
63
40
2520
More than 1000
11
50
550
Total
275
5590
Source: IDSC worker survey sampling note [14].


## 4. Survey Results: Effects of the Crisis

### 4.1. Production, Sales, and Exports by Activity, Ownership, Market Orientation, and Firm Size

There was a substantial decline in production, domestic sales, and exports between 2008 and 2009 (21 percent, 16 percent, and 22 percent, resp., Table8). Sales have already been declining since the year before (−16 percent in the year 2008), most likely on account of the 2007 tariff reductions that allowed imports to capture a substantial part of the domestic market. Exports have been declining steadily since 2006, with an accelerated decline in the year of the crisis. This steady decline can be attributed to both the end of the MFA and weakening public sector export performance.Table 8
Sample estimates for production, sales, and exports (2004–2009).
2004
2005
2006
2007
2008
2009
Level (LE millions) for 265 firms*
Real production
2511
2263
2298
2099
2034
1604
Real sales
1183
1158
1132
1203
1011
854
Real exports
1038
1013
1164
1081
970
755
Growth rate (%)
Real production
-
10
%
2%
-
9
%
-
3
%
-
21
%
Real sales
-
2
%
-
2
%
6%
-
16
%
-
16
%
Real exports
-
2
%
15%
-
7
%
-
10
%
-
22
%
Source: Author’s calculations based on IDSC firm questionnaire data [6].  *Note: these figures are calculated using sampling weights for all surveyed firms after dropping firms with missing observations. Firms that opened up after 2004 are also excluded from the analysis. Figures converted from nominal to real using CPI from world development indicators [15] and IMF financial statistics [16] (n=265).Both textiles and clothing have been hit by the crisis (Table9). For exports the fall has been largest in textiles21, falling by 46 percent, an absolute loss of LE 147 million amongst the sampled firms. But the decline in production is more pronounced in the clothing sector.Table 9
Sample estimates for production, sales, and exports by activity and market orientation (2008-2009).
Activity
Market orientation
Textile
Clothing
Exporting
Non-exporting
Total
QIZ
Non-QIZ
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
Level (LE millions)
Real production
1135
938
899
666
1096
733
593
545
345
326
2034
1604
Real sales
794
651
217
203
323
164
349
381
339
310
1011
854
Real exports
321
174
649
581
716
547
253
208
0
0
970
755
Growth rate 2008-2009 (%)
Real production
-
17
%
-
26
%
-
33
%
-
8
%
-
5
%
-
21
%
Real sales
-
18
%
-
6
%
-
49
%
9
%
-
8
%
-
16
%
Real exports
-
46
%
-
10
%
-
24
%
-
18
%
0
%
-
22
%
Source: Author’s calculations based on IDSC firm questionnaire data [6]; same note as Table 8 above.Amongst exporters, production in QIZ firms has fallen by one third, driven by sharp declines in both domestic sales and exports (Table9). These firms have lost half their domestic market (−49 percent) and a quarter of their export market (−24 percent). Non-QIZ firms have been also losing a substantial part of their export market (−18 percent), but these firms have increased their sales in the domestic market by 9 percent, quite likely in an attempt to counteract their export market losses. Non-exporting firms have lost 8 percent of their domestic market between the two years, which corresponds to a 5 percent decline in production.Both large and small firms have experienced substantial declines. Small firms (less than 50 workers) have lost a substantial part of their domestic market (−35 percent), though production has only fallen by 20 percent (Table10). About half the small-sized firms stated they accumulated inventories in response to the crisis. Medium and large firms had smaller declines in sales than small firms. For medium firms production fell by the same as sales, and rather more than sales in the case of large firms.Table 10
Sample estimates for production, sales, and exports by firm size and ownership (2008-2009).
Size
Ownership
Small
Medium
Large
Public
Private
Total
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
Level (LE millions)
Real production
107
86
177
156
1750
1362
254
272
1780
1334
2034
1604
Real sales
67
43
104
91
840
720
217
246
794
608
1011
854
Real exports
38
33
72
62
861
661
13.6
14
956
741
970
755
Growth rate 2008-2009 (%)
Real production
-
20
%
-
12
%
-
22
%
7%
-
25
%
-
21
%
Real sales
-
35
%
-
12
%
-
14
%
13%
-
23
%
-
16
%
Real exports
-
12
%
-
14
%
-
23
%
4%
-
23
%
-
22
%
Source: Author’s calculations based on IDSC firm questionnaire data [6]; same note as Table 8 above.The declines in production, domestic market sales and exports in the year of the crisis have mainly been concentrated in the private sector (Table10), which lost about a quarter of the size of both of its markets: domestic and export. Production has followed these declines very closely. The public sector, however, seems to be relatively flourishing in the crisis years, which appears surprising given the steady decline of that sector. However, this positive trend reflects the performance of just one of the six public sector firms in the sample. The other five firms have experienced sharp contractions. Without this single firm, reductions in public sector production, sales, and exports would be more pronounced in the sample. Table 11 gives public sector sample estimates during the year of the crisis without this firm’s data. It is evident that public production has also contracted by a quarter, also triggered by significant declines in export and domestic market sales.Table 11
Sample estimates for production, sales, and exports by ownership (2008-2009) without public sector outlier (firm # 136).
Public
Private
Total
2008
2009
2008
2009
2008
2009
Level (LE millions)
Real production
83
63
1780
1331
1863
1397
Real sales
49
41
794
608
1011
650
Real exports
10
9
956
741
970
750
Growth rate 2008-2009 (%)
Real production
-
24
%
-
25
%
-
25
%
Real sales
-
16
%
-
23
%
-
23
%
Real exports
-
8
%
-
23
%
-
22
%
Source: Author’s calculations based on IDSC firm questionnaire data [6]; same note as Table 8 above.


#### 4.1.1. Which Results Are Driven by the Crisis?

In order to be able to judge the extent to which the crisis has contributed to the decline in the year 2009, we need to follow the sample back a few years. According to the sample, the sector has been steadily shrinking since 2006 (Tables8, 12 and 13). The decline of the public sector is driven by spinning firms’ reduced demand of ginning firms’ cotton yarns [17] and consequently their own production. Long staple cotton prices have increased relative to the demand on spinning and weaving firms’ products. Reduced demand for fine yarns and high end products has also reduced local spinning and weaving companies’ consumption of Egyptian cotton. For these companies, imported cheap short-staple cottons have replaced long ones. As a result, total consumption of local spinning and weaving firms during Jan-July 2009 amounted to 38 thousand tons which is the lowest consumption of Egyptian cotton in 70 years. In addition to that is the termination of public investments to that sector. These factors have resulted in halts in production in several public sector cotton ginning, and spinning and weaving companies [17]. Thus, it is likely that for the public sector negative growth rates are not the result of the crisis (notice the negative trends since 2006).Table 12
Public sector sample estimates excluding outlier for production, sales, and exports (2004–2009).
2004
2005
2006
2007
2008
2009
Level (LE millions)*
Real production
128
144
123
107
83
63
Real sales
51
90
73
67
49
41
Real exports
21
20
17
14
10
9
Growth rate (%)
Real production
12%
-
15
%
-
13
%
-
22
%
-
24
%
Real sales
77%
-
18
%
-
9
%
-
26
%
-
16
%
Real exports
-
3
%
-
13
%
-
18
%
-
30
%
-
8
%
Source: Author’s calculations based on IDSC firm questionnaire data [6]. *Note: these figures are calculated using sampling weights for all 5 public sector firms excluding the outlier. Figures converted from nominal to real using CPI from World Development Indicators [15] and IMF Financial Statistics [16] (n=5).Table 13
Private sector sample estimates for production, sales, and exports (2004–2009).
2004
2005
2006
2007
2008
2009
Level (LE millions)*
Real production
2372
2100
2147
1857
1780
1334
Real sales
1122
1050
1030
1003
794
608
Real exports
1017
993
1146
747
956
741
Growth rate (%)
Real production
-
11
%
2
%
-
14
%
-
4
%
-
25
%
Real sales
-
6
%
-
2
%
-
3
%
-
21
%
-
23
%
Real exports
-
2
%
15
%
-
35
%
28
%
-
23
%
Source: Author’s calculations based on IDSC firm questionnaire data [6]. *Note: these figures are calculated using sampling weights after dropping firms with missing observations. Firms that opened up after 2004 are also excluded from the analysis. Figures converted from nominal to real using CPI from World Development Indicators [15] and IMF Financial Statistics [16] (n=259).In contrast, export demand has substantially dropped for the private sector due to the crisis (Table13). In fact, the private sector experienced substantial growth in exports in 2008 after a dip in 2007. Exports have likely picked up in 2008 due to the 2007 tariff reductions, which allowed cheaper imported inputs thus more exports. The crisis has unfortunately reversed this momentum for the private sector. This is so whilst domestic market sales have been falling already since 2005 for the private sector and since 2006 for public firms, due to increased competition from imported TC products (compare to Table 8).In summary, it is likely that shrinkage in thepublic sector has little to do with the crisis. For the private sector, however, shrinkages in domestic sales are largely independent of the crisis whilst those in exports are directly triggered by it.


#### 4.1.2. Reconciliation of Survey Data with Secondary Data: Nominal and Real

Tables8, 12, and 13 above show negative growth rates for domestic sales and production. But Figure 1 indicates increases in exports, domestic sales, and so production since around 2004 (the precise year differing by series). This apparent discrepancy is reconciled by ensuring all the data are reported in real terms, which the survey data already are. Figure 4 reports the same data as Figure 1, but converted to real Egyptian pounds. The trends in the two sets of data are now similar. There has been a declining trend in sales since 2001 and in production since 2002; this trend has not recovered as yet. Exports have risen in 2003 with the January devaluation of that year but have more or less remained steady since. If domestic sales continue to decline at this rate, without any offsetting increase from higher exports, then the industry will continue to decline. Other sources have reported the same declining trend: between the early 1980s and 2005 the share of TC in manufacturing value added fell by 10 percent, the employment share by 7 percent, and that for investment by 15 percent [30].Figure 4
TC Evolution (1997–2008): In Real Terms.Source: Same as Figure 1. Figures converted from nominal to real using CPI from World Development Indicators [15] and IMF Financial Statistics [16].


### 4.2. Employment and Industry Restructuring

#### 4.2.1. Substantial Job Losses

There has been a 3.2 percent decline in employment amongst firms in the sample (Table14), that is, 1,666 job losses throughout sampled firms. Relatively speaking, women (decline of 3.4 percent between 2007 and 2009), informal employees22 (decline by 10 percent), and low skilled and least educated workers have been the hardest hit. Eighty-one percent of the firms who reported laying off workers indicated that those laid off are illiterates and those who could just about read and write. But in absolute terms, the decline has been greatest amongst formal employees (1,464 losses versus 202 for informally employed workers).Table 14
Sample job losses by gender and employee formality status (2007–2009).
Formal
Informal
Females
Males
Total
Job losses
1,464
202
721
945
1,666
Share in job losses
88%
12%
43%
57%
100%
% Change in employment 2007–2009
-
2.9
%
-
10
%
-
3.4
%
-
2.98
%
-
3.2
%
Total sample employment in 2007
50711
2112
21148
31675
52823
Share in total employment in 2007
96%
4%
40%
60%
100%
Source: Author’s calculation based on firm questionnaire [6] using sampling weights.All job losses have been in textiles, not clothing. Clothing has experienced a modest growth in employment (1 percent) (Table15). In absolute terms, public and private sector firms share job losses equally. However, because employment in the private sector is more than 11-fold its public counterpart (see Table 15), the rate of job loss has been much higher in public firms, where 1 in every 5 workers have lost their job (−19 percent). In terms of market orientation, nonexporters (firms only serving the domestic TC market) are hit extremely hard, with three quarters of all job losses originating from these types of firms.Table 15
Sample job losses by activity, market orientation, and sector (2007–2009).
Clothing*
Textile
Public
Private
Exporters
Nonexporters
Total
Job losses
−295
1,961
849
817
425
1,241
1,666
Share in job losses
-
5
%
105%
51%
49%
26%
74%
100%
% Change in employment 2007–2009
1%
-
9
%
-
19
%
-
1.7
%
-
1
%
-
9
%
-
3.2
%
Total sample employment in 2007
30541
22282
4440
48383
38994
13829
52823
Share in total employment in 2007
58%
42%
8%
92%
74%
26%
100%
Source: Author’s calculations based on firm questionnaire [6] using sampling weights. *Negative numbers imply that jobs were created.Qualifying Industrial Zone (QIZ) firms, which are responsible for more than half of total sample employment, have actually created jobs (335) between the two years, despite the crisis (Table16). But this rise in employment is puzzling in light of the sharp declines in QIZ firms’ production by one third (Table 9). Similarly, clothing firms have created a few jobs but experienced a decline in production of a quarter. These seemingly paradoxical findings are driven by one QIZ clothing firm23, which increased employment by 120024 between 2008 and 200925.Table 16
Sample job losses by detailed market orientation (2007–2009).
Exporters
Nonexporters
Total
QIZ
Non-QIZ
Job losses
-
335
*
760
1,241
1,666
Share in job losses
-
20
%
46%
74%
100%
Percentage change in employment 2007–2009
1%
-
6
%
-
9
%
-
3.2
%
Total employment in 2007
27183
11811
13829
52823
Share in total employment in 2007
52%
22%
26%
100%
Source: Author’s calculation based on firm questionnaire [6] using sampling weights. *Negative numbers mean that jobs were created.Firms solely serving the domestic market are responsible for three quarters of all losses (Tables15 and 16), compared to their employment share of only a quarter (Tables 14 and 15). Non-QIZ exporting firms are responsible for the rest of the losses (Table 16).Nonexporters appear to have had excess labor, making it easier for them to purse job losses in response to the crisis. In 2007, non-exporting firms employed 35 workers per real unit of output whilst exporters employed 12 less, that is 23 workers for each unit of output. Thus, despite less relative decline in production for nonexporters (by 5 percent only compared to 24 percent for exporters, Table9), employment losses have been more than double that of exporters26 (Table 16). Hence, during the crisis, nonexporters have restructured to become relatively more efficient: rather than employing 1.527 times more workers per unit of real output than exporters in 2007, in 2009 they employed only 1.328 times more workers per real unit of output.With respect to firm size, large firms account for the bulk of job losses (77 percent, Table17). In fact, medium and large firms are responsible for more than 90 percent of overall job losses. But this is not surprising since small firms employ only 6 percent of overall sample employment. In relative terms, all three sizes are hit more or less in the same way (3 percent for both large and small and 4 percent for medium-size firms).Table 17
Job losses by firm size (2007–2009).
Small
Medium
Large
Total
Job losses (in sample)
98
285
1283
1,666
Share in job losses
6%
17%
77%
100%
Percentage change in employment 2007–2009
-
3
%
-
4
%
-
3
%
-
3.20
%
Total employment in 2007
3165
6409
43249
52823
Share in total employment in 2007
6%
30%
64%
100%
Source: Calculated by author based on IDSC TC firm questionnaire [6] using sampling weights.


#### 4.2.2. Identifying the Effect of the Crisis on Employment

Based on the above, we will assume in the following analysis that all public sector job losses are independent of the crisis, being part of a planned government strategy to liquidate the public sector and lay these workers off29. This assumption is supported by the fact that between 2007 and 2008 the public sector has lost 12,995 workers [17].Real private sector production has declined by 25 percent in the year of the crisis (Table13). As argued above, part of the decline in production is due to reduced domestic sales driven by increased competition from foreign products, and part is attributable to reduced exports on account of the crisis. Hence, the decline in private sector production on account of the crisis is taken as the total decline of 25 percent less than the precrisis (2004–2008) fall in production of −18 percent, which is assumed would have happened anyway (Table 18). That is, nearly three quarters (73 percent) of the reduction in production growth rate is attributable to the crisis. A similar calculation yields 2.3 percent of the decline in employment being on account of the crisis: that is, 594 jobs.Table 18
Overall job loss estimate in the industry attributable to the crisis (2007–2009).
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(
-
11
%
+
2
%
-
14
%
-
4
%
)
/
4
(1)-(2)
(
-
18
%
/
-
25
%
)
(4)*(5)
(5)-(6)
Real private sector production growth rate
Private sector job loss estimate
2008/2009
Average2004–2008
On account of the crisis
Percentage of overall growth reduction
Overall job losses
On account of crisis
Liberalization effect
-
25
%
-
7
%
-
18
%
73%
814
594
220
Source: Author’s calculation based on IDSC [6] survey data.The remainder of the job losses (220 given in column 7) is to be blamed on growing imports gradually replacing domestic production, a trend that had already started before the crisis. We may call that the effect of the sector’s liberalization. In summary, the crisis is responsible for a large part, precisely three quarters (column 4), of the slowdown of the sector.


#### 4.2.3. Restructuring of the Industry

There has been restructuring in response to the sector’s liberalization, the QIZ agreement, and possibly also in response to the crisis. Notably, there is evidence of a modest substitution effect whereby exporters have increased their, already significant, share in the domestic market, rising from 63 to 68 percent from 2004 to 2008, thereby increasing it from 63 to 68 percent (Table19). Domestic sales of nonexporters have been in continuing decline since 2004, though their market share rose slightly (from 33 to 36 percent) in 2009 as sales from QIZ exporters in particular fell more rapidly. So the 36 percent represents a rising share of a contracting market, the total value of domestic sales falling sharply across the period reflecting increased foreign competition since the liberalization of the sector, especially from China.Table 19
Domestic market sales distribution in the sample by export orientation.
2004
2005
Growth rate (2004/2005)
2006
Growth rate (2005/2006)
2007
Growth rate (2006/2007)
2008
Growth rate (2007/2008)
2009
Growth rate (2008/2009)
Level (in real LE millions)
Non-exporters
440
424
-
4
%
409
-
3
%
383
-
6
%
339
-
12
%
310
-
8
%
Exporters
QIZ exporters
506
466
-
8
%
475
2
%
458
-
4
%
323
-
29
%
164
-
49
%
Non-QIZ exporters
237
268
13
%
247
-
8
%
362
46
%
349
-
3
%
381
9
%
Total exporters
743
734
-
1
%
722
-
2
%
820
14
%
672
-
18
%
544
-
19
%
Domestic market share (%)
Non-exporters
37%
37%
36%
32%
33%
36%
Exporters
QIZ exporters
43%
40%
42%
38%
32%
19%
Non-QIZ exporters
20%
23%
22%
30%
35%
45%
Total exporters
63%
63%
64%
68%
67%
64%
Total
100%
100%
100%
100%
100%
100%
Memo item:
Real domestic sales (LE millions)
1183
1158
1132
1203
1011
854
Source: Author’s calculations based on IDSC firm questionnaire [6] using sampling weights.This restructuring may be explained by at least two factors. First, exporters are more than 1.5 times more efficient compared to producers serving the largely protected domestic market. According to the sample, average yearly productivity per worker is LE 43,590 per worker for export firms compared to only LE 28,864 for firms serving the domestic market. This higher efficiency allows firms to cut prices in the domestic market in order to capture market share30.Indeed, 61 percent of exporters in the sample cut prices in response to the crisis, with an average price reduction of 18 percent. Given their growing market share, it is likely that exporters were already reducing prices before the crisis. Fifty-five percent of producers for the domestic market31 also claim they have cut prices, but the aforementioned difference in efficiency has driven different results for market share.The second factor is the export subsidy offered by the Export Development Fund, which ranges from 8 to 10 percent of total export value. The TC sector is the main beneficiary of incentives offered by the fund, obtaining around 58 percent of all fund assistance [18]. The subsidy allows export firms to cross subsidize, thus further reinforcing their ability to cut prices and drive firms out of the domestic market. Hence this policy—which is very expensive in terms of the job losses it might prevent in exporting firms32—is having a damaging effect on domestic producers, accelerating job losses amongst those firms33.Yet a stronger restructuring trend has been particularly more pronounced within exporting firms. Producers in nonqualifying industrial zones (non-QIZ) have taken over the domestic market from their QIZ firm counterparts increasing their share by a quarter from 2004 to 2008, and by 13 percent in just one year (the year of the crisis). This trend has started not long after the ratification of the QIZ agreement. For example, in just one year between 2006 and 2007, non-QIZ firms have increased their domestic sales by about a half (46 percent) increasing their share by a third from 20 percent to 30 percent. Their sales increased again during the year of the crisis by 9 percent resulting in another 10 percent increase in market share. As a result, whilst non-QIZ firms capture about half of the domestic market (45) QIZ firms capture currently only a fifth of it (their share has declined from nearly a half (43 percent) in 2004 to 19 percent in 2009).Enjoying no preferential access to the US market, especially after the expiry of the MFA, and facing reduced worldwide export demand, non-QIZ exporting firms find the still largely protected34 domestic market attractive. Since the launch of the QIZ protocol in 2005, there has been a gradual decline in exports to the US from non-QIZ areas (Table 20) reflecting three potential movements: (1) switching of existing non-QIZ exporters to QIZ locations, or, alternatively, lobbying to have their locations included (and accordingly become QIZ firms); (2) new investments being created in QIZ zones, thus an expansion of QIZ firms by additional new firms; (3) exporting firms either downsizing, or switching wholly (i.e., exiting the export market altogether) or in part to the domestic market.Table 20
QIZ/non-QIZ TC and total exports to the US (2005–2009).
2004
2005
2006
2007
2008
2008 (Jan–Oct)
2009 (Jan–Oct)
Textiles
and
clothing
Level (million US$)
QIZ TC exports
0
252
632
730
776
655
662
Non QIZ TC exports to the US
580
375
187
145
139
119
98
Total TC exports to the US
580
627
819
875
915
775
759
Growth rate (%)
QIZ TC exports
151%
16%
6%
1%
Non QIZ TC exports to the US
-
35
%
-
50
%
-
23
%
-
4
%
-
18
%
Total TC exports to the US
8
%
31
%
7
%
5
%
-
2
%
All
commodities
Level (million US$)
Total QIZ exports
0
266
644
740
872
733
706
Total non QIZ exports to the US
1330
1825
1750
1640
1498
1234
1023
Total Egyptian exports to the US
1330
2091
2393
2380
2371
1967
1729
Growth rate (%)
Total QIZ exports
142%
15%
18%
−4%
Total non QIZ exports to the US
37
%
-
4
%
-
6
%
-
9
%
-
17
%
Total Egyptian exports to the US
57
%
14
%
-
1
%
-
0.4
%
-
12
%
Source: USITC [20].As is evident from the above analysis, non-QIZ firms are indeed increasing their share in the domestic market, that is, the third explanation in the previous paragraph. Also, there is substantial evidence that FDI has risen sharply since 2005, following the QIZ agreement35 (a tenfold increase compared to levels of 1996) (Figure 5), thus supporting the second argument above36. Indeed, investment in the sector has sharply increased by nearly 300 percent during the 13 years from 1995 to 2007, from a modest $89 million to $351 million (Table 21, Figure 5). This growth has been uneven, with growth hikes in 2000 and again in 2005. Thus, it is likely that all three factors suggested above have played a role. The balance between the three alternatives remains a matter for further investigation.Table 21
Investment in TC by nationality (1995, 2007) in US$ millions.
1995
2007
% change between 1995 & 2007
Domestic
76
227
199%
85%
65%
Arab
2
49
2350%
2%
14%
Foreign
11
75
582%
13%
21%
Total investment
89
351
294%
100%
100%
Source: GAFI [22]. *Issued capital used as proxy for investment.  *Data are converted from LE to US$ using the official exchange rate published.  *Data cover companies operating under law 8/1997 both inland and free zones, and companies organized by the companies law 159/1981.Figure 5
Evolution of FDI in TC Classified into Arab and Non-Arab (1995–2007).Source: GAFI [22]. *Issued capital used as proxy for investment. *Data are converted from LE to $US using the official exchange rate published.In summary, there is restructuring whereby producers unprotected by the QIZ agreement are turning to the largely protected domestic market. Moreover, about three quarters of the decline in private production and employment is attributable to the crisis. Contraction in domestic sales is largely independent of the crisis, whilst those in exports are directly set off by it. The remainder of the decline, however, is a more structural and gradual trend triggered by the changing global environment on the one hand and the sector’s own long inherent structural problems on the other. In real terms, the sector is in decline. The crisis has only exacerbated the contraction of an already struggling industry.


### 4.3. Social Dialogue: Is There Any?

Fourteen percent of firms’ managers and CEOs responded that there had been substantial job losses when directly asked if they had laid off workers in response to the crisis37. But the employment data in the survey suggest that a much higher percentage of firms—just under half (47 percent)—incurred job losses. Moreover, the number of reported job losses is only half the number of overall losses based on the answers collected directly from the books of the firm38. Approximately 40 percent of firms did not inform the worker before the layoff. The rest (60 percent, i.e., 24 firms) report they gave at least a week’s notice39. A majority (97 percent) claim to have given the worker all his/her financial entitlements after layoff. Surprisingly, only 7 percent of workers (285 workers) believe firms have actually laid off workers in response to the crisis.Virtually none of the firms reported consulting workers’ representatives/unions in relation to any measures undertaken in response to the crisis (Table22), and there was only one case of collective bargaining between firms and the affected workers. Collective bargaining takes place in cases of substantial layoffs or drastic employment measures in any one firm, hence, is likely to be low in the sample since only a quarter (27 percent) of the firms have had job losses of over 50 percent of their work force. On the other hand, 7 percent of the workers have reported some dialogue between them and high level management during the course of the crisis. Only 2 percent of all workers believe workers’ or trade unions play an active role in negotiation, suggesting either that there was indeed little consultation, or that the large majority of workers were not involved in any way in such consultations that did take place. Recent developments in labor law have made it easier for firms to lay off workers, making consultation less likely40.Table 22
Employment procedures other than layoffs undertaken in response to the crisis.
Procedures undertaken in response to the crisis
% of firms
Cancel extra work in firm
44
Stop new hiring
23
Reduction in daily working hours
9
Laying off temporary workers
5
Cancellation of extra pay and allowances
3
Productivity enhancing procedures
3
Wage reductions
2
Cancellation of monthly incentives
2
Reduction of social and other benefits
2
Granting open leave to permanent workers
1
Increase in unpaid additional work hours
0
Transfer of workers to other branches
0
Transfer of workers to other firms
0
Source: Calculated by author based on IDSC firm questionnaire [6].


### 4.4. Other Effects of the Crisis

#### 4.4.1. Firms’ Perspectives

Limited access to finance is perceived as the main effect of the crisis, followed by increases in production costs (according to 77 percent of respondents), then piling up of inventories (57 percent due to unsold production). Eighty-five of the firms have indicated that production costs have risen since September 2008 and an outstanding majority of those (92 percent) blame it on increases in costs of intermediate and raw materials.Only 8 percent of workers have reported ever receiving training on the job. Seventeen percent of firms have already reduced investments in machinery and 8 percent have reduced the already modest amount of training, but three quarters of firms have reduced capacity utilization (Table23).Table 23
Reductions in expenditures in response to the crisis.
Frequency
%  of Firms
Reduced capacity utilization
203
74
Cut expenditures
On machinery and equipment
47
17
On buildings
37
13
On training
22
8
On R&D
17
6
Source: Author’s calculation by author based on IDSC firm questionnaire [6].In line with the reduction in production, sales, and exports since September 2009, about 500 existing contracts have been cancelled in the sample with an overall value of LE 70 million (current prices). Most of the cancelled contracts (66 percent of them) were for garments. Some buyers have also been late in payments (reported by 14 firms) others have been particularly stringent when it comes to quality specifications (6 firms). On the suppliers’ side, suppliers have been demanding higher prices (17 percent of all sample firms), have reduced grace periods (15 percent), or have reduced contracted amounts (11 percent). Firms believe the government should give financial subsidies (66 percent of firms) and reduce the number of taxes levied (62 percent of firms) to ease the effect of the crisis on firms in the sector.


#### 4.4.2. Workers’ Perspective

Not all surveyed workers had heard of the crisis (only 70 percent of the 5383 workers had done so). Forty-two percent of those (1600 workers or 30 percent of sampled workers) believe the crisis affected them. Income-related effects top the list (Table24) followed by nonincome effects (e.g., working hours, fringe benefits...etc.).Table 24
Workers’ perception of firms’ reductions in expenditures due to the crisis.
No. workers
%
Reduction in
Income
1070
67
Bonuses
1043
65
Periodic salary raises
823
51
Working hours
614
38
Services firm provides to employees
611
38
Paid holidays
601
38
Fringe benefits (e.g., meals, transport)
545
34
Giving unpaid leave
463
29
Memo item:
Total number of workers stating they are affected by crisis
1600
100
Source: Calculated by author based on IDSC worker questionnaire [6].


#### 4.4.3. General Worker-Related Problems

The scarcity of trained and educated workers remains the top problem faced by firms in the industry (77 percent of firms). High resignation rates or turnover rates also represent a problem expressed by 40 percent of sample firms. More than half the firms of the sample thought that the youth have no desire to work in the sector mainly due to their belief that workers prefer desk work (as reported by 70 percent of firms), followed by low wages and salaries in the sector (60 percent of firms), and difficult work conditions such as large distance between work and home (31 percent).On the other hand, based on the workers’ questionnaire, only a fifth of them state that they have problems related to their job in the TC sector. Not surprisingly, modest salaries and wages top their list of reasons (65 percent of those stating to have problems) followed by fear of financial crisis repercussions (23 percent), and worker layoffs (18 percent of them).


## 4.1. Production, Sales, and Exports by Activity, Ownership, Market Orientation, and Firm Size

There was a substantial decline in production, domestic sales, and exports between 2008 and 2009 (21 percent, 16 percent, and 22 percent, resp., Table8). Sales have already been declining since the year before (−16 percent in the year 2008), most likely on account of the 2007 tariff reductions that allowed imports to capture a substantial part of the domestic market. Exports have been declining steadily since 2006, with an accelerated decline in the year of the crisis. This steady decline can be attributed to both the end of the MFA and weakening public sector export performance.Table 8
Sample estimates for production, sales, and exports (2004–2009).
2004
2005
2006
2007
2008
2009
Level (LE millions) for 265 firms*
Real production
2511
2263
2298
2099
2034
1604
Real sales
1183
1158
1132
1203
1011
854
Real exports
1038
1013
1164
1081
970
755
Growth rate (%)
Real production
-
10
%
2%
-
9
%
-
3
%
-
21
%
Real sales
-
2
%
-
2
%
6%
-
16
%
-
16
%
Real exports
-
2
%
15%
-
7
%
-
10
%
-
22
%
Source: Author’s calculations based on IDSC firm questionnaire data [6].  *Note: these figures are calculated using sampling weights for all surveyed firms after dropping firms with missing observations. Firms that opened up after 2004 are also excluded from the analysis. Figures converted from nominal to real using CPI from world development indicators [15] and IMF financial statistics [16] (n=265).Both textiles and clothing have been hit by the crisis (Table9). For exports the fall has been largest in textiles21, falling by 46 percent, an absolute loss of LE 147 million amongst the sampled firms. But the decline in production is more pronounced in the clothing sector.Table 9
Sample estimates for production, sales, and exports by activity and market orientation (2008-2009).
Activity
Market orientation
Textile
Clothing
Exporting
Non-exporting
Total
QIZ
Non-QIZ
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
Level (LE millions)
Real production
1135
938
899
666
1096
733
593
545
345
326
2034
1604
Real sales
794
651
217
203
323
164
349
381
339
310
1011
854
Real exports
321
174
649
581
716
547
253
208
0
0
970
755
Growth rate 2008-2009 (%)
Real production
-
17
%
-
26
%
-
33
%
-
8
%
-
5
%
-
21
%
Real sales
-
18
%
-
6
%
-
49
%
9
%
-
8
%
-
16
%
Real exports
-
46
%
-
10
%
-
24
%
-
18
%
0
%
-
22
%
Source: Author’s calculations based on IDSC firm questionnaire data [6]; same note as Table 8 above.Amongst exporters, production in QIZ firms has fallen by one third, driven by sharp declines in both domestic sales and exports (Table9). These firms have lost half their domestic market (−49 percent) and a quarter of their export market (−24 percent). Non-QIZ firms have been also losing a substantial part of their export market (−18 percent), but these firms have increased their sales in the domestic market by 9 percent, quite likely in an attempt to counteract their export market losses. Non-exporting firms have lost 8 percent of their domestic market between the two years, which corresponds to a 5 percent decline in production.Both large and small firms have experienced substantial declines. Small firms (less than 50 workers) have lost a substantial part of their domestic market (−35 percent), though production has only fallen by 20 percent (Table10). About half the small-sized firms stated they accumulated inventories in response to the crisis. Medium and large firms had smaller declines in sales than small firms. For medium firms production fell by the same as sales, and rather more than sales in the case of large firms.Table 10
Sample estimates for production, sales, and exports by firm size and ownership (2008-2009).
Size
Ownership
Small
Medium
Large
Public
Private
Total
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
2008
2009
Level (LE millions)
Real production
107
86
177
156
1750
1362
254
272
1780
1334
2034
1604
Real sales
67
43
104
91
840
720
217
246
794
608
1011
854
Real exports
38
33
72
62
861
661
13.6
14
956
741
970
755
Growth rate 2008-2009 (%)
Real production
-
20
%
-
12
%
-
22
%
7%
-
25
%
-
21
%
Real sales
-
35
%
-
12
%
-
14
%
13%
-
23
%
-
16
%
Real exports
-
12
%
-
14
%
-
23
%
4%
-
23
%
-
22
%
Source: Author’s calculations based on IDSC firm questionnaire data [6]; same note as Table 8 above.The declines in production, domestic market sales and exports in the year of the crisis have mainly been concentrated in the private sector (Table10), which lost about a quarter of the size of both of its markets: domestic and export. Production has followed these declines very closely. The public sector, however, seems to be relatively flourishing in the crisis years, which appears surprising given the steady decline of that sector. However, this positive trend reflects the performance of just one of the six public sector firms in the sample. The other five firms have experienced sharp contractions. Without this single firm, reductions in public sector production, sales, and exports would be more pronounced in the sample. Table 11 gives public sector sample estimates during the year of the crisis without this firm’s data. It is evident that public production has also contracted by a quarter, also triggered by significant declines in export and domestic market sales.Table 11
Sample estimates for production, sales, and exports by ownership (2008-2009) without public sector outlier (firm # 136).
Public
Private
Total
2008
2009
2008
2009
2008
2009
Level (LE millions)
Real production
83
63
1780
1331
1863
1397
Real sales
49
41
794
608
1011
650
Real exports
10
9
956
741
970
750
Growth rate 2008-2009 (%)
Real production
-
24
%
-
25
%
-
25
%
Real sales
-
16
%
-
23
%
-
23
%
Real exports
-
8
%
-
23
%
-
22
%
Source: Author’s calculations based on IDSC firm questionnaire data [6]; same note as Table 8 above.


### 4.1.1. Which Results Are Driven by the Crisis?

In order to be able to judge the extent to which the crisis has contributed to the decline in the year 2009, we need to follow the sample back a few years. According to the sample, the sector has been steadily shrinking since 2006 (Tables8, 12 and 13). The decline of the public sector is driven by spinning firms’ reduced demand of ginning firms’ cotton yarns [17] and consequently their own production. Long staple cotton prices have increased relative to the demand on spinning and weaving firms’ products. Reduced demand for fine yarns and high end products has also reduced local spinning and weaving companies’ consumption of Egyptian cotton. For these companies, imported cheap short-staple cottons have replaced long ones. As a result, total consumption of local spinning and weaving firms during Jan-July 2009 amounted to 38 thousand tons which is the lowest consumption of Egyptian cotton in 70 years. In addition to that is the termination of public investments to that sector. These factors have resulted in halts in production in several public sector cotton ginning, and spinning and weaving companies [17]. Thus, it is likely that for the public sector negative growth rates are not the result of the crisis (notice the negative trends since 2006).Table 12
Public sector sample estimates excluding outlier for production, sales, and exports (2004–2009).
2004
2005
2006
2007
2008
2009
Level (LE millions)*
Real production
128
144
123
107
83
63
Real sales
51
90
73
67
49
41
Real exports
21
20
17
14
10
9
Growth rate (%)
Real production
12%
-
15
%
-
13
%
-
22
%
-
24
%
Real sales
77%
-
18
%
-
9
%
-
26
%
-
16
%
Real exports
-
3
%
-
13
%
-
18
%
-
30
%
-
8
%
Source: Author’s calculations based on IDSC firm questionnaire data [6]. *Note: these figures are calculated using sampling weights for all 5 public sector firms excluding the outlier. Figures converted from nominal to real using CPI from World Development Indicators [15] and IMF Financial Statistics [16] (n=5).Table 13
Private sector sample estimates for production, sales, and exports (2004–2009).
2004
2005
2006
2007
2008
2009
Level (LE millions)*
Real production
2372
2100
2147
1857
1780
1334
Real sales
1122
1050
1030
1003
794
608
Real exports
1017
993
1146
747
956
741
Growth rate (%)
Real production
-
11
%
2
%
-
14
%
-
4
%
-
25
%
Real sales
-
6
%
-
2
%
-
3
%
-
21
%
-
23
%
Real exports
-
2
%
15
%
-
35
%
28
%
-
23
%
Source: Author’s calculations based on IDSC firm questionnaire data [6]. *Note: these figures are calculated using sampling weights after dropping firms with missing observations. Firms that opened up after 2004 are also excluded from the analysis. Figures converted from nominal to real using CPI from World Development Indicators [15] and IMF Financial Statistics [16] (n=259).In contrast, export demand has substantially dropped for the private sector due to the crisis (Table13). In fact, the private sector experienced substantial growth in exports in 2008 after a dip in 2007. Exports have likely picked up in 2008 due to the 2007 tariff reductions, which allowed cheaper imported inputs thus more exports. The crisis has unfortunately reversed this momentum for the private sector. This is so whilst domestic market sales have been falling already since 2005 for the private sector and since 2006 for public firms, due to increased competition from imported TC products (compare to Table 8).In summary, it is likely that shrinkage in thepublic sector has little to do with the crisis. For the private sector, however, shrinkages in domestic sales are largely independent of the crisis whilst those in exports are directly triggered by it.


### 4.1.2. Reconciliation of Survey Data with Secondary Data: Nominal and Real

Tables8, 12, and 13 above show negative growth rates for domestic sales and production. But Figure 1 indicates increases in exports, domestic sales, and so production since around 2004 (the precise year differing by series). This apparent discrepancy is reconciled by ensuring all the data are reported in real terms, which the survey data already are. Figure 4 reports the same data as Figure 1, but converted to real Egyptian pounds. The trends in the two sets of data are now similar. There has been a declining trend in sales since 2001 and in production since 2002; this trend has not recovered as yet. Exports have risen in 2003 with the January devaluation of that year but have more or less remained steady since. If domestic sales continue to decline at this rate, without any offsetting increase from higher exports, then the industry will continue to decline. Other sources have reported the same declining trend: between the early 1980s and 2005 the share of TC in manufacturing value added fell by 10 percent, the employment share by 7 percent, and that for investment by 15 percent [30].Figure 4
TC Evolution (1997–2008): In Real Terms.Source: Same as Figure 1. Figures converted from nominal to real using CPI from World Development Indicators [15] and IMF Financial Statistics [16].


## 4.1.1. Which Results Are Driven by the Crisis?

In order to be able to judge the extent to which the crisis has contributed to the decline in the year 2009, we need to follow the sample back a few years. According to the sample, the sector has been steadily shrinking since 2006 (Tables8, 12 and 13). The decline of the public sector is driven by spinning firms’ reduced demand of ginning firms’ cotton yarns [17] and consequently their own production. Long staple cotton prices have increased relative to the demand on spinning and weaving firms’ products. Reduced demand for fine yarns and high end products has also reduced local spinning and weaving companies’ consumption of Egyptian cotton. For these companies, imported cheap short-staple cottons have replaced long ones. As a result, total consumption of local spinning and weaving firms during Jan-July 2009 amounted to 38 thousand tons which is the lowest consumption of Egyptian cotton in 70 years. In addition to that is the termination of public investments to that sector. These factors have resulted in halts in production in several public sector cotton ginning, and spinning and weaving companies [17]. Thus, it is likely that for the public sector negative growth rates are not the result of the crisis (notice the negative trends since 2006).Table 12
Public sector sample estimates excluding outlier for production, sales, and exports (2004–2009).
2004
2005
2006
2007
2008
2009
Level (LE millions)*
Real production
128
144
123
107
83
63
Real sales
51
90
73
67
49
41
Real exports
21
20
17
14
10
9
Growth rate (%)
Real production
12%
-
15
%
-
13
%
-
22
%
-
24
%
Real sales
77%
-
18
%
-
9
%
-
26
%
-
16
%
Real exports
-
3
%
-
13
%
-
18
%
-
30
%
-
8
%
Source: Author’s calculations based on IDSC firm questionnaire data [6]. *Note: these figures are calculated using sampling weights for all 5 public sector firms excluding the outlier. Figures converted from nominal to real using CPI from World Development Indicators [15] and IMF Financial Statistics [16] (n=5).Table 13
Private sector sample estimates for production, sales, and exports (2004–2009).
2004
2005
2006
2007
2008
2009
Level (LE millions)*
Real production
2372
2100
2147
1857
1780
1334
Real sales
1122
1050
1030
1003
794
608
Real exports
1017
993
1146
747
956
741
Growth rate (%)
Real production
-
11
%
2
%
-
14
%
-
4
%
-
25
%
Real sales
-
6
%
-
2
%
-
3
%
-
21
%
-
23
%
Real exports
-
2
%
15
%
-
35
%
28
%
-
23
%
Source: Author’s calculations based on IDSC firm questionnaire data [6]. *Note: these figures are calculated using sampling weights after dropping firms with missing observations. Firms that opened up after 2004 are also excluded from the analysis. Figures converted from nominal to real using CPI from World Development Indicators [15] and IMF Financial Statistics [16] (n=259).In contrast, export demand has substantially dropped for the private sector due to the crisis (Table13). In fact, the private sector experienced substantial growth in exports in 2008 after a dip in 2007. Exports have likely picked up in 2008 due to the 2007 tariff reductions, which allowed cheaper imported inputs thus more exports. The crisis has unfortunately reversed this momentum for the private sector. This is so whilst domestic market sales have been falling already since 2005 for the private sector and since 2006 for public firms, due to increased competition from imported TC products (compare to Table 8).In summary, it is likely that shrinkage in thepublic sector has little to do with the crisis. For the private sector, however, shrinkages in domestic sales are largely independent of the crisis whilst those in exports are directly triggered by it.


## 4.1.2. Reconciliation of Survey Data with Secondary Data: Nominal and Real

Tables8, 12, and 13 above show negative growth rates for domestic sales and production. But Figure 1 indicates increases in exports, domestic sales, and so production since around 2004 (the precise year differing by series). This apparent discrepancy is reconciled by ensuring all the data are reported in real terms, which the survey data already are. Figure 4 reports the same data as Figure 1, but converted to real Egyptian pounds. The trends in the two sets of data are now similar. There has been a declining trend in sales since 2001 and in production since 2002; this trend has not recovered as yet. Exports have risen in 2003 with the January devaluation of that year but have more or less remained steady since. If domestic sales continue to decline at this rate, without any offsetting increase from higher exports, then the industry will continue to decline. Other sources have reported the same declining trend: between the early 1980s and 2005 the share of TC in manufacturing value added fell by 10 percent, the employment share by 7 percent, and that for investment by 15 percent [30].Figure 4
TC Evolution (1997–2008): In Real Terms.Source: Same as Figure 1. Figures converted from nominal to real using CPI from World Development Indicators [15] and IMF Financial Statistics [16].


## 4.2. Employment and Industry Restructuring

### 4.2.1. Substantial Job Losses

There has been a 3.2 percent decline in employment amongst firms in the sample (Table14), that is, 1,666 job losses throughout sampled firms. Relatively speaking, women (decline of 3.4 percent between 2007 and 2009), informal employees22 (decline by 10 percent), and low skilled and least educated workers have been the hardest hit. Eighty-one percent of the firms who reported laying off workers indicated that those laid off are illiterates and those who could just about read and write. But in absolute terms, the decline has been greatest amongst formal employees (1,464 losses versus 202 for informally employed workers).Table 14
Sample job losses by gender and employee formality status (2007–2009).
Formal
Informal
Females
Males
Total
Job losses
1,464
202
721
945
1,666
Share in job losses
88%
12%
43%
57%
100%
% Change in employment 2007–2009
-
2.9
%
-
10
%
-
3.4
%
-
2.98
%
-
3.2
%
Total sample employment in 2007
50711
2112
21148
31675
52823
Share in total employment in 2007
96%
4%
40%
60%
100%
Source: Author’s calculation based on firm questionnaire [6] using sampling weights.All job losses have been in textiles, not clothing. Clothing has experienced a modest growth in employment (1 percent) (Table15). In absolute terms, public and private sector firms share job losses equally. However, because employment in the private sector is more than 11-fold its public counterpart (see Table 15), the rate of job loss has been much higher in public firms, where 1 in every 5 workers have lost their job (−19 percent). In terms of market orientation, nonexporters (firms only serving the domestic TC market) are hit extremely hard, with three quarters of all job losses originating from these types of firms.Table 15
Sample job losses by activity, market orientation, and sector (2007–2009).
Clothing*
Textile
Public
Private
Exporters
Nonexporters
Total
Job losses
−295
1,961
849
817
425
1,241
1,666
Share in job losses
-
5
%
105%
51%
49%
26%
74%
100%
% Change in employment 2007–2009
1%
-
9
%
-
19
%
-
1.7
%
-
1
%
-
9
%
-
3.2
%
Total sample employment in 2007
30541
22282
4440
48383
38994
13829
52823
Share in total employment in 2007
58%
42%
8%
92%
74%
26%
100%
Source: Author’s calculations based on firm questionnaire [6] using sampling weights. *Negative numbers imply that jobs were created.Qualifying Industrial Zone (QIZ) firms, which are responsible for more than half of total sample employment, have actually created jobs (335) between the two years, despite the crisis (Table16). But this rise in employment is puzzling in light of the sharp declines in QIZ firms’ production by one third (Table 9). Similarly, clothing firms have created a few jobs but experienced a decline in production of a quarter. These seemingly paradoxical findings are driven by one QIZ clothing firm23, which increased employment by 120024 between 2008 and 200925.Table 16
Sample job losses by detailed market orientation (2007–2009).
Exporters
Nonexporters
Total
QIZ
Non-QIZ
Job losses
-
335
*
760
1,241
1,666
Share in job losses
-
20
%
46%
74%
100%
Percentage change in employment 2007–2009
1%
-
6
%
-
9
%
-
3.2
%
Total employment in 2007
27183
11811
13829
52823
Share in total employment in 2007
52%
22%
26%
100%
Source: Author’s calculation based on firm questionnaire [6] using sampling weights. *Negative numbers mean that jobs were created.Firms solely serving the domestic market are responsible for three quarters of all losses (Tables15 and 16), compared to their employment share of only a quarter (Tables 14 and 15). Non-QIZ exporting firms are responsible for the rest of the losses (Table 16).Nonexporters appear to have had excess labor, making it easier for them to purse job losses in response to the crisis. In 2007, non-exporting firms employed 35 workers per real unit of output whilst exporters employed 12 less, that is 23 workers for each unit of output. Thus, despite less relative decline in production for nonexporters (by 5 percent only compared to 24 percent for exporters, Table9), employment losses have been more than double that of exporters26 (Table 16). Hence, during the crisis, nonexporters have restructured to become relatively more efficient: rather than employing 1.527 times more workers per unit of real output than exporters in 2007, in 2009 they employed only 1.328 times more workers per real unit of output.With respect to firm size, large firms account for the bulk of job losses (77 percent, Table17). In fact, medium and large firms are responsible for more than 90 percent of overall job losses. But this is not surprising since small firms employ only 6 percent of overall sample employment. In relative terms, all three sizes are hit more or less in the same way (3 percent for both large and small and 4 percent for medium-size firms).Table 17
Job losses by firm size (2007–2009).
Small
Medium
Large
Total
Job losses (in sample)
98
285
1283
1,666
Share in job losses
6%
17%
77%
100%
Percentage change in employment 2007–2009
-
3
%
-
4
%
-
3
%
-
3.20
%
Total employment in 2007
3165
6409
43249
52823
Share in total employment in 2007
6%
30%
64%
100%
Source: Calculated by author based on IDSC TC firm questionnaire [6] using sampling weights.


### 4.2.2. Identifying the Effect of the Crisis on Employment

Based on the above, we will assume in the following analysis that all public sector job losses are independent of the crisis, being part of a planned government strategy to liquidate the public sector and lay these workers off29. This assumption is supported by the fact that between 2007 and 2008 the public sector has lost 12,995 workers [17].Real private sector production has declined by 25 percent in the year of the crisis (Table13). As argued above, part of the decline in production is due to reduced domestic sales driven by increased competition from foreign products, and part is attributable to reduced exports on account of the crisis. Hence, the decline in private sector production on account of the crisis is taken as the total decline of 25 percent less than the precrisis (2004–2008) fall in production of −18 percent, which is assumed would have happened anyway (Table 18). That is, nearly three quarters (73 percent) of the reduction in production growth rate is attributable to the crisis. A similar calculation yields 2.3 percent of the decline in employment being on account of the crisis: that is, 594 jobs.Table 18
Overall job loss estimate in the industry attributable to the crisis (2007–2009).
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(
-
11
%
+
2
%
-
14
%
-
4
%
)
/
4
(1)-(2)
(
-
18
%
/
-
25
%
)
(4)*(5)
(5)-(6)
Real private sector production growth rate
Private sector job loss estimate
2008/2009
Average2004–2008
On account of the crisis
Percentage of overall growth reduction
Overall job losses
On account of crisis
Liberalization effect
-
25
%
-
7
%
-
18
%
73%
814
594
220
Source: Author’s calculation based on IDSC [6] survey data.The remainder of the job losses (220 given in column 7) is to be blamed on growing imports gradually replacing domestic production, a trend that had already started before the crisis. We may call that the effect of the sector’s liberalization. In summary, the crisis is responsible for a large part, precisely three quarters (column 4), of the slowdown of the sector.


### 4.2.3. Restructuring of the Industry

There has been restructuring in response to the sector’s liberalization, the QIZ agreement, and possibly also in response to the crisis. Notably, there is evidence of a modest substitution effect whereby exporters have increased their, already significant, share in the domestic market, rising from 63 to 68 percent from 2004 to 2008, thereby increasing it from 63 to 68 percent (Table19). Domestic sales of nonexporters have been in continuing decline since 2004, though their market share rose slightly (from 33 to 36 percent) in 2009 as sales from QIZ exporters in particular fell more rapidly. So the 36 percent represents a rising share of a contracting market, the total value of domestic sales falling sharply across the period reflecting increased foreign competition since the liberalization of the sector, especially from China.Table 19
Domestic market sales distribution in the sample by export orientation.
2004
2005
Growth rate (2004/2005)
2006
Growth rate (2005/2006)
2007
Growth rate (2006/2007)
2008
Growth rate (2007/2008)
2009
Growth rate (2008/2009)
Level (in real LE millions)
Non-exporters
440
424
-
4
%
409
-
3
%
383
-
6
%
339
-
12
%
310
-
8
%
Exporters
QIZ exporters
506
466
-
8
%
475
2
%
458
-
4
%
323
-
29
%
164
-
49
%
Non-QIZ exporters
237
268
13
%
247
-
8
%
362
46
%
349
-
3
%
381
9
%
Total exporters
743
734
-
1
%
722
-
2
%
820
14
%
672
-
18
%
544
-
19
%
Domestic market share (%)
Non-exporters
37%
37%
36%
32%
33%
36%
Exporters
QIZ exporters
43%
40%
42%
38%
32%
19%
Non-QIZ exporters
20%
23%
22%
30%
35%
45%
Total exporters
63%
63%
64%
68%
67%
64%
Total
100%
100%
100%
100%
100%
100%
Memo item:
Real domestic sales (LE millions)
1183
1158
1132
1203
1011
854
Source: Author’s calculations based on IDSC firm questionnaire [6] using sampling weights.This restructuring may be explained by at least two factors. First, exporters are more than 1.5 times more efficient compared to producers serving the largely protected domestic market. According to the sample, average yearly productivity per worker is LE 43,590 per worker for export firms compared to only LE 28,864 for firms serving the domestic market. This higher efficiency allows firms to cut prices in the domestic market in order to capture market share30.Indeed, 61 percent of exporters in the sample cut prices in response to the crisis, with an average price reduction of 18 percent. Given their growing market share, it is likely that exporters were already reducing prices before the crisis. Fifty-five percent of producers for the domestic market31 also claim they have cut prices, but the aforementioned difference in efficiency has driven different results for market share.The second factor is the export subsidy offered by the Export Development Fund, which ranges from 8 to 10 percent of total export value. The TC sector is the main beneficiary of incentives offered by the fund, obtaining around 58 percent of all fund assistance [18]. The subsidy allows export firms to cross subsidize, thus further reinforcing their ability to cut prices and drive firms out of the domestic market. Hence this policy—which is very expensive in terms of the job losses it might prevent in exporting firms32—is having a damaging effect on domestic producers, accelerating job losses amongst those firms33.Yet a stronger restructuring trend has been particularly more pronounced within exporting firms. Producers in nonqualifying industrial zones (non-QIZ) have taken over the domestic market from their QIZ firm counterparts increasing their share by a quarter from 2004 to 2008, and by 13 percent in just one year (the year of the crisis). This trend has started not long after the ratification of the QIZ agreement. For example, in just one year between 2006 and 2007, non-QIZ firms have increased their domestic sales by about a half (46 percent) increasing their share by a third from 20 percent to 30 percent. Their sales increased again during the year of the crisis by 9 percent resulting in another 10 percent increase in market share. As a result, whilst non-QIZ firms capture about half of the domestic market (45) QIZ firms capture currently only a fifth of it (their share has declined from nearly a half (43 percent) in 2004 to 19 percent in 2009).Enjoying no preferential access to the US market, especially after the expiry of the MFA, and facing reduced worldwide export demand, non-QIZ exporting firms find the still largely protected34 domestic market attractive. Since the launch of the QIZ protocol in 2005, there has been a gradual decline in exports to the US from non-QIZ areas (Table 20) reflecting three potential movements: (1) switching of existing non-QIZ exporters to QIZ locations, or, alternatively, lobbying to have their locations included (and accordingly become QIZ firms); (2) new investments being created in QIZ zones, thus an expansion of QIZ firms by additional new firms; (3) exporting firms either downsizing, or switching wholly (i.e., exiting the export market altogether) or in part to the domestic market.Table 20
QIZ/non-QIZ TC and total exports to the US (2005–2009).
2004
2005
2006
2007
2008
2008 (Jan–Oct)
2009 (Jan–Oct)
Textiles
and
clothing
Level (million US$)
QIZ TC exports
0
252
632
730
776
655
662
Non QIZ TC exports to the US
580
375
187
145
139
119
98
Total TC exports to the US
580
627
819
875
915
775
759
Growth rate (%)
QIZ TC exports
151%
16%
6%
1%
Non QIZ TC exports to the US
-
35
%
-
50
%
-
23
%
-
4
%
-
18
%
Total TC exports to the US
8
%
31
%
7
%
5
%
-
2
%
All
commodities
Level (million US$)
Total QIZ exports
0
266
644
740
872
733
706
Total non QIZ exports to the US
1330
1825
1750
1640
1498
1234
1023
Total Egyptian exports to the US
1330
2091
2393
2380
2371
1967
1729
Growth rate (%)
Total QIZ exports
142%
15%
18%
−4%
Total non QIZ exports to the US
37
%
-
4
%
-
6
%
-
9
%
-
17
%
Total Egyptian exports to the US
57
%
14
%
-
1
%
-
0.4
%
-
12
%
Source: USITC [20].As is evident from the above analysis, non-QIZ firms are indeed increasing their share in the domestic market, that is, the third explanation in the previous paragraph. Also, there is substantial evidence that FDI has risen sharply since 2005, following the QIZ agreement35 (a tenfold increase compared to levels of 1996) (Figure 5), thus supporting the second argument above36. Indeed, investment in the sector has sharply increased by nearly 300 percent during the 13 years from 1995 to 2007, from a modest $89 million to $351 million (Table 21, Figure 5). This growth has been uneven, with growth hikes in 2000 and again in 2005. Thus, it is likely that all three factors suggested above have played a role. The balance between the three alternatives remains a matter for further investigation.Table 21
Investment in TC by nationality (1995, 2007) in US$ millions.
1995
2007
% change between 1995 & 2007
Domestic
76
227
199%
85%
65%
Arab
2
49
2350%
2%
14%
Foreign
11
75
582%
13%
21%
Total investment
89
351
294%
100%
100%
Source: GAFI [22]. *Issued capital used as proxy for investment.  *Data are converted from LE to US$ using the official exchange rate published.  *Data cover companies operating under law 8/1997 both inland and free zones, and companies organized by the companies law 159/1981.Figure 5
Evolution of FDI in TC Classified into Arab and Non-Arab (1995–2007).Source: GAFI [22]. *Issued capital used as proxy for investment. *Data are converted from LE to $US using the official exchange rate published.In summary, there is restructuring whereby producers unprotected by the QIZ agreement are turning to the largely protected domestic market. Moreover, about three quarters of the decline in private production and employment is attributable to the crisis. Contraction in domestic sales is largely independent of the crisis, whilst those in exports are directly set off by it. The remainder of the decline, however, is a more structural and gradual trend triggered by the changing global environment on the one hand and the sector’s own long inherent structural problems on the other. In real terms, the sector is in decline. The crisis has only exacerbated the contraction of an already struggling industry.


## 4.2.1. Substantial Job Losses

There has been a 3.2 percent decline in employment amongst firms in the sample (Table14), that is, 1,666 job losses throughout sampled firms. Relatively speaking, women (decline of 3.4 percent between 2007 and 2009), informal employees22 (decline by 10 percent), and low skilled and least educated workers have been the hardest hit. Eighty-one percent of the firms who reported laying off workers indicated that those laid off are illiterates and those who could just about read and write. But in absolute terms, the decline has been greatest amongst formal employees (1,464 losses versus 202 for informally employed workers).Table 14
Sample job losses by gender and employee formality status (2007–2009).
Formal
Informal
Females
Males
Total
Job losses
1,464
202
721
945
1,666
Share in job losses
88%
12%
43%
57%
100%
% Change in employment 2007–2009
-
2.9
%
-
10
%
-
3.4
%
-
2.98
%
-
3.2
%
Total sample employment in 2007
50711
2112
21148
31675
52823
Share in total employment in 2007
96%
4%
40%
60%
100%
Source: Author’s calculation based on firm questionnaire [6] using sampling weights.All job losses have been in textiles, not clothing. Clothing has experienced a modest growth in employment (1 percent) (Table15). In absolute terms, public and private sector firms share job losses equally. However, because employment in the private sector is more than 11-fold its public counterpart (see Table 15), the rate of job loss has been much higher in public firms, where 1 in every 5 workers have lost their job (−19 percent). In terms of market orientation, nonexporters (firms only serving the domestic TC market) are hit extremely hard, with three quarters of all job losses originating from these types of firms.Table 15
Sample job losses by activity, market orientation, and sector (2007–2009).
Clothing*
Textile
Public
Private
Exporters
Nonexporters
Total
Job losses
−295
1,961
849
817
425
1,241
1,666
Share in job losses
-
5
%
105%
51%
49%
26%
74%
100%
% Change in employment 2007–2009
1%
-
9
%
-
19
%
-
1.7
%
-
1
%
-
9
%
-
3.2
%
Total sample employment in 2007
30541
22282
4440
48383
38994
13829
52823
Share in total employment in 2007
58%
42%
8%
92%
74%
26%
100%
Source: Author’s calculations based on firm questionnaire [6] using sampling weights. *Negative numbers imply that jobs were created.Qualifying Industrial Zone (QIZ) firms, which are responsible for more than half of total sample employment, have actually created jobs (335) between the two years, despite the crisis (Table16). But this rise in employment is puzzling in light of the sharp declines in QIZ firms’ production by one third (Table 9). Similarly, clothing firms have created a few jobs but experienced a decline in production of a quarter. These seemingly paradoxical findings are driven by one QIZ clothing firm23, which increased employment by 120024 between 2008 and 200925.Table 16
Sample job losses by detailed market orientation (2007–2009).
Exporters
Nonexporters
Total
QIZ
Non-QIZ
Job losses
-
335
*
760
1,241
1,666
Share in job losses
-
20
%
46%
74%
100%
Percentage change in employment 2007–2009
1%
-
6
%
-
9
%
-
3.2
%
Total employment in 2007
27183
11811
13829
52823
Share in total employment in 2007
52%
22%
26%
100%
Source: Author’s calculation based on firm questionnaire [6] using sampling weights. *Negative numbers mean that jobs were created.Firms solely serving the domestic market are responsible for three quarters of all losses (Tables15 and 16), compared to their employment share of only a quarter (Tables 14 and 15). Non-QIZ exporting firms are responsible for the rest of the losses (Table 16).Nonexporters appear to have had excess labor, making it easier for them to purse job losses in response to the crisis. In 2007, non-exporting firms employed 35 workers per real unit of output whilst exporters employed 12 less, that is 23 workers for each unit of output. Thus, despite less relative decline in production for nonexporters (by 5 percent only compared to 24 percent for exporters, Table9), employment losses have been more than double that of exporters26 (Table 16). Hence, during the crisis, nonexporters have restructured to become relatively more efficient: rather than employing 1.527 times more workers per unit of real output than exporters in 2007, in 2009 they employed only 1.328 times more workers per real unit of output.With respect to firm size, large firms account for the bulk of job losses (77 percent, Table17). In fact, medium and large firms are responsible for more than 90 percent of overall job losses. But this is not surprising since small firms employ only 6 percent of overall sample employment. In relative terms, all three sizes are hit more or less in the same way (3 percent for both large and small and 4 percent for medium-size firms).Table 17
Job losses by firm size (2007–2009).
Small
Medium
Large
Total
Job losses (in sample)
98
285
1283
1,666
Share in job losses
6%
17%
77%
100%
Percentage change in employment 2007–2009
-
3
%
-
4
%
-
3
%
-
3.20
%
Total employment in 2007
3165
6409
43249
52823
Share in total employment in 2007
6%
30%
64%
100%
Source: Calculated by author based on IDSC TC firm questionnaire [6] using sampling weights.


## 4.2.2. Identifying the Effect of the Crisis on Employment

Based on the above, we will assume in the following analysis that all public sector job losses are independent of the crisis, being part of a planned government strategy to liquidate the public sector and lay these workers off29. This assumption is supported by the fact that between 2007 and 2008 the public sector has lost 12,995 workers [17].Real private sector production has declined by 25 percent in the year of the crisis (Table13). As argued above, part of the decline in production is due to reduced domestic sales driven by increased competition from foreign products, and part is attributable to reduced exports on account of the crisis. Hence, the decline in private sector production on account of the crisis is taken as the total decline of 25 percent less than the precrisis (2004–2008) fall in production of −18 percent, which is assumed would have happened anyway (Table 18). That is, nearly three quarters (73 percent) of the reduction in production growth rate is attributable to the crisis. A similar calculation yields 2.3 percent of the decline in employment being on account of the crisis: that is, 594 jobs.Table 18
Overall job loss estimate in the industry attributable to the crisis (2007–2009).
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(
-
11
%
+
2
%
-
14
%
-
4
%
)
/
4
(1)-(2)
(
-
18
%
/
-
25
%
)
(4)*(5)
(5)-(6)
Real private sector production growth rate
Private sector job loss estimate
2008/2009
Average2004–2008
On account of the crisis
Percentage of overall growth reduction
Overall job losses
On account of crisis
Liberalization effect
-
25
%
-
7
%
-
18
%
73%
814
594
220
Source: Author’s calculation based on IDSC [6] survey data.The remainder of the job losses (220 given in column 7) is to be blamed on growing imports gradually replacing domestic production, a trend that had already started before the crisis. We may call that the effect of the sector’s liberalization. In summary, the crisis is responsible for a large part, precisely three quarters (column 4), of the slowdown of the sector.


## 4.2.3. Restructuring of the Industry

There has been restructuring in response to the sector’s liberalization, the QIZ agreement, and possibly also in response to the crisis. Notably, there is evidence of a modest substitution effect whereby exporters have increased their, already significant, share in the domestic market, rising from 63 to 68 percent from 2004 to 2008, thereby increasing it from 63 to 68 percent (Table19). Domestic sales of nonexporters have been in continuing decline since 2004, though their market share rose slightly (from 33 to 36 percent) in 2009 as sales from QIZ exporters in particular fell more rapidly. So the 36 percent represents a rising share of a contracting market, the total value of domestic sales falling sharply across the period reflecting increased foreign competition since the liberalization of the sector, especially from China.Table 19
Domestic market sales distribution in the sample by export orientation.
2004
2005
Growth rate (2004/2005)
2006
Growth rate (2005/2006)
2007
Growth rate (2006/2007)
2008
Growth rate (2007/2008)
2009
Growth rate (2008/2009)
Level (in real LE millions)
Non-exporters
440
424
-
4
%
409
-
3
%
383
-
6
%
339
-
12
%
310
-
8
%
Exporters
QIZ exporters
506
466
-
8
%
475
2
%
458
-
4
%
323
-
29
%
164
-
49
%
Non-QIZ exporters
237
268
13
%
247
-
8
%
362
46
%
349
-
3
%
381
9
%
Total exporters
743
734
-
1
%
722
-
2
%
820
14
%
672
-
18
%
544
-
19
%
Domestic market share (%)
Non-exporters
37%
37%
36%
32%
33%
36%
Exporters
QIZ exporters
43%
40%
42%
38%
32%
19%
Non-QIZ exporters
20%
23%
22%
30%
35%
45%
Total exporters
63%
63%
64%
68%
67%
64%
Total
100%
100%
100%
100%
100%
100%
Memo item:
Real domestic sales (LE millions)
1183
1158
1132
1203
1011
854
Source: Author’s calculations based on IDSC firm questionnaire [6] using sampling weights.This restructuring may be explained by at least two factors. First, exporters are more than 1.5 times more efficient compared to producers serving the largely protected domestic market. According to the sample, average yearly productivity per worker is LE 43,590 per worker for export firms compared to only LE 28,864 for firms serving the domestic market. This higher efficiency allows firms to cut prices in the domestic market in order to capture market share30.Indeed, 61 percent of exporters in the sample cut prices in response to the crisis, with an average price reduction of 18 percent. Given their growing market share, it is likely that exporters were already reducing prices before the crisis. Fifty-five percent of producers for the domestic market31 also claim they have cut prices, but the aforementioned difference in efficiency has driven different results for market share.The second factor is the export subsidy offered by the Export Development Fund, which ranges from 8 to 10 percent of total export value. The TC sector is the main beneficiary of incentives offered by the fund, obtaining around 58 percent of all fund assistance [18]. The subsidy allows export firms to cross subsidize, thus further reinforcing their ability to cut prices and drive firms out of the domestic market. Hence this policy—which is very expensive in terms of the job losses it might prevent in exporting firms32—is having a damaging effect on domestic producers, accelerating job losses amongst those firms33.Yet a stronger restructuring trend has been particularly more pronounced within exporting firms. Producers in nonqualifying industrial zones (non-QIZ) have taken over the domestic market from their QIZ firm counterparts increasing their share by a quarter from 2004 to 2008, and by 13 percent in just one year (the year of the crisis). This trend has started not long after the ratification of the QIZ agreement. For example, in just one year between 2006 and 2007, non-QIZ firms have increased their domestic sales by about a half (46 percent) increasing their share by a third from 20 percent to 30 percent. Their sales increased again during the year of the crisis by 9 percent resulting in another 10 percent increase in market share. As a result, whilst non-QIZ firms capture about half of the domestic market (45) QIZ firms capture currently only a fifth of it (their share has declined from nearly a half (43 percent) in 2004 to 19 percent in 2009).Enjoying no preferential access to the US market, especially after the expiry of the MFA, and facing reduced worldwide export demand, non-QIZ exporting firms find the still largely protected34 domestic market attractive. Since the launch of the QIZ protocol in 2005, there has been a gradual decline in exports to the US from non-QIZ areas (Table 20) reflecting three potential movements: (1) switching of existing non-QIZ exporters to QIZ locations, or, alternatively, lobbying to have their locations included (and accordingly become QIZ firms); (2) new investments being created in QIZ zones, thus an expansion of QIZ firms by additional new firms; (3) exporting firms either downsizing, or switching wholly (i.e., exiting the export market altogether) or in part to the domestic market.Table 20
QIZ/non-QIZ TC and total exports to the US (2005–2009).
2004
2005
2006
2007
2008
2008 (Jan–Oct)
2009 (Jan–Oct)
Textiles
and
clothing
Level (million US$)
QIZ TC exports
0
252
632
730
776
655
662
Non QIZ TC exports to the US
580
375
187
145
139
119
98
Total TC exports to the US
580
627
819
875
915
775
759
Growth rate (%)
QIZ TC exports
151%
16%
6%
1%
Non QIZ TC exports to the US
-
35
%
-
50
%
-
23
%
-
4
%
-
18
%
Total TC exports to the US
8
%
31
%
7
%
5
%
-
2
%
All
commodities
Level (million US$)
Total QIZ exports
0
266
644
740
872
733
706
Total non QIZ exports to the US
1330
1825
1750
1640
1498
1234
1023
Total Egyptian exports to the US
1330
2091
2393
2380
2371
1967
1729
Growth rate (%)
Total QIZ exports
142%
15%
18%
−4%
Total non QIZ exports to the US
37
%
-
4
%
-
6
%
-
9
%
-
17
%
Total Egyptian exports to the US
57
%
14
%
-
1
%
-
0.4
%
-
12
%
Source: USITC [20].As is evident from the above analysis, non-QIZ firms are indeed increasing their share in the domestic market, that is, the third explanation in the previous paragraph. Also, there is substantial evidence that FDI has risen sharply since 2005, following the QIZ agreement35 (a tenfold increase compared to levels of 1996) (Figure 5), thus supporting the second argument above36. Indeed, investment in the sector has sharply increased by nearly 300 percent during the 13 years from 1995 to 2007, from a modest $89 million to $351 million (Table 21, Figure 5). This growth has been uneven, with growth hikes in 2000 and again in 2005. Thus, it is likely that all three factors suggested above have played a role. The balance between the three alternatives remains a matter for further investigation.Table 21
Investment in TC by nationality (1995, 2007) in US$ millions.
1995
2007
% change between 1995 & 2007
Domestic
76
227
199%
85%
65%
Arab
2
49
2350%
2%
14%
Foreign
11
75
582%
13%
21%
Total investment
89
351
294%
100%
100%
Source: GAFI [22]. *Issued capital used as proxy for investment.  *Data are converted from LE to US$ using the official exchange rate published.  *Data cover companies operating under law 8/1997 both inland and free zones, and companies organized by the companies law 159/1981.Figure 5
Evolution of FDI in TC Classified into Arab and Non-Arab (1995–2007).Source: GAFI [22]. *Issued capital used as proxy for investment. *Data are converted from LE to $US using the official exchange rate published.In summary, there is restructuring whereby producers unprotected by the QIZ agreement are turning to the largely protected domestic market. Moreover, about three quarters of the decline in private production and employment is attributable to the crisis. Contraction in domestic sales is largely independent of the crisis, whilst those in exports are directly set off by it. The remainder of the decline, however, is a more structural and gradual trend triggered by the changing global environment on the one hand and the sector’s own long inherent structural problems on the other. In real terms, the sector is in decline. The crisis has only exacerbated the contraction of an already struggling industry.


## 4.3. Social Dialogue: Is There Any?

Fourteen percent of firms’ managers and CEOs responded that there had been substantial job losses when directly asked if they had laid off workers in response to the crisis37. But the employment data in the survey suggest that a much higher percentage of firms—just under half (47 percent)—incurred job losses. Moreover, the number of reported job losses is only half the number of overall losses based on the answers collected directly from the books of the firm38. Approximately 40 percent of firms did not inform the worker before the layoff. The rest (60 percent, i.e., 24 firms) report they gave at least a week’s notice39. A majority (97 percent) claim to have given the worker all his/her financial entitlements after layoff. Surprisingly, only 7 percent of workers (285 workers) believe firms have actually laid off workers in response to the crisis.Virtually none of the firms reported consulting workers’ representatives/unions in relation to any measures undertaken in response to the crisis (Table22), and there was only one case of collective bargaining between firms and the affected workers. Collective bargaining takes place in cases of substantial layoffs or drastic employment measures in any one firm, hence, is likely to be low in the sample since only a quarter (27 percent) of the firms have had job losses of over 50 percent of their work force. On the other hand, 7 percent of the workers have reported some dialogue between them and high level management during the course of the crisis. Only 2 percent of all workers believe workers’ or trade unions play an active role in negotiation, suggesting either that there was indeed little consultation, or that the large majority of workers were not involved in any way in such consultations that did take place. Recent developments in labor law have made it easier for firms to lay off workers, making consultation less likely40.Table 22
Employment procedures other than layoffs undertaken in response to the crisis.
Procedures undertaken in response to the crisis
% of firms
Cancel extra work in firm
44
Stop new hiring
23
Reduction in daily working hours
9
Laying off temporary workers
5
Cancellation of extra pay and allowances
3
Productivity enhancing procedures
3
Wage reductions
2
Cancellation of monthly incentives
2
Reduction of social and other benefits
2
Granting open leave to permanent workers
1
Increase in unpaid additional work hours
0
Transfer of workers to other branches
0
Transfer of workers to other firms
0
Source: Calculated by author based on IDSC firm questionnaire [6].


## 4.4. Other Effects of the Crisis

### 4.4.1. Firms’ Perspectives

Limited access to finance is perceived as the main effect of the crisis, followed by increases in production costs (according to 77 percent of respondents), then piling up of inventories (57 percent due to unsold production). Eighty-five of the firms have indicated that production costs have risen since September 2008 and an outstanding majority of those (92 percent) blame it on increases in costs of intermediate and raw materials.Only 8 percent of workers have reported ever receiving training on the job. Seventeen percent of firms have already reduced investments in machinery and 8 percent have reduced the already modest amount of training, but three quarters of firms have reduced capacity utilization (Table23).Table 23
Reductions in expenditures in response to the crisis.
Frequency
%  of Firms
Reduced capacity utilization
203
74
Cut expenditures
On machinery and equipment
47
17
On buildings
37
13
On training
22
8
On R&D
17
6
Source: Author’s calculation by author based on IDSC firm questionnaire [6].In line with the reduction in production, sales, and exports since September 2009, about 500 existing contracts have been cancelled in the sample with an overall value of LE 70 million (current prices). Most of the cancelled contracts (66 percent of them) were for garments. Some buyers have also been late in payments (reported by 14 firms) others have been particularly stringent when it comes to quality specifications (6 firms). On the suppliers’ side, suppliers have been demanding higher prices (17 percent of all sample firms), have reduced grace periods (15 percent), or have reduced contracted amounts (11 percent). Firms believe the government should give financial subsidies (66 percent of firms) and reduce the number of taxes levied (62 percent of firms) to ease the effect of the crisis on firms in the sector.


### 4.4.2. Workers’ Perspective

Not all surveyed workers had heard of the crisis (only 70 percent of the 5383 workers had done so). Forty-two percent of those (1600 workers or 30 percent of sampled workers) believe the crisis affected them. Income-related effects top the list (Table24) followed by nonincome effects (e.g., working hours, fringe benefits...etc.).Table 24
Workers’ perception of firms’ reductions in expenditures due to the crisis.
No. workers
%
Reduction in
Income
1070
67
Bonuses
1043
65
Periodic salary raises
823
51
Working hours
614
38
Services firm provides to employees
611
38
Paid holidays
601
38
Fringe benefits (e.g., meals, transport)
545
34
Giving unpaid leave
463
29
Memo item:
Total number of workers stating they are affected by crisis
1600
100
Source: Calculated by author based on IDSC worker questionnaire [6].


### 4.4.3. General Worker-Related Problems

The scarcity of trained and educated workers remains the top problem faced by firms in the industry (77 percent of firms). High resignation rates or turnover rates also represent a problem expressed by 40 percent of sample firms. More than half the firms of the sample thought that the youth have no desire to work in the sector mainly due to their belief that workers prefer desk work (as reported by 70 percent of firms), followed by low wages and salaries in the sector (60 percent of firms), and difficult work conditions such as large distance between work and home (31 percent).On the other hand, based on the workers’ questionnaire, only a fifth of them state that they have problems related to their job in the TC sector. Not surprisingly, modest salaries and wages top their list of reasons (65 percent of those stating to have problems) followed by fear of financial crisis repercussions (23 percent), and worker layoffs (18 percent of them).


## 4.4.1. Firms’ Perspectives

Limited access to finance is perceived as the main effect of the crisis, followed by increases in production costs (according to 77 percent of respondents), then piling up of inventories (57 percent due to unsold production). Eighty-five of the firms have indicated that production costs have risen since September 2008 and an outstanding majority of those (92 percent) blame it on increases in costs of intermediate and raw materials.Only 8 percent of workers have reported ever receiving training on the job. Seventeen percent of firms have already reduced investments in machinery and 8 percent have reduced the already modest amount of training, but three quarters of firms have reduced capacity utilization (Table23).Table 23
Reductions in expenditures in response to the crisis.
Frequency
%  of Firms
Reduced capacity utilization
203
74
Cut expenditures
On machinery and equipment
47
17
On buildings
37
13
On training
22
8
On R&D
17
6
Source: Author’s calculation by author based on IDSC firm questionnaire [6].In line with the reduction in production, sales, and exports since September 2009, about 500 existing contracts have been cancelled in the sample with an overall value of LE 70 million (current prices). Most of the cancelled contracts (66 percent of them) were for garments. Some buyers have also been late in payments (reported by 14 firms) others have been particularly stringent when it comes to quality specifications (6 firms). On the suppliers’ side, suppliers have been demanding higher prices (17 percent of all sample firms), have reduced grace periods (15 percent), or have reduced contracted amounts (11 percent). Firms believe the government should give financial subsidies (66 percent of firms) and reduce the number of taxes levied (62 percent of firms) to ease the effect of the crisis on firms in the sector.


## 4.4.2. Workers’ Perspective

Not all surveyed workers had heard of the crisis (only 70 percent of the 5383 workers had done so). Forty-two percent of those (1600 workers or 30 percent of sampled workers) believe the crisis affected them. Income-related effects top the list (Table24) followed by nonincome effects (e.g., working hours, fringe benefits...etc.).Table 24
Workers’ perception of firms’ reductions in expenditures due to the crisis.
No. workers
%
Reduction in
Income
1070
67
Bonuses
1043
65
Periodic salary raises
823
51
Working hours
614
38
Services firm provides to employees
611
38
Paid holidays
601
38
Fringe benefits (e.g., meals, transport)
545
34
Giving unpaid leave
463
29
Memo item:
Total number of workers stating they are affected by crisis
1600
100
Source: Calculated by author based on IDSC worker questionnaire [6].


## 4.4.3. General Worker-Related Problems

The scarcity of trained and educated workers remains the top problem faced by firms in the industry (77 percent of firms). High resignation rates or turnover rates also represent a problem expressed by 40 percent of sample firms. More than half the firms of the sample thought that the youth have no desire to work in the sector mainly due to their belief that workers prefer desk work (as reported by 70 percent of firms), followed by low wages and salaries in the sector (60 percent of firms), and difficult work conditions such as large distance between work and home (31 percent).On the other hand, based on the workers’ questionnaire, only a fifth of them state that they have problems related to their job in the TC sector. Not surprisingly, modest salaries and wages top their list of reasons (65 percent of those stating to have problems) followed by fear of financial crisis repercussions (23 percent), and worker layoffs (18 percent of them).


## 5. Conclusion and Policy Recommendations

The downturn in the sector between 2008 and 2009 is largely driven by the crisis. But the sector had already been in decline on account of changes in the global environment41. So while sharp reductions in exports are mainly triggered by the crisis, reductions in firms’ domestic market sales have been accelerated by the sector’s liberalization and corresponding increased foreign competition in the domestic market. Reductions in employment have followed the decline of exports, domestic sales, and consequently of production. Some restructuring is evident: exporters unprotected by preferential trade agreements are turning away from the export market to the still largely protected domestic market. It has become evident that the sector as it stands now cannot withstand fierce international competition. How is policy going to respond to these consequences in addition to the more structural and inherent problems of the industry?Policy has to tread a fine line between insulating the economy from the temporary effects of the crisis and avoiding overdistorting incentives. Exporting firms now moving into the domestic market are unlikely to abandon it even if export prospects pick up. So government measures are needed but should be tailored so as to avoid “excessively paying for inefficiency.” But provided some restructuring is efficient (since only the least efficient firms exit the market), policy should avoid “accelerated restructuring” due to massive job losses that are not outweighed by comparable job creation. Hence, we encounter a policy dilemma. What is to be done?


### 5.1. Short- and Medium-Term Policy Recommendations

#### 5.1.1.  Labor Market Policies

There has been a 3.2 percent decline in employment in the sample. Increased public expenditure on infrastructure may help in the short run. However, in the medium term efforts should be focused on improving labor mobility42 toward more productive sectors. If unemployment is inevitable then an efficiently and transparently run unemployment benefit system ought to be in place. Workers’ representatives have called for the establishment of a publicly financed fund to combat unemployment [31]. However, such a fund is not being considered by the Government43, for which there is good reason. Especially for private sector firms there is a problem of asymmetric information so that it is very costly, if not impossible, for the government to identify who is genuinely jobless. However, unemployment benefits for six months are part of a recent discussion of the insurance and retirement draft law. Since the study has shown that job losses have been mostly concentrated in the most vulnerable groups of workers (i.e., illiterates and those with primary education) as confirmed by firms in the industry, the passing of this law is of paramount importance to help soften the effect of the crisis on poverty.The government may also undertake more direct interventions such as paying for the social insurance [32, 33] of the workers in badly hit firms in order to prevent them from laying off workers. As a temporary solution firms ought to resort to reducing wages and/or their working hours rather than laying off labor altogether [33, 34]44. Additionally, firms should utilize idle time to train those workers. The government may also advertise for largely subsidized retraining programs for the currently but temporarily unemployed, thus utilizing the slowdown positively.


#### 5.1.2. Fiscal and Monetary Policy Measures

To counter the sharp contraction of manufacturing industries caused by the crisis, the government’s main focus has been directed towards boosting aggregate demand but should also be directed towards ensuring that credit is available to businesses that may only be temporarily liquidity constrained. The government of Egypt is aware of this need, having implemented two stimulus packages to date, with a third underway.The packages rest on four pillars: (1) increasing public expenditure, mainly on infrastructure, (2) a two-stage reduction in interest rates, (3) providing various incentives to the private sector to stimulate investment and improve the business climate, and (4) increasing current expenditure of which a substantial part (LE 2.1 billion LE, i.e., 80 percent) goes to increase export competitiveness, an expense that is to be distributed by the Export Development Fund.Egypt has a tight fiscal policy space, hence fear of mounting public debt and resulting inflationary pressures on the economy is at the center of a debate around the packages. In addition, the adequacy of the packages to compensate for the negative effects of the crisis is questionable. Nevertheless, the current temporary cut in customs duties and sales taxes on industrial inputs and capital goods may ease the pressure somewhat, and has a faster impact than does government expenditure, such as that on infrastructure, actual disbursements of which may be delayed for practical, administrative, and logistical reasons. Removing or substantially reducing sales taxes (for a preannounced limited period) may also boost domestic demand along with increases in infrastructure. Infrastructure programs should be targeted to alleviate supply bottlenecks, which can include public housing near industrial zones.


#### 5.1.3. Trade Policy Measures

Efforts to increase the geographical diversity of Egypt’s TC trading partners need to be strengthened by increased competitiveness, resolving implementation problems under the Greater Arab Free Trade Area (GAFTA) and negotiating free trade agreements with new partners. Reviving stalled trade talks with the USA to first relax conditions on TC exporters currently applicable under the QIZ agreement, and second to lobby for better market access for non-QIZ exports, as many of these exports do not benefit from the US Generalized System of Preference (GSP) treatment under US trade rules45. Egypt’s exporters are not making sufficient use of the US GSP system: an estimated 10 percent of exports to the US that would benefit from GSP are subject to regular MFN tariffs on account of incorrect labelling [35]46.There should not be recourse to increased protectionism, but further reductions in tariffs should be implemented gradually. Since the phase-out of the quota system in 2005, Egypt has imposed a number of remedy actions though dealing with the genuine structural problems underlying the industry remains the most sensible policy route. Protectionist measures such as tariffs create a bias against exports by increasing the price of foreign competing products on the domestic market rendering the domestic market relatively more attractive for domestic producers and increases domestic market prices borne by domestic consumers.Providing conditional and finite incentives47 for exporters has generally been a successful way to build up strong industries and penetrate export markets (e.g., South Korea), yet “excessive” protection backfires. As seen earlier, restructuring has been evident whereby firms solely catering to the domestic market are driven out of that market. It is true that these are the least efficient firms but the enlarged export subsidy artificially increases the competitiveness of exporting firms, hence possibly leading to restructuring not purely based on efficiency. More importantly, it has led to substantial job losses amongst domestically oriented producers. These job losses are based on the sample, which includes firms that still exist in the market; therefore, accounting for additional job losses originating from firms exiting the market altogether would lead to larger estimates, and so make an even stronger argument. The job losses effect is not solely caused by the crisis but also by the further effect competition from foreign imports is placing on firms producing for the domestic market. The increase in the export subsidy rate provided by the fund has not been renewed in the second stimulus package and should also not be renewed in the third stimulus package for the reasons just given. Nevertheless, the export subsidy should not be cancelled altogether48.


### 5.2. Longer-Term Policy Recommendations

#### 5.2.1. Realities of the Sector

As a cotton producer with a substantial domestic market for final products, one might expect to see a large, competitive industry serving that market. And given that Egyptian cotton is amongst the world's best, a vibrant high-end export sector might also be expected. Unfortunately, neither of these is the case.Egypt benefitted from the Multi-Fiber Arrangement (MFA). The country’s exports were not close to its quota limits, gaining from the fact that more competitive countries like China, Bangladesh, Vietnam, and even Turkey were constrained. With the tariff reductions required by Egypt's membership to the World Trade Organization (WTO), Egyptian producers are unable to compete with lower cost overseas producers, especially those in China, losing market share at home, and would have done so abroad were it not for continued preferential treatment, notably under the European-Mediterranean Partnership agreement entering into force in 2004 and the Qualified Industrial Zones (QIZ) arrangement with the USA and Israel, which came into force in 2005—nearly three-quarters of TC exports fall under these agreements. In spite of the fact that Egypt also benefitted from both the USA and EU applying safeguard quotas on China since 2006 (on 34 categories in the case of the US and 10 in the EU case since 2006)49,50. The Ministry of Trade and Industry is taking determined and successful steps to enlarge the scope of the QIZ51. But Preferential Trade Agreements are politically tenuous and cannot be counted on to build the sector in the long term.


#### 5.2.2.  Long-Term Strategy for the Development of the Industry

There are four pillars of a strategy for the sector in order to capture further value added at home.Pillar 1: Moving Up the Clothing Industry Value Chain
Move up the clothing value chain through targeting high end export markets characterized by higher value added export items, such as high end clothing, but with a focus on products for which Egypt has some specialized experience (e.g., carpets), and in simple products, such as linen, where the proximity to the raw material provides a cost advantage. The possibility can be explored of high-value exports using Egypt’s long-staple (LS) and extra long-staple (ELS) cotton but also through the use of new materials such as microfibers52.It is true that world demand on Egyptian LS and ELS cotton has declined because of the advent of new materials (e.g., manmade fibers)53 and the rise of the American Pima cotton, which is supported by the American subsidy program54. Nevertheless, Egypt does export about 15 percent of its total TC exports in the form of unprocessed cotton, which it can alternatively process locally so as to capture the value added domestically. In the final market the difference is substantial; a woven Japanese produced shirt is sold for $120 while its Egyptian yarn content amounts to just $5. Moving up the value chain would increase value added retained at home.To reverse the situation so cotton is used at home, immense investments are required. Either the private sector undertakes these investments after the purchase of privatized spinning and weaving facilities or the government undertakes these investments prior to privatization. Each of these options, however, entails potential risks. For the former, the private sector has been engaging in the so-called “land cooling,” that is, leave their newly purchased facilities for some time—usually years—and later make a large capital gain on the sale of the land. Indeed, the current value of the spinning and weaving companies resides mainly in their real estate value given their poor technological status [11]55. Eventually the original activity of these factories is not re-pursued, which leads to a disinvestment in this vital sector of the economy. This fact may favor the second option, though the problem with the government undertaking these investments is that the government may not make the most desirable or optimal business decisions, so a PPP (Private Public Partnership) may be desirable. Or alternatively devise enforceable contracts ensuring that the firm will remain in the textile business in return for a low sale price, for instance. Under these conditions, privatization can boost competition of firms in the various sectors of the upstream industry (mainly spinning and weaving) so that Egyptian firms can turn their high quality cotton fibers into equally high quality yarns and fabrics.Other incentives should also be considered. Countries such as India support spinning producers who use cotton in their production through a number of methods including concessional interest rates, with government bearing the difference between the commercial and concessional rate. It also contributes to nearly 20 percent of the infrastructure of these firms [17]. Egypt could also consider similar policies to encourage the use of Egypt’s high value cotton provided it is used to spin fine yarns.Pillar 2: Provision of “Genuinely” Conditional Export Incentives with Extra Support to Industrial Deepening
The second pillar is the provision of “genuinely” conditional incentives. Conditionality remains necessary on many fronts. As the government increases export subsidies to deal with the financial crisis, it is vital to ensure higher levels of transparency and accountability in order to guarantee that those receiving the subsidies are those who are entitled to them without favoritism or nepotism. Tying performance to incentives is key to successful incentive structures. The subsidy should also be given on the value added portion and not on the final value of exports. Furthermore, support should be provided to those firms that are investing in fine cotton spinning technology, those that are placing themselves into competition with Japan and Italy similar to the path taken by Indian, South Korean, and Pakistani firms, to whom the country is now losing market share. These countries have become major importers of Egypt’s superior quality cotton. In other words,extra support should be targeted to those exporters entering high end market niches, utilizing Egypt’s high quality cotton fibers to produce high quality yarns, fabrics, and clothing.Pillar 3: Training, Capacity-Building, and Skills Upgrading
Increasing productivity remains a key challenge for the coming years. An essential requirement to raising productivity includes improving the quality of education at all levels, adopting a clear and well-targeted training strategy, establishing a closer link between performance and pay, and last but not least enhancing and repairing the poor work environment and ethical standards.A recent study about the clothing sector concluded that by addressing its productivity problems Egypt could increase its clothing exports by 25 to 40 percent [36]56. Endeavours to increase productivity may also be strengthened by Egyptian firms undertaking joint ventures with foreign firms including Vietnamese and South Korean for know-how and skill (marketing, networking, and quality standards) acquisition. Public private partnerships in the spinning and weaving but also in the printing and dyeing sectors may be a reasonable option because of the large investment cost involved. Moreover, as opposed to creating new institutions and/or expanding existing ones for training (e.g., the Industrial Modernization Centre, the Textiles Technology Center, and other capacity building programs such as the ones provided by the National Research Center), cost reductions will be effected through the private sector taking initiative in training employees, with the government’s role restricted to providing “conditional” cash transfers to such firms57.Pillar 4: Undergo a Comprehensive Institutional Reform
Productivity can be enhanced by government investments in both infrastructure and improved governance. The government of Egypt announced that it will establish two industrial zones in Borg Al Arab and Sixth of October cities for textile production to become the biggest in the industry in the Middle East region. But, for competitiveness it is the institutions that matter, not just the physical infrastructure. Business in Egypt suffers from a bureaucracy that is both excessive and inefficient. It is excessive in that the degree and time required for business registration and other reporting requirements are beyond those necessary for a market economy and so constrain the growth of that economy. It is inefficient since government has been slow to adopt modern technologies, such as IT-based systems, or to reform the bureaucracy itself. A comprehensive institutional reform for all public institutions including government bureaucracy is warranted. Government employees need a change in their mindset if they are to contribute to Egypt's growth, rather than hinder it. The old ways, including carelessness, petty corruption, and control for control's sake, are deeply ingrained in the system. Improved incentives, both rewards and penalties, coupled with strict monitoring will help bring about this changed mindset, but more concerted and direct efforts may be needed given the depth of the problem.


## 5.1. Short- and Medium-Term Policy Recommendations

### 5.1.1.  Labor Market Policies

There has been a 3.2 percent decline in employment in the sample. Increased public expenditure on infrastructure may help in the short run. However, in the medium term efforts should be focused on improving labor mobility42 toward more productive sectors. If unemployment is inevitable then an efficiently and transparently run unemployment benefit system ought to be in place. Workers’ representatives have called for the establishment of a publicly financed fund to combat unemployment [31]. However, such a fund is not being considered by the Government43, for which there is good reason. Especially for private sector firms there is a problem of asymmetric information so that it is very costly, if not impossible, for the government to identify who is genuinely jobless. However, unemployment benefits for six months are part of a recent discussion of the insurance and retirement draft law. Since the study has shown that job losses have been mostly concentrated in the most vulnerable groups of workers (i.e., illiterates and those with primary education) as confirmed by firms in the industry, the passing of this law is of paramount importance to help soften the effect of the crisis on poverty.The government may also undertake more direct interventions such as paying for the social insurance [32, 33] of the workers in badly hit firms in order to prevent them from laying off workers. As a temporary solution firms ought to resort to reducing wages and/or their working hours rather than laying off labor altogether [33, 34]44. Additionally, firms should utilize idle time to train those workers. The government may also advertise for largely subsidized retraining programs for the currently but temporarily unemployed, thus utilizing the slowdown positively.


### 5.1.2. Fiscal and Monetary Policy Measures

To counter the sharp contraction of manufacturing industries caused by the crisis, the government’s main focus has been directed towards boosting aggregate demand but should also be directed towards ensuring that credit is available to businesses that may only be temporarily liquidity constrained. The government of Egypt is aware of this need, having implemented two stimulus packages to date, with a third underway.The packages rest on four pillars: (1) increasing public expenditure, mainly on infrastructure, (2) a two-stage reduction in interest rates, (3) providing various incentives to the private sector to stimulate investment and improve the business climate, and (4) increasing current expenditure of which a substantial part (LE 2.1 billion LE, i.e., 80 percent) goes to increase export competitiveness, an expense that is to be distributed by the Export Development Fund.Egypt has a tight fiscal policy space, hence fear of mounting public debt and resulting inflationary pressures on the economy is at the center of a debate around the packages. In addition, the adequacy of the packages to compensate for the negative effects of the crisis is questionable. Nevertheless, the current temporary cut in customs duties and sales taxes on industrial inputs and capital goods may ease the pressure somewhat, and has a faster impact than does government expenditure, such as that on infrastructure, actual disbursements of which may be delayed for practical, administrative, and logistical reasons. Removing or substantially reducing sales taxes (for a preannounced limited period) may also boost domestic demand along with increases in infrastructure. Infrastructure programs should be targeted to alleviate supply bottlenecks, which can include public housing near industrial zones.


### 5.1.3. Trade Policy Measures

Efforts to increase the geographical diversity of Egypt’s TC trading partners need to be strengthened by increased competitiveness, resolving implementation problems under the Greater Arab Free Trade Area (GAFTA) and negotiating free trade agreements with new partners. Reviving stalled trade talks with the USA to first relax conditions on TC exporters currently applicable under the QIZ agreement, and second to lobby for better market access for non-QIZ exports, as many of these exports do not benefit from the US Generalized System of Preference (GSP) treatment under US trade rules45. Egypt’s exporters are not making sufficient use of the US GSP system: an estimated 10 percent of exports to the US that would benefit from GSP are subject to regular MFN tariffs on account of incorrect labelling [35]46.There should not be recourse to increased protectionism, but further reductions in tariffs should be implemented gradually. Since the phase-out of the quota system in 2005, Egypt has imposed a number of remedy actions though dealing with the genuine structural problems underlying the industry remains the most sensible policy route. Protectionist measures such as tariffs create a bias against exports by increasing the price of foreign competing products on the domestic market rendering the domestic market relatively more attractive for domestic producers and increases domestic market prices borne by domestic consumers.Providing conditional and finite incentives47 for exporters has generally been a successful way to build up strong industries and penetrate export markets (e.g., South Korea), yet “excessive” protection backfires. As seen earlier, restructuring has been evident whereby firms solely catering to the domestic market are driven out of that market. It is true that these are the least efficient firms but the enlarged export subsidy artificially increases the competitiveness of exporting firms, hence possibly leading to restructuring not purely based on efficiency. More importantly, it has led to substantial job losses amongst domestically oriented producers. These job losses are based on the sample, which includes firms that still exist in the market; therefore, accounting for additional job losses originating from firms exiting the market altogether would lead to larger estimates, and so make an even stronger argument. The job losses effect is not solely caused by the crisis but also by the further effect competition from foreign imports is placing on firms producing for the domestic market. The increase in the export subsidy rate provided by the fund has not been renewed in the second stimulus package and should also not be renewed in the third stimulus package for the reasons just given. Nevertheless, the export subsidy should not be cancelled altogether48.


## 5.1.1.  Labor Market Policies

There has been a 3.2 percent decline in employment in the sample. Increased public expenditure on infrastructure may help in the short run. However, in the medium term efforts should be focused on improving labor mobility42 toward more productive sectors. If unemployment is inevitable then an efficiently and transparently run unemployment benefit system ought to be in place. Workers’ representatives have called for the establishment of a publicly financed fund to combat unemployment [31]. However, such a fund is not being considered by the Government43, for which there is good reason. Especially for private sector firms there is a problem of asymmetric information so that it is very costly, if not impossible, for the government to identify who is genuinely jobless. However, unemployment benefits for six months are part of a recent discussion of the insurance and retirement draft law. Since the study has shown that job losses have been mostly concentrated in the most vulnerable groups of workers (i.e., illiterates and those with primary education) as confirmed by firms in the industry, the passing of this law is of paramount importance to help soften the effect of the crisis on poverty.The government may also undertake more direct interventions such as paying for the social insurance [32, 33] of the workers in badly hit firms in order to prevent them from laying off workers. As a temporary solution firms ought to resort to reducing wages and/or their working hours rather than laying off labor altogether [33, 34]44. Additionally, firms should utilize idle time to train those workers. The government may also advertise for largely subsidized retraining programs for the currently but temporarily unemployed, thus utilizing the slowdown positively.


## 5.1.2. Fiscal and Monetary Policy Measures

To counter the sharp contraction of manufacturing industries caused by the crisis, the government’s main focus has been directed towards boosting aggregate demand but should also be directed towards ensuring that credit is available to businesses that may only be temporarily liquidity constrained. The government of Egypt is aware of this need, having implemented two stimulus packages to date, with a third underway.The packages rest on four pillars: (1) increasing public expenditure, mainly on infrastructure, (2) a two-stage reduction in interest rates, (3) providing various incentives to the private sector to stimulate investment and improve the business climate, and (4) increasing current expenditure of which a substantial part (LE 2.1 billion LE, i.e., 80 percent) goes to increase export competitiveness, an expense that is to be distributed by the Export Development Fund.Egypt has a tight fiscal policy space, hence fear of mounting public debt and resulting inflationary pressures on the economy is at the center of a debate around the packages. In addition, the adequacy of the packages to compensate for the negative effects of the crisis is questionable. Nevertheless, the current temporary cut in customs duties and sales taxes on industrial inputs and capital goods may ease the pressure somewhat, and has a faster impact than does government expenditure, such as that on infrastructure, actual disbursements of which may be delayed for practical, administrative, and logistical reasons. Removing or substantially reducing sales taxes (for a preannounced limited period) may also boost domestic demand along with increases in infrastructure. Infrastructure programs should be targeted to alleviate supply bottlenecks, which can include public housing near industrial zones.


## 5.1.3. Trade Policy Measures

Efforts to increase the geographical diversity of Egypt’s TC trading partners need to be strengthened by increased competitiveness, resolving implementation problems under the Greater Arab Free Trade Area (GAFTA) and negotiating free trade agreements with new partners. Reviving stalled trade talks with the USA to first relax conditions on TC exporters currently applicable under the QIZ agreement, and second to lobby for better market access for non-QIZ exports, as many of these exports do not benefit from the US Generalized System of Preference (GSP) treatment under US trade rules45. Egypt’s exporters are not making sufficient use of the US GSP system: an estimated 10 percent of exports to the US that would benefit from GSP are subject to regular MFN tariffs on account of incorrect labelling [35]46.There should not be recourse to increased protectionism, but further reductions in tariffs should be implemented gradually. Since the phase-out of the quota system in 2005, Egypt has imposed a number of remedy actions though dealing with the genuine structural problems underlying the industry remains the most sensible policy route. Protectionist measures such as tariffs create a bias against exports by increasing the price of foreign competing products on the domestic market rendering the domestic market relatively more attractive for domestic producers and increases domestic market prices borne by domestic consumers.Providing conditional and finite incentives47 for exporters has generally been a successful way to build up strong industries and penetrate export markets (e.g., South Korea), yet “excessive” protection backfires. As seen earlier, restructuring has been evident whereby firms solely catering to the domestic market are driven out of that market. It is true that these are the least efficient firms but the enlarged export subsidy artificially increases the competitiveness of exporting firms, hence possibly leading to restructuring not purely based on efficiency. More importantly, it has led to substantial job losses amongst domestically oriented producers. These job losses are based on the sample, which includes firms that still exist in the market; therefore, accounting for additional job losses originating from firms exiting the market altogether would lead to larger estimates, and so make an even stronger argument. The job losses effect is not solely caused by the crisis but also by the further effect competition from foreign imports is placing on firms producing for the domestic market. The increase in the export subsidy rate provided by the fund has not been renewed in the second stimulus package and should also not be renewed in the third stimulus package for the reasons just given. Nevertheless, the export subsidy should not be cancelled altogether48.


## 5.2. Longer-Term Policy Recommendations

### 5.2.1. Realities of the Sector

As a cotton producer with a substantial domestic market for final products, one might expect to see a large, competitive industry serving that market. And given that Egyptian cotton is amongst the world's best, a vibrant high-end export sector might also be expected. Unfortunately, neither of these is the case.Egypt benefitted from the Multi-Fiber Arrangement (MFA). The country’s exports were not close to its quota limits, gaining from the fact that more competitive countries like China, Bangladesh, Vietnam, and even Turkey were constrained. With the tariff reductions required by Egypt's membership to the World Trade Organization (WTO), Egyptian producers are unable to compete with lower cost overseas producers, especially those in China, losing market share at home, and would have done so abroad were it not for continued preferential treatment, notably under the European-Mediterranean Partnership agreement entering into force in 2004 and the Qualified Industrial Zones (QIZ) arrangement with the USA and Israel, which came into force in 2005—nearly three-quarters of TC exports fall under these agreements. In spite of the fact that Egypt also benefitted from both the USA and EU applying safeguard quotas on China since 2006 (on 34 categories in the case of the US and 10 in the EU case since 2006)49,50. The Ministry of Trade and Industry is taking determined and successful steps to enlarge the scope of the QIZ51. But Preferential Trade Agreements are politically tenuous and cannot be counted on to build the sector in the long term.


### 5.2.2.  Long-Term Strategy for the Development of the Industry

There are four pillars of a strategy for the sector in order to capture further value added at home.Pillar 1: Moving Up the Clothing Industry Value Chain
Move up the clothing value chain through targeting high end export markets characterized by higher value added export items, such as high end clothing, but with a focus on products for which Egypt has some specialized experience (e.g., carpets), and in simple products, such as linen, where the proximity to the raw material provides a cost advantage. The possibility can be explored of high-value exports using Egypt’s long-staple (LS) and extra long-staple (ELS) cotton but also through the use of new materials such as microfibers52.It is true that world demand on Egyptian LS and ELS cotton has declined because of the advent of new materials (e.g., manmade fibers)53 and the rise of the American Pima cotton, which is supported by the American subsidy program54. Nevertheless, Egypt does export about 15 percent of its total TC exports in the form of unprocessed cotton, which it can alternatively process locally so as to capture the value added domestically. In the final market the difference is substantial; a woven Japanese produced shirt is sold for $120 while its Egyptian yarn content amounts to just $5. Moving up the value chain would increase value added retained at home.To reverse the situation so cotton is used at home, immense investments are required. Either the private sector undertakes these investments after the purchase of privatized spinning and weaving facilities or the government undertakes these investments prior to privatization. Each of these options, however, entails potential risks. For the former, the private sector has been engaging in the so-called “land cooling,” that is, leave their newly purchased facilities for some time—usually years—and later make a large capital gain on the sale of the land. Indeed, the current value of the spinning and weaving companies resides mainly in their real estate value given their poor technological status [11]55. Eventually the original activity of these factories is not re-pursued, which leads to a disinvestment in this vital sector of the economy. This fact may favor the second option, though the problem with the government undertaking these investments is that the government may not make the most desirable or optimal business decisions, so a PPP (Private Public Partnership) may be desirable. Or alternatively devise enforceable contracts ensuring that the firm will remain in the textile business in return for a low sale price, for instance. Under these conditions, privatization can boost competition of firms in the various sectors of the upstream industry (mainly spinning and weaving) so that Egyptian firms can turn their high quality cotton fibers into equally high quality yarns and fabrics.Other incentives should also be considered. Countries such as India support spinning producers who use cotton in their production through a number of methods including concessional interest rates, with government bearing the difference between the commercial and concessional rate. It also contributes to nearly 20 percent of the infrastructure of these firms [17]. Egypt could also consider similar policies to encourage the use of Egypt’s high value cotton provided it is used to spin fine yarns.Pillar 2: Provision of “Genuinely” Conditional Export Incentives with Extra Support to Industrial Deepening
The second pillar is the provision of “genuinely” conditional incentives. Conditionality remains necessary on many fronts. As the government increases export subsidies to deal with the financial crisis, it is vital to ensure higher levels of transparency and accountability in order to guarantee that those receiving the subsidies are those who are entitled to them without favoritism or nepotism. Tying performance to incentives is key to successful incentive structures. The subsidy should also be given on the value added portion and not on the final value of exports. Furthermore, support should be provided to those firms that are investing in fine cotton spinning technology, those that are placing themselves into competition with Japan and Italy similar to the path taken by Indian, South Korean, and Pakistani firms, to whom the country is now losing market share. These countries have become major importers of Egypt’s superior quality cotton. In other words,extra support should be targeted to those exporters entering high end market niches, utilizing Egypt’s high quality cotton fibers to produce high quality yarns, fabrics, and clothing.Pillar 3: Training, Capacity-Building, and Skills Upgrading
Increasing productivity remains a key challenge for the coming years. An essential requirement to raising productivity includes improving the quality of education at all levels, adopting a clear and well-targeted training strategy, establishing a closer link between performance and pay, and last but not least enhancing and repairing the poor work environment and ethical standards.A recent study about the clothing sector concluded that by addressing its productivity problems Egypt could increase its clothing exports by 25 to 40 percent [36]56. Endeavours to increase productivity may also be strengthened by Egyptian firms undertaking joint ventures with foreign firms including Vietnamese and South Korean for know-how and skill (marketing, networking, and quality standards) acquisition. Public private partnerships in the spinning and weaving but also in the printing and dyeing sectors may be a reasonable option because of the large investment cost involved. Moreover, as opposed to creating new institutions and/or expanding existing ones for training (e.g., the Industrial Modernization Centre, the Textiles Technology Center, and other capacity building programs such as the ones provided by the National Research Center), cost reductions will be effected through the private sector taking initiative in training employees, with the government’s role restricted to providing “conditional” cash transfers to such firms57.Pillar 4: Undergo a Comprehensive Institutional Reform
Productivity can be enhanced by government investments in both infrastructure and improved governance. The government of Egypt announced that it will establish two industrial zones in Borg Al Arab and Sixth of October cities for textile production to become the biggest in the industry in the Middle East region. But, for competitiveness it is the institutions that matter, not just the physical infrastructure. Business in Egypt suffers from a bureaucracy that is both excessive and inefficient. It is excessive in that the degree and time required for business registration and other reporting requirements are beyond those necessary for a market economy and so constrain the growth of that economy. It is inefficient since government has been slow to adopt modern technologies, such as IT-based systems, or to reform the bureaucracy itself. A comprehensive institutional reform for all public institutions including government bureaucracy is warranted. Government employees need a change in their mindset if they are to contribute to Egypt's growth, rather than hinder it. The old ways, including carelessness, petty corruption, and control for control's sake, are deeply ingrained in the system. Improved incentives, both rewards and penalties, coupled with strict monitoring will help bring about this changed mindset, but more concerted and direct efforts may be needed given the depth of the problem.


## 5.2.1. Realities of the Sector

As a cotton producer with a substantial domestic market for final products, one might expect to see a large, competitive industry serving that market. And given that Egyptian cotton is amongst the world's best, a vibrant high-end export sector might also be expected. Unfortunately, neither of these is the case.Egypt benefitted from the Multi-Fiber Arrangement (MFA). The country’s exports were not close to its quota limits, gaining from the fact that more competitive countries like China, Bangladesh, Vietnam, and even Turkey were constrained. With the tariff reductions required by Egypt's membership to the World Trade Organization (WTO), Egyptian producers are unable to compete with lower cost overseas producers, especially those in China, losing market share at home, and would have done so abroad were it not for continued preferential treatment, notably under the European-Mediterranean Partnership agreement entering into force in 2004 and the Qualified Industrial Zones (QIZ) arrangement with the USA and Israel, which came into force in 2005—nearly three-quarters of TC exports fall under these agreements. In spite of the fact that Egypt also benefitted from both the USA and EU applying safeguard quotas on China since 2006 (on 34 categories in the case of the US and 10 in the EU case since 2006)49,50. The Ministry of Trade and Industry is taking determined and successful steps to enlarge the scope of the QIZ51. But Preferential Trade Agreements are politically tenuous and cannot be counted on to build the sector in the long term.


## 5.2.2.  Long-Term Strategy for the Development of the Industry

There are four pillars of a strategy for the sector in order to capture further value added at home.Pillar 1: Moving Up the Clothing Industry Value Chain
Move up the clothing value chain through targeting high end export markets characterized by higher value added export items, such as high end clothing, but with a focus on products for which Egypt has some specialized experience (e.g., carpets), and in simple products, such as linen, where the proximity to the raw material provides a cost advantage. The possibility can be explored of high-value exports using Egypt’s long-staple (LS) and extra long-staple (ELS) cotton but also through the use of new materials such as microfibers52.It is true that world demand on Egyptian LS and ELS cotton has declined because of the advent of new materials (e.g., manmade fibers)53 and the rise of the American Pima cotton, which is supported by the American subsidy program54. Nevertheless, Egypt does export about 15 percent of its total TC exports in the form of unprocessed cotton, which it can alternatively process locally so as to capture the value added domestically. In the final market the difference is substantial; a woven Japanese produced shirt is sold for $120 while its Egyptian yarn content amounts to just $5. Moving up the value chain would increase value added retained at home.To reverse the situation so cotton is used at home, immense investments are required. Either the private sector undertakes these investments after the purchase of privatized spinning and weaving facilities or the government undertakes these investments prior to privatization. Each of these options, however, entails potential risks. For the former, the private sector has been engaging in the so-called “land cooling,” that is, leave their newly purchased facilities for some time—usually years—and later make a large capital gain on the sale of the land. Indeed, the current value of the spinning and weaving companies resides mainly in their real estate value given their poor technological status [11]55. Eventually the original activity of these factories is not re-pursued, which leads to a disinvestment in this vital sector of the economy. This fact may favor the second option, though the problem with the government undertaking these investments is that the government may not make the most desirable or optimal business decisions, so a PPP (Private Public Partnership) may be desirable. Or alternatively devise enforceable contracts ensuring that the firm will remain in the textile business in return for a low sale price, for instance. Under these conditions, privatization can boost competition of firms in the various sectors of the upstream industry (mainly spinning and weaving) so that Egyptian firms can turn their high quality cotton fibers into equally high quality yarns and fabrics.Other incentives should also be considered. Countries such as India support spinning producers who use cotton in their production through a number of methods including concessional interest rates, with government bearing the difference between the commercial and concessional rate. It also contributes to nearly 20 percent of the infrastructure of these firms [17]. Egypt could also consider similar policies to encourage the use of Egypt’s high value cotton provided it is used to spin fine yarns.Pillar 2: Provision of “Genuinely” Conditional Export Incentives with Extra Support to Industrial Deepening
The second pillar is the provision of “genuinely” conditional incentives. Conditionality remains necessary on many fronts. As the government increases export subsidies to deal with the financial crisis, it is vital to ensure higher levels of transparency and accountability in order to guarantee that those receiving the subsidies are those who are entitled to them without favoritism or nepotism. Tying performance to incentives is key to successful incentive structures. The subsidy should also be given on the value added portion and not on the final value of exports. Furthermore, support should be provided to those firms that are investing in fine cotton spinning technology, those that are placing themselves into competition with Japan and Italy similar to the path taken by Indian, South Korean, and Pakistani firms, to whom the country is now losing market share. These countries have become major importers of Egypt’s superior quality cotton. In other words,extra support should be targeted to those exporters entering high end market niches, utilizing Egypt’s high quality cotton fibers to produce high quality yarns, fabrics, and clothing.Pillar 3: Training, Capacity-Building, and Skills Upgrading
Increasing productivity remains a key challenge for the coming years. An essential requirement to raising productivity includes improving the quality of education at all levels, adopting a clear and well-targeted training strategy, establishing a closer link between performance and pay, and last but not least enhancing and repairing the poor work environment and ethical standards.A recent study about the clothing sector concluded that by addressing its productivity problems Egypt could increase its clothing exports by 25 to 40 percent [36]56. Endeavours to increase productivity may also be strengthened by Egyptian firms undertaking joint ventures with foreign firms including Vietnamese and South Korean for know-how and skill (marketing, networking, and quality standards) acquisition. Public private partnerships in the spinning and weaving but also in the printing and dyeing sectors may be a reasonable option because of the large investment cost involved. Moreover, as opposed to creating new institutions and/or expanding existing ones for training (e.g., the Industrial Modernization Centre, the Textiles Technology Center, and other capacity building programs such as the ones provided by the National Research Center), cost reductions will be effected through the private sector taking initiative in training employees, with the government’s role restricted to providing “conditional” cash transfers to such firms57.Pillar 4: Undergo a Comprehensive Institutional Reform
Productivity can be enhanced by government investments in both infrastructure and improved governance. The government of Egypt announced that it will establish two industrial zones in Borg Al Arab and Sixth of October cities for textile production to become the biggest in the industry in the Middle East region. But, for competitiveness it is the institutions that matter, not just the physical infrastructure. Business in Egypt suffers from a bureaucracy that is both excessive and inefficient. It is excessive in that the degree and time required for business registration and other reporting requirements are beyond those necessary for a market economy and so constrain the growth of that economy. It is inefficient since government has been slow to adopt modern technologies, such as IT-based systems, or to reform the bureaucracy itself. A comprehensive institutional reform for all public institutions including government bureaucracy is warranted. Government employees need a change in their mindset if they are to contribute to Egypt's growth, rather than hinder it. The old ways, including carelessness, petty corruption, and control for control's sake, are deeply ingrained in the system. Improved incentives, both rewards and penalties, coupled with strict monitoring will help bring about this changed mindset, but more concerted and direct efforts may be needed given the depth of the problem.



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*Source: 941695-2012-10-14.xml*