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Egypt Manufacturing
http://www.photius.com/countries/egypt/economy/egypt_economy_manufacturing.html
Sources: The Library of Congress Country Studies; CIA World Factbook
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    Egypt had adequate energy sources, but only a few other natural resources. The total real value of minerals mined was about ŁE102 million in 1986, up from ŁE60 million in 1981. The chief minerals in terms of volume output were iron ore, phosphates, and salt. The quantities produced in 1986 were estimated at 2,048, 1,310, and 1,233 tons, respectively, compared with 2,139, 691, and 883 tons in 1981. In addition, minor amounts of asbestos, 313 tons, and quartz, 19 tons, were mined in 1986. Preliminary exploration in Sinai indicated the presence of zinc, tin, lead, and copper deposits.

    Manufacturing

    The first systematic effort in modern Egyptian history to create a manufacturing sector was undertaken during Muhammad Ali's rule in the first half of the nineteenth century. Although that attempt failed to achieve the ambitious goals set for it, the rudiments of modern manufacturing were put in place. These consisted primarily of food processing, such as rice milling and sugar refining, and textile production, including cotton ginning and production of linen and woolen fabrics. Little was accomplished, however, for about ninety years afterward, and the economy remained essentially dependent on cotton exports.

    The Great Depression and World War II opened up new opportunities for industrialization, and the interwar period witnessed the beginning of import-substitution industrialization. Industrial output, which rose more than 40 percent between 1939 and 1946, increased by nearly 63 percent between 1946 and 1951. A brief recession occurred between 1950 and 1953, after a post-World War II boom ended; recovery followed in 1954. The high growth rates before 1950 reflected the low base from which industrialization began; during this period, industry was still in its infancy. Industrial enterprises were overwhelmingly privately owned by Egyptian nationals, a situation that contrasted with the previous periods when foreigners dominated the sector.

    Industrialization was given priority during Nasser's presidency. The government increased investment outlays and undertook a comprehensive planning effort to identify promising projects. Gradually, it took over industrial firms, and by the early 1960s, most large manufacturing firms were in public hands. From 1953 onward, growth of the manufacturing sector was uneven, with periods of high growth followed by recessions. Statistics in the manufacturing sector, as in others, were problematic and should be viewed with caution. In the ten years from FY 1953 to FY 1963, manufacturing output grew at an average rate of more than 10 percent. Whether this growth could have occurred without the revolutionary regime's drive and institutional changes is debatable. Growth slowed, however, in the late 1960s and early 1970s, even registering negative rates, especially between 1966 and 1968.

    The situation shifted in the mid-1970s. The real value of manufacturing output at current prices was estimated to have grown from about ŁE2.1 billion in FY 1975 to ŁE5.3 billion in FY 1980, at an annual rate of 19.6 percent. The corresponding figures for the period from FY 1980 to FY 1985 showed an increase to ŁE10.1 billion, and an annual growth rate of 13.7 percent. By the end of the 1980s, however, the sector was facing difficulties and possibly experiencing a recession, thanks, among other things, to the plunge in oil prices in 1986 and to the country's accumulation of large debts.

    The output increases of the 1970s resulted from investment in and improvement of the productivity of existing firms. The share of manufacturing (including mining) investment averaged from around one-fourth to one-third of total investment from 1954 up to 1989. For example, manufacturing investment was estimated at 31.3 percent in FY 1977 and 23.9 percent in FY 1986. The Second Five-Year Plan (FY 1987-91) projected that manufacturing would make up more than 26 percent of the total. It was not clear how financial difficulties would affect these projections, but the proportion of total investment to GDP was already falling by the end of the 1980s.

    Manufacturing productivity improved after the slowdown between 1966 and 1974 as a result, among other factors, of capacity utilization made possible by the income-induced rise in demand. Idle capacity approximated 16 percent of output value in 1973. Subsequently, total-factor productivity of public-sector enterprises under the Ministry of Industry was calculated as having risen by 3.5 percent annually for textiles and by 8.7 percent annually for chemicals between 1973 and 1981. No similar information was readily available after that date. The growth rates of private-sector manufacturing productivity were lower, probably reflecting the higher prices the sector paid for inputs (see below). Yet in spite of the steady rise of productivity and output, the sector's share of GDP remained constant in the 1980s, because it was outperformed by other sectors.

    The contribution of manufacturing to employment was also not commensurate with the funds that were allocated to it. The number of workers in manufacturing (including mining) was estimated at about 1.1 million in 1970, 1.4 million in 1980, and 1.8 million in 1986, or 12.3 percent, 12.6 percent, and 14.8 percent, respectively, of total employment. The sector's inability to increase employment substantially was usually attributed to the fact that manufacturing operations were highly capital intensive. Also, the increases in productivity and value added may have come largely from using previously underemployed labor, rather than from new hiring.

    One of the central issues of Egyptian industry in the 1980s was governmental price regulation in both the production and distribution domains. In the production domain, public sector companies purchased inputs, such as energy, at subsidized prices. The private sector complained that it, in contrast, had to pay higher prices. The successive increases of energy prices and the lifting of controls on agricultural prices probably narrowed the gap between the costs of the two sectors, however.

    In the distribution sphere, the government fixed the prices of a wide array of domestically manufactured consumer products, from beverages to soap to cars, at levels that many economists considered too low. Thus, the pricing system acted as a double- edged sword and affected companies differently; some benefited whereas others lost. After 1982 the government eased its price controls and permitted gradual increases so long as they did not threaten political stability. The companies themselves also resorted to various mechanisms to offset the restrictions. For example, private companies producing beverages reduced the bottle size but maintained the price, and the public car manufacturing company, An Nasr, required that buyers pay in dollars so as to have access to hard currency and avoid the continual decline of the value of the Egyptian pound. In spite of this, both private and public firms continued to lobby in 1990 for more flexibility in pricing their products.

    Manufacturing exports grew slowly, falling in some years; exports started to make a strong showing only at the close of the 1980s. For example, the value of manufactured exports dropped from US$504 million in 1978 to US$373 million in 1979 and exceeded its former level only in 1983. Manufactured exports nearly doubled in value, however, between 1983 and 1987, from US$656 million to US$1.26 billion. The share of manufacturing in total exports was dwarfed by that of oil during the peak period of oil prices in the first half of the 1980s. It grew subsequently, amounting to more than 26 percent in 1988, and manufactured exports were becoming perhaps the fastest growing area of the economy in the late 1980s. The largest manufactured export item throughout was textiles because of the favorable reputation of Egyptian cotton. Textiles made up more than one-third of total manufacturing exports in the 1980s.

    Industrialization was an inward-looking undertaking, intended in the first place to enhance self-reliance through import substitution. Industrial selection, therefore, often did not take into account comparative advantage. Some domestic-resource cost analyses indicated that steel and chemical industries, for example, did not enjoy comparative advantage. Comparative advantage changed over time, however, and domestic-resource costs for the steel industry, for instance, fell considerably between 1965 and 1985 as a result of experience, increasing skill of workers, discovery of better quality raw materials, and improving economies of scale. Manufacturing exports were also affected by macroeconomic factors, such as the overvalued currency and the level of domestic demand. The growth of exports in the late 1980s probably partially reflected the depreciation of the Egyptian pound that made Egyptian goods cheaper abroad. Developing a successful export market also required marketing skills and access to information that Egypt lacked after many years of bilateral trade. The Second Five-Year Plan (FY 1987-91) spoke of a shift to export-oriented rather than import-substitution industrialization.

    Egyptian manufacturing was progressively diversified over the years through the introduction of new products, but food processing and textiles, which produced mostly consumer goods, remained the dominant categories. The share of food processing hovered around one-third of total manufacturing between 1975 and 1985. The share of textiles was close to that of food until 1981, when, because of the fall in cotton production, it began to shrink, reaching one- quarter in FY 1985. The proportion of engineering and electrical manufactured goods, which included such items as iron and steel, vehicles, and equipment, rose from 18 percent to nearly 24 percent between 1975 and 1985. The fourth largest category was chemicals and pharmaceuticals, with 12 to 14 percent of the total over the same period. The last two types of industry were those producing intermediate goods, that is, inputs for other industries, and capital goods; no data were available on the exact share of each of these.

    Industries were located mainly in the urban governorates. Cairo and Giza accounted for about 37.5 percent of all industries and Alexandria for more than 23 percent. Industrial location was governed by factors such as population density, as in the case of food processing, and by the availability of skilled labor, as in the case of electronics in Cairo, Giza, and Alexandria, as well as in the case of furniture in Damietta and Al Qalyubiyah, north of Cairo. The concentration of industries both expressed and reinforced regional disparities as well as the skewed population distribution. In the 1980s, the government was offering tax and other incentives to investors who would locate their factories away from the metropolitan centers.

    Manufacturing had become largely a public-sector activity by the early 1960s. Before 1952 the government owned a limited number of enterprises, including a petroleum refinery, the government press, and some military factories. By the late 1960s, the public sector's output value accounted for about two-thirds of the total, and it has remained more or less at that level since. The size of the public sector would be smaller if measured in terms of its share of employment, which ranged from 50 to 60 percent. The public sector was dominant in large-scale firms, especially those with more than 500 employees; its share declined in smaller-scale industries. Government firms tended to be large because investment favored such scale, the nationalized factories were selectively large, and government job guarantees in FY 1961 often led to overstaffing. The manufacturing categories in which the public sector dominated were the chemicals, pharmaceuticals, engineering, and electrical industries. The public sector also owned large textile and sugar refining factories.

    The private sector dominated small-scale industries, especially those with ten workers or fewer. This group included industries devoted to food, beverages, dairy products, spinning and weaving, and various handicrafts. Some of the most profitable private-sector firms in the 1980s were those producing beverages, light tools, consumer electric products, printing, and apparel. Businesses with the highest productivity growth rates were food-processing operations, such as those producing sugar, oil, fodder, dairy products, and canned fruits and vegetables. Some analysts, therefore, anticipated that these manufacturing fields would attract private entrepreneurs in the near future, unless incentives in other areas were forthcoming.

    The public-sector predominance occurred chiefly through investment. Public investment in manufacturing throughout the 1960s and 1970s ranged between 85 percent and 90 percent of total manufacturing investment. In the First Five-Year Plan (FY 1982-86), it constituted about 80 percent; in the Second Five-Year Plan (FY 1987-91), it was to be reduced to between 60 percent and 63 percent, mainly because of the government's dwindling financial resources. Public investment was to focus on finishing ongoing projects and upgrading industrial plants. Any new projects would be subject to greater technical and economic scrutiny than in the past.

    Whether the private sector would be able to provide the estimated 40 percent of new investment remained to be seen. The sector faced a thicket of problems, including an unwieldy bureaucracy, a pricing system that was not based on market factors, a shortage of skilled labor, and the uncertainty of investment calculations because of the instability of the national currency. In addition, unregulated operations of investment companies drew investments from productive areas, and it was difficult to obtain foreign exchange as the pound depreciated, especially for schemes with a large import component.

    The role and size of the public sector became a point of contention after the 1974 infitah. The struggle over the sector grew more heated as Egypt's creditors and aid donors, especially the United States through AID and the multilateral agencies, began to press the policy of privatization. Many interests were involved: business, labor, political parties, government, and the intelligentsia. The thrust of the argument for privatization was that the public sector was inefficient and that many firms were losing money and would have closed down had it not been for government "bail-out." Moreover, it was contended that by selling its companies the government could reduce its debt and its budget deficits. While admitting that some public firms had lost money, privatization opponents claimed that the number of losing firms had decreased substantially in recent years; that pricing policy was responsible for some of the losses; that profits as a whole substantially surpassed losses; that the public sector invested in projects important for the country's welfare, in which the private sector would not be interested; that privatization would lead to the displacement of large numbers of workers; and that the public sector was the largest taxpayer in the country. Opponents of privatization argued that if the private sector wished to invest in manufacturing it could create new establishments rather than buy existing ones. They agreed, however, on the need for public-sector and other policy reforms. The proposed reforms revolved around giving the enterprises more flexibility to set their own production and price levels and employment policy, as well as introducing modern management procedures.

    Data as of December 1990


    NOTE: The information regarding Egypt on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Egypt Manufacturing information contained here. All suggestions for corrections of any errors about Egypt Manufacturing should be addressed to the Library of Congress and the CIA.

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