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Globalisation forces all countries to become more competitive by shifting capital and labour to new economic sectors. However, while it is widely accepted today that proactive industrial policies are needed for such structural change, there is disagreement to what extent low and middle-income countries are also able to design and implement such policies without ending up with perverse incentives for investors and bureaucrats, the creation of rents and less allocative efficiency. This discussion paper looks at the experience of Egypt with industrial policies during President Mubarak’s last years in office. The country is a particularly interesting case to be studied because it looks back to a long history of very top-down industrial policies, while the last government before the revolution, which had been appointed by Mubarak 2004, embarked on a very different, much more market friendly course. The question is thus whether this government, which included a considerable number of big business people, was better able to promote structural change and thereby economic competitiveness without favouring well-connected groups of entrepreneurs at the expense of others.
The paper argues that Egypt’s new industrial policy adopted after 2004 was in fact less interventionist, selective and redistributive than earlier ones and oriented more towards demand, and that it boosted foreign direct investment, exports and economic growth. But this growth was neither pro-poor nor sustainable; it was mainly based on short-term effects and the export of primary goods rather than structural change and innovation. The new government was able to improve entrepreneurs’ access to finance, simplify tax rates and procedures and cut away red tape. But it did not succeed in raising the technology contents of Egyptian exports, firms’ business sophistication and technology absorption, and the level of applied research and innovation.
The main reason for this failure is that the business men in office apparently did not understand that many small and medium enterprises face very other problems than themselves and that the causes of these problems are too fundamental to be relieved just by a change in economic policies. These causes include significant deficits in the quality of education and training in Egypt, in the rule of law, in the transparency and fairness of administrative and judicial procedures, in private sector representation and in the availability of affordable land for production. In addition, the government missed to help overcome failures in the coordination of investors that typically prevent structural change.