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. 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
References
[1]
The survey was conducted by the Cabinet Information and Decision Support Center (IDSC).
[2]
In the form of price ceilings under, for instance, the “clothes provision for the people program” or what was termed in Arabic “Al Kesaa El-Shaaby” program.
[3]
That is, the peasant is subsidizing the factory and the factory is subsidizing the consumer (exact words of Mohamed Kassem, comment during ECES Roundtable, ECES Cairo, February 11th, 2010), a system with absolutely no regard for economic efficiency.
[4]
This happened via two channels. First, it artificially made the domestic market more profitable, creating an antiexport bias. Second, through limiting consumers” access to foreign products, the demand generated from the largely protected domestic clothing market was limited in terms of quality. With the exception of a minor high-end and a slightly larger middle-market, mass domestic demand came from the low (value) end of the clothing market. Accordingly, with fabric imports being largely constrained by high tariffs and cumbersome import procedures (e.g., duty drawback system and import temporary admission system, especially for those wishing to export clothes) high quality cottons—unable to be exported—were wasted on the production of low quality fabrics and clothing.
[5]
As it has been precisely summarized: “… the continuous production and distribution of subsidized cotton fabrics at such volume and subsidy, for almost 20 years, dealt a ruining blow to the commercial and development capabilities of the Egyptian textile industry,” [the quality of production suffered] … carelessly produced coarse yarns, spun from high-quality Egyptian cotton lint, were delivered to weavers, who in turn produced poorly woven fabrics to be carelessly bleached or printed and delivered to undemanding customers.” (Ministry of Agriculture and Land Reclamation and APRP in American Chamber of Commerce in Egypt 2001).
[6]
This is because these countries have positioned themselves to become giant textile and clothing manufacturing countries, not only in low-priced textile goods but also in all kinds of textiles. Their increased imports of Egyptian cotton reflects their investments in fine cotton spinning ability, which challenges the European fine cotton spinners for market share.
[7]
The number of companies under the Holding Company has fallen from 39 in 2002 to 33 by 2009 ([41, 42]).
[8]
Nine of which are Cotton Ginning, Pressing and Trading Companies, 23 are spinning and weaving companies and one produces spinning equipment. Two of these 33 companies have stopped production and 13 are in deep financial need [42].
[9]
Since the start of the privatization program until 2006 there had been 5 companies subjected to Majority Public offering, 3 were sold to anchor investor, 1 company was liquidated and 4 under majority sales to employee shareholding associations (ESA) and 5 under leasing [43].
[10]
For example, it imposed specific tariffs as high as $300 per item on more than 1000 categories of clothing when the import ban on clothing was lifted, and when the ban on textiles was eliminated, tariffs of up to 54 percent were imposed (on yarns and fabrics of cotton and man-made fibres (chapters 51, 52, 54, 58, and 60)) ([24] in [12]).
[11]
Many of these producers have closed down to become importers from China (Magdy Tolba, comment during ECES Roundtable, ECES Cairo, February 11th, 2010).
[12]
An example is the case of Salmone El Omash village, 5？km outside Mansoura. Most inhabitants of this village have been working in the TC industry for more than 40 years. Factories now only operate a third of the year, their profits having been cut by half. They blame this situation on Chinese imports with prices far lower than their products’ [44].
[13]
Overall reduction in production could partly also be attributed to further devaluation of the pound against the dollar between 2000 and 2004 by 78 percent from LE 3.48 to LE 6.21.
[14]
For more information on the European Mediterranean Partnership agreement cf. El-Haddad [45]; Ministry of Trade and Industry [46]; Kheir-El-Din and Ghoneim [47], and on the QIZ agreement cf. El-Haddad [45]; Ministry of Trade and Industry [48]; Institute of National Planning [49].
[15]
Cotton lint, yarn and fabric exports lost a share of 1 percent in both US and EU markets, and carpets gained 2 percent in the EU but lost 1 percent in the US market. Note that cotton lint represents more than half of all cotton exports. See El-Haddad [18] for a more detailed assessment of the effect of the end of the MFA on Egyptian export shares in the EU and the US markets.
[16]
To figure out whether the clothing export sector is self-sufficient, a calculation of imported inputs versus exports would be warranted.
[17]
The new law gives employers more flexibility, in relation to the termination of contracts for reasons of force majeure or negative economic circumstances (such as the current crisis) and working hours, as well as allowing fixed-duration contracts and employment on probation for up to three months. Workers are guaranteed compensation of job termination and the right to strike peacefully in defense of their professional, economic or social interests. Nevertheless, most recent strikes are illegal. Under the labor law workers must acquire permission from the general federation to protest, which is controlled by the government [37–39].
[18]
For example, the General Authority for Investment (GAFI) becoming a one-stop-shop for investors in 2004.
[19]
Which means that firms in the informal sector are excluded.
[20]
Please refer to Appendix A for a note on data discrepancy problems in more detail.
[21]
Which are only half the value of clothing exports.
[22]
That is without a formal contract.
[23]
An outlier.
[24]
689 if sampling weights are used.
[25]
Without this firm, QIZ (clothing) firm job losses would be 354 (394) using sampling weights and 503 (995) without weights, that is, a negative growth rate of their employment by 2 percent (3 percent).
[26]
Precisely 2.9 calculated as 1241/(760 ？ 335).
[27]
(35/23).
[28]
(39/30).
[29]
That is, until public sector firms either stop production altogether or are privatized, in which case workers of these companies will be considered private sector ones.
[30]
A similar trend is noticeable in the tourism sector whereby travel agents, airlines, and hotels have reduced their local prices to replace foreign tourists by national ones to compensate for reduced numbers of international tourists [50].
[31]
Those still remaining as it is likely plenty have exited the market altogether, for which we have no formal count.
[32]
The cost of one job saved due to this policy roughly amounts to LE 257,694 (calculation performed based on sample data shown in Table 26), which is much larger than the general figure of LE 50,000–150,000 for creating one job in the Egyptian labor market.
[33]
Note that in December 2008 the Government scaled up all export subsidies (ranging from 8 to 10 percent of total export value) offered by the Export Development Fund by 50 percent for a seven-month period until June 2009. This policy’s effect may yet again reinforce exporters’ ability to cross subsidize between the domestic and the export market, though the effect may appear with a lag, that is, in data for 2010.
[34]
Since MFN rates ≠ 0 yet.
[35]
Implying that investments have responded to the QIZ agreement.
[36]
However, domestic investment still represents the bulk of investments in the industry ($227 million of $351 million in 2007) though its share in total investment has been declining in favor of foreign investment (from 85 percent in 1995 to 65 percent in 2007).
[37]
Question 404 in the firm questionnaire: Did you undertake any of the following procedures in response to the crisis? (1) laying off permanent workers (i.e., those working no less than 8 hours a day 5 days a week) and (2) laying of temporary, seasonal, or part time workers.
[38]
Questions 307 and 308 asked about overall employment numbers broken down by gender and worker informality status in 2007 and again in 2009. These data were collected from the interviewee but double-checked using the firms’ books. The reason why the year 2007 was picked rather than 2008 is to use a complete year with no crisis effects whatsoever.
[39]
Maximum notice reported by about a third of the 24 firms who claimed to give notice is 4 weeks.
[40]
Refer to Appendix B for recent developments in labor movements and the labor law.
[41]
Inefficient government policies and a lack of a clear strategy for its development rendering the sector uncompetetive were preconditions for this decline.
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In a recent global ranking that measured labor market efficiency, Egypt ranked 134th out of 134 countries [51]. The indicator “labor market efficiency” is composed of ten subindicators grouped under the two components of labor market flexibility and use of talent.
[43]
The Minister of Manpower and Migration approved subsidies from the Emergency Fund to 3,134 workers in ten private sector companies that were hit by the crisis. At least two of them are from the textile sector [52]. Nevertheless, institutionalized arrangements, known to all parties, and based on clear criteria, should be put in place rather than ad hoc decisions.
[44]
Only 9 percent of the firms report they have reduced working hours (Table 23).
[45]
The Generalized System of Preferences (GSP) is a voluntary, unilateral, nonreciprocal system through which developed countries offer developing countries concessional access to their markets for some products produced by developing countries. Egypt benefits from nonreciprocal preferences under the Generalized System of Preferences (GSP) of Australia, Belarus, Bulgaria, Canada, Japan, New Zealand, Norway, the Russian Federation, Switzerland, and the United States [53, 54]. It is important to note that the Egyptian TC industry has hardly benefitted from this system. While Egypt is eligible to implement the GSP, it is not possible for Egyptian textile and clothing exports to benefit from this system. Implementation of this system requires that commodities must be eligible within the GSP framework. While Egypt is a GSP-eligible country, most of the textile and clothing products manufactured within Egypt are not included within the list of eligible goods [54]. For example, only the following lines are eligible for the US GSP: silk, wool, cotton, carpets, and other floor coverings, special woven fabrics, and textile articles [55].
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The content of the previous paragraph relies heavily on ideas and suggestions from Arne Klau.
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Again for a preannounced limited period. Conditionality will be discussed in more detail in the next subsection.
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In order to provide both export incentives and financial liquidity, so as to counteract crisis borne liquidity constraints.
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Which terminated in December 2008.
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That is, TC exports still performed modestly even prior to the crisis.
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On May, 26th 2009, it was announced that the Ministry of Trade and Industry is signing a plan to incorporate two governorates in Upper Egypt to the qualifying zones.
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Since technological advances allow producing fine yarns from less expensive cotton lint.
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Cotton liberalization and continuous price decreases, have also caused successive declines in the cotton crop for over 15 years. The area of planted cotton in 2008/2009 has declined by over a half (52 percent) campared to the previous season, from 225 thousand metric ton to 108, its lowest in 150 years [17].
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The subsidy has reached 30 cents/pound in the 2003-2004 season [11].
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What reinforces the matter is that public sector companies are vertically integrated companies which produce through the value chain, thus discouraging private buyers to bid for such huge entities.
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I am grateful to Arne Klau for drawing this figure to my attention.
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Rather than charging them a percentage of their sales or profits toward training as is currently the case.
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