Imports and exports responses demonstrate that multilateral, and not unilateral trade liberalisation is the strategy of choice

A research paper published by the Economic Research Forum (ERF) shows that trade liberalisation has different effects on different sectors. The paper is co-authored by two economists, Rana Hendy and Cahir Zaki, who analyse the outcome of the trade liberalisation strategy adopted by the Egyptian government.   

The study finds that the strategy has had important effects on marriage and on females’ labour market choices, with a higher level of education also significantly affecting the individual’s choice, increasing the probability of being a wage worker rather than being inactive.

While the government strategy did benefit sectors like transport services, chemicals and animal products-as Egypt is a competitive exporter-imports of garments, processed food and vegetables mean that Egypt is a net importer of such products.

Clearly, Asian countries have a comparative advantage in those products. That is why Egypt has increased its imports of such products, according to Hendy and Zaki.

Another important finding of the research is that in the short term, real wages are increasing, but will decrease in the long run, with a corresponding reduction in the house-hold’s welfare.

Both economists highlight a very important conclusion, which is that multilateral-as opposed to unilateral-trade liberalisation is the kind of strategy needed, as demonstrated by imports and exports responses.

Liberalisation New

Trade liberalisation is certainly a pillar of the Egyptian economy.

Rachid Mohammed Rachid, Minister of Trade and Industry, recently signed a free trade agreement with the Common Market of South America, known as MERCOSUR.

The agreement provides special access for Egyptian exports to Latin markets, and in exchange facilitates imports from such countries. Egypt imports from the region mainly important commodities like sugar, meat and soya oil, which are in strategic demand here.

“This agreement will help double the trade volume between Egypt and MERCOSUR, which is currently estimated at US$7 billion,” said Rachid.

He also pointed to Egypt’s desire to increase the bloc’s investments domestically, as it is the world’s fifth largest economic bloc.

The clever thing about this bilateral trade agreement is that it includes mechanisms to monitor any harm that might hit the Egyptian economy as a result of growing Latin imports into the country.

It actually states a right to implement selective protective measures to local industries immediately, as the effects can be quick. This is in addition to a dual committee founded by both sides to evaluate the precise mutual trade liberalisation process.

Later, Rachid invited the bloc’s countries to invest in Egypt in specific sectors like medicine, textiles, machinery and IT, in the belief that countries like Brazil and Argentina would have great advantage.

Walid Helal, head of the Chemicals and Fertilizers Export, says, “Signing this agreement will help increase Egyptian exports, which will eventually help to achieve the ministry’s goal of hitting LE200 billion of exports in annual volume by 2013.”

It is worth mentioning that exports of chemicals and fertilizers hit LE11 billion in the first half of 2010.

Such agreements seem to have been taking high priority in the past couple of years, especially with an active minister like Rachid. Similar agreements were negotiated with the European Union as well, but in different commodities and sectors like food production, agriculture and services.

Research

Bureaucracy, the internet, and widespread and geographical impediments to trade all also have their own influence.

Chahir Zaki says, “When trade facilitation is simulated precisely by taking into account its cost as well as the tariff equivalents, its impact remains higher than trade liberalization. Moreover, some sectors witness a significant expansion more than others, especially food, garments and textiles.”

He argues that trade facilitation is a deadweight loss; hence all agents should gain from such a process. But, taking into account corruption, the welfare of customs agents coming from [1] bribes.

“The government should increase public servants’ wages to reduce incentives to receive bribes to speed up imported products,” Zaki advises.

Usually economists focus on income and expenditure as the sole dimension of poverty. However new research by ERF views the situation as multidimensional, and investigates poverty from a multiple non-income perspective.

Living standards, obtaining durable goods and level of education are all affected by the impact of trade liberalisation on poverty in Egypt.

It is found that the standard of living in rural area is catching up with the standard of living in urban area is catching up with the standard of living in urban areas. The improvements have benefited some middling groups of society, but not the poorest groups in terms of education.

Other findings indicate that inequality of opportunity represents on average 30% of total earnings inequality. It also appears from the study’s results that, while there has been a small increase in total earnings inequality, the inequality of opportunities is decreasing.

Stakeholders Contradiction

Trade liberalisation in conception seems to be wise. However, strategic planning, implementation and correct analysis of economic inputs and outputs are all axes of the inability to clearly point out the impact of trade on the population.

A recent study by the Social Contract Centre shows that the food gap between production and consumption has widened.

It also reveals that the trade liberalisation bonded the Egyptian market with international prices. However, with the existence of market inefficiency and monopolies in commodities distribution, the prices of local products went up at a rate higher than the international one.

In another context, Othman Mohamed Othman, Minister of Economic Development, declared in parliament at the end of March that the amount of rural poverty retreated from 31% to 26%, while urban poverty decreased from 13% to 8.6% in the fiscal year 2008/9.

He also strongly rejected the claim that a certain class of society is reaping the fruit of current economic growth.

In the same parliamentary session, Gadat Almalt, head of the Central Auditing Organisation, which is ironically a governmental body, disagreed with the minister’s and the government’s claims.

“The rural poverty percentage, especially in Upper Egypt’s governorates, reaches up to 40%, while the urban poverty percentage is 18%,” he declared to MPs.

He added that the countryside holds 77% of Egypt’s poor. Almalt’s claims have resulted in a tremendous clash between the two government entities.

And this dilemma shows that the battle of trade liberalisation to prove any impact on Egypt’s poor, in terms of figures, has ended up in a mess between the government’s stakeholders and academia.

This article is originally published by Al Borsa