Trade liberalization can have numerous unprecedented implications for the economy
The Impact of International Trade Liberalization on Developing Countries: Egypt Case
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Abstract
Trade liberalization can have numerous unprecedented implications for the economy, development and progression of a country, especially when such a country is still developing. There have been numerous liberalizations of trade through different policies all of which have had different kinds of implications for the affected country. This paper will examine the implications of such a liberalization of trade is a developing country, Egypt. The country’s economy and growth is mainly depended on agriculture and trade in agricultural products. Liberalization of trade, therefore, would not only affect the nation’s economy, but the living standards of the farmers.
Table of Contents
Abstract……………………………………………………………………………… 2
Introduction…………………………………………………………………………. 4
Effects of trade liberalization…………………………………………………………5
The NENA regions……………………………………………………………………6
Characteristics of economies vulnerable to trade liberalization………………………8
Effects of liberalization of trade in the case of Egypt……………………………….12
Summary and conclusion…………………………………………………………….15
Appendices…………………………………………………………………………..17
References………………………………………………………………………….. 21
Introduction
It has become a common refrain in policy issues that expanded trade determines success for developing country. According to this ideology, if the developed or industrialized nations would do away with their barriers of trade, especially in agriculture and apparel, this would provide a foundation for growth in developing countries, pulling millions of people from poverty. As the World Bank points out in one of its Global Economic prospects, a decrease in barriers to trade in the world could increase growth, provide an incentive to new forms of productivity- improvement specialization and result to a more rapid pace in creation of jobs and reduction of poverty around the world.
The evidence for this argument is significantly less convincing than what its proponents argue. While there are a number of reasons for believing that expanded trade can help enhance growth in developing countries, it is not likely that trade liberalization, without any support will effectively improve people’s lives in developing countries. Actually, there are reasonable scenarios in which cases of trade liberalization can indeed lead to worse results for developing nations. Additionally, it is not quite clear that liberalization of trade is the key to rapid development and growth. It is critical to note that the major stories of success in this world- more specifically Taiwan and South Korea, which now have incomes almost equal to poorer developed countries, but also nations that have more currently experienced increased growth rates like India and China, have not followed a simple path of liberalizing trade.
In the above cases, all governments had a critical role in guiding the economy. This guidance is inclusive of protection and subsidies for favored industries and limitations on flows of capital, policies usually opposed by the major proponents of liberalizing trade. In most cases, the path of liberalizing trade currently endorsed by the World Bank and others can be witnessed as directly against the development strategies that have been most successful in the post war era . This paper discusses the effects of international trade liberalization on developing countries, and particularly Egypt.
Effects of Trade Liberalization
A lot of evidence shows that liberalization of global trade, for example, by minimizing agricultural support policies in nations of the Organization for Economic Co-operation and Development (OECD) and by limiting protection, will increase world prices in agricultural products. The markets for sugar, wheat, rice, dairy products and cotton are most affected, and the markets in such markets can rise by tremendous levels. Egypt is an agricultural importer, so, there is definitely some cause for concern that the country will lose, as a result, of liberalization of global trade.
Certain studies have estimated that the trade terms effect of an increase of about 15 percent in all global agricultural prices on countries, as Egypt is about 1.2 billion dollars or 0.2 percent of the regional GDP. This estimate is larger as compared to the trade terms loses. A number of studies have been carried out to examine the macroeconomic effects of a number of types of liberalization of trade to countries in the same region as Egypt, with real GDP increasing 1 to 3 percent. The advantages of liberalization of trade to a given country are largely determined by the level of domestic liberalization carried out by the nation. Most of the gains from liberalizations in agricultural trade are related to domestic reform and not changes in the trade policy in other nations. Additionally, the benefits of liberation of multilateral trade are usually more than the gains related to bilateral trade agreements with the European Union or the US and the advantages from agreement regarding regional trade within the region.
The NENA Region
Most of the NENA nations, Egypt included are semi arid, with little water and arable land, making production of agricultural products highly dependent on rainfall. The overall density of production in the region is, as well low when compared to other developing countries, though it is more urban than other developing nations. The performance in economy of many of the members of NENA has been weak, especially due to various conflicts and political instability. Some of these have to do with the numerous spring demonstrations that occurred last year those that are currently taking place. The real GDP per capita growth during the early 1990s was not more than 1.3 percent each year. The slow growth in economy has resulted to little growth in employment especially in the formal sector leading to persistent problems of low unemployment rates among the young people. However, the strong economic growth and performance in such countries as Tunisia and Lebanon suggest that such issues are not unsolvable.
For most of the NENA members, exports in agricultural products represent a relatively insignificant share of all the exports. Wheat is a major import product and a staple food for the region. Almost all of the NENA members are net importers of food. Some nations in the region have significantly low levels of protection for the producers of food. Morocco, Egypt and Tunisia are among the 15 most safeguarded economies all over the world, according to a recent study. The products that are protected the most in the area include wheat, dairy, sugar and livestock products. The European Union is the most significant trading partner for a significant number of the members of NENA.
Egypt has carried out a significant liberalization of trade; however, expensive limitations to conducting business and investing still remain. Egypt is a key importer of wheat and exporter of rice, cotton and horticulture. The Egypt Integrated household Survey in 1998 carried out a survey and came out with a report that examines the distributional impacts of hypothetical changes in prices for agricultural products. According to an analysis done on this report, an increase of forty percent in prices of wheat would decrease the incidences of poverty among growers of wheat by more than 3 percent. In the case of cotton and rice, an increase of forty percent on prices of wheat would lead to a decrease in poverty among the farmers of the crops by not less than 7 percent. For vegetables and fruits, a similar increase in price would decrease poverty among farmers by not less than 7 percent. The most significant effect has to do with growers of sugar cane. An increase of forty percent in prices of sugar would lead to a decrease in poverty by more than 20 percent, mostly because growers of sugar cane are poorer and dependant on income from sugar cane. However, the impact of each of these increases in price on national levels of poverty is not significant as only a small percentage of the population is a farmer of any of the crops.
Characteristics of Economies Vulnerable to Trade Liberalization
Before one can determine the full effect of trade liberalization in Egypt, it is essential to first understand what the main characteristics of the economies are. Egypt belongs to an organization called NENA whose most members are derived from North Africa. All of these countries are developing countries. Although the member countries share cultural and geographical similarities, they form a heterogeneous population with regards to food insecurity, income, and their integration in the global economy. Seven of the member countries are classified by FAO as low-income nations with instances of food insecurity. Egypt is among these seven countries. The same countries are indicated as having low per capita GDP of not more than 1 465 dollars. The same countries have also had limitations and deficits in grain trade for the past five years.
In a related classification, WTO considers other members of the organization including Egypt and Morocco as net importers of food who are also developing countries. The WTO sees this group of nations as vulnerable to the probable negative impacts of implementing policies free trade in agricultural products. Specifically, this is to mean that Egypt and similar member countries are expected to experience challenges in financing some of their imports of food (WTO 2006a). In a recent study, the researchers argued for improved indicators of food security status of nations. They make use of cluster analysis to categorize 163 developing and developed countries based on five variables: production of food per capita, the proportion of sum imports to food exports, proteins and calories per capita, and the population share of nonagricultural products. These variables indicate the ability of a nation to feed itself, the ability of the nation to finance its imports in food, its level of nutrition and its population’s vulnerability to changes in agricultural and trade policies respectively.
The member countries also differ in their integration into the international economy. Only six of the member countries including Egypt are members of the WTO. All of these countries have at some point entered into a trade agreement with the US or the EU. The different agreements and the composition of flows in trade determine the differences in the protection level and access to partners in trade and their markets among the nations. Most of these countries have increasingly high levels of protection of imports, according to a study carried out by Bouet, Egypt is ranked 5th among the most protected countries. The study concluded that the member countries while extremely protective benefit from significantly excellent access to global markets, either because of a specialization in products that do not require high taxation or because of the preferential agreements with nations of OECD. The study also argues that all member countries face increased duties on their exports on agricultural products than they do on their exports involving nonagricultural products. This trend is not surprising given the increasingly high protection of agricultural products in the European Union. The categories are shown in appendix 1.
The other characteristic of economies relevant to Egypt is economic performance and growth. All the member countries are lower- middle income and low- income countries according to a classification by the World Bank. The per capita range of incomes for the nation is below 600 dollars in the poorest LDC and that is Somalia. As a whole, the region has fared way better than the rest of Africa, other than South Africa, and is almost at the same level as South Asia between 2000 and 2003, but the region is unstable because of the numerous economic and political uncertainties.
The population of the region is estimated to range at about 300 million or more people. The growth rate is significant, as well. Unemployment is another significant issue facing the region. Reflecting on the low rates of economic growth, in addition to, the rapid increase in population the issue is likely to remain for a while. This can be seen in appendix 2
The situation presented in the table in appendix 2 shows an economic case in Egypt and other member countries dominated mainly by high unemployment and GDP growth per capita.
Inequality, poverty and other social indicators are other essential characteristics of economies that can be affected by liberalization of trade. The incidence of poverty is different in all these countries. In particular, Egypt and other similar nations show lower levels of extreme poverty, however, they still register high levels of incidence of poverty at the national level and 2 dollars per day. Using the 2 dollars per day poverty line, Egypt has the highest poverty incidence of about 44 percent, more than double the poverty levels under the national level poverty line. Egypt also has relatively long life expectancy of up to 73 years. Such patterns show high poverty rates and low income in the country. The index in education combines indicators of the gross primary, tertiary and secondary schools enrolment ratios and of adult literacy. The ration is significantly low in Egypt. However, adult literacy levels are roughly equal to income levels in the region.
The role of agriculture and the structure of GDP are other critical characteristics of economies vulnerable to trade liberalization. The GDP structure in the region indicates that major role of industries and services in the nation’s economy. On average for the country, the services industry contributes not more than half of the nations GDP and the industry sector almost a third. In the country, agriculture contributes more than 20 percent of the total national output. Agriculture also provides significant job opportunities for the population in Egypt. This goes in line with the fact that the majority of the nation’s population lives in the rural areas. Another measure of significance of the agricultural industry is the large share of exports in agricultural products in the nation’s total exports. It is expected that liberalization of agricultural trade on households might be more significant even when an insignificant part of the exports is from the agricultural industry, as agricultural trade impacts prices of food, and, therefore, security of food particularly in poorer households.
Effects of Liberalization of Trade in the Case of Egypt
Among the member countries of NENA, Egypt is considered to have the second largest economy and population after turkey. The country’s per capita is 1622 dollars more than most of the other member countries, but considerably lower than that of Tunisia, Lebanon and turkey. The largest population is concentrated along the River Nile banks and in the Nile Delta. With only 43% of the whole populace in the cities, the country is less urbanized than the other country members are.
Like numerous other developing nations, Egypt pursued a strategy of industrialization based on substitution of imports between the 1970s and 1960s. In 1982, a debt crisis hit the nation and Egypt became among the initial associate countries to develop a set of economic changes to adopt a trade policy that was more outward oriented. These reforms involved simplification and reduction in import tariffs, decrease in barriers that are nontariff, unification of a number of rates of exchange and depreciation of the rate of real exchange to stimulate exports. According to figures released by the World Bank, the country’s simple average tariff rate is low by world standards, not more than 60% of the countries in the globe.
The nation today enjoys a windfall because of the high prices in the world for its exports in oil and higher revenue from Suez Canal, since the fuel costs higher and has made its alternative more expensive. Partly, this liberalization was unilateral, and part of it was associated with several agreements. The country signed an EMAA in 2001 with the European Union but the union did not come into action until 2004. The country is also a member of GAFTA, greater Arab free trade agreement, an agreement under which all trade between Arab nations would be free of duty by the end of 2005. The country also signed another agreement- the Agadir Declaration- that created free trade among Egypt, Morocco, Tunisia and Jordan.
Production of agricultural products is concentrated more along the Nile Delta and Nile River. More than 97 percent of the nation’s land is unproductive because of limited rainfall; crop production is usually through irrigation. Egypt is mainly a food importer, and the ratio of self- sufficiency in several food crops has decreased since the 1960s. The increasing dependence of the country on imported food is a key concern and has led to a number of attempts to limit imports of food and enhance domestic production. This can be seen in appendix 3
In the 1980s and 70s agricultural policies in the country intervened significantly in marketing, production and trade. A policy dealing with industrialization based on substitution of imports meant that the agricultural industry was taxed heavily through low compulsory sales and official prices. Just the same, way, some commodities were protected by import limitations. In the 1990s the country finally liberalized its markets of agricultural products and decreased its level of protection of imports, wheat markets largely remain distorted by a number of controls on imports, consumer subsidies, fixed producer prices and government control of channels resulting to subsidized bread. In 2004, a set of key tariff reductions was put in place, resulting to the World Bank to declare that Egypt had progressed more on the issue of trade liberalization than other countries. Even with this progress, the level of protection was higher than 40% of the nations globally.
Full liberalization of global trade would increase the prices of agricultural goods by not less than 15 percent. This would probably affect the country’s economy negatively, as it is a net importer of agricultural commodities. Egypt would benefit from higher cotton and rice prices but lose from increased maize and wheat prices. Reforms in domestic trade would decrease the domestic prices of imported goods like wheat, therefore, partly offsetting the adverse impacts of liberalization of global trade, in addition to, providing gains in efficiency.
In this paper, the consumption and income patterns of Egypt are reviewed based on 1997- 1998 Egypt Integrated Household Survey and indicates the impacts of changes in prices for the key agricultural commodities on poverty rates and incomes among Egyptian homes. Such changes in price might come from alterations in prices of the world market or from changes in subsidy or border policies within the country. Generally, the review indicates that changes in price have a considerable impact on poverty levels among farmers of certain crops, but these changes in price will not have a more significant effect on overall poverty rates.
For horticultural crops and rice, an increase of forty percent in prices would lead to an increase in national poverty of one percent. For wheat, the same increase in prices would lead to a decrease in poverty levels by one percent. A forty percent increase in prices of sugar and cotton will negatively affect the nation’s poverty levels. Generally, a forty percent increase of the prices of the mentioned crops will lead to more poverty in rural and urban areas, though the increase will not be more than by one percent.
Summary and Conclusion
An essential insinuation of this evaluation is that policies concerning agricultural products are relatively inefficient and insufficient policy instrument for helping the poor in rural homes. Another fascinating implication is that, although wheat is one agricultural product affected by politics, the effect of its protection on poverty is insignificant even among the farmers of the crop. This is so because most farmers of wheat are not particularly poor, as their incomes are more diversified and because numerous other families in both the rural and urban areas are buyers of the commodity. Although decisions of policies consider a broad range of factors not considered in this paper, this analysis takes the power off the argument of poverty alleviation for a policy in wheat protection.
Finally, the paper indicates that some of the poorest families in Egypt are those that are farmers but without land. Such families include agricultural tenants and laborers who use land owned by others. Policies in agricultural trade can affect the wellness of such households only indirectly and through markets of labor. As this analysis is based on data derived from 10 years ago, it is highly likely that the results and conclusions would be better if data that is more recent were used. The population share in urban areas has increased by more than 30 percent. This is to mean that the share of farm families in the country has decreased, in which the actual impact of higher prices of food is somehow negative than has been shown in the paper. At the same time, the nation’s per capita has increase by more than 30 percent. As the share of income given to food shortages as income increases, this indicates that the adverse effect of increased food prices will actually be lower than indicated in the paper.
Appendices
Appendix 1
Classification World bank income group FAO UN WTO Openness category
Food insecure Djibouti Lower middle LIFDC LDC High
Somalia Low income LIFDC LDC Low
Sudan Low income LIFDC LDC Low
Yemen Low income LIFDC LDC Low
Food neutral Algeria Lower middle Low
Egypt Lower middle LIFDC NFIDC Low
Jordan Lower middle NFIDC Low
Lebanon Middle income Low
Morocco Lower middle LIFDC NFIDC Low
Syria Lower middle LIFDC Low
Tunisia Lower middle NFIDC Low
Food secure Turkey Lowe middle Low
Not classified West Bank and Gaza Low
Sources: WTO 2005a: FAO 2006: Bouet et al 2004; Diaz- Bonila et al 2000
LIFDC is low-income food deficit countries
LDC is least developed countries
NFIDC is net food importing developing countries
Appendix 2
Real GDP per capita Population Land area Annual growth in GDP per capita 1990-200 Annual growth in GDP per capita 2000- 2003 Unemployment rate Share of urban population Population density
2000 US$ Million 1.00 km % % % % Per km
Algeria 1916 31.8 2382 -0.3 1.5 27 59 13
Djibouti 848 0.7 23 -4 2 50 85 30
Egypt 1622 67.6 995 2.3 1.8 11 43 68
Jordan 1801 5.3 89 0.6 2.8 13 79 60
Lebanon 3925 4.5 10 5.3 1.3 9 91 440
Morocco 1278 30.1 446 0.4 1.6 11 57 67
Somalia 600 9.6 627 -8.1 3.3 – 29 15
Sudan 433 33.5 2376 3.3 2.1 19 39 14
Syria 1135 17.4 184 2.12.4 12 53 95
Tunisia 2214 9.9 155 3.1 1.1 14 67 64
Turkey 2977 70.7 770 1.7 1.6 10 67 92
West Bank & Gaza 849 3.4 6 -1.7 4.2 26 87 541
Yemen 553 19.2 528 0.9 3 12 26 36
NENA13 1530 303.2 8.592 1.3 1.9 13 53 35
Source: world Bank 2005
Appendix 3
Commodity Net exports (average over 2000-02 in dollars) Commodity Net imports (average over 2000-02 in dollars)
Cotton (lint) 205 Wheat 732
Milled rice 100 Maize 561
Molasses 22 Soybean cake 207
Oranges 31 Beef and veal, boneless 185
Dry onions 17 Tobacco leaves 168
Vegetables dehydrated 15 Tea 112
Potatoes 6 Soybean oil 76
Frozen vegetables 9 Dry broad beans 66
Flax tow and fiber 7 Soybeans 68
Mango juice
4 Refined sugar 44
Source: FAO (2005)
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