News: Clusters have a lot of potential in Egypt that remain untapped…

Fatma Abdelaziz and Yasmine Mandour-  Development Strategy and Governance Division, IFPRI.

The conventional development thinking is to provide countries with what they lack, such as financial resources and sound institutions. A more viable and sustainable approach often is to build on and enhance existing strengths. As the new Egypt is on mission to foster job-creating industrialization, it may be a good time to revisit the cluster-based development model which was a driver of agricultural and economic transformation in many Asian and Latin American countries.  Egypt has a long tradition and a large number of clusters, interconnected businesses that are geographically concentrated, for example El-Mahalla El-Kubra Textile Cluster, Robiky Leather Cluster, and Damietta Furniture Cluster, etc. However, many less well known clusters exist and most of them remain small. So how to ensure this existing potential is unleashed? How to help these existing clusters grow and how to build new ones?

eces-seminar

To answer these and related questions, IFPRI in collaboration with the Egyptian Center for Economic Studies (ECES) and under the USAID funded project Evaluating Impact and Building Capacity (EIBC), will start a new research project on cluster-based development. To inaugurate the research project, a seminar was held with the aim of sharing experiences from within and outside Egypt and refining the research agenda on the topic.

Xiaobo Zhang, senior research fellow at IFPRI, explained in his presentation “Cluster-based Development as an Opportunity for Job Creation and Poverty Reduction in Egypt” how cluster-based development has taken off in other countries and how the concept may be expanded in Egypt. Outlining the factors that have been conducive for cluster development in other countries, he mentioned the existence of traditional clusters, effective institutions at the local (decentralized) level and public investments in critical infrastructure such as market places. In successful cases, the existence of social trust serves as an alternative for the lack of capital/ credit. “For private entrepreneurs to rely solely on the official banking sector may delay progress in financing cluster development”, Zhang said. China, for example, has never founded microfinance institutions, and instead borrowing money based on social trust has helped entrepreneurs to grow businesses and ultimately contribute to China’s industrialization. What also helped in China was that  local governments were put on the  the driver’s seat, Xiaobo concluded. The taxation system gave local governments strong incentives to compete among each other to attract businesses and provide a business friendly environment.

So what are the implications for Egypt? There are 145 clusters present in Egypt, 46 out of which are in textiles, 33 in food industry and 17 in agriculture (SFD, 2016). Taking the international experience to the Egyptian context, Heba Handoussa founder and director of Egypt Network for Integrated Development (ENID), explained that ENID is building clusters from scratch in Qena governorate in Upper Egypt, the initial stage which Zhang referred to as the most difficult to implement. So far, ENID has successfully introduced a number of crafts and manufacturing activities (Furniture and Readymade Garments), in the poorest hamlets and villages. Since the initiative first started in 2012, over 4 years the cumulative number of beneficiaries reached 4,431, out of which 1,477 received full time jobs. ENID plans to reach 45 villages by the end of 2017.

Abla Abdellatif who leads the Presidential Advisory Council for Economic Development and heads ECES, presented the current government plans in terms of cluster-based development and how they could be interlinked to job creation and poverty reduction in Egypt. “We have what is called the missing middle problem” Abdellatif pointed out; in comparison to other countries, Egypt has a very small share of labour in small and medium size enterprises (SMEs) at the size of 10-99 employees.  These SMEs contribute only 4% to exports; an additional challenge is that almost 79% of clusters in Egypt remain informal. Such low performance of SMEs manifests itself as a major challenge to Egypt’s economic development. SMEs in Egypt face numerous bottlenecks and barriers to entry, namely: the red tape and the lengthy and complicated governmental procedures to start an SME, difficulties in fund raising and access to credit, lack of technical and financial assistance, in addition to the lack of mentorship at the early phase of ideation. Abdellatif also announced the government’s new initiative “Wazeftak Ganb Beitak” (Your Job Next to Your Home) where 13 factories have been built to specialize in readymade garments in villages in the country side. The rationale behind the initiative is to create job opportunities in proximity to skilled labor in a decentralized manner. Accordingly, six factories were built and launched in late September 2016, export partnerships with a few companies were established to guarantee a sustainable production line and trainings for some of the female prospective workers took place.

The consensus among all panelists was that the cluster-based development model indeed has the potential to become an important driver for economic development and job creation in Egypt. As Abdellatif put it “clusters have a lot of potential in Egypt that remain untapped,” and we hope that the upcoming joint ECES-IFPRI research project will make an important contribution to unleash these potentials.