Can Egypt take advantage of structural vulnerabilities in Global Value Chains?

The global supply chain crisis is becoming an increasingly urgent matter to most world economies, who will sooner or later bear the brunt of the crisis should it not be properly and promptly addressed. The crisis which was exacerbated by Covid-19 isn’t the first and won’t be the last, as the world’s Global Value Chains (GVCs) have suffered from chronic vulnerabilities – let’s go back to the beginning of the story.

Once upon a time, an economy’s trade competitive edge stemmed from its possession of most, if not all, production inputs for its products. Globalization and multinational firms have completely eradicated this notion. Today, it’s easy to assume that any item that reaches consumers anywhere is a product of multiple inputs hailing from different parts of the world – this is the concept of Global Value Chain (GVCs).

“GVCs are not explicitly designed, created, or orchestrated but are self-organizing systems that emerge through the aggregation of decisions by companies, industry groups, and nations pursuing self-interest,” reads a newly released paper titled ‘Resilience in Global Value Chains: A Systemic Risk Approach’ by a group of researchers from both Princeton University and the American University in Cairo.

For revolutionizing how humans approach manufacturing, the concept of GVCs has garnered the interest of economists and industrialists ever since its conception in the mid-1990s. Another crucial aspect drawing attention to GVCs as a concept is that it implies the ability of any country, whether developing or developed, to upgrade its economic activities by identifying voids in the GVCs it can fill using its current resources and potentials.

“The ability of countries to prosper has been associated with their participation in the global economy and their role in GVCs, which consider the generation and transfer of value worldwide. Developing nations are able to use the GVC perspective and structural framework to strategically attract these industries and subsequently “upgrade”: advance within the industry, attain higher skill and education within the global labor force, and produce greater economic value,” explains the paper.

In emerging economies like Egypt, integration in GVCs could spur much-needed economic development and spearhead efforts to bring the economy to a better global standing. Despite sporadic attempts to achieve those goals, much is still needed to be done.

“MENA countries largely failed to upgrade their economic and technological position in GVCs and remain specialized in low value-added activities in these chains leading to little overall developments in terms of type of employment and income levels. Most of their exports are also highly concentrated in a small number of export markets,” reads a joint article by LSE’s Shamel Azmeh and AUC’s Abeer Elshennawy in 2019.

Additionally, cheaper labor and input options being available across the world, particularly Asia, and ease of doing business being a pressing issue for Egypt to solve, integration in GVCs has proven increasingly elusive.

Egypt could still stand to take advantage of structural vulnerabilities in GVCs.

“As industries grow across borders, oceans, and continents, they become increasingly reliant upon a complex web of underlying systems over which they have minimal control—such as communication, transportation, financial systems, and others. Not only are all these far-flung critical systems impossible to fully secure around the world, but increasing global integration allows shocks, which might have once been isolated to one sector or region, to now propagate quickly through these tightly coupled underlying systems that form the architecture of GVCs,” further explains the new AUC and Princeton University paper.

Why is Egypt well-poised to capitalize on that? Its geostrategic location and relative accessibility to most European and Asian markets is one big reason. But to be able to do that, upgrading infrastructure comes first – which is already well underway.

“Egypt has already signed a Memorandum of Understanding (MoU) to link to Cyprus… [In]the logistics sector, we find that in August 2019 the government completed its comprehensive plan to construct seven dry ports and logistics zones, which will be connected to the country’s rail network and used to transport products to industrial complexes around the world,” asserted Gehan Saleh, advisor to the Egyptian prime minister for economic affairs, in a recent paper titled ‘Egypt Towards Global Value Chain Integration.

Focus on producing high-quality intermediate inputs, ones that can compete on a global scale and offer a viable, cheaper, and closer alternative to manufacturers is another crucial element of Egypt’s success to integrate in GVCs. As the world attempts to lessen its reliance on China and other Asian economies for intermediate inputs, a golden opportunity presents itself to Egypt.

“COVID-19 has questioned the excessive reliance on China for supplies. Indeed, around 25 percent of intermediate inputs used in high-tech exports (that include pharmaceuticals and chemical products, machinery, motor vehicles and other transport equipment) in the United States, Japan, Korea and Mexico come from China. Clearly, this negative effect is particularly pronounced for the lower tiers of supply chains where small and medium enterprises (SMEs) are present, notably in emerging economies,” read a June 2021 paper by a group of researchers titled ‘Demand and supply exposure through global value chains: Euro-Mediterranean countries during COVID.’

It remains to be seen how effective Egypt’s efforts to integrate in GVCs will play out, but if done right, it could be exactly the push the country needs to meet its ambitious development efforts.

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