Liberalization unravels one of Egypt’s prized local industries
(Business Today Egypt, April 2010)
The showroom of El-Hosseiny textiles in the Delta town of Salmone El-Omash is one large open space.
The walls are lined with sun-bleached mannequins, their features covered in a thick layer of dust. The room is packed with overflowing boxes of brightly colored garments, leftovers from last season.
And there isn’t a customer in sight, despite the fact that it’s past noon and El-Hosseiny is one of the few stores open in Salmone, long-renowned as the country’s premier locale to buy wool clothes.
“The place never used to be like this. It used to be packed with people all the time, and we used to make LE 3,000–4,000 in profit per day,” says Ahmed El-Hosseiny, who runs the store and a textile factory in neighboring Mansoura.
“But every year it gets worse. One day we make LE 50, and another day we make nothing.”
At this time of year El-Hosseiny, like many of Salmone’s other 40,000 residents, should be brainstorming new ideas for the coming season. But with last year’s clothes gathering dust, producing a new line is more than futile — it’s a guaranteed loss.
In 2008, Salmone’s factory owners sold roughly 50% of their manufacturing quota. In 2009, that number dropped to 25%.
Salmone El-Omash was once a major hub of textile production and clothes making. Part of its name, El-Omash, literally translates to textiles. But in recent years the town’s roughly 1,500 workshops and 25 stores have seen business collapse. A lethal combination of the financial crisis, deregulation and an influx of inexpensive imports, especially from China, have leveled the local economy. And just as Hosseiny exemplifies what is happening in his village, Salmone is a microcosm of broader changes taking place throughout the country.
Villages usually evoke visions of a simple agrarian life. But Salmone turned that image on its head. For nearly 70 years, residents have been making textiles. Homespun wool workshops predated electricity in the region, and as technology was introduced, manufacturing kept pace. What began in homes evolved into workshops and factories; what sustained a region then supplied a nation.
The residents of what was once known as “Mini Japan” established an industrious reputation. In 1986, President Hosni Mubarak highlighted their contribution to the national economy with a visit to the town.
But today, the spirit is gone. “We don’t wake up before 5pm each day. We all just stay up trying to do anything that would make the night pass, then sleep all day,” says workshop owner Hassan Shafie.
Historically, production season in Salmone spanned 10 months — these days it’s lucky to last four. The inability to turn profits predictably led to decreased wages and large scale layoffs. In a local economy based around a single industry, failure also has social ramifications. Workers have abandoned the village, and desperation has fueled a rising tide of criminal activity and increased tension among neighbors.
“The thefts that are occurring now come from the village residents stealing things from each other,” says El-Hosseiny.
Through much of the 1990S, textile imports were banned by the Egyptian government, which allowed local manufacturers to thrive.
But in search of growth, Egypt joined the World Trade Organization in 1995, setting it on a path of market liberalization.
A series of cuts in tariffs during the last decade leveled the playing field for foreign manufacturers, and by 2007 imports were surging.
At the head of the pack were Chinese manufacturers, who “showered the market with their cheap products,” says Mostafa El-Samouly, the owner of a textile factory in Mahalla and a member of a key industry association.
Even when Salmone manufacturers switched to inexpensive fabrics like acrylic, they could not match the prices of imports.
“In China, they have subsidized fabrics, factories and everything they need to be very productive,” says Mo’awad El-Shafihe, who owns a Salmone plant. “Everything for us is overpriced; taxes are high and we have to pay a lot for water and electricity. I started selling the pieces that were worth LE 26 for only LE 13, and people are still not happy with the prices.”
Factory owners also face high import and port tariffs on foreign-made fabrics.
The combination of those factors has industry players worried that they will never be able to make up the gap with foreign manufacturers.
“Today everything in our life is Chinese and they will keep expanding everywhere until one day [...] there won’t be anyone else to compete against them,” says Ahmed Sakr, a Salmone native who has a business in Cairo.
While Salmone and other industrial regions were reeling from a market saturated by international competition, the economic crisis may have put the final nail in the coffin. According to Dr. Amirah El-Haddad, an economics professor at Cairo University, textile production has dropped 25% since fall 2008.
Losing the domestic sales battle in the short term does not always spell the end of an industry. The export market, where Egypt had found success in the past, offered the potential to compensate for losses.
But the lowering of international trade barriers in the middle part of this decade put the country in direct competition with textile powerhouses like China, India, Pakistan, Bangladesh and Indonesia. (In early 2005, just after one major trade barrier was dropped, exports from China and the US doubled.)
Developed countries with highly efficient production facilities made gains in the international marketplace, leaving many Egyptian firms out in the cold.
The textile sector, which employs about 25% of Egyptian workers, has suffered the brunt of liberalization. But it is not the only domestic industry reeling from Cairo’s embrace of the free market. Former stalwarts like cotton, marble, and auto production have also experienced difficulty adjusting to global competition.
“Unemployment is a huge disaster now in Egypt that should be solved immediately, before it gets even worse,” says El-Samouly. With the government focusing on other aspects of economic recovery — the vast majority of its stimulus dollars have gone towards infrastructure — the textile industry, and the people of Salmone, will likely have to weather the storm on their own.
While business is bad, El-Haddad says a sector-wide recovery is possible
“After the crisis recedes, things are expected to get better,” she says. “If [manufacturers] hang in there for a year or two, they may be able to revive their business.”
Despite the challenges, some Salmone residents remain optimistic.
“We are capable of doing anything that the market requires,” says El-Shafie, the factory owner. “We just need chances. We need fair prices for the fabrics we are using. We need export markets to open. [Then] we will be able to revive the industry.”
Inside the small workshop he shares with brothers Abdo and Mohamed, El-Shafie stares at the floor. Colored threads, half unspooled, spill into a corner and mix with spider webs. Cloth has been left on the machines, and the dust is thick enough to taste. No one has entered the space for at least a month.
“The village is dying and no one cares,” says Mo’awad El-Shafihe. bt