The most populous Arab country didn’t see the benefits that other developing countries did in the 2000s
By: Raymond Robertson, Mexico Vergara, Deeksha Kokas and Gladys Lopez-Acevedo
Tue, Sep. 14, 2021
As published in our July - August 2021 issue
Since the early 1990s, developing countries have experienced a coincidence of rising exports – especially those related to global value chains (GVCs) – and improved labor market outcomes. Further, during 2000-2010, rising trade was associated with falling poverty and inequality for many of them.
Egypt, however, was not one of them, even though it signed several trade agreements and adopted policies to foster trade growth, including slashing the maximum tariff rate from 110% in the late 1980s to 40% in the late 1990s, and making further reductions in 2003-2004. Female labor force participation (FLFP) and unemployment have remained stubborn, for example (see figure 1).
Against this backdrop, our study “International Trade and Labor Markets: Evidence from the Arab Republic of Egypt” asks two questions: Do trade agreements produce the same increase in exports in Egypt as occurred in other countries? And do higher exports generate better local labor market outcomes in Egypt as occurred in other countries?
Egypt is an excellent case to better understand trade and labor markets for several reasons: First, in the past decade, it has concluded several free-trade agreements with the European Union (EU), Turkey, Jordan, Morocco, and Tunisia (the Agadir Agreement), and members of the European Free Trade Association – helping to accelerate both imports and exports.
Second, despite bold economic reforms that allowed growth to rebound, it currently continues to struggle with: (i) high youth unemployment; (ii) low female labor force participation rates; (iii) high informality rates; and a stubborn gender wage gap.
The reforms, however, provided the underpinnings for a second generation of reforms aimed at strengthening human capital, and promoting private sector-led growth.
Third, it is a vital part of the Middle East and North Africa region, which experiences high economic volatility, remains relatively undiversified and dependent on a few commodities that often see strong relative price swings, and continues to be affected by security issues.
The results of our study suggest that there is a broken link between trade and labor market outcomes – enough so that Egypt might need to rethink its export strategy.
Starting with how Egypt fared on the export front after trade agreements, we use a gravity model approach to predict bilateral trade flows based on characteristics (like economic size and geographic distance) that should typically facilitate trade and to identify sectors and markets for which Egypt seems to have untapped potential.
Our findings clearly highlight that trade agreements tend to enhance trade and Egypt has gotten more “bang for its buck” with its trade agreements – that is, its exports following trade agreements are even above internationally estimated averages.
As for whether Egypt’s exports and labor market are linked, we use a geography-based Bartik (1991) approach to quantify exogenous import demand shocks from the United States and EU countries for Egyptian exports.
Our findings uncover the interaction between trade and domestic labor market outcomes in Egypt – clearly highlighting that trade does not connect to domestic local labor markets in the same way it does in other countries.
At the local level, labor market responses to export shocks differ across regional labor markets in the short run, but preliminary evidence suggest that these effects dissipate gradually and remain statistically insignificant for most types of workers.
Why is the link between trade and labor markets broken? Our study contends that one factor is the composition of Egypt’s low-diversified export basket in goods, with eroding global demand. Oil exports account for almost a fourth of its exports, followed by apparel, fertilizers, and fruits – and since 2010, none of the nonoil exports have managed take off.
Another factor is Egypt’s wage levels are one of the highest among countries that export the same goods, suggesting that it has a relatively weak comparative advantage in currently exported goods. Also, Egypt’s rate of participation in GVCs is one of the lowest among its peers, rendering backward linkages and employment opportunities to a minimum.
As global trade faces a restructuring of GVCs due to COVID-19 and increasing calls for GVC regulations in the EU (a major trade partner for Egypt), the urgency for Egypt to achieve better labor market outcomes becomes more evident. Part of its new trade strategy may well be to further diversify its export basket and increase its participation in GVCs to foster employment opportunities.