Egypt after the Multi-Fiber Arrangement: Global Apparel and Textile Supply Chains as a Route for Industrial Upgrading

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Courtesy of Oracle Crystal Ball GBU

What can a country like Egypt learn from the success of the East Asian countries in using the apparel industry to drive export-led growth? Throughout the 1970s and 1980s, in countries like Taiwan, South Korea, and Hong Kong, exporting light manufactures like apparel helped spur a process of industrial upgrading and economic development. The success of these countries has led many researchers to explore whether the process can be replicated in other developing economies.

In the classic path of upgrading, firms begin with low value-added assembly of garments for buyers in developed countries and, as their capabilities increase over time, move up the supply chain to higher value-added segments. Through a process of technology transfer, and in learning by doing in response to increasing interaction with demanding customers in developed markets, participating in global supply chains allowed and indeed required companies in East Asia to upgrade their manufacturing and managerial capabilities.1 As these industries grew and increased their demand for locally-sourced inputs, their development had beneficial spillover effects to the local economy as a whole.

The apparel industry remains an attractive one for developing countries like Egypt—garment production is low-capital and high-labor intensive, and the local population of 66 million provides a natural market for output and a springboard for exports. The industry accounts for about 20 percent of all of Egypt’s exports and employs nearly 30 percent of manufacturing employment, suggesting it has a strong foundation. Unfortunately, as more and more countries try simultaneously to use the apparel sector to replicate the success of the East Asian newly industrialized countries (NICs), competition increases, and the chances of winning decrease. Perhaps the greatest challenge is posed by China, where a combination of a large, low-wage workforce, highly automated plants, and access to lower cost inputs like fabric and trim, make the country a tremendous force with which to be reckoned. Indeed, with the accession of China to the World Trade Organization (WTO) and in preparation for the phaseout of quotas that occurred on January 1, 2005, due to the expiry of the Multi-Fiber Arrangement (MFA), for the past few years large apparel firms have been shifting production to China and reducing the number of other countries where they source garments. Already in early 2002, the CEO of OshKosh B’Gosh announced that his firm was focused on expanding its relationship with contractors in China, as were executives at Carole Hochman and The Children’s Place.2 So what are the prospects of a country like Egypt to drive economic growth through success in global supply chains when it must compete with the low wages and industrial strength of China?

Studies examining the role of global supply chains have looked at industries including automobiles, electronics and components, textiles and apparel, and computers (Gereffi 1999, Sturgeon and Lester 2003, and Thun 2000). However, there are at least two reasons why the apparel industry is an intriguing candidate for Egypt to succeed in global supply chains. First, the apparel industry is one of the strongest in the country in terms of exports, production, and employment. Second, a number of factors that are exogenous to Egypt’s manufacturing capabilities may contribute to Egypt’s ability to compete in the apparel industry, specifically those of geography and trade agreements. Rapidly changing fashions require quick replenishment that can reward Egypt’s geographical proximity to style-conscious Europe. Moreover, with the multitude of preferential trade agreements governing global trade, even after the phaseout of the Multi-Fiber Arrangement (discussed in more detail below), Egypt has certain access advantages to key end markets for its products, although it faces challenges from countries that may have even better trade access.

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