Views expressed are those of the author and may not reflect the opinion of Egypt Business Directory.
Technological progress is the essence of affluence of nations. Most economic theories assent that continuous technological innovation is key for wealth creation and improving living standards. No country has ever defeated poverty without making remarkable investments in technology and science. It no secret that Egypt lags behind in the sphere of technology and science. Egypt’s entrepreneurship, a major source of innovation, is severely burdened by its inefficient bureaucracy, ineffective judiciary, bloated governments as well as unstable and insufficient enforcement mechanisms. The fundamental restraints to economic success in today’s Egypt entail inconsistent business and tax administration policies, rigid regulations on entry into the country, property rights, land titling and lax enforcement of contracts. The constant undermining of entrepreneurship denies people to maximize benefit of their talents and raise their living standards.
The World Economic Forum’s Global Competitiveness Report 2011-2012 ranks Egypt 113th out of 142 countries on the quality of its scientific research institutions and 83rd on its capacity for innovation. Egypt expenditure on research and development remains low by international standards. Between 2004 and 2010 governmental R&D expenditure averaged around 0.25% of GDP, on a par with the Arab world but below the sub-Saharan African average (excluding South Africa) and barely one-tenth the OECD average. It is also some way off the Organisation of the Islamic Cooperation 1% target for Islamic countries. By comparison the regime spent around 2-3% of GDP on military expenditure each year from 2000 to 2009. It is noteworthy that other developing nations such China spends nearly 2% of its GDP on R&D whereas Brazil and India around 1%. The private sector contributes an estimated 5% to the country’s research budget, one of the lowest contributions anywhere. Most industries in Egypt seem to doubt that R&D translates into profits.
It would be nice to believe that the state of Egypt’s technologies and constraints on entrepreneurship is only a matter of some deficiencies in the system, which could be easily reformed. In my opinion, limitations on technological progress and denying the masses from utilizing their cognitive capacities to innovate have some political elements into it. Technological progress makes countries affluent; but the process of creative destruction entails the replacement of the old with the new, and the destruction of the economic privileges and political power of people in power. Before England’s Glorious Revolution in the 17th century, which paved the way for the industrial revolution, restraints on innovation were similar to today’s Egypt. In 1583 William Lee invented a knitting machine to replace hand-knitting. He travelled to London to show Queen Elizabeth how useful the machine would be and to ask her for a patent that would stop other people from copying the design. When the Queen saw the machine, her reaction was demoralizing “Thou aimest high, Master Lee. Consider thou what the invention could do to my poor subjects. It would assuredly bring them ruin by depriving them of employment, thus making them beggars” she said. Her successor King James also denied him a patent on the same grounds as his predecessor. Both thought that the mechanization of stocking production would be politically de-stabilising. It would kick people out of work; create unemployment and political instability, which potentially threatens royal power. Acemolgu and Robinson argue in their famous book the Wealth of Nations that “it is often possible to bypass the resistance of workers such as hand-knitters. But the elite, especially when their political power is threatened, form a more formidable barrier to innovation”. The fear of creative destruction and the fact that they have so much to lose makes them resist and try to stop new innovations.
The process of creative destruction, which leads to technological innovation, creates winners and losers both in the marketplace and the political arena. Europe’s history gives a good example of the latter. Before the industrial revolution, European governments were controlled by aristocracies whose main income were from landholdings and trading privileges they enjoyed thanks to monopolies granted and entry barriers imposed by monarchs. Consistent with idea of creative destruction, the spread of industries, factories and towns took resources away from the land, reduced land rents, and increased the wages that land-owners had to pay their workers. There were economic and political losers from Europe’s industrial revolution.
Today we observe something similar in Egypt. Big and profitable businesses and industries are monopolized by a few with high entry barriers. Government policies directly support those businesses and their exports through funds and tariffs. The youth’s innovative ideas and entrepreneurial talents are systematically blocked in Egypt. Therefore, we often observe a large an outflow of talent to Europe, the US and even the Gulf region, which results in brain drain that holds back Egypt’s potential to progress. The number of patents in Egypt, as the case with the rest of the Arab world, remains very low, which reflects the status of innovation and technology in those societies. Enlarging the industrial base in Egypt and including a broader segment of the society into this process may well shake the economic power of those businesses tycoons. The emergence of a broad business class in the society can also change the rules of the game and undermine the political power of the ruling elite. Yet, we have to wait and see whether the resistance to innovation, entrepreneurship and youth empowerment will remain under the new Egyptian regime or would we observe a change in the status quo.
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