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Globalization Challenges to Egypt’s Production Sectorsknowledge-building process at the firm level,is essential to sustain the process ofknowledge upgrading at the micro-level. Inother words, modernization depends on thesuccess of creating a mechanism to generatethe learning process within firms on the onehand, and on linking the acquisition oftechnology and its diffusion with educationaland training programs on the other.The performance of firms is path-dependent.The process of developing industrialcapabilities needs time. And because thetime dimension is of the essence, it iscrucial for the government to intervene in away that accelerates this process. Governmentactions are indispensable to implementing anational innovation system, to guide firmsin how to acquire technology, and to supportscientific bodies and educationalorganizations to provide firms with acontinuous stream of technology,information, and knowledge.This modernization is the only way toenhance productivity and to enable theindustrial sector to compete in labor -intensive products under globalization.Following this, with the mastering oftechnology over time, the economy wouldbe able to compete in differentiatedlabor-intensive products.Labor-intensive exports are the major fieldof specialization for Egypt, now and formany years to come. Targeting a mereincrease of these exports would negativelyaffect economic welfare. To raise nationalincome and economic welfare, buildingcompetitiveness for this type of export isessential. In order to benefit fromglobalization, Egypt has no other alternativebut to accelerate the process of structuringits national innovation system and speedingup the evolution of knowledge capacities toachieve the shift from ‘learning by doing’ to‘learning by research’.Strengthening the Financial SectorThe growing importance of financial sectorreform in the context of rapid globalizationtogether with the international financialturmoil of the second half of the 1990s,triggered thinking in the area of how tostrengthen the global financial system (SeeBox 3.5). There is internationalunderstanding among concerned bodies thatthere is a pressing need for much strongerModernization is theonly way to enhanceproductivity and toenable the industrialsector to compete inlabor-intensiveproducts underglobalization.Box (3.5)Financial Crises of the Late 1990sThe origins of the Asian crisis can be foundin financial and corporate sector weakness,macroeconomic vulnerabilities together withformal and informal currency pegs, and theartificial stability of exchange rates. Amongfinancial sector vulnerabilities, analystsconcentrated on the deterioration of bankloan values and capital adequacy ratios, thebuild-up of corporate indebtedness, andunsustainable banking practices (such asdirected, connected, and insider lending).This was coupled with a weakness in thesupervision of financial institutions and theabsence of prudent regulations, coupled witha weakness in bank and corporategovernance and accounting standards (suchas loan valuations and disclosure practices).In the aftermath, the aim of policy makerswas to stabilize the financial system and torestore confidence in economicmanagement. The priorities of theauthorities were set in the followingsequence: (i) to stop bank runs; (ii) toprotect the payment system; (iii) to limit thecentral banks liquidity support; (iv) tominimize disruption to credit flows; (v) tomaintain monetary control; and (vi) to stemcapital outflows.The negative social impact of the Asian crisishas been enormous. Human capital costseither resulting from the additionalunemployment or loss of jobs resulting fromthe recession or from the reduction of thepublic expenditures on social developmentprojects left a negative impact on the qualityof life at the time of the crisis or in theaftermath.In recent research that addressed the socialimpact and consequences of the financialcrisis in Thailand, Indonesia and Korea, it wasfound that the loss of employment has broughtabout a loss of income, which has affectedexpenditure on health and education. Withoutgovernmental programs to provide reliefthrough short-term employment assistance,public-works type activities andunemployment benefits, the impact of thecrisis on people would have been harder.Egypt Human Development Report 2000/2001 - 57