..... DEVELOPMENT ALTERNATIVES IN EGYPT IN 1974175 Thesis for the Degree of Ph. D. MICHIGAN STATE UNIVERSITY SAKR AHMED SAKR 1970 THE‘?‘$ \\\\\\\\ LIBRA ’ '( Michigan '3 . ~.te Universxty TTTTTTTTT a \\\\\\\\\\\\\\\moz 457 3 1293 1 This is to certify that the _. thesis entitled DEVELOPMENT ALTERNATIVES IN , EGYPT IN 1974/75 presented by SAKR AHMED SAKR has been aecepted towards fulfillment of The requirements for __P}_‘;_I_3:_degree in Economics fife/Q47 \07 Majo;/pEofessor Date ALIEZIUSt 20. 1970 0-169 33’ BINDIGBY )9 M! unmsm " in am amnmv mc. LIBRARY BINDERS 2-, Q a '1, glflBMfl, mama JT l F H I-.- nab»;- F-f “ H r. "2' ”Fifi-f :~‘ "In! 1:0»;th ~.-! r -— at nine "Inq $33-60 lube-3 ZL’ $thM3tUIIi ' ~ "gm-v.21 (no: untamed f 51w gum: *e'se. rabbe: ”new 6535. 1:; My” $31!!“ «no ABSTRACT DEVELOPMENT ALTERNATIVES IN EGYPT IN 1974/75 By Sakr Ahmed Sakr The purpose of this study is to construct a macro economic model for Egypt that can be used for the purpose of projection planning. The model divides the economy into the following sectors: Three production sectors (industry, agriculture, and services), household, government, finance and foreign sectors. The model defines the major economic flows in the economy, as well as defining the major limits to growth by 37 variables. To determine the values of these variables in the target year (1974/75), 37 independent equations are postulated. The intensive effort of the Egyptian government to raise the rate of growth of the economy during 1957-66 has resulted in large structural transformation that strained the balance of payments. At the same time, public consump- tion has increased considerably. To overcome these two bottlenecks, foreign borrowing increased sharply. The model is constructed so as to reflect the structural characteristics of the economy. The problems Sakr Ahmed Sakr related to the large structural transformation point to a period of proportional expansion in the major production sectors of the economy as a growth strategy. The feasi- bility of this strategy is further supported by the accumulated evidence against the existence of disguised unemployment in agriculture. This strategy is incorporated in the model by specifying proportional expansion for the different production sectors. The completion of the High Dam will result in an increase in the cultivated area by 20%, which will make it possible to overcome the balance of payments difficulties through its effect on food imports. This is allowed for in the model by assuming that food imports will be zero in the target year. Furthermore, saving rate, trade policy and foreign borrowing are chosen as policy instruments that could be changed within limits, while public consumption, full employment, and the level of income represent the targets that have to be achieved. The solution of the model, makes it possible to generate some consistent sets of alternative development programs for the target year, each subject to different assumptions about the values of the policy variables men- tioned above. These alternative programs provide the planners not only with the flexibility required for the decision making process, but also with the advantage of readily substitutable programs and many other programs that could be worked out quite easily in case of any uncertainty. Sakr Ahmed Sakr The model can also be used to identify whether the saving bottleneck or the foreign exchange bottleneck is the most restrictive one for growth. In the case of Egypt, it is found that the saving bottleneck is most restrictive up to an annual rate of growth slightly below 6%. In addition, the model can help choose among alternative programs or alternative policy-mix subject to certain values of the policy instruments or the targets respectively, provided that it is possible to construct a social welfare function that reflects the welfare implications of each solution. The model, however, has some limitations that reduce its operational value. It is of a comparative static nature, and thus, it does not specify the time path of the variables of the model from the base to the target year. In addition, the limited sector division of the production activities, which is necessitated by the availability of data, will tend to give the model an optimistic bias due to the neg- lect of any possible bottleneck that might occur in any of the sub-sectors. This latter defect could be overcome by subjecting the most promising programs to a detailed input— output analysis, to examine the sub-sectoral effects of each program. DEVELOPMENT ALTERNATIVES IN EGYPT IN 1974/75 BY Sakr Ahmed Sakr A THESIS Submitted to Michigan State University 1n-partia1 fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Economics 1970 :Liigtitutiom. .. 1 . ‘ ' r ‘ -' . the: nment ’ I" 1 would 3.3” .. '1 r éfi- zen; ‘n, thanks ti. 0..th Cult Aral and [:3 cats. mo)! Bur-an ~. for their cooperation and help. . a ‘1 the tile : m marking on thio study, “we“: bu the “estate a: - , 7 LL PREFACE The chief purpose of this study is to construct a ‘chro economic model for the Egyptian economy that could fie used for projection planning and policy analysis. My ‘VTEnterest in such problems stems mainly from the interest .iacquired during my work as a research assistant at the l ’stitute of National Planning in Cairo in 1962-64, and l};rammy belief that improvements in policy making is a 'cessary, though not sufficient, condition for ellevating ‘problems of underdevelopment that most of the developing tries now suffer from. r This study is part of a program arranged by the P.C. The program was partly financed by the Ford :ation.and the I.N.P.C., and the author wishes to ‘1 both institutions, as well as the Egyptian Government ‘;eir support. I would like also to express my thanks staff of the U.A.R. Cultural and Educational Bureau .“kii I would like to express my deep thanks to Professor ”'khthony C. Koo, the chairman of my dissertation committee, . EC.“ ‘ meet his helpful guidance, suggestions, and encouragements. - I T Q .i *1 wish also to thank Professor John P. Henderson, Associate "errofessor Carl Liedholm, and Professor Suhbiah Kannappan L’J. " n,‘ 1‘ _ ‘tfifbr their cooperation. , l“y‘ Special thanks go also to Professor Jan Kmenta for lgfihis helpful comments, and to Professor Bent Hansen for a. QVLEPIOViding me with parts of his work about Egypt, that was \{ot available to me. H My thanks are also due to a lot of my colleagues ' and friends, especially for Dr. Ragaa Hassan, for their .11p and stimulating discussion. ‘I would also like to express my thanks to my ‘ly in Egypt, and especially for my uncle, Professor {1m Sakr, and my brother Mohamed Sakr, for their ffinuous encouragement and moral support. ‘Jm‘Finally, I wish to express my deep gratitude for ’drsameh, deserve my special thanks, for they é patient, inspite of their youth. Chapter I. INTRODUCTION . . . . . . . . . . . . 1. Introductory Remarks . . . . . . 2. Purpose of Study . . . . . . . . 3. Method of Study . . . . . . . . 4. Plan of the Chapters Ahead . . . II. THE STRUCTURAL CHARACTERISTICS OF THE EGYPTIAN ECONOMY . . . . . . . . . . 1. Introduction . . . . . . . . . . 2. Historical Background . . . . . 3. The Demographic Situation . . . 4. The Developments of Agriculture 5. Industrial Developments . . . . 6. Foreign Trade and the Balance of Payments . . . . . . . . . . . . 7. Saving and Investments . . . . . 8. Actual Planning and Planning Techniques . . . . . . . . . . . 9. Summary and Conclusions . . . . III. GOALS, INSTRUMENTS AND SECTORS 1. 2. 3. 4. 5. TABLE OF CONTENTS Introduction . . . . . . . . . . Goals . . . . . . . . . . . . . Instruments . . . . . . . . . . Sector Division . . . . . . . . Summary and Conclusion iv Page ww-bHH 16 16 17 20 24 , 42 48 56 6O 66 69 69 70 75 77 83 Chapter IV. VI. VII. THE DESIGN OF THE MODEL . . . . . 1. Introduction . . . . . . . . . 2. Accounting Equations . . . . . 3. Behavioral Equations . . . . . 4. Exogenous Variables . . . . . 5. Development Alternatives . . . 6. Summary . . . . . . . . . . . DEVELOPMENT ALTERNATIVES IN EGYPT IN 1974/75 C O C I I O O O O I I O 1. Introduction . . . . . . . . . 2. Solution of the Model . . . . 3. Estimation of the Parameters and Exogenous Variables . . . 4. Development Alternatives in Egypt in 1974/75 . . . . . OTHER USES OF THE MODEL . . . . . 1. Introduction . . . . . . . . . 2. Identification of Bottlenecks 3. Choice Among Alternative Programs 4. Optimum Choice Among Policies CONCLUS IONS C C I O C O C O Q C I BIBLIOGRAPHY o o O o O I O o o I o o o - APPENDICES I. DEFINITION OF THE VARIABLES OF THE MODEL II. SOLUTION OF THE MODEL . . . . . . . III. ESTIMATES OF THE PARAMETERS AND EXOGENOUS VARIABLES . . . . . . . . IV. THE REDUCED FORM . . . . . . . . . . Page 85 85 87 103 118 122 124 128 128 129 138 147 169 169 170 176 180 183 191 198 213 225 254 Table II.1 IIOZ II.3 II.4 II.5 II.6 II.7 III.1 IV.1 V.1 A.1 A. 3 AO4 A.5 A.6 LIST OF TABLES Population growth in Egypt . . . . . . . . . Population by Age Groups, 1907- 1960 (Percentages). . . . . . . . . . . . . . Development of Employment (In l,ooo laborers). . . . . . . . . . . . . . . . . Costs and Returns of Main Crops, Per Feddan (L.E.), 1954-57. s o o o I I e a o o o O 0 Gross Value Added Per Worker by Sectors (L.E.) Per Year, at 1954 Prices) . . . . . Balance of Current Transaction Estimates (L.E. million) . . . . . . . . . . . . . . Investment, Savings, Balance of Payment Deficit, and Private and Public Consumption Classification of Policy Variables . . . . . National Income Matrix . . . . . . . . . . . Selected Solutions of the Model. . . . . . . Government payments to the household sector. Government saving in the budget . . . . . . Household savings. . . . . . . . . . . . . . Net foreign borrowing. . . . . . . . . . . . Agricultural output. . . . . . . . . . . . . Data for the variables of the Model (1959/60 - 1965/66 0 I I e o o a I o l O 0 vi Page 20 21 25 28 45 49 57 78 89 160 201 202 203 206 207 211 Table A07 A.8 A.9 Price Deflators (1965/66 prices = 100) . . . Investment in the Production Sectors . . . . Investment and Income in the Industrial Sector I I O I I I O I I I I I I I I I O 0 Investment and Income in the Agricultural Sector . . . . . . . . . . . . . . . . . . Investments and Income in the Services Sector I I I I I I I I I I C I I I I I I I G.D.Y. and Household Income. . . . . . . . . Household Saving, Government Payments, and Household Income . . . . . . . . . . . . . Agricultural Inputs into Industry, Industrial Inputs into Agriculture, Industrial Output, and Agricultural Output . . . . . . . . . . . . . . . . . . Intermediate Imports into Industry, Services Imports, Industrial Output, and Services' Income I I I I I I I I I I I I I I I I I I Industrial Income and Imports of Manufactured Goods . . . . . . . . . . . . Capital Goods Imports and Total Investments. . . . . . . . . . . . . . . . G.D.Y., Industrial Income, and Services Income 0 I I I I I I I O I I I O I I I I I Employment and Income in the Different Production Sectors . . . . . . . . . . . . Agricultural Exports . . . . . . . . . . . . vii Page 228 229 232 233 234 235 236 237 240 241 244 246 248 Figure IV-l: V-l: V-2: V—3: V-4: VI-l: VI-2: VI-3: LIST OF FIGURES Flow Chart . . . . . . . . . Development Alternatives when constrained . . . . . . . . Development Alternatives when constrained . . . . . . . . Development Alternatives when Sf are constrained. . . . . Development Alternatives when Y are constrained . . . . . Development Alternatives--The Sf 15 not Y is not both Y and both Sf and Reduced Form. Optimum Choice Among Alternative Programs . Optimum Choice Among Policies viii Page 92 150 152 156 158 174 178 181 CHAPTER I INTRODUCTION 1. Introductory Remarks Up to the end of 1956, the Egyptian economy was mainly a private enterprise economy with some direct, though limited, government intervention. Starting from 1957 (immediately after the end of the Suez Crisis of 1956) foreign economic influence, which was prominent in many fields, was liquidated by the government, and the Egyptian economy became a mixed economy from an ownership point of view. A series of land reforms, Egyptianization and seques- tration, nationalization, and also through direct government investments helped to achieve this result. The early efforts of the new regime, that came to power in 1952, to enhance economic development concentrated on the construction of specific projects, where the em- phasis in planning was given to demand and cost conditions. In time, the authority became concerned that while such work was important, it was too partial and micro oriented to achieve optimum economic results. Thus, it was not until 1957 that planning on a broad scale was introduced 1.1;fith the adoption of the first Comprehensive Five Year Plan ‘fitl covering the period July 1,1960 - June 30,1965. This ) plan, which could be considered an extension of the two akxfiplans mentioned above, consisted mainly of an investment ‘\i$plan plus a forecast for the rest of the economy. A funda- "fiflental sutdy of the possibilities of implementing the plan llIoes not seem to have been undertaken, however. The long iintern goal was to double national income over a ten-year period comprising two successive five-year plans. In order “achieve this objective, the planners worked out that a Despite the fact that the goals of the First Five 1P1an has not been fully achieved, the economy has been 9 impressive progress. Real income grew at an annual ‘b§*5.5% per year.2 With this rapid expansion, the .N u, \' ‘Vbalance of payment by an active policy to boost the growth Ekate of the economy. A great part of these deficits have I \‘Inbeen covered by capital inflows with the result of the - ‘x3wfipharp increase in the country's indebtedness abroad. : ‘R'fij The second plan (for 1965/66 to 1969/70) was sup- . 11% posed to complete the goal of doubling national income in 9‘: 'ten years. This goal was reconsidered, and early in 1966 1#t was decided to extend the period of execution to seven -lfgears. It should be mentioned, however, that the second ‘ gfilan was not formally laid down. Developmental activities y“§§0ntinued through these years through investment expendi- YEIumes in the government budget (disregarding 1967 and Ibbably 1968, where the economic development was slowed "_ as a result of the war of June 1967).1 It has been ‘ ftioned recently that the planners are working on the A ation of a third plan to cover the period from July, . 2 June, 1975, but no formal document has appeared yet. :2," The experience of planning during the First Five 5rhtio of grabs investment to gross domestic ageda17. 9% from 1960- -1966, but it reached ’ 612% in 1968 ' 'v .- i» _A V “use of resources. The essential problem facing the our ‘ €§fl§i§nners, thus, will be related to plan implementation and W ‘iyfihe-policies necessary to carry it out. If the country has ’ Vito improve its balance on current account, while maintaining (1.1 1 “Ya high rate of growth, there should be a solution to the ‘flkproblem of making private and public consumption grow more ‘ [VJ310W1Y than gross national product, and this may mean in- ‘9ereased taxation, while wages and salaries will have to be I IEprevented from increasing in step with productivity. Also, ‘ lfijncreased attention has to be given to the principle of I‘Ifidnmparative advantage in planning for new industries. \ ‘..~ -gi§. Purpose of the Study The main purpose of this study is to analyze the _n development alternatives that are feasible for Egypt ‘ces of the economy. By development alternatives it ‘ tructed in this dissertation. The advantages behind ‘flvfifie use of such models for development planning are nu- ‘.§§rous: the use of a macro-economic model helps to check Ihe internal consistency of development plans; the impact bf changes in broad policy instruments can be computed on policy targets thereby having development alternatives which satisfy part of the need of the planners to know the effects of alternative policies; these development alter- natives, furthermore, gives the planners the flexibility l-when the value of key variables diverge from their anti- :Vggfipated level. This last point is of crucial importance r ‘I? fiince, with the situation in the Middle East as it is ‘ P“. H t ‘onal limits. -'A development program must be defined within the "f the planners' desired objectives, the instru- Ijare readily available to the planners, and the :Ised by the structure and characteristics.- a. Policy objectives. The desired objectives of a developing economy can iflaflally be found among the following: rapid increase in .:|uper capita income, full employment, a specific income level . ;by'a given year, relatively stable prices, improvements in i ,the allocation of factors of production, and a more equal 3‘) income distribution.1 The order of priority of objectives ““”that are in fact selected depends on the economic structure ‘Iijfif‘the country in question, the existing disequilibriums, . fine-preference of the various policy makers and their in- yfluence. 'iflté. Based upon the study of the structural character- ifIstics of the Egyptian economy (in Chapter II), it will be in Chapter III, that the goals chosen for this model 7.:1fj038 which the planners ought to aim at) are the fol- 7*! 'g: (i) maximum gross domestic income (hereafter '.), (ii) a fixed level of public consumption (for .ary and welfare considerations), (iii) full employ- ‘ and (iv) a certain level of net foreign borrowing =d‘savings). uurther detail on this point, see Etienne s. a cien Morissens, "The Objectives and Instru-- b. Instruments. Among typical instrumentsl one could find tax ‘ H trade policy, allocation policy, instruments of fiaikect controls such as the control of foreign exchange, jjioreign trade, prices or other controls on the internal Ipwbconomy, and foreign aid or borrowing. It is important to “whats the following: “pg’ 1) Some instrumental variables also partake the ‘winature of policy targets in their own right. An obvious ) Some of the instruments used for one objective :.have effects on other objectives and some instruments sinterfer with each other. Also, the objectives may be ‘to be independent, complementary, or conflicting. E‘Various interactions may reinforce the efficiency of ,struments, but may also weaken their effects and #0 conflicts that can only be solved by choice. ‘ iii) The use of an instrument to achieve an ob- 'is not without cost to the economy. For example, ‘_y are among the common objectives of developing eco- ltfigflies that would be achieved, ceteris paribus, with larger fénpunts of foreign borrowing. Foreign borrowing, on the fi‘ather hand, is usually thought of as an instrument which V can only be obtained at cost. This implies that there is ‘Q trade off possibilities between the benefits of reaching a chosen objective and the cost of the instrument. All such _ I“ w ‘v‘ .t L development alternatives rather than a single development v considerations suggest the necessity of preparing a set of ‘11}fiprogram. ‘ ' In Chapter III, the policies chosen to achieve the rbbjectives chosen for this model are the following: (i) the 'viialue of net foreign borrowing or foreign saving; (ii) the ' qunue of exports of the industrial sector through changes .éfi - various instruments of trade policy such as exchange he, export subsidies, and the like; and (iii) the saving c. Institutional Limits. The more common restrictions or institutional init§~t6tfeasible”policy~changES. The it;‘ N such constraints makes the conclusions «'(fibie realistic, although the results are less susceptible o Ekfid‘generalization in the form of simple decision rules. V 7" The institutional limits chosen in this study are P o if the fgllowing: (i) foreign savings; (ii) the saving rate; ‘ ‘ I and (ii i) the rate of increase in labor productivity. \ . . . . ‘ l ’ A word of caution 1s necessary, however, s1nce u 9 . ' fl there is a tendency to expect too much from planning .{_ ‘\ fi‘to be difficult insofar as there is no theory of develop- ‘. Eunbnt that can be readily translated into a development 0 - 0 '~ '8 Max .mpdels. The formulation of a development program is bound 1. Q 1‘ 2%; program. In addition, the ability to formulate such pro- 1 é as has also been severely limited by the lack of ‘u.§%qu131te data and the imperfect character of such statis- H.‘ -“r f1iwhcs as are available. Recently, there has been some '13 -‘ " 'Eress in most underdeveloped countries in overcoming the '"ing methods. But regardless of the improvements in 10 ledge to construct an economic model that can be used jggrams for Egypt for the year 1975. The functions of an economic model for policy 1, purposes are to determine consistent sets of economic §rpolicies and to facilitate the choice among them. The 1v_nature and results of development policies are represented ’ .ryfhy the variables of the model. For the purposes of the ‘T‘L é mndel to be constructed in this study, these variables ' ? must include the principle elements affecting the rate of } growth of the economy such as the existing factor supply, *che rate of population increase, the rate of saving, the ,gffic1ency of factor use and its change over time, the H§§£low-of foreign resources, the present and future com- Q ,3 tion of demand, and the ability to plan and carry out -, Q‘- ‘I Y‘- g~1opment activities. Drawing on J. Tinbergen's and H. Theil's theories economic policy, the variables of a policy model could predetermined or exogenous variables; ib) instrument variables_(i.e., those subject to government control); 11 c) objective variables (i.e., those reflecting the aims of policy and they may be either fixed or variable); and d) other endogenous variables (i.e., those that are irrelevant for policy analysis). These variables will be related to each other in the form of equations which express certain economic re- lationships, that may describe either: a) the behavior of an economic entity in terms of the response of one economic variable to a change in another variable (as the consumption function); b) a technilogical relationship (as the produc- tion function); or c) take the form of an accounting identity that must hold true in any economy (as the equality of total demand and supply). It should be noted that a development model pro- vides a systematic framework for economic programing; the purposes of economic programing, in turn, is to provide for an effective government economic policy which is con- sistent with the goals pursued. The nature of the development program, and consequently the type of model, will differ in accordance with the characteristics of the economy in question, the nature and extent of government intervention, and consequently the types of 12 instruments used, and the availability of data.1 The type of model that is finally chosen would be the result of a deliberate decision on the part of the model builder, who should balance the merits and demerits of using other ) different types before making his choice. It is to be noted that the model to be constructed in this dissertation will not be dynamic in nature (that which specify the movement over time of the variables * defined by the model), but a projection model (that which accounts only for two time periods, the base and target years) of the Chenery and Bruno type.2 Since we are con- , cerned with constructing a terminal year model for the { Egyptian economy, there exists no need to specify in a ) complete way the path the economy has to follow from a i given initial point to the terminal configuration. Thus ) the model may be said to give a perspective rather than a plan. However, this construction of a terminal configura- tion is an essential ingredient in any finite horizon plan- ning model so that the model will provide some guide lines for the planners, even though it does not specify a com- plete time phased course of action. VET 1For further details on this point, see the U. N., ”Use of Models in Programing," Industrialization and Productivity Bulletin, 4 (April 9 l , pp. - . . 2Hollis Chenery and Michael Bruno, "Development {’ Alternatives in an Open Economy: The Case of Israel, " The Economic Journal, Vol. LXXII (March, 1962), pp. 79- -lO3. 13 i The comparative static nature of the model does not 'It}#hhn, however, that in estimating the parameters to be used \pkin this model it is not necessary to take into account, as i . 'Hmuch as possible, the probable changes in the structure of [a 5 1‘) the economy between the base and target years. Wm: )9 4. Plan of the Chapters Ahead . . \ .CVQ ‘fl4“ Chapter II contains a study of the structural t‘; ‘ . . . . 1~.‘characterist1cs of the Egypt1an economy 1n order that they '4 may be incorporated into the model, so that the model will .‘-H have a realistic setting. It will also be concerned with E :~identifying in advance the factors that may prove effective 2) klimits to growth. The emphasis throughout this chapter u l 1 [11 be on planning and policy problems in Egypt in recent ' 0 Chapter III will be concerned with the development the analytical tools required for the model: 3 a. The analysis of Chapter II will be used to , 1 '4- .1 --0I v.4 It) I ‘P I l4 pbfiyg b. The policy tools will also be specified. The ‘ 0 “”initial study of development problems and possibilities in e" 5" Chapter II will be designed to permit a choice of policy ' ,h' instruments in the different fields. Such factors as the 3 ‘it extent of excess demand for imports, the future amount of unemployed labor, the magnitude of shift in resources 0;' needed in particular sectors, and the importance to the §;; rest of the economy of a given investment, can only be h' determined from such an analysis. if c. The division of the economy into sectors. Here x; it should be noted that while a greater sector breakdown TV is more preferable, since it will allow for the discovery ‘ flyef any bottlenecks that may arise in any of the sub-sectors, ~gthe final decision will depend on the availability of data. I E‘fihlw Chapter IV will be concerned with constructing the .(mndel itself which will contain all the last elements. In In Chapter V, the model will then be solved ab- ahtly in terms of the policy variables, parameters, enous variables, and base year variables. It should 'eTVed that there is no need to work with the complete Cal model of the economy. Instead, the irrelevant at: "‘1“ u~fls variables will be eliminated through algebraic 15 The second section of Chapter V includes the esti— tee of the exogenous variables and of the parameters that 'u ’Eppear in the behavioral equations. It should be noted . . , " ' “that these estimates are for the target year of the model ‘x1974/75), and, therefore, they must reflect, as far as development programs which can be obtained by varying values of the policy variables chosen in this study ‘their relevant range. CHAPTER II STURCTURAL CHARACTERISTICS OF THE EGYPTIAN ECONOMY I 1. Introduction i It is important to take the structural character- y istics of the Egyptian economy into account in order to give the model a proper and realistic setting. This is . due to the fact that the main problem in designing this type of models is to identify in advance the factors that may prove to be effective limits to growth. When one of these elements is omitted, then it is implied that what- ever changes take place in this element will not signifi- cantly affect the parameters of the model. It must be mentioned, however, that it is beyond the scope of this chapter to review in detail the struc- ture of the Egyptian economy and its past development. There already exists a large number of recent books doing t j such a job1 and, therefore, what needs to be done in this é -; » * 1See Bent Hansen and Girgis Marzouk, Development -' V'and Economic Policy in the U. A. R. (Egypt) (Amsterdam: North— HolIand Publishing Company, 1965); Magdy E1 Kammash, Economic Development and Planning in Egypt (Prager, 1966); ~Efiaries Issawi, Egypt in Revolut1on an Economic Analysis r—{Hew York: Oxfor Un1versity Press, 1963); Donald Mead, owth and Structural Change in the Egyptian Economy (Home- *wbod, 111.: R. D. Irwin, Inc., 1967); and Patrick 0' Brien, 16 17 chapter is only to review briefly these structural charac— teristics and how they could be included into the model. 2., Historical Background The economic history of Egypt in the last 170 years falls into three unequal periods. The first period (which goes roughly from the 1800's to the great depres— sion) started with the regime of Mohamed Ali [1805-49) who attempted to effect a transition from the subsistence economy prevailing at the beginning of the 19th century to a modern complex economy. His attempts of forced in- dustrialization failed largely due to the lack of political autonomy required to protect infant industries and to _support certain important sectors.l With the failure of Mohamed Ali's industrial plans, the attempted leap from a subsistence to a complex economy had failed, and instead, the country had landed on the road leading to an export oriented economy. Egypt could now be integrated, as an agriculturalunit,withaaworld wide economic system largely due to converting the economy into a highly specialized one-crop economy (i.e., cotton). In the last three decades of this period, roughly from 1900-1930, the growth of the Egyptian economy has been characterized by 1'f yThe_Revolution in E t's Economic S stems 1952-1965 (Lon- on: 0x or Un1ver51ty Press, . lissawi, op. cit., pp. 23—24. 18 proportional expansion with agriculture playing a consist- ent and predominant role from both income and employment points of view.1 The second period started with the great depres- sion of the 1930's, which resulted in a fall in the price of cotton on which Egypt was mainly dependent as its major export. With these changes in relative prices and the rate of return on capital in favor of manufactured indus- trial products, domestic capital turned its interests from agriculture to industry. This process has been intensi- fied by several other factors, all of which are responsible for starting the modern process of industrialization in Egypt. These other factors are (1) around the same time of the shift in relative prices [1930], the country gained the control over its tariff which made it possible to protect domestic industry; (2) the efforts of Bank Misr which was founded in 1919 to promote local industrial and commercial enterprises by combining the functions of an investment trust with deposit banking and thereby is similar to such banks that led the early industrial develop- ment in some European countries;2 and (3) the existence of 1Mead, op. cit., p. 16. 2Alexander Gershenkron, Economic Backwardness in 7.34 Historical Pers ective (Cambridge: Harvard University -.2 Frees, I§€§. n ..‘r - ..v" s Q! ~' .- “‘- I.“ Ch.“ Ana. - Urdu. an... N'- \ In... 1‘;- I (D 'n (D l .4 - n~' n . :- h“.'~‘ 5 19 a fairly mature infrastructure. All such factors have helped to make the 1930's a decade of impressive advance. The basic characteristics of growth of the Egyp- tian economy since the 1930's, therefore, is one of structural transformation. In absolute terms, agriculture has retained a primary role in the economy, but the major impetus for growth has come from other sectors of the -economy. Manufacturing industry has grown rapidly, al- though from a small base and also services have grown considerably. The early attempts of industrialization were un- able, however, to bring about any radical change in Egypt's per capita income. From 1928 to 1948, domestic production per capita rose by about 1/4% per annum, and from 1948 to 1956 it stagnated completely.1 This was due mainly to the increase in the rate of growth of population and to the slack after the Korean boom. The third period starts with 1956/57 where the annual increase in per capita income often reached 3 to 4%. Thus, the 1956/57 represents the demarcation line between stagnation and development. It is on this most ; recent period that the following discussion will be con- . ,centrated . Hansen and Marzouk, op. cit., p. 5. 1“ .y'.’ 1" a; '1 )- IL) a" :‘u. u" 7’5. 3‘ w 20 3. The Demographic Situation The following table shows the growth of the Egyptian population since the first reliable census. Table II.1--Popu1ation growth in Egypt. Annual Compound Growth Year Population Rate During Inter Census Years (%) 1897 9,715,000 -- 1907 11,287,000 1.51 1917 12,751,000 1.23 1927 14,218,000 1.09 1937 15,933,000 1.15 1947 19,022,000 1.78 1960 26,089,000 2.45 1966 30,139,000 2.54 Source: Up to 1960, population censuses, and for 1966, Statistical Handbook U.A.R. 1952-1966 (Cairo: Central Agency For Public Mobilization and Statistics, 1967), P. 7. This table shows the acceleration in the rate of growth during the 1940's and 1950's. This acceleration may be expected to continue for some time to come due to the decline in the death rate unaccompanied by any appre- ciable fall in the birth rate. 21 It is clear from these data that Egypt has not yet ‘.#:h ne'any substantial demographic transition; it is not 11* (g1: 2 Qfl3n in the process of doing so. With increasing urbani- lation and industrialization, it is hoped that the whole flcustcm and outlook of the population will change to result 33113 a decline in birth rates. As a result of these developments, the Egyptian '.4popu1ation has become younger than before: the average :fage of population has fallen from 25.8 years in both 1937 83nd 1947 to 24.4 years in 1960, as could be seen from the ifipllowing table which shows the percentage age distribu- Egion-of the population. la II. 2--Popu1ation by Age Groups, 1907-1960 (Percentages). 1907 1917 1927 1937 1947 1960 30.1 28.0 27.5 27.2 26.4 36.0 119' 18.5 20.3 20.3 20.5 21.7 15.7 18.0 15.5 16.4 15.2 15.1 12.8 9 14.7 13.5 14.1 14.7 13.8 12.6 9.0 9.0 9.2 10.1 10.4 9.6. ‘9.7 13.7 12.5 12.3 12.7 13.6 100.0 100.0 100.0 100.0 100.0 tion Censuses, Sample Survey of- Labor Force, 1:931. ., _. , 22 Thus, it is clear, that the dependency ratio has increased, i.e., to every ten people between 15 and 60 'years of age, there are 8.5 children under 15. This, of course, has a bad effect on saving and investment because of the increase in consumption. fIt is to be noted that starting in 1962 the govern- ment began a serious campaign to convince the public of the importance of birth control and to educate them on various possible methods. But so far this does not seem to have any effect on fertility.‘ The important question that needs an answer now is how large will Egypt's population be in the target year (1974/75), i.e., what is the expected rate of growth of population? As it was shown in Table II.1, the rate of growth was 2.54% from 1960 to 1966. If one assumes that the current government efforts to reduce fertility will start to show some results, then an assumption of 2.5% per annum seems to be accurate enough. This will give a total popu- lation equal 37,139,000 in 1975. The expected increase in the labor force during the future period will depend on what happens to the par- ticipation ratio. If this does not change, then the labor force will grow by the same percentage as the total popu- lation. In recent years (during the first Five Years Plan), participation ratio increased slightly more than (.' (I, .‘l, p . h I 1" ‘I I” 1“ 23 the growth in population. It has actually declined slightly for males and increased slightly for females. The former tendency is expected to continue during the coming few years due to a related fall in child labor as a result of improving educational opportunities. Matters are less clear with re- spect to the extent of increase with the participation ratio for females. Participation of women is difficult to define precisely in agriculture since it is a function of demand and employment opportunities, and due to habits and tradition married women may still be prevented from working outside family enterprises. Change in social attitudes towards women's work would be a factor in increasing the participa- tion ratio for women. For all these reasons, it might be beneficial to as- sume a rate of increase in labor force slightly larger than the rate of increase in population, i.e., of about 2.6%. It may be mentioned that available statistics do not show the annual figures of the labor force (these are avail- able only for census years). Since full employment was chosen as a policy objective for the model, the only alter- native is to apply to the employment figures given in the base year of the model (1965/66), the rate of growth as- sumed for the labor force (2.6% per annum). The resultant figures will give the total amount of labor force that has to be employed by the target year (1974/75) in order to ’-i .achieve the full employment goal. The following table VCTable 11.3) the development of employments in the 24 different production sectors for the period 1959/60 - 1965/66 is noted. The full employment goal will, therefore, be ac- hieved if employment in the target year (1974/75) reaches l 1.8 (74/75) = 7,494.9 (1+.026)9 = 9,440.576. 4. The Development of Agriculture a. General Survey As it was mentioned earlier, the center of gravity of the economy has shifted from agriculture towards manufac- turing and services since the 1930's, slowly but decisively. Inspite of this shift, however, Egypt is still in many ways very much dependent on agriculture. As of 1966, almost 30% of income and over 50% of employment were derived from this sector.2 This dependence is most clear in the areas of for- eign trade, where the overwhelming majority of the country's exports are agricultural, at least in origin, although some have gone through substantial processing before being ex- ported. Furthermore, a substantial part of the activities in other fields, such as commerce, finance, and transport are centered around the processing and handling of agricultural products. It is to be recognized that Egypt differs from most underdeveloped countries in that it has already had ‘its agricultural revolution. The factors behind such ‘revolutionary change took place through the introduction 1 2 This figure is in 1,000 laborers. Statistical Handbook, op. cit., pp. 220-221. 25 .Hmm .m ..0H0 .mo .xoonocmm Hmonumnpmum "mousom m.vm¢.h o.oam.h o.mmo.h m.wwm.m m.wmw.m m.HHm.w o.moo.m Hmuoa b.mvvrm v.Hhm.N m.onmrm N.hhH.N m.mmo.m N.hoa.m m.~omra m00H>H0m N.mmH.H N.mmH.H m.HvH.H o.mmo.H H.hmm h.vow h.mmh %H#m5vcH o.hmm.m o.Hmh.m o.mnmrm o.mmw.m o.oom.m o.oom.m o.mvN.m mhsuflsoflumd mm\mw mm\¢m vw\mo mw\Nm N®\Hm Hm\om om\mmmH Houomm .Amumuoan ooo.H ch ucwfihoamem mo ucmfimoao>mo||m.HH canes 26 of cotton with perennial irrigation by canals under Mohamed Ali; the rapid expansion of cotton cultivation during the American Civil War; the huge irrigation works; and the various measures to intensify production after the First World War. [As a result of these developments, Egyptian agriculture is now marked by a highly developed system of irrigation, a labor intensive technique, inten- sive use of fertilizers, and dependence on cotton as the major cash crop and as the main item in exports. As a result of this, agricultural techniques are relatively advanced, while output-productivity in agri— culture has continued to increase during the recent period. Not only yields per acre are rising, they are also impressively high in absolute terms. Output per acre in Egypt ranked 14th for wheat, 12th for maize, third for rice, first for check peas, lentiles, and millet, and fifth for cotton (30% above the U.S.).l This is not to deny that increases in agricultural output could be achieved through such means as more wide- spread use of higher yielding seeds. But the scope for such relatively simple and cheap improvements is limited. Besides this, with some additional capital for better irrigation control, with educated farmers, it might be possible to attain a 30% higher yield. But Mead is 1Mead’ 0E2. Cit., p. 75. 27 skeptical that such a large scale increase in agricultural output represents an attainable and wise short run target (within the coming four or five years). But it should be pointed out that while it may be difficult for Egypt to achieve large scale increases in agricultural output, it is possible to achieve a large increase in agricultural income by shifting output to more profitable products. This is what has been called by Issawi that Egypt is due for a second agricultural revolu- tion.1 This should be one of the basic problems facing the Egyptian planners. In the past, the government has encouraged grain cultivation, the economic rationale be- hind such policy is extremely doubtful. An increase in / food imports is not necessarily something bad if it is matched by exports of alternative crops with higher value.' The essential point to be remembered is that Egypt's soil is much too precious, and its water is too scarce to be wasted on wheat and maize which are better left to coun- tires practicing extensive cultivation, like Canada, United States, or Australia. On the other hand, exclusive reliance on cotton as the major export of the country is admittedly dangerous, and diversification is necessary, but this must be in the direction of increasing the coun- try's real income. lIssawi, op. cit., p. 127. <77Vv 28 In support of this point, W. F. Owen has shown that before the construction of the High Dam, the crop- ping rotation, which has been closely determined by water availability, need no longer dominate. Egypt now faces the possibility of reorganizing its crop roation, by abandoning wheat production, and concentrating her land and water in areas where she has greater comparative advantage such as rice, maize, and oil crops as well as sugar and vegetables.1 The following table shows the costs and returns per feddan of main crops for the period 1954-1957. Table II.4--Costs and Returns of Main Crops, Per Feddan (L-E-), 1954-57. Costs of Net Income Cultivation (including rent) Summer Crops Cotton 21.7 44.6 Rice 17.9 17.1 Millet 16.6 9.4 Sugar Cane 38.4 49.3 Winter Crops Wheat 13.9 16.3 Beans 8.4 16.3 Berseem 7.6 29.8 Onions 25.7 40.9 Barley: 9.1 12.5 1W. F. Owen, "Land and Water Use in the Egyptian H19 h Dam Era," Land Economics, Vol. XL, No. 3 (August, r.— 1964), pp. 277- 29 ,1144 (continued) Costs of Net Income Cultivation (including rent) 13.2 8.8 . ‘9 Q: n ‘iigfvsgetables ' Sumner 32.5 11.0 pg. Winter 20.5 37.5 Autumn 36.5 11.5 Fruits w"Oranges , ‘VH‘E‘f'y‘H Grapes _ Mangos 68.0 100.0 ‘ 4‘” PigS‘ Bananas pea-s as payments difficultiesw A shift- "y' --.c.on FY 30 in the agricultural policy will help to overcome these difficulties. ,' Another important factor is the rapid growth in the neighboring regions of West Europe, East Europe, and the Middle East. The Egyptian soil, climate, location, and abundance of labor points to it as a vast vegetable, fruit, and flower garden for these neighboring regions. Exports of fresh and canned fruits and vegetables, jams, flowers and dairy produce is now possible due to the development of air transport and refrigeration. It should be mentioned that these changes will require large capital investments in processing plants, refrigeration, transport, and far reaching organizational changes in marketing. Provided there will be price incentives all the way through,1 the only problem that could face these develop— ments is whether such markets, especially those of West Europe, will be open to Egyptian output. To summarize, it seems clear that substantial gains for Egypt can be realized through improved drainage and irrigation, through increased use of chemicals (fer- tilizers and pesticides, etc.), improved cereal seed varieties, and a change in the composition of crops to- wards more profitable crops. The major additional lEgyptian farmers have been shown to respond easily to price changes in cotton cultivation. See R. M. Stern, "Price Responsiveness of Egyptian Cotton Producers," Kyklos, Vol. XII, Fasc. 3 (1959). 31 benefits that have not been discussed yet are the bene- fits accruing from the High Dam at Aswan, which we are going to discuss in the next sub-section. b. The High Dam The work on the High Dam started in 1958. During the first few years of construction (up to 1964/65) ap- proximately half the amount of investment was spent while the benefits started to appear since 1964/65. The pro- ject will influence both agriculture and industry in Egypt. For the former there will be a substantial in- crease in the cultivated area which is estimated to reach 1.3 m. feddan through land reclamation [the cultivated area in Egypt reached 5.9 m. feddan in 1960].1 At the same time it will enable the abolition of the basin sys- tem in upper Egypt which reached 0.7 m. feddan,2 thereby permitting multiple cropping instead of one crop each year (cropped area in Egypt reached 10.4 m. feddan in 1960). The number of crops per year on the reclaimed areas is not known, but it seems unlikely that none of the reclaimed areas would give more than one cr0p per year at least in their first few years of cultivation. On this assumption and also assuming that the basin area in upper Egypt will be cultivated twice instead of once 1Hansen and Marzouk, op. cit., p. 52. 2Statistical Handbook, op. cit., p. 253. 32 a year, cropped area will be estimated to increase by 20% (1.3 + .7 = 2 m.f.). The influence of the High Dam on industrial develop- ment will be in providing a cheap source of energy, i.e., electricity. The generators at the High Dam are planned to produce 10 billion kwh per year compared with an out- put of 5.2 billion kwh in 1964/65 (the first generator was started in 1967 and maximum production was obtained in July, 1970). It is hoped that these structural changes could be included into the model in order to make it a good representation of the real world situation. c. Disguised Unemployment in Agriculture There is a large and extensive volume of research about whether such phenomenon does or does not exist in Egypt in recent years. As early as 1936, Egypt was con- sidered to have a large amount of under employment in agriculture.1 It was again cited by Arthur Lewis as a typical example where unlimited supplies of labor exist. The idea of surplus labor was supported by C. Issawi2 and D. Mead,3 while it was attacked recently by several 1W. Cleland, The Population Problem in Egypt (Lancaster, Pa.: Science Press Printing Co., 1936), pp. 104-106. 2Issawi, op. cit., pp. 298-299. 3D. Mead, OE. Cite, pp. 80—98. bfi‘ ' 'l‘ 35 uA NI ‘. '§ ‘v- u” .5. :‘II’I;' r 3 ., ._. I v 33 economists who argue that there is no disguised unemploy- ment in Egyptian agriculture. The implication of this problem to the model to be constructed in this study is rather important. The existence of such phenomenon will necessitate a specific construction of the model which will allow for such labor to be transferred to profitable employment elsewhere in the economy. This will mean that the policy makers should seek an expansion of the industrial and services sectors where such surpluses could be used, and then one could envisage such mechanism as developed by Lewis, and Ranis 1’2 On the and Fei of expansion of the capitalist sector. other hand, if no such surpluses exist, then efficiency in the use of labor must be recognized. It is important, therefore, to analyze in detail the phenomenon of disguised unemployment in Egypt. 1See W. A. Lewis, "Economic Development with Unlimited Supplies of Labor," The Manchester School (May, 1954), Published in A. N. Agrawala and S._P. Singh (eds.) The Economics of Underdevelopment (New York: Oxford University Press, 1963), pp: 400:450; Gustav Renis and John Fei, "A Theory of Economic Development," A.E.R., Vol. XI (Sept. 1961), pp. 533-558; and J. Fei and G. Renis, Development of the Labor Surplus Economy: Theory and Policy (Homewood, 111.: R. D. Irwin, Inc., 1964). 2It may be mentioned that two similar studies were based on such mechanism. See Samuel Ho, "Develop- ment Alternatives: the Case of Taiwan," Yale Economic Essays, Vol. 5, No. 1 (Spring, 1965), pp. 63-142. Arthur Machan, "Development Alternatives in Pakistan: A Multisectoral and Regional Analysis of Planning Prob- lems," (Unpublished Ph.D. dissertation, Dept. of Economics, Harvard University, 1969). I,‘ .5- 34 On the basis of figures on labor requirements per feddan for the various kinds of work for each individual crop, B. Hansen and M. El-Tomyl attempted to estimate the total labor requirements in terms of days of work per month per person permanently employed on farms. These calcula- tions showed that the permanent labor force is at certain times of the year fully employed, and that there is a sea- sonal demand for outside labor. If disguised unemployment is taken to mean that the marginal productivity of workers is near zero, so that labor can be removed permanently with- out detrimental effects on production, then there is good evidence for the opposite View, viz., that there is not disguised unemployment, but that there is some open unem- ployment, and a large seasonal underemployment which may very well correspond to 25% of the total permanent labor force calculated on an annual basis. Some other studies bearing on this problem gave support to the idea that there is no disguised unemploy- ment in the Egyptian agriculture. Production functions studies by M. M. El-Emau? and H. Kheir El-Dine3 showed lB. Hansen and M. El-Tomy, "The Seasonal Employment Profile in Egyptian Agriculture," J.D.S., I (July, 1965), pp. 399-409. 2M. M. El-Emam, "A Production Function for Egyptian Agriculture, 1913-1955," I.N.P.C., Memo No. 259, Dec., 1962. 3H. Kheir El-Dine, "The Cotton Production Function in the U.A.R. and its Relation to Technical Progress and Disguised Unemployment," I.N.P.C., Meme. No. 3 0, 1963. 35 that rural wages were in line with the value of marginal product of labor. These findings were, however, challenged by D. Meadl who argued that the rapid expansion of employ- ment Opportunities outside of agriculture may have drained away considerable numbers of people who had previously worked as paid agricultural workers with the result that there were sharp increases in the wage rate during sea- sons of peak demand in the mid-1960's. Thus, while there has been a tightening in the market for paid agricultural workers in recent years, this tightening was confined to the market for paid workers, leaving considerable dis- guised unemployment on family farms. He concludes, there- for, that the agricultural sector has more workers than it can use, that there is a considerable number in the agricultural sector whose marginal physical product is Virtually zero, who could permanently be withdrawn from the sector with no loss of output and only minor organiza- tional changes in the production process. This conclusion will mean that more people could be absorbed in the agri- cultural sector only with a reduction in the standard of living, unless this is offset by technical change. In economies with unlimited supplies of-labor, Lewis and Ranis and Fei emphasized that the wage rate is institutionally determined by the subsistence level. An \ 1Mead, op. cit., p. 63. 36 indirect test will then be to see whether the behavior of factor rentals followed the subsistence theory or the Irtaarginal productivity theory. This test was tried by who tested two statistical hypotheses: a regres- I—Ia.nsenl sion of average agricultural productivity over wages and a regression of agricultural cost of living index over wages. The first hypothesis derived from the marginal productivity theory by using a Cobb-Douglas production function has a higher correlation and more significant re gression coefficients . Furthermore, Hansen discussed the seasonal varia- tions in wages, and found that the index of wages is correlated to an index of employment and that the seasonal variations of wages cannot be explained by correlating month to month movements of the cost of living index. Hansen rules out a subsistence interpretation of these Variations. Therefore, it seems that shortage rather than L111 limited supplies of labor is experienced during the Peak season, and that wages, for these periods at least, are determined by the ordinary laws of supply and demand. Iic‘amsen's conclusion supports his earlier one (derived fIfom the labor requirements estimate) that Egyptian \ B. Hansen, "Marginal Productivity Wage Theory and Subsistence Wage Theory in Egyptian Agriculture," J.D.S. quly, 1966), II, pp. 367-407 and B. Hansen, "The D1stribu- lve Shares in Egyptian Agriculture," Inter Eco. Rev. (June, 1968), pp. 175-194. 37 agriculture suffers from seasonal underemployment rather th an disguised unemployment. But it should be noted that seasonal variations in wages are not sufficient evidence against disguised unemployment. Other phenomena have to be considered that may explain the co-existence of seasonal shortage of hired labor and permanent underemployment. This has been done by A. Moheieddin1 in his case study of agricultural under- employment in Egypt, where he introduces the size of the farm as a new variable in the analysis and takes into ac- count important institutional rigidities that affect the Supply of agricultural labor. He shows that a consider- able surplus of man-labor is available on small farms (less than» 5 feddans) while in the same regions and at the same time large farms can suffer from acute shortage of women and children labor. Moreover, the seasonal pattern of shortages and unemployment varies among regions. This situation results from regional immobility and from a stereotyped pattern of work allocation to men, women, and children, determined by tradition which prevents the S"'Jbstitution of one category of labor for the other when a specific shortage is experienced. Also, custom barriers \ lA. Moheieddin, "Agricultural Investments and Employment in Egypt Since 1935" (Unpublished Ph.D. dis- Sertation, Dept. of Economics, University of London, 1966). . 0" at h 0 38 prevent women who normally work in the small family farm from hiring their services outside to the large farms. Thus, these rigidities explain perfectly well the simultaneous existence of shortages of hired labor (with the correlation variation in wages) and the existence of permanent underemployment of a large portion of the labor force. These conclusions are also supported by Mabro.1 This controversy about whether or not there exist disguised unemployment in Egyptian agriculture has been settled rather definitely against the surplus labor hypo- thesis by the publication of the rural employment survey conducted by the International Labor Organization and the Institute of National Planning in Cairo. The survey took Place from March, 1964 to February, 1965.2 The sample was for four hundred eighty households selected from forty- eight villages in six governorates. Following are the main results of this survey: 1) The survey shows that the level of employment in rural areas is much higher than had earlier been thought. F or men, the annual number of hours worked corresponds QlLosely, and on the average, to a normal eight-hour day.3 \ lR. Mabro, "Industrial Growth, Agricultural Under- EIt'lployment and the Lewis Model: The Egyptian Case, 1937- 1965," J.D.S., Vol. III (July, 1967), pp. 322-351. . 2The main results of this survey were summarized in B. Hansen's, "Employment and Wagesein Rural Egypt," A\-E.R., Vol. LIX, No. 3 (June, 1969), pp. 298-314. 3Ibid., p. 300. 39 Thus ignoring nonfield work, and nonagricultural work, earlier labor requirements studies systematically and grossly underestimated actual employment. ii) The work outside the farm shows a seasonal pattern similar to that of the farm's labor input. It seems clear, therefore, that farmers have a real choice be tween taking paid labor outside the farm or working on the farm. Under these circumstances, there is little rea- son to believe that the value of marginal product of labor, even on the smallest farms, would be lower than current rural wages. iii) The use of hired labor is smaller on farms with big families than on farms with small families. This has a bearing on Moheieddin and Mabro who argued that because there is a tendency on large farms to be concentrated in certain regions, household members from the small farms would not get in contact with labor demand where it actually exists. The survey shows that labor ‘Eleemand exists everywhere even if there are no large farms. iv) The survey supports the seasonal pattern of el'l'iployment revealed by the labor requirements studies. 113119 difference between seasonal peaks and troughs is much smaller, however, than that found in the labor require- Il'lent studies . v) Wages generally appear to be highly flexible and react strongly and rapidly to changes in demand. The 40 ssIJrvey clearly supports the hypothesis of demand and supply determined wages. The seasonal fluctuations of «fleaily wages are very strong. The highest daily wage is saukaout.50% above the lowest for men; the corresponding figures are about 100 and 175% for women and children :1:eespectively. vi) The survey supports Mead's result that employ- ment is at a lower level in Upper Egypt than in the Delta. :rstit, the lower employment in Upper Egypt is concentrated leeainly among women and children. Thus, it would seem illiat women and child labor serves as a buffer, with the IImean working about full time and the women and children '€1<>ing what has to be done beyond that. In other words, ‘tifle differences in the employment possibilities have con- sequences. mainly for the employment of women and children. Thus, one meets here an elasticity of supply of labor, l=>I1t this is very different from the unlimited supplies (2’15 labor found in Lewis' model. Whatever the relationship 1=>eatween supply proper and actual employment of women and ‘:=Iiildren, there can be no doubt that when one turns to s<>cia1 norms and development possibilities, the women and ‘:=Iiildren do not represent a reserve of labor available 15<>r industrialization. The former will only be partly E’e‘railable for agriculture, while the latter can be con- EB:iLdered a temporary source since a successful development IPJrogram must include efforts to have children attend 41 school regularly. This would permit children to work (during the holidays), but satisfactory education for the children would presumably imply an increased demand for adult hired labor in agriculture. To summarize, with the planned increase in school attendance, with the expected increase in the area culti- vated as a result of the completion of the High Dam, and with the rather remote possibility of mechanization of eaggriculture, it seems very likely that agriculture will rmeeed an increase in the adult labor force at least up to izlue terminal year of the model, i.e., up to 1974/75. Part of the natural increase of population in rural areas will, however, have to find employment outside agricul- tzlare, but the supply of unskilled labor from rural areas will be limited to part of the natural increase in the labor force. It is clear, thus, that the supply of labor Outside agriculture is rather limited, and that economic planning will go very wrong if it assumes unlimited sUpply of unskilled laborers, even in the short run. The JZ‘eserves in agriculture are mainly seasonal, and are Partly available for agriculture itself (for married women) . It is important, therefore, to economize on the 1Ilse of labor at all levels, and efficiency in production and an increase in labor productivity become imperative for future developments. 42 £5 - Industrial Development The growth of Egyptian industry did not proceed stage by stage, from handicraft to small factories, and -t:11en to large scale factories, but rather it provides a <221ear example of industrialization through import substi- ‘t:11tion.l In the early stages of industrial developments, Iaqupt concentrated its efforts on the production of com- :nnradities that were previously imported and which were Ik>eased on existing natural resources such as cement, oil, jfeertilizers. Several factors have given industrial growth a comparative advantage vis a vis other sectors of tzlue economy, important among which are the government JE>Jcotectionist policy and the movements of the internal ‘tzeerms of trade, of agriculture versus industrial prices (which was partly a result of the pricing policies of the government) in favor of industry. With the emphasis on industrial growth after :1—5356, the production of new commodities were started, ‘kwtith.great emphasis given to self sufficiency, and with- <:>lnt due regard given to the principle of comparative ad- ‘V'Eantage. \ As will be seen later on, the establishment of This gives an example of what Hirschman has em- IE>11asized that the presence of imports is an excellent §Flabstitute for market research, indicating an already ex- aLasting demand and enabling enterpreneurs to calculate ‘Vvlmether it would be profitable or not to enter into the Ileew business. See A. Hirschman, The Strategy of Eggpomic IDeveIOpment (New Haven and London: Yale University Press, 1‘958) , pp. 120-125. “a. a ‘ C III. I u. A w '10". . , ‘3»: 8'. ed 4 ‘Iflnn ....: ESE 'Vll‘vv ‘e V" ‘ tflt '1’ 'l' 5‘ db 43 some of these new industries proved to be questionable jEtrrom an economic point of view. A study by the United Nations, in 1955, about the cost and efficiency of the industrial sector in Egypt, concluded that a number of important industries, including fertilizers, cement and several other food processing ;irridustries could dispense with tariff protection without danger. Since that time, output per man has continued to grow in many of these industries while wage rates have Jcnj.sen only slowly. Output, similarly, was rising more rapidly than capital stock. Thus, on the whole, these exPanding industries maintained or improved their competi- i::inve position.1 These pioneering Egyptian industries have, thus, grown from infancy to maturity mainly due to the fact that they were started in fields where the coun- tllciy has an obvious comparative advantage, and because of the favorable development of wage-cost conditions in the Egyptian industry. The situation is different for a number of newer products where quality is generally below, and costs is g’enerally above that of world markets. In these cases, the government policy is to provide whatever degree of p3":tntection required to support domestic industry. It should be emphasized that Egypt has no other a~3L'ternative but to give industrialization a major role. \ 1Mead, op. cit., p. 105. 44 With the scarcity of agricultural land necessary for ver- tical expansion of agriculture, with the relatively advanced techniques already in use in agricultural pro- duction, it seems unrealistic to expect substnatial and continuing increases in agricultural output. Thus, as a develoPment strategy, Egypt should concentrate on the development of industry and services, since the aggregate growth rate of the economy will be highly dependent on them. It is important to note that this analysis lies behind the sector division chosen in this model. Not only the ratio of national income generated by these sectors is large, but also the development of these sec- tors is important from a long run developmental policy point of view. The remaining point in this section is to see the impact of industrialization on value added, employment, and the balance of payments, and to see what are the policy implications of this analysis. As a result of the impetus given to industrializa- tion in the mid-1950's, Egypt is now no longer an agri- cultural country. In 1964/65, 24% of gross domestic product was produced in industry (including extraction, public utilities and electricity) against 28% for agri- culture. Furthermore, value added per capita in this sector is among the highest in the country (this, inci dentally gives an additional reason for industrialization). 45 The following table gives gross value added per worker per sector in Egypt. Table II.5--Gross Value Added Per Worker by Sectors (L-E-) Per Year, at 1954 Prices). 1947 1960 Agriculture 73.4 88.5 Industry and Electricity 171.5 293.1 Services, total 168.5 237.2 Commerce 130.0 186.7 Transport and Communication 227.7 357.7 Construction 223.2 257.9 All Others 105.4 171.7 Source: D. Mead, op. cit., p. 291. The development of industrial employment in Egypt shows clearly that the expansion of an industrial sector cannot absorb over a relatively long period of time more than a small share of the natural increase in the labor force. Despite the fact of the high increase in indus- trial output, additional employment in this sector ab- sorbed 15% of the increase in the number of adult males in Egypt from 1947 to 1960. For the same period, the share of industrial workers in total employment of adult males rose only from 9.8% to 10.8%. 46 It has been convincingly argued that the economic reasons behind this slow increase in employment opportuni- ties in industry is the monopolistic structure of the Egyptian industry. The number of firms in each branch of activity is small and the industry is protected against foreign competition. If competitive conditions prevail, there would probably have been a tendency towards more labor intensive techniques. Both this factor and the favorable movements of industrial prices relative to the cost of living made it possible for enterpreneurs to choose more capital intensive techniques without remark- able fall in the rate or share of profit.1 Reynolds gave two reasons for this behavior of industrial employment:2 new industries start off at a low level of productivity but by time productivity in- creases, which means that employment rises less rapidly than output; and due to the tendency of real wages to rise in the developing countries (for social reasons), employers will respond to this in the normal way by capital-labor substitution. This second reason is not true in the case of Egypt, however. 1Mabro, cp. cit., p. 344. 2Lloyd G. Reynolds, "Economic Developments with Surplus Labor," Oxford Economic Papers, Vol. XXI, No. 1, (March, 1969), p. 95. 47 With respect to the impact of industrialization on the balance of payments, it should be noted that, theoretically, the new projects were supposed to be chosen such as to maximize income given the constraint on the balance of payments. Actually, these new projects were mainly chosen through a process of bargaining within and among different ministries. In addition, the bias towards self sufficiency through import substitution, which was mentioned before, did have an important influence on the selection of industrial projects. The influence of this bias resulted in the production of such commodities as cars, refrigerators, washing machines, etc. However, the expansion of such commodities was achieved at the cost of greater dependence on imported raw materials and semi— manufactured goods. In this sense, the planners' aim to make the economy less dependent on the outside world did not materialize. Indeed, one of the side effects of this policy was the occurrence of idle capacity in many'newly established industries whenever foreign exchange became in short supply or because of sales and marketing diffi- culties due to inability to compete effectively with the sophisticated products of industrial countries in world markets. In addition to the imports of raw materials and intermediate products required for the newly established industries, there aretwo other strains on the balance of 48 payments. The first is the large imports of capital goods required for the implementation of the development pro- gram. The second is that the increase in industrial out- put of some commodities did not result in as much import substitution as was expected.1 Thus, the increase in production was only import replacing in the sense that, given the level of effective demand, if domestic produc- tion had not risen as much as it did, imports would have had to increase even more than they did. It seems clear, therefore, that the negative im- pacts on industrialization on the balance of payments, has thus far outweighed the positive aspects, and this contributed to the balance of payments difficulties ex- perienced on a large scale since the early 1960's. This will be the subject of the next section. 6. Foreign Trade and the Balance of Payments The following table gives a summary of the balance of current transactions estimates for Egypt from 1950 to 1967. With respect to merchandise trade, it is to be noted that raw cotton is still the largest export commodity, even though its relative importance has declined somewhat. The normal share of raw cotton in the sixties is around 60% of total exports.2 It is needless to say that this 1Mead, op. cit., pp. 108-110. 2See Hansen and Marzouk, op. cit., p. 181. 49 Table II.6--Balance of Current Transaction Estimates (L.E. million). Current Transactions Balance Year Merchandise Transac- Other Transactions Curggnt t1ons Trans- Payments Proceeds Payments Proceeds actions 1950 221.7 188.5 57.2 80.0 - 10.4 1951 241.9 201.9 65.5 90.3 - 15.2 1952 210.5 145.6 61.6 73.1 - 53.4 1953 165.2 135.3 57.8 79.8 - 7.9 1954 150.7 138.8 67.9 82.4 + 3.6 1955 190.3 133.1 71.0 94.2 - 34.0 1956 192.3 129.9 59.5 88.9 - 33.0 1957 217.5 166.0 50.9 71.2 - 31.2 1958 214.0 161.0 56.3 89.2 - 20.1 1959 235.3 164.3 65.6 100.6 - 36.0 1960 255.2 200.2 70.1 101.5 - 23.6 1961 237.8 161.3 71.6 94.8 - 53.3 1962 294.2 145.2 70.3 101.7 -117.6 19632 402.6 228.8 84.1 135.0 -122.9 1964 399.4 227.6 97.4 146.1 -123.1 1965 413.3 246.8 99.3 155.8 -110.0 1966 410.9 259.5 94.7 170.5 - 75.6 1967 413.2 258.7 86.9 115.9 -125.5 Source: National Bank of Egypt (N.B.E.) Economic Bulletin, Vol. XXII, No. l 2, Cairo, 1969, Section 471. As from 1962, merchandise transactions figures include transit trade which was previously included among other transactions. of the new exchange rate of L.E. 1 = $2.3 instead of $2.87. 2As from 1963, figures are calculated on the basis 50 high dependence on one crop for exports leaves the country's balance of trade highly dependent on the fluctuations in the supply and demand for the product. Starting from the 1950's, other commodities started to make contributions to the country's balance of trade. Other agricultural products such as rice, vege- tables, and fruits started to appear on the export side and they are rising in importance. The stabilization of the flow of water as a result of the completion of the High Dam should make possible a more substantial and regular production of rice. This actually started to take place and exports of rice in the first 11 months in 1968 registered a 52.6% increase over the same period the year before. If one adds to this the increased atten- tion given to the exports of other agricultural products such as onions, potatoes, edible fruits, one should ex- pect a larger increase in the exports of these items in the near future. The new additional area of land re- claimed to utilize the water of the High Dam will help in this direction provided that the European market will be open for the Egyptian exports. With respect to manufacture, the exports of tex- tiles and yarn have increased rapidly since the 1950's. The country started also exporting minerals, cement and other products of the manufacturing sectors such as fur- niture, artificial silk, shoes, and automobile tires. F‘ O‘- Ill 6. f (’ r" 51 It should be stressed, that while the foreign ex- change difficulties experienced through the first Five Year Plan affected the efficiency and expansion of some of the newly established industries, it is the increased ef- ficiency and expansion of these industries that will help in relieving these foreign exchange crises in the long run. This is one of the reasons for which exports of the industrial sector was chosen as one of the policy instru- ments in the model to be constructed in this study. This choice will allow the planners to know the effects of any change in this instrument on the other variables of the model. The composition of imports has undergone more substantial changes. The main trend from the late 1930's to the early 1950's has been for the share of food items to increase sharply while the share of manufactured and capital goods were about unchanged. From 1952 onward, one could find a further decline in the share of manufac- ture, more or less unchanged share for food and raw materials, and a large increase in that of capital goods. The important observation-from the last table is that while in 1960 the balance of trade was unfavorable to Egypt by L.E. 55m. in 1960, this imbalance increased sharply where it reached L.E. 154m. in 1967. These in- creasing deficits were mainly due to the stagnation of exports, while imports were expanding rapidly. 0“. 3” F! 'V t- ‘1. I'.’ ,‘ '5 52 It is to be noted that from the more recent data, this tendency for the trade deficit to increase has stop- ped or been reversed. During the first eleven months of 1968, for which data is available, exports surged upward by 8.4% to L.E. 246m., while imports declined to L.E. 269.8m., a 9.2% decline over the corresponding period a year earlier. As a result of these changes the balance of trade recorded a deficit of L.E. 23.8m. compared with L.E. 71.6m. in the corresponding period of 1967. This represents a 66.8% improvement over the previous year and is the lowest since 1960.1 To round up the current account picture, we have to consider the role of invisibles. Here the main items are Suez Canal dues, interest payments, tourism, and government expenditure. The Suez Canal dues increased sharply during the 1950's from L.E. 26.7m. in 1950 to L.E. 50.4m. in 1960, to L.E. 95.2m. in 1966.2 As a result of the Middle East war in June, 1967, the Suez Canal was closed and it is still closed up to now. It should be noted that the Egyptian economy has not, so far, felt completely the effect of this loss because of the compen- sations paid by some of the oil producing countries in the Arab World. Whether these payments will remain as long 1See NBE, Economic Bulletin, op. cit., p. 108. 2Ibid., Statistical Appendix, 4/3a. . O 0' .~.- ‘0 u .0. ’7 Phi. n 4;. ni- 9- 1‘ ha“ 53 as the Canal is closed is to be seen, but one could expect (judging from the power structure in the Arab World) that it will remain as long as the Israeli occupation remains. It is to be observed that there is still a major loss of closing the Canal, although this is of a long term nature. The closure of the Canal in 1967 has created the tendency to build super tankers for shipping oil. These super tankers can't pass through the Canal without a deepening of the Canal. In 1960, the Canal authorities presented a five-year plan for deepening the Canal from 38 feet to 48 feet; this will more than allow the empty super tankers to pass through the Canal. Thus, when the Canal will be opened, a major part of the Middle Eastern oil will not pass through it. This reduction in Canal traffic would be partly overcome, however, by the planned pipeline from Suez to the Mediterranean, the work on it is supposed to start this year (1969/1970). The other major item is the net interest payments, which are expected to reach a high level as a result of the increase in the country's indebtedness in recent years. Net interest payments abroad reached L.E. 7.1m. in 1965, L.E. 4.4m. in 1966, and L.E. 9m. in 1967. These developments in the balance of current ac- counts led to foreign exchange difficulties which became more critical after 1962 when the Egyptian pound was for- mally devalued, and some drawings on the IMF plus some 54 adjustments in domestic policies. It is to be noted that the improvements in the terms of trade and the increase in the net invisibles (which were mainly due to the in- crease in Suez Canal revenues) helped to meet part of the increase in imports; but even this favorable development was not sufficient to prevent a growing deficit. Until 1958, these deficits were financed exclusively through a fall in the reserves of gold and foreign exchange which had even to cover a certain net outflow of capital. Since 1959 a growing part of the deficit has been covered by capital inflows, in particular U.S. counterpart funds which reached L.E. 195.7m. for the period 1959-63.1 The rest of these deficits have been covered mainly by Russian High Dam deliveries which is covered by Soviet loans agreed on in 1958 and later. Other sources such as changes in the IMF position and short term credits have contributed in covering these deficits, too. These continuous and substantial deficits in the balance of payments are an indication of the strains put on it by an active effort to accelerate the rate of growth of the economy. In principle, the country should even- tually reach a stage where it is less dependent on im- ports, being able to produce at home a higher portion of the intermediate and final goods needed for domestic uses. 1Mead, op. cit., p. 185. an 55 As was shown in the preceding pages, recent developments point in this direction. These recent develoPments should be expected to continue in the future as a result of the economic effects of the completion of the High Dam and its effects on agricultural production. It is important to note that, from a development policy point of view, these reductions in imports must not affect the imports of raw materials and capital goods. The whole burden must lie, therefore, on the imports of consumer goods particularly food, which reached 30% of imports in 1964- 1965. Gross agricultural production is estimated to in- crease by 20% due to the effects of the High Dam. These may amount to about L. E. 150m. in 1964/65 prices. All of them are virtually exportables (cotton or rice), or import substitutes (wheat, maize, and barley). Thus, it will be assumed in the model, that food imports will be zero in the target year (1974/75). It should be noted that an important condition for self sufficiency in food to occur is that domestic consumption of agricultural products should not increase in connection with the increase in agricultural production. If, in addition to such increases, agricultural output increases by 2.5% per year (which is the same rate assumed for pOpulation growth up to 1975), it will be possible to keep per capita food consumption constant. It is to be noted, also, that unchanged per capita food consumption 56 in the near future is a feasible target in regard to the relatively satisfactory average caloric intake in Egypt. From a domestic policy point of view, the fore- going measures would obviously require tough demand man- agement, not only with respect to disposable income: a change in relative prices sufficient to shift demand some- what from agricultural products to other goods and ser- vices would be necessary. It should be noted that a policy to equilibrate the balance of payments, by definition, tends also to equilibrate domestic saving and investments.1 Thus, de- mand management must face the problem of increasing the domestic savings to reach the level of investment reached in the previous period. This is what is going to be dis- cussed in the next section. 7. Savings and Investment The following table shows saving and investment and their relation to gross domestic product. With reSpect to investment, one can observe that while the investment rate remained in the range of 12-14% of gross domestic product through 1959-60, it has risen during the planning period to reach almost 20%. This has declined somewhat in 1967 and 1968 as was mentioned before. 1Sydny Alexander, "Effects of a Devaluation on a Trade Balance," I.M.F. Staff Papers, Vol. II (April, 1952), pp. 263-278. 0 case mHN UHQHQ .mmm .o ..ueo .mo .xooooomm Hmoaumeumumm 57 H.emma H.mama o.mev «.mm m.mam H.m>m o.oam~ mo\mmma m.moma m.a>ma m.Hmv e.mv m.o~m m.vom v.m~a~ mo\vmma H.Hmma m.mema m.aoq m.mma m.mmm e.~wm m.emma em\mmma o.mmea m.oeaa «.mam o.voa o.mmH m.mm~ o.vmma mm\mmmH m.mvma m.Hoaa H.5em «.mm e.vma H.Hmm m.mHmH mm\amma m.me~a m.mmm m.mmm m.mH H.oam o.mmm m.mmva Hm\omma e.mmaa m.aea H.mmm m.v a m.mea ¢.HhH o.mhma om\mmma A.E.m.qc mooflnm umxumz 1.8.5.: 6.5.38 1.8.5.: 9...; A.E.m.qv AE.m.qV A.E.m.qv psosmoo A.E.m.nv um smooeum soap sown hood» ucofimmm mmsfi>mm Queue nexus: Imfismcou Imfismcou ImEdmcoo mo owumofioa lumm>sH ucmunsu Hmuoa mum>flum owaasm wosmamm mmouw mmouw pm wow .sowumesmsoo Deansm new mum>fium new .uwoflmmo sneezed mo occmamm .mmsfl>mm..ucofiumm>cHnue.HH manna 88. o‘- n‘b 58 During the first Five Year Plan, the planners were highly optimistic about the supply of saving to meet planned investment; in fact, planned savings were expected to exceed planned investment in the final year of the plan by some L.E. 40m. making it possible to start repaying the external debt. The planners assumed high marginal saving rates in all major sectors; for example, household savings were ex- pected to increase from an average saving rate of 3% in 1959-1960 to 6.1% in 1964/65 which would imply a marginal saving rate of 16%. Such high marginal saving rates could, of course, be achieved; they only need tough demand manage- ment. But with little or no discussion of how private savings were to be increased in this way and little or no determination to use the government budget to generate public savings, it is not surprising that these plans have not been fulfilled. The marginal rate of domestic savings over the plan period amounted to 18.8% while the increase in per capita consumption reached 27.7%. As a result of these develop- ments, greater resort has to be made for foreign savings than was originally planned. Gross domestic savings ac- counted for 72.4% of gross investment during the plan period. To a large extent the failure to achieve the planned saving target was due to the rapid rate of in- crease in public consumption, which rose by 89% in the plan period with an annual rate of increase of 14.2%. (I AI) 9A 2“ we. ~v I“ ‘I ~J (J 1 59 These resulted in financial deficits incurred by the public sector, which were partly overcome by a financial surplus in the private sector, and partly through a deficit in the balance of payments that was covered by foreign exchange reserves up to the early sixties when they were virtually exhausted, and later on through an increase in the country's indebtedness to foreign countries. From a short run point of view, it might be good economic policy to try to depend on foreign loans to finance developmental activities. But with the world market conditions facing the exports of developing coun- tries as it is, exports does not grow fast enough to finance the development process and a large and growing debt service. This means that while foreign loans could be used by Egypt to avoid any reduction in private or public consumption. foreign interest payments would in- crease continuously and the balance of payments would be- come more and more strained. Thus, as a growth strategy, it would seem more beneficial if Egypt tries to reduce its dependance on foreign borrowing. This study, however, is concerned with the determination of alternative develop- ment programs. The development strategy suggested in this section will be considered by assuming the lower value of foreign saving to be equal to zero. 60 8. Agtual Plgnning and Planning Techniques The first Five Year Plan was constructed mainly by a stage by stage method a la Tinbergen, and was not based on a comprehensive econometric model, nor was it based on an up-to-date input-output table which reveals the interdependence among various sectors and industries. To the target increase in income, which was deter- mined by political considerations, was applied an esti- mated overall capital—output ratio to reach the required volume of investment. Deducting from this the expected supply of foreign loans, required domestic savings was reached. Once the level of government expenditure was known, the level of private consumption could be easily calculated. A series of income elasticities of demand for various consumer goods, which were obtained from "family budget" studies, made it possible to calculate the expected distribution of consumer demand by sector. As for estimating inter-sectoral demand, a small Leontief input-output table was utilized, but with little success. The sectoral production targets were, therefore, largely determined in an intuitive way. By the application of sectoral capital-output ratios, the investment needed for each sector was then determined. The choice of concrete investment projects was delegated to individual ministries where the tendency has been to choose projects with high 61 profitability, labor incentive, high import substitution. In practice, when the National Planning Committee was re- viewing the proposed projects, they seem to have concen- trated on the rate of return to capital. While the plan consisted mainly of an investment program, its annual realization was based on the annual state budget. It should be noted, however, that the dis- tinction between private and public sector, by itself, does not show the real impact of government on the economy. From an ownership point of view, the economy is a mixed economy but it is highly regulated with a good deal of government intervention in the private part, and decen- tralization in the public part. In agriculture, current production and investment in stocks are determined by the farmer's response to market prices for inputs and outputs which are generally administered by government. Small scale industries and handicraft, mainly belongs to the private sector, and government has very little influence. On the other hand, the government is able to give big industrial concerns, which are mostly nationalized, any orders as it finds appropriate, but industrial production seems to be decentralized to a large extent. Thus, enter- prises function as profit maximizers within the given administrative framework of price fixing, import licens- ing, etc. , 1? (3 ar- 62 The striking characteristic of the first plan was the overwhelming importance of the industrial sector accounting for over 50% of the planned increase in income over this period. The planned rate of growth was 14.6% per annum, while the realized rate reached a compound rate of 8.5% per annum.1 The planned patterns of develop- ment was planned to result in structural transformation being not on the expense of agriculture (which is gener- ally the standard case), but on the expense of services. The growth rate of agriculture during the plan period, however, was highly below the average of the economy (3.3% compared to 5.5%). If one adds to this that the actual growth of the services sector was quite high, one can see directly that the resulting structural transformation has followed the more familiar pattern, whereby both services and industry have increased their relative importance at the expense of agriculture. There are some criticisms to the plan that could be summarized as follows: i) The procedure of selecting investment projects has led to a sub-Optimal structure of foreign trade. The plan emphasized self-sufficiency, but a small country such as Egypt can't hope to produce the whole range of manufac- tures and primary products, and is, therefore, forced to 1B. Hansen, "Planning and Economic Growth in the U.A.R.," op. cit., p. 31. 63 pay more attention to comparative advantage. Limitations on resource diversity and size of domestic markets suggest that the natural choice of development strategy is "planned specialization" so as to link the growth of the new indus- tries to the expansion of world trade; hence, the relevance of comparative advantage as a guiding principle of develop- ment planning.l ii) The method of project selection led to inopti- malities owing to the use of inappropriate shadow prices. The planners assumed that labor is abundant and that, therefore, the marginal product of labor is zero. As a result of this, the rate of return on capital played a central role in selecting investment projects. But, as mentioned earlier, there is a good deal of evidence now that the marginal productivity of labor is positive. This would mean that in the selection of investment projects, it would have been more appropriate to deduct the cost of labor from value added when estimating the rate of return on capital. Another shadow price problem is related to foreign trade. Domestic prices, and not foreign prices, have been used to arrive at the social profitability of capital, and these include tariffs and/or monoploy profits conditioned lNaiem A. El-Sherbiny, "Comparative Advantage and Develogment Planning Under the Foreign Exchange Constraint with Special Reference to Egypt" (Unpublished Ph.D. dis- sertation, Dept. of Economics, University of California at Berkeley, 1969). 64 by protection from foreign competition. Unless the infant industry argument for protection is involved this must imply that comparative advantage has not been fully con- sidered. iii) The planned investment in many fields will lead to excess capacity as compared to domestic demand, it was then taken for granted that the residual will auto- matically be sold in foreign markets. This gives another major deficiency in the principles of planning with regard to foreign trade since there were no detailed analysis of the question whether such industries could be competitive in the world market. iv) As was shown through most of this chapter, the significant divergencies from the plan were in the use of resources side, where the plan target has not been even approached. For future planning in Egypt, the rate of growth itself may not be the worst problem facing the planners, but a large number of improvements will be needed in planning for investment and the level of aggregate de- mand and its distribution among sectors. By the end of 1963, some theoretical studies were made for the construction of the second plan, namely a model constructed by Ragner Feisch.1 His model is a linear programming model, like the one to be constructed l . Ragner Frisch, "How to Plan," I.N.P.C., Memo. No. 380, Dec. 1963. 65 in this study, and is only distinguished from similar other models by the large number of sectors chosen. While he divides the economy into nine sectors, he tries to take into account the dynamics of investment capacity creation process, and, therefore, each year of the plan appears explicitly into the model. The model is kept together by a weighted social preference function which includes total potential income, employment, private and public consump- tion, and foreign indebtedness. Maximization of this function, under the given constraints, will give the solution for investment, consumption, and foreign trade pattern during the five year period. The most important theoretical problems related to this model are the problems related to the choice of the appropriate discount rate, and the social preference function, which he tries to determine empirically. There are many reasons to be skeptical about the possibilities of establishing empirical social welfare function. This is a common problem for all models which attempt to apply maximization methods to policy making. But, fortunately, systematic planning is possible without this device. If the planner can get a vague qualitative and imperfect idea about the targets in which the politician is interested, he can work out a series of alternative plans among which the politician can choose. By applying these simulation methods, the planners might be able to present the n!" ' 0'! o.) '0' '0! 'V '\ 9' f T“ 66 government with a series of feasible solutions to choose from; and in this way the problem of the objective func- tion is sidestepped. This dissertation will present an attempt in this direction, within the limitations of data and time available. 9. Summary and Conclusions The early attempts of industrialization in Egypt started with the Great Depression, but were unable, how- ever, to bring about any radical change in per capita in- come. This process has been intensified after the Suez Campaign of 1956, where annual increases in per capita income aften reached 3-4%. The rate of growth of labor force depends on the rate of growth of population and the participation ratio. The former has reached 2.54% per annum in the early 1960's, and the government attempt to reduce it does not seem to have any effect yet. The latter depends on changes in social attitudes (regarding women's work), and educational Opportunities (regarding child labor). The net effect of these two factors suggest an annual rate of growth in the labor force equal to 2.6%. While agricultural techniques are relatively ad- vanced in Egypt, it is still possible to achieve large in- creases in agricultural income by shifting output to more profitable products. The controversy about whether or not I 0F“ o—h a ”In. on. A!» an. a I I 67 there exist disguised unemployment in Egyptian agriculture has been settled rather definitely against the surplus labor hypothesis, by the publication of the rural employ- ment survey in-l969. It seems clear, therefore, that with the planned fall in child labor, with the expected in- crease in the cultivated area due to the High Dam, and with the remote possibility of mechanization, agri- culture will need an increase in the adult labor force at least up to 1974/75. In its early stages of industrial development, Egypt concentrated its efforts on the production of com- modities in which she had natural advantages. With the emphasis on industrial growth, after 1956, the emphasis has shifted to self-sufficiency, without due regard to comparative advantage. This resulted in the production of new commodities which was economically questionable. It also percipitated in balance of payments difficulties that affected the efficiency and expansion of these indus- tries themselves. Over the longer run, however, it is the increased efficiency and expansion of these new in- dustries that will help in relieving these foreign exchange shortages. As a result of the completion of the High Dam, gross agricultural production is expected to increase by 20%. These increases could help in overcoming the balance of payments problem by making Egypt self-sufficient in 1" lb! . 0 .Ai Ifld (I I I H H 68 food production. This will help toward the suggested growth strategy aiming at reducing the dependence on foreign savings. The first Five Year Plan was constructed by a stage by stage method a laflfinbergen. In the theoretical studies related to the second plan, which was not formally laid down, R. Feisch constructed a linear programming model, where the aim was to maximize a social welfare function, subject to the given constraints. This approach faces some theoretical problems related to the choice of the appropriate discount rate and the social preference function. Such problems could be sidestepped by having a model that could create consistent and feasible alterna- tive development programs, which is the subject of this dissertation. \. CHAPTER III GOALS, INSTRUMENTS, AND SECTORS 1. Introduction In this chapter, an attempt will be made to de- termine the appropriate goals that should be achieved by the target year, 1974/75; the policies chosen to reach these goals will also be specified; and finally, the divi- sion of the economy into sectors will be laid down. The study of the previous chapter (Chapter II) will be used as a basis for the determination of which goals should the Egyptian planners try to achieve. Policy instruments will then be chosen where emphasis will be on their manageabil- ity to the planners, and their relevance to the problems facing the economy and the goals chosen. The sector division will then be discussed with the aim of making the most important economic flows intersectoral and thereby showing the interdependence among the different sectors in the economy. 69 70 2. Goals The choice of goals for a policy model could either be fixed or variable.1 we will combine both approaches in our choice, in the sense that if there is any objective variable that it is desired to take certain value in the target year, for political, social, or economic reasons it will be assumed as a fixed goal for the economy. On the other hand, if there exist no such reasons for a fixed goal, then this will be a variable objective which could be determined by the maximum value that the variable take within the feasible region, or by specific values that the variable is allowed to take. In Chapter II, it was shown that public consumption has increased rapidly during the sixties. Specifically, it rose during the first Five Year Plan by 89% with an annual rate of increase of 14.2%. The ratio of public consumption to GDP rose from 14% in 1959/60 to 25.2% in 1965/66. These developments resulted in financial deficits incurred by the public sector which were partly overcome by a financial surplus in the private sector and partly through a deficit in the balance of payments. lProfessor J. Tinbergen is the advocate of the fixed goals approach. See J. Tinbergen, o . cit., while Professor Theil is the advocate of the variEBIe target approach. This latter approach is more general, see H. Theil, op. cit., Chapter 7. 71 It is to be noted that part of the public consump- tion constitutes a contribution to growth process (as expenditures on education, health and so on). An increase in these items in the process of development is understand- able and they actually rose from less than four per cent in 1959/60 to more than 5% of gross domestic product in 1965/66. On the other hand, the other part of public consumption on administration and defense have increased sharply from 10% of GDP to 21% in 1965/66. While part of these increases could and should be curtailed, a large portion of it is very difficult to reduce at least for the time being (those expenditures on defense in regard of the current Israeli occupation). To solve this dilemma means that the government should aim at reducing its ex- penditures on administration gradually. This could be done if one assumes that public consumption will increase by 4% a year. If gross domestic product rises by more than 4% in this coming period, this will mean that the share of public consumption in GDY will tend to fall. Thus, it will be assumed that government expendi- ture increases annually by 4%, for political and defense considerations, during the period 1965/66 - 1974/75. This will be a fixed target for the model. In addition to public consumption as a fixed goal, full employment will constitute the second fixed goal. During our discussion about the problem of disguised 72 unemployment in the Egyptian agriculture, we came to the conclusion that sufficient evidence is against the exist- ence of such phenomenon in the Egyptian agriculture. The development process, it was shown, cannot be built on an assumption of the transfer of surplus manpower from the agricultural sector to other sectors where they can find more productive employments. It was shown, also, that agriculture will require an increase in labor force, at least up to 1975. The full employment goal will be specified in the model by the value that GDY has to take in order for full employment of the labor force to be achieved. Once the supply of labor in the target year, and the sectoral demand for labor are known, then a given value for the rate of increase in labor productivity will determine a certain value for GDY. It may be noted that the rate of increase in labor productivity (2) is assumed to be an institutional limit since it is subject to customs and tradition, and it will be allowed to take three different values (1*, R, and £**) where 2* is a pessimistic value, 1 is an intermediate one, and l** is an optimistic value. On the other hand, there are some additional targets where Theil's approach will be more suitable. Most important among these is the level of income. One of the basic problems facing the underdeveloped countries of the world, and Egypt is no exception, is the low level 73 of per capita income vis-a-vis that of the advanced countries. To make matters worse, the gap among the two groups of countries is widening. This constitutes one of the main impetus behind planning for development. There is no reason to define a fixed target for income (or gross domestic income which is the concept we are using through- out). In contrast, the level of income achieveable at each solution of the model will be the maximum level at- tainable within the feasible area. In addition to the level of income as a variable objective, the level of net foreign borrowing will also be considered as another one. It was shown in the previous chapter that due to the effects of the High Dam, Egypt could solve its balance of payments problem which was a major constraint on development recently. A policy to equiliberate the balance of payments will mean that domes- tic savings and investments must also be equalized. If the government does not wish to retard the development process, this will mean that consumption expenditures, both public and private must be cut, and not investment expenditures. But since public consumption was considered as a fixed goal, then this might result in a large reduc- tion in private consumption. It might be mentioned that there is some limita- tions, both political and social, to the extent to which private consumption could be reduced. It is for this 74 reason that the solution of the model will be considered with different values for net foreign borrowing. A high level of foreign borrowing utilized will mean, ceteris paribus, a high level of private consumption and con- versely. An additional reason why it is better to use different values for net foreign borrowing is that the model to be constructed in this dissertation tries mainly to show development alternatives under different assump- tions of available resources and resource uses. Thus, it will be assumed that net foreign borrowing will take three different values: S§=O; SfZO; SE*:0. The first alterna- tive will allow for achieving equilibrium in the balance of current accounts; and the third will permit an expan- sion in the development process without putting heavy burden on private consumption, by depending on foreign borrowing to a limited extent, while the second alterna- * and S**. f f It should be added that while foreign borrowing tive (Sf) is an intermediate value between S is being treated here as one of the variable goals chosen for the model, it could be considered also as one of the instruments available to the planners. This possibility of a target being a policy tool at the same time has already been mentioned in Chapter 1. While foreign borrowing is considered also as an instrument, the government might not be able to achieve any level of it that it considers necessary. This is due 75 to the fact that foreign lenders might be unwilling, on economic or political grounds, to invest their money in Egypt. Thus, in addition of being a goal, an instrument, foreign borrowing also represents the planners with an institutional limit that they may not be able to raise above certain limits. 3. Instruments In addition to foreign borrowing, the propensity to save out of household income is taken to be as the second policy instrument. It is obvious that savings out of household income depends on a lot of factors important among which is the level of income, government tax policy, income distribution, and the like. It should be pointed out that the Egyptian government could exercise major influence on household savings since it is defined here so as to include retained profits in private and public enter- prises. Since most of the large enterprises are owned by the government, the planners could exercise any kind of influence on such enterprises as the determination of prices and so on. In addition to this, a part of the private sector savings is generated through the govern- ment. This is related to pension and insurance funds accumulation collected from the household sector through the government. Thus, the choice of the propensity to save out of household income is suitable since the govern- ment plays a major role in its determination. 76 It may be noted that while the government is free to determine and control the prOpensity to save, it is not free to determine it at any given level, since there is some social, political, and institutional limits to the rate at which savings could be increased. For all these reasons, three different values for a will be considered: a* §.a : a** where a* represents a pessimistic value, 0 represents a trend value of previous developments, and a** represents an optimistic value which is considered to be high enough, that any increases above this value is highly unlikely. The last instrument that will be used is trade policy and its effects on the exports of the industrial and manufacturing sector. The planners could exercise some control on these exports through their efforts on export prices: through such measures as export subsidies, variation in the exchange rate and the like. The choice of trade policy as an instrument seems to be reasonable since the government controls almost com- pletely the foreign trade sector in Egypt.1 It seems quite clear, however, that there are certain limits to the increase in exports of industry and manufacture within a 1As early as 1961, it was stated in the National Charter that all imports have to be under the supervision of the public sector, while for exports both public and private sectors have to participate in its volume by the ratio of 75% to 25% respectively. 77 short period of time since a change in exports is a func- tion of many variables as relative cost conditions, quality of the product, conquering new markets, and trade policies of other countries. Most of these variables require time to change in an effective manner, and, therefore, we have to consider only three different values for exports: one which represents a pessimistic value, a trend which re- presents an extrapolation of the current developments, and an optimistic value that is reasonable within the limiting factors discussed above. Before concluding this section, it might be ad- visible to present a table which contains the classifica- tion of all the policy variables that will be used in this model, differentiating among goals, instruments, or in- stitutional limits. (See Table III.1, p. 78). 4. Sector Division In any economy, an innumerable number of economic transactions are performed daily. To provide information about the structure and functioning of the economic system would require splitting up the economy into various sectors so that the internal relationship among these sectors can be observed. It should be mentioned that many different kinds of sector breakdowns are possible, and that different forms of economic problems will require different types of sector breakdown. It is for this reason that no social 78 Table III.l--C1assification of Policy Variables. 4 Variables Goals Instru- Institutional Fixed Variable ments Limits Gross Domestic Income x Public Consumption x Full Employment x Net Foreign Borrowing x x X Value of Industrial Exports (Trade Policy) x Saving Rate x x Rate of increase in Labor Productivity x accounting system could claim competence to embrace all aspects of economic activity with similar throughness for the use of policy makers. Any system will, therefore, be admissable as long as it has a coherently determined plan for the analytical presentation of economic aggregates, so that there is some interdependence between them. Following the procedure of many national income accounting systems,1 a functional sector breakdown will be 1See for example, H. E. Edey and A. T. Peacock, National Incomejand Social Accounting (Hutchinson House, London, 1954), Chapter 1; and R. Ruggles and N. D. Ruggles, ngional IncomelAccounts and Income Analysis, (McGraw Hill, 1956), Chapter 5. 79 used. The sectors are functional in the sense that they classify the function of the transaction under considera- tion rather than the nature of the individual or agency involved in the transaction. For example, a farmer is considered in the producing sector whenever the farmer acts in his role as a producer. This same farmer, however, will be considered in the consuming sector with respect to all transactions concerning his consumption activities. The sector division to be used in this study dis- tinguishes among two major groups of sectors. The first group relates to production activities, and the second relates to all other activities such as consumption by either household or government, transactions among dif- ferent sectors on capital account, and the transactions of these different sectors with the rest of the world. The distinction among sectors in this latter group is quite classical, and, therefore, it is better to start with them. The household sector is concerned with the activ- ities of individual households in their role as private consumers. The household receives income from the pro- duction sectors in the form of wages, interest, rent and profit. This income is either consumed, saved, or paid as taxes to the government. Because the household sector constitutes a major part in the use of resources, it is important to keep them as a separate sector. 80 The government sector could be regarded as delim- iting a special section of the consumption activity of the economy performed by government. In discussing the goals chosen for the study, it was decided, for social and mili- tary purposes, to keep government expenditures at a given level in the target year. This gives one of the rationale behind separating the government sector from the household sector. An additional reason is that the government as early as 1957 took the main responsibility for development of the economy and therefore it is better to separate it from the household in order to see how much and in what direction it can affect the economy. The rest of the world sector or foreign sector consolidates the transactions between the various domestic sectors and foreign countries. It is important to show explicitly the relations of other sectors to the rest of the world sector because of the strategic role that foreign trade plays in the economic development of a small country such as Egypt which is highly dependent on it. The resid- ual item in this account (net foreign borrowing)is important from a developmental policy point of view since it shows the extent to which the country can go in depending on foreign countries in its development. Net foreign savings is, in addition, a subject to policy choice (as was men- tioned previously) and therefore it is important to keep a Close eye on it. 81 The saving-investment sector or finance sector, like the preceeding one, does not refer to a single sector, but is used instead to record all those transactions or residual items that enter the other current accounts once but do not have a balancing entry in any of the other accounts. The other group is related to the appropriate way of division of the productive activities in the economy. The argument here is whether to have all the production activities in the economy aggregated in one sector or whether it is beneficial to have some groupings such as agricultural, industrial, and services sector. For the present model, the argument for one production sector could be represented in the following: a. It is clear from the analysis in Chapter II that Egypt passed a period of structural change from the 1930's up to the 1960's during which foreign trade has had a major role in making possible this continuing growth. In the future, it is clear that the economy will not con- tinue to grow in the same way based on an ever expanding services sector along with an expansion of manufacturing output reaching 10% per year. In other words what is needed is a period proportional expansion all around. Therefore, if the model would indicate a certain target for GDY, which by the application of income elasticity of demand could suggest a certain level of final demand which 82 in turn, through the use of an input output model could suggest the appropriate levels of output for the different sectors. b. It was shown also in Chapter II that, contrary to the common belief, there is sufficient evidence that Egypt does not belong to the group of countries character- ized by unlimited supply of labor to which such models as those of A. Lewis or Ranis and Fei apply. In such coun- tries the process of economic development is thought of as expanding other sectors such that the surplus labor in agriculture could be employed productively. Because Egypt does not have disguised unemployment in agriculture, there is no need to emphasize any mechanism like this, and one production sector might be sufficient. Despite these points, the author finds it more advantageous to divide the production sector into three different sectors industrial (which includes industry, manufacture and construction), agricultural, and services sectors, since this will provide us with the major inter- industry transactions in the economy. In addition, since these sectors might differ in their capacity to compete in the world market, their capital-output ratio, or their rate of increase in labor productivity and these proved to be the effective limits to growth in many underdeveloped countries, it is better to have a wider sector division in order that they could be taken into consideration in the 83 final solution. Finally each of the three production sectors suggested here constitutes a major magnitude in the Egyptian economy. A detailed sectorial division will help to show a clear picture of what to expect as a result of any change in policy objective or instrument. A detailed sector division, to be sure, increases the complexity of the model. It should be emphasized, however, that it increases the analytical usefulness of the model, and therefore it is the one to be used here. A wider sector breakdown than the one just chosen was not considered because in addition to the increase in the complexity of the model, we will face formidable diffi- culties with respect to the data requirements of such division. With the goals chosen, the policy tools decided upon, and the sector division specified, the stage is now set for the construction of the model which is the subject of Chapter IV. 5. Summary and Conclusions Both public consumption and full employment were * chosen as fixed goals that have to achieve a certain level by the target year of the model (1974/75). On the other hand, both the level of GDY and net foreign borrowing are chosen as variable objectives that could be determined either by the maximum value that the variable take within 84 the feasible region (G.D.Y.), or by the specific value that the variable is allowed to take (net foreign borrowing). While net foreign borrowing is chosen as an ob- jective, it is also considered as one of the policy instruments that the planners can determine its value within certain limits. In addition, both the saving rate and the level of exports of industry and manufacture are chosen as policy instruments. A functional sector classification is used in this study. The production activity in the economy is divided into three major sectors: Industry (which includes in- dustry and mining, manufacture, and construction), agri- culture, and services (this includes transportation and means of communication, finance and trade, housing, public utilities, and other services). The other sectors are the household sector, the government sector, the rest of the world sector, and the saving-investment sector. CHAPTER IV THE DESIGN OF THE MODEL 1. Introduction Having considered the main structural characteris— tics of the Egyptian economy, and after discussing the appropriate policy targets and instruments and the division of the economy into different sectors, the stage is now ready for the construction of an aggregate economic model that reflects all these characteristics, and that includes among its key variables the policy instruments and goals chosen for this study, as well as the institutional limits on growth. Before going into the presentation of the de- tailed relationships of the model, it would seem worth- while to state explicitly at the beginning certain of the general properties of the model. Some of thee properties have been mentioned in previous chapters, but it is im- portant to bring them explicitly together. These general properties include: a. The model is comparative statics, i.e., it yields a comparison of the value of the variables in 1974/75 with 1965/66, but it does not reveal anything about the annual time pattern of change during the intermediate years. 85 86 b. The variables of the model are measured in 1965/66 prices, which are the base year prices. Prices are not endogenous variables of the system, and price substitution in production and final demand is not con- sidered. This is necessitated by empirical and computa- tional difficulties. 0. In the production sector, deliveries of goods and services among industry and agriculture are recognized. Thus, the model is a simplified type of input-output models. d. In estimating the parameters of the model, an attempt will be made to anticipate the important structural and technical changes which are expected to take place, rather than assuming the base year's technical relations to hold. Technological change has always been a funda- mental factor in bringing about economic growth, and one could expect this to manifest itself both in the structure of input-output tables and in the magnitudes of the capital- output ratios. e. The model will show the pattern of resource use at the aggregate level with the aid of an internally consistent national income accounting system which will indicate the availability of total resources of domestic and foreign origin as well as the utilization of these resources for development or non-develOpment purposes. It should be noted that the acceptance of such a system is a prerequisite for systematized planning becuase it 87 focuses the attention on a set of strategic variables appearing in every planning context, and on the structural relations between them. Such a system of accounts, usu- ally help to answer certain questions about overall economic policies especially with regard to its realism: whether it is capable of being achieved with the available resources; its effects: how does the policy affect the Operation of the economy and in what magnitudes; and its consistency: whether the policy is consistent with it- self, and whether it can be expected to produce a result superior to those alternative general economic policies. The model that will be presented in this chapter will consist of three types Of equations: accounting equations, behavioral equations, and exogenous variables. These will be presented in the following sections. 2. Accounting Equations These equations will provide the accounting rela- tionships among the different sectors in the model. It is important that the model should satisfy these accounting equations in order to have internally consistent solutions. It is Obvious that these equations represent the accounting relationships among the variables of the national income accounts. 88 One Of the neat ways Of presenting the figures Of national income accounts is the matrix form1 where each row contains the receipts of one sector and each column contains the payments of one sector, so that each sector has one row and one column, and the payments from one sector to another are shown in the space where the column Of one and the row of the other cross one another. A national income matrix which satisfies the sector division used in this model appears in Table IV.l. There are several Observations about the national- income matrix that has to be kept in mind: a. Because of the fact that all these sector accounts are presented in a consolidated form, the intra- sector transactions cancels out, and we have zero entries in each cell connecting the same sector. All such cells lie on the diagonal of the matrix. b. Due to the division Of the production activi- ties to three sectors, the inter-industry flows among these sectors will be included in the output Of each separate sector. This will mean that the total production Of these sectors will add up tO more than gross domestic product. Further details of inter-industry flows could .be shown if one enlarges the sector division than the one acH me u- o m e m H m nooaeom mm In II o m m m m ucOEcHO>Oo me n- u- m 0 am om mm oaooomeom cm H e e em 0 m m mmoa>uom we a m m on e o ma ousuasoasoe mm a e o mm s m o shampooH Hmuoa .3.0.m Hum some pact moos>uom mmmwmflu anumsch IGH0>OU I mmfiOm mm mucosamm mm mumflmomm .xflnumz mfioosH Hmcowumz|la.>H magma 90 c. In Chapter III, when the sector division was discussed, it was shown that a functional sector breakdown will be follwed; i.e., the system is not one which separates individuals into various groups with respect to their total activity but rather one which separates transactions according to their functions. Accordingly, government activities in the production activities will be recorded in any one of the production sectors, but the rest of the activities Of government, those related to the collection of taxes and transfers and government consumption, or public consumption activities in general will be recorded in the government sector. d. The matrix shows the rather trivial fact which is that total receipts and payments by each sector are equal. This, as will be expalined in a moment, provides the accounting equations which provide the model with internal consistency. This system of national income accounting could be described more clearly with the help of a pipe diagram where the variables of the model could be represented by the pipes, and where the arrows inside each pipe indicates the direction of money flows in the magnitude indicated inside each pipe. A diagram like this will help to ex- plain the kind of dependency among different variables through the connection of the pipes. When two or more pipes are connected, there exists a direct accounting 91 relationship among them. These accounting relationships means that at each branch-point (where two or more pipes meet) the value of all inflows must exactly equal the value of all outflows. This is another way of saying that the two sides of a T account must always balance. Since our sector division is somewhat large, and it takes into account a large number of the relevant inter-sector relations, a presentation of a pipe diagram will be complicated somewhat, and therefore will not be presented here. Instead, a flow chart in the form of a linear graph which shows the intra and inter-sector flows will only be presented. Each line in this chart will represent a relationship between the two branch points that it connects.1 Thus, these lines represent the mone- tary transactions or flows among sectors with the arrow showing the direction of these monetary flows. Each variable Of the model will be represented by one line. This linear graph form of the model will be represented on the following page. 1For a discussion of how linear graph techniques can be used in the formulation and analysis of development plans, the reader is referred to John C. Fei and Gustav Ranis, "A Study in Planning Methodology with Special Reference to Pakistan's Second Five Year Plan," Monographs in the Economics of Development, NO. 1 (Karachi: The Institute of Development Economics, June, 1960). See also, Samuel HO, O . cit., and F. Harrery, Graph Theopy (Addison-Wesley, I869), Chapters I-IV, pp. 1:40. (0189'! = x 92 unmnu 30am uH|>H musmflm o o "$9.;me $7an OMOuHuOHHme Th F O we: no» . 0, damn.» 80.85 _. . w Notes: 93 The variables of the model are represented by the different lines in the flow chart and are defined as 1‘ 7 ‘4 Q ’ - follows: ,Y Gross Domestic Income. Yi Gross domestic income generated from the industrial sector. Ya Gross domestic income generated from the agricultural sector. Ys Gross domestic income generated from the services sector. Yh Household income. . Yg Current budget net revenue. G Government payments to the household sector in the p form of wages and salaries, and interest payments and price subsidies. Ge Government purchases of goods and services produced by any Of the production sectors. C a Government consumption of goods produced by the g agricultural sector. .C Government consumption of goods and services pro- g duced by the industrial and services sectors. . Ch Household consumption of goods and services pro- duced by the industrial and services sectors. ‘Cha Household consumption of agricultural products. “Ca Total agricultural goods available for final domestic consumption. Ci Total industrial goods available for domestic final demand. CS Output Of services available for domestic final demand. C. Domestically produced goods from the industrial and services sectors available for final consumption. 94 Household savings (includes pension and insurance funds accumulation with the government and retained profits of public and private companies). Government savings in the budget. Net borrowing from abroad. Investment expenditures on domestically produced goods and services. Investments in the industrial sector. Investments in the agricultural sector. Investments in the services sector. Imports of capital goods. Imports of manufactured goods for final consumption. Imports of intermediate and primary products for the industrial sector. Imports of agricultural goods for final consumption. Imports of services. Exports of the industrial sector. Exports of the agricultural sector. Exports of the services sector. Agricultural inputs into industry. Industrial inputs into agriculture. Domestically produced industrial goods available for final domestic consumption. Domestically produced agricultural goods available for final domestic consumption. Gross output of the industrial sector (net of inputs used by the same sector). Gross output of the agricultural sector (net of in- puts used by the same sector). QuL 1M '(7 L): H 2. 95 Appendix I shows the detailed definition of all these variables and the method used for obtaining their values. It-includes also annual data for all the variables for the period 1959/60 - 1965/66 in current prices and the sources of these data. The arrows show the direction of monetary flows in the magnitude shown; and When any two or more lines meet they form a juncture or a branch point, and there will result an accounting relation- ship among them. These will constitute our accounting equations which are represented by heavy dots in the graph. Certain modifications (or omissions) were introduced in the flow chart either to facilitate exposition or to fit it with available data. These modifications are as follows: a. In the rest of the world sector, all net for- eign borrowing were assumed to accrue to the government. This is the reasonable assumption in the case of Egypt since the government took the main responsibility for the process of development in the early 1950's, and after the Socialization Acts of 1961 and 1963, investment is mainly financed and planned by government funds and government policy. Furthermore, no distinction was made between foreign borrowing or foreign transfers, since the major part of Egypt's foreign assistance comes in the form of loans. This is especially true after 1965 when wheat deliveries from the United States under the P. L. 480 Program were terminated. b. In Chapter II, it was shown that the major part of the industrial sector is owned by the government. 96 All the big establishments are virtually government owned, and thus, the profits generated in these establishments are either invested internally or are provided for invest- ments in other industrial establishments (or other sectors) according to the government's investment plan. It is ob- vious, therefore, that these savings should be included in government savings. Available data, however, does not allow for such treatment, and government savings shown in the chart will include only savings (or dissaving) in the current government budget. Retained profits in public companies, will, therefore, be included in household savings. This has some advnatages, however, since it will enable the government to control household savings, there- by justifying the choice of the saving rate as one of the policy instruments. The same advantage is achieved by including pensions and insurance funds accumulations which are collected by the government from its employees in household savings. These savings are not included in the government budget, and there will be no difficulty in adding them to household savings. In addition to this, there are some analytical advantages in restricting government savings to those shown in the budget. It has been stressed by some econo- mists1 that the surplus (or deficit) on the current lUrsula Hicks, Development Finance: Planning and Control (New York: Oxford University Press, 1963), Chap- ter 9. 97 account is a key figure which has great economic signifi- cance because it shows the contribution of government to national savings (or dissavings). It is desirable, of course, that there should be a sufficient surplus on the current accounts of the government budget to finance part of the investment plan. c. Due to the lack of statistics, no inputs of services are assumed to enter either the agriculture or the industrial sectors. Thus, it will be assumed that all the services output is for final consumption. d. Gross domestic income (Y) is assumed to flow from the production sectors in the form of (Yi), (Ya) and (Y8) to the household sector in the form of wages, rents, interest, profits, and indirect business taxes. Out of this magnitude, current budget net revenue (Yg) is with- held through the different types of taxes. The remainder will constitute household income (Yh). From the chart, the following accounting equations could be easily identified: Gross domestic income is equal to the sum of income generated from the industrial, agricultural, and services sectors: II !-< + |< + "< (4.1) Y where Y refers to G.D.Y., and Yi' Y and Y8 refer to gross al domestic income generated from the industrial, agricultural, 98 and services sectors respectively. On the other hand, part of the G.D.Y. is taken by the governments in the form of different types of taxes, and the rest goes to the households. + Y “ (4.2) Y = Yh 9 To household income (Yh) we should add government payments to the household sector (GP) which consists of wages of government employees, interest payments, and price subsidies, the total of which is then spent on the products of either of the production sectors (Ch) and (Cha), or saved (Sh). Thus: “’3“ y-,k.‘ , .. 1 \ . +G =c +c J h p h ha + S (4.3) Y h As was mentioned earlier, household savings (Sh) include retained profits for public and private companies, and pensions and insurance funds accumulations with the government. On the production side, the total supply of agri- cultural goods for final consumption (Ca) is either pro— duced domestically (0;) or imported (Ma). On the other hand, from the comsumption side, this total supply of agricultural goods is either consumed by the household sector (Cha) or by government sector (C ). These give ga the following accounting equations: u:n tn‘v‘ \‘ ~‘ 99 ll 0 I + (4.4) C Ma : and II 0 + O (4.5) Ca The current budget net revenue (Yg) is either paid back to the household sector (GP) consumed on goods and services produced by either of the production sectors (Ge), or saved (89). Thus: 4.6 Y = G + G + S ( ) 9 P e 9 Government expenditures on the consumption of goods and services (Ge) is either spent on agriculture products (Cga) or on the consumption of goods and ser- vices produced either by the industrial or the services sectors (Cg). Thus: _. ;( (4.7) Ge — Cga + cg \ J”..- The total supply of industrial goods and services available for final consumption (Cis) is either consumed by the government sector (Cg), or by the household sec- tor (Ch). This provides the following accounting equation: (4.8) C. = c + C J ‘ is g h On the other hand, the total supply of industrial goods and services availalbe for domestic final demand (Ci) s3: (7') '4" 100 and (CS) are either provided for final domestic consump- tion or for investment expenditures on goods and services I produced domestically (Iid). Thus: 1 I \, ’ ' 4 ,\ J (4.9) C. +{C} - C. + I x// fif’r .. 1 \JS _ 18 d Total industrial goods available for final domes- tic consumption (Ci) consists of domestically produced industrial goods available for final consumption (Oi) and imports of manufatured goods (Mm): _ . / (4.10) Ci — oi + Mm Total investment expenditures, which is the sum of investment in industry (Ii)’ investment in agriculture (Ia)’ and investment in services (13) is either spent on goods and services produced domestically, (Id), or is spent on capital imports (Mk): i \/ “ J’“‘..,‘ K r w v I l I 4. . = ( 11) I1 + Ia + Is Id + Mk Gross output of the industrial sector (Oi), is spent either on imports of raw materials or intermediate Products (Mi)' on intermediate inputs from agriculture (Iéi), or to pay for the services rendered from the house- hold sector in the form of wages, interest, rent, profits, and indirect business taxes (Yi)‘ This last component ’7 1 (Y1) constitutes the contribution of the industrial sec- tor to gross domestic income. Thus: 101 (4.12) Oi = Mi + Iai + Yi On the other hand, the total output of the indus- trial sector (Oi)' is either made available for domestic consumption (Oi), exported to the rest of the world (Ei), or provided as intermediate inputs for the agricultural sector (Iia) in the form of chemical fertilizers, pesti- cide, and so on. The following accounting equation, there- fore, describes the total use of the output of the industrial sector: = u u v (4.13) oi oi + Ei + Iia Gross output of the agricultural sector (03) is spent either on intermediate inputs from industry (Iia) or to pay for the services performed by the household in the form of wages, interest, rent, profits, and indirect business taxes (Ya). Thus: \ (4.14) 0 =1! +Y ‘/ a la a On the other hand, gross output of the agricultural sector (0a) is either exported (Ea), made available as raw materials or intermediate inputs in the industrial sector (Iéi), or provided for final domestic consumption (0;). Thus: \‘(4.15) 0a = E + I'. + 0' a a1 a \J In 102 The value of total output of the services sector (YS) is assumed to flow to the household sector in the form of wage, interest, rent, profits, and indirect busi- ness taxes. The contribution of the services sector to gross domestic income is, therefore, represented by (Ys). As was shown earlier, to overcome shortage of data, the assumption was made that all the services output is either for domestic consumption (CS), or net exports (ES-MS). So the allocation of services output is expressed by the following equation: (4.16) Y = C8 + ES - M S S The sum of investments in the production sectors (Ii + Ia + Is) should be equal to the sum of household saving (Sh), government saving (Sg) and net borrowing from abroad (8 Thus, the equilibrium condition of f)“ saving and investments is provided by the following ac- counting equation: 4 o . = \/ ( 17) Il + Ia + Is S + Sg + s h f Finally, in the rest of the world sector, the sum of imports of manufactured goods (Mm), imports of primary and intermediate products for the industrial sector (Mi), imports of agricultural goods for final consumption (Ma)' imports of services (MS), and imports of capital goods (Mk), should be equal to the sum of industrial exports (Bi), . r‘) ' lav ‘\ 103 agricultural exports (Ea), services exports (ES), and net foreign borrowing (Sf). Thus, the balance of payments equilibrium condition is provided by the following account- ing equation (4.18) M + M. + M + M + M = E. + E + E + S m 1 a s i a s k f It may be noted that the accounting equations (4.1)-(4.16) are identities that are included in the model for purposes of logical completeness, while the accounting equation (4.17) and (4.18) states the equilibrium condition of saving and investments, and the balance of payments equilibrium. These equilibrium condtions should be stated explicitly in order that the model be complete. 3. Behavioral Equations The preceeding accounting equations, though neces- sary to guarantee the consistency among the variables of the model, are not sufficient to determine the values of these variables. To make the model determinate, one needs to stipulate some additional independent conditions which could either be exogeous variables that are determined outside the system or behavioral equations that may de- scribe either the behavior patterns of different trans- actors or the technical relationship between inputs and outputs. It should be mentioned that the system will be determined whether one depends heavily on exogenous 104 variables or on behavioral equations. A system that re- lies more heavily on behavioral equations, is, however, a better one since it permits greater play for the contri- bution of economic theory. Nonetheless, the use of more or less behavioristic equations might not simply be a question of preference but of necessity since some behavior- al relationships may not be obtainable, given the state of economic knowledge and available data. The following behavioral equations (with the exo- genous variables that will be Specified in the next section) will include all the possible independent economic conditions which the planner might want to take into con- sideration. One of the important, yet still weak, parts of any aggregative model of the type to be constructed here is the choice of an aggregate production function for each sector in the economy. In the writer's view, production functions when used to the whole economy or to large parts of it are at best useful fiction. They may suggest under- lying reality, but can hardly be expected to replicate it. The function that is finally chosen will depend on the preferences of the model builder who, hopefully, has con- sidered the advantages and diadvantages of tye type he chooses versus other types. The particular production function that is chosen here must be understood in this light. 105 The production function that will be used for the industrial sector is one of the fixed proportion types of production functions which assumes perfect complementarity among factors of production. Such functions were used in growth models initiated by Harrod and Domer and have been criticized for the omission of substitution among factors of production. This had led to the utilization of a Cobb- Douglas production function in some growth models,1 but here this type of function proved to have limitation in growth setting. It is generally recognized, however, that substi- tution among factors can only take place over a period of time and can only take place with the installation of new equipments, which is more likely to be true in the short run than in the long run. Furthermore, one could assume that relative prices do not change so that it is not ef- ficient to alter input proportions regardless of the shape of production function. There are both theoretical and empirical grounds for expecting relative prices to be fairly stable apart from periods of war time shortages and similar situations.2 1R. M. Solow, "A Contribution to the Theory of Economic Growth," Q.J.E., February, 1956 and T. Swan, "Economic Growth and Capital Accumulation," Economic Record, November, 1956. 2H. Chenery and P. Clark, Inter-Industry Economics (John Wiley and Sons, 1959), Chapter II, pp. 39-42. 106 The use of a fixed coefficients production function does not allow also for technical change. A very ingenious justification for using the aggregate Harrod-Domer produc- tion function involving only capital as input, with no provision for labor or technical change is given by M. Frankel.l He showed that if the output of each industry in an economy is governed by a Cobb-Douglas production function using both capital and labor, but the scale fac- tor, or the "development modifier" as he calls it, in each production function incorporates external effects by being a function of the aggregate capital-labor ratio, then the Harrod-Domer model may give a good approximation to output in the aggregate. Thus, while the conditions of a Cobb-Douglas function hold fully for the enterprise, as the enterprise varies its factor input, say accumulat- ing capital in response to market and other opportunities, the modifier shifts. The shifts are exogenous to the enterprise in question. So, instead of moving along a Cobb-Douglas function, which is an ex-ante function, the enterprise moves along a realized function which mirrors namely Herrod-Domer function.2 1Marvin Frankel, "The Production Function: Alloca- tion and Growth," A.E.R., LII, No..5,(December, 1962), pp. 995-1022. 21bid., pp. 999-1000. 107 Since Frankel's results are associated with the external industrial effects of economic development, it provides some justification for what is assumed in this model. A further reason for ignoring labor as an input is that unskilled labor is in large supply and for it to be useful, it must be trained, which is analogous to making an investment in physical plant and equipment. Also, such assumption will permit the consideration of the effects of capital accumulation on growth in the context of a simple linear model, that emphasize the role played by capital accumulation as an "engine of growth." Thus, the production function for the industrial sector could be written in the form: (4.19) Y. = Y? + b.(K. - K?) 1 1 1 1 1 where Yi refers to G.D.Y. generated from the industrial sector at the target year, while Y; refers to the same variable in the base year,1 bi refers to the incremental output-capital ratio in industry, while K1 and K; refer to capital stock at the target and base year respectively. Finally, it may be mentioned that the use of such type of production function implies that changes in the 1To avoid complex notation, all variables that have no time subscript will be for the target year, while base year variables will be distinguished by the subscript o. 108 composition of the output of the industrial sector acts randomly on the overall capital-output ratio of the in- dustrial sector. This is due to the fact that changes in the composition of output reflects mainly changes in final demand, and there is nothing to suggest that demand changes in such a way that the capital-output ratio is consistently pushed in one direction or the other. With respect to the production function in the agricultural sector, the situation might not be as clear cut. Here there may exist different factors of produc- tion, that have to be considered separately. First of all, land could be considered as a factor of production. But as was shown in Chapter II, the cultivated area in Egypt is limited by water supply, and apart from the expected increase in the reclaimed area as a result of the comple- tion of the High Dam at Aswan, additional increases in the cultivated area will not be possible at least in the fore- seeable future. Thus, for our purposes, the supply of land could be taken as fixed. In addition, chemical fertilizers and water supply could be considered as separate factors of production. The contribution of such factors of production to total output seems, however, to be very small when a Cobb- Douglas production function was estimated for the Egyptian agriculture.l 1El-Emam, op. cit., pp. 32-33. 109 This leaves labor and capital. In the study about the agricultural production function referred to above, the coefficient of labor was found to be significant. It seems clear, however, that increases in agricultural pro- duction during the period of the model will require in- creases in agricultural investment, both for horizontal and vertical expansion. It is in this coming period that the major part of the area to be reclaimed to utilize the High Dam water is due to be brought to cultivation and this requires a large amount of investment. Vertical expansion, on the other hand, requires investment expendi- ture on drainage, chemical fertilizers, and improved plant varieties. It seems, therefore, that both labor and capi— tal will both be important as major determinants of agri- cultural output. To simplify our analysis, however, a similar argu- ment to the one used for the production function of the industrial sector can be used to write the agricultural production function in the following form: °> = O - (4.20) Ya Ya + ba(Ka Ka Similarly, the production function of the services sector could be written as: _ o _ o (4.21) Ys — Ys + bs(Ks KS) 110 The demand for labor in the production sectors will depend on the level of output in each sector and on the rate of increase in the average labor productivity. Ob- viously, an increase in the average labor productivity will have a negative impact on the demand for labor; i.e., the faster the rate of increase of labor productivity is, the harder will be the full employment goal to achieve. The demand for labor for each production sector could be represented in the following form: _ o . _ t (4.22) Li — 11(1 Ki) Yi Similarly, (4.23) L = x°(1 - 2 )tY a a a a and, (4.24) L = 10(1 - 2 )tY S S S 3. where (A) refers to the average labor input per unit of output (or the labor-output ratio) in each sector, (2) is the annual increase in the average labor productivity, and (t) refers to the time period of the model. The following points should be noted with regard to the demand functions for labor: a. Since the production functions in the model (equations 4.19-4.21) assume complementarity among labor and capital, equations (4.22-4.24) could be restated as 111 the production functions by solving for Yi’ Ya, and Y5, if labor should become the limiting factor to the growth process. b. With regard to the rate of the annual increase in the average labor productivity in each sector (2), it is obvious that while it is subject to government policy such as education, vocational and on the job train- ing, and the like, it must be considered also as an in- stitutional limit since it depends to some extent on tradition and culture, and there might be some limitations to achieve higher values for it in a short period of time. In a study of development alternatives, it seems prefer— able, therefore, to consider three different values that reflect different levels of efforts of the government policies, and different degrees of flexibility of social customs and traditions. Thus, three different values for (2) will be assumed, where 2* i.£.i 2** instead of specify- ing a single value. The first value will reflect modest increase, the second reflects a moderate one, and the third will show large changes. The behavioral equation describing the investment process in Egypt should be dependent mainly on the planners' decisions to achieve the goals specified by the plan, and on their expectations with regard to the future movement in prices (at least international versus domestic prices). But since these factors are difficult to express 112 quantitatively, a simple approximation will be assumed that expresses investment as the addition to capital stock.1 T-l (4.25) 2 I = (K - KO) t=o where I is the annual gross capital formation, and Ko and K are the capital stock in the base and target years re- spectively. In order to express the model in terms of initial and final year values only, a simple approximation could be used to relate investment to capital stock: (4.26) I = p(K - KO) where p depends on the rate of growth of investment and the length of the planning periods.2 Applying this reasoning to the sector division used in our model, annual gross capital fromation in the industrial sector could be represented as follows: _ _ 0 Similarly, for the agricultural sector we have: lItis to be noted that this same approximation was also used by H. Chenery and M. Bruno, op. cit., p. 89. 2If the planning period is equal to 9 years as the one used in our model, then p could be expressed as follows: 113 o (4.28) Ia + pa (Ka - Ka) Finally, for services, we have: °) (4.29) I = ps(Ks - KS 3 Now, for the different production sectors, if one goes back to the production functions of these production sectors (equations 4.19, 4.20, and 4.21), one can find that these functions were represented mainly as dependent on changes in capital stock. Since changes in capital stock are, as represented by equations (4.27), (4.28), and (4.29), dependent on the volume of investment, these production functions could be combined with the investment equations to give the following: ._ __i_ _ o (4.30) Ii — bi (Yi Yi) (4 31) I — E‘- (y - y°) ° a _ ba a a and (4 32) I = p—s- (y- - y°) ' 3 b8 3 s Through this manipualtion the investment equation and the production function for each sector were combined. It is in this form that these two relations will be re- presented in the model.1 llt may be noted that this is the same form used by samuel HO, OE. Cite, p. 98. 114 While household saving (Sh) depends on the level of per capita income, the distribution of income both between government and household and among household themselves, many of these factors cannot be estimated adequately, and therefore, the relation will take the following form: With respect to household income (Yh), it will be assumed that it depends mainly on the level of gross domes- tic product (which is the sum of (Yi' Ya, and Y8) and on the policies of the government with respect to the deter- mination of its policies, i.e., the government tax policy. Thus (4.33) Yh = (1 - t) (Y) where (t) is the aggregate tax rate. It is to be noted that no distinction will be made between different types of taxes, and the value of (t), therefore, represents the relation between the current budget net revenue of the government and G.D.Y. Household savings have to be considered as a function of household income (Yh), and government pay- ments to the household sector (GP). Thus (4.34) Sh = 0L(Yh + GP) where (a) is the marginal propensity to save, and is as- sumed to be equal to the average propensity to save. 115 For the estimation of household saving, ideally household income should be broken down to the different components (profits, wages, and rents), and a separate saving rate should be estimated for each component, there- by showing the effects of changes in income distribution on household savings. But in the absence of information which would make this possible, there is no other alterna- tive than using household income as the major determinant of saving disregarding its composition. It is to be remembered that the propensity to save (a) was chosen as one of the policy instruments in this model. This seems as a reasonable assumption, since the retained profits of public and private companies (which are mostly reinvested again) are included in the household income (Yh). As was mentioned earlier, the government exercises its control over those savings. The same argument could be used with respect to pensions and insurance funds accumulation which is determined and collected by the government. This last item has been in- cluded with the household savings, because they actually belong to the household even though they are collected by the government, and because it is better to focus atten- tion on the government savings in the budget. Agricultural inputs for industry (Iéi) such as raw cotton, vegetables, etc., is a technological relation that has to be satisfied by the model. Thus: 116 (4.35) Iéi = 81(Oi) where (Bi) is the coefficient for agricultural inputs into industry, and (Oi) is gross output in the industrial sector. Similarly, industrial inputs in agriculture (Iia) such as fertilizers, machines, etc., could be presented as a function of gross output of the agricultural sector (0a): (4.36) Iia = Ba(0a) where (Ba) is the input coefficient. For imports of manufactured goods (Mm), it will be assumed to be a function of domestic income generated from the industrial sector. Thus: (4.37) Mm = um(Yi) With respect to imports of intermediate and pri- mary products required for the industrial sector (Mi), it will be assumed to be proportional to industrial out- put. This might not be unreasonable, at least in the short run, where the industrial structure does not change rapidly. Thus: (4.38) M1 = ui(Oi) 117 For services imports, an assumption will be made that it is proportional to domestic income generated from the services sector. Thus: (4.39) MS = us(Ys) With respect to imports of capital goods, an as- sumption will be made that they will be proportional to gross domestic investment which is the sum of investment in the different production sectors. This seems realistic, at least in the short run, because Egypt is still far away from the stage of producing at home capital goods required for domestic investment. Thus: (4.40) Mk =‘L1k(Ii + IS + Ia) Because of the importance of G.D.Y. (Y) for social welfare, in the solution of the model, (Y) has to be ex- pressed in terms of the parameters, base year variables, exogenous variables, and the other polich variables chosen for this model. In order to be able to do this, the dif- ferent components of G.D.Y., (Yi)’ (Ya), and (Y8) has to be expressed in terms of G.D.Y. To do this, one needs to know the ratio of any two of these components to G.D.Y. If the ratio of these two components are known, then the third could be known easily as a residual. It should be noted that these ratios should re- flect not only past performances and possible future 118 trends, but also they should reflect policy goals with respect to the preference for specific growth rates for certain sectors. Thus, if it is desired to put more empha- sis on the growth of the agricultural sector, then the ratio of (Ya) to (Y) should be determined to reflect this preference. In the case of Egypt, the growth of the dif- ferent sectors was discussed in Chapter II, and it was shown that Egypt has gone through as much structural change as possible between the mid 1950's and the mid 1960's, and that what is needed is another period of proportional expansion all around. The value of these ratios has, therefore, to reflect past performance in addition to any basic trend during the period of the model. Thus, both domestic income generated from both the industrial and services sectors could be expressed in terms of G.D.Y. as follows: (4.41) Yi = in , and (4.42) YS = wsY 4. Exogenous Variables In addition to the accounting and behavioral equa- tions mentioned in the last two sections, the variables that are determined outside the system (the exogenous vari- ables) has to be specified. These exogenous variables may 119 take the form of policy goals, policy instruments, and independent conditions. With respect to the imports of agricultural pro- ducts, it was shown in Chapter II that these imports in- creased sharply in the past decade. The completion of the High Dam will lead, as it was mentioned before, to an increase in the cultivated area in Egypt by 1.3 m. feddan in addition to the conversion of .0538,000 feddan from basin to perennial irrigation. It was also mentioned that Egypt could increase its benefits if it shifts agri- cultural production away from grain to fruits, vegetables, meat and dairy products. However, these latter benefits should be looked at as a long run goal since the achieve- ment of these radical changes depends among other things on the policy of the EurOpean Economic Community with respect to the agricultural products of different coun- tries, upon improvements in agricultural techniques and transporation methods, upon conquering new markets . . . etc., and all of these factors are of long term nature. Thus, it would look more advisable, if one assumes that in the short run part of the newly cultivated area will be diverted to make Egypt self-sufficient in food. It will be assumed, therefore, that imports of agricultural goods for final consumption (Ma) will be equal to (4.43) Ma = Ma where Ma = o 120 It is to be remembered from the previous chapter, that trade policy was chosen as one of the instruments in the model that could be exercised on the exports of the industrial sector (including manufacture ). Although a country's exports are a function of many variables, im- portant among which are relative prices, quality of the product, commercial policy, . . . etc. and not all of these are under the government control, still the govern- ment, through such things as export subsidies, trade agreements, currency devaluation and the like, could to a large extent affect the level of exports within consider- able limits. Thus, three levels will be assumed for (Bi): a pessimistic, moderate, and an optimistic level. Accord- ingly, in the target year (1974/75), Ei will be assumed to be: (4.44) E. = E. where E; < E. < 63* On the other hand, the values of Ea and Es’ has to be determined for the target year. The values assumed for these variables should reflect, of course, previous rates of growth, possibilities of expansion, and possible future trends. Thus, in the target year, it will be assumed that and II (III (4.45) Ea ll till (4.46) ES 5 121 where Ea is agricultural exports, and ES is the exports of services. As was mentioned in the first two chapters, the balance of payments problems were an effective limit to growth in the 1960's. This was behind the choice of net foreign borrowing (Sf) as one of the goals of the model in Chapter III. Equilibrium in the balance of current accounts will, of course, mean that S is equal to zero. f But since planning usually takes place in a world full of uncertainty, which are the main reasons behind the con- struction of this model, three different values of Sf will be assumed. Therefore, we have: = ‘ '* = '** (4.47) Sf Sf where Sf 0, 8f > o , Sf 3 o It is to be noted that one of the policy goals chosen for this model was that, for security purposes, government expenditure was taken as given. Thus: 4.48 c = E ( ) g g . (4.49) cga = Ega , and 4.50 G = a ( ) p p . where C9 is government consumption from the industrial and services sector, Cga is government consumption of agricultural products, and (GP) is government payments to 122 the household sector in the form of wages and salaries, interest payments, and price subsidies. 5. Development Alternatives The alternative development programs that are go- ing to be presented in this model are defined with respect to different values of some of the policy variables of the model. These are as follows: a. The saving rate which will be assumed to take either of the following values: (4.51) a* i a.: 0* b. The annual rate of increase in the average labor productivity, which will be assumed to take either of the following values: 1* < 2 ( £** It is to be observed that (R) will enter the model through its effect on the level of G.D.Y. (Y) that is compatible with full employments which is one of the targets in the model. The full employment target could be expressed as follows : (4.52) L = Li + La + LS where L is the supply of labor in the target year, Li’ La’ anci LS are the demand for labor in the target year by the 123 industrial, agricultural, and services sectors respectively. It may be mentioned that L refers to the size of actually employed workers, and not to the labor force, because it was difficult to get annual data about the labor force in Egypt. The data that are available are those related to the development of employment in the different production sectors. The supply of labor, will, therefore, be assumed to be equal to: (4.53) L Lo(l + 5)t where (Lo) refers to the number of workers employed in the base year, (6) is the rate of growth of the labor force,1 and (t) is the time period of the model. Looking at equa- tion (4.53) it can be seen that (L), the supply of labor that has to be employed in the target year is easily known since (LO), (6) and (t) are known. Once the value that represents the supply of labor in the target year is known, then the value of G.D.Y. (Y) could be expressed in terms of (12,21): (4:, ia)’ (Ag. 28) and (L) by substituting (4.22-4.24) into the full employment condition equation (4.52). The values of (4:, 1:, and 1:) are known parameters in the model, while that of (ii, 2a, and is) are assumed to be institutional 1In Chapter II, the rate of growth of the labor force (6) was assumed to be equal to 2.6% up to the target year of the model. 124 constraints that could take any value over a pre-determined range. Thus, depending on which value the annual increase in the average labor productivity in the different pro- duction sectors (2i, 2a, and RS), the value of G.D.Y. will be determined when labor is the effective constraints on growth. Thus: (4.54) Y* E.Y i Y* depending on whether 2 = 2*,2, or g** c. The level of exports of the industrial sector (Ei), which will be assumed to take either of the follow- ing values: (4.55) E? < E. < E?* 1— —l d. The level of net foreign borrowing (Sf) will be assumed to take either of the following values: * *1: (4.56) Sf i Sf.: Sf 6. Summary The model defines the structure of the Egyptian economy in terms of 37 variables. To determine the values of these variables in the target year (1974/75), the fol— lowing equations are postulated:1 1The numbers appearing before each equation in this section are those that are going to be used from now on when any reference is made to any of the equations of the model. 125 I. Accounting Equations a. Definitions r_wmm_fl. , ”m . / /.i13_rye7w?é_+ Ya + Ys : (2) vY = Yh + Y (3) «Yh + GP = ch +cha + 5h (4) C = 0' + M a a a (5) VCa = Cha + cga (6) Y - /G + G + s 9 P e . g 7 “G = {c k ( ) e ‘Cga “\19 4" - 1‘ ll (8) Cis _ C9 + ch _ ~/ (9) Ci + CS — Cis + Id J r/I .. I (11) Ii + Ia + Is — Mk + Id ’ W ’ = I .— (12) \91 Mi + Iai + Yi ’ (13) «IO. = O! + E. + I! j S“; .1.A“‘:‘ 1 -. 1. f .. . 1 — ' “4' *1-» \ ‘ (15) O = 0' + E + I'. \ . __ I." 9"" .. a a a a1. 3' (l6) YS =CS + ES - M l S . , g b. Equilibrium Conditions: (17) Ii + Ia + IS = Sh + $9 + Sf 1 m a s 1 a s k f II. III. 126 Behavioral Equations 9. _ i _ o (20) I - 3‘1 (Y - Y0) _ ba a a (21) I - EE-(Y - Y°) - bS s s (22) Yh = (1 - t) Y (23) Sh = o:[Yh + GP] (24) I' = 81(01) (25) I! = Ba(Oa) (26) Mm = um(Yi) (27) M. = ui(oi) (28) M = uS(YS) (29) M = uk(Ii + Is + Ia) (30) Y- = wi(Y) (31) Y = ¢S(Y) Exogenous Variables (32) Ma = Ma (33) E = Ea (34) E = Es (35) s = 5f (36) c = E 127 (37) Cga =.Cga 38 G=G ()pp IV. Development Alternatives (39) a* < a i a** (40) Y* _<_ Y _<_ Y** (41) Ei < E1 < Ei (42) Sf < Sf < Sf CHAPTER V DEVELOPMENT ALTERNATIVES IN EGYPT IN 1974/75 1. Introduction The purpose of this chapter is to determine some consistent sets of development alternatives available to Egypt in 1974/1975 under the constraints imposed by the model. By a consistent set it is meant a set of values for the 37 variables that constitute the model that lie within the different constraints imposed by the model which may be either policy goals, instruments, or insti- tutional limitations. The method through which a consist- ent set of development alternatives is determined could be explained as follows: The model that was stated explicitly at the end of chapter IV will first be solved to determine the value of the different variables of the model. These values will, of course, depend on the values of the exogenous variables, parameters, and base year values. This will be done in the following section of this chapter. To determine the values of the different parameters and exogenous variable is the purpose of the third sec- tion. The estimation process, though straight forward, 128 129 will try as much as it possibly can to include all the possible shifts or structural changes that might be expect- ed to take place in the near future in the Egyptian economy. The fourth part of this chapter will be concerned with determining a limited number of development alter- natives facing the Egyptian planners in 1974/75. The economic implications of some of these alternative pro- grams will also be discussed. 2. Solution of the Model There are two possible ways through which the model could be solved. The first is to try to get a solution for Y in terms of the parameters, exogenous variables, base year values, a and Ei' In this case, once a and E1 are determined, then Y is determined, and once Y is known, then all the other variables could be determined too. The second method is to try to reduce the model into two equations that express saving-invest- ment equilibrium and balance of payments equilibrium. The two methods give the same answer, but the former pre- sents the develOpment alternatives more clearly, while the latter will focus the attention on some of the other uses of the model as the identification of the possible bottlenecks and the choice among policies. This chapter is concerned with the determination of some sets of al- ternative development programs and, therefore, the first 130 method of solution will be presented here. In Chapter VI, which is concerned with the determination of bottlenecks and the choice of policy, the second method will be pre- sented. The method through which the solution is deter- mined could be explained as follows: ((9)4 Once the exogenous variables are known (equations 32-38) one more variable could also be determined. This variable is Ge (in Equation 7) since it depends on two other exo enous variables. To determine the values of 37-“2—1 I: 334-? ’30 43-m- the other 29 variables, the remaining equation has to be solved simultaneously. The method through which the solu- tion is obtained could be easily explained by referring to the equations of the model at the end of Chapter IV and to the Flow Chart in Cahpter IV. Looking at the equation that defines Y8, one can find that YS is expressed from equation (16) as: Y =CS+ES-M S S Moving counter clockwise, CS could be expressed in terms of Cis' Id' and Ci' C8 = Cis + Id - Ci’ These in turn could be expressed in terms of other variables until finally one can express CS in terms of Y. The details of this process is explained in detail in Appendix II, but as an example the process through which Id is expressed in terms of Y will be shown here: 131 From equation (11), Id is expressed as Substituting for Mk from equation (29) into equation (11): Id = (1-uk)(Ii + Ia + IS) Substituting for Ii’ Ia and IS from equation (19), (20), and (21) respectively: p. p D _ _ 1 _ o a _ o s _ 0 But from equation (30): and from equations (1), (30), and (31): Ya = (1 ' Wi " WS)Y Substituting these values for Yi' YS and Ya’ into equation (5.1), Id could be expressed in terms of Y and after rearranging the terms, it becomes: 132 1P D (PW-'49) O (5.2) I =(1-u)[——i——i-+ a l s +—]Y d k bi , ba b8 9- p o J. O a O S O ‘1 “HES? Yi + Ya + g Ys] This same procedure could also be followed with respect to Cis and C1' and once this is done, CS could be expressed in terms of Y. Cis could be expressed in terms of Y-as follows: _ _ [}-wi-ws81wi (5.3) Cis — Cg + Gp + (l-t)Y - -j:§;-" I:E—:§— +43 -M +62 -a[(l-t)Y+Gp] a a ga Similarly, Ci could be expressed in terms of Y as follows: wi sa(1-wi-ws) ‘5-4’ Ci = I=i;=3; ‘ 1-ea + “mwi Y ' Ei Once this is done, Cs could be expressed in terms of Y by substituting for Id, Cis' and Ci from equations (5.2), (5.3) and (5.4) into equation (9). Thus: 5 5 - - l-wi ws Biwi _ ( o ) CS - Cg 4‘ GP + (l-t) Y - T " FEE-2E.- Y + Ea " Ma + cga - aEi- t)Y+G pfl + (1- uk)[ 1-wi -ws ) as w: + p ( b1+ b Y — (1- uk) _—'YI + a p o ‘ w. B (1-w.-w ) a o s o 1 a 1 s b—Ya+b_ys:|-[I-—ui_:57- l-Ba +Um‘Pi] 133 The two other variables in equation (16) are either known or could be easily expressed as a function of Y. From equation (34), ES is known: E = E S S and from equation (28): MS = uS(YS) substituting for YS from equation (31), MS becomes (5.6) M5 = u w Y Thus, Ys could be expressed in terms of Y through algebraic manipulation of the different relationships in the model. The final result will be as follows: Equation (16) gives the following Y =CS+ES-M S S Substituting for Ys from equation (31), for Cs from equation (5.5), for ES from equation (34), and for MS from equation (5.6) one gets: - - -wi-ws 31w: _ (5.7) WSY — C9 + GP +(l-t)Y- [Lil—'8: " Fu—iZ—BI]Y + Ea " _ - - piwi pa(l-wi-w3) Ma 4" Cga "' a[(l-t)Y 4' GP] 4' (l'uk) [fi— + ba w p. o s s 1 o a o s o _ + b ] Y - (l-uk) [B—i Yi + F; Ya + 5; Y8] 134 wi Ba(1-wi-ws) _ I-ui-Bi - l-Ba + umwi Y + Ei + Es - ustY which could be written as ‘A + E' - B(0L)‘_ (5.8) Y’.. 57;) + 0 where A, B, C, and D are constants and equal to: (5.9) A = E + G + E - M + E I I: I t WV le K O + I.» K 9’0 + la) n ‘9 + WI (5.10) B = G , (5.11) C = (1 - t), and 1-w.-w 8.4- 4.1.) D = .3 - (I...) + [T - —] a l 1 0.4- o’(1-W--w ) o w (l-Uk) ;.1 + a b 1 s + g s ] 1 a S + Wi - Ba(l-Wi-WS) + u w + u w I-u.-B. 1-8 m i s s' 1 1 a Once the valuerfifY is determined, the other variables could also be determined by the use of one or another of the behavioral or accounting relationships in the model. For example, from equation (22) Yh is expressed as: Yh = (1-t)Y 135 Once (l-t) and Y are known, then Yh is determined, and so on for the other variables in the model. It may be noted that in deriving the solution of the model in terms of Y, E1' and a, all the relationships of the model were used except 3 equations. Two of these will be used to determine two other variables (once Y is known of course). These equations are the following: a. Equation (6): Y = G + G + S g P e g This is one of those equations that has not been utilized yet. It is obvious that once Y is known, then Yg could be determined by the use of equations (22) and (2), while Gp and Ge are exogenously determined. Thus equation (6) will be used to determine the value of 59. b. Equation (18) which shows the balance of payments equilibrium: Mi+Mm+Ma+MS+M = Ei+Ea+ES+S k f Once Y is known, then the different import com- ponents Mi, Mm, Ms and Mk could be easily determined through the use of the behavioral equations (26), (27), (28), and (29). On the other hand, Ma’ Ea and ES are exogenously determined as stated by equations (32), (33), and (34). Thus, the two other unknowns in the equation 136 are E1 and Sf, and once Y is known, then equation (18) will provide a relationship between Sf and Ei’ The derivation of this relationship is also explained in Appendix II, and only one example will be provided here. For example, from equation (26) Mm is expressed as: But Yi could be expressed in terms of Y, through equation (30), or Substituting, one gets: Mm = umwi Y and so on for the other import components. Once this is done, Sf could be expressed in terms of Y and Ei as follows: u-w- u w + u w + u 0.4. (5 13) S = ( 1 1 + m s s s k 1 1 f l-u.- . E. 1 1 1 + ukpa(l-wi-ws) + ukpsws )Y _ u (0i Y° ba bS k 5; 1 D D a o s o - - - + 5; Ya + F; YS) + Ma Ea ES E1 Which, after the substitution for Y from equation (5.8) could be written as: .‘B A+El (a) (5.14) S = F C O. For variables where there seems to be a trend involved, two approaches will be used. A first attempt will be tried to fit a trend line through simple least square techniques of the form: X=a+Bt where: X = the variable in question t = time a and b = constants, where a > o and b > o. If the estimated value seems reasonable, then it will be the one used in this study. This is true in the case of agricultural exports (Ea). If the trend value of the parameter or the exo- genous variable seems unreasonably high, an attempt will be made to provide a rough figure, based on past perform- ance, knowledge about the economy and the experience of some other developing countries at a similar stage of development. Thus, the value judgment involved in the choice of such parameter or exogenous variable will not be without foundation. Among this group of parameters are wi, ws, uk, and Bi' The details of the estimation process ofr these parameters are presented in the 142 appendix, but some of the relevant factors taken in the decision on the value for each might be in order. a. wi: this refers to the ratio of domestic in- come generated from the industrial sector to G.D.Y. This ratio has grown (as shown in Table A. 18) from .886 in 1952/53 to .27943 in 1965/66 (these ratios are in 1965/66 prices). It was shown in Chapter II, that Egypt went through as much structural change as possible during the late 1950's and the early 1960's, and that what is needed is another period of proportional expansion all around. Therefore, it will be assumed that wi = .3 in 1974/75. b. 03: this refers to the ratio of domestic in- come generated from the services sector to G.D.Y. As shown in Table A, 18, this ratio has declined from .49873 in 1952/53 to .42604 in 1965/66 (these ratios are in 1965/66 prices). For the reasons mentioned in Chapter II, about the prospects of traffic in the Suez Canal, which is one of the major components in the services sec- tor, it should be expected that this ratio will continue to decline in the near future. It will be assumed, there- fore, that ws = .4. It may be noted that these assumptions about the value of wi and ws imply a value of .3 for the ratio of agricultural income to G.D.Y. From Table A.ll, it could be shown that this ratio (in 1965/66 prices) has declined 143 from .328 for the period 1952/53-1956/57 (on the average) to .283 on the average for the period of 1960/61-1965/66. This trend should not be expected to continue, as a result of the additional new land that will be utilized by the water of the High Dam. In addition, some gains to agri- culture income should be expected from the attempt to use better seed varieties. Thus, a ratio of agricultural in- come to G.D.Y. of .3 seems to be more plausible. c. uk: this refers to the ratio of capital goods imports to total investment. As shown in Table A.10, this ratio (in 1965/66 prices) has increased considerably from .0936 in 1959/60 to .3007 in 1965/66. While capital goods imports should be expected to continue at a high rate during the period of development,1 there seems to be a certain level that any increases above it will become unrealistic. The level chosen here will be assumed to be .3.2 d. Bi: this parameter shows the ratio of agri- cultural inputs into the industrial sector (Iéi) to total output of the industrial sector (Oi). The least square estimate of Bi in the appendix gives a value for Bi = .45935. An assumed value for Bi of this magnitude in l . . . J. R. Hicks, Essays 1n World Econom1cs (New York: Oxford University Press, 1959), Cahpter 8. . 2It may be noted that a value of .3 for this ratio of capital goods imports to total investment was also assumed by S. Ho, op. cit., p. 113. 144 1974/75 seems to be highly excessive due to the relative changes that are taking place within the industrial sector in Egypt itself. During the period 1960-1968, the pro- duction index of chemical industries has increased from 100 in 1960 to 310 in 1968. Similarly, the production index of engineering and electrical industries has in- creased from 100 in 1960 to 250 in 1968. Both these groups of industries do not depend on agriculture for raw materials. On the other hand the production index of both food stuff industries, and spinning and weaving industries has increased from 100 in 1960 to 210 and 185 respectively in 1968.1 Both these groups of industries depend exten- sively on agriculture as a major supplier of raw material. Thus, it seems more plausible to assume a value of .4 in- stead of the estimated value of .45935. With these considerations in mind, the following are the estimates of the parameters, exogenous variables, and the base year values of the Egyptian economy in 1974/75. a. Parameters pi = .22129 pa = .18137 08 = .13799 bi = .29532 1N.B.E., Economic Bulletin, Vol. XXII, No. 4, 1969, pp. 322-323. 145 b = .57684 a bS = .24886 a — .18893 Bo - e4 1 B = .1845 a um = .10814 vi = .12395 us = .11204 “k = 03 wi = 03 ws = 04 A? = 2.099 1 1° = 6.751 a 1° = 2.902 s b. Exogeneous Variables M = 0 a E = 108 a E = 240 s C = 335.9 9 Cga = 9.1 G = 438.5 P c. Base Year Values Y? = 583.2 1 146 Y 614.7 Y 889.2 (00 910 Development Alternatives 0* = .175 d** .25 Y* = 3,095.169 when 2: 3%, 2: = 2%, and 2* = 3% s Y** = 3,730.273 when 23* = 5%, 23* = 4%, and 2** = 5% s E? = 265.3 1 ** = Ei 375.1 * = Sf 0 ** = Sf 126.4 It was shown earlier in this chapter that upon 8 F the solution of the model, one can express Y as a func- tion of the parameters, exogenous variables, base year values, industrial exports, and the saving rate as fol- A + Ei - B(a) , and SF could be expressed as: C(a) + D A + Ei - B(a) F - H - Ei C(a) + D Upon the substitution of the parameters, exogenous vari- ables, and base year values in equations (5.9, (5.10), 147 (5.11), (5.12), (5.15) and (5.16), the values of A, B, C, D, F, and H are as follows: = 345.17959 = 438.5 .80549 -.02876 "11 U 0 (I! 3’ II = .31765 H = 684.99446 Substituting these values for A, B, C, D, F, and H in equations (5.8) and (5.14), these two equations could be written as: 345.17959 + 31,” 438.5 a .80549 a - .02876 Y: 345.17959 + Ei - 438.5 a Sf = .31765 - 684.9945 - Ei .80549 a - .02876 The model is now in a convenient form to deter- mine some of the development alternatives facing Egypt in 1974/75 which is the subject of the following section. 4. Development Alternatives 1n Egypt in 1974275 In getting the solution of the model for Y, Sf, and the other variables of the model all the equations of the model were satisfied, except those related to de- velopment alternatives. These are the additional 148 restrictions imposed on policy targets, instruments and institutional limitations that limit their variation within a predetermined range. Thus, any development al- ternative that satisfies the original model equations (1-38) will be consistent. It will also be feasible, if and only if the values determined by the model for a, Y, Ei and Sf lie within the predetermined range specified by the development alternatives restrictions. In other words, any consistent and feasible development alternative must satisfy: A + E. - B(a) (5.8) Y = 1 C(a) + D A + Ei - B(a) (5.14) Sf = F - H - Ei C(a) + D (5.17) 0* i 0.: a** (5.18) Y* §_Y : Y** (5.19) Ei‘: E. < E** 1- .‘L * ** (5.20) Sf': Sf §_Sf Using the estimates presented in section 3 of this chapter, these six equations could be written as: 345.17959 + E, - 438.5a (5.8) Y = l .80549q - .02876 149 [345.17959 + Ei - 438.5 a (5.14) s = .31764 l_ F .80549 a - .02876 - 684.9945 - Bi (5.17) .175: on i .25 (5.18) 3,095.169 i Y‘: 3,730.273 (5.19) 265.3 E Ei i 375.1 (5.20) 0‘: s .5 126.4 f The determination of alternative development programs might proceed in the following manner:1 If the restriction imposed on Sf by equation (5.20) is relaxed, i.e., if net foreign borrowing can be obtained without costs to the economy, then given a value for a that lies within the range determined by equation (5.17), equation (5.8) will provide a linear relationship between Y and Ei' A higher value for a will shift the curve to the right, and a lower value for it will shift it to the left. In Figure (V-l) four of these relation- ships are demonstrated for a = .175; a = .20845; a = .25; and a = .265. The additional restrictions on Y and Bi imposed by equations (5.21) and 5.22) are also inserted in the graph as horizontal and vertical straight lines at the given level implied by each of these two equations. ¥ 1It may be noted that the method used in drawing the graphic solution is similar to the one used by 3. Ho, op. cit., pp. 115-124. 150 Figure V-l: Development Alternatives when S O I f is not constrained. Y A 5’ . (9‘? l’ a? 6‘ o a 'e 4000) Y*( = 3139.2 ' . 5 ‘ ' _ i 3500 I Y* 1HM|n| 1¥* = 3095-7 //' l 2 2500 , - 0| ‘ 555 300 4* 400 E. * _ l 151 Looking at Figure (V-l), one can easily see that equations (5.8), (5.17), and (5.18) and (5.19) help in defining the feasible region implied by points 1-2-3-4-5. Any point inside or on the boundary of this area will satisfy the relationships implied by equations (5.8), (5.14), (5.17), (5.18), and (5.19). By satisfying equa- tion (5.8), and (5.14) the point will also satisfy the equations of the original model, equations (1-38) because all of these were used in determining the solution for Y and Sf. The only constraint that is not satisfied by the feasible area delineated as 1-2-3-4-5 in Figure (V-l) is, therefore, the constraint on Sf implied by equation (5.20). On the other hand, if the restriction imposed on Y, (the full employment target), by equation (5.18) is relaxed; i.e., if Y is permitted to take any value that is consistent with all the other relationships of the model, then given a value for a that lies within the range implied by equation (5.17) equation (5.14) will provide a linear relationship between Ei and Sf. Any change in the value of a will generate a fimily of this relationship (an increase in a will shift the curve to the right and a decrease will shift it to the left). Figure (V-2) pro- vides four curves representing this relationship between Bi and Sf for a = .22341; a = .24011; a = .25; and a = .265. The additional restrictions on E1 and Sf imposed by equations (5.19) and (5.20) are also inserted in the 152 Figure V-2: Development Alternatives when Y is not constrained. Sf? E2" = 265.3 E**= 375.1 1 l V M '5 300 fly 4 0‘ , i Y 200 I ~ 3, 9.6» 3’ _ é (5' ** :3 5f 126.4 V , 100 ' 3 0 11 7 153 graph as vertical and horizontal lines at the given level implied by each of these two equations. Looking at Figure (V-2) it is obvious that equa- tions (5.8), (5.14), (5.17), (5.19), and (5.20) help in defining the feasible region implied by the points i-ii- iii-iv-v. Any point inside or on the boundary of this area will satisfy all the relationships implied by equa- tions (5.8), (5.14), (5.17), (5.19), and (5.20). By satisfying equations (5.8) and (5.14), the point will also satisfy all the equations of the original model, equations (1-38), because all these equations were used in determin- ing the value of Y and Sf. The only restriction that remains to be satisfied is the restriction imposed on the value of Y by the full employment condition. The model constructed in this study for the Egyp- tian economy, has, however, restrictions on both Sf and Y. Thus, parts of the feasible area delineated by 1-2-3- 4-5 in Figure (V-l) or by i-ii-iii-iv-v in Figure (V-2) might not be feasibel since the former might contain some points where the implied value for S exceeds (or falls f short of) the value of Sf specified by equation (5.20), and the latter might contain some points where the implied value for Y exceeds (or falls short of) the value of Y specified by equation (5.18). To make sure that the feasible region in the Y-Ei plane and that in the Sf-Ei Plane contain those points that satisfy both restrictions 154 on Y and Sf, the area i-ii-iii-iv-v could be mapped in the Y-Ei plane, and the area 1—2-3-4—5 could be mapped in the Sf - Ei plane. The mapping process of one point from one region into the other figure might proceed as follows: Start from point 1 in Figure (V-l), which implies1 Y = 3095.1 E. = 265.3 1 This means (from equation (5.8)), that a = .2386. Substituting these values for a, Ei and Y into equation (5.14), the value of Sf is determined and will be equal to: Sf = 32.9 Thus, point 1 in Figure (V-l) corresponds to the point in Figure (V-2) at which: E. 1 265.3 8 32.9 f and so on for the other points of the feasible region in Figure (V-l). Similarly, if one starts from point V in Figure (V-2), one can see that at this point: Sf = 126.4 E. = 265.3 1 a = .22341 1From now on, all the values mentioned for any variable will be in L.E.m., and in 1965/66 prices, unless otherwise specified. 155 Substituting these values in equation (5.14), one can easily see that the corresponding value for Y will be: Y = 3389.0 Thus, the corresponding point for (v) in Figure (V-2) will be the point in Figure (V-l) at which: 265.3, and E. 1 Y 3389.0 The mapping process is, therefore, nothing more than the identification of the value of Sf correspondent to the values of Ei’ Y, and a in Figure (V-l), and the value of Y correspondent to the values of Ei’ Sf, and a in Figure (V-2). The point that should be emphasized is that there is one-to-one correspondence between each point in the two figures. In Figure (V-3) the feasible region in Figure (V-2), i-ii-iii-iv-v, is mapped out in the Y - Ei plane. To avoid confusion these points will be written in Figure (V-3) as i, ii, 111, I6, 6. It could be easily seen now from Figure (V-3), that point 5, which was feasible in Figure (V-l) is now not feasible since it implies a value for S = 234.8 which is greater than the maximum value f allowed to it by equation (5.20) which is Sf = 126.4. The mapping out of the feasible region i-ii-iii- iv-v in Figure (V-2) into the Y - Ei plane in Figure (V-3), 156 Figure V-3: Development Alternatives when both Y and Sf are constrained. YAK ’ “‘0 Sb 2" a 'o 4000 375’ s‘é 4% '1?) 6 . 2 Y** = 3730.2 5 iv 0 . y d 1 ( - c 3500 3 V- ;e . E . f f 1: 1Y* = 3095.1 :-a b I 1 'F'l' 2 3000 2500i. ’ 200 300 400 E? = 265.3 E?*= 375.1 E. 1 1 1 157 will limit the feasible area available for the choice of development alternatives, as could be seen from the new feasible region delineated by the points (a), (b), (c), (d), and (e). The important point to notice here is that any point in this feasible region in Figure (V-3) satis- fies equations (5.8) and (5.14) and all the other restric— tions implied by equations (5.17), (5.18), (5.19), and (5.20). Similarly, in Figure (V-4), the feasible region in Figure (V-l), 1-2-3-4-5 is mapped out into the Sf - Ei plane as I, 2, 3, 4, 5. As could be easily seen, point (1) which was feasible in Figure V-2, is not feasible now since it implies a value for Y = 2991.6 which is less than the minimum value given by equation (5.18) which is Y* = 3095.1. The mapping out of the feasible region 1-2-3-4-5 in Figure (V-l) into the Sf - Ei plane, will also limit the feasible area available for the choice of development alternatives. The new feasible region that satisfy equa- tions (5.8) and (5.14), and all other restrictions implied by equations (5.17), (5.18), (5.19), and (5.20), is delineated by the points (a), (b), (c), (d), (e). It is obvious that these points are exactly the correspondent points to points (a), (b), (c), (d) and (e) in Figure (V-3), and any reference to any of these points in one graph will imply the other point. 158 Figure V-4: Development Alternatives when both Sf and Y are constrained. * = f Ei 265.3 E?*= 375.1 1 **= Sf 126.4 ;. e *4 F ha 90‘ 999» 159 Once the feasible region is determined, the stage is now ready for the choice of an adequate number of de- velopment alternatives that are facing the Egyptian economy in 1974/75. It is obvious that an infinite num- ber of such alternatives exist within the feasible region in Figures (V-3) and (V-4). To consider all these alter- natives is, of course, impossible, but what will be done here is to consider only the corner solution delineated by the points (a), (b), (c), (d), and (e), and one in- terior point - (f). These selected solution of the model will be presented in the following Table (Table V-l), after which some analysis of the implication of each point will follow. The economic implications of the various corner solutions that are presented in Table (V-l) can be shown by starting out at point (a) in both Figures (V-3) and (V-4).1 At this point, both the lower values of the rate of increase in labor productivities in the different pro- duction sectors, and exports of the industrial sector are operative. For the level Y and EJ.- associated with point (a), a is equal to .2386, and, therefore, Sh = 699.5. If one adds to this government saving in the budget, S9 = -181.5, than total domestic savings will be = 518.0. On the other hand, total investment in the production sectors, 1It should be emphasized that any reference to any point representing the corner solutions such that a-b-c-d- e and f will refer to each point in both Figure (V-3) and (V-4) e .1.2.m.qv ea one maneue ee\meea an mum menu» was» an mmusmem 8:9.HH4H 160 o.mvm m.mmv o.¢HNH o.mbom m.avm H.mmom 0.0NMH o.omm o.omm o.oomm mmmmm.uo o.mvm m.mmv n.0vma H.mmam m.mmm m.m~hm m.mmma h.maoa h.maoa o.mmmm vamm.ud o.mvm m.mmv m.mbma H.0mmm m.mmh m.voom H.mmva H.mHHH H.mHHH o.omnm HHovN.no U o.m¢m m.mmv m.aoma m.mmmm «.mmm m.mvwm N.mava v.HmoH v.Hm0H o.mmmm mN.flM o.mvm m.mmv h.mMHH H.0mma o.Nom H.mmvm h.mmma m.mmm m.mmm H.mmom mN.nM o.mvm m.mmv h.mMHH H.0mma o.mom H.mm¢m b.mmma m.mmm m.mmm H.mmom mmmm.uM moam> m.mvm H.mom N.hah N.mmma h.vmv v.~mma ~.mmm h.vao N.mmm H.5mom new» ommm m a mo 0 «0 flo 6» a» m» m» .w s H.Hmooz may no msoflusHom omuooamm In H.> manna l 6 l m.aea- H.oee m.e~e~ m.e~ma H.~mea e.ee~ m.me~ m.omom m.mmm H.m m m.ema- m.eoe o.mem~ m.eeme e.mees 5.4mm e.me~ H.mmam a.mmm H.m m m.em . e.e~m m.eme~ m.eeea m.~ema m.e~m «.mam e.mmm~ m.mmm H.m e m.mm . 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UTSGHUCOUIIH . > UHQMB 164 for this level of G.D.Y., will be equal to (Ii + Ia + Is = 550.9). It can be easily seen now that available domestic savings fall short of investment requirements by an amount equal to 32.9. Similarly, at the level of Y given by point (a), total import requirements will be equal to ( Mi+Mm+Ma+MS+Mk = 646.2), while total exports (Ei+Ea+ES = 613.3), and, therefore, the total exports fall short of import require- ments by an amount equal to 32.9. A quick glance at Figure (V-4) will show that at point (a) the level that Sf reaches is equal to 32.9 which is exactly sufficient to achieve both saving and investment equilibrium and the balance of payments equilib- rium. This preceding analysis shows clearly the dual role that foreign capital or foreign saving (Sf) plays in supplying both saving and foreign exchange. It may be noted that if the lower limit of the rate of increase in labor productivity in the production sectors still hold, i.e., if (Y = Y* = 3095.1), but that now it is possible for the planners to increase the sav- ing rate (a) from its previous point (a), which is a = .2386, then it is obvious that further savings will re- duce the amount of foreign borrowing required at the same level of G.D.Y., but hence it increases the export requirements at the same time. This process could con- tinue until one reaches point (b), where the saving rate 165 can rise no longer, because it reaches its maximum level (a = a** = .25), and foreign borrowing (Sf) reaches its minimum level, (Sf = SE = 0). At point (b), therefore, both domestic savings and exports have increased enough to fill the foreign exchange gap and the domestic resources (or saving) gap from domestic resources instead of depend- ing on foreign borrowing. Point (b) will represent what has usually been called severe national effort case where the country will depend solely for its development on its own domestic resources. If it is possible now to allow the rate of in- crease of labor productivity in the different production sectors to increase from its minimum value, which corres— ponds to (Y = Y* = 3095.1) at point (b), then as long as 0 remains at its level at point (b), (a = a** = .25), then one could move on the boundary line that connects point (b) with point (c), where it will be possible to increase the level of G.D.Y. But with the increase in Y, export requirements from the industrial sector (Ei) has also to increase, and, therefore, this process could continue until one reaches point (c) where Ei can no longer rise (at point (c), E1 = E;* = 375.1). It is important to note that at this point while Ei and domestic savings rise with the increase in income, they do not rise enough in order to meet both the import and investment requirements at the new level of G.D.Y. at point (c) (Y = 3538). To 166 fill these two gaps, the planners must depend on foreign borrowing for an amount equal to Sf = 63.7 at point (c). Once at point (c), further increases in labor productivity could still raise G.D.Y., but Ei can no longer rise, because it has already reached its maximum value Ei = E?* = 375.1. Since import requirements in- crease with the increase in G.D.Y., further increases in Y would require larger dependence on foreign borrowing, and therefore, Sf will tend to increase as one moves from point (c) towards point (d). It is important to note, that as one moves from point (c) toward point (d), the saving rate will tend to decline from its level at (c), (a = a** = .25) until finally it reaches (a = .24011) at point (d). This is due to the fact that at this range, the foreign exchange gap is the more restrictive, and that further increases in domestic savings will be of no help in increasing the level of G.D.Y. above the level that is permissable by the foreign exchange supply. The movement from point (d) to point (e) will be possible only if it is difficult to keep both the saving rate (a) at the level it already reached at point (d), (a = .24011), and the level of exports of the industrial sector (Bi) at its level at point (d), (Ei = E3* = 375.1). If these values prove to the planners to be impossible to achieve, then the only alternative is to move on the bound- ary segment from (d) towards (e). Once point (e) is 167 reached then Ei would have its lowest value that it is allowed to take (Ei = E; = 265.3), and Y will be equal to 3,389. The level of foreign borrowing associated with point (e) is (Sf = SE* = 126.4). It should be noted, there- fore, that at point (e), a is equal to .22341 which is the level consistent with the values of both Y and Ei at point (e). If, under the conditions prevalent at point (e) with respect to (E1) and (Sf), it were possible to increase the saving rate from this level, this increase will be of no help in increasing the level of G.D.Y. above its level at (e), because at this range, the foreign exchange gap is the more restrictive bottleneck for economic growth. This analysis shows clearly how the model con- structed in this study could be used by the planners to anticipate the effects of any changes in the economic conditions or the variables of economic policy and how it could help them to analyze the economic implications of each situation and their probable effect on the de- velopment program as a whole. Through such type of an- alysis, the task of economic policy, i.e., the task of deciding on what type of economic measure to be taken and in what magnitude will be facilitated to the planners. The model, in addition, helps the planners in knowing the effects of any action they might take on the other key variables in the economy, thereby satisfying the learning process required for good economic planning. 168 It may be noted, finally, that the analysis in the preceding paragraphs has been concerned only with the corner solutions of the model, but the same could be applied for any point in the feasible area delineated by points (a)-(b)—(c)—(d)-(e). CHAPTER VI OTHER USES OF THE MODEL 1. Introduction In Chapter V, it was shown how the model that was constructed for the Egyptian economy could be used to determine consistent and feasible alternative development programs, subject to any changes in the magnitude of the policy variables. This chapter will show some other uses through which the model could be useful to the planners. Section 2, will be concerned with the problem of how to use the model to identify two of the major bottlenecks in economic development; i.e., the domestic resources bottle- neck, and the foreign exchange bottleneck. Section 3 will be concerned with the use of the model to choose among alternative programs subject to given values of policy instruments. Finally, Section 4 will show how the model could be used to determine the optimum choice among the different policies subject to a given value of one of the targets. It will be shown that the analysis of Sections 3 and 4, are based on the assumption that some information about the properties of social welfare function are avail- able to the planners. 169 170 2. Identification of Bottlenecks The purpose of this section is to show how the model could be used in identifying the domestic resources (saving) bottleneck and the foreign exchange bottleneck. In the analysis that followed the determination of the alternative development programs in Chapter V, it was shown that some information could be obtained about the ranges at which each bottleneck will be most effective. It is possible, however, through the use of a different method in the solution of the model to obtain more precise information about the magnitude of these two bottlenecks and the range at which each will become the effective limit to growth. It may be noted that while both the saving and foreign exchange bottlenecks must be equal in any ex-post accounting (and equal to the amount of net foreign bor- rowing that Egypt receives from abroad), it is very important to the planners that these two bottlenecks must be equal in an ex-ante sense if the plan is consistent. Through the use of the model, the planners could discover how much change in saving or exports is required in order that the two bottlenecks are equalized. In order to show how this could be done, the equations of the model eq.s (1-42) has to be reduced through algebreic manipulation to the following: 171 (6.1) Sf=fl(Y,0) (6.2) Sf=f2(Y,Ei) (39) 0* i 0 i 0** (40) Y* :_Y i Y** (41) E; .i Ei‘: E;* (42) s; ,: sf‘: s;* Equations (39-42) provide the development alter- natives chosen in this study, eq. (6.1) provides the equilibrium condition of saving and investments, and eq. (6.2) provides the balance of payment equilibrium condition. The method through which the equation of the re- duced form [eq.s (6.1) and (6.2)] are obtained is explained in detail in Appendix IV, and what is going to be shown here is only a brief summary of this process. Starting from the saving-investment equilibrium condition, eq. (17), one can find: Ii+Ia+IS=Sh+Sg+Sf Substituting for these variables from the different re- lationships of the model, it could be shown that: p-w- (1-w--w )9 w o (6.1) S = 1 l + 1 s a + s S - 0(1-t) - t Y f 51 ba 5 S _pio p6:10 pso - - — [biyi + Egya + KEYS - (a-1)Gp + Cga + C9 172 Given a certain value for (0), eq. (6.1) provides a relationship between Y and S For different values for f. (0), the equation will generate a family of this relation- ship as shown in Figure (VI-1). Each of those relationships gives the maximum value of Y, that is consistent with the saving-investment equilibrium condition, given a certain value for (0) and (Sf). Similarly, starting from the balance of payment equilibrium condition, eq. (18), one can find: Mi + Mm + Ma + MS + Mk = Ei + Ea + ES + Sf Substituting for these variables from the dif- ferent relationships in the model, it could be shown that: A-D(Y)+Ej] A-D(Y)+Ei C(YT+B J + R C(Y)+B (6.2) Sf = N + 0(Ei) + P(Y) + QY Where A, B, C, D, N, O, P, Q, and R are constants the components of which are defined in Appendix II (for A, B, C, and D) and Appendix IV (for N. O. P, Q, and R). Given a certain value for Ei’ eq. (6.2) will generate a relationship between Y and S For different values of f. Ei’ eq. (6.2) will give a family of this relationship. Each of those relationships gives the maximum value for Y, that is consistent with the balance of payment equilibrium condition, given a certain value for Sfand Ei' When eq.s (6.1) and (6.2) intersect, they will give a value for Sf that will satisfy the equilibrium condition of both saving and investment and the balance of payments. 173 Upon the substitution of the values of the parame- ters, exogenous variables, and base year variables, the equations of the reduced form become: (6.1) S Y(.346-.805490) - 438.50 - 339.815 f (6.2) Sf = .3198Y - .89925Ei - 650.205 [T02876Y+345.17959+Ei ' '08115YL 438.5+.8054"‘9—Y .02876Y+345.l7959+E-j] " 44'17889 438.5+.80549Y _l (6.3) .175 §_0 §_.25 (6.4) 3,095.1 : Y i 3,730.2 (6.5) 265.3 3 Ei 5 375.1 (6.6) 0 i Sf _<_ 126.4 The graphic solution of the reduced form is pre- sented in Figure (VI-l), and the reader should note the following points: a. In drawing eq.s (6.1) and (6.2), it was shown in Appendix IV, that all the relationships of the original model, eq.s (1-38) were used in the process of the deri- vation. Thus, eq.s (6.1)-(6.6) embody all the relation- ships of the model eq.s (1-42), and any solution that satisfy thesesix equations will also be found to satisfy the equations of the original model. It is for this reason, that the graphic solution presented in Figure (VI-1) 174 HIH> mHsmHm .EHom cocoomm oseulmo>vasuouH¢ unmemoao>mo H. 8.3 is 8mm x «a o .o... 8 A . I I. M O imb U 0 *WM . pun-{:wa-ppv Ha * Lom.” ed e .r 3 kw * kw \\ \\ ac . ac 9e 9.. \I. m (.m 175 is exactly Similar to the graphic solution presented in Figures (V-3) and (V-4), and the feasible region delimited by (a)-(b)-(c)-(d)-(e) correspond to the similar points in those two figures and to the data concerning the values of each variable at each of those points presented in Table (V-l). b. It should be noted also, that although eq. (6.2) gives a curve and not a straight line, for the range of G.D.Y. considered here, the curvature is very slight that it could be regarded as a straight line. Now, assume that the maximum value for 0** is .25, and E{* = 375.1, then if the net foreign borrowing (Sf) = 0, it can be easily seen from Figure (VI-l) that the growth of G.D.Y. is more severely limited by the shortage of domestic resources, than by the potential level of export, as can be seen at point (b) in Figure (VI-1). This limitation will remain up to point (c), which gives a growth rate of G.D.Y. slightly below 6%. Since import re- . O I O C 1 quirements increase more rapidly than sav1ng requirements, 1This can be easily seen if one remembers that the dS slope of eq.(6.l) which is dy— gives the requirement of (Sf) for investment purposes as (Y) increases, while the dS slope of eq.(6.2) which is 3?: gives the requirement of (Sf) for foreign exchange purposes as (Y) increases. A quick look at Figure (VI-l) will show that the relation generated by eq.(6.2) for E** is more steep than the relation generated by eq.(6.l) for 0**. 176 the two bottlenecks become equally restrictive at point (c), while at higher growth rates of G.D.Y., the shortage of foreign exchange is more restrictive than the potential level of saving. 3. Choice AmongiAlternative Programs In this section, it will be shown how the model could be used in the choice among alternative programs, given certain values for the policy instruments, and pro- vided that there exists a social welfare function to help in the process of choice among alternative programs. Assume, for example, that the planners are considering the choice of the optimum program, when the following policy instruments and institutional limits take these values: 0 = .25; E. = 375.1; and 2. = 5%, 2 = 4%, and 2 = 5%. 1 1 a 5 To do this, assume that social welfare is a function of: (6.7) w =w1[c, s K] 1 f' where C is total consumption, S is net foreign borrowing, f and K refers to the economy's capital stock. The variable K, could be replaced in the social welfare function with G.D.Y., since with fixed capital coeffients, one imply the other. To determine total consumption at a given level of (Y), one has to deduct from (Y), both (Sh) and ($9) at that level of G.D.Y. thus C = Y-Sh-Sg substituting from 177 eq.s (23) and (22), then C Y-0[Y(l-t) + Gp] - Sg (6.8) C Y[1-0(l-t)] - 06p - Sg Substituting for the values of parameters, exogenous variables, and for 0 as assumed in this example (0 = .25), this eq. could be written as (6.9) C = .79863Y - 109.625 - Sg It should be noted that eq.s (6.1), (6.2), and (6.4) summarize the production possibilities of the economy, with respect to the capital limit, balance of payment limit, and full employment limit respectively. Once the value of the policy instruments and institutional limits are known, then total consumption can be determined for different amounts of foreign borrowing. The consumption possibility frontier is constructed in Figure VI-2 by the use of eq. (6.8) and the data in Table (V-l), on these assumptions. The shape of the curve is due to the fact that increased foreign borrowing have a high productivity at low levels of net foreign borrowing, because an increase in Sf permits a further increase in investment and G.D.Y., from point (b) up to point (c). Between point (c) and point (d) growth is limited by the shortage of foreign exchange, and therefore an increase in S permits further f increases in G.D.Y. Beyond point (d), G.D.Y. is constant because full employment of labor has been reached and the 178 Figure VI-2: Optimum Choice Among Alternative Programs 1 W0 W1 1 1 W1 0 Labor Limit)” W1 Balance of payment], Limit ’7 Capital Limit 175 150 125 100 75 50 25 Increase in Foreign Borrowing 3200 3100 3000 2900 2800 2700 2600 2500 2400 Total Consumption in 1974/75 179 increase in Sf goes only to increase consumption. The three segments of the consumption possibility frontier correspond to the saving-investment limit, balance of payment limit, and full employment limit respectively. The point that should be mentioned is that each point on the consumption possibility frontier presents an alternative development program. To choose among these alternatives, one needs to determine the properties of the S.W.F. that was specified by eq. (6.7). If total consumption over time is taken as a measure of welfare, then the welfare loss due to an in- crease in net foreign borrowing could be measured as the sum of interest costs, reduction in future borrowing power, the loss in future consumption due to the need to develop an export surplus, the implied delay in making the neces- sary change required to raise savings and exports in the short run, and the hampering of the development of exports where it usually takes some time to conquer markets for new products and so on. If one could visualize the pos- sibility of constructing a social welfare function1 that could reflect all these considerations, as Wl-Wl in Figure VI-2, then the optimum program will be discovered 1The social welfare function could either reflect the planners' preferences, or it could reflect the weighted sum of individual prefer- ences. ‘See, John C. Harsenyi, "Cardinal Welfare, Indi- vidualistic Ethics, and Interpersonal Comparison of Utility," J.P.E., 63(1955), pp. 309-21. 180 to be at point (1), where the social welfare function is tangent to the consumption possibility frontier. 4. Optimum Choice Among Policies One of the possible uses of the model is also to help the planners in deciding on the optimum level of different types of economic policies, given a certain goal to be achieved. For example, if a certain level of G.D.Y. is to be achieved in the target year, then looking back at Figure (V-3) Chapter V, one can see that along any hori- zontal line in the feasible area (which specifies certain level of income), there exist a different combination of 0 and Ei' It should be noted, also, that with any combina- tion of 0 and Ei’ there exists a certain level for Sf. Figure (VI-3),presents these different combinations of 0 and Ei’ for the level of G.D.Y. = 3090.1, where it turns out that it is a straight line. This line could be called the . iso-income line. For different levels of in- come, we will,of course, have different iso-income lines. It is obvious that different values for 0, Ei' and, therefore Sf will have different welfare implications. An increase in (0) at the same level of income, for example, will mean reduced private consumption, while an increase in exports might lead to a reduction in foreign borrowing. Foreign borrowing, on the other hand, could allow for the achievements of the same level of income, with a reduction 181 Figure VI-3: Optimum Choice Among Policies. Q N" 17 .225 Y=3095.1 Ain 0350 )275 ’200 182 in the exports of the industrial sector, but this has its costs too in terms of reducing future borrowing power, the sum of interest charges, the loss of future consumption due to the need to develop an export surplus, the implied delay in making the necessary changes required to raise savings and exports in the short run, and the hampering of the development of exports while it usually takes some time to open new markets. If the welfare function re- flecting these considerations take the form: W = W2(a, E1, 3 2 f)! then the optimum level of policies will be determined where the curve representing this function W2-W2 is tangent to the given iso-income line. CHAPTER VII CONCLUSIONS The major purpose of this dissertation is the con- struction of a macro economic model for the Egyptian economy that could be used for projection planning through the gener- ation of feasible and consistent alternative development programs, each subject to different assumptions about the values of the policy variables chosen in this model. The model has been presented in Chapter IV, and the chosen al- ternative development programs were presented in Chapter V which contains also a discussion about the economic impli- cations of each alternative. In Chapter VI, the model was solved in a different way from that presented in Chapter V, to permit the consideration of the precise identification of the domestic resources bottleneck, and the foreign exchange bottleneck. This method, in addition helped in the process of choice of an optimum program or policy-mix subject to certain values of the policy instruments or targets avail- able to the planners. The remaining thing is to present some concluding remarks about some of the possible uses of the model and also some of the limitations and shortcomings that have to be kept in mind. 183 184 1. In a world full of uncertainty, a model of development alternatives provides the planners not only with the flexibility required for the decision making process, but also with the advantage of already existing substitute development programs that can be utilized if it appears that the values of the policy variables are those implied by any of these alternatives. Many other alter- native develOpment programs could be computed quite easily subject to different assumptions about the values of these policy variables. 2. It may be noted that the model is of the com- parative static type, and therefore, the different development alternatives presented in Chapter V, give only the values of the different variables at the terminal year of the model (1974/75) without specifying the time path for every variable from the base year to the terminal con- figuration. In this sense, the alternative development proqrams presented here might give a perspective rather than a plan. It should be emphasized, however, that the construction of a terminal configuration is an essential ingredient in any finite horizon planning model. The model will provide some guidelines to the planners, even though it does not specify a complete time phased course of , action. These detailed specifications could be worked out in the annual plans. 185 3. The variables of the model are measured in the base year prices (1965/66), and, therefore, prices are not endogenous variables in the model. This was necessitated by empirical and computational difficulties. 4. One of the advantages of using the model, even though it is not operational enough for everyday planning is that it will help the planners to focus their attention on the right questions: what are the major constraints and bottlenecks which will have to be overcome to accelerate the rate of growth of the economy, how far should one try to push the economy to grow, and in what direction, etc.... While the model might not provide completely operational answers for these questions, still by concentrating atten- tion on them, it will force the policymakers to come to grips with them instead of ignoring them. 5. It was shown in Chapter VI that the model could provide some help in defining whether the saving bottleneck or the foreign exchange bottleneck is operative at different rates of growth in G.D.Y. It was shown that at lower rates of growth in G.D.Y. (up to a rate of growth slightly below 6% of G.D.Y.), the saving bottleneck (the domestic resources gap) will be most restrictive, while at higher rates of growth in G.D.Y. the foreign exchange bottleneck will be the most restrictive bottleneck. This is due to the fact that import requirements increase faster with the increase in G.D.Y., than investment requirements. 186 6. The model could also help in the process of choice among alternative development programs, if certain values were given for the policy instruments and institu- tional limits and provided that some information about the properties of the social welfare function are available. The consumption possibility frontier was shown to express total consumption at various levels of net foreign borrowing, and the point of tangency between the social welfare func- tion and the consumption possibility frontier will provide the optimum program. By providing total consumption at various levels of net foreign borrowing the model could, also, provide the developed countries offering aid to developing countries with some information about the pos- sible rates of productivity of foreign aid, provided, of course, that the productivity of foreign assistance enters at all in the allocation of foreign aid. 7. The model could also help the planners in decid- ing on the optimum level of different types of economic policies, at a given level of income. For example, if a certain level of G.D.Y. is to be achieved in the target year, then there exist a different combination of 0, and Ei’ and with any combination of these, a value for Sf that can achieve this level of income. It is obvious that different values for 0 and E1' and therefore Sf, will have different welfare implications. If one could visualize the possibility of constructing a social welfare function that could reflect 187 these considerations, then it will be possible to choose the optimum combination of policies for each desired level of in- come, where this social welfare function is tangent to the iso income line in the plane that represent the combina- tion of these different policies available to the planners. 8. In its presentation of alternative development programs, the aggregate model will usually contain an opti- mistic bias. This optimistic bias might result from the implicit assumption that there is no structural difficulties in transforming saving into desired forms of investment. Also, while the magnitude of the shift in resources 1e- quired to satisfy the balance of payments equilibrium may appear to be relatively small, the total may conceal pos- sible bottlenecks in certain sub-sectors or obstacles to increasing particular kinds of output. To overcome this optimistic bias, some kind of input-output analysis would be required in order to determine the effects of develop- ment programs in the various subsectors. This process, beside helping in specifying the various factors that may limit growth, may have the additional advantage of modify- ing some of the parameters in the original model. 9. From the experience gained through the work on this research, it seems clear that it will be quite some time before the Egyptian data can be relied upon for use in linear optimization models involving explicit inter- sectoral and intertemporal relationships which satisfies 188 boundry conditions relating to the initial year as well as to the terminal year of the plan. 10. With respect to available data, some suggestions for improvements might be in order: (i) the data should be published on quarterly basis to make it easier for the researcher to transfer figures from calendar to fiscal years and vice versa; (ii) some care should be given to the specification of the definitions of each variable with some idea about their importance from the point of view of economic theory, (iii) if there is a shift from one type of definition to the other, some attempt should be made as far as possible to provide previous data under the new definition and the new data under the old definition so that the researcher will have the freedom of which defini- tion will be more suitable for his purposes, and (vi) in Egypt there needs to be some decentralization in data collection, since the work of the existing agencies: the Ministry of Planning, the Central Agency for Public Mobilization and Statistics, etc., seem to overlap each other to a great extent. The results are, besides confusion, low quality and small coverage. If each department in the government concerns itself with data gathering in its immediate field of work, and there exist statistical units in each of these departments, while one central agency takes the duty of coordination, and direction, the quantity and quality of data will surely improve. 189 11. In working with this model about the Egyptian economy, while a good deal of rigorous analysis was called for, there yet was a place for some common sense and intui- tion. The range of some exogenous variables was decided upon in an intuitive way with the view of making the model manageable and solvable. In addition, in the process of solving the model, a good deal of trial and error was necessary before a satisfactory solution was determined. 12. Finally, it should be emphasized that re- gardless of improvements in the evolution of planning models, the policy makers cannot escape from the making of value judgments, and political decisions are still re- quired. While the model presented here might point out the economic consequences of alternative development pro- grams, nonetheless, the economist alone cannot determine an optimum program. Furthermore, a development program should be thought of as A. K. Cairncross remarks "as a focus, not a substitute for decision making... it is nonsense to think, that a program settles everything and that no sensible decisions can be taken without one. It furnishes no more than a systematic way of trying to coordinate decisions and improve on uncoordinated decisions. Although uncoordinated decisions may be bad or costly 190 so also may coordinated decisions: there is no magic about a program that transforms the quality of decisions beyond the virtue that coordination lends."l . 1A. K. Cairncross, ”Programmes as Instruments of coordination," Scottish Journal'of'Political'Economyp June 1961, p. 90. BIBLIOGRAPHY BIBLIOGRAPHY Public Documents U. A. R., Ministry of Treasury. Report of the Minister of Treasury Regarding the Budget Pro-ectfpr the Fiscal Year 1965-1966. May, 23, .965’(In Arabic). U.A.R., National Assembly. The General Report of the Plan, Budget, and Final Accounts Committee about Monetagy and Economic Poli_y of the Budget Project of the Fiscal Year 1964465. June, 1964 (In Arabic)} U.A.R., National Assembly. Report of the Plan, Budget, and Final Accounts Committee about Monetary and Economic Policy of the Budget Prggect of the Fis- caI’YearI1965- 66. June, 16,1965*(In Arabic). U.A.R. Presidency of the Republic, National Planning Com- mittee. The Frame of the Five Year Plan for Economic and Soc1aI;Devélopment: July, I960 - June, 1965. 1960 (In Arabic). Books Adelman, Irma, and Thorbecke, Erik. Theory_and Design of Economic Development. Baltimore: The Johns Hopkins Press. Arkadie, B. Van and Frank, C. Economic Accounting and Development Planning. New York: OxfOrd University Press, 1969. Beach, E. F. Economic Models. Wiley. Central Bank of Egypt. Economic Review. Central Agency for Public Mobilization and Statistics. Statistical Pocket Book, U.A.R. 1952-1963. Cairo, 1964. 191 192 . Statistipal Handbook of the U.A.R. 1952-1966. Caifo, 1967. Chenery, Hollis B., and Clark, Paul G. Inter Industpy Economics. John Wiley and Sons, 1959. Cleland, W. The Population Problem in Egypt. Lancaster, Pa.: Science Press Printing Company, 1936. Edey, H. C. and Peacock, A. T. National Income and Social Accounting. London: Hutchinson House, 1954. El-Kammash, Magdy. Economic Development and Planning in Egyp . Prager, 1966. Gerschenkron, Alexander. Economic Backwardness in His- torical Perspective. Cambridge: Harvard Univer- s1ty Press, 1962. Hansen, Bent. Lectures in Economic Theory, Part III: The Theory of Economic Policy. I. N. P. 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Irwin, Inc., 1967. Meier, Gerald M. LeadingyIssues in Development Economics. New York: Oxford University Press, 1964. National Bank of Egypt. Economic Bulletin. O'Brien, Patrick K. The Revolution in Egypt's Economic System, 1952-1965. London: Oxford University Press, 1966. Ranis, Guster and Fei, John. Development of the Labor Surplus Eggnomy: Thepry and Policy. Homewood, Ill.: R. D. Irwin, Inc., 1964. Ruggles, Richard and Ruggles, Nancy D. National Income Accounts and Income Analysis. McGraw-Hill, 1956. Sandee, J. A Demonstration Planning Model for India. New York: Asia Publishing House, 1960. Theil, Henry. Economic Forecasts and Economic Policy. 2nd ed. Amsterdam: North Holland Pfiinshing Co., 1961. Tinbergen, Jan. Economic Policy: Principles_and Design. Amsterdam: North Holland Publishing Co., 1956. Tinbergen, Jan and Bos, Hendricus C. Mathematical Models of Economic Growth. New York: McGraw-Hill, 1962. United Nations. Programinngechniques for Economic Develppment. U.N. Commission for Asia and the Far East,*I961. . Studies in Long Term Economic Projections for the World Economy. New York: U.N., 1964. Vatikiotis, P. J. (ed). Egypt Since the Revolution. London: George AIlen and Unwin, 1968. Articles Abdel-Rehman, Ibrahim Helmi. "Comprehensive Economic Planning in the U.A.R." Memo No. 196, I.N.P., Cairo, 1962. 194 Adelman, Irma, and Chenery, Hollis B. "Foreign Aid and Economic Development: The Case of Greece." R.E. & SO, Feb.' 1966. Alexander, Sydney. "Effects of a Devaluation on a Trade Balance." I.M.F. Staff Papers. Vol. II, April, 1952. Bhagwati, Jagdish N. and Chacravarty, Sukhamoy. "Contribu- tions to Indian Economic Analysis: A Survey." A.E.R., Vol. LIX, No. 4, Part 2, Supplement, September, 1969. Bruton, Henry J. "Growth Models and UnderdevelOped Economies." J.P.E., Vol. LXIII, August, 1955. Cairncross, A. K. "Programmes as Instruments of Co- ordination." Scottish Journal of Political Economy. June, 1961. Chenery, Hollis B. "Development Policies and Programmes." Economic Bulletin for Latin America. III, No. 1, March, 1958. . "Comparative Advantage and Development Policy." A.E.R. Vol. L, March, 1960. , and Bruno, Michael. "Development Alternatives in an Open Economy: The Case of Israel." The Economic Journal. Vol. LXXII, March, 1962. , and Kretschmer, K. "Resource Allocation for Economic Development." Econometrica, Vol. XXIV, Oct., 1956. , and Taylor, L. J. "Development Patterns: Among Countries and Overtime." R.E. & 8., Nov., 1968. El-Emam, Mohamed M. "A Production Function for Egyptian Agriculture, 1913-1955." Memo No. 259, I.N.P. Cairo, , 1962. Fei, John and Ranis, Gustav. "A Study of Planning Methodology with Special Reference to Pakistan's Second Five-Year Plan," Monographs in_the Economics 9f Develgpmepp, No. l, KaraEHi: PThe Institute of Development Economics, 1960. . "Foreign Assistance and Economic Development: Comment," A.E.R., Vol. LVIII, Sept., 1968. 195 Frankel, Marvin. "The Production Function in Allocation and Growth: A Synthesis." A.E.R., Vol. LII, No. 5, Dec., 1962. Frisch, Ragner. "How to Plan," Memo No. 380, I.N.P., Cairo, Dec., 1963. Goodwin, R. M. "The Optimal Growth Path for an Under- developed Economy." Economic Journal, Vol. LXVI, Dec., 1956. Hansen, Bent. "The National Outlay of the U.A.R. (Egypt), 1937-1939 and 1945-1962/63." Memo No. 377, I.N.P., Cairo, 1963. . "Savings in the U.A.R. (Egypt), 1938/39 and 1945/ 46 - 1962/63." Memo. No. 551, I.N.P. Cairo, 1965. . "Marginal Productivity Wage Theory and Subsist- ence Wage Theory in Egyptian Agriculture." J.D.S. Vol. II, July, 1966. . "The Distributive Share in Egyptian Agriculture, 1897-1961." International Economic Review, Vol. IX, June, 1968. . "Planning and Economic Growth in the U.A.R. (Egypt) 1960-65." in Egypt Since the Revolution, P. J. Vatikioties (ed.), London: George Allen and Unwin, 1968. . "Employment and Wages in Rural Egypt." A.E.R. Vol. LIX, No. 3, June, 1969. , and El-Tomy, Mona. "The Seasonal Employment Profile in Egyptian Agriculture." J.D.S., Vol. I, July, 1965. ., and Mead, Donald. "The National Income of the U.A.R. (Egypt), 1939-1962." Memo No. 355, I.N.P. Cairo, 1963. Harsanyi, John C. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility." J.P.E., Vol. 63, 1955. Reprinted in Arrow, K. and Scitovsky, T. (eds.) Readings in Welfare Economics A.E.A., Vol. XII, 1969. Ho, Samuel, P. S. "Development Alternatives--The Case of Taiwan," Yale Economic Essays, Vol. V, No. 1, Spring, 1965. 196 Kirschen, Etienne S. and Morissens, Lucien. "The Objec- tives and Instruments of Economic Policy." in Heckman, Bert, Quantitative Planning of Economic Policy. The Brookings Institution, I965. Kheir, El-Dine, Hanaa. "The Cotton Production Function in the U.A.R. and Its Relation to Technical Progress and Disguised Unemployment." Memo No. 370, I.N.P. Cairo, 1963. Lewis, W. Arthur. "Economic Development with Unlimited Supplies of Labor." The Manchester School, May, 1954, Printed in Agrawela A.N. and Singh S. P. The Economics of Underdevelopment. New York: Oxford University Press, 1958. Mabro, Robert. "Industrial Growth, Aggricultural Under- Employment and the Lewis Model. The Egyptian Case, 1937-1965." JeDoSo, V01. 3' (1111)], 1967a Manne, A. S., and Rudra, A. "A Consistency Model of India's Fourth Plan." Sankhya, Series B, Vol. 27, Parts 1 and 2, 1965. McKinnon, Ronald I. "Foreign Exchange Constraints in Economic DevelOpment and Efficient Aid Alloca- tion." Economic Journal, Vol. LXXIV, June, 1964. Owen, W. F. "Land and Water Use in the Egyptian High Dam Era." Land Economics, Vol. XL, No. 3, August, 1964. Ranis, Gustav and Fei, John. "A Theory of Economic Development," A.E.R., Vol. LI, Sept., 1961. Reynolds, Lloyd G. "Economic Development with Surplus Labor: Some Complications," Oxford Economic Papers, Vol. XXI, No. 1, March, 1969. Solow, Robert M. "A Contritution to the Theory of Econo- mic Growth," Q.J.E., Feb., 1956. Stern, Robert M. "Price Responsiveness of Egyptian Cotton Producers." Kyklos, Vol. XII, Fasc 3, 1959. Swan, Trevor W. "Economic Growth and Capital Accumula- tion," Economic Record, Novemben 1956. United Nations. "Use of Models in Programming," Industriali- zation and Productivity Bulletin, Vol. IV, April, 1961. 197 Unpublished Material El-Sherbiny, Naiem A. "Comparative Advantage and Develop- ment Planning Under the Foreign Exchange Con- straints with Special Reference to Egypt." Un— published Ph.D. dissertation, University of California at Berkeley, 1969. Machen, Arthur. "Development Alternatives in Pakistan: A Multisectoral and Regional Analysis of Planning Problems." Unpublished Ph.D. dissertation, Harvard University, 1969. Moheiddin, Amr. "Agricultural Investment and Employment in Egypt Since 1935." Unpublished Ph.D. disser- tation, University of London, 1966. Prodromidis, Kyprianos. "An Economic Planning Model: The Case of Greece." Unpublished Ph.D. disseration, Wayne State University, 1968. APPENDICES APPENDIX I DEFINITION OF THE VARIABLES OF THE MODEL This appendix will be concerned with laying down the definitions of the different variables that constitute the model, and the method used for estimating their values. The first section will be concerned with these two problems, while the second section will show the values of these vari- ables over the period 1959/60-1965/66, in current prices and in m.L.E. A. 1. Definition of Variables (Y) This represents gross domestic income (G.D.Y.). Data for this variable are provided in the N.B.E. Economic Bulletin, Section 7/lb. (Yi) This variable shows the contribution of the in- dustrial sector to G.D.Y. The sectOr is defined here so as to include industry and mining, electricity, and construction. Data concerning this variable are pro- vided in the N.B.E., Economic Bulletin, Section 7/lb. (Ya) This indicates.the contribution of the agricul- tural sector to G.D.Y. Data for this variable are provided in the N.B.E., Economic Bulletin, Section 7/lb. (YS) This variable represents the contribution of the services sector to G.D.Y. The sector is defined such 198 199 as to include transportation, communication and storage, trade and finance, housing, public utilities, and other services. Data for this variable are provided in the N.B.E., Economic Bulletin, Section 7/1b. (Yg) This variable shows current budget net revenue. It includes the classical sources of revenue for the government such as taxes on income and wealth, commodity and other taxes, and other revenues for the government. An estimate for this variable up to 1962/63 appears in B. Hansen, "The National Outlay of the U.A.R. (Egypt)," I.N.P.C. Memo No. 377, 1963. For later years an attempt will be made to obtain these data from the official bulletins. See, The General Assembly, Report of the Plan, Budget, and Final Accounts Committee about Mone- tary and Economic Policy of the Budget Project of 1965466, p. 20. (Hereafter referred to as the Report . . .). The estimates in this Report, however, include beside taxes, and other revenues of the government, the surplus of the revenue of the public sector, and the revenue of public utilities, and these have to be ex- cluded to be consistent with estimates for earlier years, and also to satisfy the sector classification used in this study. (Yh) This shows household income. Data for this vari- able will be obtained from the accounting equation No. (2): Y = Yg + Yh. Data for (Y) and (Y9) is provided 200 in the next section, and the sources of data were ex- plained in items (1) and (5) above. By subtracting these two figures, the values for (Yh) is obtained. (GP) This variable represents government payments to the household sector in the form of wages and salaries, and interest payments and price subsidies (direct social transfers are quite negligible in Egypt). Data for these two components for 1962/63-1965/66 are taken from the Report . . . , p. 19. For earlier years, data about interest payments and price subsidies are taken from B. Hansen and G. Marzouk, op. cit., p. 323, and data about wages and salaries for the first year 1959/ 60 is taken from the Frame of the First Five Year Plan for Economic and Social Development, p. 160. For the other two years l960/6lsl961/62, the figures are the author's guess. It may be noted that taxes from wages and salaries of government employees has to be deducted from this figure. These are shown for 1959/60-1962/63 t in the Budget Reports, several issues, while the addi- tional three figures are the author's estimate. The following table (Table A.1) shows the method of obtain- ing the values of Gp for the period 1959/60-1965/66. 201 Table A.l--Government payments to the household sector. 1959/ 1960/ 1961/ 1962/ 1963/ 1964/ 1965/ Year 60 61 62 63 64 65 66 Wages and salaries 143.3 152.6 162.4 166.9 186.4 208.0 234.9 4. Interest payments and price 15.0 18.8 30.3 54.0 56.6 62.2 75.5 subsidies Taxes from govern- ment employees 1.3 1.7 1.7 1.6 1.8 2.0 2.3 Gp 157.0 169.7 191.0 219.3 241.2 268.2 308.1 8. ($9) This variable represents government savings in the budget. It will be calculated as follows: From data about current budget net revenue (item 5 above), public consumption and interest payments and price subsidies has to be deducted to get (89). Data about public con- sumption is shown in the Statistical Handbook, United Arab Republic (1952-1967), General Agency for Public Mobilization and Statistics, 1968 (hereafter: S.H.), p. 223; while data for interest payments and price sub- sidies are taken from Table A.1. The following table (Table A.2) shows the calculation of $9. 202 Table A.2——Government saving in the budget. Year 1923/ 60/61 61/62 62/63 63/64 64/65 65/66 Current budget net revenue 259.5 263.6 260.3 325.5 357.0 385.1 424.7 Public consumption 228.1 255.9 247.1 318.2 401.8 431.3 475.0 Interest payments and price 15.0 18.8 30.3 54.0 56.6 62.2 75.0 subsidies S 9 26.4 —11.1 -17.1 -46.7-101.4 -98.4-125.8 9. 10. 11. (Ge) Government expenditures on goods and services. This is calculated from the accounting equation No. 6, Y = G + G + S . g P e g (Cga) This represents government consumption of agri- cultural commodities. Data for this variable are provided in the Report . . . , p. 26, for the years 1962/63-1964/65. For the other years, these figures will be extrapolated with an assumption of 3 per cent annual rate of increase. (Cg) This shows government consumption of goods produced by the industrial and services sectors. Data for this variable will be obtained from the accounting equation No. 7, 203 12. (Sh) This variable represents household savings. Data for domestic savings are provided in the S.H., p. 223, and by subtraction of government savings in the budget (item 8, above), one can get the data for house- hold savings. It should be stressed that these figures for household savings include retained profits in pri- vate and public companies, and pensions and insurance funds accumulations outside the government budget. Table A.3 shows how to reach these figures. Table A.3--Household savings. 1959/ Year 60 60/61 61/62 62/63 63/64 64/65 65/66 Total domestic savings 175.9 210.1 164.7 195.6 236.8 320.6 315.9 Government savings in the budget 26.4 —ll.l -17.1 -46.7-101.4 -98.4-125.8 Household savings 149.5 221.2 181.8 243.3 338.2 419.0 441.7 l3. (Mm) This variable represents imports of manufactured goods for final consumption. Data for this variable are provided in the S.H., pp. 229-230. It includes the imports of prepared foodstuffs, beverage and tobacco, paper and paper products, textiles and textile articles, footwear, headgear, umbrellas, artificial flowers, articles of stone, plaster, cement, asbestos and glass, 14. 15. 16. 17. 204 optical, cinematographic surgical instruments and watches, arms and munition, miscellaneous manufactured articles, and works of art, collectors pieces, and antiques. (Mi) This variable refers to imports of intermediate goods for the industrial sector. Data for this item are provided in the S.H., pp. 229-230, and it includes mineral products, products of chemical industries, artificial resins and plastic materials, cellulose and rubber, rawhides and skins, furskins and articles thereof, wood and its products, base metals and arti- cles of base metals. (Ma) This represents imports of agricultural goods for final consumption. Data for this variable are provided in the S.H., p. 229, and it includes living animals and its products, vegetable products, and fats, oils and its products. (MS) This variable refers to imports of services. This item includes all invisible imports which are provided in several issues of the Central Bank of Egypt, Economic Review. (Mk) This shows imports of capital goods. It includes machinery, and mechanical appliances electrical, and vehicles, aircraft, and parts thereof. These data are provided in the S.H., pp. 229-230. 18. 19. 20. 21. 205 (Bi) This represents exports of the industrial sector. Data for this variable are provided in the S.H., pp. 227-228. It includes prepared foodstuffs, beverages and tobacco, mineral products, products of chemical industries, artificial resins, and plastic materials, cellulose and rubber, rawhides and skins, furskins and articles thereof, wood and its products, paper and its products, textile and textile products, footwear, etc., articles of stone, of plaster, cement asbestos and glass, pearls, precious stones, etc., base metals and articles of base metals, machinery and mechanical ap- pliances, vehicles, aircraft, and parts thereof, Opti- cal, cinematographic, surgical instruments and watches, arms and munitions, miscellaneous manufactures articles, and works of art, collectors pieces and antiques. (Ea) This item represents the exports of the agricul- tural sector. Data for this variable are provided in the S.H., p. 227, and it includes living animals, and its products, fats, oil and its products. ‘ (ES) This represents exports of services (invisible exports). Data for this variable will be provided through the accounting equation No. 18, M.+M+M +M+M=E.+E+E+S. 1 m a s k 1 a s f (Ii) This shows investment of the industrial sector. Data for this variable are provided in the S.H., p. 218, 22. 23. 24. 25. 206 and it includes investment in industry, electricity, and construction. (Ia) This refers to investment in the agricultural sector. Data for this variable are provided in the S.H., p. 218, and it includes agriculture, irrigation and drainage, and the High Dam. (Is) This represents investments in the services sector. Data for this variable are provided in the S.H., p. 218, and it includes transportation and means of communica- tions, and Suez Canal, finance and trade, housing, public utilities, and other services. (Id) Total investment expenditure on domestic products of the industrial and services sectors. Data for this variable will be obtained from the accounting equation No. 11, +M=I.+I-l-I. 1 a s (Sf) This shows net foreign borrowing (foreign saving). Data for this variable could be derived from the S.H., by subtracting figures for gross savings, p. 223, from figures for gross investments, p. 218. This will be shown in Table A.4. Table A.4--Net foreign borrowing. Year 1959/60 60/61 61/62 62163 63/64 64/65 65/66 Gross investment 171.4 225.6 251.1 299.6 372.4 364.3 379.1 Gross saving 175.9 210.1 164.7 195.6 236.8 320.6 315.9 Net foreign -4.5 15.5 86.4 104.0 135.6 43.7 63.2 borrowing 207 26. (0a) This shows the output of the agricultural sector. Data about agricultural production are provided in the S.H., p. 219. For these data to be adequate with the system of national income accounts used in this study, one should deduct from these figures the value of agricultural production that is used as raw materials in the agricultural sector itself. These consist mainly of seeds and fodder. Data about these two items are provided in the N.B.E., Economic Bulletin, Section 5/1.b. The only shortcoming is that these data are for calendar years, while fiscal years are being used here. It will be assumed that the 1959 figures correspond to 1959/60, and so on. The following table (Table A.5) presents these steps. Table A.5--Agricultura1 output. 1959/ Year 60 60/61 61/62 62/63 63/64 64/65 65/66 Gross agricultural 581.6 582.7 564.8 625.7 677.0 310.3 886.3 production Seeds _ 19.6 19.5 20.4 21.3 19.8 19.4 25.4 Fodder - 59.8 62.8 67.1 69.3 72.6 91.7 143.7 OA - 502.2 500.4 477.3 535.1 584.6 699.7 717.2 27. (Iia) This shows industrial inputs into agriculture, and could be calculated from the accounting equation No. 14, 28. 29. 30. 31. 32. 208 = l (oa Iia + Ya). (151) This variable represents agricultural inputs into industry. These consist mainly of the raw materials re- quired for the food industries and cotton. An estimate of this variable for the years 1959/60 and 1961/62—1964/ 65 is provided by the ministry of planning. The rest will be the author's guess. (Oi) This represents industrial output, and will be cal- culated from the accounting equation No. 11, O. = M. + I'. + Y.. 1 1 a1 1 (Di) This shows the total amount of domestically pro- duced industrial goods available for final demand. It will be calculated from the accounting equation No. 12, = ' , 3 , Oi Oi + E1 + Ila (Ci) Total amount of industrial goods available for final domestic demand. It will be calculated from the accOunt- ing equation No. 9, = I Ci Mm + Oi (CS) This shows the total amount of services output avail- able for final domestic demand. It will be calculated from the accounting equation No. 16, 33. 34. 35. 36. 37. 209 (Gig) Total amount of goods and services produced by the industrial and services sectors available for final consumption. This variable will be calculated from the accounting equation No. 8, (Ch) Total amount of goods and services produced for the industrial and services sectors available for final consumption by the household sector. It will be calculated from the accounting equation No. 13, Cis = Cg + Ch. (0;) Total amount of domestically produced agricultural goods available for final domestic consumption. This variable will be calculated from the accounting equa- tion No. 15, O = 0' + E + I'.. a a a a1 (Ca) Total amount of agricultural goods available for final domestic consumption. It will be calculated by the accounting equation No. 4, C = O' + M . a a a (Cha) Total amount of agricultural goods available for final domestic consumption by the household sector. It will be calculated from the accounting equation No. 5, Values for the variables for the period 1959160-1965/66 The following table (Table A.6) will show time series data for the variables of the model for the period 1959/60-1965/66. The method and sources of data were explained in the previous section. All the values in this table will be in current prices, and in L. E. Millions. 211 Table A.6 Data for the variables of the Model (1959/60 - 1965/66). Year 1959/60 60/61 61/62 .62/63 63/64 64/65 65/66 1. Y 1285.2 1363.5 1411.1 1562.8 1739.6 1924.1 2087.1 2. Yi 313.2 342.0 399.8 452.8 507.6 539.2 583.2 3. Ya 405.0 402.7 373.0 425.0 475.0 570.1 614.7 4. YS 567.0 618.8 638.3 684.8 757.0 814.8 889.2 5. Y9 259.5 263.6 260.3 325.5 357.0 385.1 424.7 6. Yh 1025.7 1099.9 1150.8 1237.3 1382.6 1539.0 1662.4 7. Gp 157.0 169.7 191.0 219.3 241.2 268.2 308.1 8. S9 26.4 -ll.1 -17.1 —46.7 -101.4 -98.4 -125.8 9. Ge 76.1 105.0 86.4 152.9 217.2 215.3 242.3 10. Cga 4.4 4.5 4.6 4.8 4.8 6.2 6.4 11. C9 71.7 100.5 81.8 148.1 212.4 209.1 236.0 12. Sh 149.5 221.2 181.8 242.3 338.2 419.0 441.7 13. Mm 45.4 45.2 50.2 54.5 50.5 51.6 67.8 14. Mi 124.1 115.4 123.2 171.2 156.9 147.2 175.0 15. Ma 42.3 38.4 53.5 76.3 102.7 104.3 106.3 16. Ms 59.6 82.0 73.8 78.6 92.3 92.1 104.2 17. Mk 16.5 25.7 44.4 41.2 108.6 97.6 114.0 18. E 169.2 174.3 138.2 173.0 192.3 226.0 222.0 Table A.6 (Continued) 212 Year 1959/60 ,60/61 61/62 62/63 63/64 64/65 65/66 19. Ea 10.7 14.7 12.6 24.8 46.0 39.2 36.5 20. ES 112.5 102.2 107.9 120.0 137.1 183.9 245.6 21. I1 55.5 73.4 61.6 95.9 145.5 158.3 161.9 22. Ia 29.5 38.2 51.9 73.1 102.1 89.0 82.3 23. IS 86.4 114.0 142.6 129.9 124.8 117.0 134.9 24. Id 154.9 199.9 206.7 258.4 263.8 266.7 267.1 25. Sf -4.5 15.5 86.4 104.0 135.6 43.7 63.2 26. 0A 502.2 500.4 477.3 535.1 584.6 699.7 717.2 27. Iia 97.2 97.7 104.3 109.8 109.6 129.6 102.5 28. Iéi 444.5 430.0 417.0 494.0 521.0 .558.2 614.0 29. Oi 857.3 887.4 940.0 1118.0 1185.5 1300.4 1383.2 30. Oi 590.9 615.4 697.5 835.2 883.6 944.8 1058.7 31. Ci 636.3 660.6 747.7 889.7 934.1 996.4 1126.5 32. CS 514.1 598.6 604.2 643.4 712.2 723.0 747.8 33. Cis 995.5 1059.3 1145.2 1274.7 1382.5 1452.7 1609.2 34. Ch 923.8 958.8 1063.4 1126.6 1170.1 1243.6 1373.2 35. 0; 71.5 55.7 47.7 17.3 17.6 46.5 55.7 36. Ca 113.8 93.5 101.2 93.6 119.8 150.8 162.0 37. C 109.4 88.6 96.6 88.8 115.0 144.6 155.6 APPENDIX II SOLUTION OF THE MODEL In this appendix, the model that was stated explicitly at the end of Chapter IV, will be solved abstractly to de- termine the value of G.D.Y. (Y) in terms of industrial ex- ports (Ei), saving rate (a), exogenous variables, parameters, and base year values. Once the value of (Y) is determined, it will be shown that all the other variables could be de- termined too. The process through which the solution is determined could be shown as follows: In addition to the exogenous variables (eqs. 32-38) that are already known, one other variable could be deter- mined from these exogenous variables, and that is Ge' The remaining (30) equation in (29) variables1 has to be solved simultaneously in order to find a solution for the model. This is done as follows: eq. (16) gives the following: Y=C+E-M S S S S 1It may be noted that one of the accounting equa-' tions is not independent, i.e., it could be determined once the others are known. Thus, the number of independent equations is equal to the number of the unknowns. 213 214 But, from eq. (31) Ys is expressed as a function Y; Also from eq. (34), E5 is given: E=E S S Also from eq. (28), Ms is expressed as a function of YS, which could, in turn, be expressed in terms of Y (using eq. 31), thus (A.1) M = n Y = u w Y S SS SS The remaining variable in eq. (16) that has to be expressed in terms of Y is CS. This is done as follows: Equation (9) gives the following value for CS: (A.2) C = C. + I - C. But, from eq. (10); From eq. (26): This could be expressed in terms of Y by the use of eq. (30): (A.3) M 11 (LY 215 and, from eq. (13) O! = O. - E. - I! 1 1 1 1a But from eq. (12): O. = M. + I'. + Y. 1 a1 1 which could be written, after substituting for Mi from eq. (27) and for Iéi from eq. (24) as Oi = uiOi + Bioi + Yi Rearranging, _ 1 i‘1-ui-Biyi This could also be expressed in terms of Y be substituting for Yi from eq. (30), thus: (4) 0 $1 Y A. ' . = 1 I “i 71 Also, from eq. (24): '= I1a BaOa But, from eq. (14): O =I! +Y =80 +Y a 1a a a a a Rearranging, _ 1 0a - 1 - 8 Ya 216 This could be expressed also in terms of Y by substituting for Ya from eqs. (1, 30, and 31). Thus: 1 - W1 - tI’s To express Iia in terms of Y we substitute for 0a from the last equation eq. (A.5): (A.6) I! = Y To get the value of Ci in terms of Y, one should substitute for Oi in eq. (13) from eqs. (A.4) and (A.6), and for Mm from eq. (A.3) into eq. (10): wi Ba(1 - 1pi - W5) ci = I _ “i _ Bi y - _. 1 _ Ba Y - Ei + “min which by rearranging, becomes: [ wi Ba(l ' wi ‘ ws) - + . Y - . 1 - “i - Bi 1 - Ba umwi] E1 (A.7) Ci = The next item that will be considered from eq. (A.2) 1s Cis' From eq. (8): Cis = C9 + Ch But from eq. (36), C9 is given: 0 = C', 9 g and from eq. (3), Ch could be expressed as: ch = GP + Yh - cha - sh 217 But: Eq. (38) states the following G = 5 ; P P eq. (22) expresses Yh as a function of Y: Yh = (1 - t)Y; eq. (23) expresses Sh as: (A.8) sh = a(Yh + Gp) = a[(1 - t)Y + Gp] after substituting for Yh from eq. (22); and from eq. Cha = Ca - Cga But from eq. (4) Ca could be expressed as: a a a and, eq. (15) expresses 0; as: o' = o - E - I'. a a a a1 which by substitution for 0a from (A.5), and for Iéi from eqs. (24) and (A.4), becomes: 1 - w. -w B.w. (A.9) o; = I _18 s Y - 1 _ l f B Y - E a Hi i a Also Ma and Ea are given from eq. (32) and (33) as: M =.fi a a E = E a a (5) 218 Substituting for Ma and 0; from eqs. (32) and (A.9) re- spectively into eq. (4): l-wi-ws Bill) 1-sa '1-ui i (A.10) c=[ ]Y-E +1? a - Bi a a Eq. (37) gives Cga as an exogenous variable: Cga = Cga Substituting this value for C and substituting for Ca ga from (A.lO) into eq. 5, C could be determined as a ha function of Y. Thus 1 - 111. -' W 8.11)- _ l S _ l l _ — — _ To get the value of Ch’ one should now substitute into eq. (3) for: Gp from eq. (38), Yh from eq. (22), for S from eq. (A.8), and for C a from eq. (A.11): h 1 - w. -¢ B-W. (A.12)c=€+(1-t)Y- l S- _11_ Y + Ea - Ma + Cga - a[(1 - t)Y + GP] Substituting into Cis in eq. (8) for C from (A.12) and h Cg from eq. (36), one gets: f. 1 - ¢_ _ W 3,¢, .r ,_*- - _ _ 1 s _ 1 1 Y + Ea - Ma + Cga - d[(1-t)Y + Gp] 219 The remaining variable in equation (A.2) that has to be expressed in terms of Y is Id. From equation (11), Id is expressed as Id = Ii + Ia + IS - Mk But from eq. (29): M = 11k(Ii + Ia + Is) Substituting for Mk' Id will be: Id = (1-Uk)(Ii + Ia + IS) Substituting for Ii’ Ia, and Is from eq.s (19), (20), and (21) respectively: p p. p (A.l4) Id - (1 11k) [Fi— (Yi Yi) + B; (Ya Ya) 4' b8 (Y8 Y8) Substituting for Yi' Y3, and Ya from eqs. (30), (31), and (30, 31, and 1) respectively, and rearranging: Oiwi Da(l-Wi'ws) DSWS (A.15) I = (l-u ) + + Y 6 k bi ba b8 9. p o -(1-u) 1Y‘.’+—"i‘-Y°+—‘-”-Y° k [:5; 1 a a b8 5 Returning to the original equation (eq. 16), and substitut- ing for Ys from.eq. (31) for BS from eq. (34) and for Ms from eq. (A.1) and also substituting for C1 from eq. (A.7). for Cis form eq. (A.13) and for Id from eq. (A.15) into 220 C8 in eq. (A.2) and substituting this value for Cs into eq. (16), one gets: _ _ 1- W W B1wi- _ (A.16) WSY = Cg 4' GP '1' (l-t)Y " [Ti-177 Y + Ea-Ma p.W. ll +Ega-a[(l- -t)Y+Gp]+ (1" 11k) ["5— D (l-W--W ) D W ”W a 1 s s s + ba + b Y - (l-uk E_Y s + 33 o + is Yo _ Wi _ Ba(l-wi-ws) ba a bS s l-ui-Bi 1-Ba + 11me Y + E1 + Es — uswsY Which could be written as: A + Ei - B(a) (A.17) Y = C(a) + D Where A, B, C, and D are constants, that will be determined after the estimation of the parameters and exogenous variables. Once the value of Y is determined, the other vari- ables could also be determined by the use of one or another of the behavioral or accunting relationships that consti- tute the original model. The only variables that are not determined up to now are S9 and S These two variables f. could be determined through the two equations that have 221 not been utilized yet.1 The first of these equations is: Y = G + G + S g P e 9 Looking at this equation, one can find that once Y is determined, then Yh could be determined by the use of eqs. (22) and (2). Since Gp and Ge are exoqenous vari- ables, then the value of S9 will be known once Yg is known. The second equation that has not been utilized yet is: Mi + Mm + Ma + Ms + Mk = Ei + Ea + ES + Sf To express S as a function of Ei is a relatively f easy matter, since Ba and ES are exogenous variables, and the value of the different import components could be determined once Y is known. The following steps will be concerned with the determination of the value of Sf. From eq. (18), Sf could be written as: (A.18) Sf = Mi + Mm + Ma + MS + Mk - (Ei + Ea + ES) But: from eqs. (27), (A.1), and (30): 19 uiwi (A. ) Mi = Mi (Oi) — FlTl—‘B—i Y from eqs. (26), and (30): 1Equation 17 was not utilized in deriving the solu- tion, because it is not independent of the others, i.e., it will be known if the other equations are already known. 222 (A.20) Mm = uin = umwi Y from eq. (32): M = M from eqs. (28) and (31): (A.21) M8 = USYS = HSWS Y and from eqs. (29) and (A.6): (A.22) M = uk(Ii+Ia+IS) = k p w p. o p s s 1 o a o s o 4' b3] " 11k ET Yi "l" 5'— Ya 4' b—- YS] Substituting for Mi' Mm, Ma’ Ms' and Mk from eqs. (A.19), (A.20), (32), and (A.21), and (A.22) respectively and for Ea and ES from eqs. (33) and (34) into eq. (A.18), one gets: (A 23) s = uiwi + um‘pi + usws + ukoiwi + ukoa(1-wi-ws> . f l-ui-Ei T ba u p 0:] [6. p p ] + --- Y - n Y. + —_ y + __ Y b8 k Fi. 1 ha a b8 3 which could be simplified upon the substitution for the value of Y from eq. (A.17) as: 223 A + Ei -B(a) (A.24) sf = F - H - Ei C(a) + D where F and H are constants that will be determined after the values of the parameters and exogenous variables are determined. In addition to eqs. (A.17) and (A.24), one additional constraint needs to be specified. This is the constraint imposed by the full-employment target. The full employ- ment goal will be specified, (depending on the value of $1, £a' and is chosen) by the value that Y has to take in order to achieve full employment. The full employment equilibrium is given by eq. \1!V.25) as follows: (A.25) L = L. + L + L 1 a s The supply of labor (L) in 1975, was estimated by eq. (IV.50) and thus, it is known = i. From eqs. (22), (23), and (24) we have _ o _ t Li- 41(1 2'1) 1’1! __ O _ 1: La - Aa(l 2a) ya, and _ o _ t Ls — 18(1 13) ys. Substituting for Li' La and LS from these three equations, and substituting for Yi’ Ya, and Y8 from eqs. (29); (1), (29) and (30): and (30), into eq. (A.23), we get 224 L"! I _ 12(1-£)tin + 12(1-za)t(1-wi-ws)y + 12(1-zs)twsy o t o t o t [kiwiu-z) + Kan-wi-WSHl-fia) + Aswsu-zs) ]Y L"! l Which by rearranging gives us the labor supply constraint: (A.26) Y = L .o t o t o t 1101(1-11) + la(1-wi-ws)(1-£a) + 1805(1-28) APPENDIX III ESTIMATES OF THE PARAMETERS AND EXOGENOUS VARIABLES This appendix will be concerned with the estimation of the parameters of the behavioral equations and of the exogenous variables. Before going into the details of this process, it should be stressed, as it has already been done in the text, that no sophisticated econometrics techniques will be used in this process. This is mainly due to several reasons: the limited number of observa- tions available for each variable; data for some variables were obtained as residuals through the use of one or more of the accounting equations; the institutional changes that took place in the Egyptian economy by the end of the fifties and the beginning of the sixties, which make it difficult to judge if the changes in the data reflect technical and economic changes or that it reflects mainly changes in the institutional structure of the economy; and last but not least the definition of some variables is not availabe, and sometimes they are inconsistent. For all these reasons, the simplest of all statistical methods will be used with the hOpe that such studies might suggest possible ways of improvement in data collection, 225 226 and once these improVements take place, they could be substituted instead of the rough estimates that have been used here (provided, of course, that the structure of the economy will not have been radically changed to make the model inadequate for the analysis). The process of estimation will depend mainly on the data regarding each variable that was presented in Table A.6. These data, however, were in current prices and to estimate the parameters from these data will mean that the estimates reflect price changes as well as technologi- cal and/or behavioral changes. One way of eliminating the effects of price changes is to estimate all the values of the relevant variables in terms of the base year prices (1965/66). The price deflator of G.D.Y. that will be used here is the one prepared by Professor B. Hansen1 for the years 1959/60-1964/65. For the year 1965/66, the im- plicit price deflator of G.D.Y. used by the Ministry of Planning in determining constant price estimates of G.D.Y. of that year, will be used.2 For some variables,the price deflator chosen was the general number of industrial products and materials pre- pared by the Central Agency for Public Mobilization and 1B. Hansen, "Planning and Economic Growth in the U.A.R., 1960-65'" OE Cite, p. 280 2N.B.E., Economic Bulletin, Vol. XXII, No. 2, 1969, Section 7/1.b. 227 Statistics. Finally, for variables related to the foreign trade sectors (imports, and exports), due to the difficulty of finding a price deflator of the Egyptian imports and ex- ports, it was decided to use as a proxy the price deflator of the imports and exports of developing countries in general.1 Table A.7 expresses these price deflators in terms of 1965/66 prices. A. Parameters l. The estimation of pi, pa, and p3. It was assumed in the text, that these represent the ratio of investment in the production sectors in the tar- get year of the model, to total investment during the pre- ceding years of the model. For example, I1974/75 p - 1 etc o - p O 1 Ii6/67+"'+IZ3/74 The estimation of these parameters will be assumed to be: I65/66 i o-= 1 Ii7/58+...+Ig4/65 ' and similarly for pa and p8. Table A.8 gives data about 'these variables in current ‘and 1965/66 prices for these years. 1U.N., "Monthly Bulletin of Statistics," July, 1966. 228 manomxm mom OOH O.OOH ~.OOH O.OOH O.OOH O.OOH O.OOH meaH moHum . . . . . . muuodeH mom OOH O HOH O OOH O OOH O «OH O HOH O OOH mecH moHum mamwumumz O O O O O O can mpogv OOH O OOH H OOH O OOH O OOH O OOH O OOH uoum HOHqusOOH mo .02 Hmumcmw OOH O.OOH O.OOH O.OOH O.~HH O.OHH 0.0HH .O.o.o Hmuoa OOH O.~OH O.OOH O.OOH O.HHH O.HHH O.~HH moOH>umm OOH O.OOH O.OOH O.OOH ~.OHH ~.OHH O.OHH OqusOcH OOH O.OOH O.OOH O.OHH O.OHH O.OHH O.OHH musuHsoHuOO OO\OO OO\OO OO\OO OO\OO ~O\HO HO\OO OO\OOOH .AOOH u Omoflum OO\OOOHO OHOOOHOOO moHumu-O.< «Hana 229 .mamwnmumfi paw muoopoum Hmfluumsoqw mo Hogans Hmnmsmm may ma Houmammp moflum mnav oomN om souiflo nmm .ommz .9 Sony swxmu muw3 Hum» man» How mmusmwm moaum uanHsOm .momam mxmu HHH3 mucmaumm>cfl Hmsuusm on thma no one on» osaoumv pmuoameoo ma vomnonm on» cmn3 umnu pomm may on map ma cowmsHoxm on» .560 swam on» EH ucmEumm>cH monaocfi #0: oc usmspmm>cw HonduHSOHumM How mwuamflm one .O.¢ mHan scum cmxmu mum OOmeuOOxOOOH mom amusmHmM O.OOH O.OO O.HOH O.OOH O.OO O.HOH OO\OO O.HOH O.OO O.OOH O.OHH O.OO O.OOH OOxOO 0.00H H.OO O.OOH O.O~H O.OO O.OOH OO\OO H.OOH O.OO O.OOH O.O~H O.OO 0.00 OO\~O H.wOH O.OO O.OO O.~OH O.OO O.HO ~O\HO H.HOH 0.00 O.OO O.OHH O.HO O.OO HO\OO O.OO O.OO O.OO O.OO O.O~ O.OO OO\OO O.OOH O.O~ O.OO H.~OH 0.0~ 0.00 OOO\OO 0.00H O.- ~.OO 0.00H O.HO 0.00 OOO\OOOH mH mm! OH mH me OH Ham» 72.9.: 1.2.95 wmmoflum mwmmme :H II .1» wmooaum ucmuuoo CH ll” W'W WIW WIW .muouomm coODUSpoum 0:» ca ucmEumm>cHnnm.¢ magma 230 From the previous table, pi, p and ps could be a estimated as follows, _ 161.9 _ Di - m — ”-129 _ 63.3 _ __ 134.9 _ 2. The estimation of b., b and b . 1 a s The production functions used in this model are of the fixed proportion type, i.e., those for which the aver- age productivity of capital is equal to the marginal produc- tivity. If data about capital stock and its distribution among sectors are available for Egypt, which it is not, it would have been preferable to calculate the average produc- tivity of capital (the output-capital ratio), instead of calculating the marginal productivity. This is especially true in the case of agricultural sector, where agricultural product could be affected by weather conditions and the like. Due to these factors, investments could be positive in one year, while output declines. To overcome this defect, and also to take a more realistic view in the estimation, it was decided to extend the number of observations to start from 1952/53-1965/66. The following tables (Tables A.9, A.10, and A.ll) will show these observations both in current prices and in 1965/66 prices. The purpose will be 231 to fit a simple least square regression line of the form AY = bI. In these tables, figures for gross investment in different sectors at current prices for the period 1952/53-1958/59 will be taken from D. Mead, op. cit., p. 240 and data about G.D.Y. at current prices for the same period, will be taken from the Statistical Pocket ngk_(l952-1963) published by the Department of Public Mobilization and Statistics, April, 1964. To express these in 1965/66 prices, the general number of industrial products and materials will be used to deflate invest- ment figures, while the implicit G.N.P. deflator used by B. Hansen and D. Mead, The National Income of the U.A.R. (Egypt) 1939-1962, Memo No. 355 (Cairo, I.N.P, July, 1963), Table 8 will be used for the period 1952/53-1958/59. From 1959/60 to 1965/66, current price figures were taken from Table A.6 and the price deflators are taken from Table A.7. 232 Table A.9--Investment and Income in the Industrial Sector. In Current Prices In 1965/66 Prices (L.E.M.) (L.E.M.) Year Ii Yi Ii Yi AYi 1952/53 35.3 152.0 44.1 194.3 -- 1953/54 38.5 167.0 48.9 207.7 13.4 1954/55 40.9 181.0 52.1 219.4 11.7 1955/56 58.7 197.0 67.0 235.0 15.6 1956/57 40.4 224.0 41.8 259.8 24.8 1957/58 43.3 256.0 46.2 297.5 37.7 1958/59 54.5 283.0 58.4 329.7 32.2 1959/60 55.5 313.2 58.0 367.4 37.7 1960/61 73.4 342.0 77.9 397.4 30.0 1961/62 61.6 399.8 67.0 456.6 59.2 1962/63 95.9 452.8 104.3 495.8 39.2 1963/64 145.5 507.6 155.8 537.5 41.7 1964/65 158.3 539.2 164.0 560.2 22.7 1965/66 161.9 583.2 161.9 583.2 23.0 From these figures, the simple least square estimate of b. will be 1 34,169.41 = 115,701.01 = '29532 233 Table A.10--Investment and Income in the Agricultural Sector. 1 i :— In Current Prices J: I In 1965/66 Prices (L.E.M.) (L.E.M.) Year Ial Ya Ia Ya AYa 1952/53 13.7 252.0 17.1 322.1 -- 53/54 14.8 262.0 18.8 325.9 3.8 54/55 15.3 301.0 19.5 364.8 38.9 55/56 18.0 342.0 20.5 408.0 43.2 56/57 19.6 374.0 20.3 433.8 25.8 57/58 21.2 381.0 22.6 442.7 8.9 58/59 24.8 364.0 26.6 424.1 -18.6 59/60 25.3 405.0 26.5 467.0 42.9 60/61 31.4 402.7 33.3 446.3 -2.7 61/62 37.5 373.0 40.8 430.1 -34.2 62/63 49.8 425.2 54.2 491.5 61.4 63/64 67.3 475.0 72.1 522.0 30.5 64/65 70.4 570.1 72.9 594.0 72.0 65/66 63.3 614.7 63.3 614.7 20.7 Notes: 1. Figures for High Dam investment were excluded from agricultural investment for the purposes of calculating the output-capital ratio in the agricultural sector since they did not contribute to output during this period of construction of the dam. From these figures, the simple least square estimate of ba W111 be: ZIaYa b - 13'631'33 — .57684. 2 - 23,717.48 - a a 21 234 Table A.11--Investments and Income in the Services Sector. In Current Prices In 1965/66 Prices (L.E.M.) (L.E.M.) Year Is Ys IS YS AYS 1952/53 69.6 402.0 86.9 513.8 -- 53/54 79.1 418.0 100.5 520.0 6.2 54/55 90.0 438.0 114.8 530.8 10.8 55/56 95.4 456.0 108.9 544.0 13.2 56/57 91.0 469.0 94.2 544.1 0.1 57/58 100.9 489.0 107.6 568.2 24.1 58/59 102.1 510.0 109.5 594.2 26.0 59/60 86.4 567.0 90.4 636.7 42.5 60/61 114.0 618.8 121.1 690.0 53.3 61/62 142.6 638.3 155.1 711.0 21.7 62/63 129.9 684.8 139.1 745.7 34.0 63/64 124.8 757.0 133.6 794.1 48.4 64/65 117.0 814.8 121.2 831.1 37.0 65/66 134.9 889.2 134.9 889.2 58.1 From these figures, the simple least square estimate of bs will be:b = Is Y3 = 45,930.03 = 24886 3 I2 184,558.75 ° 3 3. The estimation of (l-t): From equation no. (22), Y = (1-t)Y h From data about Yh and Y, a simple least square regression line will be fitted, where (l-t) is the slope of this line. Table A.12 gives current and 1965/66 prices for both variables. 235 Table A.12--G.D.Y. and Household Income. — :— L _ t -' In Current Prices1 In 1965/66 Prices2 (L.E.M.) (L.E.M.) Year Y Yh Y Yh 1959/60 1285.2 1025.7 1458.7 1164.2 60/61 1363.5 1099.9 1539.4 1244.8 61/62 1411.1 1150.8 1586.1 1293.5 62/63 1562.8 1237.3 1717.5 1359.8 63/64 1739.6 1382.6 1847.4 1468.3 64/65 1924.1 1539.0 1966.4 1634.4 65/66 2087.1 1662.4 2087.1 1662.4 Notes: A 6 1These figures for Y and Yh are taken from Table 2Both Y and Yh are deflated by the G.D.Y. deflator shown in Table A.7. From these figures, the simple least square estimate of (l-t) will be ZY Y _ _ h _ 17,397,557.13 _ (l t) "' -:Y'2 - 21,598—o6-W7 . - 080549 4. The estimate of (a) The behavioral equation no (23) gives household savings as a function of Sh = 0L(Yh + Gp) .A simple least square line will be fitted from the obser- vations of Sh' and Yh and Op. The following table (Table A.13) shows current and 1965/66 prices for these variables. 236 Table A.13--Household Saving, Government Payments, and House- hold Income. In Current Prices ‘— In 1965/66 Prices2 (L.E.M.) (L.E.M.) Year Sh Gp Sh Gp Yh (Gp+Yh) 1959/60 149.5 157.0 169.68 178.2 1164.2 1342.4 60/61 221.2 169.7 249.73 191.6 1244.8 1436.4 61/62 181.8 191.0 204.34 214.7 1293.5 1508.2 62/63 242.3 219.3 266.28 241.0 1359.8 1600.8 63/64 338.2 241.2 359.17 256.2 1468.3 1724.5 64/65 419.0 268.2 428.22 274.1 1634.4 1908.5 65/66 441.7 308.1 441.70 308.1 1662.4 1970.5 Notes: 1These figures for S and G are taken from Table (A.6). h p 2The current price estimates are deflated by the implicit deflator of G.D.Y., shown in Table (A.7). From these figures, the simple least square estimate for a will be: _ ZSh‘Gp+Yh) _ 3,627,953.60 _ 18893 _ -—__1—3-5—.__-' 2(Gp+Yh)2 19,30 , 3 35 5. The estimation of Bi and Ba. The behavioral equations no. (24) and (25 give the following: I — 237 .h.¢ manna cH s3onm mm3 mans .Houomm Hmnsuasoaumm may Eonm pmumumsmm mEoocfl Udpmmsoo mo HoumHmmc moaum uHoHHmEO on» GO poms uoumammp mofium 039m .h.« manna cw c3onm mm3 mans .HOpomm HoauumSUcfl on» Eoum pmumumcmm mEoocH oaumofioo mo Houmammo mowum DOUOHQEO on» ma poms Houmammp moaum one m .m.¢ magma Eoum cmxmu mum monsmwm mmmneH «mmuoz ~.OHO O.~OH ~.OHO O.~OH ~.mOOH 0.0~O ~.OOOH 0.000 OO\OO H.OOO 0.00H 0.000 0.0~H H.HOOH O.HOO 0.000H ~.OOO OO\OO 0.000 H.OHH 0.000 0.00H 0.000H O.~OO 0.00HH O.HNO OO\OO 0.0HO ~.ONH H.OOO 0.00H N.O-H H.HOO 0.0HHH 0.000 OOme 0.000 H.OHH 0.000 0.00H 0.000H 0.000 0.000 0.0HO mOxHO 0.000 0.0HH 0.000 0.00 O.HOOH 0.000 0.000 0.000 HO\OO 0.000 0.0HH «.mOO ~.OO 0.000H O.~HO 0.000 0.000 OO\OOOH mo OMH Omo OMH mHo OHWH Ho HWH A.E.m.HO A.E.m.HO A.E.m.HO A.E.m.HV 960» O0 HHm HGQHHSU GH “III [I mmoHum OO\OOOH :H HmmoHum Hamuuso OH mmOHum OO\OOOH EH .usmuoo Hansuasoflumm can .usmuso Hmflnumoch .mnsuasowumd oucfl musmcH HMOHHmSGGH .mnumnocH oucw muamcH amusuadowumdllva.¢ manna 238 I .— Iia — Bama)’ ' I I Table A.14 gives data about Iai and 01’ and Iia and 0a in both current and 1965/66 prices in order to estimate the coefficients Bi and Ba by least square techniques. From Table A.14 the estimates for Bi and Ba will be as follows: ZO.I' _ 1 ai _ 4,610,806.00 _ Bi - 73'2— - W ' -45935' i It may be noted that while industrial inputs into the agricultural sector (Iia) may be expected to follow the same trend in the past (it may even tend to increase as a result of increases in the use of chemical fertili- zers), this seems to be less certain in the case of agri— cultural inputs into the industrial sector (Iéi). With the increase in the industrial production, the share of industries that depend on agricultural raw materials will decline relative to the whole industrial output. There— fore, the value of Bi will be assumed to be .4 instead of the one estimated above. Also: 3 = _______. _ 517,636.06 :0: ' 2,812,434,9 .18405 239 6. The estimation of “i and us. The behavioral eqs. no. (26) and (27) give the following: Mi = ui(Oi) and M5 = us(Ys) The table on the following page (Table A.15) gives data about Mi' Oi’ MS and YS in both current and 1965/66 prices, in order to estimate ”1 and us. From this table, the estimates of pi and us will be as follows: zOiMi _ 1,244,144.86 _ “i = ‘E;‘2" 10,037,649.9 ’ '12395 i zY M s s _ 454,433.25 = .11204 “s =‘Eg‘2' ‘ 070507070703 S 7. The estimation of um. From the behavioral equation no (26): Through simple least square techniques, um is estimated to be: 2M Y. m 1 _ 182,772.73 _ .10814 “m = 2Y.2 ’ 1,690,063.25 ‘ J. 240 .b.¢ oanoe GO Houoom moofl>uom on» Eoum ooumuocom oEoocH oumHmoo on com: oco on» me Houoamoo ooOHm onev .h.< oanoe cw Houoom Hofiuumsocw on» Some ooumuonom oEoonH ouoamoo ou pom: ono on» we Houoamop ooeum one O .>.« oanoe GO Houoamoo oOOHm unomEO onp me Houoamoo.ooeum oneN .m.¢ oanme Eoum conou ohm monao> omoneH "mouoz O.OOO 0.00H ~.OOO ~.OOH ~.OOOH 0.00H 0.000H 0.00H OO\OO H.HOO 0.00 0.0HO H.OO H.HOOH 0.00H 0.000H ~.OOH OO\OO H.OOO H.OO 0.000 O.~O 0.00~H 0.00H 0.00HH 0.00H OO\OO 0.000 0.00 0.000 0.00 O.O~OH 0.00H 0.0HHH O.HOH OO\~O O.HHO 0.00 0.000 0.00 OOOOOH 0.0~H 0.000 0.0~H OO\HO 0.000 O.~O 0.0HO O.~O O.HOOH 0.0HH 0.000 0.0HH HO\OO O.OOO 0.00 0.000 0.00 0.000H 0.0~H 0.000 H.OOH OO\OOOH Owe mm: me O: OHo NH: H0 H2 1.2.m.HO 1.2.O.HO 1.2.6.81 1.2.O.HO HOOO mmOHum OO\OOOH cH mmoHum unmuuso EH monum OO\OOOH aH HOmoHum pamyuso 6H .111 .oEoonH .moow>nom cam .usmuso Hofluumsone .muuomEH mooe>uom .mnumsonH ounw manomEH ouoepofinoenelan.4 oanoe 241 Table A.16--Industria1 Income and Imports of Manufactured Goods. In Current Prices In 1965/66 Prices2 (L.E.M.) (L.E.M.) Year Yi Mm Yi Mm 1959/60 313.2 45.4 367.4 46.3 60/61 342.0 45.2 397.4 45.7 61/62 399.8 50.2 456.6 51.2 62/63 452.8 54.5 495.8 56.1 63/64 507.6 50.5 537.5 51.5 64/65 539.2 51.6 560.2 52.1 65/66 583.2 67.8 583.2 67.8 Notes: 1These values are taken from Table A.6. 2The price deflators are of industrial income for Yi and of imports for Mm. These price deflators are shown in Table A.7. The preceding table shows relevant data about Mm and Yi for the period 1959/60-1965/66. 8. The estimation of uk. The behavioral equation no. (29) gives the follow- ing relationships Mk = uk(Ii + Ia + IS) 242 Table A.l7 gives values for these variables in both current and 1965/66 prices. Table A.17--Capital Goods Imports and Total Investments. 1 In Current Prices1 In 1965/66 Prices Year (L.E.M.) (L.E.M.) M 21 +1 +1 M 2 21 +1 +1 -—EE———- k i a s k i a s XI.+I +1 .1. a 8 1959/60 16.5 171.4 16.8 179.3 .0936 60/61 25.7 225.6 26.0 239.6 .1085 61/62 44.4 251.1 45.3 278.6 .1625 62/63 41.2 299.6 42.4 322.9 .1313 63/64 108.6 372.4 110.8 398.7 .2779 64/65 97.6 364.3 98.6 377.4 .2612 65/66 114.0 379.1 114.0 379.1 .3077 Notes: 1These figures are taken from Table A.6. 2The price deflator is the import price deflator in Table A.7. 3The deflation is by the general number of indus- trial products and materials in Table A.7. The last column of the previous table shows the Mk XIi+Ia+IS ratio of From these figures, it can be easily seen that as total investment (ZIi+Ia+IS) increase, the ratio of capital imports (Mk) to total investment tends also to increase. The simple least square estimation for 243 the parameter “k will not, therefore, give the appropriate magnitude of “k because of the trend involved. It can also be seen from the last column of Table A.17, that the value of “k is asymptotically approaching 0.3. This will be the value assumed for uk. Thus: “k = .3 9. The estimate of 0i and ws. The following two equations no (30) and (31) give these relationships Y8 = WSY The table on the following page (Table A.18) gives values for Yi' YS, and Y both in current and 1965/66 Y. Y prices. It gives also the ratios of -%~and -% . From the last two columns of Table A.18, it can be easily seen that $1 has a tendency to increase through time while ws had a tendency to fall. This reflects the structural change that took place in the Egyptian economy during the fifties and the first half of the sixties. As it was shown in Chapter II, such large structural changes Inight not be forthcoming in the future. It might be rea- sonable, therefore, to assume the following values for *1 and.ws, in 1974/75: 244 OOOOO. OOOOO. ~.OOO ~.OOO H.OOOO 0.000 ~.OOO H.OOOO OO\OO OONOO. OOOOO. H.HOO ~.OOO 0.000H 0.0HO ~.OOO H.OOOH OO\OO OOOOO. OOOOO. H.OOO 0.000 0.000H O.OOO 0.000 0.000H OO\OO OHOOO. OOOOO. 0.000 0.000 0.0HOH 0.000 O.~OO O.~OOH OO\~O OOOOO. OOOOO. O.HHO 0.000 H.OOOH 0.000 0.000 H.HHOH ~O\HO OOOOO. OHOOO. 0.000 0.000 0.000H 0.0HO O.~OO 0.000H HOxOO OOOOO. OOHOO. 0.000 0.000 0.000H 0.0HO ~.OHO ~.OO~H OO\OO OOOOO. OOOOO. 0.000 0.0~O 0.000H 0.0HO OOO OOHH OO\OO OOOOO. OOONO. ~.OOO O.OO~ 0.000H OOO OOO OOHH OO\OO OOOOO. OOOOO. H.OOO 0.00~ O.OO~H OOO OOO OOOH OO\OO OOOOO. OOOOH. OOO 0.000 OOHH OOO OOH OOO OO\OO OOOOO. OOOOH. 0.000 0.0HO 0.0HHH OOO HOH OOO OO\OO OOOOO. OHOOH. 0.000 0.00~ 0.000H OHO OOH OOO OO\OO OOOOO. OOOOH. 0.0HO 0.00H ~.OOOH OOO OOH OOO OO\~OOH O OO HO O OO OO O IN u we .llu Oe Hmoe OO O HO O 1.2.m.HO A.E.m.HO mmoOum OOmeOH cH mmoHum uamnusu cH 1IILNIIIIIIIIIIIIIIaIIIIIIIIILVIIIIIIIIIIIIIIIIIIIIIIIIIIII. mooO>Oom poo .oEoocH OoOHumDUnH ..e.Q.OIImO.¢ oOnoe 245 Notes: (Table A.18) lAnnual figures for 1952/53-1958-59 are taken from the Statistical_Pocket Book, op. cit.; from 1959/60-1965/66 are taken from Table A.6. 2The price deflator for 1952/53-1958/59 is the implicit G.N.P. deflators used by Bent Hansen and D. Mead, op. cit., and for later years the price deflators of G.D.Y., industrial income, and services income are taken from Table A.7. 3 Figures for these two ratios are those in 1965/66 prices. $1 = .3 $3 = .4 The change in the value of wi is not very great, since it has already reached more than .285 in four out of the last five years for which data are shown. The reduction in the value of 08, while small by itself, will allow for an in- crease in the share of agricultural production in G.D.Y. to allow for the additional land provided by the comple— tion of the High Dam. 10. The estimation of 1:, 1:, and 1:. From Chapter Iv, equations (22) (23) and (24), the demand for labor in the different production sectors is represented by: _ o _ t Li - 11(1 2i) Yi, O t 246 o t Aa(1 2a) Ya, and To estimate the values of 1:, la 0 , and 1:, a straight line will be fitted by least square techniques from data on Li’ Yi; L a , Ya; and LS, Ys. A.l9) gives these data. Table A.19--Employment and Income in the Different Production Sectors. The following table (Table Figures are in (000) In 1965/66 Prices2 laborers (L.E.M.) Year L L Y Y Y i a Ls i a 8 1959/60 798.7 3,245.0 1,962.3 367.4 476 636.7 60/61 804.7 3,600.0 2,107.2 397.4 464.3 690.0 61/62 957.1 3,600.0 2,099.8 456.6 430.1 711.7 62/63 1,059.0 3,632.0 2,177.2 495.8 491.5 745.7 63/64 1,141.8 3,673.0 2,270.2 537.5 522.0 794.1 64/65 1,188.2 3,751.0 2,371.4 560.2 594.0 831.1 65/66 1,188.2 3,857.0 2,449.7 583.2 614.7 889.2 Notes: 1These figures are taken from the S.H., p. 221. 2These figures are taken from Table A.6 and are deflated by the price deflators of industrial, agricultural, and services income respectively (shown in Table A.7 ). 247 From these figures, one can obtain the following estimates: A0 = ZYiLi = 3,547,599.6 = 2 099 1 E7727 176007066726 ' 1 A6 _ ZYaLa = 12,637,485.9 = 6 751 a ’ 2y 2 1,871,884.84 ' 3. A6 = ZYsLs = 11,773,239.71 = 2 902 s E7727” *47056,070.93 ° 3 B. Exogenous variables This section will be concerned with the estimation of the value of the exogenous variables in 1974/75. Some of these exogenous variables (Ei and Sf) determine the development alternatives, and, therefore, three different values for these variables has to be estimated (one re- flecting an optimistic, intermediate, and a pesimistic value). 1. The estimation of Ma' In the discussion about the balance of payment problems in Egypt, it was shown that the additional agri- cultural land made possible by the utilization of the water of the High Dam could help in solving the Egyptian balance of payments problems, through eliminating food imports. The value assumed for Ma will, therefore, be zero. Thus, 248 2. The estimation of Ea' An estimate of Ba will be obtained by fitting a straight line of the form: E = a + bt a through simple least square techniques where t is time, and a and b are the constant and the slope of the trend line respectively. The following table (Table A.20) gives figures about these two variables. Table A.20--Agricu1tural Exports. In 1965/66 Prices (L.E.M.) Years Ea t 1959/60 11.0 1 60/61 15.0 2 61/62 13.3 3 62/63 26.7 4 63/64 48.4 5 64/65 39.2 6 65/66 36.5 7 From these figures, the fitted line will be as follows: Ea = -1.229 + 6.82(t) 249 For the target year of the model t is (16), and thus: Ea = 107.89 2 108 3. The estimation of Ei and Es' The attempt to fit a trend line for Ei and Es similar to the one fitted for Ea’ produces highly unrea- sonable figures for Bi and Es' Thus, it will be assumed that the medium value for EJ.- will be a growth rate of 4% annually (this 4% figure was chosen on the performance of Ei in the period 1959/60-1965/66). The lower and higher values for Ei will be assumed to be an annual growth rate of 2% and 6% respectively. Thus, in 1974/75: E. = 316.0 1 E? = 265.3 J. ** = Ei 375.1 To estimate the 1974/75 value for Es' the situation is not as easy as Ei' Based on 1965/66 figure (which seem un- reasonably high) ES has grown by over 10% annually during the period (1959/60-1965/66) as a whole. Even on the assumption that this figure is accurate, it seems certain that a rate of growth similar to this in the coming few years will be impossible for factors already mentioned in Chapter II. Thus, the more moderate assumption of 4% 250 annual rate of growth for ES seems more plausible. To base the estimate on the value of E8 in 1965/66 might be misleading, since this figure is obtained through the use of one of the accounting equations. Instead, the average of exports of services in 1965 and 1966 is taken to re- present the 1965/66 figures for the purpose of this pro- jection. This value is = 168.1, and with a 4% annual growth rate, it will give a value for ES in 1974/75 as: E = 240 s 4. The estimation of Sf. It was shown earlier, that the country's indebted- ness to foreign countries was increasing sharply over the past few years. This might strain the economy in the future due to the burden on the current account balance to ser- vice a large amount of debt. The level reached in 1965/66 was a moderate one, and it will be assumed to be the moderate value that Sf can take in 1974/75. The higher value will be assumed to be twice this amount, while the lower value for Sf will be assumed equaI to zero. This lower value for Sf will represent a severe national ef- fort case, where the country will depend mainly for its development on its own resources. Thus, in 1974/75: S = 63.2 251 ** = Sf 126.4 5. The estimation of C , C , and G . 9 93 12 In Chapter III, government expenditure was chosen as a fixed target of the model. It will be assumed here that C , Cga’ and Gp will grow by 4%1 annually over their 9 1965/66 values. Thus, in 1974/75: C = 335.9 g C = 9.1 ga G = 438.5 P 6. The estimation of alternative values for a: In the previous section, a was estimated to be equal to a = .18893 this value will be taken to represent the intermediate range. The lower value of a, (a*) will be assumed to be equal to .175,while the optimistic value (0**) will be assumed to be .25. Thus, in 1975, a* = .175 a = .18893 0** = .25 1This figure was decided upon after consultation with some of the officials at the Ministry of Treasury. 252 7. The estimation of the different values of 21, la, and 2 . _§ Hansen has estimated the rate of increase of labor productivity in different sectors during the first five year plan, to be as follows:1 Agriculture 2% Industry 3% Electricity 10% Transport, etc. 6% Public Utilities 0% For the sector classification used in this study, these figures would be equivalent to 2% in agriculture, 3% in industry. For services, it will be assumed that the relevant and industry prior to the will be made for the rate intermediate respectively figure is 3%. The figures for agriculture were largely the same figures that prevailed plan period,2 and, therefore, an assumption that these values constitute the lower limit of increase of labor productivity. The and higher value will be higher--l% and 2% from the lower value. Thus: 1B. Hansen, "Planning and Economic Growth in the U.AORO"' OE. Cit.’ p. 33. 2 Ibid. 9.? = 3% 2.. = 4% 2** = 5% J. 1 l * = = ** = La 2% La 3% 97a 4% * = = ** = 2.8 3% £8 4% 2.3 5% 8. The estimation of Y*, Y, Y**. The labor supply of 1974/75 was given in Chapter II to be: L = 9,440.576 Substituting this value in equation (A.24) and also sub- stituting for the values 1:, 1:, 1:, wi’ ws' 2;, 2;, and 2; from the estimates provided in this section, one gets: 9,440.576 *= Y 270097737777603T06T76ITT3777033676270027707777603) 3,095.169 For the value of Y we should substitute as above, except ' * changing £1, 2;, and z; to 2i, la, and is. = 9,440.576 2.099(.3)(.6925)+6.75(.37(.7603)+2.902(.4)(.6925) 3,396.257 To get the value of Y**, we have to substitute for ii, 2a, and 28 by 13*, 23*, and £;*. Thus: 9,440.576 2.099(.3)(.6302)+6.751(.3)(.6925)+2.902(.4)(.6302) 3,730.273 APPENDIX IV THE REDUCED FORM In this appendix, the model that was presented at the end of Chapter IV will be reduced to two equations that express the equilibrium condition of saving and in- vestments, equation (17); and the balance of payments equilibrium, equation (18). The other relationships of the model will be substituted in these two equations in order to eliminate all the irrelevant endogenous variables. Since all these relationships will be substituted into the reduced form equations, these two reduced form equa- tions will embody all the relationships represented by equations (1-38) that constitute the structural model. 1. Savinngnvestment Equilibrium From equation (17): I1 + Ia + IS = Sh + Sg + Sf Substituting for Ii' I and IS on the left hand side from a equations (19), (20), and (21) respectively, one gets: 9- p 9 1 _ o a _ o _s _ 3; (Y1 Yi) + 5; (Ya Ya) + bs (Y8 Y5 h 254 255 Substituting for (Yi)’ (Y3), and (Ya) from equa- tions (30), (31), and (1) respectively, on the left hand side, one gets: _1 _ _ Ii+1a+IS-E-i—[wi (Y) Yci> ’rgilglwi -ws)(Y> 4de -:-[-j=°‘" --——v‘-: 1 1 +<1-wb-$aw>o y_;3YO+W§_§Y-:§Y: a a a S S o W (1-4. W ) w p _ 1 1 1 a s s (A.27) Ii + Ia + Is — Y bi + b + _E;_ p. p p 1 O a O S O - Y.+ Y+ Y Bi 1 Ba a BS 5 On the other hand, if we substitute for Sh' S g! and Sf on the right hand side of equation (17) from equations (23), (22), and (38); (6), (2), (22), (38), (7), (36), and (37); and (35) respectively, we get: sh + 59 + Sf = a[(1-t)Y + GP] + t Y - Gp - Cga- C91 sf (A.28) sh + Sg + sf = Y[a(l-t) + t] + Gp (a-l) - Cga 256 Substituting for the left and right hand sides of equation (17) from equations (A.27) and (A.28) respec- tively, we get: piwi (l_wi-ws)pa wsps 9i 0 pa 0 ps Y b + b +_—b "FYi F—Ya+b—Y i a s i a s = Y [0t(1-t) + t] + Gp(0L-1) - C - C + Sf + Rearranging, we get: DiWi (l-Wi‘WS)Da S S _ _ Y Til—- 4" ba + —B-S—— (1(1 t) t D. D O _ _i 0 _3 0 _g o - _ _ - _ _ _ — b. Y + b Ya + b Y + Gp(a 1) Cga C9 + Sf which could be written as: _.(1-w.-w )p w o .- . (A.29) sf = b; + 1b S a + {—94 - 0L(1-t) - t Y 1 a S - 0i 0 pa 0 ps 0 E57Y1+ b—Ya + FY53] - (a-1)§p + Ega + Cg 1 a S Equation (A.29) gives the first reduced form equation which expresses saving-investment equilibrium. 2. Balance of Payment Equilibrium From equation (18): Mi+Mm+Ma+MS+Mk=Ei+Ea+ES+Sf 257 Starting with Ms’ one can find from equation (28): MS = uS(YS) But, from equation (16), YS = Cs-+-ES-MS Substituting for YS in equation (28), Ms could be expressed as: (A.30) M = u [C + E - M ] S S S S S But CS could be expressed as: Also, from equation (A.13), Cis could be expressed as: (:15 - Cg + 6p + (1' t)Y ‘ “W Y I _ I - _ _ " + Ea Ma + Cga a[(1 t)Y + GP] and from equation (A.15), Id is equal to oiwi pa(1-wi-ws) 9848 Id: ‘1’“k) b. + b +76"- Y ’ (l‘uk) F:- Y. + B— Y and, from equation (A.7), Ci could be expressed as: 258 wi 83(1-41-05) w = - + u n Y - E o I-fii-Bi l-Ba m 1 1 Substituting for (Cis) from equation (A.13), for (Id) from equation (A.15), and for (Ci) from equation (A.7), CS in equation (A.2) could be expressed as: _ _ l'W-‘W B-W— (A.31) C = c + G + (l-t)Y - l S - -—i—§—— Y + S g p 1-8a l-ui Bi _ _ piwi Ea - Ma + Cga - d[(l t)Y + G ] + (l‘uk) —B;— o (l-w.-w ) o w o. p a 1 s s s 1 o a o + b + b 1Y’(1'“k) [STYi+b—Ya a s 1 a Os 0 ‘pi Bau—wi-ws) + ——'Y ‘ -:——:——-- _ + u w. Y + E. bS S] E. “1 Bi 1 Ba 10 J. :L which could be written as (A.32) C3 = J + K(Y) - (1-t)a Y - de + Ei where: _ — - - _ - - _ _ o J - Cg + GP + Ea Ma + Gga (1 Mk) 5— Y1 + 0a 0 ps €] Y + — Y , E_' b8 3 and, _ 1 01 ws 8 I K "' (l’t) " -6 l-ui-B i + (1- pk) T + pa (1- oi -ws ) Ba(l-w _W s) + n W Ba -111 $1-81 1" m 259 Substituting this value for (CS) into equation (A.30) us (A.33) MS = 1:3; [J + K(Y) - (l-t)aY - asp + Ei + ES] On the other hand, from equation (A.19): M uiwi 1 l-ui- Y i from equation (A.20): Mm = umwi Y from equation (32) M = M and from equation (A.22): p-w. o (l-W--w ) o w o- 1]. a 13 SS 10 Mk=“k[bi+ ba +b IY‘“k[BTYi+ Substituting for M1 from equation (A.19); M.m from equation (A.20); M; from equation (32); MS from equation (A.33); Ea from equation (33); and for E8 from equation (34), into equation (18), Sf could be expressed as: \ Ii. '31!!! ii I 260 u s - ' - (A.34) Sf i:fi;-[J + K(Y) (l t) 0Y 0GP + Ei + ES] uiwi _ oiwi + T:U;:F; Y + umwi Y + Ma + “k —BT_' 1 + oa(1-wi-ws) + osws Y _ u oi Y? + :2.y° ba bs k B: 1 ha a p s o - - + E; Ys] E1 Ea Es which could be written as (A.35) sf = N + 0(Ei) + P(Y) + Q(aY) + R(a) where N, O, P, Q, and R are constants and equal to: U D- p p _ s - - _ _1_ o _2. 0 _§_ 0 N — Iii; [J + E31 + Ma “k [;i Yi + ba Ya + be Yé] -f: -E a S U _ s - 0 - 1+1:s Ei E1 P = Ms K + ini + u w + u Diwi Da(1'¢i'¢s) I+us l-ui-Ei m i k Bi ba pSwS + b s] u U _ _ s Q m:(1t),&hd u _ _ S R ififiT- (GP) 261 In order to be able to present graphical analysis of the two reduced form equations, (a) has to be removed from equation (A.35) in order to show Sf as a function of Y and Ei only. Looking at equation (A.17) one can find that (a) could be expressed in terms of (Y) and (Bi) as follows: A-D(Y) +Ei (A.36) a = C(Y) + B Substituting for (a) into equation (A.35), Sf could be expressed as: - D(Y) + £1" C(Y) +T3 J A (A.37) Sf = N + 0(Ei) +P(Y) + Q I: Y '- D(Y) +Ei + R C(Y) + B ' Equation (A.37) gives the second reduced form equation that expresses the balance of payments equilibrium. It may be noted that by reviewing these two reduced form equations (A.29 and A.37), it can be easily seen that all the relationships of the model equations (1-38) have been used in the process of derivation. The two reduced form equations, therefore, embody all the relationships speci- fied by the model. "Illlllilfljfl'flllljllflll'TS