- Email: [email protected]
The Egyptian economy in 1999
The Egyptian economy in 1999 An input-output study Aly Zeineldin
An input-output modej is outlined and constructed to provide a quantitative basis jtir the stud!: of possible scenarios that might be followed bJ, the EgJlptian economy?. The econom!? sf 1979 is depicted and compared with the prqjected economies sf 1989 and 1999. Specijicall~~, the input-output model is formulated as a set of linear equations which are used to project: (a) sales of products of nine producing sectors: (b) private und public household purchases,. (c) capital equipment expenditures; and (d) e.uport.7 und imports by each sector. To prqject changes in the Egyptian economy ocer a period of 20 veurs, from u representutit’e base vear 1979 to an arbitrari? target Jyeat 1999. three pokible scenarios are presented. The:y differ in their underlyin& ussumptions. The 1973 Eg!qptian input-output table is updated to 1979, using a modified Stone’s RAS method. Changes over- time in the structural coefficients are considered and euch equation in the s~~stem can be transformed to explain the linear relation of particular vuriables. The nrrmerical results presented maI> enable policy makers to compare the ulternatire scenurios that might be,followed up to the end of the century*. Kc\~vovrl.\: Economtc modelling: Input-output: Egypt
About 10 years ago, the government of Egypt’ embarked on a new economic policy, which became known as an ‘open-door’ policy. in order to shift the economy towards liberalization or a market-oriented type. Measures were taken to give the private sector some form of free hand. such as the creation of a free foreign exchange market for private transactions and the encouragement of private and foreign investment. The balance of payments improved considerably as a result of the surge in foreign exchange receipts from tourism, workers’ remittances and foreign aid assistance. The result was an economy growing at an annual real rate of 9”,, and an inflation rate of IO”,, (Ministry of Planning [ 12)). Nevertheless, that decade of economic growth was The author is at Long Island University. 11548,USA. This paper is adapted
from Chapter
Greenvale,
7 of the author’s
NY
thesis T/W
Furwe of r/w Eyyprim Ecmtny us u C/WIW N,,w,,<, Airrr,~ur;t~r~ .hwurios: AN fnpur-Ourptrr Srurl~. submitted to New York University
in November
Final manuscript
140
I Egypt’s International I OOOOOOkmz, while the
1978.
received
II
October
not as impressive as it might have been relative to the incoming foreign exchange. Egypt’s population has been growing at an annual rate of ?5”,,. The consequent rise in the man/land ratio has exerted a dominant influence on the direction and shape of economic development efforts. The government still intervenes in the pricing process as well as in agriculture and industry. This policy has kept costs to consumers and industry relatively low. which has encouraged higher consumption growth. Any reduction in foreign exchange receipts resulting from declining petroleum exports. not only in Egypt but over the entire region, could impact workers’ remittances and, accordingly, the Suez Canal revenues may wipe out the high rates of growth the economy experienced over the past decade. The purpose of this paper is to outline an inputoutput model for Egypt. The model is constructed to provide a quantitative basis for the study of possible scenarios that might be followed by the Egyptian economy. The economy of 1979 is depicted and
1985.
restricted to 36000 km’,
boundaries drau an expanse of some cultivable. at, well as the habitable area. IS located mainly along the Nile.
0264_9993/86/02014(rO7 $03.OOV; 1986 Butterworth & Co (Publishers) Ltd
The Egyptian economy in 1999: A. Zeineldirl
compared with the projected economies of 1989 and 1999. Specifically, the model is formulated as a set of linear equations that will be used to project: (a) sales of products of nine producing sectors; (b)private and public household purchases; (c)capital equipment expenditures; and (d)exports and imports by each sector.
Alternative scenarios To project changes in the Egyptian
economy over a period of 20 years, from a representative base year 1979 to an arbitrary target year 1999, three possible scenarios, A. B and C, are presented. They differ from each other in their underlying assumptions. Scenarios B and C are identical to scenario A with respect to the choice of the endogenously determined variables. The three scenarios are characterized with relatively optimistic prescribed income targets. Scenario A assumes an average annual growth rate of gross domestic per capita income of 8.5”,. Scenarios Band C assume lower rates of growth of 8 T; and 7’), respectively.’ Scenario A differs from scenarios B and C. aside from the prescribed income target, in the assumption underlying foreign trade. The magnitude of selected import coefficients is reduced and export coefficients are increased relative to their values in the base year under scenario A. On the other hand. import and export shares in GDP change with prescribed change in gross domestic per capita income under scenarios B
and C. This assumption will serve to demonstrate to what degree the reduction of some imports and the acceleration of some exports may contribute to a narrowing of the gap in the persistant balance of trade deficit. Since the amounts of traded output flowing into and out of Egypt have direct as well as indirect impact on the input-output balance of the economy, changes in import andior export coefficients will have to be matched by a corresponding change in the domestic economic balance (see Leontief [6]. Chapter 11). Table 1 presents a summary of the exogenous as well as endogenous variables under the three scenarios.
The input-output model The model centres around the balance of sectoral output identity. Each equation can be transformed to explain the linear relation of a particular variable and some other variables in the system. Initial
(I-A(f))X(f)Investment
Domestic
Table I.
Alternative
(1)
X(r - 1)) = 0
(2)
Y(t)-D(r)=0
(3)
output
(I-A(r))X(t)household
consumption
C(t)--(‘F(t)=0
(4)
scenarios.
Scenarios
Variables Private and public consumption
A
Endogenous
ECONOMIC
Y(t)=0
demand
D(t) - @X(r)-
Private ‘These ligures are selected to conform with the average annual rare of growth of the economy of 8.2”,, between 1977 and 19X2. albeit below the inflation rate of P,, in the same period.
output
Investment
Domestic output
Hate of population growth (%)
Endogenous
Endogenous
2.5
Endogenous
Endogenous
Endogenous
2.4
Endogenous
Endogenous
Endogenous
2.3
MODELLING
April 1986
Foreign trade
Gross domestic per capita income
Selected import coefficients reduced and export coeflicients increased
Increase at the average annual rate of 8.5”,,
Import and export shares change with gross domestic income
Increase at the average annual rate of 8”,,
Increase at the average annual rate of 7”,,
Final demand
Increase by an average of 1X”,, per year
Increase by an average of I7”,, per year
141
The Egyptian
economy
Public household
in 1999:
A. Zeineldin
consumption
G(t)-yY(t)=O
(5)
Total imports
(6)
M(t)-mX(t)=O Total exports E(r)-rW(t)=O Balance of sectoral
(7) output
(I-A(t))X(t)-C(t)-G(t)-D(r)-E(t)+M(t)=O
(8) Equation (1) shows net output, X(t), as equal to the amount delivered for intermediate u=e, A(t)X(r), and to final demand except investment, k: in a given year. Investment demand, o(t), given in Equation (2) equals the difference between the output levels in two successive years, ie the increment in output multiplied by the pertinent capital coefficients, B. Equation (3) describes domestic output as divided between intermediate demand and final demand plus investment. Private and public household consumption demand for goods and services are shown in Equations (4) and (5) as functions, c and y, of gross domestic income, y(t).” The c and y reflect the share of each commodity consumed by private consumers and the government, respectively. In Equation (6) M(t) describes total imports as a fixed proportion, 111, of domestic output. Total exports, E(t), given in Equation (7) on the other hand are represented as a certain amount, r, of the world pool of exports in a given year.4 Finally, the balance of sectoral output (8) an identity. describes total supply of domestic output, X(t) less M(r), is equal to total demand which consists of intermediate demand, A(t)X(t), plus final demand, C(t)+G(t)+D(t)+E(t). in year t.
Solution to the system The numbers obtained from solution of the inputoutput model, for practical policy, result from two
3 Expenditure components of GNP are not available: Instead we used GDP to equal CD/ (the sum of Incomes accruing from production) plus net indirect taxes (indirect taxatton less production subsidies). 4A similar assumption is made in the world model (see Leontiefrr U/ [61. Chapter II). Note that r, the vector of export coefticients. represents exports of a given commodity as equal to Egypt‘s exports of that commodity divided by the world pool of exports of same commodity.
142
types of quantitative information. One is data used in the form of appropriate structural coefficients, and the other type is specific numerical values assigned to pertinent exogenous variables. To appraise the influence of factors considered external to the system, the model consists of an identity and seven equations in 12 variables. Consequently, six variables must be specified exogenously for final demand, Y(t), gross domestic income. Y(t). final demand except investment, Y(r), domestic output in the prebase year, X(t - l), world pool of exports, IV(t), and, finally. initial sectoral output, X(f). Given the structural characteristic oft he economy as represented by the sets of flow and capital coefficients, we can examine the dynamic development of the economy resulting from the selection of a particular scenario to be implemented. A significant stride for the numerical solution of the input-output system is the choice of a base year. The most recent input-output table for Egypt dates back to 1973, and the revised available data on the system of national accounts are only up to 1479. As a result, the input-output table is updated to 1979. which will serve as the base year, using a modified Stone’s RAS met hod developed by Westley [14].’ The updated table contains 13 producing and consuming sectors. A capital matrix for Egypt does not exist at present. Lacking a better alternative, a capital matrix for India is borrowed and used in the calculation of investment demand (see Mathur [lo]). It is necessary to perform some aggregation of sectors to make the computation consistent with both the capital matrix and the system of national accounts. Table 2 presents the aggregated sectors. In a developing economy like that of Egypt, technological change may be regarded as adhering to the general pattern followed by developed economies. This is to say that, as new industries are installed (or, for that matter, as existing industries are modernized), developing economies import available technologies currently in use in industrialized economies. Therefore, account is taken of the possibilities of introducing new technologies in the different sectors of the economy in the manner assumed in the world model. Specifically, changes over time in some of the structural coefficients will be associated with overall projected world changes in technology (see Leontief rr u/ [S]). This process is done by multiplying specific coefficients by ‘coefficient updators’ in all scenarios. In calculating the values of the endogenous variables
’ This technique utilizes in part. the structural coeflicients of an existing input-output table at current prices. and time series data from the national income accounts for the updatmg years.
ECONOMIC
MODELLING
April 1986
The
Producing sector
I 2 3
-I
: 7
8 9
Table 3.
Sector classification for 1979 input-output
Agriculture. hunting. forestry and fishing Mming. quarrying. crude oil and natural gas Cotton and fibres. wood and cork products. spinnmg and weavin_g. paper and cardboard. rubber, chemicals. metallic and non-metallic products. and electric equipment Electricity. gas and water Construction Wholesale and trade. restaurants and hotels Transportation. storage. communication and Suez Canal Fmance. insurance. real estate. and business ser\ ice Community. social and personal service
in 1999:
A. Zeineldirl
Numerical results The input-output model of the Egyptian economy described earlier is used to project three scenarios from a base year 1979 to a target year 1999. Table 3 summarizes the numerical results presenting the aggregative variables from the complete printout of the solutions. Each column shows the total value of the variables depicted at the top row. Domestic
output,
X
Comparison of the results of the computation for scenario A relative to scenarios Band C shows that the rate of growth of domestic output will tend to vary. A shift from scenario A to scenario B would result in an increase in domestic output of 16.3O,,in I989 and 14.3”,, in 1999; a shift from scenario B to scenario C would result in a decline in domestic output of l.S’,, in 1989 and 0.3O, in 1999; and a shift from scenario A to scenario C is expected to yield an increase in domestic output of 14.2”~~and 13.8Y, in 1989 and 1999. as can be seen in Table 4. The shares of major sectors (agriculture. mining and quarrying, manufacturing and transport) in total output. ie the percentage of total output originating in each major sector will also tend to vary. While agricultural output constituted 20.9”,, of total output in 1979. the share of agriculture is expected to
table for Egypt.
Aggregate sector
Full designation
economy
must be balanced within the economy, intermediate and final demands for traded outputs influence both directly and indirectly the balance of sectoral output. This relationship is presented by the solutions (6), (7) and (8) in the mode1.6
in terms of the given values of the exogenous variables and the various coefficients for each scenario, we start by SolvingEquation (1) with a prescribed bill of final demand, k: Required stocks that would permit the production sectors to increase their capacity output are obtained from the solution of Equation (2). The resulting investment for expansion, o(t). when added to final demand will, by an iterative process, give rise to the same sectoral output, X(t), in Equation (3). To explain sectoral composition of the economy under a growth process, two vectors of consumption expenditures by sector serve as the basis for projecting private and public household consumption in Equations (4) and (5). The Egyptian economy is linked with the rest of the world through flows of traded goods and services. While the input and output of these goods and services
Table 2.
Egypriun
Agriculture Mining and quarrymg Manufacturing
ElectricIt!. gas and water Constructlon Wholesale and retail trade Transportation and communication Fmance
“The input-output model required the use oftwo~eparatecomputer programs: one for updating the input output table. and the other for simultaneous solution of the system. Some 53 subroutes usmg FORTRAN language have been utilized to perform a total of seven runs: two for each scenario in 19X9 and 1999. and one for the updating procedure.
Communit! her\ ice
Values of variables used under scenarios A. B and C (million Egyptian pounds). Variables
Scenario
X
k’
G
D
E
1979
25719
1794x
x3x1
2069
4150
334x
- 5433
12515
19x9 A B c
29787 345X3 34064
25675 25667 24945
I’630 I2676 12292
3017 30X2 ‘793
5274 51x8 5523
4754 4711 4737
-x552 - X606 -799x
17123 17061 16947
I999 A B C
36005 41117 40989
3465X 34554 33462
17231 169X1 15938
40x4 3884 3771
6545 6985 7050
6798 6704 6703
-11192 -11344 - 10372
23466 ‘3’10 -.23090
ECONOMIC
MODELLING
c
April 1986
hl
j’
143
The Ey~~priun economy
A. Zeineldin
in 1999:
average of 1.1:; under all scenarios by the 1990s. reflecting capacity utilization of cultivable land coupled with high rates of population growth. The industrial sector encompasses a wide range of activities with the main industries being cotton-based spinning and weaving. food processing. engineering and metallurgy. According to scenario A. the rate of growth of the industrial sector is expected to grow from 6”” in the base year to 11.4”” in 1999. slightly higher under scenario B, up to 13.10,,. and is expected to be relatively lower under scenario C. up to 10.2”,, over the same period. While the increase in output by the target year is anticipated to be widespread in the three scenarios relative to the base year, cotton yarn and textile production are expected to decline. The share of textiles in total industrial output is expected to decrease from 460, in 1979 to 34”,, in 1999 under scenario A, and 33”” and 30”,, respectively under scenarios Band C. Some unfavourable conditions may be responsible for the expected lower shares. among them, a shortage of skilled labour which is a direct
remain roughly the same under all scenarios at 23.7”, by 1999. This is because the cultivable area in Egypt has been expanded to the borders of the desert and no further expansion in cultivable land is possible. at least by the end of the century. The problem is further aggravated by food subsidies on basic agricultural products (wheat and flour, rice. sugar and edible fats). These subsidies which accounted for 70:; of total government outlays in 1979 (Ministry of Agriculture [ 111) tend to slow the growth of the agricultural sector as a result of the cost-price distortion that diverts resources away from this sector. The average growth rate of per capita agricultural products is expected to remain the same under scenario A during the 1980s and to increase by 1.71; and IS?,, under scenarios B and C respectively over the same period, as can be seen from Table 5. This may be the result of the increase in food subsidies (taking the form of government transfer of funds to various agencies) and a higher bill of imports. On the other hand, these rates of growth of per capita agricultural products are expected to decrease by an
Table 4.
Percentage change in sectoral output under alternative scenarios. I989
1999
Sector
Shift from A to B
I
+ 16.5
2 3 4 5 6 7
8 9
Agriculture Mining and quarrying Manufacturing Electrcity. gas and water Construction Wholesale and retall trade Transportation and communication Fmance Community service Total
Table 5.
Agricultural
+
Shift from B to C -3.1
Shift from A to c + 12.9
Shift from A to B +2.x
Shift from B to C
Shift from A to c
-0.5
+ 2.3
+ 3.2
- 0.9
+ 2. I
+ I.1
- 0.3
+ 0. R
+ 1.2
- I.4
- 0.2
+3.3
- 0.3
+ 1. I + 2.6
16.2
I I.9
f
+
16.3
+ I.0
+ 1.7
+ X.2
-0.x
+21.2
+6.3
- 0.3
+ 59
+ 30.6
- 0.9
+ 29.3
+ 6. I
- 0. I
+ 6.0
I.5
+ 29.9
+ 13.X
- 0.3
+
+ 13.6
+31.x
-
I.2
+ 33.5
+ 13.9
-0.3
+x.1
- I.5
+ 6.5
+4.x
- 0. I
+ 16.3
~ I.5
+ 13.3
+ 14.2
+35.1
-0.3
I .3..i
+1.6 + 13.8
output. Agricultural output (million 1979 Egyptian pounds)
Share of agriculture in total output (“,,)
Per capita agricultural output (Egyptian pounds)
1979
5377
20.9
131
19X9 A B c
7029 8192 7936
23.6 23.7 23.3
151
I999 A B c
X66X x909 XX65
24. I
144
131 1-1
123 I32 134
12.7 22.6
ECONOMIC
MODELLING
April 1986
The Egyptian
result ofgovernment ownership and the relatively low wages offered by industry. The mining and quarrying sector has developed into one of the key industries in Egypt since the mid-1970s. It includes the petroleum industry which accounted for 1.59, of GDP and 699, of the values of exports in 1979. The sharp increase in international petroleum prices in the 1970s encouraged exploration which resulted in new discoveries and more production.’ Under the three scenarios, petroleum products are expected to exceed the textile products as Egypt’s major exports by 1999. Ifprojection offuture production ofcommodities is made with some degree of uncertainty, projection of future crude oil production, specifically, is less certain. This may be due to changes in domestic and foreign consumption, changing conditions in the international petroleum market and pricing policy development in the spot market. None of these factors is considered in this study. The Suez Canal is an important and stable source of revenue to Egypt. After widening and deepening the canal in 1980, receipts can increase only if the toll structure changes. The Suez Canal contributed 33; of GDP in 1979, and that share is expected to remain fairly constant under all scenarios by 1999. Finul
demand
Projected domestic expenditures indicate that GDP would increase at an average rate of 36.5”, in 1999 from 289; in 1979 under scenario A. 36”” over the same period under scenario B and 35”, under scenario C. At the same time, final domestic demand (private and public consumption, gross investment and exports) is expected to grow by 33”~ up to the year 1999 under scenario A, and 32.5’1, and 30”” under scenarios B and C, respectively, over the same period from 23.6”” in the base year. This is due largely to the expected increase in private consumption share in GDP of 74”” under scenarios A and B, and 717; under scenario C in 1999 from 67 S;, in 1979. This result suggests that there is a definite trend over the period 1979-99 for private consumption to increase faster than GDP and for domestic saving to decline. Gross fixed investment, according to the numerical solution of the input-output system, is expected to show a marked degree of stability relative to the base year under the three scenarios. This is due to the steady growth of public sector investment which accounted for an average of 774, of gross investment in the period 1976-79. However, gross fixed investment is expected
economy
in 1999: A. Zeineldin
to grow at the average rate of 37”, under scenario A. 36”, and 35.8:b under scenarios B and C by the target year from 35.6”, in the base year. Most industrial products in Egypt are destined for the domestic market as a result of increasingly buoyant demand. The share of exports is expected to remain virtually stationary at 28.3”” of GDP until 1999 under scenarios A and B, and to decrease somewhat to 26.5’,, under scenario C relative to the base year share of 26.79,;. Moreover, the share of exports in the gross value of industrial production is expected to decline steadily from 1493,in 1979 to 9”, under scenarios A and B, and to 7”; under scenario C in 1999. Finally, as a result of the expected decline in textile exports to the end of the century. exports of engineering products are expected to replace exports of textiles by 1999 under the scenarios. In contrast to the consumption/GDP ratio which is expected to increase under all scenarios, the share of gross fixed investment in GDP would exhibit a positive relationship with the movement in the import/GDP ratio. Egypt’s commodity composition of imports up to the year 1999 indicates that the country would remain a net importer under all scenarios. Intermediate products account for 34”: of total imports under scenario A, 3794 and 31”” under scenarios B and C in 1999 from 28% in the base year. On the other hand, commodities imported for final consumption are expected to account for 31”,,, of total imports under scenario A, 30;/, under scenario B and 26”,, under scenario C by 1999 compared with 23”,, in 1979. As an indication of the growth in final demand. the share of imports in GDP would increase from 43.4”” in 1979 to an average growth of 48.9”” in 1999 under scenarios A and B, and is expected to decrease to 38.5”” under scenario C over the same period. The expected increase in the imports/GDP ratio under scenario A and B reflects the increasing share of private and public consumption in GDP. This implies that the increase in foreign resources acquired from imports is expected to substitute for domestic savings in order to maintain the expected rise in consumption and investment. A sustained economic growth in Egypt calls for imports to fall below exports. However. this may not be thecase until 1999. Therefore, the import surplus has to be financed by a combination of long-term borrowing and foreign aid on the one hand, and a substantial reduction in domestic price subsidies and military expenditure on the other.
Concluding remarks ’ Crude petroleum production reached 1979 (Ministry of Planning [I?]).
75OOW barrels
ECONOMIC
April 1986
MODELLING
per day in
Analytical comparison of the three scenarios is based mainly on their different sets of assumptions. The
145
The Egyptian
economy
in 1999:
A. Zeineldin
Egyptian economy might follow one of the scenarios up to the year 1999. and the results presented in Table 4 suggest that scenario B is the most worthy. The different features of interdependence between the various producing sectors are considered. In addition to the updated input-output table used in the projection of alternative development paths, outside sets of factual information were utilized. Problems concerning the reliability of data are inevitable. Given that our study is attempting to look into the obscure future, our goal has been to stimulate further efforts in the field of long-range development policy. When the numerical results are disappointing and give a gloomy picture of the economy, one can only hope they show the direction and trend of the various development trajectories so that priorities can be determined for economic policy. The conclusions presented are based on numerical solutions to the input-output model. and may have to be revised as improvements in the database are introduced. Finally, input-output tables need to be consistent with the principal source of information on the economy, namely the system of national accounts. This will help to avoid any contradictions within the database and, hence. improve the numerical results of the projections.
Outpur
Change, Cambridge University Press, London. 1970. J. K. Barbour, The Growth, Locution. und Structure q/‘ Indusrry in Egypt, Praeger Publishers, New York, 1972.
4
9 10
11 12
Year Plunftir Economic und Sociul Development 198.?183~ 1986/87, Part I. Principul Component.s. Cairo. 1982. 13
14
References 1 M. Bacharach,
146
Biproportional
Mutrices
und
Input-
and J. Hurt, Numericul Cukulutions und McGraw-Hill. New York. 1967. B. Hansen and K. Nashashibi. Foreign Trude Regimes und Economic Decelopmenr: Egypt. NBR distributed by Colombia University Press. New York. 1975. W. Leontief, The Structure of the Americun Econon~~. Oxford University Press, New York. 1953. W. Leontief et al, The Future of the Wbrlrl Economic. Oxford University Press. New York, 1977. W. Leontief et al, Economic Ana/ysis in Inpu-Ourpur Frumework. P. N. Mathur Publisher. India. 1967. W. Leontief et ul, United Nations World Model Dutu Documentation, ‘Rows XXI-30 into Columns Xx2-30’. March 1977. unpublished. R. Mabro, The Egyptiun Economy IYj_l-197-7, Oxford University Press, London, 1974. N. P. Mathur er rrl, ‘An inter-industry coefficients table for India - first approximation’. in W. Leontief ef (11.eds. Economic Anulysis in Inputautput Frumework. P. N. Mathur Publisher, India, 1967. Ministry of Agriculture, Sfrutey! of Agriculturul Derelopment in the Eighries, Cairo, 1982. Ministry of Planning, The Derailed Frume of the FiwR. Beckett
A/gorirhms,
M. L. Weitzman, ‘Iterative multilevel planning with production targets’, Econometricu. Vol 38. 1970. pp 5@ 65. G. Westley, Upduting Inpu-Ottrput Tub/es hj, u Mod$cution of the RAS Method. \citll Case Appiicution IO Jumuicu. Inter-American Development Bank, Papers
on Project Analysis No 17, Washington.
ECONOMIC
MODELLING
DC. 1979.
April 1986
An input-output modej is outlined and constructed to provide a quantitative basis jtir the stud!: of possible scenarios that might be followed bJ, the EgJlptian economy?. The econom!? sf 1979 is depicted and compared with the prqjected economies sf 1989 and 1999. Specijicall~~, the input-output model is formulated as a set of linear equations which are used to project: (a) sales of products of nine producing sectors: (b) private und public household purchases,. (c) capital equipment expenditures; and (d) e.uport.7 und imports by each sector. To prqject changes in the Egyptian economy ocer a period of 20 veurs, from u representutit’e base vear 1979 to an arbitrari? target Jyeat 1999. three pokible scenarios are presented. The:y differ in their underlyin& ussumptions. The 1973 Eg!qptian input-output table is updated to 1979, using a modified Stone’s RAS method. Changes over- time in the structural coefficients are considered and euch equation in the s~~stem can be transformed to explain the linear relation of particular vuriables. The nrrmerical results presented maI> enable policy makers to compare the ulternatire scenurios that might be,followed up to the end of the century*. Kc\~vovrl.\: Economtc modelling: Input-output: Egypt
About 10 years ago, the government of Egypt’ embarked on a new economic policy, which became known as an ‘open-door’ policy. in order to shift the economy towards liberalization or a market-oriented type. Measures were taken to give the private sector some form of free hand. such as the creation of a free foreign exchange market for private transactions and the encouragement of private and foreign investment. The balance of payments improved considerably as a result of the surge in foreign exchange receipts from tourism, workers’ remittances and foreign aid assistance. The result was an economy growing at an annual real rate of 9”,, and an inflation rate of IO”,, (Ministry of Planning [ 12)). Nevertheless, that decade of economic growth was The author is at Long Island University. 11548,USA. This paper is adapted
from Chapter
Greenvale,
7 of the author’s
NY
thesis T/W
Furwe of r/w Eyyprim Ecmtny us u C/WIW N,,w,,<, Airrr,~ur;t~r~ .hwurios: AN fnpur-Ourptrr Srurl~. submitted to New York University
in November
Final manuscript
140
I Egypt’s International I OOOOOOkmz, while the
1978.
received
II
October
not as impressive as it might have been relative to the incoming foreign exchange. Egypt’s population has been growing at an annual rate of ?5”,,. The consequent rise in the man/land ratio has exerted a dominant influence on the direction and shape of economic development efforts. The government still intervenes in the pricing process as well as in agriculture and industry. This policy has kept costs to consumers and industry relatively low. which has encouraged higher consumption growth. Any reduction in foreign exchange receipts resulting from declining petroleum exports. not only in Egypt but over the entire region, could impact workers’ remittances and, accordingly, the Suez Canal revenues may wipe out the high rates of growth the economy experienced over the past decade. The purpose of this paper is to outline an inputoutput model for Egypt. The model is constructed to provide a quantitative basis for the study of possible scenarios that might be followed by the Egyptian economy. The economy of 1979 is depicted and
1985.
restricted to 36000 km’,
boundaries drau an expanse of some cultivable. at, well as the habitable area. IS located mainly along the Nile.
0264_9993/86/02014(rO7 $03.OOV; 1986 Butterworth & Co (Publishers) Ltd
The Egyptian economy in 1999: A. Zeineldirl
compared with the projected economies of 1989 and 1999. Specifically, the model is formulated as a set of linear equations that will be used to project: (a) sales of products of nine producing sectors; (b)private and public household purchases; (c)capital equipment expenditures; and (d)exports and imports by each sector.
Alternative scenarios To project changes in the Egyptian
economy over a period of 20 years, from a representative base year 1979 to an arbitrary target year 1999, three possible scenarios, A. B and C, are presented. They differ from each other in their underlying assumptions. Scenarios B and C are identical to scenario A with respect to the choice of the endogenously determined variables. The three scenarios are characterized with relatively optimistic prescribed income targets. Scenario A assumes an average annual growth rate of gross domestic per capita income of 8.5”,. Scenarios Band C assume lower rates of growth of 8 T; and 7’), respectively.’ Scenario A differs from scenarios B and C. aside from the prescribed income target, in the assumption underlying foreign trade. The magnitude of selected import coefficients is reduced and export coefficients are increased relative to their values in the base year under scenario A. On the other hand. import and export shares in GDP change with prescribed change in gross domestic per capita income under scenarios B
and C. This assumption will serve to demonstrate to what degree the reduction of some imports and the acceleration of some exports may contribute to a narrowing of the gap in the persistant balance of trade deficit. Since the amounts of traded output flowing into and out of Egypt have direct as well as indirect impact on the input-output balance of the economy, changes in import andior export coefficients will have to be matched by a corresponding change in the domestic economic balance (see Leontief [6]. Chapter 11). Table 1 presents a summary of the exogenous as well as endogenous variables under the three scenarios.
The input-output model The model centres around the balance of sectoral output identity. Each equation can be transformed to explain the linear relation of a particular variable and some other variables in the system. Initial
(I-A(f))X(f)Investment
Domestic
Table I.
Alternative
(1)
X(r - 1)) = 0
(2)
Y(t)-D(r)=0
(3)
output
(I-A(r))X(t)household
consumption
C(t)--(‘F(t)=0
(4)
scenarios.
Scenarios
Variables Private and public consumption
A
Endogenous
ECONOMIC
Y(t)=0
demand
D(t) - @X(r)-
Private ‘These ligures are selected to conform with the average annual rare of growth of the economy of 8.2”,, between 1977 and 19X2. albeit below the inflation rate of P,, in the same period.
output
Investment
Domestic output
Hate of population growth (%)
Endogenous
Endogenous
2.5
Endogenous
Endogenous
Endogenous
2.4
Endogenous
Endogenous
Endogenous
2.3
MODELLING
April 1986
Foreign trade
Gross domestic per capita income
Selected import coefficients reduced and export coeflicients increased
Increase at the average annual rate of 8.5”,,
Import and export shares change with gross domestic income
Increase at the average annual rate of 8”,,
Increase at the average annual rate of 7”,,
Final demand
Increase by an average of 1X”,, per year
Increase by an average of I7”,, per year
141
The Egyptian
economy
Public household
in 1999:
A. Zeineldin
consumption
G(t)-yY(t)=O
(5)
Total imports
(6)
M(t)-mX(t)=O Total exports E(r)-rW(t)=O Balance of sectoral
(7) output
(I-A(t))X(t)-C(t)-G(t)-D(r)-E(t)+M(t)=O
(8) Equation (1) shows net output, X(t), as equal to the amount delivered for intermediate u=e, A(t)X(r), and to final demand except investment, k: in a given year. Investment demand, o(t), given in Equation (2) equals the difference between the output levels in two successive years, ie the increment in output multiplied by the pertinent capital coefficients, B. Equation (3) describes domestic output as divided between intermediate demand and final demand plus investment. Private and public household consumption demand for goods and services are shown in Equations (4) and (5) as functions, c and y, of gross domestic income, y(t).” The c and y reflect the share of each commodity consumed by private consumers and the government, respectively. In Equation (6) M(t) describes total imports as a fixed proportion, 111, of domestic output. Total exports, E(t), given in Equation (7) on the other hand are represented as a certain amount, r, of the world pool of exports in a given year.4 Finally, the balance of sectoral output (8) an identity. describes total supply of domestic output, X(t) less M(r), is equal to total demand which consists of intermediate demand, A(t)X(t), plus final demand, C(t)+G(t)+D(t)+E(t). in year t.
Solution to the system The numbers obtained from solution of the inputoutput model, for practical policy, result from two
3 Expenditure components of GNP are not available: Instead we used GDP to equal CD/ (the sum of Incomes accruing from production) plus net indirect taxes (indirect taxatton less production subsidies). 4A similar assumption is made in the world model (see Leontiefrr U/ [61. Chapter II). Note that r, the vector of export coefticients. represents exports of a given commodity as equal to Egypt‘s exports of that commodity divided by the world pool of exports of same commodity.
142
types of quantitative information. One is data used in the form of appropriate structural coefficients, and the other type is specific numerical values assigned to pertinent exogenous variables. To appraise the influence of factors considered external to the system, the model consists of an identity and seven equations in 12 variables. Consequently, six variables must be specified exogenously for final demand, Y(t), gross domestic income. Y(t). final demand except investment, Y(r), domestic output in the prebase year, X(t - l), world pool of exports, IV(t), and, finally. initial sectoral output, X(f). Given the structural characteristic oft he economy as represented by the sets of flow and capital coefficients, we can examine the dynamic development of the economy resulting from the selection of a particular scenario to be implemented. A significant stride for the numerical solution of the input-output system is the choice of a base year. The most recent input-output table for Egypt dates back to 1973, and the revised available data on the system of national accounts are only up to 1479. As a result, the input-output table is updated to 1979. which will serve as the base year, using a modified Stone’s RAS met hod developed by Westley [14].’ The updated table contains 13 producing and consuming sectors. A capital matrix for Egypt does not exist at present. Lacking a better alternative, a capital matrix for India is borrowed and used in the calculation of investment demand (see Mathur [lo]). It is necessary to perform some aggregation of sectors to make the computation consistent with both the capital matrix and the system of national accounts. Table 2 presents the aggregated sectors. In a developing economy like that of Egypt, technological change may be regarded as adhering to the general pattern followed by developed economies. This is to say that, as new industries are installed (or, for that matter, as existing industries are modernized), developing economies import available technologies currently in use in industrialized economies. Therefore, account is taken of the possibilities of introducing new technologies in the different sectors of the economy in the manner assumed in the world model. Specifically, changes over time in some of the structural coefficients will be associated with overall projected world changes in technology (see Leontief rr u/ [S]). This process is done by multiplying specific coefficients by ‘coefficient updators’ in all scenarios. In calculating the values of the endogenous variables
’ This technique utilizes in part. the structural coeflicients of an existing input-output table at current prices. and time series data from the national income accounts for the updatmg years.
ECONOMIC
MODELLING
April 1986
The
Producing sector
I 2 3
-I
: 7
8 9
Table 3.
Sector classification for 1979 input-output
Agriculture. hunting. forestry and fishing Mming. quarrying. crude oil and natural gas Cotton and fibres. wood and cork products. spinnmg and weavin_g. paper and cardboard. rubber, chemicals. metallic and non-metallic products. and electric equipment Electricity. gas and water Construction Wholesale and trade. restaurants and hotels Transportation. storage. communication and Suez Canal Fmance. insurance. real estate. and business ser\ ice Community. social and personal service
in 1999:
A. Zeineldirl
Numerical results The input-output model of the Egyptian economy described earlier is used to project three scenarios from a base year 1979 to a target year 1999. Table 3 summarizes the numerical results presenting the aggregative variables from the complete printout of the solutions. Each column shows the total value of the variables depicted at the top row. Domestic
output,
X
Comparison of the results of the computation for scenario A relative to scenarios Band C shows that the rate of growth of domestic output will tend to vary. A shift from scenario A to scenario B would result in an increase in domestic output of 16.3O,,in I989 and 14.3”,, in 1999; a shift from scenario B to scenario C would result in a decline in domestic output of l.S’,, in 1989 and 0.3O, in 1999; and a shift from scenario A to scenario C is expected to yield an increase in domestic output of 14.2”~~and 13.8Y, in 1989 and 1999. as can be seen in Table 4. The shares of major sectors (agriculture. mining and quarrying, manufacturing and transport) in total output. ie the percentage of total output originating in each major sector will also tend to vary. While agricultural output constituted 20.9”,, of total output in 1979. the share of agriculture is expected to
table for Egypt.
Aggregate sector
Full designation
economy
must be balanced within the economy, intermediate and final demands for traded outputs influence both directly and indirectly the balance of sectoral output. This relationship is presented by the solutions (6), (7) and (8) in the mode1.6
in terms of the given values of the exogenous variables and the various coefficients for each scenario, we start by SolvingEquation (1) with a prescribed bill of final demand, k: Required stocks that would permit the production sectors to increase their capacity output are obtained from the solution of Equation (2). The resulting investment for expansion, o(t). when added to final demand will, by an iterative process, give rise to the same sectoral output, X(t), in Equation (3). To explain sectoral composition of the economy under a growth process, two vectors of consumption expenditures by sector serve as the basis for projecting private and public household consumption in Equations (4) and (5). The Egyptian economy is linked with the rest of the world through flows of traded goods and services. While the input and output of these goods and services
Table 2.
Egypriun
Agriculture Mining and quarrymg Manufacturing
ElectricIt!. gas and water Constructlon Wholesale and retail trade Transportation and communication Fmance
“The input-output model required the use oftwo~eparatecomputer programs: one for updating the input output table. and the other for simultaneous solution of the system. Some 53 subroutes usmg FORTRAN language have been utilized to perform a total of seven runs: two for each scenario in 19X9 and 1999. and one for the updating procedure.
Communit! her\ ice
Values of variables used under scenarios A. B and C (million Egyptian pounds). Variables
Scenario
X
k’
G
D
E
1979
25719
1794x
x3x1
2069
4150
334x
- 5433
12515
19x9 A B c
29787 345X3 34064
25675 25667 24945
I’630 I2676 12292
3017 30X2 ‘793
5274 51x8 5523
4754 4711 4737
-x552 - X606 -799x
17123 17061 16947
I999 A B C
36005 41117 40989
3465X 34554 33462
17231 169X1 15938
40x4 3884 3771
6545 6985 7050
6798 6704 6703
-11192 -11344 - 10372
23466 ‘3’10 -.23090
ECONOMIC
MODELLING
c
April 1986
hl
j’
143
The Ey~~priun economy
A. Zeineldin
in 1999:
average of 1.1:; under all scenarios by the 1990s. reflecting capacity utilization of cultivable land coupled with high rates of population growth. The industrial sector encompasses a wide range of activities with the main industries being cotton-based spinning and weaving. food processing. engineering and metallurgy. According to scenario A. the rate of growth of the industrial sector is expected to grow from 6”” in the base year to 11.4”” in 1999. slightly higher under scenario B, up to 13.10,,. and is expected to be relatively lower under scenario C. up to 10.2”,, over the same period. While the increase in output by the target year is anticipated to be widespread in the three scenarios relative to the base year, cotton yarn and textile production are expected to decline. The share of textiles in total industrial output is expected to decrease from 460, in 1979 to 34”,, in 1999 under scenario A, and 33”” and 30”,, respectively under scenarios Band C. Some unfavourable conditions may be responsible for the expected lower shares. among them, a shortage of skilled labour which is a direct
remain roughly the same under all scenarios at 23.7”, by 1999. This is because the cultivable area in Egypt has been expanded to the borders of the desert and no further expansion in cultivable land is possible. at least by the end of the century. The problem is further aggravated by food subsidies on basic agricultural products (wheat and flour, rice. sugar and edible fats). These subsidies which accounted for 70:; of total government outlays in 1979 (Ministry of Agriculture [ 111) tend to slow the growth of the agricultural sector as a result of the cost-price distortion that diverts resources away from this sector. The average growth rate of per capita agricultural products is expected to remain the same under scenario A during the 1980s and to increase by 1.71; and IS?,, under scenarios B and C respectively over the same period, as can be seen from Table 5. This may be the result of the increase in food subsidies (taking the form of government transfer of funds to various agencies) and a higher bill of imports. On the other hand, these rates of growth of per capita agricultural products are expected to decrease by an
Table 4.
Percentage change in sectoral output under alternative scenarios. I989
1999
Sector
Shift from A to B
I
+ 16.5
2 3 4 5 6 7
8 9
Agriculture Mining and quarrying Manufacturing Electrcity. gas and water Construction Wholesale and retall trade Transportation and communication Fmance Community service Total
Table 5.
Agricultural
+
Shift from B to C -3.1
Shift from A to c + 12.9
Shift from A to B +2.x
Shift from B to C
Shift from A to c
-0.5
+ 2.3
+ 3.2
- 0.9
+ 2. I
+ I.1
- 0.3
+ 0. R
+ 1.2
- I.4
- 0.2
+3.3
- 0.3
+ 1. I + 2.6
16.2
I I.9
f
+
16.3
+ I.0
+ 1.7
+ X.2
-0.x
+21.2
+6.3
- 0.3
+ 59
+ 30.6
- 0.9
+ 29.3
+ 6. I
- 0. I
+ 6.0
I.5
+ 29.9
+ 13.X
- 0.3
+
+ 13.6
+31.x
-
I.2
+ 33.5
+ 13.9
-0.3
+x.1
- I.5
+ 6.5
+4.x
- 0. I
+ 16.3
~ I.5
+ 13.3
+ 14.2
+35.1
-0.3
I .3..i
+1.6 + 13.8
output. Agricultural output (million 1979 Egyptian pounds)
Share of agriculture in total output (“,,)
Per capita agricultural output (Egyptian pounds)
1979
5377
20.9
131
19X9 A B c
7029 8192 7936
23.6 23.7 23.3
151
I999 A B c
X66X x909 XX65
24. I
144
131 1-1
123 I32 134
12.7 22.6
ECONOMIC
MODELLING
April 1986
The Egyptian
result ofgovernment ownership and the relatively low wages offered by industry. The mining and quarrying sector has developed into one of the key industries in Egypt since the mid-1970s. It includes the petroleum industry which accounted for 1.59, of GDP and 699, of the values of exports in 1979. The sharp increase in international petroleum prices in the 1970s encouraged exploration which resulted in new discoveries and more production.’ Under the three scenarios, petroleum products are expected to exceed the textile products as Egypt’s major exports by 1999. Ifprojection offuture production ofcommodities is made with some degree of uncertainty, projection of future crude oil production, specifically, is less certain. This may be due to changes in domestic and foreign consumption, changing conditions in the international petroleum market and pricing policy development in the spot market. None of these factors is considered in this study. The Suez Canal is an important and stable source of revenue to Egypt. After widening and deepening the canal in 1980, receipts can increase only if the toll structure changes. The Suez Canal contributed 33; of GDP in 1979, and that share is expected to remain fairly constant under all scenarios by 1999. Finul
demand
Projected domestic expenditures indicate that GDP would increase at an average rate of 36.5”, in 1999 from 289; in 1979 under scenario A. 36”” over the same period under scenario B and 35”, under scenario C. At the same time, final domestic demand (private and public consumption, gross investment and exports) is expected to grow by 33”~ up to the year 1999 under scenario A, and 32.5’1, and 30”” under scenarios B and C, respectively, over the same period from 23.6”” in the base year. This is due largely to the expected increase in private consumption share in GDP of 74”” under scenarios A and B, and 717; under scenario C in 1999 from 67 S;, in 1979. This result suggests that there is a definite trend over the period 1979-99 for private consumption to increase faster than GDP and for domestic saving to decline. Gross fixed investment, according to the numerical solution of the input-output system, is expected to show a marked degree of stability relative to the base year under the three scenarios. This is due to the steady growth of public sector investment which accounted for an average of 774, of gross investment in the period 1976-79. However, gross fixed investment is expected
economy
in 1999: A. Zeineldin
to grow at the average rate of 37”, under scenario A. 36”, and 35.8:b under scenarios B and C by the target year from 35.6”, in the base year. Most industrial products in Egypt are destined for the domestic market as a result of increasingly buoyant demand. The share of exports is expected to remain virtually stationary at 28.3”” of GDP until 1999 under scenarios A and B, and to decrease somewhat to 26.5’,, under scenario C relative to the base year share of 26.79,;. Moreover, the share of exports in the gross value of industrial production is expected to decline steadily from 1493,in 1979 to 9”, under scenarios A and B, and to 7”; under scenario C in 1999. Finally, as a result of the expected decline in textile exports to the end of the century. exports of engineering products are expected to replace exports of textiles by 1999 under the scenarios. In contrast to the consumption/GDP ratio which is expected to increase under all scenarios, the share of gross fixed investment in GDP would exhibit a positive relationship with the movement in the import/GDP ratio. Egypt’s commodity composition of imports up to the year 1999 indicates that the country would remain a net importer under all scenarios. Intermediate products account for 34”: of total imports under scenario A, 3794 and 31”” under scenarios B and C in 1999 from 28% in the base year. On the other hand, commodities imported for final consumption are expected to account for 31”,,, of total imports under scenario A, 30;/, under scenario B and 26”,, under scenario C by 1999 compared with 23”,, in 1979. As an indication of the growth in final demand. the share of imports in GDP would increase from 43.4”” in 1979 to an average growth of 48.9”” in 1999 under scenarios A and B, and is expected to decrease to 38.5”” under scenario C over the same period. The expected increase in the imports/GDP ratio under scenario A and B reflects the increasing share of private and public consumption in GDP. This implies that the increase in foreign resources acquired from imports is expected to substitute for domestic savings in order to maintain the expected rise in consumption and investment. A sustained economic growth in Egypt calls for imports to fall below exports. However. this may not be thecase until 1999. Therefore, the import surplus has to be financed by a combination of long-term borrowing and foreign aid on the one hand, and a substantial reduction in domestic price subsidies and military expenditure on the other.
Concluding remarks ’ Crude petroleum production reached 1979 (Ministry of Planning [I?]).
75OOW barrels
ECONOMIC
April 1986
MODELLING
per day in
Analytical comparison of the three scenarios is based mainly on their different sets of assumptions. The
145
The Egyptian
economy
in 1999:
A. Zeineldin
Egyptian economy might follow one of the scenarios up to the year 1999. and the results presented in Table 4 suggest that scenario B is the most worthy. The different features of interdependence between the various producing sectors are considered. In addition to the updated input-output table used in the projection of alternative development paths, outside sets of factual information were utilized. Problems concerning the reliability of data are inevitable. Given that our study is attempting to look into the obscure future, our goal has been to stimulate further efforts in the field of long-range development policy. When the numerical results are disappointing and give a gloomy picture of the economy, one can only hope they show the direction and trend of the various development trajectories so that priorities can be determined for economic policy. The conclusions presented are based on numerical solutions to the input-output model. and may have to be revised as improvements in the database are introduced. Finally, input-output tables need to be consistent with the principal source of information on the economy, namely the system of national accounts. This will help to avoid any contradictions within the database and, hence. improve the numerical results of the projections.
Outpur
Change, Cambridge University Press, London. 1970. J. K. Barbour, The Growth, Locution. und Structure q/‘ Indusrry in Egypt, Praeger Publishers, New York, 1972.
4
9 10
11 12
Year Plunftir Economic und Sociul Development 198.?183~ 1986/87, Part I. Principul Component.s. Cairo. 1982. 13
14
References 1 M. Bacharach,
146
Biproportional
Mutrices
und
Input-
and J. Hurt, Numericul Cukulutions und McGraw-Hill. New York. 1967. B. Hansen and K. Nashashibi. Foreign Trude Regimes und Economic Decelopmenr: Egypt. NBR distributed by Colombia University Press. New York. 1975. W. Leontief, The Structure of the Americun Econon~~. Oxford University Press, New York. 1953. W. Leontief et al, The Future of the Wbrlrl Economic. Oxford University Press. New York, 1977. W. Leontief et al, Economic Ana/ysis in Inpu-Ourpur Frumework. P. N. Mathur Publisher. India. 1967. W. Leontief et ul, United Nations World Model Dutu Documentation, ‘Rows XXI-30 into Columns Xx2-30’. March 1977. unpublished. R. Mabro, The Egyptiun Economy IYj_l-197-7, Oxford University Press, London, 1974. N. P. Mathur er rrl, ‘An inter-industry coefficients table for India - first approximation’. in W. Leontief ef (11.eds. Economic Anulysis in Inputautput Frumework. P. N. Mathur Publisher, India, 1967. Ministry of Agriculture, Sfrutey! of Agriculturul Derelopment in the Eighries, Cairo, 1982. Ministry of Planning, The Derailed Frume of the FiwR. Beckett
A/gorirhms,
M. L. Weitzman, ‘Iterative multilevel planning with production targets’, Econometricu. Vol 38. 1970. pp 5@ 65. G. Westley, Upduting Inpu-Ottrput Tub/es hj, u Mod$cution of the RAS Method. \citll Case Appiicution IO Jumuicu. Inter-American Development Bank, Papers
on Project Analysis No 17, Washington.
ECONOMIC
MODELLING
DC. 1979.
April 1986