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Some Aspects of the U.A.R.’s First Five-Year Plan

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1969
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Andreas S. Gerakis

BETWEEN July 1, 1960 and June 30, 1965 the United Arab Republic was engaged in attempting to implement its First Five-Year Plan. This was a period of many difficulties for the country: its already high rate of population growth ran even higher, there were hostilities in Yemen, a crop failure in 1961/62, and inevitable transitional problems associated with the large-scale nationalization programs which were carried out in these years. In spite of these troubles, in many respects the country made good economic progress. Yet the U.A.R.’s intensive efforts to attain ambitious objectives simultaneously in development, welfare, and defense overtaxed its resources with resulting strains on its internal and external equilibrium. How these strains arose and what they meant for the future progress of the national economy will be of interest to other developing countries.

Output and Employment

The development effort of the United Arab Republic during the period of the First Five-Year Plan may be credited with a number of significant achievements. Output, as measured by the gross domestic product (GDP) in constant prices (Tables 1 and 2), increased by 37 per cent over the years of the Plan, i.e., at a compound rate of 6.5 per cent per annum (Table 2). Although this was a little short of the Plan objective of about 40 per cent, it represented a considerable improvement over the preceding five years. In per capita terms also, the growth rate accelerated between 1955/56-1959/60 and 1960/61-1964/65 (the Plan period) from 2.5 per cent to 3.6 per cent a year. Since the rate of increase of the population rose from 2.3 per cent to 2.8 per cent, this was a noteworthy accomplishment.

Table 1.United Arab Republic: Output and Expenditure, 1954/55-1964/651(In millions of Egyptian pounds)
Total, 1955/56–1959/601959/60Total, 1960/61–1964/65
1954/55I2II31964/65
Output41,0145,7531,2811,3768,2861,886
Demand1,0396,1411,3711,3719,0142,126
Investment1468401711711,513364
Consumption8935,3011,2001,2007,5001,762
Private7534,3899729725,8461,331
Public1409122282281,654431
Excess demand absorbed
by2538890–5728241
Net borrowing from abroad25117–5–541876
Price increases27195310165
Sources: International Monetary Fund, International Financial Statistics; Ministry of Planning of the U.A.R.; and Bent Hansen and Girgis A. Marzouk, Development and Economic Policy in the U.A.R. (Egypt) (Amsterdam, 1965).

Because of rounding, figures do not add to all totals in this and following tables.

With output at constant 1954/55 prices.

With output at constant 1959/60 prices.

Represents GDP at constant market prices.

Sources: International Monetary Fund, International Financial Statistics; Ministry of Planning of the U.A.R.; and Bent Hansen and Girgis A. Marzouk, Development and Economic Policy in the U.A.R. (Egypt) (Amsterdam, 1965).

Because of rounding, figures do not add to all totals in this and following tables.

With output at constant 1954/55 prices.

With output at constant 1959/60 prices.

Represents GDP at constant market prices.

Table 2.United Arab Republic: Growth of Output, Expenditure, and Population, 1955/56-1959/60 and 1960/61-1964/65(In per cent per annum)
1955/56-1959/601960/61-1964/65
Total growth rate during period
Output26.337.1
Demand32.055.1
Investment17.1112.9
Consumption34.446.8
Private29.136.9
Public62.989.0
Annual compound growth rate
Population2.32.8
Output4.86.5
Output per capita2.53.6
Real private consumption per capita11.71.7
Real public consumption per capita26.18.8
Sources: Table 1; International Monetary Fund, International Financial Statistics; and United Nations, Monthly Bulletin of Statistics.

Based on figures for private consumption at current prices deflated by the cost of living index and divided by population.

Based on figures for public consumption at current prices deflated by the cost of living index and divided by population.

Sources: Table 1; International Monetary Fund, International Financial Statistics; and United Nations, Monthly Bulletin of Statistics.

Based on figures for private consumption at current prices deflated by the cost of living index and divided by population.

Based on figures for public consumption at current prices deflated by the cost of living index and divided by population.

Employment actually surpassed the Plan’s objective of 7 million, rising from about 6 million in 1959/60 to about 7.3 million in 1964/65. While some of this in crease should probably be discounted as representing an overstaffing of government services and enterprises dictated by social rather than economic considerations, nevertheless, it can be surmised that there was an appreciable reduction in the country’s unemployment, open or disguised.

One event with an important actual and potential effect on U.A.R. output was the completion of the first phase of the High Dam which has enabled the United Arab Republic to control, at long last, the waters of the Nile. Already this control has averted what would otherwise have been a flood disaster in 1964 and serious injury to agricultural output from the low rainfall upstream in 1965. But the country has not even now reaped the full benefits anticipated from the High Dam. Eventually, when the entire project is completed, it will make possible a substantial expansion of the cultivated area, the conversion of a considerable acreage of cultivated land from basin irrigation to perennial irrigation, improved navigation along the Nile, a large increase in output and exports of rice, and a very significant expansion in power production. It has been estimated that the direct increase in national income as a result of the High Dam will amount annually to 15 per cent or more of GDP (in 1964/65).

Demand

Demand, as measured by expenditure in current prices, rose by some 55 per cent over the years of the First Plan. Of the three components of demand, investment expenditure in current prices went up by no less than 113 per cent between 1959/60 and 1964/65. For the years 1960/61-1964/65 as a whole, the first Plan envisaged fixed capital formation totaling LE 1,577 million. In fact, fixed capital formation during these years amounted to LE 1,513 million in current prices, or somewhat less than LE 1,470 million in real terms. In this important field, then, the Plan came near to fulfillment.

Public consumption expenditure in current prices rose from LE 228 million in 1959/60 to LE 431 million in 1964/65, or by 89 per cent. Since the aim was to reduce this expenditure as a proportion of GDP, the results were disappointing; instead of falling from 17 per cent to 15 per cent of GDP, public consumption expenditure rose to 21 per cent. This development represented one of the sharpest and most unwelcome deviations from the objectives of the Plan.

Private consumption expenditure rose by more than one third between 1959/60 and 1964/65; as a percentage of GDP, however, it declined from 71 per cent to 65 per cent, the latter figure being the figure provided under the Plan. In real terms and on a per capita basis, private consumption expenditure rose at a compound rate of 1.7 per cent a year. The relatively modest extent of this increase should be attributed mainly to government efforts to restrain the growth of private disposable income, chiefly by increases in taxation and in contributions for social security plans.

The over-all large increase in demand was made possible and financed by the expansionary monetary and credit policy pursued by the authorities; domestic credit outstanding doubled during the Plan years. Claims of the banking system on the government sector rose by more than 130 per cent, reflecting the country’s heavy budget deficits, and credit to the nongovernment sector increased by somewhat less than 70 per cent. In part the additional credit created by the banking system was absorbed by changes in net foreign assets, which fell from a large positive amount to a negative amount. Even so, the money supply rose by 64 per cent while the concurrent increase in GDP in real terms amounted to 37 per cent.

Excess Demand

Table 1 shows that expenditure exceeded output in the period reviewed. Demand totaled LE 9,014 million in 1960/61-1964/65 and output, LE 8,286 million. Thus, excess demand amounted to LE 728 million. Of this excess, LE 310 million (43 per cent) was absorbed by price increases and LE 418 million (57 per cent), by current account deficits.

Prices

Table 3 summarizes price changes during the years 1959/60 to 1964/65; in this period the cost of living rose by 10 per cent and the wholesale price index by 8 per cent. The fact that price increases were so limited was due to determined government efforts to suppress inflation through rationing, price controls, and subsidies; export taxes were not used primarily for this purpose, but they nevertheless had the same effect. These methods of holding down prices had some serious disadvantages. A black market developed for controlled or rationed commodities. The budgetary difficulties of the Central Government were aggravated by the extent of the Ministry of Supply’s expenditures on cost of living subsidies. Low prices tended to boost private consumption and to shift the burden of absorbing excess demand onto the balance of payments. Furthermore, the price structure became distorted, and, as a result, economic incentives for a rational allocation of resources and effort were probably impaired.

Table 3.United Arab Republic: Price and Wage Indices, 1959/60-1964/65(1959/60=100)
PricesGross Average Wages1Output per Worker2
Cost of livingWholesaleIn all sectorsIn agricultureIn all sectorsIn agriculture
1960/61101.0100.094.291.197.989.6
1961/62100.0102.0100.9107.699.183.0
1962/6398.0101.0114.2115.2104.594.1
1963/64100.0102.0121.1125.5110.198.8
1964/65110.0108.0131.2146.7112.3101.2
Sources: International Monetary Fund, International Financial Statistics, and U.A.R. Ministry of Planning.

Figures for wages and salaries, including fringe benefits (but not including receipts of wage earners and salary earners under the existing profit-sharing scheme, which applies to employees of the nationalized industries), divided by employment figures.

Value added at constant prices divided by employment.

Sources: International Monetary Fund, International Financial Statistics, and U.A.R. Ministry of Planning.

Figures for wages and salaries, including fringe benefits (but not including receipts of wage earners and salary earners under the existing profit-sharing scheme, which applies to employees of the nationalized industries), divided by employment figures.

Value added at constant prices divided by employment.

The policy of suppressing inflation should also be evaluated in relation to wage and productivity developments. Table 3 shows, in addition to price indices, indices of average gross wages and of output per worker. The table reveals that, in the period surveyed and for all economic sectors combined, average gross wages rose by 31 per cent, while productivity increased by only 12 per cent. In the agricultural sector the disparity was even larger; wages went up by 47 per cent and productivity, by just 1 percent.

As indicated above, these wage increases did not result in commensurate increases in disposable incomes, because they were offset by higher taxes and social security contributions. However, their impact on costs of production was not similarly offset, so that business profits were squeezed and economic incentives were undermined. Direct quantitative evidence of this profit squeeze is not available, since the Ministry of Planning has not published statistics on profits for any year after 1960. The Ministry does publish, nevertheless, statistical series on “nonwage” and wage income; these series indicate a considerable redistribution in favor of the wage earners and a corresponding reduction in the share of nonwage income—particularly so in the agricultural sector.

Balance of Payments

The Plan allowed for heavy current account deficits during its first four years, but envisaged that these deficits would be progressively reduced and that, beginning in the fifth year, surpluses would be achieved in order to repay foreign indebtedness. In fact, the total deficits incurred over the Plan period were considerably less than had been projected, but the hoped-for transformation failed to materialize; in 1964/65 and subsequent years the current account registered large deficits.

Imports increased during the Plan period not only in absolute terms (see Table 4) but also in relation to GDP. Their increase was partly attributable to the fact that, as indicated earlier, consumption rose and that there was, in addition, an unwelcome increase in the import content of consumption (i.e., the fraction of domestic consumption representing imports). Moreover, the increase in total imports reflected the country’s intensified development effort.

Table 4.United Arab Republic: Foreign Trade, 1955/56-1964/65(Values in millions of U. S. Dollars)
1955/56-1959/601960/61-1964/65
Annual Average1959/60Annual Average1964/65
ValuePer centValuePer centValuePer centValuePer cent
Imports
Consumer goods176.929.4197.030.4249.730.7291.931.7
Intermediary goods243.840.5256.139.5270.033.2307.333.3
Investment goods1182.130.2195.630.2294.536.2322.535.0
Total602.7100.0648.7100.0814.2100.0921.8100.0
Exports
Onions11.52.410.11.815.02.917.52.9
Rice26.45.513.52.541.78.149.48.1
Raw cotton334.270.0385.770.7288.956.1340.955.9
Fuels8.01.713.72.536.87.149.08.0
Cotton yarn17.53.721.84.037.17.254.08.9
Cotton fabrics12.62.620.43.721.34.123.93.9
Other66.914.080.414.774.214.475.212.3
Total477.3100.0545.3100.0515.1100.0610.0100.0
Source: Customs data.

Including goods classed as “unspecified” that are, in fact, largely investment goods.

Source: Customs data.

Including goods classed as “unspecified” that are, in fact, largely investment goods.

These trends in imports did not bear out the expectations of the authors of the First Plan, who believed that the investment projects they had provided for would lead to far-reaching import substitution. Indeed, import substitution was expected to be so important that imports of consumer and intermediary products, and even total imports, would decline in absolute magnitudes. Some replacement of imports by home production was indeed achieved, notably by expanding output of fertilizers and petroleum. Nevertheless, the results attained fell far short of the Plan targets. In part this was due to circumstances that could not have been easily foreseen by the planners, as, for instance, the acceleration of the country’s already rapid rate of population growth, which necessitated heavy imports of basic foodstuffs over and above those forecast in the Plan. On the other hand, a number of the technical assumptions of the Plan proved unrealistic. Thus, according to an Egyptian source, errors were made in estimating the time needed to complete industrial investments and in planning industries so that they would complement each other. This source asserts that both these errors led to larger and longer dependence on imported raw materials and semi-industrialized goods.1

Of special interest is the experience of some industries established in the hope that they would save on imports of finished consumer products. What actually happened was that imports of such goods were replaced by increased imports of raw materials or spare parts. Indeed, it may be argued that the end result was a net increase in imports, in that if the new industries had not been created, imports of consumer goods would have been severely restricted by the authorities in accordance with existing policy. It proved difficult, however, to curb imports of intermediate goods needed by these industries, because such action would have meant idling part of the country’s productive capacity and laying off some of its workers.

Over the Plan period as a whole, average annual exports rose by some 8 per cent above their depressed levels in the preceding five years. Between 1959/60 and 1964/65 they increased by about 12 per cent, i.e., by considerably less than the 36 per cent increase envisaged in the Plan. These data suggest that, although the country’s export performance improved during the Plan period, it was somewhat less than satisfactory. There were three main reasons for this. One was the heavy damage to agricultural production inflicted by pests in 1961/62.2 A second was that population growth cut even deeper into the country’s exportable surpluses. Third, there is considerable evidence of a weakening of incentives to produce goods for export.

NOTES ON THE MECHANICS OF GROWTH AND DEBT

World Bank Staff Occasional Paper No. 6

BY BENJAMIN B. KING

In assessing the net growth-producing effect of a loan, the borrowing country must consider the interest payments of all outstanding loans as well as the positive effects of the creation of new savings, which provide the springboard for investment and expansion. If the marginal savings ratio is related to gross domestic product, its behavior is different from that when it is related to gross national product—i.e., after payment of interest—with some odd theoretical results. This issue in growth model-building appears not to have been raised before. The paper shows that more than an accounting difference is involved. The author also develops a simplifying notation for the kind of expressions which occur in debt-cum-growth models. This notation may prove a useful addition to tools of calculation in this and other fields.

Benjamin B. King is an Economic Adviser in the Asia Department of the World Bank, in which he has served more than two decades.

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As already mentioned, the policies of permitting extensive increases in wages and of holding the line on prices led, in all probability, to a squeeze on profit margins, particularly in agriculture—the main sector producing export goods. There are, unfortunately, no comprehensive statistical data on prices, wages, and profits directly related to export production. There is, however, a good deal of nonstatistical information confirming the argument made here. For one thing, toward the end of the Plan period, farmers were reported to have been finding cotton cultivation much less attractive than before, with the result that they eventually were not taking up their full acreage allotments. There were also reports that rice farmers were complaining about rising costs and that, for this reason, many of them were trying to migrate to the cities. Moreover, it is understood that the textile industry, which contributes the bulk of the country’s industrial exports, was being hampered by the deteriorating cost situation; textile exports, therefore, were being subsidized on a heavy and increasing scale.

Despite the over-all lag in export growth, some progress was made in diversifying exports. As indicated in Table 4, the share of cotton exports in total exports declined over the period of the Plan, while the shares of other export products, i.e., onions, rice, fuel, cotton yarn, and cotton fabrics, increased.

The end result of these changes in imports and exports was that the trade deficit widened substantially (see Table 4). At the same time the trade deficit vis-à-vis the Western European countries and the Western Hemisphere increased while the U.A.R. surplus vis-à-vis the Eastern European countries rose appreciably. These developments reflected a shift in exports away from convertible currency areas, this shift being associated with the United Arab Republic’s continued reliance on bilateralism and a deterioration in its competitive position in Western markets.

In the services sector of the balance of payments there was a marked increase in receipts, mainly those from Suez Canal dues and—after 1963—tourism. There were also increases in payments, especially government expenditures in foreign countries and interest and dividends, owing to the large expansion in U.A.R. foreign indebtedness. The surplus on invisibles rose over the period reviewed, thus offsetting to some extent the trade deficit. Nevertheless, the current account deficit rose considerably.

The Capital Account and Net Foreign Assets

This current account deficit was partly financed by a surplus in the capital account, as the inflow of long-term and medium-term capital increased substantially. Some of the inflow represented U.S. assistance under Public Law 480 and other aid programs repayable in domestic currency; for the most part, however, it consisted of loans to be repaid in foreign exchange. This increase in borrowing eventually led to a large increase in repayments, which placed a heavy burden on the balance of payments in the years following the completion of the First Plan.

The remainder of the current account deficit was financed by a decline in net foreign assets, including the country’s IMF position. The decline amounted to about $280 million and, at the end of the period reviewed, net foreign assets were negative (equivalent to —$92 million). A fraction of this decline represented an increase in U.A.R. debit balances on clearing accounts. Another part reflected increased short-term borrowing from foreign commercial banks. This latter method of financing proved helpful for a while, but eventually the problem of rolling over and further enlarging a substantial volume of foreign banking facilities in the face of continuing balance of payments deficits and growing restlessness on the part of creditors proved difficult to manage. Since the end of the Plan period, the United Arab Republic has been obliged to reduce considerably its reliance on such short-term financing.

Conclusions

The experience of the United Arab Republic with its First Five-Year Plan may be of interest to other countries attempting to speed up their development process. The first lesson to be gained from this experience is, of course, the need to hold over-all demand within the limits of productive capacity. Failure to do so may lead to price inflation, which, inter alia, tends to undermine the balance of payments and the exchange rate. Or, if, as in the United Arab Republic, excess demand is absorbed by current balance of payments deficits financed by borrowing from abroad, a heavy debt-servicing burden is placed on the economy, and balance of payments equilibrium becomes difficult to achieve in the future. A second lesson relates to price policy. If an attempt is made to prevent inflationary pressure from raising prices, distortions, which inevitably dampen economic incentives, are introduced into the structure of relative prices. A third lesson concerns incomes policy. Excessive increases in wages, particularly in the face of efforts to hold prices down, create problems. Even if the authorities offset the impact of wage increases on disposable incomes by means of, say, higher taxes, the effect on costs of production is not so offset; profit margins are squeezed and productive incentives are further impaired. Finally, efforts to improve the balance of payments with an investment policy aiming at import substitution may not be successful, particularly so when total demand is not kept under effective control. In any event, there are important slips ’twixt the cup and the lip insofar as import substitution is concerned; a number of these are illustrated in the U.A.R. experience. In conclusion, it must be emphasized that there are definite limits to the rate at which a country can accelerate its economic development; these limits cannot be violated with impunity.

See National Bank of Egypt, Economic Bulletin, Volume 19 (1960), p. 127.

This is reflected in comparisons of average exports in 1955/56-1959/60 and 1960/61-1964/65 but not, of course, in comparisons between the years 1959/60 and 1964/65.

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