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Capital-output ratio and economic development : |b studies in conception and application, with special.. Korayem, Karima Aly Mohamed 1970

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THE CAPITAL-OUTPUT RATIO AND ECONOMIC DEVELOPMENT I Studies in Conception and Application, with Special Reference to Planning Experience in the U.A.R. EARIMA A.M. KORAYEM B.A., Cairo University, 1965 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF M.A. in the Department of Economics We accept this thesis as conforming to the required standard: THE UNIVERSITY OF BRITISH COLUMBIA August, 1970 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the Head of my Department or by his representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of £? CO l/\Q CJ" The University of British Columbia Vancouver 8, Canada Date 4 l\*rJ '110 TABLE OF CONTENTS Chapter I Introduction . • % Chapter II The Concept of the Capital-Output Ratio 3 1- The Meaning of the Capital-Output Ratio ........3 2- Problems of Estimating the Capital-Output Ratio ........8 3- Methods of Estimating the Capital-Output Ratio .......17 Chapter-Ill The Appraisal of the Five-Year Plan '* .......29 1- A Historical Review of the Egyptian Economy ....... 30 2- The Five-Year Plan 38 3- Appraisal of the Invest ment Program in the Plan 44 Appendix to Chapter III 79 Chapter IV The Capital-Output Ratio and the Development Process 88 1- Theoretical Review 91 2- Statistical Analysis 97 3- Implication of the rising SJrend of the Capital-Output Ratio with respect to the Expected Rate of Growth inU.A.E. IM Appendix to Chapter IV ......117 Chapter V Conclusion ......119 Footnotes ......130 Bibliography 146 INTRODUCTION The capital-output ratio has been widely used by economists and econometricians in model building for policy purposes in both developed and developing coun tries. Particularly in the developing economies, where planning has been an important feature of economic po licy, the projection of output and investment require ments in different sectors is often based on the capi tal-output ratio. In the First Five-Year Plan of the United Arab Re public (U.A.R.), planners have basically used the in cremental capital-output ratio for broad general sec tors to derive investment requirements therein. The plan's realizations fell short of the target. This was natural and to be expected in a first effort to plan economic development. However, this raises many im portant questions. Was the discrepancy between the rea lization and the target in the First Five-Year Plan due to the very nature of the capital-output ratio tech-- 2 -nique itself? To what extent did changing external con ditions lead to such discrepancy? In order to attempt an answer to these question?, it is necessary to he aware of the meaning, limitations and problems of measuring the capital-output ratio. This is the subject matter of Chapter II. Chapter III is de voted to searching the answers to the question raised in the previous paragraph. T^he trend of the capital-output ratio is vitally important for the developing countries with scarce ca pital. This is because the higher is that ratio, the more investment will be needed to achieve a certain rate of growth. In our case: What is the likely trend of the capital-output ratio for U.A.R., and what are its im plications for the future development of the country? Specifically, will the country face increasing, or di minishing, problems in the future as far as capital financing is concerned? Chapter IV will attempt to frame an answer to these questions based on both, theo retical argument and empirical evidence. CHAPTER II THE CONCEPT OP THE CAPITALiOUTPUT RATIO - 3 -(l) The Meaa&H-ng of the Capital-Output Ratio; The capital-output ratio of any industry indicates the amount of capital required to produce one unit of output. Hence, it throws some light on two correlated points: first, the nature of the method of production adopted in the in dustry, whether it is a capital intensive or a labour in tensive method; second, the amount of investment required in the future, assuming that the technique of production and the labour productivity will not change. If a capital intensive method of production is adopted in the industry, then, proportionately more investment will be needed in the future and vice versa. That is why the capital-output ratio is considered an important concept and analytical tool of both economic growth theory and development planning. Several definitions are found in dealing with the con cept of capital-output ratio. As Domar wrote: "Capital coef ficient can be defined and disaggregated in so many ways that the fate of a hypothesis may sometimes depend on the particular coefficients used, and what is proved by one set may yet be disproved by another."1 Actually, capital-out put ratio means, in general, the relationship between capi-- 4 -tal and output produced by it. The diversity in the de finitions is due to the difference in understanding of what should he included under "capitalB and under "out put n. One of the important differentiations, vdiich is usual ly made, is between the average and the incremental ca pital-output ratios. The average capital-output ratio describes the existing structure, while the incremen tal ratio indicates the changes occuring in it. The ave rage capital coefficient is obtained by dividing the to tal capital, while the incremental coefficient is es timated by dividing the increase in capital, by the in crease in output. Only in the case where capital inten sity remains constant, thereowill "be no difference be-p tween the average and the marginal capital coefficients. Since we are interested in the behaviour of the capital-output ratio and its usefulness as an analytic tool for planning and projection, the marginal ratio is more sig nificant to us than the average ratio.3 But we should bear in mind that the marginal ratio is much more sen sitive to the cyclical fluctuations in the economy -5 -than the average ratio. Therefore, the period for which the marginal ratio is estimated, should be sufficiently long and should cover, as far as possible, the entire 4 period of the longest observed cycle. Another distinction can be made with reference to the items considered under the terms capital and out put in the numerator and the denominator respectively. The most useful distinction on this basis has been made between "gross capital coefficient" and "net capital coefficient". Gross capital coefficient refers to the relationship between gross capital and the the gross value of output produced by it. Net capital coefficient will be obtained by deducting depreciation from both the numerator and the denominator. But, which ratio is more indicative? In fact, the net ratio is the prefe rable one.-* With the passage of time, the capital be comes old and will not be as good as the new one. A part of output should be used to restore the existing stock of capital. Hence, depreciation should be deduc ted from the numerator and the denominator, no matter whether we are dealing with average or incermental ca-6 ^ pital-output ratio. - 6 -Let us examine the composition of capital. Two items that all economists agree to treat as capital are cons— struction and machinery and equipment. But arguments are raised about whether the term "capital" includes land or not. Here opinions ranged from the absolute ex clusion of land and natural resources, being irreprodu-cible, to the other extreme of including both, with some individuals arguing for including only improve-7 ments upon these items,' Another debatable item of capital is the producers' 8 and traders' inventories. It is reasonable indeed to include it in the numerator, since it is a part of the working capital. But we should bear in mlnifit that the services of the working capital, other than inventories,, are included in the ouput produced, yfaich is not the case with regard to inventories. Hence, to limit biased-ness in the capital-output ratio estimates, it is more safe to exclude inventories from the numerator. We can also differentiate between domestic and natio nal capital-output ratio. The former is the relationship between domestic capital and domestic output in the nu-merator and denominator respectively. The latter ratio indicates the relationship between national capital and national output. Hence, the net balance of claims against 10 foreign countries is included in the numerator. The concept of the capital-output ratio may be used with reference to the whole economy, a particular sec tor, industry or process and may he accordingly termed as "overall capital coefficient," or "process capital coefficient.n11 - 8 -(2) Problems of Estimating the Capital-Output Ratio; When measuring the capital-output ratio, three main problems are faced; 1- Price fluctuations. 2- Changes in capacity utilization (fluctuations of output). 3- Depreciation. The first problem is the elimination of price fluc tuations. In fact, it is misleading to compare capital formation at current prices to national product at cur rent prices. The reason is that the pattern and pace or price changes in the case of output differ from that 12 for the case of capital. Here we face the problem of looking for the convenient price indeces, with which we can deflate capital and output. In general, the avai lability of a suitable price index for either output or capital is conditioned by the availability of price time-series for detailed commodity classifications within each category. For output, the problem can be easily solved by using either the wholesale price in dex, if we are dealing with output at factor cost, or using the consumer price index if we are interested in the output at market prices. The index number problem is much more serious with regard to capital,13because of the nonavailability of sufficient data of the dif ferent items of capital: its prices, its life span, and its depreciation rate. This renders the adjustments for price changes in the book value of capital cruder than that of output. A convenient deflator for capital, is used by Creamer in his estimate of the capital-output ratio in 15 industry groups in TJ.S.A."*'^ He derives a composite price index including the three items of capital: buildings and lands, machinery and equipments, and working capital. For the first item, he derives a constant index weighted by the volume of construction depreciated over fifty years. For the second item, he uses a price index of machinery and equipment produced, and depreciated according to the length of life repor ted by the Bureau of Internal Revenue. For the last item, the working capital, he uses the wholesale price index. Then, he combines, these three indeces into one composite price index weighted by the relative impor tance of the three items in the structure of capital. - 10 -The second problem usually faced in estimating the capital-output ratio is how to eliminate the distortion caused in the coefficient by the fluctuations of output. To construct an accurate series of capital-output ratio, we should get annual estimates of the output associated with the "full" utilisation of the existing stock of capital. J In this case, the series will not suffer from any upward or downward bias, so far as capacity utili zation is concerned. Any change in the ratio, assuming constant prices in capital and output and constant la bour productivity, will be due to the change in the technology adopted. But this is not easy to achieve, since no country, except the U.S.A., has data concer ning the "capacity11 output. Hence, several methods are used by different economists to eliminate the ef fect of the fluctuation of output as far as possible. But none of these methods yields completely satisfac-tory results.xo 1- One method is simply to note that the series is distorted by the occurence of recessions and depressions during which capital is under-utilized. In this case, - 11 -although we know the coefficient is upward biased, we do not know the degree of this biasedness. In addition, the problem is symmetrical. That is, during the wboomn periods, capital is usually overutilised and the coef ficient will experience a downward bias. But, usually, the economy is vulnerable to the under-utilization of ware capital^easily than over-utilization. Thus, the estin mate of the capital-output ratio will likely to be more upward biased over the cycle. 2- Another approach is to measure the capital coef ficient for only those years when there are a high le vel of full employment and a high degree of full uti lization of capital. When this method is applied for a market economy, we have for any given period, just a few scattered capital coefficients. In the case of a period, such as that around the Great Depression, we do not have an estimation for the coefficient for several years. 3- A third and more common method is to construct a single coefficient for a long period, a decade or - 12 --or longer, by applying the ratio of the average annual capital stock to the average annual output over the period, or using the ratio of the change in capital to the change in output over the period. Even if we apply this third method, we will not correct for the under-utilization of capital associated with a long depres-17 sion such as the 1930*s. ' However, this seems to be the more suitable method, that can be adopted. And the longer the period one spans to estimate the capital-output ratio, the less will be the effect of the fluc tuations in output on the average value of the coef ficients over the period, since the downward bias in one year will compensate for the upward bias in another year and so on. The third problem we meet in calculating the capi tal-output ratio is the estimation of depreciation charges of different kinds of capital. As we have seen before, the net capital-output ratio is more informa tive than the gross ratio. Thus, calculating deprecia tion is of vital importance in order to get the net - 13 -values of capital and output. The underlying idea of depreciation is to compensate for the day to day dec rease in the productive capacity of capital, so that at the end of its life span, when the capital becomes scrap ped, we find the funds sufficient to renew it. This means that the value of depreciation, which we deduct in any year, should equal the value of obsolescence of capital in this year. This condition is not fulfil led in practice, since, as pointed out by Hoffman, the amount of annual obsolescence conforms usually to some kind of normal distribution, while total depreciation charges are normally a linear function of time. In other words, the depreciation charges are usually the same each year, while the number of machines that be come worn out annually is much smaller during the earlier years following the purchase of such machines than in the later years. Hoffman concludes that the adoption of the straight line method of depreciation 18 results in the overvaluation of capital stock. To judge "pis conclusion, we may express his idea explicitly by means of the following diagram: - 14 -pi 1 •>re.c\cih £>(• ep fecial o«l Time is measured along the horizontal axis, with t rep resenting the end of the life-span of capital. Total depreciation charges and obsolescence are measured along the vertical axis. This diagram makes clear two important points related to Hoffman's argument. The first is that he seems to be concerned with the life of capital up to point C only, which is short of its life span, t. Now, up to the point 0, obsolescence - 15 -Exceeds depreciation by the amount OAB, which measures the degree of overvaluation of capital according to Hoffmaa. But, if we consider the whole life-span of capital, i.e., till point t in Diagram 1, we find that BDT will compensate, at least partially, for the over valuation of capital measured by OAB. The degree of compensation depends on the amount of the annual dep reciation. The higfafer the latter, the greater is the angle of the depreciation line, D', and the greater will be the compensation, B'tD', for the overvalua tion of capital. But, even forgetting abojit the rest of the life span of capital for the moment and considering only the capital's life until period C, what Hoffman con cludes is only one possibility. Another possibility is well revealed by means of Diagram 2. obsolescence - 16 -According to Hoffman's argument, the rate of obsolescence of capital will be small at the beginning of its;life. This allows for the other possibility that depreciation charges may exceed obsolescence over the range OB. This results in an undervaluation of capital, which may com pensate for, or even exceed, the overvaluation of ca pital along BA, where the rate of obsolescence increa ses. Thus, adopting the straight-line method of depre ciation (deducting equal amounts of depreciation each year) will not result usually in an overvaluation of capital as Hoffman concludes. - 17 -(3) Methods of Estimating the Capital-Output Ratio:: Capital-output ratio indicates, as we have seen be fore, the amount of capital required to produce one unit of output. It will reflect the nature of techno logy adopted, only if we relate capital to what is cal led capacity output. But it is difficult to get capaci ty output in real life, since the industries do not ope rate the whole time at full capacity. We find that, un der certain conditions (in boom periods), it may be advantageous to run capital continuously at its full capacity, and consequently the total product to which the capital stock is related will be quite large and, thus, the capital-output ratio will be low. Under c others Jin depression periods), it may be more advan tageous to run the equipment at lower than full capa city and the output will be correspondingly low, and consequen*lyMthe capital-output ratio will be high. Since the estimation of the capacity capital-output ratio is not possible because of the! lack of the re-quired data, ^ different methods have been suggested - 18 -to estimate the capital-output ratio, given this handi cap* 1- One of the methods used in estimating the capi tal-output ratio, is by using in denominator what is called the "potential output". Potential output is a measure of the optimum level which the economy is ca pable of achieving without having serious instability with output, employment and prices. In o^er words, it is the amount of goods and services produced at stable prices, given the best knowledge of technology, the 20 least cost and nearly full employment. It can be measured, according to Knowles, by estimating the to tal of goods and services in constant prices (real G-HP) produced under the assumption of the employment of 96$ of the labour force. This is merely the indicator 21 or measure. Using potential output in the denomina tor and gross investment in the numerator, we obtain the gross incremental capital-output ratio. Subtjpactiijg depreciation from the denominator and the numerator, we get the net incremental capital^output ratio. It should be noted that potential output is less than capacity output. Consequently, this potential capital coefficient - 19 -will have an upward bias compared with the capacity-capital coefficient. But the degree of overstatement 22 is assumed to be theoretically constant. The advantage of this method, is supposed to be that it solves the problem of fluctuations of output, which we mentioned before, by estimating the amount of output, which is as close as possible to the capacity output. But, a question now arises: If it is possible to estimate, whatever the actual output is, the amount of output porduced by 96$ of the labour force, why don't we estimate by the same way, the amount of output pro duced by 100$ of the labor force. Also, why is "poten tial output" determined by the output produced by 96$, and not by 100$ of the labour force? Moreover, this method can be adopted only in the developed economies. It implies the availability of sufficient capital to support the employment of 96$ of the labour force. But this is not true in the developing economies, which are plagued with structural unemployment. One of the main problems of these economies is the scarcity of capital, so that -even by working at full capacity-- 20 -it may not support 96% of the labour force. In other words, to employ 96% of the labour force, which is the measuring rod for this method, you have to increase the capacity of the economy. The inconvernience of this method in the case of the developing economy can be fur ther revealed by looking at Levy's definition of "po tential output". According to him, it is that output produced with "the use of best available technologies, least cost combinations of inputs and rate of utiliza tion of both capital and labour consistent with the pre-23 vailing full-employment norms of the the edonomy." J Obviously, these qualifications do not apply to the developing countries. 2- A second method for estimating the capital inten-sity is used by Borukhov. ^ He criticizes the use of .Ti the concept of capital-output ratio as a measure of the input of capital in the output produced. He states that capital consumption, properly calculated, under certain conditions, can be a measure of "capital services" in the relevant product. His criticism is built on the fact that capital has a relatively long productive life. There-- 21 -fore, it is not correct to consider a piece of capital, which is expected to last many years, as the input to the output produced in one year only. The input of ca pital is its consumption per unit of time and that will be related to the output in the same unit of time. Thus, to get the input of capital in a certain product, either we relate the value of capital to the output produced over its life time, or we relate the output produced in one year to the consumption of capital in that year. But how to measure the value of capital consumed in a certain product? Assuming two factors of production, labour and capital, the value of output is distributed between the return to labour, wages, and the the return to capital. The share of capital in total revenue in cludes the recovering of the cost of the piece of ca pital that was invested, plus a profit or interest. This means that the share of capital in the product produced is not only the usual depreciation charges calculated at the original cost of capital, but it exceeds it by the amount of interest calculated on the - 22 -capital consumed. The capital intensity of an industry can thus be measured by comparing the relative share of capital in the value of its output with that share in other indestries.2^ In fact, this method can be used to measure the in put of ca^pital in a certain product, i.e., capital in tensity, but it is not useful as an indicator to the amount of capital required to produce one unit of out put. This is because of the concept of the indivisibi lity of capital. Using capital consumption in the nu merator, the capital coefficient will be small indica ting that with a small amount of investment, we can obtain the required amount of output; and that is not true. Capital-output ratio cannot be calculated by di viding the value of capital consumed by the value of the output produced, since this ratio will not show us the amount of investment required to realize a certain amount of output and, consequently, a certain level of rate of growth. 3- A more common method in estimating the incremen tal capital-output ratio is by dividing the increase - 23 -in capital stock, i.e., investment, by the increase in output. We can get gross or net incremental capital-output ratio, depending on whether w# use gross values of capital and output or net values. Although the changes in prices affect both output and capital, its impact on output is greater. Thsrefore, to minimize, if not to eliminate, the effect of. price :ehanges, we have to express both numerator and <ieno* 26 minator in constant prices. But now we face the prob lem of choosing suitable price indices. This can be solved, as mentioned before, by using the wholesale pri.ce index, or the consumer price index to adjust the; value of output. To capital, the best index is th'e Creamer's composite price index. However, the deflator of output is much more important than the deflator' of capital, because the rate of change of the prices itt the former is greater than in the latter. This was clear in the research that Euznets has undertaken^to • measure the capital-output ratio in 23 different coun tries. He found that the differences between the"ratios - 24 -of gross domestic capital formation to gross domestic product at constant and current prices are small, and that the trends of the two sets are practically identir-cal. Quoting Kuznets: ttWe can, therefore, assume for all analytical purposes that the two sets of ratios here would yield the same result; that they are inter changeable; and that they can be referred to as incre-27 mental capital-output ratio.* However, it is more ac curate, of course, to deflate capital with a convenient price index. This method for estimating the Incremental capital-output ratio as the increase in capital over the in crease in output and deflating the denominator and the numerator, if possible, with the price Indices indica ted above, is a simple and suitable one to adopt in any economy. Aside from the output fluctuation problem, which is incurable especially in the developing coun tries for the lack of data, two shortcomings are found in this method. First, it neglects the effect of labour productivity on the capital-output ratio. This ratio may decline, not because of the change in technology - 25 -as it is supposed to indicate, but due to the increase in the labour force and/or its productivity, given the amount of capital in the economy. Although it is dif ficult to measure the productivity of labour, at least we can adjust the ratio for the labour.input by sub tracting from the denominator the value of the increase in output attributable to the increase in labou* force.' In this sense Leihenstein stated that, if we like to use the capital-output ratio in a meaningful way, we must be aware of the changes that may occur in other factors affecting output concomitant with the increase in the stock of capital. Hence, he differentiated be tween the net incremental capital-output ratio and the adjusted incremental capital-output ratio. By the for mer he meant the incremental capital-output ratio cal culated on the assumption that the supplies of all other factors are held constant. By the latter he meant the incremental capital-output ratio adjusted to a 29 given increase in the supply of other factors. The second shortcoming is that it relates the in vestment in a certain year to the output produced in - 26 -the same year. This can be true only for working capital (e.g., raw materials and semi-finished goods). But for fixed capital, a lag period should be allowed for be tween the increase in capitalland the increase in out put induced by it. This lag period differs between pro jects and even between the sectors of the same economy. Unfortunately, the lack of data makes it difficult to remedy this shortcoming in many countries. 4- The production function provides an alternative method of deriving the capital-output ratio. This method was suggested by Douglas.30 It is used for es timating the capital-output ratio for the whole econo my or for individual sectors or industries therein. A Cobb-Douglas production function"*" is one of the most popular types of production functions, both theoreti cally and emperically. + It may be written as: Q = alK* LP ; > 0 , (3> O where Q = output; K = capital; L = labour. - 27 -But there are two points against employing such method. First, the Cobb-Douglas production function assumes that the elasticity of substitution between capital and labour equals unity.+ Second, the unitary elasticity of substitution implies that the marginal + -dQ/aE = <x a E*-1 L' = ot Q/E h *dQ/3L = (i a E* L^"1 = Q/L . Therefore: <x =^ Q/dK • E/Q :sTt Q/3L • L/Q = (?)Q/aE • E/Q )(3L/9Q • Q/L ) = E/0E »^L/L = E/L • 3 L/3E Thus, E/L = • 3 E/3L Under cost minimization: (3Q/?L)/w = <^Q/3E)/r ; or ^E/9L = w/r where w = wage rate, and r = interest rate. Therefore: E/L = U/Q • w/r log (E/L) = log (<x/0) - log (r/w) 3 (log (E/L)) /9 (log (r/w)) = -1 Or equivalently: 3(log (E/L)) /0(log (w/r)) = 1. - 28 -productivity of any factor can never reach zero. A unitary value for the elasticity of substitution is unlikely within the context of the less developed economies, because of the strong rigidity of their economic structure. Also, this form, with always po sitive marginal productivity for the factors, will not accord to reality in the developing countries, since disguised unemployment is a common feature of most of them, including U.A.R. + If the marginal productivity of capital or labour, r or w, reaches zero, the elaticity of substitution between capital (K) and labour (L) : 3 (log (E/L)) (log (r/w)) will be equal to oo or zero respectively. CHAPTER*'I II THE APPRAISAL OF THE FIVE-YEAR PLAN - 29 -In order to evaluate the First Five-Year Plan (1960/ 61 - 1964/65), we have, first, to review the historical conditions of the economy of the country. The Plan cannot be derived from scratch; it has to consider the economic aspects of the country in which it is suppo sed to be implemented. Otherwise, it stands on shaky grounds and is vulnerable to drastic failure. Also, depending on the historical background of the country, you can Judge, to a certain extent, whether the plan has been too ambitious or not. Hence, Chapter III will include: first, a brief historical...review of the Egyptian economy; second, a description.'.of the Five-Year Plan; "and, third, an appraisal of the investment program in the plan. - 30 -(l) A Historical Review of the Egyptian Economy: Egypt was, and still is, an overwhelmingly agrarian country. Agriculture plays a major, although decreasing, role in output and employment. In the 1930*s, agricul ture formed 50% of total output.According to avai lable data, this share has decreased from 42% of GHP in 1945 to 28% of GBP in 1960/61.2 With regard to em ployment, 70% of the labour force was concentrated in the agricultural sector in 1937. This ratio fell to 61% in 1947nand to 56% in I960.3 Cotton is the main agricultural crop, comprising over 40% of the value of agricultural crops in U.A.R.^ Wheat, maize and rice form 2/3 of the gross value of all agricultural output other than cotton. Cotton is also the dominating component in Egypt's export: Raw cottom amounted to over 70% of the total export within the period 1937 - 39 to 1957 - 59. Manufactured cotton products, however, ranged only from 4% - 7% of total export value during this period. Until the turn of the 20^- century, the country was able to feed her growing population. The building of the Delta Barrage (a Sam in lower Egypt) during the - 31 -last 20 yeares of the 19 - century, raised agricultual yields 70$ - 100$ as much as before.7 In the 20t- cen tury, the improvements introduced in the agricultural sector have taken the form of intensive methods of cul tivation, which have a comparable moderate effect on the increase of agricultural output. On the other hand, the annual compound growth rate of population has in creased from an average of 1.1$ during the period 1907 - 1937 to 1.8$ during the following ten years (1937 1947) and to 2.5$' within the period 1947 -8 I960. This accelerating rate of growth of population compared with the moderate average annual compound growth rate of agriculture - about 1.4$ over the period 1945 - 19629 - has made the importation of different food stuffs unavoidable. However, the building of the High Dam in Asswan is supposed to contribute signifi cantly to agricultural output. It will lead to the cul tivation of an additional one million feddans+ (about + One feddan = 1.038 acres = 4,300.833 square meters. - 32 = 20% of the present cultivated area) and the conversion <£. of 700,000 feddans in upper Egypt from "basin to p^en-r nial irrigation. In addition, a hydro-el ectfic station with an aggregate capacity of 2.1 million lew., and a maximum output of 10,000 million kwh. will be set up.10 The industrial sector, by contrast to agriculture!, plays a relatively small, although increasing, role in the U.A.R. Economy. Its output has formed 13% of the G-EP in 194511 and has increased to about 20 - 21% of ?; G-HP: in 1959/60.12 Only 7% - 10% of the labour force has been working in the industrial sector. 3 More at tention has been directed to industry since 1930. Early in this year the international convention controlling the customs duties in Egypt expired. The country rushed to take advantage of this situation and raised the ta riffs to encourage the establishment of new national industries. In addition, World War II stimulated the demand for local industrial output, because of shortages in imported goods.In 1957, a Five-Year Industrial Plan of LE 221 million was drawn up. The government - 33 -was expected to provide 60$ of the investment in this r Plan and the private sector was assigned an important role in it. In 1960/61 the picture has changed. The in dustrial Plan was amalgamated in a Five-Year Plan co vering the whole economy, and the public sector took 15 a dominaivfcd role in its implementation. One of the main features of the Egyptian economy is the change in the government's role in economic life. In spite of substantial encouragement given to the private sector, government intervention in the economic life took a number of forms: public works, acreage con trol in agriculture to provide sufficient food for the growing population, price control of basic foods, and 16 different legislations In the industrial sector. The government's encroachment on the private sector started in 1956, after the Suez "War. A number of finan cial institutions were placed under sequestration; In 1957, it was announced that all other financial insti-17 tutions were to be "Egyptianized" within five years. - 34 -The broad government intervention in the economic life was clear in the "Socialist Acts" announced in July 1961. According to thenffc, the major industrial establishments were nationalized; and in 1961 the government put her hand on 95% of the manufacturing and mining industries. The investment of the public sector amounts to over 75% of all investments in the overall five-Year Plan.18 The government's control has spread over the different sectors of the economy. In the foreign trade sector, the government controls the import and export opera tions, leaving to the private sector only 25% of to tal exports in 1962. In internal trade, the official aim is to raise the government's s&hare to 25%.19 Pri ces of different commodities have been set under govern ment's control. Evenr.the rents of the houses have to be determined by official committees formed especially for this purpose to avoid any chance of exploitation by the house-owners of the public. Transportation .--and communication are owned by the government. Agriculture is the only area in which the private sector plays the - 35 -major role. Government's intervention in this area was reflected in the Agrarian Reforms announced in 1952 and 1961. According to the Agrarian Reforms in 1952 the maximum amount of agricultural lands owned by any individual should not exceed 200 feddans excluding the uncultivated land in process of reclamation.. Up to 100 feddans can be transferred to the children. Hence, the maximum amount owned by any family in Egypt should not exceed 300 feddans. This maximum level has been lowered to 100 feddans for the whole family (including the un cultivated land which was: exempted before) <> Compensa tion was paid in bonds to the landowners. The landhol?* dings of the royal family were confiscated without com pensation. The agricultural lands, which have been taken by the government, have been distributed to the farmers working on it with a minimum of two feddans and a maxi mum of five feddans. The price of the lands f.is being paid in installments over 20 years. Also,-: the rent of the landholdings may; not exceed seven times the value on of land tax. The idea behind all the above mentioned legislations - 36 -is to achieve an even distribution of income and pro perty to build a socialist society. This trend is ref lected, also, in the fundamental change undergone by the income tax rate. In 1949, the income tax rate was 50% on incomes over LE 100,000. In 1961 90% was levied 21 on incomes above LE 10,000. Finally, something should be said about the resour ces of the coutry. With regard to natural resources, Egypt is not a rich country. Unlike many of the under developed economies, most of U.A.R. natural resources, 22 excluding the desert, are already being used. A ma jor part of the population, the human resources of the country, suffer from diseases and illatpacy. About 60% of the population suffer from Bilharzia, a disease which is said to reduce the productivity of the patient by 25% - 50%.23 Illitpacy is another wellknown "disease" which affects the productivity and the performance of the population. Although the illiteracy rate shows a e decreasing trend, illi-^racy still embodies most of the population. The illi^racy rate has fallen from 92.7% - 37 -in 1907 to 85.2$ in 1937 and to 70.3$ in I960.** However, it is expected to decrease at an accelerating rate due to the increasing effort by the government in providing a free system of education in schools and universities.+ One of the main reasons which impair the quality of the human resources in TJ.A.R. is population pressure. Not th until the 20 — century, did this phenomena emer.ge in the country as a consequence of a dramatic fall in death rates. As late as the 1860fs, Egypt suffered from a shortage of labour. Plans for the immigration of Italians, 25 Chinese and other laboures were seriously considered. + Prom 1923, education has been free and compulsory between the ages of 7 and 12 years. - 38 -(2) The Five-Year Plan: U.A.R. commenced its First Five-Year Plan in 1960/61. The main object was to double the national income in 10 years. In fact, this object was imposed on the Na tional Planning Committee, whidh was responsible for the Plan. The target of the Plan, as had been original ly set by the Planning Committee, was to double the income per capita within 20 years.. 21 The Five-Year Plan is subdivided into annual plans. An investment program is the only policy program inclu ded in it. The rest of the plan comprises forecasts and targets based on unspecified policies, that will be de-28 termined in the annual budgets. The Plan has not been formulated according to a particular or definite model. The planners used the given overall increase in the G-NP i'ogether with a series of income elasticities for con sumer goods, estimated by informed guesses, to deter mine the consumers'demand in the different sectors. By adding the government's current demand, the planned sectoral outputs have been calculated. Using the pro-- 39 -jected sectoral capital-output ratios, derived from the historical data and the experiences of other coun tries, the planners calculated the investments required pq in each sector. Total investment requirements amoun ted to LE 1636 million, one third of which were planned to be financed from abroad.30 The majority of the in vestments (about 90$) was intended to be undertaken by public authorities.^ The selection of projects within each sector was left to the ministries, which were en couraged to chose projects with high value added re-turns, high employment and high import-aaving capacity. -Table 1 shows the planned annual value added, capital coefficient and investments in different sectors: - 4-0 -Table 1 Value added and capital formation by sectors (at fixed 1959/60 prices) Projected increase in gross value added LE millions Projected increase mental capital output ratio Planned total capital formation during 5-year period LE millions Agriculture and irrigation (including High Dam) 112 3.4 383 Industry, electricity and construction 266 2.2 575 Transportation, com munication and storages (including Suez Canal) 20 13-5 269 Dwellings 11 12.7 Services (including 140 public utilities) 104 1.4 149 Stock Changes — — — — — — — 121 Total 513 3.2 1637 Source: Bent Hansen, Development and Economic Policy in the UAR (Egypt), (North-Holland Publishing Company, Amsterdam: 1965 ;, p. 301. +Ibid., p. 297-- 41 -To fulfil the target of doubling the tiational in come within 10 years, the plan determined the compound annual rate of growth of G-NP by 7$ during the first five years and by 7.4$ during the second five years. As it is clear from Table 2, agriculture and industry were supposed to grow at a high rate in the first five years of the Plan and slacken relatively in the second half, while the service sector was to achieve its higher rate of growth in the Second Plan. - 42 -Table 2 Target Income Levels by Sectors (LE Million, Constant Prices) Implied Annual Compound Growth Rates 1964/65 ! 1969/70' r1959/60 to 1964/65 1964/65 to 1969/70 Agriculture 512 627 5.1 4.1 Industry 540 802 14.6 8.2 Construe tion 51 75 -0.5 8.0 Subtotal commodity sectors 1,103 1,504 8.7 6.4 Trade and finance 162 265 5.0 10.4 Basic development sectors: Transportation and Communications 117 3.8 Housing 84 2.9 Public utilities 9 5.2 Security, justice, defence 61 3.6 Public administration 45 6.4 Subtotal, basic develop 435 ment 316 3.9 6.6 Other services: Education 67 •• 5.2 Health 15 6.4 Social and religious 6 8.4 Culture and recreation 18 6.7 Personal services 108 3-9 Subtotal, other services 214 360 4.8 11.0 Subtotal, all services 692 1,060 2,564 4.4 8.9 Ground total 1,795 7.0 7.4 Donald C. Mead, Growth and Structural Change in the Egyptian Economy, (Richard D. Irwin, Inc., Homewood, Illinois: 196? ), p. 240. - 43 -With regard to employment, it has been planned to expand by one sisth, i.e., 1026 employment's oppor tunities have to be created during the Five-Year Plan. Agriculture absorbs one half of the expansion (555)9 services about one quarter (256) and industry less than one fifth (204).33 The Savings's ratio would need to rise from 12% of GKP at the base year to 20% of G-KP at 1964/65 in order to fulfil the Plan.3^ Domestic savings, were expected to exceed investments by LE 40million at the end of the Plan, making it possible for the country to start repaying it external debt. Household's consumption and governmental administration's consumption were sup posed to increase by 26% (from LE 975 to LE 1,236.3) and by 24% (from LE 57.9 to LE 72.l) respectively.36 The export's target was established as a 36% increase by the end of the First Five-Year Plan,37 while im ports were expected to be reduced by 6% of its level at the base year.38 (3) A-p-praisal of the Investment Program in the Plan: The First Five-Year Plan, as we have seen, consis ted of an investment program? s plus a forecast for the rest of the economy based on the automaic responses of enterprises and households as influenced by future po licies. There is much to be said in favour of this kind of procedure. The main aggiament is that the future con tains so many unknowns impossible to forecast five years ahead. Hence, it may seem better to decide specific policies subsequently, when external conditions con cerning technical knowledge, foreign trade, climate conditions, etc* are better known or at least easier to forecast. But, according to this policy, the system is vul nerable to bottlenecks in production, in ther;.alloca-tion of resources, in the balance of payments, etc. As Zimmerman^^ointed out, the economic development5 problem has four aspects that shoud be decided upon: (a) What rate of investment should give the best results? - 45 -(b) How much to invest (long-term structural plan ning)^ (c) Where to invest (regional planning)^ (d) When to invest (short-term planning)*? What seems to be backing mostly in the ?-lan is the fourth aspect: when to invest. The investment prog ram did not define how investment will develop during the Plan.41 The incremental capital-output ratio was an impor tant tool in planning. The required investment for each sector was calculated by using the incremental capital-output ratio, given the planned output. AISD, in the selection of the investment projects more weight was. given to the return on capital in terms of value added. TheMrule of thumb", which seemed to be agreed upon for allocating'investment witMn sectors was that "... invest ment should be allocated to industries where the capital-output ratio, or the capital-labour ratio is as low as 4-? possible." In this chapter, several questions will be answered with regard to the appraisal of the investment prog-- 46 -ram in the First Five-Year Plan: A- Was the investment program a feasible -one with respect to the available resources? B- Is it advisable to give such weight to the ca pital-output ratio in calculating the required investment, as was done in the plan? C= Is there any relation between the achieved ca pital-output ratio and the realization of the growth target in the plan? The main problem encountered in any trial to answer these questions if the relatively limited data sources and the remarkable diversity in the data given by them. Differences in the definitions and in prices used ap pear to be the major causes of this diversity.^ Con sequently, to obviate as much inconsistency as we can, we shall depend mainly in our analysis on one source of data, trying to derive most of the needed figures from it. - 47 -A- The Feasibility of the Investment Program: As is clear from Table 1, the total investment re quired by the Five-Year Plan amounted to LE 1637 mil lion. Foreign capital formation was supposed to form i/& of this total investment.44 Disregarding for the moment the actual achievements of the plan, and trying to evaluate the feasibility of the investment program (given the conditions prevailing in 1959/60), two questions arise at the outset; Was the saving rate high enough to provide the domestic share of the capital formation in the program? Was the situation of the balance of payment in U„A.R. at 1959/60 conducive to belief in the feasibility of get ting the LE 545million foreign exchange required by the Plan? In the five-years preceding the Plan, 1956 - 60, the average saving rate was 11.2% of GHP, as is clear in Table 3. Since the investment figures in the Plan absorb-3 20% of G-NP45 this means a deficit of 8.8% of GEP will arise if the saving rate was maintained at - 48 -Table 3 Savings in U. A. R., 1953-65 (Constant Price, 1958 = 100) LE Million Year Savings Percentage of Savings in GNP 1953 102.04 12 I95I1. 151•42 15 1955 155.85 15 1956 114.94 10 1957 145.14 12 1958 114.80 10 1959 111.30 10 i960 201.40 14 1961 272.11 18 1962 251.86 15 1963 121.93 7 1964 169.26 9 1965 207.16 12 Note: Savings have been calculated as the difference between the deficit in the balance of current payments - after converting them to constant prices using the wholesale price index, Table III in the Appendix to Ch. Ill -and the investment at constant prices in Table V in the Appendix to Ch. III. this level. However, the planners did not depend on domustic saving to finance all the investments required in the Elan. Foreign oapi%a3: financier was deemed neces sary for the development process, not only to fill the gap between investment and domestic saving, but also to provide U.A.R. with foreign exchange to buy machines raw materials, intermediate goods, etc. from abroad. Domestic saving is not helpful in this rspects unless it is directed to produce export commodities. This might be a deliberate policy as long as the country's exports can be sold profitably abroad. But this is not the case in U.A.R. Cotton, the main export of the coun try, is undergoing, at present, a declining trend in the world markets.+ Thus, increasing-cotton production cannot be used as a means of obtaining foreign exchange in the to finance investment^growing industrial sector. Since only 67$ of the investments had been planned to be covered by domestic saving, the required level + For a fuller elaboration of this point, see op. 76> £g—in tho paper- below. - 50 -of domestic saving was 13.3% of G-NP. Certainly, it looks a feasible target to raise the level of saving from 11.2% of G-NP to 13.3%. By contrast, however, the share of investment which to be covered by foreign capital formation seems a very doubtful target. The foreign financing, measured by the total deficits in the balance of current accounts in the five years preceding the Plan, have been LE 213 million. The required foreign capital formation during the Plan period has been LE 545.12 million, i.e. more than double the level of the preceding period. What seems even more unfeasible than the prospects for attaining LE 545.12 million of foreign exchange, is the surplus in the balance of payment that the plan ners had expected to appear in 1964/65.46 The surplus was supposed to be formed not only through a decrease in imports, but also through an increase in exports. The increased output in agriculture together with the import-substitution products in the industrial sector were expected to reduce the imports of foods, consump-- 51 -tion and intermediate goods. On the other hand, exports 47 m of manufactured goods were expected to increase. Thus, it had been planned that U.A.R. will start to repay 4ft its debt in the fifth year of the plan. Undounted-ly, it looks like a very ambitious goal in the foreign trade sector. Depending on the available conditions in U.A.R. at the beginning of the Five-Year Plan, we can conclude that the investment program seemed feasible with regard to the domestic resources only. A shortage in foreign resources is expected to appear during the implementa tion of the plan. The trade surplus expected in 1965 seem to be quite unfeasible. - 52 -Table 4 Foreign Trade in U. A. R., 1953-65 (LE million, Current Prices) Year Imports Exports Current balance of payment 19535 179-7 142.5 - 37.2 1954 164.4 143.9 - 20'.. 5 1955 187.2 146.0 - 41.2 1956 186.4 142.3 - 44.1 1957 190. 4 171.6 - 18.8 1958 230.4 163.8 - 66.6 1959 214.4 154.3 - 60.1 i960 225.0 191.6 - 23.4 1961 238.5 l6l. 2 - 77.3 1962 300.9 157-4 -143-5 1963 398.3 226.0 -I72.3 1964 414. 3 233-6 -I8O.7 1965 405.8 2o2.5 -143.3 Source: Excluding column 4; U. N., Yearbook of International Trade Statistics 19^7 (New York: 19bB) - 53 -The data in Table 3 and Table 4 show the actual resources that have been attained during the Five-Year Plan. The actual domestic resources were LE 1023.32 million,compared with the planned figure of LE 1091.88 million. This means that the domestic re sources have almost realised the requirement of the Plan. The average rate of saving has increased to 12.2$. Unexpectedly, foreign resources have exceeded the plan ned level by LE 142.78 million. Actual foreign resour-ces are LE 688.9 million and the planned had been LE 545.12 million. Consequently, the actual total in vestments are LE 1712.22 million compared with the planned amount of LE 1637 million. The financial resources, then, were not a bottle neck in the implementation of the Five-Year Plan. + Calculated from Table 4 after the conversion into constant price figures using the wholesale price index in Table III in the Appendix to Ch.III. - 54 -But the increasing.-burden on the balance of payment forms a main latent constraint to the development pro cess. As might have been expected, no surplus appeared in 1965. Instead, a deficit of LE 143.3 million has been realized. The heavy burden on the balance of pay ment can be roughly related to five causes: First, the unexpected increase in the rate of grow*h of population, which jumped from 2.3$ to 2.8$ per an-49 num. ^ This has led to an increase in the consumption of foods and other consumer goods. In spite of the in crease in agricultural output, (Table 5), imports of food increased from an average of 25.6$ of total imports in the five years preceding the Plan to an average of 26.2$ during the Plan period. Imported consumption goods in the first three years of the Plan fell only £y 3.7$ from its average level in the preceding five years. Second, the output of the import substitution in-r dusi^ies had not been produced during the Plan as fast as it was expected, in order to significantly reduce imported consumption goods. Moreover, it can be - 55 -noticed that the imports of many of the goods which were produced locally had not fallen due tothe great increase in population. These industries, then, can be called import-substitution in the specific sense that if they were not established, the imports would have 5 3 increased than its previous level. Thirdly, the planners, by expecting a surplus in the fifth year of the Plan, had taken for granted that the excess output would be exported. Whether these products would be competitive to their counterparts abroad, and whether there would be a foreign demand for them, are subjects which seemed not to have been discussed among the planners in spite of their vital 54 importance. Fourthly, the pricing system used in calculating the cost of production was not suitable to the export goal. Sales and costs should have been calculated at the world prices at which the commodities involved can be traded abroad. This presents the true opportunity costs or - 56 -revenues of the activity in question* This makes it easier to judge whether the produced goods are compe titive to their foreign couterparts or not. Consequent ly, the export's feasibility of any kind of commodity can be decided upon on a more realistic basis. Finally, the deteriorated terms of trade, that fell from 100.2 in 1961/62 to 87.8 in 1963/64 and to 89.6 in 1964/65, further aggravated the deficit during the Five-Year Plan.56 Depending on the actual investment data during the Five-Year Plan, we can conclude that the "investment program" had been surpassed during the implementation of the plan with respect to domestic as well as foreign resources. In spite of that5the planned sectoral and aggregate target with respect to output had not been completely realized as is clear in Table 5. - 57 -Table 5 Actual Achievements of the Five-Year Plan Sector Actual increase in output in constant prices (1958 = 100) LE million realized capital output ratio Actual allocation of investment in constant prices (1958 = 100) LE million Agriculture and irrigation (including High Dam) 116.67 3.2 352.38 Industry, electricity 151.24 and construction 4.7 724.10 Housing - 8.77 __ 197 • 47 Transport and C ommuni ca ti on (including Suez Canal) 65-42 4.6 300.85 Other Services 134.89 1.5 196.50 Total 459.45 3-9 1771•30 Calculated from Tables IV and V in the Appendix to Ch. III. The reason lies in the underestimation of the capital-output ratio in some critical sectors of the economy. This raises a question which we shall try to answer in the following section: Is it advisable to give great weight to the capital-output ratio in calculating the required investment as was done in the TJ.A.l. Plan? - 59 -B- The„ Capital-Output Ratio and the Calculation of the required Investment in the Plan; The incremental capita-output ratio has been used as an important tool in the Five-Year Plan. The plan ners have used the incremental capital coefficient to determine the investments required in each sector. They have derived the projected sectoral capital-out put ratios from the histori'cal data of Egypt and the experiences of the contemporary developing countries. The question is whether these sources are bases for projecting the sectoral capital-output ratio in the Five-Year Plan. As weeknow, many things affect the capital-output ratio, e.g. the kind of equipments used, its efficiency, the capacity utilized and the main-tainance of capital, etc. Certainly, these factors change with economic development. Can these changes be projected and considered in the calculation of the sectoral capital coefficient in U.A.I.? It might be answered that these factors' changes which are due to the development process are embodied implicitly in - ,60 -the capital-output ratios of contemporary countries which are ahead of U.A.R. in the development planning, e.g. Yugoslavia and India. Unfortunately, the sectoral capital coefficients of those countries are not available in the sources available. Also, the data of the sectoral investments in U.A.R. cannot be traced back more than eight years before the Plan. Hence, for lack of data, we shall not discuss the accuracy of the derivation of the projec ted capital-output ratios from both sources mentioned above. In other words, we shall assume that;the plan ners have really considered the historical capital-output ratios in U.A.R. as well as the ratios of other developing countries. Our judgement, then, on how re liable is this method in planning, will depend on the comparison between the projected and the realized ca pital coefficients as well as between the planned and the achieved output targets. T^e actual incremental capital coefficient in the agricultural sector (including "the High Dam) during the Five-Year Plan was 3»2, compared with the plan-- 61 -ned ratio 3.4. Although the investments devoted to the agricultural sector have been only LE 352.38 million, i.e. LE 30.62 million less than the planned amount, the:-; output target in this secor, LE 112 million, has been surpassed to LE 116.6 million. This para&oxcan be ex plained by the fall in the capital-output ratio to 3.2, which has compensated for the decrease in investment devoted to the sector. In fact, a decrease in the ca pital coefficient has the same effect as an increase in 57 investment. That is why the concept of the capital-output ratio is important in the planned economies, es pecially in those where capital is a scarce factor of production. Moving to industry, electricity and construction the divergence between the planned and the realized capital-output ratio is remarkably large. The projected capital coefficient in this secjbr had been 2.2 while the rea lized ratio is 4.7, i.e. more than twice as much as ther-1? "::-planned coefficient. Although the investment allocated to these fields (LE 724.10 million) was 26% higher than - 62 -the planned amount (LE 575 million), the output tar get, LE 266 million has not "been achieved. The rea lized output was LE 151.24 million, i.e. 43$ lower than the planned level. The underestimation of the ca pital-output ratio is, in fact, the cause of this great divergence beween the actual and the planned level of output."iBut, on the other hand, the high capital coef ficient realized is the result of different reasons, some of which could not be known to the planners ex ante. The important reasons can be summarized as fol lows: : 1- The nationalization of the industries in 1961 had not been expected and counted upon by the planners. The government, as an unexperienced owner of the.'.in-dustrial sector is, naturally, expected to make mis takes in production and administration. But some mis takes were not estimatable. One of these mistakes which was hardly excusable is the appointment of mili tary officers, who had no experience at all in this field, as managers to many firms. The important role - 63 -of the manager in the production process is not well recognized in the public-owned enterprises. This mal administration has led to a waste of factors of pro duction, and consequently has increased the capital coefficient of the sector. In fact, the transfer of the productive sectors from private ownership to government was expected to have two adverse effects: a rise in the capital-output ratio, owing to less efficient operation causing a slackening in the rate of growth of GET?; a rise in the rate of depreciation of capital owing to less efficient maintainance lea ding to a further fall in the rate of growth of the net national product,5® For example, it is known that the costs of building and construction have risen sub-59 stantially owing to the governmental supervision. 2- Comparing the planned capital coefficient of in dustry, electricity and construction in the Five-Year Plan (2.2) with that of the preceding seven year pe riod (2.6), we find the former lower than the latter. - 64 -It might have "been expected that a higher coefficient would he needed. The Five-Year Plan contained mainly 60 consumption goods and food industries, which does not show much dhange from before in the structure of the industrial sector. But the building of new indus tries in UoA.R. should have been expected to be accom panied by some waste in resources due to the lack of experiences and skill. Hence, the planners were very ambitious when they projected the capital coefficient in indestry, electricity and construction as 2,2. 3- An important factor affecting the capital-out put ratio is the gestation period. Unfortunately, the data with regard to this factor is not available in f\~\ many countries. A gestation period longer than ex pected will raise the capital coefficient. An unsuc cessful attempt has been made to calculatethe secto-ral gestation period in UeA.R. However, it is ex pected that some of the projects that have been built during the implementation of the Plan will yield their products after the plan period. J These enterprises with long gestation periods will certainly have raised the capital-output ratio during the Plan period. 4- The idle capacity which has appeared in some pro jects due to the lack of spare parts, raw materials and intermediate goods, has also contributed to the rise of the capital coefficient in industry, electri city and construction. This rise in the actual capital coefficient has made the output target of this sector not feasible unless more investments are allocated to it. Thus, to fulfil the output target, given the rea lized capital-output ratio, investment has to rise to LE 1250.0 million, i,e. more than twice as much as the planned figure. In the service sector, we differentiate between transport and communication, and other services. In the former, the realized capital-output ratio, 4.6, was far below the projected ratio, 13«5. The only explanation given in this respect was the complete underestimation of the increase in Suez Canal traffic. With regard to "other services", the realized capital-- 66 -output ratio, 1.5, is almost the same as the projected one, 1.4. The actual investments allocated to transport and communication have been LE 300.83 million, i.e. about 11% more than the planned amount, LE 269 million. Actual output in the same sector was LE 63.42 million, i.e. about 200% more than the output target, LE 20 pil lion. This big jump in the output achieved, in spite of the relatively low increase in investment is due to the low sector capital coefficient realized in trans port and communication. The planned investment of "other services", LE 149 million, and its target output, LE 104 million, have been also surpassed. Achieved investment and output were LE 196.50 million and LE 134.89 million respectively. After reviewing the discrepancies realized between the results achieved and the planned targets, we can conclude that it is not advisable to depend only on the capital coefficient to determine the investment re quired in each sector and then wait and expect the rea lization of the output target. The volume of investment by itself is not sufficient to determine the expected - 67 -income. The kind of investment, the equipment used, the efficiency in using the njachines, the prices of investment commodities, final goods and wages, all must be taken into account to realize the final aim: the increase in the volume of goods and services produced.^1 The capital-output ratio is a technical realtion between investment and output. It can be used to deter mine the investment required tow a projected level of income only if other things remain unchanged,. This is especially not possible in a period of economic trans formation. Changes in the equipment used, in the tech niques applied, in the efficiency of labour, in the maintaina*iance of capital and in the capacity utili zation, all of these lead to a change in the capital-output ratio. Thus, the historical capital coefficient cannot be depended upon to forecast the required in vestment in the future as long as the country is under going structural change. Even if it is claimed that the capital-output ratios in the underdeveloped coun tries which have made progress in the development plan-- 68 -ning* >embody all these changes, we cannot have faith in the suitability of this ratio to any developing coun try, e.g. U.A.E. Every country has its own conditions with respect to capital, natural and human resources, efficiency, etc. This makes it impossible to adopt one technique of production in two countries and expect the same degree of success in both. However, the capital-output ratio ie a simple tech nique in planning. The lack of data and experience make it necessary for the countries that are just starting planning,' to begin with rather simple 67 techniques, which can be developed as the years go by. Depending on this argument, the planners in U.A.E. may not be blamed by adopting this simple technique in the First-Five Year Plan. But, they could have made something better out of it, if they have used, in addition to the incremental capital-output ratio, the input-output tables. The discrepancy between the ac tual and the projected capital coefficient in many cases can be explained as the result of the incon sistency between the different projects. The Plan should - 69 -have included a quantitative statement of production in the different fields, and the outlay of this prere duction. The input-output tables are essential because through these tables we can realize whether production tends to meet consumption and investment requirements, or whether there is imbalance between what is. produced 68 for investment and for consumption. Input-output tables suffer from severe shortcomings in common with the capital-output ratio, e.g.nthey depend chronically upon fixed technical coefficients. But, a combination of the two techniques, capita-out put ratio and inpu-output tables, might be expected to give a better: result than using the capital coef ficient technique alone, as it has been done in the Five-Year Plan in U.A.R. - 70 -c- The Aggregate Capital-Output Ratui and tke Rate of  Growth of the Economy; It is argued, both theoretically and empirically that there is an inverse relationship between the ca pital-output ratio (incremental) and the rate of growth gq of the economy. 3 The higher the capital-output ratio of the economy, the lowej? its rate of growth, given a certain level of investment. The rate of growth of the economy, then, can be accelerated either by increa sing investment or by decreasing the aggregate capital coefficient. The capital-output ratio for the whole economy de pends not only on mechanization, technical progress, etc., but also on the sectoral structure of the natio nal economy and the rate of its development. Therefore, the economic analyst should distinguish between the ca pital-output ratio involved in the production of speci fic products and the capital-output ratio that applies to the national economy as a whole. The latter*s dyna--71-mics are determined not only by changes in the capital-output ratios related to separate products, but by the share of these products in the total output of the na-70 tional economy as well. This means that if more weight is given to the sectors with the high capital coefficient^ the aggregate capital-output ratio is expected to be high. On the contrary, if the sectors with low capital coefficients have the greater share in the anticipated increase in output, the aggregate coefficient is ex pected to be low. According to the ©lan, more weight has been given 71 to industry, electricity and construction. This can be shown by examining the share of investments direc ted to this sector with respect to total planned invest ments , and the product expected from it compared with the total output anticipated during the Five-Year Pi:an. About 35$ of the planned total investments were direc ted towards this sector. Its anticipated contribution, was about 52$ of the total increase in output. The agricultural sector comes next with respect to its - 72 -importance in the Five-Year Plan. Its contribution was planned to be 22% of the increase in output. Ac cording to this sectoral structure of the economy, the projected aggregate capital-output ratio was 3«2 (Ta ble 1). During the implementation of the Plan, the sectors' weights, measured by shares in the actual increase in output, have changed. Industry^ electricity and con struction, together wih the agricultural sector have contributed only 58%+ of the decrease in output com pared with 74%++ iii the planned figures. The services sector which was planned to contribute with 24% of the total increase, its share rose to 46% of the ac tual increase,in total output. The aggregate capital-output ratio realized during the Five-Year Plan was 3.9« Although this is already greater than the plan ned raMo, it would have been much more higher if the + 33% for industry, electricity and construction, and 25% for agriculture (calculated from Table 5). ••Calculated ffrom Table 1. - 73 -weights given by the planners to the different sectors have not been changed during the implementation of the Plan. The change in the sectoral shares with respect to total output in favour of the services sector has mitigated the effect of the high capital-output ratio realized in industry, electricity and construction on the aggregate capital coefficient. The significant fall in the realized capital-output ratio in the ser vices sector has compensated for the rise in the capi tal coefficient achieved in industry, electricity and construction. Otherwise, the aggregate capital-output ratio would have jumped higher than 3.9. The average actual annual rate of growth of GNP during the Five-Year Plab was!; 5.8$.+ To raise it to the average planned growth rate of 7.2$, either the level of investment would have hid to increase to 28$ of GUP, or the aggregate capital-output ratio would have had to -fiall to 2«B» + Derived from Table IT in the Appendix to Ch. III. - 74 -The possibility of raising the investment level to 28% of SEP seems unfeasible in the present time because of the low saving ratio in U.A.R. and the already heavy burden on the balance of payment. It might be said that the aggregate capital-output ratio can be decreased bjr allocating investments in favour of services and agriculture, the sectors with the lower capital coefficients. This seemsotc be not an advisable policy to a country seeking structural change and economic development. The expansion of pro ductivity in the services sector is a prerequisite and a concomitant to economic development. Industrialisation and economic progress, .'.in general, postulate improve ment in the quality and quantity of many services, e.g. financial services, education, health services, trans port and communication, etc. In fact, the development of the goods producing sectors has to be accompanied by the growth in the services sector; a slackening of the latter might reduce the rate of growth of the former. On the other hand, in the case where the goods producing sector is underdeveloped, the servi ces sector is likely to be limited. In fact, the ab-- 75 -sorptive and productive capacity of the services sector does likely depend on the degree of development and progress in the country concerned. This can be proved if we compare the number and quality of banks and in surance companies, health, education, etc. in the de veloped countries with their counterparts in the deve loping ones. The services sector is larger in the for mer than in the latter. Thus, giving more weight to the services sector in U.A.B. without making sufficient improvements in the goods producing sectors, is Mkely not a solution in our case. With regard to the agricultural sector, the problem is quite different. TJ.A.R. was, and still is, an agri cultural country with respect to both, output and employment. This has its disadvantage with regard to the low income per capita, since the majority of the productive population are working in the agricultural sector, where productivity is relatively low.+ The + The most recent available data is for 1959. Accor ding to it, the weekly money wage rate in manufac turing is 2185 milliemes and 700 milliemes in agri culture. See Mead, op. cit.t p.116. - 76 -disadvantage with regard to output can be suiimarized in the unfavourable structure of the foreign trade of the countryo Cotton, the main export of U.AoR.;', can not be depended upon, at present, as a good source of foreign exchange,as some may suggest. The synthetic fibres, which are improving day after day, are used now on a wide scale, as a substitute to cotton in pro duction. Also, the appearance of Sudan in the recent years, as a competitor to TJoA.R. in producing the long staple cotton, has narrowed the world markets of the 72 Egyptian cotton. In addition, there are rather heavy fluctuation in the value of cotton, from year to year, partly because of crop-fluctuations, but also because of the well-known price instability of raw material markets, J In fact, export: ' diversification and import' substitution make the country less depen dent on traditional export commodity. Foreign trade will decline compared to national income, and this in itself will make the country's economy less sensitive 7 to fluctuations in foreign trade and crop conditions. That is why the planners have given more weight to the industrial sector in the Five-Year Plan. - 77 -Industrialisation is the traditional and still the most sought-after path of economic development. Many of the developing countries, which have started on their way towards economic development, have taken this path, e.g. Yugoslavia and India. But, as long as we accept industrialisation as a rational path to economic deve lopment, we have to expect a rise in the aggregate ca pital-output ratio of the country. Thus the rise of the aggregate capital coefficient in U.A.E. from 2e8 in the five-year period preceding- the Plan to 3°9 during the iipylemejitation of the Plan is a normal phenomenon.. The important question is: What is the trend of the capital-output ratio during the subsequent development process? In other wods, whan the structural transfor mation period is over, will the capital coefficient have a continuing upward trend, or will it tend to decline? As we know, a decrease in the capital-output ratio has the same effect as an increase in investment. + Derived from Tables IV and V in the Appendix toCh. III. - 78 -and vice versa. Thus, the trend of the capital coefficient has a speciallimportance to developing countries, such as the U.A.R., which suffer from the scarcity of ca pital. An upward trend in the capital coefficient in dicates that more difficulties have to be expected as the development process proceeds. The time-path of eco nomic development will be longer and the sacrifices and efforts required will be greater. On the other hand, if the trend of the coefficient is downward, the deve lopment process looks more promising, since the path becomes easier (at least in this one respect) as the time passes. Chapter IV will be devoted, therefore, to discussing the theoretical and empirical aspects of the trend of the capital-output ratio during the development pro cess in general, and its implications with regard to the expected rate of growth of U.A.R. in particular over the future period. - 79 APPEEDIH TO CHAPTER III Calculation of the Capital-Output Satio in IT.A.R,,: It is well Known that some projects have longer gestation period than others. This should be consi dered in the calculation of the capital coefficient, if accuracy is required. Since this data is lacking in TJ.A.R., as is also the case in many other coun tries, we have tried to find a rough picture of the sectoral gestation period by calculating the corre lation coefficient between investment and output in each sector, assuming four suppositions: (a) no ges tation period; (b) gestation period of one year; (c) gestation period of two years; (d) gestation period of three years. The result is shown in Table I. - 80 -Table I The Correlation Coefficient between Investment and the increase in output by secors, 1954-1966 Indus try Agri cul ture Hou sing Trans port & Commu nica tion Other Servi ces Total No lag 0.1644 0.4856 0.4386 0.4022 0.1086 0.5837 1-year lag 0.0377 0.2334 0.1289 0.4026 -0.329 0.2691 2-year lag -0.067 0.3390 0.1289 0.5082 0.1470 0.2712 3-year lag -O.678 0.6254 -O.I63 0.1463 -0.153 0.4198 - 81 -As it is clear from Table I, the correlation coef ficients, in general, are so low that we cannot de pend upon them to derive convincing results. Hence, this trial fails to give us a reliable ansewer about the gestation period in different secjors. It fails to show us the length of the sectoral lag period, if any, between investment and the increase in output related to it. A handy and realistic way to calcultate the actual incremental capital-output ratio during the Five-Year Plan is to relate the ratio of gross investments du ring the planning period, excluding land and stock changes, to the increase in gross value added form the base year to the final year of the plan. This may has been used in calculating the realized sectoral capi tal-output ratios in Table 5. The same method has been used by G-ianaris in his calculation of the incremen tal capital- output ratio with regard to a cross-75 section of developed and developing countries. - 82 -In fact, both, of the series of output and invest ment suffer from statistical weaknesses.+ This makes them less reliable in the calculation of the incremen tal capital coefficient on a year to year basis than at a certain period taken as unity. + This can be shown by the diversities of these two sets of data when derived from different sources. - 83 -Table II Consumer Price Index in U. A. R. (1958 = 100 ^ 1948 1953 1954 1955 1956 1957 1958 All Items 93 98 94 94 96 100 100 Pood 83 91 92 93 95 99 100 1959 I960 1961 1962 1963 1964 1965 All Items 100 101 101 98 99 103 118 Pood 101 102 103 103 105 111 139 Source: U. N., Statistical Yearbook 1962 and 1966. Table III Wholesale Price Index in U. A. R. (1958 = 100) 1948 1953 1954 1955 1956 1957 1958 General Buildings Textiles 79 70 85 92 83 84 90 84 89 93 93 99 96 101 103 103 100 100 100 1959 i960 1961 1962 1963 1964 1965 General Buildings Textiles 100 98 98 100 101 98 102 103 96 101 105 96 100 104 103 105 106 105 113 115 110 Source: U. N.; Statistical Yearbook 1962 and 19oo. - 84 -Table IV GNP at Constant Market Prices (1958 = 100) LE million Sector Year Agriculture & Irrigation (including High Dam) Industry, Electricity and Constr ue tion Hous ing Transport and Commu nication Other Services Total 1953 1954 1955 1956 1957 1958 1959 I960 1961 1962 1963 1964 1965 267.34 320.21 331.91 389•58 381.00 364.00 407•00 399.00 436.63 478.57 479.79 565.14 515.67 168.36 193.61 208.50 228.12 250.00 278.00 312.00 340.53 384.15 484.69 512.71 523.49 491.77 57.1^ 55.95 69.14 69.79 68.00 70.00 73.00 73.26 77 • 22 79.59 79.49 72.71 64.49 56.12 61.70 65.95 60.41 65.OO 72.00 92.00 100.99 112.87 126.53 157.77 170.87 166.6l 312.30 337.23 351.07 363.54 362.OO 373-00 407 . 00 436.63 529.70 497.95 527.38 585.24 561.52 864.26 978.61 1026.57 1111.47 1126.00 1157.00 1289.00 1350.46 1540.57 1667.33 1757.14 1917•45 1800.06 Sources: '1^ D. C. Mead, Growth and Structural Chan^ in the Egyptian Ec onomy, p. 2b6. '2^ U. N.: Yearbook of National Accounts Statistics, 1968 - 85 -Notes: Source (l) includes the Gross National Income and Product at market price from 1952/53 - 1962/63 in cur rent prices. Source (2) contains the Gross Domestic Product at factor cost from 1962 - 1965. To convert the GDP at factor cost into GNP at mar ket prices to form a consistent time series of the pro duction in U.A.I., mathematical manipulation has been used. Comparing the data of the common years, 1962 and 1963, in both sources, we get a rough relation ship between the national product at current market prices and the domestic product at factor cost in each sector. These sectoral relationships have been used to convert the data of the period 1963 - 65 in source (2), into gross national product at market prices. Thus, we get one consistent time series of U.A.B. in cluding the GNP at current market prices from 1953 -1965. Using the consumption price index in Table II, we <••. calculate the data in Table IV. - 86 -Table V Investment at Constant Prices (1958 = 100) LE million Sector Agriculture Industry, Hous Transport Other Total Year & Irrigation Elec tricity ing and Services (including and Construct Commu High Dam) ion nication 1953 17 • 41 48.47 54.11 22.58 13.17 155.74 1954 18.43 54.81 60.24 28.43 14.21 176.12 1955 21.42 75.95 61.90 29.16 16.42 204.85 1956 21.60 50.32 53.76 20.96 15.70 162.34 1957 21. 38 50.49 47.52 28.21 16.14 163.74 1958 25.30 64.90 4o. 00 33.00 18.20 181.40 1959 26.50 63.OO 31.10 35.80 15.00 171.40 i960 37.10 80.20 18.20 73.10 16.20 224.80 196I 6l. 36 124.21 41.27 80.68 40.39 347.91 1962 74.24 155.14 45.64 66.06 52.78 393.86 1963 70.45 144.82 39.49 60.17 39.30 294.23 1964 79-14 150.75 29.04 46.95 35 • 43 36.1.31 1965 67.16 149.18 42.03 46.99 28.60 333.96 - 87 -Notes and Sources: Table V is calculated by applying the wholesale price index in Table III to the investment data at current prices derived from the following Sources: (1) D.C. Mead, Growth and Structural Change, p.290; (1953 - 1963). (2) U.N. Yearbook of Bationsl Accounts Statistics; -.1968 i (1964 - 1965). Investments in 1963 are not available. Therfore, in Table "V", investment in each secor for this year, 1963, is calculated by averaging over the period 1961 - 65, excluding 1963. Unfortunalely, we could not use Creamer's method+ in deflating the investment series in U.A.R. because of the lack of the required data~with respect to wor king capital, as well as the volume and depreciation of buildings and machines and equipment in the country. + See p. 9 in Chapter II above. CHAPTER IV THE CAPITAL-OUTPUT RATIO AND THE DEVELOPMENT PROCESS -88 -In this Chapter, we shall try to evaluate some broad generalizations dealing with the difference be tween capital-output ratios in the developed and under developed economies. The first hypothesis is that ca pital-output ratios are greater in the developed coun tries than in the underdeveloped ones. By contrast, the second hypothesis argues that the capital-output ratios are lower in the developed economies than in the un derdeveloped ones. Consequentlyj the first argument is in favour of an upward trend in the capital-output ratio during the development process, while the second is in favour of a downward trend. The appraisal of these two contradictory views will be attempted theoretically and empirically, using a sample of developed as well as underdeveloped countries. The empirical evaluation will be basejon the fact that each of the two hypotheses has its arguments based on certain factors that are considered to have an important effect on the capital-output ratio. We shall try to pick up from both aspects these factors, - 89 -that are measurable and treat thep as independent va riables. The dependent vaiable will be the gross in cremental capital-output ratio. There are two alter native sources of data on these variables. The one is time series; the other is cross-section data* In the first, we trace the development of the capital-output ratio for one country over an extended period of time. Evidently, this calls for data for a sufficiently long period to characterize the different stages of deve lopment of that country. In the second approach, we need data for a spectrum of countries wide enough to designate different stages of development. The second approach is more appealing, since we are concerned with relating the differential in the capi tal coefficient to the difference in the level of deve lopment, other things being equal (dog., if we talte a group of countries they might be argued to have more "equal opportunities" in terms of the possibilities of trading, importing technology, etc., than is true in the case of one country only over time). Now, the + This is not to deny that contemporaneous countries do not, in fact, have "equal opportunities" due to re source differences, trading and tariff arrangements, etc. - 90 -question is whether there is a signigicant difference between the level of the capital-output ratio in deve loped countries and its level in the underdeveloped ones. We shall not dwell on the problem of the distinc tion between "developed" and "underdeveloped" countries. Rather, a pragmatic approach will be followed, taking as a basis for classification the level of per capita income. Regression analysis will be used to assess the relative importance of each of the factors chosen with respect to the capital: coefficient in the different groups of countries. Let us, first, review the theoretical basis of the two aspects, then move on to the statistical part: the evaluation of coefficients of the independent va riables. - 91 -(l) !Eheoz&3^§i&.Jl&Yi ew; A- Hypothesis: "Capital Coefficients are greater in the Developed Countries11: This view argues that the capital coefficient in creases with the development process. In fact, an un derdeveloped economy, is in most cases characterised by a:.large quantity of labour relative to the capital stock and a low propensity to save out of a given income; while a developed economy has a large capital stock re lative to the available labour force and a high pro pensity to save out of a given income. We shall ex pect, therefor, that the real wage rate will be lower and the rate of interest will be higher in underdeve loped countries than in the developed ones. Under these conditions, all industries in the underdeveloped coun tries would be using methods of production,. which are more labour intensive than in a developed economy. In other words, the dapital-output ratio of each industry in an underdeveloped economy should be smaller, than the capital-output ratio of the corresponding industry in a developed economy.1 - 92 -This aspect is supported also, to some extent, by p Harvey ljeihenstein. He states that as an economy deve lops, the wage rate will rise and as a consequence, there will be a tendency to substitute capital for la bour. The result is that in those industries where factor substitution is possible, the methods of pro duction will be less labour-intensive than in the less-developed stage, and capital-output ratios will rise with development. Shifts between agriculture and industry have also an influence on the overall capital-output ratio of the economy. Agriculture requires more labour and less capital, consequently, the capital-output ratio in the agricultural sector is low. On the contrary, industry needs less labour and more capital, and subsequently, the capital coefficient in the industrial sector is high. Hence, the capital-output ratio in the developed 'countries is expected to be higher than in the under-** developed ones, since usually the industrial sector is relativetly greater in the former than in the latter.^ - 93 -Hypothesis; "Capital Coefficients are greater in the Underdeveloped Countries." One of these arguments is supported "by Colin Clark. He argues that, as per capita income grows, the compo sition of output shifts away from the primary towards the tertiary industies, where the capfetal-output ratios are low. There may be some significant exceptions to this general view. Por example, in the case of medical services, the capital-output ratio is quite high com pared withe the capital-output ratio in some secondary industries. Furthermore, some more advanced countries have higher capital-output ratios than some seejiiingly less advanced countries.^ This view requires the in vestigation of the industrial sector in each of the de veloped and underdeveloped countries and the measure ment of the capital-output ratio in each type of manufacturings This cannot be achieved easily for the lack of data. However, it is beyond the scope of this paper. Other discussions that agree with this trend are - 94 -based on the facility with which indivisibilities of certain capital goods can be overcome as output increa ses. We fr.ind that the level of output is higher in the developed countries than in the underdeveloped ones, since the income per capita is greater in the former than in the latter. The overcoming of indivisibilities of capital will lead to a fall of the capital coeffi-cients.^ According to this argument, the higher the in come per capita, the higher the output produced, the greater the possibility of overcoming the indivisibi lity of capital and the less the capital-output ratio will be. Since the indivisibility of capital cannot be measured to evaluate directly its relative significance to the capital-output ratio, it may help to take the income per Capita as a substitute, considering the direct relationship between the level of income per capita and the overcoming of the indivisibility of capital. AnotheS factor which affects the capital-coefficients is the utilisation of capital goods in production. - 95 -The more efficient the workers and managers in using the capital goods, the more product they produce and, consequently, the lower the capital coefficients are. But undermaintenance of capital goods and inefficien cy in using them are common characteristics in the in dustries of the underdeveloped economies. On the con trary, in the developed countries , more attention is paid to this fact which, in turn, leads to lower capi-taljboefficients in these countries than in the under developed ones..'6 This view is compatible with the argument that puts a considerable importance on what is called "human investment". Increasing per capita expenditures on edu cation and on the learning of specific skills are among the concomitants of per capita income growth. As the labour force is gradually improved in this manner, the value added by labour per unit of output increases ac cordingly. Consequently, the same quntity of labour, without any increase in capital, yields a greater out put. Hence, as economic development proceeds, labour - 96 -skills improve, economies of scale are experienced at particular stages of growth, and technical knowledge advances. Consequently, the continuing increase in capital per head may be associated with a non-rising, 7 or even falling capital-output ration One important independent variable should be added to our equation::the rate of growth of GDP. It has been observed that the capital-output ratios are clse-ly but inversely related to the rate of growth. The higher the rate of growth, the higher the output produced, given the stock" of capital, the lower the capital-out-o put ratio, and vice versa. (2) Statistical Analysis: Our dependent variable in the equation will be the incremental (and not the average) capital output ratio, since this is what counts in the development process. Therefore, the equation will be: C/0 = aQ + a-^ + a2X2 + + a^ + a^ + u. (l) where: X^ = Rate of growth of GDP (Gross Domestic Pro duct) . X2 = Per Capita GDP (in U.S.A. $). X^ = Industry's share of GDP. X^ = Cost of labour (wage/week) in U.S.A. #. X,- = Percentage expenditure on education. 0/0= Incremental capital-output ratio. ur = Error term, where r denotes the number of observations. An important point should be added here: the econo mic variables are interdependent between each other. The capital-output ratio, in fact, affects many of the above mentioned variables as well as being affected - 98 -by them. Hor example, a high capital-output ratio is likely to raise the physical productiviy of labour and, consequently, the wage rate of the labour force. More over, the high capital coefficient, by raising produc tivity and output, may increase the GDP per capita. In fact, X^,...y Xp. in equation (l), have been chosen as independent variables on the basis of the two hy--j-ppthises dicussed before. r To evaluate the importance of the independent variables with respect to capital-output ratio (C/0) in equation (l), we shall proceed in two steps: First step: We chose two groups of the underdeve loped and developed countries respectively. Each one includes 10 countries. The first group includes coun tries with income per capita ranging from $130 - $800 (all in U.S.A. dollars). The second group Includes coun tries with income per capita ranging from $1000 - $3000'. + See pp. 88, 89 above. - 99 -By regessing C/0 on each of the independent vaiables (X-p...^^) in equation (l), we got the following two equations: C/0 = 1.0782 - 0e0467X1 + 0.6148X2 + O.O3O6X (1.9399) (0.2655) (0.4646) (0.1024) + 0.1087X4 + O.50l7Xc + ur (0.1123) (0.4689) 12=0.3887 (2) C/0 = 0.3025 + 0.0818X1 - 0.5022X2 + Q.0914X-(3.3286) (0.1774) (6.4421) (0.0579) + 0.5375X4 - O.O707X. + ur E2=0.7697 (3) (0.0125) (0.1456) Equation (2) is for the underdeveloped countries ?. and (3) for the devloped ones. In the first equation, the coefficients of X2 and X^ are the only statistical ly significant ones, judging by their standard errors. In the second equation, only the coefficients of X^ and X^ are statistically significant. "V9e shall not ana lyse these results because it is unsatisfactory, since the matrix of the correlation coefficients reveals mul ticollinearity between some of the independent variables. - 100-If we investigate the independent variables carefully, we find that it is not unexpected that multicollinea rity should exist between the rate of growth of GDP (X^ and the per capita GDP(X2). X1 can be a substi tute for X^ as an indicator of the stage of the coun try in the development process,, Knowing that the. ave rage rate of growth of population in the underdeveloped countries is greater than in"Mie developed ones, the same rate of growth of GDP in both groups indicates that the increase in per capita GDP (X2) in the latter is greater than in the former. Also, there are multicol-liniarties between X^, X^ and X^. The reason for this is that the higher the rate of growth of GDP, the higher the expected expenditure on education. Also, the hijgh&r the industrial share of GDP, normally the higher the level of the income per capita (because the rate of wages in industrial sector is usually higher than in the agricultural one) and consequently the more will be spent on education. Hence, by dropping X,p and X^ the theoretical basis of the equation (l) will not be seriously affected. This is what Lis done in the second step. - 101 -Second step: Our general equation becomes: C/0 = aQ + a1X1 + a3X3 + a^ + ur (4) "Another reason, why the results of the equaion$(2) and (3) are unsatisfactory, is the wide range between the income per capita in each group. Therefore in this step, we split the two groups into three groups: iThe first group includes six underdeveloped countries with per capita income ranging from $130 1- $233 (U.S.A,. I), the second group includes six "semideveloped" countries with per capita income ranging from #430 - $1155, and the third includes six developed countries with per capita income from 11500 - $1800. U.S.A. and Canada excluded from the last group, because their income per capita is much higher in comparison to the other deve loped countries, y By recessing the C/0 on each of the three indepen dent variables included in equation (4), we obtained: C/0 1.7303 - Oi4568X1 + 0.1899X3 + 0.0766X4 + ur (0.6O15) (0.0913) (0.0351 (0.0160) R2 = 0.9496 (5) C/0 - 102 -C/0 = -2.4299 + 0.106^ + O.1317X3 + 0.4247X4 + uy (7) (2.9765) (O.3OO3) (0.0516) (0.0127) E2 = 0.7895 Equation (5) is for the underdeveloped countries, (6) for the "semi-developed" ones and (7) for the developed countries. We shall ignore equation (6) because of the o very low value for R . Now let us try to analyse the relative importance of the variables in the other two equations and compare -jfehe result with the theoretical basis we reviewed before. (a) The coefficient of X^ is statistically signi ficant in equation (5) only (with regard to the value of the standard etror). The negative coefficient of X^ implies an inverse relationship between X^ and C/0, which conforms to the theoretical hypothesis: the higher the rate of growth, the lower the capital-output ratio, and vice versa. The coefficient of X^ is statistically inslgnii^rflficant in equation (7). (b) The coefficient of X^, the industry's share in G-DP, is statistically signigicant in the two equations. It indicates that X^ has a positive relationship with the C/0, which is compatible with the theoretical hy-- 103 -pothesis that: the higher the industry s share of GDP, the higher the capital-output ratio, since industry-uses more capital-intensive methods of production than agriculture, for example. Comparing equations (5) and (70, we find that the coefficient of X^ is greater in the case of the under developed countries group than in the case of the de veloped countries group. If this differentiallis real, it suggests that industry's share in GDP exerts more positive influence on the capital-output ratio in the underdeveloped countries group than in the developed countries.(The coefficient in the former group is al most 44$ higher than the latter). But this is counter acted by a much higher value for the share of industrial product in GDP in the developed countries'group. (In the developed countries'group industry's share in GDP is nearly double that of the underdeveloped coun^v. tries groug).+ + Calculated from the Table in the Appendix to Ch.IV. - 104 -(c) The cost of labour, X^, proved to have a sig nificant positive effect on the capital-output ratio* It is also clear from comparing the coefficient of X^ in equations (5) k (7) that the effect of the cost of labour on the capital-output ratio increases with the development process. This can be explained by the fact that structural rigidity decreases as the development process proceeds. The economy will be more able to adjust to the changes in the relative costs of capi tal and labour through factor substitution. More over, in view of the fact that the underdeveloped coun tries import their technology, their chance is relar-tively smaller of effecting factor substitution in conformity with factor endowment. After discussing the empirical findings, the ques tion is: Can we say anything about the relative mag nitude of the capital-output ratio in the developed and underdeveloped countries? Or, put another way, what happens to the capital-output ratio through the - 105 development process- does it decrease or increase or remain constant? In order to work our way to an answer, the empirical findings will be matched with the theo retical arguments. The growth rate will be excluded from the list of independent variables because of the inconclusiveness of its effect on the capital-output ratio. We are then left with the industry's share in GDP, X^, and the cost of labour, X^. Among the theoretical arguments presen ted in favour of an increasing capital coefficient with development, two aspects were discussed. First, the increase in the cost of labour, that accompanies the economic development, induces factor; substitution in favour of capital, through development. The expec tation, then, is that capital-output ratio will in-\aboiAr crease with rising relative^cost. The positive coef^' ficient of X^ confirms this theoretical speculation. It was also pointed out in these theoretical ar guments that structural change, during development process, in favour of industry will be expected to - 106 result in a higher capital coefficient with develop ment. In other words, it is expected that this struc tural change, measured, say, in terms of the industry's share in GDP, will "be positively related to the capi tal-output ratio. This is what our findings regarding the coefficient of X^ reveals. We may, then, derive the answertlhat the capital-output ratio is expeSted to increase with development. Our statistical results conform with the hypothesis that the capital coefficient is higher in the deve loped countries than in the underdeveloped ones. The statistical results also conform with the sectoral and overall incremental capital-output ratios of a sample of developed and developing countries, calculated by G-ianaris. He has pointed out that in the majority of sectors, developing countries have lower incremental 9 capital-output ratios than developed countries. The overall capital-output ratio is, also, generally higher in the developed countries than the developing ones,1^ . However, this does not mean that the emp-irical work -.10? -done in this repect supports the first iiyyothesis (that the capital-output ratio is higher in the deve loped countries than the developing ones). The opposite result ( a capital-output ratio higher in the developing than the developed countries: the second hypothesis), 11 has been supproted "by the empirical wark of Kuznets, 12 13 Bhatt, and Abbas* J However, the following analysis will be based on the first hypothesis, since this is what our statistical resultsohave tended to confirm. A few words of warning are due. They relate to the reliability of the conclusions reacjed here. These conclusions have to be taken with great ,e?are for three reasons: Pirst, the sample size is too small to allow drawing really general conclusions. Secondly, it is expected that the errors of measurement will be rela tively large, especially in the case of the underde veloped countries. Thirdly, though, we have tried to minimize the effect of multicollinearity, it cannot be claimed that it has been done away with completely. We know enoughhof its distorting effects oh the results. - 108 -(3) The Implication of the Rising fTgend of the Capial-Output Ratio, with rspect_to .the expected Rate of Growth in U.A.R.: Applying the above mentioned result - that the ca-pital-ouput ratio will increase with the fevelopment process-':&o\.i&he case of U.A.R., we find that the deve lopment path does not look optimistic. As the time passes, the rate of investment required for develop ment shoud be increased to sustain the same rate of growth of the economy. Sow, the question is whether it is feasible to increase the rate of investment of the country to the extent needed to raise, or even to sustain,the rate of growth of the economy in the future, gsJren the rising trend of the capital-output ratio. To answer this question we should discuss the feasible capacity of two sources::$irst, foreign ex change; second, domestic savings. First, foreign exchang can be derived from two sources: (a) Earning a surplus in the balance of cur-- 109 -rent payment; (t>) Obtaining grants and loans from other ountries. (a) A surplus can he achieved through increasing exports and/or decreasing imports. The feasibility of the realization of surplus in the balance of payment in the future is, however, a debatable subject in the U.A.E. case. With regard to exports, it had been planned, as we know, to reduce the share of cotton in exports and to diversify the country's exports in favour of manufac tured goods. According to this policy, the rate of increase in the exported manufactured commodities should be large enough to compensate for the decrease in cotton exports and to raise total exports to a le vel higher than imports. By comparing the structurecbf exports before and during the plan period, we find that cotton's share in exports has been reduced from 70$ in 1955/56 - 1959/60 to 56.1$ during the plan period. By contrast, the share of non-agricultural goods (including ootton yarns and cotton rr/.abrics) in total exports has risen from 20.3$ in the five years - 110 -proceding the plan to 24.5/° only in the Blan period. Actually, increasing total exports and making a struc tural change in it at the same time, is not an easy target, whether for the U.A.R. or forr any other de veloping country in its first phase of development. Lack of experience and skill? in the manufacturing field will make it difficult for the U.A.R. to com pete with established manufacturing countries in world + The So-yet Experts' report on Vocational and Tech nical Training in U.A.R. emphasized the need for establishing a centrallorganization for vocational and technical training that would be responsible for planning and coordinating the manpower require ments. The report pointed out that the general edu cation in U.A.R. does not keep pace wiit]> the large industrial projects of the development Plan. See: :Monthly Review of iiEconomic..,and Social Event, (Cairo: Institute of National Planning), Nos. 9 -10, SeptemberrOctober, 1965, pp. 71 - 72. - Ill -markets in the near future. Although this structural change in exports has improved for U-«A.R. , as has "been explained before, it is unlikely to yield results in the short ren. Thus, it is laot expected to raise ex ports in U.A.R significantly in the near future. However, this is only one side of the coon; the other side is imports. If imports can be reduced re latively to the present level of exports, a surplus can be realized without any increase in exports. Re viewing the data during the past period, including the Five-Year Plan, we find that imports have had a rising trend. The question is whether this trend will change in the future and whether it will begin to decline. It is expected that the irrigation projects built in .j. the Five-Year Plan and the completion of the Aswan Dam + U.A.R. has not reaped yet the full benefit antici pated from the High Dam. This 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,= - 112 -will increase agrlcultiiral products and, consequently, reduce the import' of food. Also, in the industrial sector^- the import: substitution industries which have had a gestation period longer than had been ex-pectec, are expected to produce yields a£ter the plan ning period and, consequently, reduce the imports of consumption goods. On the other hand, the accelerated rate of growth of population togerher with the needs of economic development with respect to the imported machines, tools, intermediate goods, etc., all work to raise the level of imports• Por these reasons, even if imports have a decreasing trend, it is not to be expected that its level will decrease sufficient to make a significant surplus in the balance of current payments, as long as the development process is in its earlier phases. Thus, the possibility of making a sur plus in the current balance of payment through the increase in exports or the redection in imports is = improved navigation along the Nile, a large increase in output and exports of rice and a very signifcicant 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$ or more of GDP in 1964/65. See, Gerakis, "U.A.Ro's Pive-Year Plan," Po 10. - 113 -limited with respect to U.A.R., at least in the near future. (b) With regard to grants, most countries cannot depend, usually, on them as^a magor source of foreign investment, since they are in amount limited (except for certain special cases). Loans are the most preva^ lent source of foreign exchang in cases where the country cannot make a sufficient supluft in its balance of current patments. But the interest rate on borro wing and the burden of loan repayment create subse quent balance of payments difficulties, which can often have, an adverse effect on the economic development of the country concerned. This is actually the case in the U.A.R. The already heavy burden on its balance of payment is a serious bottleneck to the develop ment process. That is why the Blanning Committee has decided that industrial enterprises, which are financed by foreign currency should repay their due commitment 15 through the export of all their products to abroad. Thus, it can be concluded that foreign investments - 114 -which can he allocated "safely" to U.A.R. are rela tively limited, at least in the near future, given the prevailing situation. Second, with reyard to domestic resources, the rate of savings in U.A.R. is low, as it is shown in Table 3-Given the rising trend of the capital-output ratio witei the development process, and given the limited foreign resources, as we have seen above, the rate of saving will have to make a remarkable jump in order to sus^ tain (not even to increase) the achieved rate of growth of the economy. A low rate of saving indicates a high rate of con sumption. Hence, an increase in the level of savings requires a reduction in consumption, private and pub lic. Private consumption has risen in absolute terms during the Five-Year Plan. The share of public consump tion in GDP, instead of falling from 17% to 15% of ffiDP in the Plan period, has risen to 21%. This represents one of the sharpe^st and most unwelcome deviations from the objectives of the Plan.16 This high level - 115 -of consumption endangers the seccess of eonomic deve lopment. That is why the Planning Committee has taken new measures to cut government expenses in addition to raising prices of consumer and durable goods to reduce 17 private consumption as well. It may be WOEMI mention ing that the rate of saving, after rising from a very low level in the immediate postwar period, has shown no long run change. It seems to have been stable at a level of 12% of G-Sg.18 Even in the Five-Year Plan it had risen very slightly. With this low level of sa ving, together with the expected limited amount of foreign exchange and the already existing heavy bur den on the balance of payment, the rate of growth achieved during the Five-Year Plan -although it falls short of the planned target- cannot even be sustained in the future as the development process continues and the capital coefficient tends to rise. The rising trend of the capital-output ratio with economic development makes the development process a big challenge for the countries with scarce capital^ including uVA.l. ). - 116 -More efforts and more sacrifices are needed in the fu ture to overcome this challenge, otherwise the rate of growh in U.A.R will deteriorate. These difficulties will not last for ever. The establishment of a succes sful new industrial economy will raise the income per capita and,overcome the scarcity of capital which is the hindrance to a high'-rate of growth in U.A.R., as long as we expect a rising trend in the capital-output ratio over the development path. - 117 -APPENDIX TO CHAPTER IV Table I j-roup I Country Cyl on U.A.R. Paraguay Hondorus Phillipines Peru Per capita income (US ^ 132 158 189 19° 230 233 c/o-3.35 3.97 2.57 2.64 2.16 2.87 X. 1 4.2 3.5 3.6 4.5 5.5 6.6 X2 (US 140 162 210 214 258 253 0 (0/0) 8 23 16 18 22 22 •X, (US $) 4.0 6.4 9-02 10.55 13.49 1.60 X5 0/0) 4.7 4.3 1.6 2.7 4.1 4.9 J-roup II Jamaica Uraguay Japan Ireland Austria Israel 430 550 791 798 1033 1155 2.95 0.27 2.12 4.00 3.07 3.18 4.3 0.1 9.8 3.2 4.1 8.4 491 559 919 845 1183 26 26 28 33 4l 30 24.36 15-22 30.29 29.68 31.74 83.47 3-1 2.7 7.3 5.2 4.8 7-3 -roup III Belgium T:J. Germany France U. K. Australia Denmark 1502 1518 -1542 1577 1764 1808 3.01 4.22 2.85 3.21 308 2.22 4.6 4.5 5.2 2.8 4.7 4.6 1667 1740 1729 1644 1978 2246 30 40 35 35-34 31 29.56 50.29 30.49 42.33 65.17 74.39 7-1 4.5 e'.h 4.3 7. Il Canada U. S. A. 1980 3153 2.31 1.93 5.6 5.1 2329 3504 33 33 88.84 98.69 8.5 6.5 ources '1) U. N., "2) UNESCO, '3) ILO, Yearbook Yearbook of National Accounts Statistics 1967 tical Yearbook 19^7. Stati: of Labour Statistics 1967. International Labour Office, 196b). (Geneva: - 118 -Notes: (1) Data for most coutries relate to the year 1966. But, for some coutries, the data refer to only 1-3 years prior to 1966, which is the most recent data available. As far as the. nature of our problem is concerned, ""' this is not likely to endanger the results obtained. (2) The figures for the marginal capital-output ratio C/0, and thercost of labour (wage/week) X^ are calcula ted as follows: c/o (((&KiF)t-i * CTPt-l)/l00) GNP. - GNP. i t t—1 where GFCF is the gross fiEed capital formation as a percentage of gross national product (GNP), t indicates the time. A one year lag is assumed between investment (the numerator) and the corresponding output (the de nominator) . X = wage per week in non-agricultural sectors (in national cuifenc;v 4 the exchange rate (l tr.S.A.dollar=?national curyenc N.B.: The data for wage rate in the agricultural sec tor in some countries included in the sample, could not be found. - 119 = CONCLUSION To judge the performance of the first-Five Year Plan in U.A.E., we shall take the achievements rea lized in Yugoslavia and India as nospms helping us to pass some sort of judgement. These two countries have been chosen for two reasons: (l) The structure of their economies, at least at the start, was similar to that of U.A.E. with respect to the preponderant agricultu ral sector and the meagreness of the industrial sec tor. (2) Both have adopted development planning, al though they differ with regard to the relative impor tance given to the public and private sectors. The public sector in Yugoslavia dominated the economic life of the eountry,^" while in India it is still quite p small, even on mixed economy standards. In this res-pectj U.A.E. stands in between. The First-Five Year Plan in U.A.E. has achieved 89% of its output target.-^ This is, in fact, a good performance if we compare it with the performance un der the First Five-Year Plans of Yugoslavia (1946 -- 120 -1951) and India (1951 - 1956), respectively. The First Five-Year Plan in Yugoslavia aimed at dotifbling per ca pita income.'*' This ambitious aim was not realized un til the end of 19555. In India, the First Five-Year Plan aimed at raising Teal national income by less than 12$. Actually, it was increased only by half as much." ''In Yugoslavia the actual growth for 1947 - 52 was 1.9$ per annum. In U.A.E. the achieved average annual rate of growth during the first Plan was 5.8$. Although the achievements in the first Five-Year Plan in U.A.E. were remarkable, the future of the economic development of the country does not look optimistic unless the bottlenecks encountered in the First Plan are deliberately considered. One might mention three obstacles affecting economic develop-ment in the U.A.E.: the heavyoburden on the balance of payment; the low level of domestic saving, and the low quality and unorganized human resources. The heavy burden on the balance of payments has been one of the serious bottlenecks for? economic deve lopment in the U.A.E. To mitigate the seriousness of - 121 -this problem, more efforts should be devoted to increa sing exports and decreasing imports. With regard to ex ports, it might be reasonable to concentrate on the pro duction of goods in whMLch U.A.R. has comparative advan-tage, no matter whfther they be agricultural (e.g. rice, onions, vegetales, fruits) or manufactured goods. In a report undertaken by the United Nations in 1954, it was found that for the U.A.R. "among the in dustries which couM probably dispense with protec tion are most minerals, fertilizers, cement, vegetable oil, e.oap, leather products, cigarettes and some food Q processing industries." The textile industry^also9was q judged competitive at that time. These goods are pro bably competitive with their counterparts abroad. Why dojhot the planners concentrate on these industries in the export sector and use them as a means to obtain the foreign exchang needed to finance the gowing industrial sector? In fact, the target of increasing exports should have higher priority, at least at the present time, than the aim to change the structure of foreign trade - 122 -in the U.A.R. in favour of manufactured goods. r With regard to impojts, intermediary and investment goods form, at present, about 70$ of total imports.10 As a rule, a developing country is not in a position to produce all kinds of modern equipment, and needs to import it in considerable quantities. These large-r scale impojts of equipment create considerable balance-of-payments difficulties. To solve this problem one could imagine three levels of production techniques, and hence, three levelfe of sectors within the same country. The first secor is based on the lowe^st level of capital intensity and makes the maximum use of exis ting equipment. The second sector works with a higher level of capital intensity. Existing capital equip ment can pE?3bably be replaced by more efficient means of production manufactured within the country. The third sector uses the most advanced level of technique, not from the viewpoint of the level of technical develop ment of a given country, but according to international standards. The investments in this sector ought to con-- 123 -stitute the main levers of development since they should generate the largest returns to capital invested, and would provide a clear orientation as regards future development„11 This might suggest an approach suitable to the U.A.E. in seeking to alleviate the balance-of-payments problem. The sector, which may be expected to use the lowest capital intensity technique, can probably best be represented by agriculture0 this, suggestion can be supported by the high yields per acre already achieved 12 by the agricultural sector in U.A.E., which has eco nomized capital by the successfully^used labor intensive techniques. Of: course, the productiviy of this sector could be further raised by using more advanced, capi tal-intensive, technique, butbecause of the scarcity of capital, at present, it might be better to allocate it to the sectors, where capitals-labour substitution is more difficult, e.g. manufactured sector, trans port and communication, etc.. Moreover, in the agri-- 124 -cultural sector, it is also,, in general, easier than in other sectors to accumulate capital by labour intensive methods. This accumulation of capital may take the form of land improvements, irrigation projects, etc. The division between the second and the third sectors is considered more difficult. It would require a careful projection of relative efficiencies of various capi tal-producing industries in the U.A.E., taking account of economies of scale and other dynamic efficiency considerations, and in light of the possible techolo-gical developments in these capital goods industries overseas. This amounts to determining those capital goods industries for which the U.A.E is likely to have the greatest comparative advantage (or *he least com parative disadvantage), after they have passed through the initial "infant industry" stage. Such projections r are notojiously difficult to make, but a rational allo cation of scarce foreign exchang reserves would require such choice to be made for the economy. - 125 -The production of capital goods have already been included in the Second Five-Year Plan,+ which was sup-r posed now to have started, had the 1967 war not occu^ed. This policy, although it mitigates the burden on the balance of payment, raises the capital-output ratio. The capital-goods industries have longer gestation periods, and consequently higher capital-output ratios than the the consumption^industries, which have been stressed in the First Five-Year Plan. High capital-output ratios, as we know, require high investment. Thus, domestic savings would have to rise to iEulfil these requirements and to decrease the dependence of the country on fsMireijL loans. One of the points emph-sized in the theoretical models of aid dependence developed witin the Agency for International Develop ment, is that if a country is eventually to make a + More than 50% of the total investments of the Second-Five Year Plan have been allocated to heavey industry. See, Monthly. Review of Economic and Social Events, No. 1, January 1965, p.4. - 126 -successful transition, away from dependence on foreign aid, it must increase domestic savings sufficiently to cover domestic capital formation. A necessary condition for this development to take place is that the marginal savings rate exceeds the target investment rate. This target investment rate, in turn, is equal to the pro duct of the marginal capital-output ratio and the tar-13 get rate of growth of output. This means that the marginal savings rate in the U.A.E., assuming no change in the capital-output ratio, should exceed 28$ of the increase in GEP.+ The stability of the rate of saving in U.A.E. for a long period at about 12$ indicates that the marginal rate of saving has been almost stagnant at about this level. Thus, to acjieve this high mar ginal rate of saving, the marginal rate of consumption has to be reduced to 72$ of the increase in GHP.++ The + The marginal rate of saving = actual marginal capi tal-output ratio (3.9) x target average rate of growth of GEP (7.2) = 28. ++The share of total consumption, private and public, in SEP has fallen only from 88$ in the period prece^ ding the Plan to 86$ during the Plan. See, G-erakis, = ~ 127 -feasibility of this great redaction in the marginal rate of consumption seems to be very doubtful, espe cially with the increasing rate of growth of population. The marginal rate of saving required to fulfil the investment target can be reduced by decreasing the in cremental capitals-output ratio of the whole economy<> One way of doing that is to allocate investments in favour of the sectors with lower incremental capital coefficient, such as agriculture and services in the Egyptian case. This way has been discussed before, and S seems to be unadvd^able with regard to the U.A.R. Another way to reduce the capital-output ratio can be by in creasing the efficiency and skill of the labour force, by improving administration and management, by placing the right man in the rigt place to avoid as much as possible the waste in resources. Thus^ the improve ment in the quality of "human resources" can very likely aleJo, be an effective mean in reducing the sectoral, as well as the overall capital- output ratio in U.A.R. = " U.A.R.'s Five-Year Plan," p.11. - 128 "Human rsources" are considered to be among the im portant bottlenecks in the economic development in U.A.R. Accroding to some criteria for human resource development, U.A.R. is considered a semi-advanced country."^ But, the criterion applied is irrelevant, at least in the case of U.A.R. It considers the percentage of enrollment of both the second and third level of education, but ignores the possible misallocation of manpower resources. As an example, it is common to find the badly needed graduate of a technical school holding a white-collar position in the government. In fact, the UoA.R. may suffer from acute shortage of some skills j but its problem seems, also, to be the misal location of resources already available. However, mis-allocation and shortage in skills leads to the same result: the nonavailability of qualified manpower nee ded to fulfil the requirements of economic development. This can likely be a serious constraint on the absorp tive capacity of the U.A.R., as long as the import of technicians is difficult because of the already heavy - 129 -burden on ±ts balance of payment. Thus, the improve ment of the "human resources" of the country, by trai ning and reallocation of the labour foree, is vitally important for the success of the economic development in the U.A0Ro - 130 FOOTNOTES Footnotes to Chapter I ; (l) T.K. Lakshman and Smt. Vijayalakshmi, "Studies in Vapital-Output Ratios and their Signi ficance ," The Indian Journal of Economics, Vol. 49, No. 192 (July 1968), p.26. Footnotes to Chanter II : (1) E.D. Domar, " The Capital-Output Ratio in the United States: its variation and stability," in The Theory of Capital, ed. F.A. Lutz and D.C. Hague (New York: St. Martin's Press, 1965), pp. 95-96. (2) S.A. Abbas, Capital Requirements for the Develop ment of South and South-East Asia. (Croningen., Netherlands: J'.B. Walters, 1956), p. 77. (3) V.V...Bhatt, " Aggregate Capital-Output Ratio:: Some conceptual issues," Indian Economic_. Journal, Vol. 10, no. 4 (April 1963), p. 401; Domar, - 131 -p. 99; and J.Vanek and A.A. Studenraund, "To ward a Better Understanding of the Incremental Capital-Output KatiO," The Quarterly Journal of Economics. Vol. 32, no, 3 (August 1968), p. 452. (4) Bhatt, " Aggregate Capital-Output Ratio," p. 99. (5) Vanek and Studenmund, p.452; Domar, p.98; and S. Kuznets, Capital in the, American Economy: Its formation and,financing (Princeton:-Prince ton University Prss, 1961), p.56. (6) Domar, p.97. (7) Por an advocate of the exclusion of land and natu-ral resoupes from "capital", see: Bhatt, "Aggre gate Capital-6utput Ratio," p.399. For a proponent of the inclusion of land in "ca pital", see: Abbas, Capital Requirements, p.77. For a view on including only improvements of land and natural resources in "capital", see: S.Kuznets, "Quantitative Aspects of the Economic Growth of Nations; Capital Formation Proportions: Inter national comparisons for recent years," Economic 132 -Development andm Cultural Change, Vol.8, no. 4 (July i960), p.l; and Domar, p.97. (8) F. Lutz, The Teory-of Capital: Proceedings of a conference held by the International Economic Association (London: Mac Millan and Co. Ltd., 1961), p.96; and Kuznets, "Quantitative Aspects," P.l. (9) Bhatt, "Aggregate Capital-Oiktput Ratio," p.400; and Kuznes, "Quantitative Aspects," p.l. (10) Kuznets, "Quantitative Aspects," p.l. (11) Abbas, Capital Requirements, p.77. (12) Ibid., p.79; S.Creamer, Capital and Putput Trends in Manufacturing Industries.1880-1948f National Bureau of Economic Research, Studies in Capital Formation and Financing,'no. 41 (Hem York:,1954), p. 27; and Kuznejs, " Quantitative Aspects," p.46. (13) V.V.Bhatt, "Some Further Notes on Aggregate Capi tal-Output Ratios," Indian Economic Journal, Vol.11, no. 4 (April-June 1964), p.383. (14) Creamer, Capital and Ouput, p.27. (15) Thus, if we relate capital to this "full capa city output," we get what we call the "capacity capital-output ratio." - 133n-(16) J.E. la Tourette, "Potential QutpUt'and the Capi tal-Output Ratio in the U.S. Private Business Sector, 1909-1959," Kyklos. Vol. 18, no. 2 (1965), p.316. (17) Ibifl.f pp.316-317. (18) W.G. Hoffman, " Long Term Growth and Capital for mation in Germany," in The Theory of Capital, ed. Lutz and Hague, p.121. (19) V.V.Bhatt, Employment and Capital Formation in Underdeveloped Economies (Bombay: Orient Long mans, I960), p.23. (20) J.W. Knowles, The Potential Economic Growth in the United Statedf Congress of the United States, Joint Economic Committe, Studies in Employment, Growth, and Price Levels, no.20, (Washington, D.C.: I960), pp.6-7; and M.E. Levy, Fiscal Po licy, Cycles and Growth ( New York: National Industrial Conference Board Inc., 1963), pp.159-160. (21) Knowles, Potential Economic Growth, p.9 (22) La Tourette, "Potential Output," p.318. (23) Levy, Fiscal Policy, pp. 59-60. -134 (24) E. Eorukov, "The Capital-Output Rato, Factor In tensity and the Input of Capital," Economist Internazionale. Vol. 19, no. 2 (May 1966), pp. 222-233. (25) Ibid., p.49. (26) Creamer, C ani t al,„, and, But put f v. 27: and Kuznets, "Quantitative Aspects," p.46. (27) Kuznets, Ibid.f p.49. (28) A.A. Walters, "Incremental Capital-Ouput Ratios," The Economic Journal, Vol. 76, no. 304 (Decem ber 1966), p.818. (29) Harvey Leibenstein, Economic Backwardness and Economic Grpwth (New York: John Wiley and Sons, Inc., 1957), p.178. (30) T.K.Lakshman and Smt. Vijayalakshmi, "Studies in Capital-Output Ratios and their Significance," The Indian Journal of Economics,, Vol. 49, no. 192 (July 1968), p.25. - 135 -Footnotes to Chapter III : (1) Donald C. Mead, G-rowth and Structural Change in the Egyptian Economy (Homewood, Illinois: Richard Irwin$ Inc. 1967), p.16. (2) Bent Hansen and G-.A. Marzouk, Development and Eco nomic Policy in the U.A.R. (Bgypt) (Amsterdam: North-Holland Publishing Co., 1965), pp.319-320. (3) D.C.Mead, Growth and Structural Charge, p.33. (4) Charles Issawi, Egypt in Revolution;.An economic analysis (London: Oxford University Press, 1963), p.139. (5) D.C. Mead, Growth and Structural Change, p. 12. (6) Ibid., p.163. (7) Ibid., p.2. (8) Ibid., p.21. (9) Ibid., p.46. (10) Ch. Issawi, Egypt, p.130. (11) B. Hansen and G. Marzouk, Development afld Econo mic Policy, p•319. (12) Ibid., p.320; and D.C. Mead,p.241. (13) D.C. Mead, Ibig., p.33. - 136 • •• (u) Ibid., pp. 15-16; and Ch. Issawi, Egypt, pp.14 (15) D.C. Mead, pp. 51-53. (16) Ibid., pp.48-49. (17) Ibid*, p.50. (18) Ch. Issawi, Egypt. ppp62-64. (19) Ibid., p.63. (20) Ibid., pp.159-162. (21) Ibid_», p.56. (22) Ibid., p. 90. (23) D.C. Mead, pp.27-28. (24-) Ibid., p.29. (25) Ibid., p.33. (26) Hansen and Marzouk, p.280; and Mead, p.236. (27) Hansen and Marzouk, p.280. (28) Ibid., p.279, and p.299. (29) Ibid.^ P.303. (30) 'Ibid., p.308. (3D Ibid., p.278. (32) Ibid.., p.303. (33) ililiid. if p.298, and p. 301. (34) Ibid., p.313. - 137 -(35) Mead, p.242. (36) Ch. Issawi, p.68. (37) Ibid.. p.67. (38) Mead, p.243; and Issawi, p.67. (39) Hansen and Marzouk, p.304. (40) Organization of European Economic Cooperation, Problems of Developments:Series of lecture on economic growth, (european Econ. Cooperation and Development, 1961), pp. 20-21. (41) Hansen and Marzouk, p.299. (42) Mead, p. 106. (43) Fore example, for the diversity in the figures of Gross National Income and Product, see: Me ad,p.286; and U.N., Yearbook of National Ac counts Statistics 1968. pp.694-695; Issawi, p.115 and p.117; and Hansen, Statistical Appendic. Por the Capital formation figures, see: Mead, appendix; Issawi, p.67; U.N.?Yearbook of National Accounts Statistics.,19,68, p. 695; and Hansen, statistical appendix. Por the Savings figures, see: - 138 -Issawi, p.255; Hansen, statistical appendix; and Meas, appendix. Por foreign trade figures, see: Hansen, Tables 7.1-7.12; Issawi, Tables 26-32 ; Mead, Tables 7-1 to 7-18; and li.N.^ Yearbook of International Trade Statisticsf different volumes. (44) Hansen and Marzouk, pp. 308-309. (45) Ibid., p.299. (46) J.Ibid., p.308. (47) Ibid. (48) Mead, p.242. (49) Andreas S, G-erakis, " Some Aspects of the U.A.R.'s First Five-Year Plan," Finance and Development. Vol. 6, no.l (March 1969), p.10. (50) Calculated from: U.A.R., Institute of National? Plan ning (INP), Monthly Review of Economic and Social Events in U.A.R.t Vol. 1, nos. 11 and 12 (Novem ber-December 1965), p.54; and from U.N. Yearbook of International Trade Statistics 1967 (New York: United Nations, 1968), p.871. (51) U.A.R., INP.Monthly Review, p. 54. - 139 -(52) Mead, p.24-3. (53) Ibid., p.102. (54) Hansen and Marzouk, p. 308. <55) Ibid., p.307. (56) U.A.E., IIP, Monthly Review. Vol. 2, no.6 (June 1966), p.5. (57) Ya Kvasha and V. Krasovski, "The Capital-Output Ratio and Reserves for Reducing it," Problems of Economics,Vol.2f no. 9(January I960), pp.46-54. (58) Issawi, p.70. (59) Hansen and Marzouk, p.287. (60) U.A.E.\, IMP, Monthly Review. Vol.1,no. 1 (January 1965). (61) Strasimir Popovic, " Investment Problems in the Yugoslavian Economy," in Yugoslav Economists on Problems of a Socialist Economy, ed. Rad-mita Stojanovic (New York: International Arts and Sciences Press, 1964), p.78. (62) See*Appendix to Ch.III. (63) Hansen and Marzouk, p.296. 140 -(64) M. Kakegi, " Egypt Expands Industry, Improves Agriculture" Foreign, T^ade (Ottawa: Dept. of Trade and Commerce, April 16, 1966), p.27. (65) Hansen and Marzouk, p. 296. (66) U,A.R., IMP, Monthly Review, Vol.2, no.6.J(June 1966),p. 6. (67) Organization for European Economic Cooperation, Problems of Development, p.21. (68) U.A.R.,IIP, Monthly Review. Vol. 2, no.6 (June 1966), p.7. (69) H. Leibenstein, " Incremental Capital-Output Ratios and Growth Rates in the Short Run," Review Economic and Statistics. 48 (l966^s ppp 20-27. Lwibenstein conducted an empirical study of the relationship.^ using both cross-section and time-series data. His conclusion was that its inverse nature holds in 129 cases out of 134 used in time-series study, and the same conclusion was confirmed fey his cross-section study on a random sample of 18 countries. 142 -(4) Leibenstein, Economic„Backwardness, pp.180-181. (5) Bhatt, Employment and Capital formation, p.44. (6) Ibid.. p.53. (7) Leibenstein, Economic Backwardness, p.183; and K.Martin, " Capital-Output Ratios in Economic Development," Economic Development and Cultural Change.Vol. 6, ndi'' 1 (October 1957), p.27. (8) A.A. Walters, " Incremental Capital-Output Ratio," The Economic Journal. Vol. 76, no. 304 (December 1966), p.819; and Vanek and Stuipund, •» Towards a Better Understanding of Capital-Output Ratio," The Quarterly, Jpurnal,,.of_.Ecpnomics. Vol, 32, no. 3 (August 1968) p.456. (9) Nicholas V. Gianaris, "International Differences in Capital-Output Ratios," American Economic Review^ Vol. 60, no. 3 (June 1970), p.471. (10) Ibid., Table 2, p.476. (11) S. Euznets, Capital in.the American..Economyt Its formation and financing: (Princeton: Princeton University Prss, 1961), pp. 80-81. (12) Bhatt, Employment and Capital Formation, pp.24-27. - 143 -(13) S.A, Abbas, Capital Requirements for the Deve lopment of South and South-East Asia (Gr o-ningen, Netherlands: :<T.B. Wolters, 1956),pp.95-96. (14) Calculated-fram Table 4 in Andreas S. Gerakis, "Some Aspects of the U.A.R.1s First live-Year Plan," Finance and Development, Vol. 6, no.l (March 1969), p.13. (15) U.A.R., IMP.Monthly Review of Economic and Social Events in U.A.R. Vol. 1, nos. 11 and 12 (November and December 1965) p.12. (ii6) Gerakis, "U.A.R.'s Five-Year Plan," p.11. (17) U.A.R., INP, Monthly Review. Vol. 1, nos. 11 and 12 (November and December, 1965), p.10. (18) D.C. Mead, Growth and Structural Change in %he Egyptian Economy (Homewood, Illinois: Richard Irwin, Inc., 1967), p.220; and B. Hansen and G. Marzouk, Development and Economic Policy in U.A.R. (Egypt) (Amsterdam : Botth-Holland Publishing Co., 1965), p.224. - 144 Footnotes to Chapter, V,. : (1) F.E. Ian Hamilton, Yugoslavia: Patterns of economic activity (New York::Fredrick A.Praeger, Publi shers, 1968), pp.94-95; and Joan Mitchell, Ground work to Economic Planning ( London: Seeker and Warburg, 1966), p.25« (2) Mitchell, Economic Planning, p.219. (3) HA planned increase in output was LE5l3million (Table l) and the realized fignite was LE 495.45 mil lion (Table 9). (4) Hamilton, Yugoslavia, p.120. (5) Svetzar Pejovich, The Market Planned Economy of Yugoslavia (Minneapolis: university of Minne sota Press, 1966), p.61. (6) Mitchell, Economic Planning.;- p.219. (7) Hamilton, Yugoslavia, p.121. (8) B. Hansen and G.Marzouk, Development and Economic Policy in U.A.R. (Egypt).(Amsterdam: North-Hol land Publishing Co., 1965), p.157. (9) Ibid. - 145 -(10) JUS. &erakis, rt Some Aspects of U.A.R.'s First Five-Year Plan," Finance and Development. Vol.6, no. 1 (March 1969),p.13. (11) Radmila Stojanovich (ed.), Yogoslay Economists on Problems of a Socialist Economy (New York: International Arts and Sciences Press, 1964), pp. 11-12. (12) D.C. Mead, Growth and Structural Change in the Egyptian Bconpm$[ (Homewood, Illinois: Richard D. Irwim, Inc., 1967), p. 75. (13) Mead, pp;* 225-226. (14) F. Harbison and Ch.Meyers, Education. Manpower and Economic Growth (New York: Mc Grawhill, 1964), p.72. - 146 BIBLIOGRAPHY ABBas, S.A. Capital Requirements for the Development £|-.§P V^lL and S outhE as t Asi a.. Groningen, He ther-lands:: J.B.Wolters, 1959. Adler, J.H. "World Economic Growth-Retrospect and Brospects," Review of Economics and Statistics Vol. 38. no. 3, August 1956. Anderson, P.S., "The Apparent Decline in Capital-Output Ratios," Quarterly Journal of Economics Vol. 75, Novermber 1961. Bhatt, V.V. Employment and Capital, Formation inJJnder-developed Economies. Bombay: :• Orient Longmans, 1960. Ill— "Capital-Output Ratio of Certain Industries: A comparative study of certain industries," Review of Economics and Statistics Vol. 36, August 1954. —>~ "Aggregate Capital-Output Ratio: Some conceptual issues," Indian Economic Journal Vol. 10, no. 4, April 1963. - 147 -Bhatt, V.V. "Some Hurther Notes on Aggregate Capital-©utput Hatio," Indian Economic Journal Vol. II, no. 4., April-June 1964. Birla, C.N. Struggle for Growth. Calcutta: The World Press Private L*&., 1969. Borukhov, E. "The Capital-Output Ratio, Factor Inten sity and the Input of Capital, " Economia Inter-nazionale Vol. 19, no. 2, May 1966. Bunich, P. "Proportion between Fixed Assets and Gross Industrial Output," Problems of Economics Vol. 5, no. 3, July 1962. Creamer, D. Capital and Output Trends in Manufacturing Industries. 1880 - 1948. National Bureau of Economic Reseach, Studies in Capital Formation and Financing, no. 41. New York, 1954. Domar, E.D. "The Capital-Output Ratio in the United States::Its variation and stability," in The Theory of Capital, ed. F.A. Lutz and D.C. Hague. New York: St. Martin's Press, 1965. Gerakis, Andreas S. "Some Aspects of the U.A.R.'s First Five-Year Plan," Finance and Development. Vol. 6, no. 1, March 1969. 148 -Gianaris, Nicholas V, "Inernational Defferences in Capital-Output Ratios," American Economic  Review. Vol. 60, no. 3, June 1970. Hamilton, F.E.Ian (ed.) Yugoslavia: Patterns of econo mic activity. New York: Fredrick A. Praeger, Publishers, 1968. Hansen, Bent and G-. Marzouk, Development and Economic Policy in U.AtR. (Egypt). Amsterdam: Noth-Hol-land Publishing Co., 1965. Harbison, F. and Ch. Meyers Education, Manpower, and Economic Growth. New York: Mc Graw-Hill, 1964. Hoffman, W.G. "Long Term Growth and Capital Formation in Germany," in The Teory of Capital, ed. Lutz and Hft-goe. Issawi, Charlus, Egypt in Revolution:, An economic analysis. London:"Oxford University Press, 1963. Kakegi, M. "Egypt Expands Industry, Improves Agricul ture," Foreign Tgade. Ottawa: Dept. of Trade and Commerce, April 16, 1966. Knowles, J.W. The Potential Economic Growth in the United States. Congress of the United States* 149 -Joint Economic Commitee, Studies in Employ ment, Growth and Price Levels, no. 20. Washing ton, D.C., I960. Kurien, C.T. Indian Economic Crisis. A Diagnostic Study. Bombay: Asia Publishing House, 1969. Kuznets, S. Capital in the American Economy: Its for mation^ and financing. Princeton: Princeton Unisrersity Press, 1961. — "Incremental Capital-Output Raio," Econo mic Development and Cultural Change,Vol. 8, no. 4, part II, July I960. ~— "Quantitative Aspects of the Economic Growth of Nations; Capital Formation Proportions: Inter national Comparisons for Recent Years," Economic Development and Cultural Change. Vol. 8, part II, July I960. Kvasha, Ya and V. Krasovski "The Capital-Output Ratio and Reserves for Reducing it," Problems of Economics, Vol. 2, no. 9, January I960. - 150 -Lakshman, T.K. and Smt. Vijayalakshmi "Studies in Capital-Output Ratios an Theii? Significance," The Indian Journal of Economics. Vol. 49, July 1968. La Tourette, J.E. "Potential Output and the Capital-Output Ratio in the U.S. Business Sector, 1909-1959," Kyklos. Vol. 17, no. 2, 1965. "Sources of Variation in the Capital-Output Raio in the U.S. Private Business Sector, 1909 - 1959," Kyklos. Vol. 18, no. 4, 1966. Leibenstein, H. Economic Backwardness and Economic Growth 2~ ed. rev. New York::John Wiley and Sons, Inc., I960. — "Incremental Capital-Output Ratios and Growth Rates in the Short Run," Review of  Economics and Statistics, Vol. 48, 1966. Levy, M.E. Fiscal Bolicy. Cycles and Growth. Sew York: National Indestrial Conference Board, Inc., 1963. Macesich, George Yugoslavia::The theory and proctice of development planning. Charlottesville: The University Press of Virginia, 1964. 151 Mead, Donald C. Growth and Structural Change in the Egyptian Economy, Homewood, Illinois? Richard D, Irwin, Inc., 1967. Mitchel, Joan Groundwork to Economic Planning. London: Seeker and Warburg, 1966. Nurkse, R. Problems of Capital Formation in Underdeve loped Countries. Oxford: Basil Blackwell, 1953. 0•Brien, Patrick,vThe Revolution in Egypt's Economic  System. London; Oxford University Press, 1966. Organization for European Economic Cooperation Prob lems of Development: Series of lectures on economic growth. 1961 Pejovich, S. The Market-Planned Economy of Yugoslavia. Minneapolis: University of Minnesota Press,1966. Stoj anovic, Radmila (ed.) Yugoslav Economists on Prob  lems of a Socialist Economy. New York: Inter national Arts and Sciences Press, 1964. Thorn, R.S. and 0. Von Fieandt "Mr Adler on Capital-Output Ratios," Review of Economics and Statis  tics. Vol. 40, May 1958. - 152 -Vanek, J. Estimating "Foreign Resource Needs for Econo-mid Development. Few York: :MaJSraw-Hill Book Company, 1967. and A.H. Studenmund, "Towards a Better Under standing of the Incremental Capital-Output Ratio," Quarterly Journal of Economics, Vol. 82, no. 3, August 1968, Walters, A.A. "Incremental Capital-Output Ratios,"-The Economic Journal, Vol. 76, no. 304;, December 1966. 

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