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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 i n Conception and Ap p l i c a t i o n , with S p e c i a l Reference to Planning Experience i n the U.A.R. EARIMA A.M. KORAYEM B.A., Cairo U n i v e r s i t y , 1965 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF M.A. i n the Department of Economics We accept t h i s t h e s i s as conforming to the required standard: THE UNIVERSITY OF BRITISH COLUMBIA August, 1970 In p r e s e n t i n g t h i s t h e s i s in p a r t i a l f u l f i l m e n t o f the r e q u i r e m e n t s f o r an advanced degree at the U n i v e r s i t y o f B r i t i s h C o l u m b i a , I a g ree t h a t the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and s t u d y . I f u r t h e r ag ree t h a t p e r m i s s i o n f o r e x t e n s i v e c o p y i n g o f t h i s t h e s i s f o r s c h o l a r l y purposes may be g r a n t e d by the Head o f my Department o r by h i s r e p r e s e n t a t i v e s . I t i s u n d e r s t o o d tha t c o p y i n g o r p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l not be a l l o w e d w i t h o u t my w r i t t e n p e r m i s s i o n . Department o f £ ? CO l/\Q CJ" The U n i v e r s i t y o f B r i t i s h Co lumbia Vancouver 8, Canada Date 4 l\*rJ '110 TABLE OF CONTENTS Chapter I Introduction . • % Chapter I I The Concept of the C a p i t a l - Output Ratio 3 1- The Meaning of the C a p i t a l - Output Ratio ........3 2- Problems of Estimating the Capital-Output Ratio ........8 3- Methods of Estimating the Capital-Output Ratio .......17 C h a p t e r - I l l The Appraisal of the Fi v e - Year Plan '* .......29 1- A H i s t o r i c a l Review of the Egyptian Economy ....... 30 2- The Five-Year Plan 38 3- Appraisal of the Invest- ment Program i n the Plan 44 Appendix to Chapter I I I 79 Chapter IV The Capital-Output Ratio and the Development Process 88 1- Theoretical Review 91 2- S t a t i s t i c a l Analysis 97 3- Implication of the r i s i n g 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 r a t i o has been widely used by economists and econometricians i n model b u i l d i n g f o r p o l i c y purposes i n both developed and developing coun- t r i e s . P a r t i c u l a r l y i n the developing economies, where planning has been an important feature of economic po- l i c y , the p r o j e c t i o n of output and investment require- ments i n d i f f e r e n t sectors i s often based on the c a p i - tal-output r a t i o . In the F i r s t Five-Year Plan of the United Arab Re- p u b l i c (U.A.R.), planners have b a s i c a l l y used the i n - cremental capital-output r a t i o f o r broad general sec- tors to derive investment requirements t h e r e i n . The plan's r e a l i z a t i o n s f e l l short of the target. This was natural and to be expected i n a f i r s t e f f o r t to plan economic development. However, t h i s r a i s e s many im- portant questions. Was the discrepancy between the rea- l i z a t i o n and the target i n the F i r s t Five-Year Plan due to the very nature of the capital-output r a t i o tech- - 2 - n i q u e i t s e l f ? To what e x t e n t d i d c h a n g i n g e x t e r n a l c o n - d i t i o n s l e a d t o s u c h d i s c r e p a n c y ? I n o r d e r t o a t t e m p t an answer t o t h e s e q u e s t i o n ? , i t i s n e c e s s a r y t o he aware o f t h e meaning, l i m i t a t i o n s and problems o f m e a s u r i n g t h e c a p i t a l - o u t p u t r a t i o . T h i s i s t h e s u b j e c t m a t t e r o f C h a p t e r I I . C h a p t e r I I I i s de- v o t e d t o s e a r c h i n g t h e answers t o t h e q u e s t i o n r a i s e d i n t h e p r e v i o u s p a r a g r a p h . T^he t r e n d o f t h e c a p i t a l - o u t p u t r a t i o i s v i t a l l y i m p o r t a n t f o r t h e d e v e l o p i n g c o u n t r i e s w i t h s c a r c e c a - p i t a l . T h i s i s because t h e h i g h e r i s t h a t r a t i o , t h e more i n v e s t m e n t w i l l be needed t o a c h i e v e a c e r t a i n r a t e o f g r o w t h . I n our c a s e : What i s t h e l i k e l y t r e n d o f t h e c a p i t a l - o u t p u t r a t i o f o r U.A.R., and what a r e i t s i m - p l i c a t i o n s f o r t h e f u t u r e development o f t h e c o u n t r y ? S p e c i f i c a l l y , w i l l t h e c o u n t r y f a c e i n c r e a s i n g , or d i - m i n i s h i n g , problems i n t h e f u t u r e as f a r as c a p i t a l f i n a n c i n g i s c o n c e r n e d ? C h a p t e r I V w i l l a t t e m p t t o frame an answer t o t h e s e q u e s t i o n s based on b o t h , t h e o - r e t i c a l argument and e m p i r i c a l e v i d e n c e . CHAPTER I I THE CONCEPT OP THE CAPITALiOUTPUT RATIO - 3 - ( l ) The Meaa&H-ng of the Capital-Output Ratio; The capital-output r a t i o of any industry i n d i c a t e s the amount of c a p i t a l required to produce one u n i t of output. Hence, i t throws some l i g h t on two correlated points: f i r s t , the nature of the method of production adopted i n the i n - dustry, whether i t i s a c a p i t a l intensive or a labour i n - tensive method; second, the amount of investment required i n the future, assuming that the technique of production and the labour p r o d u c t i v i t y w i l l not change. I f a c a p i t a l i n t e n s i v e method of production i s adopted i n the industry, then, proportionately more investment w i l l be needed i n the future and vice versa. That i s why the capital-output r a t i o i s considered an important concept and a n a l y t i c a l t o o l of both economic growth theory and development planning. Several d e f i n i t i o n s are found i n d e a l i n g with the con- cept of capital-output r a t i o . As Domar wrote: "Capit a l coef- f i c i e n t can be defined and disaggregated i n so many ways that the f a t e of a hypothesis may sometimes depend on the p a r t i c u l a r c o e f f i c i e n t s used, and what i s proved by one set may yet be disproved by another." 1 A c t u a l l y , c a p i t a l - o u t - put r a t i o means, i n general, the r e l a t i o n s h i p between c a p i - - 4 - t a l and output produced by i t . The d i v e r s i t y i n the de- f i n i t i o n s i s due to the d i f f e r e n c e i n understanding of what should he included under " c a p i t a l B and under "out- put n . One of the important d i f f e r e n t i a t i o n s , vdiich i s usual- l y made, i s between the average and the incremental ca- p i t a l - o u t p u t r a t i o s . The average capital-output r a t i o describes the e x i s t i n g s t r u c t u r e , while the incremen- t a l r a t i o i n d i c a t e s the changes occuring i n i t . The ave- rage c a p i t a l c o e f f i c i e n t i s obtained by d i v i d i n g the t o - t a l c a p i t a l , while the incremental c o e f f i c i e n t i s es- timated by d i v i d i n g the increase i n c a p i t a l , by the i n - crease i n output. Only i n the case where c a p i t a l i n t e n - s i t y remains constant, t h e r e o w i l l "be no d i f f e r e n c e be- p tween the average and the marginal c a p i t a l c o e f f i c i e n t s . Since we are i n t e r e s t e d i n the behaviour of the c a p i t a l - output r a t i o and i t s usefulness as an a n a l y t i c t o o l f o r planning and p r o j e c t i o n , the marginal r a t i o i s more s i g - n i f i c a n t to us than the average r a t i o . 3 But we should bear i n mind that the marginal r a t i o i s much more sen- s i t i v e to the c y c l i c a l f l u c t u a t i o n s i n the economy -5 - than the average r a t i o . Therefore, the period f o r which the marginal r a t i o i s estimated, should be s u f f i c i e n t l y long and should cover, as f a r as possible, the e n t i r e 4 period of the longest observed cycle. Another d i s t i n c t i o n can be made with reference to the items considered under the terms c a p i t a l and out- put i n the numerator and the denominator r e s p e c t i v e l y . The most useful d i s t i n c t i o n on t h i s basis has been made between "gross c a p i t a l c o e f f i c i e n t " and "net c a p i t a l c o e f f i c i e n t " . Gross c a p i t a l c o e f f i c i e n t r e f e r s to the r e l a t i o n s h i p between gross c a p i t a l and the the gross value of output produced by i t . Net c a p i t a l c o e f f i c i e n t w i l l be obtained by deducting depreciation from both the numerator and the denominator. But, which r a t i o i s more i n d i c a t i v e ? In f a c t , the net r a t i o i s the pr e f e - rab l e one.-* With the passage of time, the c a p i t a l be- comes old and w i l l not be as good as the new one. A part of output should be used to restore the e x i s t i n g stock of c a p i t a l . Hence, depreciation should be deduc- ted from the numerator and the denominator, no matter whether we are dealing with average or incermental ca- 6 ^ p i t a l - o u t p u t r a t i o . - 6 - Let us examine the composition of c a p i t a l . Two items that a l l economists agree to t r e a t as c a p i t a l are cons— s t r u c t i o n and machinery and equipment. But arguments are r a i s e d about whether the term " c a p i t a l " includes land or not. Here opinions ranged from the absolute ex- c l u s i o n of land and natural resources, being i r r e p r o d u - c i b l e , to the other extreme of i n c l u d i n g both, with some i n d i v i d u a l s arguing f o r i n c l u d i n g only improve- 7 ments upon these items,' Another debatable item of c a p i t a l i s the producers' 8 and traders' i n v e n t o r i e s . I t i s reasonable indeed to include i t i n the numerator, since i t i s a part of the working c a p i t a l . But we should bear i n mlnifit that the servic e s of the working c a p i t a l , other than inventories,, are included i n the ouput produced, yfaich i s not the case with regard to in v e n t o r i e s . Hence, to l i m i t biased- ness i n the capital-output r a t i o estimates, i t i s more safe to exclude inventories from the numerator. We can also d i f f e r e n t i a t e between domestic and n a t i o - n a l capital-output r a t i o . The former i s the r e l a t i o n s h i p between domestic c a p i t a l and domestic output i n the nu- merator and denominator r e s p e c t i v e l y . The l a t t e r r a t i o indicates the r e l a t i o n s h i p between n a t i o n a l c a p i t a l and n a t i o n a l output. Hence, the net balance of claims against 10 f o r e i g n countries i s included i n the numerator. The concept of the capital-output r a t i o may be used with reference to the whole economy, a p a r t i c u l a r sec- t o r , industry or process and may he accordingly termed as " o v e r a l l c a p i t a l c o e f f i c i e n t , " or "process c a p i t a l c o e f f i c i e n t . n 1 1 - 8 - (2) Problems of Estimating the Capital-Output Ratio; When measuring the capital-output r a t i o , three main problems are faced; 1- P r i c e f l u c t u a t i o n s . 2- Changes i n capacity u t i l i z a t i o n ( f l u c t u a t i o n s of output). 3- Depreciation. The f i r s t problem i s the e l i m i n a t i o n of p r i c e f l u c - tuations. In f a c t , i t i s misleading to compare c a p i t a l formation at current p r i c e s to n a t i o n a l product at cur- rent p r i c e s . The reason i s that the pattern and pace or p r i c e changes i n the case of output d i f f e r from that 12 f o r the case of c a p i t a l . Here we face the problem of looking f o r the convenient p r i c e indeces, with which we can d e f l a t e c a p i t a l and output. In general, the a v a i - l a b i l i t y of a s u i t a b l e p r i c e index f o r e i t h e r output or c a p i t a l i s conditioned by the a v a i l a b i l i t y of p r i c e time-series f o r d e t a i l e d commodity c l a s s i f i c a t i o n s within each category. For output, the problem can be e a s i l y solved by using either the wholesale p r i c e i n - dex, i f we are dealing with output at f a c t o r cost, or using the consumer p r i c e index i f we are inte r e s t e d i n the output at market p r i c e s . The index number problem i s much more serious with regard to c a p i t a l , 1 3 b e c a u s e of the n o n a v a i l a b i l i t y of s u f f i c i e n t data of the d i f - ferent items of c a p i t a l : i t s p r i c e s , i t s l i f e span, and i t s d e preciation r a t e . This renders the adjustments f o r p r i c e changes i n the book value of c a p i t a l cruder than that of output. A convenient d e f l a t o r f o r c a p i t a l , i s used by Creamer i n h i s estimate of the capital-output r a t i o i n 15 industry groups i n TJ.S.A."*'^ He derives a composite p r i c e index i n c l u d i n g the three items of c a p i t a l : buildings and lands, machinery and equipments, and working c a p i t a l . For the f i r s t item, he derives a constant index weighted by the volume of construction depreciated over f i f t y years. For the second item, he uses a p r i c e index of machinery and equipment produced, and depreciated according to the length of l i f e repor- ted by the Bureau of Internal Revenue. For the l a s t item, the working c a p i t a l , he uses the wholesale p r i c e index. Then, he combines, these three indeces i n t o one composite p r i c e index weighted by the r e l a t i v e impor- tance of the three items i n the structure of c a p i t a l . - 10 - The second problem usually faced i n estimating the capital-output r a t i o i s how to eliminate the d i s t o r t i o n caused i n the c o e f f i c i e n t by the f l u c t u a t i o n s of output. To construct an accurate s e r i e s of capital-output r a t i o , we should get annual estimates of the output associated with the " f u l l " u t i l i s a t i o n of the e x i s t i n g stock of c a p i t a l . J In t h i s case, the s e r i e s w i l l not suffer from any upward or downward bias, so f a r as capacity u t i l i - z a t i o n i s concerned. Any change i n the r a t i o , assuming constant pr i c e s i n c a p i t a l and output and constant l a - bour p r o d u c t i v i t y , w i l l be due to the change i n the technology adopted. But t h i s i s not easy to achieve, since no country, except the U.S.A., has data concer- ning the "capacity 1 1 output. Hence, several methods are used by d i f f e r e n t economists to eliminate the e f - f e c t of the f l u c t u a t i o n of output as f a r as possibl e . But none of these methods y i e l d s completely s a t i s f a c - tory r e s u l t s . x o 1- One method i s simply to note that the s e r i e s i s d i s t o r t e d by the occurence of recessions and depressions during which c a p i t a l i s u n d e r - u t i l i z e d . In t h i s case, - 11 - although we know the c o e f f i c i e n t i s upward biased, we do not know the degree of t h i s biasedness. In addition, the problem i s symmetrical. That i s , during the wboom n periods, c a p i t a l i s u s ually o v e r u t i l i s e d and the coef- f i c i e n t w i l l experience a downward bia s . But, usually, the economy i s vulnerable to the u n d e r - u t i l i z a t i o n of ware c a p i t a l ^ e a s i l y than o v e r - u t i l i z a t i o n . Thus, the e s t i n mate of the capital-output r a t i o w i l l l i k e l y to be more upward biased over the c y c l e . 2- Another approach i s to measure the c a p i t a l coef- f i c i e n t f o r only those years when there are a high l e - v e l of f u l l employment and a high degree of f u l l u t i - l i z a t i o n of c a p i t a l . When t h i s method i s applied f o r a market economy, we have f o r any given period, j u s t a few scattered c a p i t a l c o e f f i c i e n t s . In the case of a period, such as that around the Great Depression, we do not have an estimation f o r the c o e f f i c i e n t f o r several years. 3- A t h i r d and more common method i s to construct a s i n g l e c o e f f i c i e n t f o r a long period, a decade or - 12 - -or longer, by applying the r a t i o of the average annual c a p i t a l stock to the average annual output over the period, or using the r a t i o of the change i n c a p i t a l to the change i n output over the period. Even i f we apply t h i s t h i r d method, we w i l l not correct f o r the under- u t i l i z a t i o n of c a p i t a l associated with a long depres- 17 s i o n such as the 1930*s. ' However, t h i s seems to be the more s u i t a b l e method, that can be adopted. And the longer the period one spans to estimate the c a p i t a l - output r a t i o , the l e s s w i l l be the e f f e c t of the f l u c - tuations i n output on the average value of the coef- f i c i e n t s over the period, since the downward bias i n one year w i l l compensate f o r the upward bias i n another year and so on. The t h i r d problem we meet i n c a l c u l a t i n g the c a p i - tal-output r a t i o i s the estimation of depreciation charges of d i f f e r e n t kinds of c a p i t a l . As we have seen before, the net capital-output r a t i o i s more informa- t i v e than the gross r a t i o . Thus, c a l c u l a t i n g deprecia- t i o n i s of v i t a l importance i n order to get the net - 13 - values of c a p i t a l and output. The underlying idea of depreciat i o n i s to compensate f o r the day to day dec- rease i n the productive capacity of c a p i t a l , so that at the end of i t s l i f e span, when the c a p i t a l becomes scrap- ped, we f i n d the funds s u f f i c i e n t to renew i t . This means that the value of depreciation, which we deduct i n any year, should equal the value of obsolescence of c a p i t a l i n t h i s year. This condition i s not f u l f i l - l e d i n p r a c t i c e , since, as pointed out by Hoffman, the amount of annual obsolescence conforms usually to some kind of normal d i s t r i b u t i o n , while t o t a l depreciation charges are normally a l i n e a r 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 i s much smaller during the e a r l i e r years following the purchase of such machines than i n the l a t e r years. Hoffman concludes that the adoption of the s t r a i g h t l i n e method of depreciation 1 8 r e s u l t s i n the overvaluation of c a p i t a l stock. To judge "pis conclusion, we may express h i s idea e x p l i c i t l y by means of the following diagram: - 1 4 - pi 1 •>re.c\cih £>(• ep fecial o«l Time i s measured along the h o r i z o n t a l axis, with t rep- resenting the end of the l i f e - s p a n of c a p i t a l . Total d e p r e c i a t i o n charges and obsolescence are measured along the v e r t i c a l a x i s . This diagram makes cle a r two important points r e l a t e d to Hoffman's argument. The f i r s t i s that he seems to be concerned with the l i f e of c a p i t a l up to point C only, which i s short of i t s l i f e 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, i f we consider the whole life-span of capital, i .e., t i l l point t i n Diagram 1, we find that BDT w i l l compensate, at least p a r t i a l l y , 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 l a t t e r , the greater i s the angle of the depreciation l i n e , D', and the greater w i l l be the compensation, B'tD', for the overvalua- tion of capital. But, even forgetting abojit the rest of the l i f e - span of capital for the moment and considering only the capital's l i f e u n t i l period C, what Hoffman con- cludes i s only one po s s i b i l i t y . Another p o s s i b i l i t y i s well revealed by means of Diagram 2. obsolescence - 16 - According to Hoffman's argument, the rate of obsolescence of c a p i t a l w i l l be small at the beginning of i t s ; l i f e . This allows f o r the other p o s s i b i l i t y that depreciation charges may exceed obsolescence over the range OB. This r e s u l t s i n an undervaluation of c a p i t a l , which may com- pensate f o r , or even exceed, the overvaluation of ca- p i t a l along BA, where the rate of obsolescence i n c r e a - ses. Thus, adopting the s t r a i g h t - l i n e method of depre- c i a t i o n (deducting equal amounts of depreciation each year) w i l l not r e s u l t usually i n an overvaluation of c a p i t a l 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 w i l l r e f l e c t the nature of techno- logy adopted, only i f we relate capital to what i s c a l - led capacity output. But i t i s d i f f i c u l t to get capaci- ty output i n real l i f e , since the industries do not ope- rate the whole time at f u l l capacity. We find that, un- der certain conditions (in boom periods), i t may be advantageous to run capital continuously at i t s f u l l capacity, and consequently the total product to which the capital stock i s related w i l l be quite large and, thus, the capital-output ratio w i l l be low. Under c others Jin depression periods), i t may be more advan- tageous to run the equipment at lower than f u l l capa- ci t y and the output w i l l be correspondingly low, and consequen*lyMthe capital-output ratio w i l l be high. Since the estimation of the capacity capital-output ratio i s not possible because of the! lack of the re- quired data, ^ different methods have been suggested - 18 - to estimate the capital-output r a t i o , given this handi- cap* 1- One of the methods used i n estimating the c a p i - tal-output r a t i o , i s by using i n denominator what i s c a l l e d the " p o t e n t i a l output". P o t e n t i a l output i s a measure of the optimum l e v e l which the economy i s ca- pable of achieving without having serious i n s t a b i l i t y with output, employment and p r i c e s . In o^er words, i t i s the amount of goods and services produced at stable p r i c e s , given the best knowledge of technology, the 20 l e a s t cost and nearly f u l l employment. I t can be measured, according to Knowles, by estimating the t o - t a l of goods and services i n constant p r i c e s (r e a l G-HP) produced under the assumption of the employment of 96$ of the labour force. This i s merely the i n d i c a t o r 21 or measure. Using p o t e n t i a l output i n the denomina- tor and gross investment i n the numerator, we obtain the gross incremental capital-output r a t i o . Subtjpactiijg d e p r e c i a t i o n from the denominator and the numerator, we get the net incremental capital^output r a t i o . I t should be noted that p o t e n t i a l output i s l e s s than capacity output. Consequently, t h i s p o t e n t i a l c a p i t a l c o e f f i c i e n t - 19 - w i l l have an upward bias compared with the capacity- c a p i t a l c o e f f i c i e n t . But the degree of overstatement 22 i s assumed to be t h e o r e t i c a l l y constant. The advantage of t h i s method, i s supposed to be that i t solves the problem of f l u c t u a t i o n s of output, which we mentioned before, by estimating the amount of output, which i s as close as possible to the capacity output. But, a question now a r i s e s : I f i t i s possible to estimate, whatever the actual output i s , 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 f o r c e . Also, why i s "poten- t i a l output" determined by the output produced by 96$, and not by 100$ of the labour force? Moreover, t h i s method can be adopted only i n the developed economies. I t implies the a v a i l a b i l i t y of s u f f i c i e n t c a p i t a l to support the employment of 96$ of the labour force. But t h i s i s not true i n the developing economies, which are plagued with s t r u c t u r a l unemployment. One of the main problems of these economies i s the s c a r c i t y of c a p i t a l , so that -even by working at f u l l capacity- - 20 - i t may not support 96% of the labour force. In other words, to employ 96% of the labour force, which i s the measuring rod f o r t h i s method, you have to increase the capacity of the economy. The inconvernience of t h i s method i n the case of the developing economy can be f u r - ther revealed by looking at Levy's d e f i n i t i o n of "po- t e n t i a l output". According to him, i t i s that output produced with "the use of best a v a i l a b l e technologies, l e a s t cost combinations of inputs and rate of u t i l i z a - t i o n of both c a p i t a l and labour consistent with the pre- 23 v a i l i n g full-employment norms of the the edonomy." J Obviously, these q u a l i f i c a t i o n s do not apply to the developing countries. 2- A second method f o r estimating the c a p i t a l i n t e n - s i t y i s used by Borukhov. ^ He c r i t i c i z e s the use of .Ti- the concept of capital-output r a t i o as a measure of the input of c a p i t a l i n the output produced. He states that c a p i t a l consumption, properly calculated, under c e r t a i n conditions, can be a measure of " c a p i t a l s e r v i c e s " i n the relevant product. His c r i t i c i s m i s b u i l t on the f a c t that c a p i t a l has a r e l a t i v e l y long productive l i f e . There- - 21 - fore, i t i s not correct to consider a piece of c a p i t a l , which i s expected to l a s t many years, as the input to the output produced i n one year only. The input of ca- p i t a l i s i t s consumption per u n i t of time and that w i l l be r e l a t e d to the output i n the same un i t of time. Thus, to get the input of c a p i t a l i n a c e r t a i n product, e i t h e r we r e l a t e the value of c a p i t a l to the output produced over i t s l i f e time, or we r e l a t e the output produced i n one year to the consumption of c a p i t a l i n that year. But how to measure the value of c a p i t a l consumed i n a c e r t a i n product? Assuming two fac t o r s of production, labour and c a p i t a l , the value of output i s d i s t r i b u t e d between the return to labour, wages, and the the r e t u r n to c a p i t a l . The share of c a p i t a l i n t o t a l revenue i n - cludes the recovering of the cost of the piece of ca- p i t a l that was invested, plus a p r o f i t or i n t e r e s t . This means that the share of c a p i t a l i n the product produced i s not only the usual depreciation charges ca l c u l a t e d at the o r i g i n a l cost of c a p i t a l , but i t exceeds i t by the amount of i n t e r e s t calculated on the - 22 - c a p i t a l consumed. The c a p i t a l i n t e n s i t y of an industry can thus be measured by comparing the r e l a t i v e share of c a p i t a l i n the value of i t s output with that share i n other i n d e s t r i e s . 2 ^ In f a c t , t h i s method can be used to measure the i n - put of c a ^ p i t a l i n a c e r t a i n product, i . e . , c a p i t a l i n - t e n s i t y , but i t i s not useful as an i n d i c a t o r to the amount of c a p i t a l required to produce one u n i t of out- put. This i s because of the concept of the i n d i v i s i b i - l i t y of c a p i t a l . Using c a p i t a l consumption i n the nu- merator, the c a p i t a l c o e f f i c i e n t w i l l be small i n d i c a - t i n g that with a small amount of investment, we can obtain the required amount of output; and that i s not true. Capital-output r a t i o cannot be calcul a t e d by d i - v i d i n g the value of c a p i t a l consumed by the value of the output produced, since t h i s r a t i o w i l l not show us the amount of investment required to r e a l i z e a c e r t a i n amount of output and, consequently, a c e r t a i n l e v e l of rate of growth. 3- A more common method i n estimating the incremen- t a l capital-output r a t i o i s by d i v i d i n g the increase - 23 - i n c a p i t a l stock, i . e . , investment, by the increase i n output. We can get gross or net incremental c a p i t a l - output r a t i o , depending on whether w# use gross values of c a p i t a l and output or net values. Although the changes i n p r i c e s a f f e c t both output and c a p i t a l , i t s impact on output i s greater. Thsrefore, to minimize, i f not to eliminate, the e f f e c t of. p r i c e :ehanges, we have to express both numerator and <ieno* 26 minator i n constant p r i c e s . But now we face the prob- lem of choosing s u i t a b l e p r i c e i n d i c e s . This can be solved, as mentioned before, by using the wholesale pri.ce index, or the consumer pr i c e index to adjust the; value of output. To c a p i t a l , the best index i s th'e Creamer's composite p r i c e index. However, the d e f l a t o r of output i s much more important than the d e f l a t o r ' of c a p i t a l , because the rate of change of the prices itt the former i s greater than i n the l a t t e r . This was c l e a r i n the research that Euznets has undertaken^to • measure the capital-output r a t i o i n 23 d i f f e r e n t coun- t r i e s . He found that the d i f f e r e n c e s between th e " r a t i o s - 24 - of gross domestic c a p i t a l formation to gross domestic product at constant and current pr i c e s are small, and that the trends of the two sets are p r a c t i c a l l y identir- c a l . Quoting Kuznets: ttWe can, therefore, assume f o r a l l a n a l y t i c a l purposes that the two sets of r a t i o s here would y i e l d the same r e s u l t ; that they are i n t e r - changeable; and that they can be r e f e r r e d to as i n c r e - 27 mental capital-output r a t i o . * However, i t i s more ac- curate, of course, to d e f l a t e c a p i t a l with a convenient p r i c e index. This method f o r estimating the Incremental c a p i t a l - output r a t i o as the increase i n c a p i t a l over the i n - crease i n output and d e f l a t i n g the denominator and the numerator, i f possible, with the p r i c e Indices i n d i c a - ted above, i s a simple and s u i t a b l e one to adopt i n any economy. Aside from the output f l u c t u a t i o n problem, which i s incurable e s p e c i a l l y i n the developing coun- t r i e s f o r the lack of data, two shortcomings are found i n t h i s method. F i r s t , i t neglects the e f f e c t of labour p r o d u c t i v i t y on the capital-output r a t i o . This r a t i o may de c l i n e , not because of the change i n technology - 25 - as i t i s supposed to i n d i c a t e , but due to the increase i n the labour force and/or i t s p r o d u c t i v i t y , given the amount of c a p i t a l i n the economy. Although i t i s d i f - f i c u l t to measure the p r o d u c t i v i t y of labour, at l e a s t we can adjust the r a t i o f o r the labour.input by sub- t r a c t i n g from the denominator the value of the increase i n output a t t r i b u t a b l e to the increase i n labou* force.' In t h i s sense Leihenstein stated that, i f we l i k e to use the capital-output r a t i o i n a meaningful way, we must be aware of the changes that may occur i n other f a c t o r s a f f e c t i n g output concomitant with the increase i n the stock of c a p i t a l . Hence, he d i f f e r e n t i a t e d be- tween the net incremental capital-output r a t i o and the adjusted incremental capital-output r a t i o . By the f o r - mer he meant the incremental capital-output r a t i o c a l - culated on the assumption that the supplies of a l l other f a c t o r s are held constant. By the l a t t e r he meant the incremental capital-output r a t i o adjusted to a 29 given increase i n the supply of other f a c t o r s . The second shortcoming i s that i t r e l a t e s the i n - vestment i n a c e r t a i n year to the output produced i n - 26 - the same year. This can be true only f o r working c a p i t a l (e.g., raw materials and semi-finished goods). But f o r f i x e d c a p i t a l , a l a g period should be allowed f o r be- tween the increase i n c a p i t a l l a n d the increase i n out- put induced by i t . This l a g period d i f f e r s between pro- j e c t s and even between the sectors of the same economy. Unfortunately, the lack of data makes i t d i f f i c u l t to remedy t h i s shortcoming i n many countries. 4- The production function provides an a l t e r n a t i v e method of d e r i v i n g the capital-output r a t i o . This method was suggested by D o u g l a s . 3 0 I t i s used f o r es- timating the capital-output r a t i o f o r the whole econo- my or f o r i n d i v i d u a l sectors or i n d u s t r i e s therein. A Cobb-Douglas production function"*" i s one of the most popular types of production functions, both t h e o r e t i - c a l l y and emperically. + I t may be written as: Q = a l K * L P ; > 0 , (3> O where Q = output; K = c a p i t a l ; L = labour. - 27 - But there are two points against employing such method. F i r s t , the Cobb-Douglas production function assumes that the e l a s t i c i t y of substitution between capital and labour equals unity. + Second, the unitary e l a s t i c i t y 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 ( l o g (w/r)) = 1. - 28 - p r o d u c t i v i t y of any fa c t o r can never reach zero. A unitary value f o r the e l a s t i c i t y of s u b s t i t u t i o n i s u n l i k e l y within the context of the l e s s developed economies, because of the strong r i g i d i t y of t h e i r economic structure. Also, t h i s form, with always po- s i t i v e marginal p r o d u c t i v i t y f o r the f a c t o r s , w i l l not accord to r e a l i t y i n the developing countries, since disguised unemployment i s a common feature of most of them, i n c l u d i n g U.A.R. + I f the marginal p r o d u c t i v i t y of c a p i t a l or labour, r or w, reaches zero, the e l a t i c i t y of s u b s t i t u t i o n between c a p i t a l (K) and labour (L) : 3 (log (E/L)) (log (r/w)) w i l l be equal to oo or zero r e s p e c t i v e l y . CHAPTER*'I II THE APPRAISAL OF THE FIVE-YEAR PLAN - 29 - In order to evaluate the F i r s t Five-Year Plan (1960/ 61 - 1964/65), we have, f i r s t , to review the h i s t o r i c a l conditions of the economy of the country. The Plan cannot be derived from scratch; i t has to consider the economic aspects of the country i n which i t i s suppo- sed to be implemented. Otherwise, i t stands on shaky grounds and i s vulnerable to d r a s t i c f a i l u r e . Also, depending on the h i s t o r i c a l background of the country, you can Judge, to a c e r t a i n extent, whether the plan has been too ambitious or not. Hence, Chapter I I I w i l l include: f i r s t , a b r i e f historical...review of the Egyptian economy; second, a description.'.of the Five-Year Plan; "and, t h i r d , an appraisal of the investment program i n the plan. - 30 - (l) A Historical Review of the Egyptian Economy: Egypt was, and s t i l l i s , an overwhelmingly agrarian country. Agriculture plays a major, although decreasing, role i n 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 i n 1945 to 28% of GBP i n 1960/61.2 With regard to em- ployment, 70% of the labour force was concentrated i n the agricultural sector i n 1937. This ratio f e l l to 61% i n 1947nand to 56% i n I960. 3 Cotton i s the main agricultural crop, comprising over 40% of the value of agricultural crops i n U.A.R.̂ Wheat, maize and ric e form 2/3 of the gross value of a l l agricultural output other than cotton. Cotton i s also the dominating component i n 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 i n lower Egypt) during the - 31 - l a s t 20 yeares of the 19 - century, raised a g r i c u l t u a l y i e l d s 70$ - 100$ as much as bef o r e . 7 In the 20 t- cen- tury, the improvements introduced i n the a g r i c u l t u r a l sector have taken the form of intensive methods of c u l - t i v a t i o n , which have a comparable moderate e f f e c t on the increase of a g r i c u l t u r a l output. On the other hand, the annual compound growth rate of population has i n - 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$' within the period 1947 - 8 I960. T h i s a c c e l e r a t i n g rate of growth of population compared with the moderate average annual compound growth rate of a g r i c u l t u r e - about 1.4$ over the period 1945 - 1962 9 - has made the importation of d i f f e r e n t food s t u f f s unavoidable. However, the b u i l d i n g of the High Dam i n Asswan i s supposed to contribute s i g n i f i - c a n tly to a g r i c u l t u r a l output. I t w i l l lead to the c u l - t i v a t i o n of an a d d i t i o n a l one m i l l i o n feddans + (about + One feddan = 1.038 acres = 4,300.833 square meters. - 32 = 20% of the present c u l t i v a t e d area) and the conversion <£. of 700,000 feddans i n upper Egypt from "basin to p^en- r n i a l i r r i g a t i o n . In addition, a hydro-el ectfic s t a t i o n with an aggregate capacity of 2.1 m i l l i o n lew., and a maximum output of 10,000 m i l l i o n kwh. w i l l be set u p . 1 0 The i n d u s t r i a l sector, by contrast to a g r i c u l t u r e ! , plays a r e l a t i v e l y small, although increasing, r o l e i n the U.A.R. Economy. I t s output has formed 13% of the G-EP i n 1945 1 1 and has increased to about 20 - 21% of ?; G-HP: i n 1959/60. 1 2 Only 7% - 10% of the labour force has been working i n the i n d u s t r i a l sector. 3 More at- te n t i o n has been dire c t e d to industry since 1930. E a r l y i n t h i s year the i n t e r n a t i o n a l convention c o n t r o l l i n g the customs duties i n Egypt expired. The country rushed to take advantage of t h i s s i t u a t i o n and r a i s e d the t a - r i f f s to encourage the establishment of new national i n d u s t r i e s . In addition, World War II stimulated the demand f o r l o c a l i n d u s t r i a l output, because of shortages i n imported g o o d s . I n 1957, a Five-Year I n d u s t r i a l Plan of LE 221 m i l l i o n was drawn up. The government - 33 - was expected to provide 60$ of the investment i n t h i s r P l a n and the pr i v a t e sector was assigned an important r o l e i n i t . In 1960/61 the p i c t u r e has changed. The i n - d u s t r i a l Plan was amalgamated i n a Five-Year Plan co- vering the whole economy, and the public sector took 15 a dominaivfcd r o l e i n i t s implementation. One of the main features of the Egyptian economy i s the change i n the government's r o l e i n economic l i f e . In s p i t e of s u b s t a n t i a l encouragement given to the pri v a t e sector, government i n t e r v e n t i o n i n the economic l i f e took a number of forms: p u b l i c works, acreage con- t r o l i n a g r i c u l t u r e to provide s u f f i c i e n t food f o r the growing population, p r i c e c o n t r o l of basic foods, and 16 d i f f e r e n t l e g i s l a t i o n s In the i n d u s t r i a l sector. The government's encroachment on the pr i v a t e sector started i n 1956, a f t e r the Suez "War. A number of f i n a n - c i a l i n s t i t u t i o n s were placed under sequestration; In 1957, i t was announced that a l l other f i n a n c i a l i n s t i - 17 tutions were to be "Egyptianized" within f i v e years. - 34 - The broad government i n t e r v e n t i o n i n the economic l i f e was c l e a r i n the " S o c i a l i s t Acts" announced i n J u l y 1961. According to thenffc, the major i n d u s t r i a l establishments were nat i o n a l i z e d ; and i n 1961 the government put her hand on 95% of the manufacturing and mining i n d u s t r i e s . The investment of the public sector amounts to over 75% of a l l investments i n the o v e r a l l five-Year P l a n . 1 8 The government's control has spread over the d i f f e r e n t sectors of the economy. In the f o r e i g n trade sector, the government controls the import and export opera- ti o n s , l e a v i n g to the private sector only 25% of to- t a l exports i n 1962. In i n t e r n a l trade, the o f f i c i a l aim i s to r a i s e the government's s&hare to 25%. 1 9 P r i - ces of d i f f e r e n t commodities have been set under govern- ment's c o n t r o l . Evenr.the rents of the houses have to be determined by o f f i c i a l committees formed e s p e c i a l l y f o r t h i s purpose to avoid any chance of e x p l o i t a t i o n by the house-owners of the p u b l i c . Transportation .--and communication are owned by the government. Agr i c u l t u r e i s the only area i n which the private sector plays the - 35 - major r o l e . Government's i n t e r v e n t i o n i n t h i s area was r e f l e c t e d i n the Agrarian Reforms announced i n 1952 and 1961. According to the Agrarian Reforms i n 1952 the maximum amount of a g r i c u l t u r a l lands owned by any i n d i v i d u a l should not exceed 200 feddans excluding the uncultivated land i n process of reclamation.. Up to 100 feddans can be transferred to the c h i l d r e n . Hence, the maximum amount owned by any family i n Egypt should not exceed 300 feddans. This maximum l e v e l has been lowered to 100 feddans f o r the whole family ( i n c l u d i n g the un- c u l t i v a t e d land which was: exempted before) <> Compensa- t i o n was paid i n bonds to the landowners. The landhol?* dings of the r o y a l family were confiscated without com- pensation. The a g r i c u l t u r a l lands, which have been taken by the government, have been d i s t r i b u t e d to the farmers working on i t with a minimum of two feddans and a maxi- mum of f i v e feddans. The p r i c e of the lands f . i s being paid i n installments over 20 years. Also,-: the rent of the landholdings may; not exceed seven times the value o n of land tax. The idea behind a l l the above mentioned l e g i s l a t i o n s - 36 - i s to achieve an even d i s t r i b u t i o n of income and pro- perty to b u i l d a s o c i a l i s t s o c i e t y . This trend i s r e f - l e c t e d , also, i n the fundamental change undergone by the income tax ra t e . In 1949, the income tax rate was 50% on incomes over LE 100,000. In 1961 90% was l e v i e d 21 on incomes above LE 10,000. F i n a l l y , something should be said about the resour- ces of the coutry. With regard to natural resources, Egypt i s not a r i c h 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, s u f f e r from diseases and i l l a t p a c y . About 60% of the population s u f f e r from B i l h a r z i a , a disease which i s said to reduce the p r o d u c t i v i t y of the patient by 25% - 5 0 % . 2 3 I l l i t p a c y i s another wellknown "disease" which a f f e c t s the p r o d u c t i v i t y and the performance of the population. Although the i l l i t e r a c y rate shows a e decreasing trend, i l l i - ^ r a c y s t i l l embodies most of the population. The i l l i ^ r a c y rate has f a l l e n from 92.7% - 37 - i n 1907 to 85.2$ i n 1937 and to 70.3$ i n I960.** However, i t i s expected to decrease at an a c c e l e r a t i n g rate due to the i n c r e a s i n g e f f o r t by the government i n providing a free system of education i n schools and u n i v e r s i t i e s . + One of the main reasons which impair the q u a l i t y of the human resources i n TJ.A.R. i s population pressure. Not t h u n t i l the 20 — century, did t h i s phenomena emer.ge i n the country as a consequence of a dramatic f a l l i n death r a t e s . As l a t e as the 1860 fs, Egypt suffered from a shortage of labour. Plans f o r the immigration of I t a l i a n s , 25 Chinese and other laboures were s e r i o u s l y 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 i t s F i r s t Five-Year Plan i n 1960/61. The main object was to double the national income i n 10 years. In f a c t , t h i s object was imposed on the Na- t i o n a l Planning Committee, whidh was responsible f o r the Plan. The target of the Plan, as had been o r i g i n a l - l y set by the Planning Committee, was to double the income per c a p i t a within 20 years.. 21 The Five-Year Plan i s subdivided i n t o annual plans. An investment program i s the only p o l i c y program i n c l u - ded i n i t . The r e s t of the plan comprises forecasts and targets based on unspecified p o l i c i e s , that w i l l be de- 2 8 termined i n the annual budgets. The Plan has not been formulated according to a p a r t i c u l a r or d e f i n i t e model. The planners used the given o v e r a l l increase i n the G-NP i'ogether with a s e r i e s of income e l a s t i c i t i e s f o r con- sumer goods, estimated by informed guesses, to deter- mine the consumers'demand i n the d i f f e r e n t sectors. By adding the government's current demand, the planned s e c t o r a l outputs have been calculated. Using the pro- - 39 - jected s e c t o r a l capital-output r a t i o s , derived from the h i s t o r i c a l data and the experiences of other coun- t r i e s , the planners calculated the investments required pq i n each sector. Total investment requirements amoun- ted to LE 1636 m i l l i o n , one t h i r d of which were planned to be financed from a b r o a d . 3 0 The majority of the i n - vestments (about 9 0 $ ) was intended to be undertaken by p u b l i c a u t h o r i t i e s . ^ The s e l e c t i o n of projects within each sector was l e f t to the m i n i s t r i e s , which were en- couraged to chose projects with high value added r e - turns, high employment and high import-aaving capacity. - Table 1 shows the planned annual value added, c a p i t a l c o e f f i c i e n t and investments i n d i f f e r e n t sectors: - 4-0 - Table 1 Value added and capital formation by sectors (at fixed 1 9 5 9 / 6 0 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 i r r iga t ion (including High Dam) 1 1 2 3 . 4 3 8 3 Industry, e lec t r i c i ty and construction 2 6 6 2 . 2 5 7 5 Transportation, com- munication and storages (including Suez Canal) 2 0 1 3 - 5 2 6 9 Dwellings 1 1 1 2 . 7 Services (including 140 public u t i l i t i e s ) 104 1 . 4 1 4 9 Stock Changes — — — — — — — 1 2 1 Total 5 1 3 3 . 2 1 6 3 7 Source: Bent Hansen, Development and Economic Policy in the UAR (Egypt), (North-Holland Publishing Company, Amsterdam: 1 9 6 5 ; , p. 3 0 1 . +Ibid., p. 2 9 7 - - 41 - To f u l f i l the target of doubling the tiational i n - come within 10 years, the plan determined the compound annual rate of growth of G-NP by 7$ during the f i r s t f i v e years and by 7.4$ during the second f i v e years. As i t i s clear from Table 2, a g r i c u l t u r e and industry were supposed to grow at a high rate i n the f i r s t f i v e years of the Plan and slacken r e l a t i v e l y i n the second h a l f , while the service sector was to achieve i t s higher rate of growth i n the Second Plan. - 42 - Table 2 Target Income Levels by Sectors (LE M i l l i o n , Constant Prices) Implied Annual Compound Growth Rates 1 9 6 4 / 6 5 ! 1 9 6 9 / 7 0 ' r1959/60 to 1 9 6 4 / 6 5 1 9 6 4 / 6 5 to 1 9 6 9 / 7 0 Agriculture 5 1 2 6 2 7 5 . 1 4 . 1 Industry 5 4 0 8 0 2 14.6 8 . 2 Construe tion 5 1 7 5 - 0 . 5 8 . 0 Subtotal commodity sectors 1 , 1 0 3 1 , 5 0 4 8 . 7 6 . 4 Trade and finance 1 6 2 2 6 5 5 . 0 1 0 . 4 Basic development sectors: Transportation and Communications 1 1 7 3 . 8 Housing 84 2 . 9 Public u t i l i t i e s 9 5 . 2 Security, justice, defence 6 1 3 . 6 Public administration 4 5 6 . 4 Subtotal, basic develop- 4 3 5 ment 3 1 6 3 . 9 6 . 6 Other services: Education 67 •• 5 . 2 Health 1 5 6 . 4 Social and religious 6 8 . 4 Culture and recreation 1 8 6 . 7 Personal services 1 0 8 3 - 9 Subtotal, other services 214 3 6 0 4 . 8 1 1 . 0 Subtotal, a l l services 6 9 2 1 , 0 6 0 2 , 5 6 4 4 . 4 8 . 9 Ground total 1 , 7 9 5 7 . 0 7 . 4 Donald C. Mead, Growth and Structural Change in the Egyptian Economy, (Richard D. Irwin, Inc., Homewood, I l l i n o i s : 196? ), p. 240. - 43 - With regard to employment, i t has been planned to expand by one s i s t h , i . e . , 1026 employment's oppor- t u n i t i e s have to be created during the Five-Year Plan. A g r i c u l t u r e absorbs one h a l f of the expansion (555)9 services about one quarter (256) and industry l e s s than one f i f t h ( 2 0 4 ) . 3 3 The Savings's r a t i o would need to r i s e from 12% of GKP at the base year to 20% of G-KP at 1964/65 i n order to f u l f i l the P l a n . 3 ^ Domestic savings, were expected to exceed investments by LE 40million at the end of the Plan, making i t possible f o r the country to s t a r t repaying i t 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) r e s p e c t i v e l y . 3 6 The export's target was established as a 36% increase by the end of the F i r s t Five-Year P l a n , 3 7 while im- ports were expected to be reduced by 6% of i t s l e v e l at the base y e a r . 3 8 (3) A-p-praisal of the Investment Program i n the Plan: The F i r s t Five-Year Plan, as we have seen, consis- ted of an investment program? s plus a forecast for the re s t of the economy based on the automaic responses of enterprises and households as influenced by future po- l i c i e s . There i s much to be said i n favour of t h i s kind of procedure. The main aggiament i s that the future con- ta i n s so many unknowns impossible to forecast f i v e years ahead. Hence, i t may seem better to decide s p e c i f i c p o l i c i e s subsequently, when external conditions con- cerning t e c h n i c a l knowledge, f o r e i g n trade, climate conditions, etc* are better known or at l e a s t easier to forecast. But, according to t h i s p o l i c y , the system i s v u l - nerable to bottlenecks i n production, i n ther;.alloca- t i o n of resources, i n the balance of payments, etc. As Zimmerman^^ointed out, the economic development 5 problem has four aspects that shoud be decided upon: (a) What rate of investment should give the best r e s u l t s ? - 45 - (b) How much to invest (long-term s t r u c t u r a l plan- ning)^ (c) Where to invest (regional planning)^ (d) When to invest (short-term planning)*? What seems to be backing mostly i n the ?-lan i s the fourth aspect: when to invest. The investment prog- ram d i d not define how investment w i l l develop during the P l a n . 4 1 The incremental capital-output r a t i o was an impor- tant t o o l i n planning. The required investment for each sector was calculated by using the incremental c a p i t a l - output r a t i o , given the planned output. A I S D , i n the s e l e c t i o n of the investment projects more weight was. given to the return on c a p i t a l i n terms of value added. The Mrule of thumb", which seemed to be agreed upon fo r allocating'investment w itMn sectors was that "... i n v e s t - ment should be a l l o c a t e d to i n d u s t r i e s where the c a p i t a l - output r a t i o , or the capital-labour r a t i o i s as low as 4-? p o s s i b l e . " In t h i s chapter, several questions w i l l be answered with regard to the appraisal of the investment prog- - 46 - ram i n the F i r s t Five-Year Plan: A- Was the investment program a f e a s i b l e -one with respect to the avai l a b l e resources? B- Is i t advisable to give such weight to the ca- p i t a l - o u t p u t r a t i o i n c a l c u l a t i n g the required investment, as was done i n the plan? C= Is there any r e l a t i o n between the achieved ca- pit a l - o u t p u t r a t i o and the r e a l i z a t i o n of the growth target i n the plan? The main problem encountered i n any t r i a l to answer these questions i f the r e l a t i v e l y l i m i t e d data sources and the remarkable d i v e r s i t y i n the data given by them. Differences i n the d e f i n i t i o n s and i n p r i c e s used ap- pear to be the major causes of t h i s d i v e r s i t y . ^ Con- sequently, to obviate as much inconsistency as we can, we s h a l l depend mainly i n our analysis on one source of data, t r y i n g to derive most of the needed figures from i t . - 47 - A- The F e a s i b i l i t y of the Investment Program: As i s clear from Table 1, the t o t a l investment r e - quired by the Five-Year Plan amounted to LE 1637 m i l - l i o n . Foreign c a p i t a l formation was supposed to form i/& of t h i s t o t a l investment. 4 4 Disregarding f o r the moment the actual achievements of the plan, and t r y i n g to evaluate the f e a s i b i l i t y of the investment program (given the conditions p r e v a i l i n g i n 1959/60), two questions a r i s e at the outset; Was the saving rate high enough to provide the domestic share of the c a p i t a l formation i n the program? Was the s i t u a t i o n of the balance of payment i n U„A.R. at 1959/60 conducive to b e l i e f i n the f e a s i b i l i t y of get- t i n g the LE 5 4 5 m i l l i o n f o r e i g n exchange required by the Plan? In the five-years preceding the Plan, 1956 - 60, the average saving rate was 11.2% of GHP, as i s cl e a r i n Table 3. Since the investment figures i n the Plan absorb-3 20% of G-NP45 t h i s means a d e f i c i t of 8.8% of GEP w i l l a r i s e i f the saving rate was maintained at - 48 - T a b l e 3 Savings i n U. A. R., 1 9 5 3 - 6 5 ( C o n s t a n t P r i c e , 1 9 5 8 = 1 0 0 ) LE M i l l i o n Year Savings P e r c e n t a g e o f Savings i n GNP 1 9 5 3 1 0 2.04 1 2 I95I1. 1 5 1•42 1 5 1 9 5 5 1 5 5 . 8 5 1 5 1 9 5 6 1 1 4 . 9 4 1 0 1 9 5 7 145.14 1 2 1 9 5 8 1 1 4 . 8 0 1 0 1 9 5 9 1 1 1 . 3 0 1 0 i 9 6 0 2 0 1.40 14 1 9 6 1 2 7 2 . 1 1 1 8 1 9 6 2 2 5 1 . 8 6 1 5 1 9 6 3 1 2 1 . 9 3 7 1 9 6 4 1 6 9 . 2 6 9 1 9 6 5 2 0 7 . 1 6 1 2 Note: Savings have been c a l c u l a t e d as the d i f f e r e n c e between the d e f i c i t i n the b a l a n c e o f c u r r e n t payments - a f t e r c o n v e r t i n g them t o c o n s t a n t p r i c e s u s i n g the w h o l e s a l e p r i c e i n d e x , T a b l e I I I i n the Appendix t o Ch. I l l - and the i n v e s t m e n t a t c o n s t a n t p r i c e s i n Ta b l e V i n the Appendix t o Ch. I I I . t h i s l e v e l . However, the planners did not depend on domustic saving to finance a l l the investments required i n the Elan. Foreign oapi%a3: f i n a n c i e r was deemed neces sary f o r the development process, not only to f i l l the gap between investment and domestic saving, but also to provide U.A.R. with f o r e i g n exchange to buy machines raw materials, intermediate goods, etc. from abroad. Domestic saving i s not h e l p f u l i n t h i s rspects unless i t i s dire c t e d to produce export commodities. This might be a del i b e r a t e p o l i c y as long as the country's exports can be sold p r o f i t a b l y abroad. But t h i s i s not the case i n U.A.R. Cotton, the main export of the coun- t r y , i s undergoing, at present, a d e c l i n i n g trend i n the world markets. + Thus, increasing-cotton production cannot be used as a means of obtaining f o r e i g n exchange in the to finance investment^growing i n d u s t r i a l sector. Since only 67$ of the investments had been planned to be covered by domestic saving, the required l e v e l + For a f u l l e r elaboration of t h i s point, see op. 76> £g—in tho paper- below. - 50 - of domestic saving was 13.3% of G-NP. Certainly, i t 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 d e f i c i t s i n the balance of current accounts i n 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, i s the surplus i n the balance of payment that the plan- ners had expected to appear i n 1964/65.46 The surplus was supposed to be formed not only through a decrease i n imports, but also through an increase i n exports. The increased output i n agriculture together with the import-substitution products i n the industrial sector were expected to reduce the imports of foods, consump- - 51 - t i o n and intermediate goods. On the other hand, exports 47 m of manufactured goods were expected to increase. Thus, i t had been planned that U.A.R. w i l l s t a r t to repay 4ft i t s debt i n the f i f t h year of the plan. Undounted- l y , i t looks l i k e a very ambitious goal i n the fo r e i g n trade sector. Depending on the availa b l e conditions i n U.A.R. at the beginning of the Five-Year Plan, we can conclude that the investment program seemed f e a s i b l e with regard to the domestic resources only. A shortage i n f o r e i g n resources i s expected to appear during the implementa- t i o n of the plan. The trade surplus expected i n 1965 seem to be quite unfeasible. - 52 - T a b l e 4 F o r e i g n Trade i n U. A. R., 1953-65 (LE m i l l i o n , C u r r e n t P r i c e s ) Year Imports E x p o r t s C u r r e n t b a l a n c e of payment 19535 1 7 9 - 7 1 4 2 . 5 - 37.2 1 9 5 4 1 6 4 . 4 1 4 3 . 9 - 20'.. 5 1955 1 8 7 . 2 1 4 6 . 0 - 4 1 . 2 1956 186.4 1 4 2 . 3 - 4 4 . 1 1957 190. 4 171.6 - 18.8 1958 230 .4 163.8 - 66 .6 1 9 5 9 2 1 4 . 4 1 5 4 . 3 - 6 0 . 1 i 9 6 0 225.0 191.6 - 2 3 . 4 1961 238.5 l 6 l . 2 - 7 7 . 3 1962 300.9 157-4 - 1 4 3 - 5 1963 398.3 226.0 - I 7 2 . 3 1 9 6 4 4 1 4 . 3 233-6 -I8O.7 1965 4 0 5 . 8 2o2.5 - 1 4 3 . 3 Source: E x c l u d i n g column 4 ; U. N., Yearbook of I n t e r n a t i o n a l Trade S t a t i s t i c s 19^7 (New York: 19bB) - 53 - The data i n 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 fig u r e of LE 1091.88 m i l l i o n . This means that the domestic r e - sources have almost r e a l i s e d the requirement of the Plan. The average rate of saving has increased to 12.2$. Unexpectedly, f o r e i g n resources have exceeded the plan- ned l e v e l by LE 142.78 m i l l i o n . Actual f o r e i g n resour- ces are LE 688.9 m i l l i o n and the planned had been LE 545.12 m i l l i o n . Consequently, the actual t o t a l i n - vestments are LE 1712.22 m i l l i o n compared with the planned amount of LE 1637 m i l l i o n . The f i n a n c i a l resources, then, were not a b o t t l e - neck i n the implementation of the Five-Year Plan. + Calculated from Table 4 a f t e r the conversion i n t o constant p r i c e f i g u r e s using the wholesale price index i n Table I I I i n the Appendix to Ch.III. - 54 - But the increasing.-burden on the balance of payment forms a main latent constraint to the development pro- cess. As might have been expected, no surplus appeared i n 1965. Instead, a d e f i c i t of LE 143.3 million has been realized. The heavy burden on the balance of pay- ment can be roughly related to five causes: F i r s t , the unexpected increase i n the rate of grow*h of population, which jumped from 2.3$ to 2.8$ per an- 49 num. ^ This has led to an increase i n the consumption of foods and other consumer goods. In spite of the i n - crease i n agricultural output, (Table 5), imports of food increased from an average of 25.6$ of total imports i n the five years preceding the Plan to an average of 26.2$ during the Plan period. Imported consumption goods i n the f i r s t three years of the Plan f e l l only £y 3.7$ from i t s average level i n the preceding five years. Second, the output of the import substitution i n - r dusi^ies had not been produced during the Plan as fast as i t was expected, i n order to significantly reduce imported consumption goods. Moreover, i t can be - 55 - noticed that the imports of many of the goods which were produced l o c a l l y had not f a l l e n due tothe great increase i n population. These i n d u s t r i e s , then, can be c a l l e d import-substitution i n the s p e c i f i c sense that i f they were not established, the imports would have 5 3 increased than i t s previous l e v e l . T h i r d l y , the planners, by expecting a surplus i n the f i f t h year of the Plan, had taken f o r granted that the excess output would be exported. Whether these products would be competitive to t h e i r counterparts abroad, and whether there would be a f o r e i g n demand fo r them, are subjects which seemed not to have been discussed among the planners i n s p i t e of t h e i r v i t a l 54 importance. Fourthly, the p r i c i n g system used i n c a l c u l a t i n g the cost of production was not s u i t a b l e to the export goal. Sales and costs should have been calculated at the world p r i c e s at which the commodities involved can be traded abroad. This presents the true opportunity costs or - 56 - revenues of the a c t i v i t y i n question* This makes i t easier to judge whether the produced goods are compe- t i t i v e to t h e i r f o r e i g n couterparts or not. Consequent- l y , the export's f e a s i b i l i t y of any kind of commodity can be decided upon on a more r e a l i s t i c b a s i s . F i n a l l y , the deteriorated terms of trade, that f e l l from 100.2 i n 1961/62 to 87.8 i n 1963/64 and to 89.6 i n 1964/65, further aggravated the d e f i c i t during the Five-Year P l a n . 5 6 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 f o r e i g n resources. In s p i t e of t h a t 5 t h e planned s e c t o r a l and aggregate target with respect to output had not been completely r e a l i z e d as i s c l e a r i n Table 5. - 57 - T a b l e 5 A c t u a l Achievements o f the F i v e - Y e a r P l a n S e c t o r A c t u a l i n c r e a s e i n o u t p u t i n c o n s t a n t p r i c e s ( 1 9 5 8 = 1 0 0 ) LE m i l l i o n r e a l i z e d c a p i t a l o u t p u t r a t i o A c t u a l a l l o c a t i o n o f i n v e s t m e n t i n c o n s t a n t p r i c e s ( 1 9 5 8 = 1 0 0 ) LE m i l l i o n A g r i c u l t u r e and i r r i g a t i o n ( i n c l u d i n g H i g h Dam) 1 1 6 . 6 7 3 . 2 3 5 2 . 3 8 I n d u s t r y , e l e c t r i c i t y 1 5 1 . 2 4 and c o n s t r u c t i o n 4 . 7 7 2 4 . 1 0 Housing - 8 . 7 7 _ _ 1 9 7 • 4 7 T r a n s p o r t and C ommuni ca t i on ( i n c l u d i n g Suez Ca n a l ) 6 5-42 4 . 6 3 0 0 . 8 5 Other S e r v i c e s 1 3 4 . 8 9 1 . 5 1 9 6 . 5 0 T o t a l 4 5 9 . 4 5 3 - 9 1 7 7 1 • 3 0 C a l c u l a t e d from T a b l e s I V and V i n the Appendix t o Ch. I I I . The reason l i e s i n the underestimation of the c a p i t a l - output r a t i o i n some c r i t i c a l sectors of the economy. This r a i s e s a question which we s h a l l t r y to answer i n the following section: Is i t advisable to give great weight to the capital-output r a t i o i n c a l c u l a t i n g the required investment as was done i n the TJ.A.l. Plan? - 59 - B - The„ Capital-Output Ratio and the C a l c u l a t i o n of the required Investment i n the Plan; The incremental capita-output r a t i o has been used as an important t o o l i n the Five-Year Plan. The plan- ners have used the incremental c a p i t a l c o e f f i c i e n t to determine the investments required i n each sector. They have derived the projected s e c t o r a l c a p i t a l - o u t - put r a t i o s from the his t o r i ' c a l data of Egypt and the experiences of the contemporary developing countries. The question i s whether these sources are bases f o r p r o j e c t i n g the s e c t o r a l capital-output r a t i o i n the Five-Year Plan. As weeknow, many things a f f e c t the capital-output r a t i o , e.g. the kind of equipments used, i t s e f f i c i e n c y , the capacity u t i l i z e d and the main- tainance of c a p i t a l , etc. C e r t a i n l y , these factors change with economic development. Can these changes be projected and considered i n the c a l c u l a t i o n of the se c t o r a l c a p i t a l c o e f f i c i e n t i n U.A.I.? I t might be answered that these f a c t o r s ' changes which are due to the development process are embodied i m p l i c i t l y i n - ,60 - the capital-output r a t i o s of contemporary countries which are ahead of U.A.R. i n the development planning, e.g. Yugoslavia and India. Unfortunately, the se c t o r a l c a p i t a l c o e f f i c i e n t s of those countries are not av a i l a b l e i n the sources a v a i l a b l e . Also, the data of the se c t o r a l investments i n U.A.R. cannot be traced back more than eight years before the Plan. Hence, fo r lack of data, we s h a l l not discuss the accuracy of the d e r i v a t i o n of the projec- ted capital-output r a t i o s from both sources mentioned above. In other words, we s h a l l assume that;the plan- ners have r e a l l y considered the h i s t o r i c a l c a p i t a l - output r a t i o s i n U.A.R. as well as the r a t i o s of other developing countries. Our judgement, then, on how r e - l i a b l e i s t h i s method i n planning, w i l l depend on the comparison between the projected and the r e a l i z e d ca- p i t a l c o e f f i c i e n t s as well as between the planned and the achieved output targets. T^e actual incremental c a p i t a l c o e f f i c i e n t i n the a g r i c u l t u r a l sector (including "the High Dam) during the Five-Year Plan was 3»2, compared with the plan- - 61 - ned r a t i o 3.4. Although the investments devoted to the a g r i c u l t u r a l sector have been only LE 352.38 m i l l i o n , i . e . LE 30.62 m i l l i o n l e s s than the planned amount, the:-; output target i n t h i s secor, LE 112 m i l l i o n , has been surpassed to LE 116.6 m i l l i o n . This para&oxcan be ex- plained by the f a l l i n the capital-output r a t i o to 3.2, which has compensated f o r the decrease i n investment devoted to the sector. In f a c t , a decrease i n the ca- p i t a l c o e f f i c i e n t has the same e f f e c t as an increase i n 57 investment. That i s why the concept of the c a p i t a l - output r a t i o i s important i n the planned economies, es- p e c i a l l y i n those where c a p i t a l i s a scarce factor of production. Moving to industry, e l e c t r i c i t y and construction the divergence between the planned and the r e a l i z e d c a p i t a l - output r a t i o i s remarkably l a r g e . The projected c a p i t a l c o e f f i c i e n t i n t h i s secjbr had been 2.2 while the rea- l i z e d r a t i o i s 4.7, i . e . more than twice as much as ther-1? "::- planned c o e f f i c i e n t . Although the investment allocated to these f i e l d s (LE 724.10 m i l l i o n ) was 26% higher than - 62 - the planned amount (LE 575 m i l l i o n ) , the output t a r - get, LE 266 m i l l i o n has not "been achieved. The rea- l i z e d output was LE 151.24 m i l l i o n , i . e . 43$ lower than the planned l e v e l . The underestimation of the ca- p i t a l - o u t p u t r a t i o i s , i n f a c t , the cause of t h i s great divergence beween the actual and the planned l e v e l of output."iBut, on the other hand, the high c a p i t a l coef- f i c i e n t r e a l i z e d i s the r e s u l t of d i f f e r e n t reasons, some of which could not be known to the planners ex ante. The important reasons can be summarized as f o l - lows: : 1- The n a t i o n a l i z a t i o n of the i n d u s t r i e s i n 1961 had not been expected and counted upon by the planners. The government, as an unexperienced owner of the.'.in- d u s t r i a l sector i s , n a t u r a l l y , expected to make mis- takes i n production and administration. But some mis- takes were not estimatable. One of these mistakes which was hardly excusable i s the appointment of m i l i - t ary o f f i c e r s , who had no experience at a l l i n t h i s f i e l d , as managers to many firms. The important r o l e - 63 - of the manager i n the production process i s not well recognized i n the public-owned enterprises. This mal- administration has l e d to a waste of f a c t o r s of pro- duction, and consequently has increased the c a p i t a l c o e f f i c i e n t of the sector. In f a c t , the t r a n s f e r of the productive sectors from priva t e ownership to government was expected to have two adverse e f f e c t s : a r i s e i n the capital-output r a t i o , owing to l e s s e f f i c i e n t operation causing a slackening i n the rate of growth of GET?; a r i s e i n the rate of depreciation of c a p i t a l owing to l e s s e f f i c i e n t maintainance l e a - ding to a further f a l l i n the rate of growth of the net national product, 5® For example, i t i s known that the costs of b u i l d i n g and construction have r i s e n sub- 59 s t a n t i a l l y owing to the governmental supervision. 2- Comparing the planned c a p i t a l c o e f f i c i e n t of i n - dustry, e l e c t r i c i t y and construction i n the Five-Year Plan (2.2) with that of the preceding seven year pe- r i o d (2.6), we f i n d the former lower than the l a t t e r . - 64 - I t might have "been expected that a higher c o e f f i c i e n t would he needed. The Five-Year Plan contained mainly 60 consumption goods and food i n d u s t r i e s , which does not show much dhange from before i n the structure of the i n d u s t r i a l sector. But the b u i l d i n g of new indus- t r i e s i n UoA.R. should have been expected to be accom- panied by some waste i n resources due to the lack of experiences and s k i l l . Hence, the planners were very ambitious when they projected the c a p i t a l c o e f f i c i e n t i n indestry, e l e c t r i c i t y and construction as 2,2. 3- An important factor a f f e c t i n g the c a p i t a l - o u t - put r a t i o i s the gestation period. Unfortunately, the data with regard to t h i s f a c t o r i s not ava i l a b l e i n f\~\ many countries. A gestation period longer than ex- pected w i l l r a i s e the c a p i t a l c o e f f i c i e n t . An unsuc- c e s s f u l attempt has been made to calculatethe secto- r a l gestation period i n UeA.R. However, i t i s ex- pected that some of the projects that have been b u i l t during the implementation of the Plan w i l l y i e l d t h e i r products after the plan period. J These enterprises with long gestation periods w i l l c e r t a i n l y have r a i s e d the capital-output r a t i o during the Plan period. 4- The i d l e capacity which has appeared i n some pro je c t s due to the lack of spare parts, raw materials and intermediate goods, has also contributed to the r i s e of the c a p i t a l c o e f f i c i e n t i n industry, e l e c t r i - c i t y and construction. This r i s e i n the actual c a p i t a l c o e f f i c i e n t has made the output target of t h i s sector not f e a s i b l e unless more investments are allocated to i t . Thus, to f u l f i l the output target, given the rea- l i z e d capital-output r a t i o , investment has to r i s e to LE 1250.0 m i l l i o n , i , e . more than twice as much as the planned f i g u r e . In the service sector, we d i f f e r e n t i a t e between transport and communication, and other s e r v i c e s . In the former, the r e a l i z e d capital-output r a t i o , 4.6, was f a r below the projected r a t i o , 13«5. The only explanation given i n t h i s respect was the complete underestimation of the increase i n Suez Canal t r a f f i c . With regard to "other s e r v i c e s " , the r e a l i z e d c a p i t a l - - 66 - output r a t i o , 1.5, i s almost the same as the projected one, 1.4. The actual investments allocated to transport and communication have been LE 300.83 m i l l i o n , i . e . about 11% more than the planned amount, LE 269 m i l l i o n . Actual output i n the same sector was LE 63.42 m i l l i o n , i . e . about 200% more than the output target, LE 20 p i l - l i o n . This b i g jump i n the output achieved, i n s p i t e of the r e l a t i v e l y low increase i n investment i s due to the low sector c a p i t a l c o e f f i c i e n t r e a l i z e d i n trans- port and communication. The planned investment of "other s e r v i c e s " , LE 149 m i l l i o n , and i t s target output, LE 104 m i l l i o n , have been also surpassed. Achieved investment and output were LE 196.50 m i l l i o n and LE 134.89 m i l l i o n r e s p e c t i v e l y . A f t e r reviewing the discrepancies r e a l i z e d between the r e s u l t s achieved and the planned targets, we can conclude that i t i s not advisable to depend only on the c a p i t a l c o e f f i c i e n t to determine the investment r e - quired i n each sector and then wait and expect the rea- l i z a t i o n of the output target. The volume of investment by i t s e l f i s not s u f f i c i e n t to determine the expected - 67 - income. The kind of investment, the equipment used, the e f f i c i e n c y i n using the njachines, the p r i c e s of investment commodities, f i n a l goods and wages, a l l must be taken i n t o account to r e a l i z e the f i n a l aim: the increase i n the volume of goods and services produced.^ 1 The capital-output r a t i o i s a t e c h n i c a l r e a l t i o n between investment and output. I t can be used to deter- mine the investment required tow a projected l e v e l of income only i f other things remain unchanged,. This i s e s p e c i a l l y not possible i n a period of economic trans- formation. Changes i n the equipment used, i n the tech- niques applied, i n the e f f i c i e n c y of labour, i n the maintaina*iance of c a p i t a l and i n the capacity u t i l i - z ation, a l l of these lead to a change i n the c a p i t a l - output r a t i o . Thus, the h i s t o r i c a l c a p i t a l c o e f f i c i e n t cannot be depended upon to forecast the required i n - vestment i n the future as long as the country i s under- going s t r u c t u r a l change. Even i f i t i s claimed that the capital-output r a t i o s i n the underdeveloped coun- t r i e s which have made progress i n the development plan- - 68 - ning* >embody a l l these changes, we cannot have f a i t h i n the s u i t a b i l i t y of t h i s r a t i o to any developing coun- t r y , e.g. U.A.E. Every country has i t s own conditions with respect to c a p i t a l , natural and human resources, e f f i c i e n c y , etc. This makes i t impossible to adopt one technique of production i n two countries and expect the same degree of success i n both. However, the capital-output r a t i o i e a simple tech- nique i n planning. The lack of data and experience make i t necessary f o r the countries that are j u s t s t a r t i n g planning,' to begin with rather simple 67 techniques, which can be developed as the years go by. Depending on t h i s argument, the planners i n U.A.E. may not be blamed by adopting t h i s simple technique i n the F i r s t - F i v e Year Plan. But, they could have made something better out of i t , i f they have used, i n add i t i o n to the incremental capital-output r a t i o , the input-output ta b l e s . The discrepancy between the ac- t u a l and the projected c a p i t a l c o e f f i c i e n t i n many cases can be explained as the r e s u l t of the incon- sistency between the d i f f e r e n t p r o j e c t s . The Plan should - 69 - have included a quantitative statement of production i n the d i f f e r e n t f i e l d s , and the outlay of t h i s prere- duction. The input-output tables are e s s e n t i a l because through these tables we can r e a l i z e whether production tends to meet consumption and investment requirements, or whether there i s imbalance between what is. produced 68 f o r investment and f o r consumption. Input-output tables s u f f e r from severe shortcomings i n common with the capital-output r a t i o , e.g.nthey depend c h r o n i c a l l y upon f i x e d t e c h n i c a l c o e f f i c i e n t s . But, a combination of the two techniques, capita-out- put r a t i o and inpu-output tables, might be expected to give a better: r e s u l t than using the c a p i t a l coef- f i c i e n t technique alone, as i t has been done i n the Five-Year Plan i n U.A.R. - 70 - c - The Aggregate Capital-Output Ratui and tke Rate of Growth of the Economy; I t i s argued, both t h e o r e t i c a l l y and e m p i r i c a l l y that there i s an inverse r e l a t i o n s h i p between the ca- pi t a l - o u t p u t r a t i o (incremental) and the rate of growth gq of the economy. 3 The higher the capital-output r a t i o of the economy, the lowej? i t s rate of growth, given a c e r t a i n l e v e l of investment. The rate of growth of the economy, then, can be accelerated e i t h e r by i n c r e a - s i n g investment or by decreasing the aggregate c a p i t a l c o e f f i c i e n t . The capital-output r a t i o for the whole economy de- pends not only on mechanization, t e c h n i c a l progress, etc., but also on the s e c t o r a l structure of the n a t i o - nal economy and the rate of i t s development. Therefore, the economic analyst should d i s t i n g u i s h between the ca- pital-output r a t i o involved i n the production of s p e c i - f i c products and the capital-output r a t i o that applies to the national economy as a whole. The l a t t e r * s dyna- -71- mics are determined not only by changes i n the c a p i t a l - output r a t i o s r e l a t e d to separate products, but by the share of these products i n the t o t a l output of the na- 70 t i o n a l economy as w e l l . This means that i f more weight i s given to the sectors with the high c a p i t a l c o e f f i c i e n t ^ the aggregate capital-output r a t i o i s expected to be high. On the contrary, i f the sectors with low c a p i t a l c o e f f i c i e n t s have the greater share i n the anticipated increase i n output, the aggregate c o e f f i c i e n t i s ex- pected to be low. According to the ©lan, more weight has been given 7 1 to industry, e l e c t r i c i t y and construction. This can be shown by examining the share of investments d i r e c - ted to t h i s sector with respect to t o t a l planned i n v e s t - ments , and the product expected from i t compared with the t o t a l output anticipated during the Five-Year Pi:an. About 35$ of the planned t o t a l investments were d i r e c - ted towards t h i s sector. I t s anticipated contribution, was about 52$ of the t o t a l increase i n output. The a g r i c u l t u r a l sector comes next with respect to i t s - 72 - importance i n the Five-Year Plan. I t s contribution was planned to be 22% of the increase i n output. Ac- cording to th i s s e c t o r a l structure of the economy, the projected aggregate capital-output r a t i o was 3«2 (Ta- ble 1). During the implementation of the Plan, the sectors' weights, measured by shares i n the actual increase i n output, have changed. Industry^ e l e c t r i c i t y and con- s t r u c t i o n , together wih the a g r i c u l t u r a l sector have contributed only 58% + of the decrease i n output com- pared with 74% + + i i i the planned f i g u r e s . The services sector which was planned to contribute with 24% of the t o t a l increase, i t s share rose to 46% of the ac- t u a l i n c r e a s e , i n t o t a l output. The aggregate c a p i t a l - output r a t i o r e a l i z e d during the Five-Year Plan was 3.9« Although t h i s i s already greater than the plan- ned raMo, i t would have been much more higher i f the + 33% f o r industry, e l e c t r i c i t y and construction, and 25% f o r a g r i c u l t u r e (calculated from Table 5). ••Calculated ffrom Table 1. - 73 - weights given by the planners to the d i f f e r e n t sectors have not been changed during the implementation of the Plan. The change i n the s e c t o r a l shares with respect to t o t a l output i n favour of the services sector has mitigated the e f f e c t of the high capital-output r a t i o r e a l i z e d i n industry, e l e c t r i c i t y and construction on the aggregate c a p i t a l c o e f f i c i e n t . The s i g n i f i c a n t f a l l i n the r e a l i z e d capital-output r a t i o i n the ser- vices sector has compensated f o r the r i s e i n the c a p i - t a l c o e f f i c i e n t achieved i n industry, e l e c t r i c i t y and construction. Otherwise, the aggregate capital-output r a t i o would have jumped higher than 3.9. The average actual annual rate of growth of GNP during the Five-Year Plab was!; 5.8$. + To r a i s e i t to the average planned growth rate of 7.2$, either the l e v e l of investment would have hid to increase to 28$ of GUP, or the aggregate capital-output r a t i o would have had to -fiall to 2«B» + Derived from Table IT i n the Appendix to Ch. I I I . - 74 - The p o s s i b i l i t y of r a i s i n g the investment l e v e l to 28% of SEP seems unfeasible i n the present time because of the low saving r a t i o i n U.A.R. and the already heavy burden on the balance of payment. I t might be said that the aggregate capital-output r a t i o can be decreased bjr a l l o c a t i n g investments i n favour of services and a g r i c u l t u r e , the sectors with the lower c a p i t a l c o e f f i c i e n t s . This seemsotc be not an advisable p o l i c y to a country seeking s t r u c t u r a l change and economic development. The expansion of pro- d u c t i v i t y i n the services sector i s a p r e r e q u i s i t e and a concomitant to economic development. I n d u s t r i a l i s a t i o n and economic progress, .'.in general, postulate improve- ment i n the q u a l i t y and quantity of many services, e.g. f i n a n c i a l services, education, health s e r v i c e s , trans- port and communication, etc. In f a c t , the development of the goods producing sectors has to be accompanied by the growth i n the services sector; a slackening of the l a t t e r might reduce the rate of growth of the former. On the other hand, i n the case where the goods producing sector i s underdeveloped, the s e r v i - ces sector i s l i k e l y to be l i m i t e d . In f a c t , the ab- - 75 - sorptive and productive capacity of the services sector does l i k e l y depend on the degree of development and progress i n the country concerned. This can be proved i f we compare the number and q u a l i t y of banks and i n - surance companies, health, education, etc. i n the de- veloped countries with t h e i r counterparts i n the deve- l o p i n g ones. The services sector i s l a r g e r i n the f o r - mer than i n the l a t t e r . Thus, g i v i n g more weight to the services sector i n U.A.B. without making s u f f i c i e n t improvements i n the goods producing sectors, i s M k e l y not a s o l u t i o n i n our case. With regard to the a g r i c u l t u r a l sector, the problem i s quite d i f f e r e n t . TJ.A.R. was, and s t i l l i s , an a g r i - c u l t u r a l country with respect to both, output and employment. This has i t s disadvantage with regard to the low income per capita, since the majority of the productive population are working i n the a g r i c u l t u r a l sector, where p r o d u c t i v i t y i s r e l a t i v e l y low. + The + The most recent avai l a b l e data i s f o r 1959. Accor- ding to i t , the weekly money wage rate i n manufac- t u r i n g i s 2185 milliemes and 700 milliemes i n a g r i - c u l t u r e . See Mead, op. c i t . t p.116. - 76 - disadvantage with regard to output can be suiimarized i n the unfavourable structure of the fo r e i g n trade of the countryo Cotton, the main export of U . A o R . ; ' , can- not be depended upon, at present, as a good source of f o r e i g n exchange,as some may suggest. The synthetic f i b r e s , which are improving day a f t e r day, are used now on a wide scale, as a substitute to cotton i n pro- duction. Also, the appearance of Sudan i n the recent years, as a competitor to T J o A . R . i n producing the long staple cotton, has narrowed the world markets of the 72 Egyptian cotton. In addition, there are rather heavy f l u c t u a t i o n i n the value of cotton, from year to year, p a r t l y because of crop-fluctuations, but also because of the well-known p r i c e i n s t a b i l i t y of raw material markets, J In f a c t , export: ' d i v e r s i f i c a t i o n and import' s u b s t i t u t i o n make the country l e s s depen- dent on t r a d i t i o n a l export commodity. Foreign trade w i l l decline compared to national income, and t h i s i n i t s e l f w i l l make the country's economy l e s s s e n s i t i v e 7 to f l u c t u a t i o n s i n foreign trade and crop conditions. That i s why the planners have given more weight to the i n d u s t r i a l sector i n the Five-Year Plan. - 77 - I n d u s t r i a l i s a t i o n i s the t r a d i t i o n a l and s t i l l the most sought-after path of economic development. Many of the developing countries, which have started on t h e i r way towards economic development, have taken t h i s path, e.g. Yugoslavia and India. But, as long as we accept i n d u s t r i a l i s a t i o n as a r a t i o n a l path to economic deve- lopment, we have to expect a r i s e i n the aggregate ca- pit a l - o u t p u t r a t i o of the country. Thus the r i s e of the aggregate c a p i t a l c o e f f i c i e n t i n U.A.E. from 2 e8 i n the five-year period preceding- the Plan to 3°9 during the iipylemejitation of the Plan i s a normal phenomenon.. The important question i s : What i s the trend of the capital-output r a t i o during the subsequent development process? In other wods, whan the s t r u c t u r a l t r a n s f o r - mation period i s over, w i l l the c a p i t a l c o e f f i c i e n t have a continuing upward trend, or w i l l i t tend to decline? As we know, a decrease i n the capital-output r a t i o has the same e f f e c t as an increase i n investment. + Derived from Tables IV and V i n 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- p i t a l . An upward trend i n the capital coefficient i n - dicates that more d i f f i c u l t i e s have to be expected as the development process proceeds. The time-path of eco- nomic development w i l l be longer and the sacrifices and efforts required w i l l be greater. On the other hand, i f the trend of the coefficient i s downward, the deve- lopment process looks more promising, since the path becomes easier (at least i n this one respect) as the time passes. Chapter IV w i l l be devoted, therefore, to discussing the theoretical and empirical aspects of the trend of the capital-output ratio during the development pro- cess i n general, and i t s implications with regard to the expected rate of growth of U.A.R. i n particular over the future period. - 79 APPEEDIH TO CHAPTER I I I C a l c u l a t i o n of the Capital-Output S a t i o i n IT.A.R,,: I t i s well Known that some projects have longer gestation period than others. This should be co n s i - dered i n the c a l c u l a t i o n of the c a p i t a l c o e f f i c i e n t , i f accuracy i s required. Since t h i s data i s l a c k i n g i n TJ.A.R., as i s also the case i n many other coun- t r i e s , we have t r i e d to f i n d a rough pi c t u r e of the se c t o r a l gestation period by c a l c u l a t i n g the corre- l a t i o n c o e f f i c i e n t between investment and output i n each sector, assuming four suppositions: (a) no ges- t a t i o n period; (b) gestation period of one year; (c) gestation period of two years; (d) gestation period of three years. The r e s u l t i s shown i n 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 . 1 6 4 4 0 . 4 8 5 6 0 . 4 3 8 6 0.4022 0.1086 0 . 5 8 3 7 1-year lag 0.0377 0.2334 0.1289 0 . 4 0 2 6 - 0 . 3 2 9 0.2691 2-year lag -0 .067 0 . 3 3 9 0 0.1289 0.5082 0.1470 0.2712 3-year lag -O.678 0 . 6 2 5 4 -O . I63 0.1463 -0 .153 0.4198 - 81 - As i t i s c l e a r f r o m T a b l e I , t h e c o r r e l a t i o n c o e f - f i c i e n t s , i n g e n e r a l , a r e s o l o w t h a t we c a n n o t d e - p e n d u p o n them t o d e r i v e c o n v i n c i n g r e s u l t s . H e n c e , t h i s t r i a l f a i l s t o g i v e us a r e l i a b l e a n s e w e r a b o u t t h e g e s t a t i o n p e r i o d i n d i f f e r e n t s e c j o r s . I t f a i l s t o show us t h e l e n g t h o f t h e s e c t o r a l l a g p e r i o d , i f a n y , b e t w e e n i n v e s t m e n t and t h e i n c r e a s e i n o u t p u t r e l a t e d t o i t . A h a n d y and r e a l i s t i c way t o c a l c u l t a t e t h e a c t u a l i n c r e m e n t a l c a p i t a l - o u t p u t r a t i o d u r i n g t h e F i v e - Y e a r P l a n i s t o r e l a t e t h e r a t i o o f g r o s s i n v e s t m e n t s d u - r i n g t h e p l a n n i n g p e r i o d , e x c l u d i n g l a n d and s t o c k c h a n g e s , t o t h e i n c r e a s e i n g r o s s v a l u e added f o r m t h e b a s e y e a r t o t h e f i n a l y e a r o f t h e p l a n . T h i s may h a s b e e n u s e d i n c a l c u l a t i n g t h e r e a l i z e d s e c t o r a l c a p i - t a l - o u t p u t r a t i o s i n T a b l e 5 . The same method h a s b e e n u s e d b y G - i a n a r i s i n h i s c a l c u l a t i o n o f t h e i n c r e m e n - t a l c a p i t a l - o u t p u t r a t i o w i t h r e g a r d t o a c r o s s - 75 s e c t i o n o f d e v e l o p e d and d e v e l o p i n g c o u n t r i e s . - 82 - In fact, both, of the series of output and invest- ment suffer from s t a t i s t i c a l weaknesses.+ This makes them less reliable i n the calculation of the incremen- t a l 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 I I Consumer P r i c e Index i n U. A. R. (1958 = 100 ̂ 1948 1953 1954 1955 1956 1957 1958 A l l Items 93 98 94 94 96 100 100 Pood 83 91 92 93 95 99 100 1959 I960 1961 1962 1963 1964 1965 A l l Items 100 101 101 98 99 103 118 Pood 101 102 103 103 105 111 139 Source: U. N., S t a t i s t i c a l Yearbook 1962 and 1966. Table I I I Wholesale P r i c e Index i n U. A. R. (1958 = 100) 1948 1953 1954 1955 1956 1957 1958 General B u i l d i n g s T e x t i l e s 79 70 85 92 83 84 90 84 89 93 93 99 96 101 103 103 100 100 100 1959 i 9 6 0 1961 1962 1963 1964 1965 General B u i l d i n g s T e x t i l e s 100 98 98 100 101 98 102 103 96 101 105 96 100 104 103 105 106 105 113 115 110 Source: U. N.; S t a t i s t i c a l Yearbook 1962 and 19oo. - 84 - Table IV GNP at Constant Market Prices ( 1 9 5 8 = 1 0 0 ) LE m i l l i o n Sector Year Agriculture & I r r i g a t i o n (including High Dam) Industry, E l e c t r i c i t y and Constr- ue tion Hous- ing Transport and Commu- nic a t i o n Other Services Total 1 9 5 3 1 9 5 4 1 9 5 5 1 9 5 6 1 9 5 7 1 9 5 8 1 9 5 9 I 9 6 0 1 9 6 1 1 9 6 2 1 9 6 3 1 9 6 4 1 9 6 5 2 6 7 . 3 4 320.21 331 . 9 1 389•58 3 8 1 . 0 0 3 6 4 . 0 0 407•00 399.00 4 3 6 . 6 3 478.57 479.79 565.14 515.67 1 6 8 . 3 6 193 . 6 1 2 0 8 . 5 0 2 2 8 . 1 2 2 5 0 . 0 0 2 7 8 . 0 0 3 1 2 . 0 0 340.53 384.15 484 . 6 9 5 1 2 . 7 1 523.49 4 9 1 . 7 7 57.1^ 55.95 69.14 69.79 6 8 . 0 0 7 0 . 0 0 7 3 . 0 0 7 3 . 2 6 77 • 22 79.59 79.49 72.71 64.49 5 6 . 1 2 6 1 . 7 0 6 5 . 9 5 6 0 . 4 1 65.OO 7 2 . 0 0 9 2 . 0 0 1 0 0 . 9 9 1 1 2 . 8 7 1 2 6 . 5 3 1 5 7 . 7 7 1 7 0 . 8 7 1 6 6 . 6 l 3 1 2 . 3 0 3 3 7 . 2 3 3 5 1 . 0 7 3 6 3 . 5 4 362.OO 3 7 3 - 0 0 4 0 7 . 0 0 4 3 6 . 6 3 5 2 9 . 7 0 4 9 7 . 9 5 5 2 7 . 3 8 5 8 5 . 2 4 5 6 1 . 5 2 864 . 2 6 9 7 8 . 6 1 1 0 2 6 . 5 7 1111.47 1 1 2 6 . 0 0 1157.00 1 2 8 9 . 0 0 1350.46 1540.57 1 6 6 7 . 3 3 1757.14 1917•45 1800 . 0 6 Sources: ' 1 ^ D. C. Mead, Growth and Structural Chan^ i n the Egyptian Ec onomy, p. 2 b 6 . ' 2 ^ U. N.: Yearbook of National Accounts S t a t i s t i c s , 1 9 6 8 - 85 - Notes: Source (l) includes the Gross National Income and Product at market price from 1952/53 - 1962/63 i n 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 i n U.A.I., mathematical manipulation has been used. Comparing the data of the common years, 1962 and 1963, i n both sources, we get a rough relation- ship between the national product at current market prices and the domestic product at factor cost i n each sector. These sectoral relationships have been used to convert the data of the period 1963 - 65 i n source (2), into gross national product at market prices. Thus, we get one consistent time series of U.A.B. i n - cluding the GNP at current market prices from 1953 - 1965. Using the consumption price index i n Table I I , we <•. calculate the data i n Table IV. - 86 - T a b l e V Investment a t Constant P r i c e s (1958 = 100) LE m i l l i o n S e c t o r A g r i c u l t u r e I n d u s t r y , Hous- T r a n s p o r t Other T o t a l Year & I r r i g a t i o n E l e c t r i c i t y i n g and S e r v i c e s ( i n c l u d i n g and C o n s t r u c t - Commu- High Dam) i o n n i c a t i o n 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 i s calculated by applying the wholesale p r i c e index i n Table I I I to the investment data at current p r i c e s derived from the following Sources: (1) D.C. Mead, Growth and S t r u c t u r a l Change, p.290; (1953 - 1963). (2) U.N. Yearbook of B a t i o n s l Accounts S t a t i s t i c s ; -.1968 i (1964 - 1965). Investments i n 1963 are not a v a i l a b l e . Therfore, i n Table "V", investment i n each secor for t h i s year, 1963, i s c alculated by averaging over the period 1961 - 65, excluding 1963. Unfortunalely, we could not use Creamer's method + i n d e f l a t i n g the investment s e r i e s i n U.A.R. because of the lack of the required data~with respect to wor- king c a p i t a l , as well as the volume and depreciation of buildings and machines and equipment i n the country. + See p. 9 i n Chapter II above. C H A P T E R I V T H E C A P I T A L - O U T P U T R A T I O A N D T H E D E V E L O P M E N T P R O C E S S - 8 8 - In t h i s Chapter, we s h a l l t r y to evaluate some broad generalizations dealing with the diffe r e n c e be- tween capital-output r a t i o s i n the developed and under- developed economies. The f i r s t hypothesis i s that ca- pit a l - o u t p u t r a t i o s are greater i n the developed coun- t r i e s than i n the underdeveloped ones. By contrast, the second hypothesis argues that the capital-output r a t i o s are lower i n the developed economies than i n the un- derdeveloped ones. Consequentlyj the f i r s t argument is i n favour of an upward trend i n the capital-output r a t i o during the development process, while the second i s i n favour of a downward trend. The appraisal of these two contradictory views w i l l be attempted t h e o r e t i c a l l y and e m p i r i c a l l y , using a sample of developed as well as underdeveloped countries. The empirical evaluation w i l l be basejon the f a c t that each of the two hypotheses has i t s arguments based on c e r t a i n f a c t o r s that are considered to have an important e f f e c t on the capital-output r a t i o . We s h a l l t r y to pick up from both aspects these f a c t o r s , - 89 - that are measurable and tre a t thep as independent va- r i a b l e s . The dependent vaiable w i l l be the gross i n - cremental capital-output r a t i o . There are two a l t e r - native sources of data on these v a r i a b l e s . The one i s time s e r i e s ; the other i s cross-section data* In the f i r s t , we trace the development of the capital-output r a t i o f o r one country over an extended period of time. Evidently, t h i s c a l l s f or data f o r a s u f f i c i e n t l y long period to characterize the d i f f e r e n t stages of deve- lopment of that country. In the second approach, we need data for a spectrum of countries wide enough to designate d i f f e r e n t stages of development. The second approach i s more appealing, since we are concerned with r e l a t i n g the d i f f e r e n t i a l i n the c a p i - t a l c o e f f i c i e n t to the di f f e r e n c e i n the l e v e l of deve- lopment, other things being equal ( d o g . , i f we talte a group of countries they might be argued to have more "equal opportunities" i n terms of the p o s s i b i l i t i e s of trading, importing technology, etc., than i s true i n the case of one country only over time). Now, the + This i s not to deny that contemporaneous countries do not, i n f a c t , have "equal opportunities" due to r e - source d i f f e r e n c e s , trading and t a r i f f arrangements, etc. - 90 - question i s whether there i s a s i g n i g i c a n t d i f f e r e n c e between the l e v e l of the capital-output r a t i o i n deve- loped countries and i t s l e v e l i n the underdeveloped ones. We s h a l l not dwell on the problem of the d i s t i n c - t i o n between "developed" and "underdeveloped" countries. Rather, a pragmatic approach w i l l be followed, taking as a basis f o r c l a s s i f i c a t i o n the l e v e l of per c a p i t a income. Regression analysis w i l l be used to assess the r e l a t i v e importance of each of the fac t o r s chosen with respect to the capital: c o e f f i c i e n t i n the d i f f e r e n t groups of countries. Let us, f i r s t , review the t h e o r e t i c a l basis of the two aspects, then move on to the s t a t i s t i c a l part: the evaluation of c o e f f i c i e n t s of the independent va- r i a b l e s . - 91 - (l) !Eheoz&3^§i&.Jl&Yi e w ; A- Hypothesis: "Cap i t a l C o e f f i c i e n t s are greater i n the Developed Countries 1 1: This view argues that the c a p i t a l c o e f f i c i e n t i n - creases with the development process. In f a c t , an un- derdeveloped economy, i s i n most cases characterised by a:.large quantity of labour r e l a t i v e to the c a p i t a l stock and a low propensity to save out of a given income; while a developed economy has a large c a p i t a l stock r e - l a t i v e to the a v a i l a b l e labour force and a high pro- pensity to save out of a given income. We s h a l l ex- pect, therefor, that the r e a l wage rate w i l l be lower and the rate of i n t e r e s t w i l l be higher i n underdeve- loped countries than i n the developed ones. Under these conditions, a l l i n d u s t r i e s i n the underdeveloped coun- t r i e s would be using methods of production,. which are more labour intensive than i n a developed economy. In other words, the dapital-output r a t i o of each industry i n an underdeveloped economy should be smaller, than the capital-output r a t i o of the corresponding industry i n a developed economy.1 - 9 2 - This aspect is supported also, to some extent, by p Harvey ljeihenstein. He states that as an economy deve- lops, the wage rate wi l l rise and as a consequence, there wi l l be a tendency to substitute capital for l a - bour. The result is that in those industries where factor substitution is possible, the methods of pro- duction wi l l be less labour-intensive than in the less- developed stage, and capital-output ratios wi l l 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; "Capi t a l C o e f f i c i e n t s are greater i n the Underdeveloped Countries." One of these arguments i s supported "by C o l i n Clark. He argues that, as per ca p i t a income grows, the compo- s i t i o n of output s h i f t s away from the primary towards the t e r t i a r y i n d u s t i e s , where the capfetal-output r a t i o s are low. There may be some s i g n i f i c a n t exceptions to t h i s general view. Por example, i n the case of medical se r v i c e s , the capital-output r a t i o i s quite high com- pared withe the capital-output r a t i o i n some secondary i n d u s t r i e s . Furthermore, some more advanced countries have higher capital-output r a t i o s than some seejiiingly l e s s advanced countries.^ This view requires the i n - v e s t i g a t i o n of the i n d u s t r i a l sector i n each of the de- veloped and underdeveloped countries and the measure- ment of the capital-output r a t i o i n each type of manufacturings This cannot be achieved e a s i l y f o r the lack of data. However, i t i s beyond the scope of t h i s paper. Other discussions that agree with t h i s trend are - 94 - based on the f a c i l i t y with which i n d i v i s i b i l i t i e s of c e r t a i n c a p i t a l goods can be overcome as output i n c r e a - ses. We fr.ind that the l e v e l of output i s higher i n the developed countries than i n the underdeveloped ones, since the income per c a p i t a i s greater i n the former than i n the l a t t e r . The overcoming of i n d i v i s i b i l i t i e s of c a p i t a l w i l l lead to a f a l l of the c a p i t a l c o e f f i - c i e n t s . ^ According to t h i s argument, the higher the i n - come per capita, the higher the output produced, the greater the p o s s i b i l i t y of overcoming the i n d i v i s i b i - l i t y of c a p i t a l and the l e s s the capital-output r a t i o w i l l be. Since the i n d i v i s i b i l i t y of c a p i t a l cannot be measured to evaluate d i r e c t l y i t s r e l a t i v e s i g n i f i c a n c e to the capital-output r a t i o , i t may help to take the income per Capita as a s u b s t i t u t e , considering the d i r e c t r e l a t i o n s h i p between the l e v e l of income per c a p i t a and the overcoming of the i n d i v i s i b i l i t y of c a p i t a l . AnotheS fac t o r which a f f e c t s the c a p i t a l - c o e f f i c i e n t s i s the u t i l i s a t i o n of c a p i t a l goods i n production. - 95 - The more e f f i c i e n t the workers and managers i n using the c a p i t a l goods, the more product they produce and, consequently, the lower the c a p i t a l c o e f f i c i e n t s are. But undermaintenance of c a p i t a l goods and i n e f f i c i e n - cy i n using them are common c h a r a c t e r i s t i c s i n the i n - dustr i e s of the underdeveloped economies. On the con- t r a r y , i n the developed countries , more att e n t i o n i s paid to t h i s f a c t which, i n turn, leads to lower c a p i - t a l j b o e f f i c i e n t s i n these countries than i n the under- developed ones..'6 This view i s compatible with the argument that puts a considerable importance on what i s c a l l e d "human investment". Increasing per c a p i t a expenditures on edu- cation and on the l e a r n i n g of s p e c i f i c s k i l l s are among the concomitants of per c a p i t a income growth. As the labour force i s gradually improved i n t h i s manner, the value added by labour per unit of output increases ac- cordingly. Consequently, the same quntity of labour, without any increase i n c a p i t a l , y i e l d s a greater out- put. Hence, as economic development proceeds, labour - 96 - s k i l l s improve, economies of scale are experienced at p a r t i c u l a r stages of growth, and t e c h n i c a l knowledge advances. Consequently, the continuing increase i n c a p i t a l per head may be associated with a non-rising, 7 or even f a l l i n g capital-output r a t i o n One important independent variable should be added to our equation::the rate of growth of GDP. I t has been observed that the capital-output r a t i o s are c l s e - l y but i n v e r s e l y r e l a t e d to the rate of growth. The higher the rate of growth, the higher the output produced, given the stock" of c a p i t a l , the lower the c a p i t a l - o u t - o put r a t i o , and vice versa. (2) S t a t i s t i c a l Analysis: Our dependent va r i a b l e i n the equation w i l l be the incremental (and not the average) c a p i t a l output r a t i o , since t h i s i s what counts i n the development process. Therefore, the equation w i l l be: C / 0 = a Q + a - ^ + a 2 X 2 + + a ^ + a ^ + u. ( l ) where: X^ = Rate of growth of GDP (Gross Domestic Pro- duct) . X 2 = Per Capita GDP ( i n U.S.A. $). X^ = Industry's share of GDP. X^ = Cost of labour (wage/week) i n U.S.A. #. X,- = Percentage expenditure on education. 0/0= Incremental capital-output r a t i o . u r = Error term, where r denotes the number of observations. An important point should be added here: the econo- mic v a r i a b l e s are interdependent between each other. The capital-output r a t i o , i n f a c t , a f f e c t s many of the above mentioned variables as well as being affected - 98 - by them. Hor example, a high capital-output r a t i o i s l i k e l y to r a i s e the physical productiviy of labour and, consequently, the wage rate of the labour force. More- over, the high c a p i t a l c o e f f i c i e n t , by r a i s i n g produc- t i v i t y and output, may increase the GDP per capita. In f a c t , X ^ , . . . y X p . i n 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 r a t i o (C/0) i n equation ( l ) , we s h a l l proceed i n two steps: F i r s t step: We chose two groups of the underdeve- loped and developed countries r e s p e c t i v e l y . Each one includes 10 countries. The f i r s t group includes coun- t r i e s with income per capi t a ranging from $130 - $800 ( a l l i n U.S.A. d o l l a r s ) . The second group Includes coun- t r i e s 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...^^) i n equation ( l ) , we got the following two equations: C/0 = 1.0782 - 0 e0467X 1 + 0.6148X 2 + O.O3O6X ( 1 . 9 3 9 9 ) ( 0 . 2 6 5 5 ) (0.4646) (0.1024) + 0.1087X 4 + O . 5 0 l 7 X c + u r (0.1123) ( 0 . 4 6 8 9 ) 1 2 = 0 . 3 8 8 7 (2) C/0 = 0.3025 + 0.0818X 1 - 0 . 5 0 2 2 X 2 + Q.0914X- (3.3286) (0.1774) (6.4421) ( 0 . 0 5 7 9 ) + 0 . 5 3 7 5 X 4 - O . O 7 0 7 X . + u r E 2 = 0 . 7 6 9 7 (3) (0.0125) ( 0 . 1 4 5 6 ) Equation (2) i s f o r the underdeveloped countries ?. and (3) f o r the devloped ones. In the f i r s t equation, the c o e f f i c i e n t s of X 2 and X^ are the only s t a t i s t i c a l - l y s i g n i f i c a n t ones, judging by t h e i r standard e r r o r s . In the second equation, only the c o e f f i c i e n t s of X^ and X^ are s t a t i s t i c a l l y s i g n i f i c a n t . "V9e s h a l l not ana- l y s e these r e s u l t s because i t i s unsatisfactory, since the matrix of the c o r r e l a t i o n c o e f f i c i e n t s reveals mul- t i c o l l i n e a r i t y between some of the independent v a r i a b l e s . - 100- I f we i n v e s t i g a t e the independent variables c a r e f u l l y , we f i n d that i t i s not unexpected that m u l t i c o l l i n e a - r i t y should e x i s t between the rate of growth of GDP ( X ^ and the per c a p i t a GDP(X 2). X 1 can be a s u b s t i - tute f o r X^ as an i n d i c a t o r of the stage of the coun- t r y i n the development process,, Knowing that the. ave- rage rate of growth of population i n the underdeveloped countries i s greater than in"Mie developed ones, the same rate of growth of GDP i n both groups indicates that the increase i n per c a p i t a GDP (X 2) i n the l a t t e r i s greater than i n the former. Also, there are m u l t i c o l - l i n i a r t i e s between X^, X^ and X^. The reason f o r t h i s i s that the higher the rate of growth of GDP, the higher the expected expenditure on education. Also, the hijgh&r the i n d u s t r i a l share of GDP, normally the higher the l e v e l of the income per c a p i t a (because the rate of wages i n i n d u s t r i a l sector i s usually higher than i n the a g r i c u l t u r a l one) and consequently the more w i l l be spent on education. Hence, by dropping X,p and X^ the t h e o r e t i c a l basis of the equation ( l ) w i l l not be s e r i o u s l y affected. This i s what Lis done i n the second step. - 101 - Second step: Our general equation becomes: C/0 = a Q + a 1 X 1 + a 3X 3 + a ^ + u r (4) "Another reason, why the r e s u l t s of the equaion$(2) and (3) are unsatisfactory, i s the wide range between the income per ca p i t a i n each group. Therefore i n t h i s step, we s p l i t the two groups in t o three groups: iThe f i r s t group includes s i x underdeveloped countries with per capi t a income ranging from $130 1 - $233 (U.S.A,. I), the second group includes six "semideveloped" countries with per ca p i t a income ranging from #430 - $1155, and the t h i r d includes s i x developed countries with per cap i t a income from 11500 - $1800. U.S.A. and Canada excluded from the l a s t group, because t h e i r income per cap i t a i s much higher i n comparison to the other deve- loped countries, y By recessing the C/0 on each of the three indepen- dent va r i a b l e s included i n equation (4), we obtained: C/0 1.7303 - O i4568X 1 + 0.1899X3 + 0.0766X4 + u r (0.6O15) (0.0913) (0.0351 (0.0160) R 2 = 0.9496 ( 5 ) C/0 - 102 - C/0 = -2.4299 + 0 . 1 0 6 ^ + O . 1 3 1 7 X 3 + 0.4247X4 + u y (7) (2.9765) (O.3OO3) (0.0516) (0.0127) E 2 = 0.7895 Equation (5) i s f o r the underdeveloped countries, (6) f o r the "semi-developed" ones and (7) f o r the developed countries. We s h a l l ignore equation (6) because of the o very low value f o r R . Now l e t us t r y to analyse the r e l a t i v e importance of the variables i n the other two equations and compare -jfehe r e s u l t with the t h e o r e t i c a l basis we reviewed before. (a) The c o e f f i c i e n t of X^ i s s t a t i s t i c a l l y s i g n i - f i c a n t i n equation (5) only (with regard to the value of the standard e t r o r ) . The negative c o e f f i c i e n t of X^ implies an inverse r e l a t i o n s h i p between X^ and C/0, which conforms to the t h e o r e t i c a l hypothesis: the higher the rate of growth, the lower the capital-output r a t i o , and vice versa. The c o e f f i c i e n t of X^ i s s t a t i s t i c a l l y i n s l g n i i ^ r f l f i c a n t i n equation (7). (b) The c o e f f i c i e n t of X^, the industry's share i n G-DP, i s s t a t i s t i c a l l y s i g n i g i c a n t i n the two equations. I t i n d i c a t e s that X^ has a p o s i t i v e r e l a t i o n s h i p with the C/0, which i s compatible with the t h e o r e t i c a l hy- - 103 - pothesis that: the higher the industry s share of GDP, the higher the capital-output r a t i o , since industry- uses more c a p i t a l - i n t e n s i v e methods of production than a g r i c u l t u r e , f o r example. Comparing equations (5) and (70, we f i n d that the c o e f f i c i e n t of X^ i s greater i n the case of the under- developed countries group than i n the case of the de- veloped countries group. I f t h i s d i f f e r e n t i a l l i s r e a l , i t suggests that industry's share i n GDP exerts more p o s i t i v e influence on the capital-output r a t i o i n the underdeveloped countries group than i n the developed countries.(The c o e f f i c i e n t i n the former group i s a l - most 44$ higher than the l a t t e r ) . But t h i s i s counter- acted by a much higher value f o r the share of i n d u s t r i a l product i n GDP i n the developed countries'group. (In the developed countries'group industry's share i n GDP i s nearly double that of the underdeveloped coun^v. t r i e s groug). + + Calculated from the Table i n the Appendix to Ch.IV. - 104 - (c) The cost of labour, X^, proved to have a s i g - n i f i c a n t p o s i t i v e e f f e c t on the capital-output r a t i o * I t i s also clear from comparing the c o e f f i c i e n t of X^ i n equations (5) k (7) that the e f f e c t of the cost of labour on the capital-output r a t i o increases with the development process. This can be explained by the f a c t that s t r u c t u r a l r i g i d i t y decreases as the development process proceeds. The economy w i l l be more able to adjust to the changes i n the r e l a t i v e costs of c a p i - t a l and labour through f a c t o r s u b s t i t u t i o n . More- over, i n view of the f a c t that the underdeveloped coun- t r i e s import t h e i r technology, t h e i r chance i s r e l a r - t i v e l y smaller of e f f e c t i n g f a c t o r s u b s t i t u t i o n i n conformity with f a c t o r endowment. Aft e r d i s c u s s i n g the empirical f i n d i n g s , the ques- t i o n i s : Can we say anything about the r e l a t i v e mag- nitude of the capital-output r a t i o i n the developed and underdeveloped countries? Or, put another way, what happens to the capital-output r a t i o through the - 105 development process- does i t decrease or increase or remain constant? In order to work our way to an answer, the empirical f i n d i n g s w i l l be matched with the theo- r e t i c a l arguments. The growth rate w i l l be excluded from the l i s t of independent variables because of the inconclusiveness of i t s e f f e c t on the capital-output r a t i o . We are then l e f t with the industry's share i n GDP, X^, and the cost of labour, X^. Among the t h e o r e t i c a l arguments presen- ted i n favour of an increasing c a p i t a l c o e f f i c i e n t with development, two aspects were discussed. F i r s t , the increase i n the cost of labour, that accompanies the economic development, induces factor; s u b s t i t u t i o n i n favour of c a p i t a l , through development. The expec- t a t i o n , then, i s that capital-output r a t i o w i l l i n - \aboiAr crease with r i s i n g r e l a t i v e ^ c o s t . The p o s i t i v e coef^' f i c i e n t of X^ confirms t h i s t h e o r e t i c a l speculation. I t was also pointed out i n these t h e o r e t i c a l ar- guments that s t r u c t u r a l change, during development process, i n favour of industry w i l l be expected to - 106 r e s u l t i n a higher c a p i t a l c o e f f i c i e n t with develop- ment. In other words, i t i s expected that t h i s s t r u c - t u r a l change, measured, say, i n terms of the industry's share i n GDP, w i l l "be p o s i t i v e l y r e l a t e d to the cap i - tal-output r a t i o . This i s what our findings regarding the c o e f f i c i e n t of X^ reveals. We may, then, der ive the answertlhat the c a p i t a l - output r a t i o i s expeSted to increase with development. Our s t a t i s t i c a l r e s u l t s conform with the hypothesis that the c a p i t a l c o e f f i c i e n t i s higher i n the deve- loped countries than i n the underdeveloped ones. The s t a t i s t i c a l results also conform with the s e c t o r a l and o v e r a l l incremental capital-output r a t i o s of a sample of developed and developing countries, calculated by G-ianaris. He has pointed out that i n the majority of sectors, developing countries have lower incremental 9 capital-output r a t i o s than developed countries. The o v e r a l l capital-output r a t i o i s , also, generally higher i n the developed countries than the developing ones, 1^ . However, t h i s does not mean that the emp-irical work -.10? - done i n t h i s repect supports the f i r s t iiyyothesis (that the capital-output r a t i o i s higher i n the deve- loped countries than the developing ones). The opposite r e s u l t ( a capital-output r a t i o higher i n 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 w i l l be based on the f i r s t hypothesis, since t h i s i s what our s t a t i s t i c a l resultsohave tended to confirm. A few words of warning are due. They r e l a t e to the r e l i a b i l i t y of the conclusions reacjed here. These conclusions have to be taken with great ,e?are f o r three reasons: P i r s t , the sample s i z e i s too small to allow drawing r e a l l y general conclusions. Secondly, i t i s expected that the errors of measurement w i l l be r e l a - t i v e l y large, e s p e c i a l l y i n the case of the underde- veloped countries. T h i r d l y , though, we have t r i e d to minimize the e f f e c t of m u l t i c o l l i n e a r i t y , i t cannot be claimed that i t has been done away with completely. We know enoughhof i t s d i s t o r t i n g e f f e c t s oh the r e s u l t s . - 108 - (3) The Implication of the R i s i n g fTgend of the C a p i a l - Output Ratio, with rspect_to .the expected Rate of Growth i n U.A.R.: Applying the above mentioned r e s u l t - that the ca- pital-ouput r a t i o w i l l increase with the fevelopment process-':&o\.i&he case of U.A.R., we f i n d that the deve- lopment path does not look o p t i m i s t i c . As the time passes, the rate of investment required f o r develop- ment shoud be increased to sustain the same rate of growth of the economy. Sow, the question i s whether i t i s f e a s i b l e to increase the rate of investment of the country to the extent needed to r a i s e , or even to sustain,the rate of growth of the economy i n the future, gsJren the r i s i n g trend of the capital-output r a t i o . To answer t h i s question we should discuss the f e a s i b l e capacity of two sources::$irst, f o r e i g n ex- change; second, domestic savings. F i r s t , f o r e i g n exchang can be derived from two sources: (a) Earning a surplus i n the balance of cur- - 109 - rent payment; (t>) Obtaining grants and loans from other ountries. (a) A surplus can he achieved through increasing exports and/or decreasing imports. The f e a s i b i l i t y of the r e a l i z a t i o n of surplus i n the balance of payment i n the future i s , however, a debatable subject i n the U.A.E. case. With regard to exports, i t had been planned, as we know, to reduce the share of cotton i n exports and to d i v e r s i f y the country's exports i n favour of manufac- tured goods. According to t h i s p o l i c y , the rate of increase i n the exported manufactured commodities should be large enough to compensate f o r the decrease i n cotton exports and to r a i s e t o t a l exports to a l e - v e l higher than imports. By comparing the structurecbf exports before and during the plan period, we f i n d that cotton's share i n exports has been reduced from 70$ i n 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) i n t o t a l exports has r i s e n from 20.3$ i n the f i v e years - 110 - proceding the plan to 24.5/ ° only i n the Blan period. A c t u a l l y , i n c r e a s i n g t o t a l exports and making a s t r u c - t u r a l change i n i t at the same time, i s not an easy target, whether f o r the U.A.R. or f o r r any other de- veloping country i n i t s f i r s t phase of development. Lack of experience and s k i l l ? i n the manufacturing f i e l d w i l l make i t d i f f i c u l t for the U.A.R. to com- pete with established manufacturing countries i n world + The So-yet Experts' report on Vocational and Tech- n i c a l T r a i n i n g i n U.A.R. emphasized the need for e s t a b l i s h i n g a c e n t r a l l o r g a n i z a t i o n f o r vocational and t e c h n i c a l t r a i n i n g that would be responsible for planning and coordinating the manpower require- ments. The report pointed out that the general edu- cat i o n i n U.A.R. does not keep pace wiit]> the l a r g e i n d u s t r i a l projects of the development Plan. See: :Monthly Review of iiEconomic..,and S o c i a l Event, (Cairo: I n s t i t u t e of National Planning), Nos. 9 - 10, SeptemberrOctober, 1965, pp. 71 - 72. - I l l - markets i n the near future. Although t h i s s t r u c t u r a l change i n exports has improved f o r U-«A.R. , as has "been explained before, i t i s u n l i k e l y to y i e l d r e s u l t s i n the short ren. Thus, i t i s laot expected to r a i s e ex- ports i n U.A.R s i g n i f i c a n t l y i n the near future. However, t h i s i s only one side of the coon; the other side i s imports. I f imports can be reduced r e - l a t i v e l y to the present l e v e l of exports, a surplus can be r e a l i z e d without any increase i n exports. Re- viewing the data during the past period, i n c l u d i n g the Five-Year Plan, we f i n d that imports have had a r i s i n g trend. The question i s whether t h i s trend w i l l change i n the future and whether i t w i l l begin to decline. I t i s expected that the i r r i g a t i o n projects b u i l t i n .j. the Five-Year Plan and the completion of the Aswan Dam + U.A.R. has not reaped yet the f u l l b e n e f i t a n t i c i - pated from the High Dam. This w i l l make possible a s u b s t a n t i a l expansion of the c u l t i v a t e d area, the conversion of a considerable acreage of c u l t i v a t e d land from basin i r r i g a t i o n to perennial i r r i g a t i o n , = - 1 1 2 - w i l l increase a g r l c u l t i i r a l products and, consequently, reduce the import' of food. Also, i n the i n d u s t r i a l sector^- the import: s u b s t i t u t i o n i n d u s t r i e s which have had a gestation period longer than had been ex- pectec, are expected to produce y i e l d s 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., a l l work to r a i s e the l e v e l of imports• Por these reasons, even i f imports have a decreasing trend, i t i s not to be expected that i t s l e v e l w i l l decrease s u f f i c i e n t to make a s i g n i f i c a n t surplus i n the balance of current payments, as long as the development process i s i n i t s e a r l i e r phases. Thus, the p o s s i b i l i t y of making a sur- plus i n the current balance of payment through the increase i n exports or the redection i n imports i s = improved navigation along the N i l e , a large increase i n output and exports of r i c e and a very signifcicant expansion i n power; production. I t has been estimated that the d i r e c t increase i n national income as a r e s u l t of the High Dam w i l l amount annually to 1 5 $ or more of GDP i n 1 9 6 4 / 6 5 . See, Gerakis, "U.A.Ro's Pive-Year Plan," P o 1 0 . - 1 1 3 - l i m i t e d w i t h r e s p e c t t o U.A.R., a t l e a s t i n t h e n e a r f u t u r e . (b) With r e g a r d t o g r a n t s , most c o u n t r i e s c a n n o t d e p e n d , u s u a l l y , on them a s ^ a magor s o u r c e o f f o r e i g n i n v e s t m e n t , s i n c e t h e y a r e i n amount l i m i t e d ( e x c e p t f o r c e r t a i n s p e c i a l c a s e s ) . Loans a r e t h e most p r e v a ^ l e n t s o u r c e o f f o r e i g n exchang i n c a s e s where t h e c o u n t r y c a n n o t make a s u f f i c i e n t supluft i n i t s b a l a n c e o f c u r r e n t p a t m e n t s . But t h e i n t e r e s t r a t e on b o r r o - w i n g and t h e b u r d e n o f l o a n repayment c r e a t e s u b s e - quent b a l a n c e o f payments d i f f i c u l t i e s , w h i c h c a n o f t e n h a v e , an a d v e r s e e f f e c t on t h e economic development o f t h e c o u n t r y c o n c e r n e d . This i s a c t u a l l y t h e case i n t h e U.A.R. The a l r e a d y heavy b u r d e n on i t s b a l a n c e o f payment i s a s e r i o u s b o t t l e n e c k t o t h e d e v e l o p - ment p r o c e s s . That i s why t h e B l a n n i n g Committee has d e c i d e d t h a t i n d u s t r i a l e n t e r p r i s e s , w h i c h a r e f i n a n c e d by f o r e i g n c u r r e n c y s h o u l d r e p a y t h e i r due commitment 15 t h r o u g h t h e e x p o r t o f a l l t h e i r p r o d u c t s t o a b r o a d . Thus, i t c a n be c o n c l u d e d t h a t f o r e i g n i n v e s t m e n t s - 114 - which can he allocated " s a f e l y " to U.A.R. are r e l a - t i v e l y l i m i t e d , at l e a s t i n the near future, given the p r e v a i l i n g s i t u a t i o n . Second, with reyard to domestic resources, the rate of savings i n U.A.R. i s low, as i t i s shown i n Table 3- Given the r i s i n g trend of the capital-output r a t i o witei the development process, and given the l i m i t e d f o r e i g n resources, as we have seen above, the rate of saving w i l l have to make a remarkable jump i n order to sus^ t a i n (not even to increase) the achieved rate of growth of the economy. A low rate of saving i n d i c a t e s a high rate of con- sumption. Hence, an increase i n the l e v e l of savings requires a reduction i n consumption, priva t e and pub- l i c . P r i v a t e consumption has r i s e n i n absolute terms during the Five-Year Plan. The share of public consump- t i o n i n GDP, instead of f a l l i n g from 17% to 15% of ffiDP i n the Plan period, has r i s e n to 21%. This represents one of the sharpe^st and most unwelcome deviations from the objectives of the P l a n . 1 6 This high l e v e l - 1 1 5 - of consumption endangers the seccess of eonomic deve- lopment. That i s why the Planning Committee has taken new measures to cut government expenses i n addition to r a i s i n g p r i c e s of consumer and durable goods to reduce 17 pr i v a t e consumption as well. I t may be W O E M I mention- i n g that the rate of saving, a f t e r r i s i n g from a very low l e v e l i n the immediate postwar period, has shown no long run change. I t seems to have been stable at a l e v e l of 12% of G-Sg.18 Even i n the Five-Year Plan i t had r i s e n very s l i g h t l y . With t h i s low l e v e l of sa- ving, together with the expected l i m i t e d amount of f o r e i g n exchange and the already e x i s t i n g heavy bur- den on the balance of payment, the rate of growth achieved during the Five-Year Plan -although i t f a l l s short of the planned target- cannot even be sustained i n the future as the development process continues and the c a p i t a l c o e f f i c i e n t tends to r i s e . The r i s i n g trend of the capital-output r a t i o with economic development makes the development process a b i g challenge f o r the countries with scarce c a p i t a l ^ i n c l u d i n g uVA.l. ). - 116 - More e f f o r t s and more s a c r i f i c e s are needed i n the f u - ture to overcome t h i s challenge, otherwise the rate of growh i n U.A.R w i l l d e t e r i o r a t e . These d i f f i c u l t i e s w i l l not l a s t for ever. The establishment of a succes- s f u l new i n d u s t r i a l economy w i l l r a i s e the income per cap i t a and,overcome the s c a r c i t y of c a p i t a l which i s the hindrance to a high'-rate of growth i n U.A.R., as long as we expect a r i s i n g trend i n the c a p i t a l - output r a t i o over the development path. - 117 - APPENDIX TO CHAPTER IV Table I j-roup I Country Cyl on U.A.R. Paraguay Hondorus P h i l l i p i n e s Peru Per c a p i t a 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 X 2 (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 I I Jamaica Uraguay Japan Ireland A u s t r i a I s r a e l 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 4 l 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 I I I Belgium T:J. Germany France U. K. A u s t r a l i a 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 N a t i o n a l Accounts S t a t i s t i c s 1967 t i c a l Yearbook 19^7. S t a t i : of Labour S t a t i s t i c s 1967. I n t e r n a t i o n a l Labour O f f i c e , 196b). (Geneva: - 118 - Notes: (1) Data f o r most coutries r e l a t e to the year 1966. But, for some coutr i e s , the data r e f e r to only 1-3 years p r i o r to 1966, which i s the most recent data a v a i l a b l e . As f a r as the. nature of our problem i s concerned, ""' th i s i s not l i k e l y to endanger the r e s u l t s obtained. (2) The figures f o r the marginal capital-output r a t i o C/0, and thercost of labour (wage/week) X^ are c a l c u l a - ted as follows: c/o ( ( ( & K i F ) t - i * CTPt-l)/l00) GNP. - GNP. i t t—1 where GFCF i s the gross f i E e d c a p i t a l formation as a percentage of gross national product (GNP), t indi c a t e s the time. A one year l a g i s assumed between investment (the numerator) and the corresponding output (the de- nominator) . X = wage per week i n non-agricultura l sectors ( i n national cuifenc;v 4 the exchange rate ( l tr.S.A.dollar=?national curyenc N.B.: The data f o r wage rate i n the a g r i c u l t u r a l sec- tor i n some countries included i n the sample, could not be found. - 119 = CONCLUSION To judge the performance of the f i r s t - F i v e Year Plan i n U.A.E., we s h a l l take the achievements rea- l i z e d i n Yugoslavia and India as nospms helping us to pass some sort of judgement. These two countries have been chosen f o r two reasons: ( l ) The structure of t h e i r economies, at l e a s t at the s t a r t , was s i m i l a r to that of U.A.E. with respect to the preponderant a g r i c u l t u - r a l sector and the meagreness of the i n d u s t r i a l sec- t o r . (2) Both have adopted development planning, a l - though they d i f f e r with regard to the r e l a t i v e impor- tance given to the pu b l i c and private sectors. The pub l i c sector i n Yugoslavia dominated the economic l i f e of the eountry,^" while i n India i t i s s t i l l quite p small, even on mixed economy standards. In t h i s r e s - pectj U.A.E. stands i n between. The F i r s t - F i v e Year Plan i n U.A.E. has achieved 89% of i t s output target.-^ This i s , i n f a c t , a good performance i f we compare i t with the performance un- der the F i r s t Five-Year Plans of Yugoslavia (1946 - - 120 - 1951) and India (1951 - 1956), r e s p e c t i v e l y . The F i r s t Five-Year Plan i n Yugoslavia aimed at dotifbling per ca- p i t a income.'*' This ambitious aim was not r e a l i z e d un- t i l the end of 1955 5. In India, the F i r s t Five-Year Plan aimed at r a i s i n g T e a l national income by l e s s than 12$. Actually, i t was increased only by h a l f as much." ''In Yugoslavia the actual growth f o r 1947 - 52 was 1.9$ per annum. In U.A.E. the achieved average annual rate of growth during the f i r s t Plan was 5.8$. Although the achievements i n the f i r s t Five-Year Plan i n U.A.E. were remarkable, the future of the economic development of the country does not look o p t i m i s t i c unless the bottlenecks encountered i n the F i r s t Plan are d e l i b e r a t e l y considered. One might mention three obstacles a f f e c t i n g economic develop- ment i n the U.A.E.: the heavyoburden on the balance of payment; the low l e v e l of domestic saving, and the low q u a l i t y and unorganized human resources. The heavy burden on the balance of payments has been one of the serious bottlenecks for? economic deve- lopment i n the U.A.E. To mitigate the seriousness of - 121 - th i s problem, more e f f o r t s should be devoted to i n c r e a - s i n g exports and decreasing imports. With regard to ex- ports, i t might be reasonable to concentrate on the pro- duction of goods i n whMLch U.A.R. has comparative advan- tage, no matter whfther they be a g r i c u l t u r a l (e.g. r i c e , onions, vegetales, f r u i t s ) or manufactured goods. In a report undertaken by the United Nations i n 1954, i t was found that f o r the U.A.R. "among the i n - du s t r i e s which couM probably dispense with protec- t i o n are most minerals, f e r t i l i z e r s , cement, vegetable o i l , e.oap, leather products, cigarettes and some food Q processing i n d u s t r i e s . " The t e x t i l e industry^also 9was q judged competitive at that time. These goods are pro- bably competitive with t h e i r counterparts abroad. Why dojhot the planners concentrate on these i n d u s t r i e s i n the export sector and use them as a means to obtain the fo r e i g n exchang needed to finance the gowing i n d u s t r i a l sector? In f a c t , the target of increasing exports should have higher p r i o r i t y , at l e a s t at the present time, than the aim to change the structure of for e i g n trade - 122 - i n the U.A.R. i n favour of manufactured goods. r With regard to impojts, intermediary and investment goods form, at present, about 7 0 $ of t o t a l i m p o r t s . 1 0 As a r u l e , a developing country i s not i n a p o s i t i o n to produce a l l kinds of modern equipment, and needs to import i t i n considerable q u a n t i t i e s . These l a r g e - r scale impojts of equipment create considerable balance- of-payments d i f f i c u l t i e s . To solve t h i s problem one could imagine three l e v e l s of production techniques, and hence, three levelfe of sectors within the same country. The f i r s t secor i s based on the lowe^st l e v e l of c a p i t a l i n t e n s i t y and makes the maximum use of e x i s - t i n g equipment. The second sector works with a higher l e v e l of c a p i t a l i n t e n s i t y . E x i s t i n g c a p i t a l equip- ment can pE?3bably be replaced by more e f f i c i e n t means of production manufactured within the country. The t h i r d sector uses the most advanced l e v e l of technique, not from the viewpoint of the l e v e l of t e c h n i c a l develop- ment of a given country, but according to i n t e r n a t i o n a l standards. The investments i n t h i s sector ought to con- - 123 - s t i t u t e the main levers of development since they should generate the l a r g e s t returns to c a p i t a l invested, and would provide a cle a r o r i e n t a t i o n as regards future development„ 1 1 This might suggest an approach sui t a b l e to the U .A.E. i n seeking to a l l e v i a t e the balance-of-payments problem. The sector, which may be expected to use the lowest c a p i t a l i n t e n s i t y technique, can probably best be represented by a g r i c u l t u r e 0 t h i s , suggestion can be supported by the high y i e l d s per acre already achieved 1 2 by the a g r i c u l t u r a l sector i n U.A.E., which has eco- nomized c a p i t a l by the successfully^used labor intensive techniques. Of: course, the productiviy of t h i s sector could be further r a i s e d by using more advanced, c a p i - t a l - i n t e n s i v e , technique, butbecause of the s c a r c i t y of c a p i t a l , at present, i t might be better to a l l o c a t e i t to the sectors, where capitals-labour s u b s t i t u t i o n i s more d i f f i c u l t , e.g. manufactured sector, trans- port and communication, etc.. Moreover, i n the a g r i - - 124 - c u l t u r a l sector, i t i s also,, i n general, easier than i n other sectors to accumulate c a p i t a l by labour intensive methods. This accumulation of c a p i t a l may take the form of land improvements, i r r i g a t i o n projects, etc. The d i v i s i o n between the second and the t h i r d sectors i s considered more d i f f i c u l t . I t would require a c a r e f u l p r o j e c t i o n of r e l a t i v e e f f i c i e n c i e s of various c a p i - tal-producing i n d u s t r i e s i n the U.A.E., taking account of economies of scale and other dynamic e f f i c i e n c y c o n s i d e r a t i o n s , and i n l i g h t of the possible techolo- g i c a l developments i n these c a p i t a l goods i n d u s t r i e s overseas. This amounts to determining those c a p i t a l goods i n d u s t r i e s f o r which the U.A.E i s l i k e l y to have the greatest comparative advantage (or *he l e a s t com- parative disadvantage), a f t e r they have passed through the i n i t i a l "infant industry" stage. Such projections r are notojiously d i f f i c u l t to make, but a r a t i o n a l a l l o - c a t i o n of scarce f o r e i g n exchang reserves would require such choice to be made for the economy. - 125 - The p r o d u c t i o n o f c a p i t a l goods have a l r e a d y been i n c l u d e d i n t h e Second F i v e - Y e a r P l a n , + w h i c h was sup- r posed now t o have s t a r t e d , had t h e 1967 war n o t occu^ed. T h i s p o l i c y , a l t h o u g h i t m i t i g a t e s t h e b u r d e n on t h e b a l a n c e o f payment, r a i s e s t h e c a p i t a l - o u t p u t r a t i o . The c a p i t a l - g o o d s i n d u s t r i e s have l o n g e r g e s t a t i o n p e r i o d s , and c o n s e q u e n t l y h i g h e r c a p i t a l - o u t p u t r a t i o s t h a n t h e the c o n s u m p t i o n ^ i n d u s t r i e s , w h i c h have been s t r e s s e d i n t h e F i r s t F i v e - Y e a r P l a n . H i g h c a p i t a l - o u t p u t r a t i o s , as we know, r e q u i r e h i g h i n v e s t m e n t . Thus, d o m e s t i c s a v i n g s would have t o r i s e t o iEulfil t h e s e r e q u i r e m e n t s and t o d e c r e a s e t h e dependence o f t h e c o u n t r y on fsMireijL l o a n s . One o f t h e p o i n t s emph- s i z e d i n t h e t h e o r e t i c a l models o f a i d dependence d e v e l o p e d w i t i n t h e Agency f o r I n t e r n a t i o n a l D e v e l o p - ment, i s t h a t i f a c o u n t r y i s e v e n t u a l l y t o make a + More t h a n 50% o f t h e t o t a l i n v e s t m e n t s o f t h e Second- F i v e Y e a r P l a n have been a l l o c a t e d t o heavey i n d u s t r y . See, Monthly. R e v i e w o f Economic and S o c i a l E v e n t s , No. 1, J a n u a r y 1965, p.4. - 126 - successful t r a n s i t i o n , away from dependence on f o r e i g n aid, i t must increase domestic savings s u f f i c i e n t l y to cover domestic c a p i t a l formation. A necessary condition f o r t h i s development to take place i s that the marginal savings rate exceeds the target investment rate. This target investment rate, i n turn, i s equal to the pro- duct of the marginal capital-output r a t i o and the t a r - 13 get rate of growth of output. This means that the marginal savings rate i n the U.A.E., assuming no change i n the capital-output r a t i o , should exceed 28$ of the increase i n GEP.+ The s t a b i l i t y of the rate of saving i n U.A.E. f o r a long period at about 12$ indicates that the marginal rate of saving has been almost stagnant at about t h i s l e v e l . Thus, to acjieve t h i s high mar- g i n a l rate of saving, the marginal rate of consumption has to be reduced to 72$ of the increase i n GHP. + + The + The marginal rate of saving = actual marginal c a p i - tal-output r a t i o (3.9) x target average rate of growth of GEP (7.2) = 28. ++The share of t o t a l consumption, private and public, i n SEP has f a l l e n only from 88$ i n the period prece^ ding the Plan to 86$ during the Plan. See, G-erakis, = ~ 127 - f e a s i b i l i t y of t h i s great redaction i n the marginal rate of consumption seems to be very doubtful, espe- c i a l l y with the increas i n g rate of growth of population. The marginal rate of saving required to f u l f i l the investment target can be reduced by decreasing the i n - cremental capitals-output r a t i o of the whole economy<> One way of doing that i s to a l l o c a t e investments i n favour of the sectors with lower incremental c a p i t a l c o e f f i c i e n t , such as ag r i c u l t u r e and services i n 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 r a t i o can be by i n - creasing the e f f i c i e n c y and s k i l l of the labour force, by improving administration and management, by pl a c i n g the r i g h t man i n the r i g t place to avoid as much as possible the waste i n resources. Thus^ the improve- ment i n the q u a l i t y of "human resources" can very l i k e l y aleJo, be an e f f e c t i v e mean i n reducing the s e c t o r a l , as well as the o v e r a l l c a p i t a l - output r a t i o i n U.A.R. = " U.A.R.'s Five-Year Plan," p.11. - 128 "Human rsources" are considered to be among the im- portant bottlenecks i n the economic development i n U . A . R . Accroding to some c r i t e r i a f o r human resource development, U . A . R . i s considered a semi-advanced country."^ But, the c r i t e r i o n applied i s i r r e l e v a n t , at l e a s t i n the case of U.A.R. I t considers the percentage of enrollment of both the second and t h i r d l e v e l of education, but ignores the possible m i s a l l o c a t i o n of manpower resources. As an example, i t i s common to f i n d the badly needed graduate of a t e c h n i c a l school holding a white-c o l l a r p o s i t i o n i n the government. In f a c t , the U o A.R. may s u f f e r from acute shortage of some s k i l l s j but i t s problem seems, also, to be the misal- l o c a t i o n of resources already a v a i l a b l e . However, mis- a l l o c a t i o n and shortage i n s k i l l s leads to the same r e s u l t : the n o n a v a i l a b i l i t y of q u a l i f i e d manpower nee- ded to f u l f i l the requirements of economic development. This can l i k e l y be a serious constraint on the absorp- t i v e capacity of the U . A . R . , as long as the import of technicians i s d i f f i c u l t because of the already heavy - 1 2 9 - b u r d e n o n ±ts b a l a n c e o f p a y m e n t . T h u s , t h e i m p r o v e - m e n t o f t h e " h u m a n r e s o u r c e s " o f t h e c o u n t r y , b y t r a i - n i n g a n d r e a l l o c a t i o n o f t h e l a b o u r f o r e e , i s v i t a l l y i m p o r t a n t f o r t h e s u c c e s s o f t h e e c o n o m i c d e v e l o p m e n t i n t h e U.A 0 Ro - 130 FOOTNOTES Footnotes to Chapter I ; (l ) T.K. Lakshman and Smt. Vijayalakshmi, "Studies i n Vapital-Output Ratios and t h e i r S i g n i - 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 i n the United States: i t s v a r i a t i o n and s t a b i l i t y , " i n The Theory of C a p i t a l , ed. F.A. Lutz and D.C. Hague (New York: St. Martin's Press, 1965), pp. 95-96. (2) S.A. Abbas, C a p i t a l Requirements f o r 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 ( A p r i l 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, C a p i t a l i n the, American Economy: I t s formation and,financing (Princeton:-Prince- ton U n i v e r s i t y Prss, 1961), p.56. (6) Domar, p.97. (7) Por an advocate of the exclusion of land and natu- r a l resoupes from " c a p i t a l " , see: Bhatt, "Aggre- gate Capital-6utput Ratio," p.399. For a proponent of the i n c l u s i o n of land i n "ca- p i t a l " , see: Abbas, C a p i t a l Requirements, p.77. For a view on i n c l u d i n g only improvements of land and natural resources i n " c a p i t a l " , see: S.Kuznets, "Quantitative Aspects of the Economic Growth of Nations; C a p i t a l Formation Proportions: Inter- n a t i o n a l comparisons f o r recent years," Economic 132 - Development and m C u l t u r a l Change, Vol.8, no. 4 (July i 9 6 0 ) , p . l ; and Domar, p.97. (8) F. Lutz, The Teory-of C a p i t a l : Proceedings of a conference held by the International Economic As s o c i a t i o n (London: Mac M i l l a n 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, C a p i t a l Requirements, p.77. (12) I b i d . , p.79; S.Creamer, C a p i t a l and Putput Trends i n Manufacturing Industries.1880-1948 f National Bureau of Economic Research, Studies i n C a p i t a l 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, C a p i t a l and Ouput, p.27. (15) Thus, i f we r e l a t e c a p i t a l to t h i s " f u l l capa- c i t y output," we get what we c a l l the "capacity capital-output r a t i o . " - 133n- (16) J.E. l a Tourette, "Potential QutpUt'and the Capi- tal-Output Ratio i n the U.S. P r i v a t e Business Sector, 1909-1959," Kyklos. Vol. 18, no. 2 (1965), p.316. (17) I b i f l . f pp.316-317. (18) W.G. Hoffman, " Long Term Growth and C a p i t a l f o r - mation i n Germany," i n The Theory of C a p i t a l , ed. Lutz and Hague, p.121. (19) V.V.Bhatt, Employment and C a p i t a l Formation i n Underdeveloped Economies (Bombay: Orient Long- mans, I960), p.23. (20) J.W. Knowles, The P o t e n t i a l Economic Growth i n the United Stated f Congress of the United States, J o i n t Economic Committe, Studies i n Employment, Growth, and P r i c e Levels, no.20, (Washington, D.C.: I960), pp.6-7; and M.E. Levy, F i s c a l Po- l i c y , Cycles and Growth ( New York: National I n d u s t r i a l Conference Board Inc., 1963), pp.159- 160. (21) Knowles, P o t e n t i a l Economic Growth, p.9 (22) La Tourette, "Potential Output," p.318. (23) Levy, F i s c a l P o l i c y , 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 i n 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 i n the Egyptian Economy (Homewood, I l l i n o i s : Richard Irwin$ Inc. 1967), p.16. (2) Bent Hansen and G-.A. Marzouk, Development and Eco- nomic Policy i n 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 i n 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 ) I b i d . , pp. 15-16; and Ch. Issawi, Egypt, pp.14 (15) D.C. Mead, pp. 51-53. (16) I b i d . , pp.48-49. (17) Ibid*, p.50. (18) Ch. Issawi, Egypt. ppp62-64. (19) I b i d . , p.63. (20) Ibid., pp.159-162. (21) Ibid_», p.56. (22) I b i d . , p. 9 0 . (23) D.C. Mead, pp.27-28. (24-) I b i d . , p.29. (25) Ibid., p.33. (26) Hansen and Marzouk, p.280; and Mead, p.236. (27) Hansen and Marzouk, p.280. (28) I b i d . , p.279, and p.299. (29) I b i d . ^ P.303. (30) 'Ibid., p.308. ( 3 D I b i d . , p.278. (32) Ibid.., p.3 0 3 . (33) i l i l i id. if p.298, and p. 3 0 1 . (34) I b i d . , p.313. - 137 - (35) Mead, p.242. (36) Ch. Issawi, p.68. (37) I b i d . . 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 l e c t u r e 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, f o r the d i v e r s i t y i n the figures of Gross National Income and Product, see: Me ad,p.286; and U.N., Yearbook of National Ac- counts S t a t i s t i c s 1968. pp.694-695; Issawi, p.115 and p.117; and Hansen, S t a t i s t i c a l Appendic. Por the C a p i t a l formation f i g u r e s , see: Mead, appendix; Issawi, p.67; U.N. ?Yearbook of National Accounts Statistics. , 1 9,68, p. 695; and Hansen, s t a t i s t i c a l appendix. Por the Savings f i g u r e s , see: - 138 - Issawi, p.255; Hansen, s t a t i s t i c a l appendix; and Meas, appendix. Por f o r e i g n trade f i g u r e s , see: Hansen, Tables 7.1-7.12; Issawi, Tables 26-32 ; Mead, Tables 7-1 to 7-18; and li.N.^ Yearbook of Inter n a t i o n a l Trade S t a t i s t i c s f d i f f e r e n t volumes. (44) Hansen and Marzouk, pp. 308-309. (45) I b i d . , p.299. (46) J.Ibid., p.308. (47) I b i d . (48) Mead, p.242. (49) Andreas S, G-erakis, " Some Aspects of the U.A.R.'s F i r s t Five-Year Plan," Finance and Development. Vol. 6, no.l (March 1969), p.10. (50) Calculated from: U.A.R., I n s t i t u t e of National? Plan- ning (INP), Monthly Review of Economic and S o c i a l Events i n U.A.R.t Vol. 1, nos. 11 and 12 (Novem- ber-December 1965), p.54; and from U.N. Yearbook of Inter n a t i o n a l Trade S t a t i s t i c s 1967 (New York: United Nations, 1968), p.871. (51) U.A.R., INP.Monthly Review, p. 54. - 139 - (52) Mead, p.24-3. (53) I b i d . , p.102. (54) Hansen and Marzouk, p. 308. <55) I b i d . , 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 f o r Reducing i t , " Problems of Economics,Vol.2 f 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) Stra s i m i r Popovic, " Investment Problems i n the Yugoslavian Economy," i n Yugoslav Economists on Problems of a S o c i a l i s t 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 A g r i c u l t u r e " Foreign, T^ade (Ottawa: Dept. of Trade and Commerce, A p r i l 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 f o r 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 i n the Short Run," Review Economic and S t a t i s t i c s . 48 (l966^ s ppp 20-27. Lwibenstein conducted an empirical study of the relationship.^ using both cro s s - s e c t i o n and time-series data. His conclusion was that i t s inverse nature holds i n 129 cases out of 134 used i n time-series study, and the same conclusion was confirmed fey h i s cross-section study on a random sample of 18 countries. 142 - (4) Leibenstein, Economic„Backwardness, pp.180-181. (5) Bhatt, Employment and C a p i t a l formation, p.44. (6) I b i d . . p.53. (7) Leibenstein, Economic Backwardness, p.183; and K.Martin, " Capital-Output Ratios i n Economic Development," Economic Development and C u l t u r a l Change.Vol. 6, ndi'' 1 (October 1957), p.27. (8) A.A. Walters, " Incremental Capital-Output Ratio," The Economic Journal. V o l . 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 i n Capital-Output Ratios," American Economic Review^ Vol. 60, no. 3 (June 1970), p.471. (10) I b i d . , Table 2, p.476. (11) S. Euznets, C a p i t a l in.the American..Economyt I t s formation and financing: (Princeton: Princeton U n i v e r s i t y Prss, 1961), pp. 80-81. (12) Bhatt, Employment and C a p i t a l Formation, pp.24-27. - 143 - (13) S.A, Abbas, C a p i t a l Requirements f o r the Deve- lopment of South and South-East A s i a (Gr o- ningen, Netherlands: : < T . B . Wolters, 1956),pp.95- 96. (14) Calculated-fram Table 4 i n Andreas S. Gerakis, "Some Aspects of the U.A.R.1s F i r s t l i v e - Year Plan," Finance and Development, Vol. 6, no.l (March 1969), p.13. (15) U.A.R., IMP.Monthly Review of Economic and S o c i a l Events i n 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 S t r u c t u r a l Change i n %he Egyptian Economy (Homewood, I l l i n o i s : Richard Irwin, Inc., 1967), p.220; and B . Hansen and G. Marzouk, Development and Economic P o l i c y i n 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 activ i t y (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 i n output was LE5l3million (Table l ) and the realized fignite was LE 495.45 mil- l i o n (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 i n 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 F i r s t Five-Year Plan," Finance and Development. Vol.6, no. 1 (March 1969),p.13. (11) Radmila Stojanovich (ed.), Yogoslay Economists on Problems of a S o c i a l i s t Economy (New York: International Arts and Sciences Press, 1964), pp. 11-12. (12) D.C. Mead, Growth and S t r u c t u r a l Change i n the Egyptian Bconpm$[ (Homewood, I l l i n o i s : 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. 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