FLEW COPY Agricultural Price Management in Egypt SWP388
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FLEW COPY Agricultural Price Management in Egypt SWP388 Public Disclosure Authorized World Bank Staff Working Paper No. 388 April 1980 Public Disclosure Authorized Public Disclosure Authorized Prepared by William Cuddihy Agriculture and Rural Development Department ight o 1980 Vorld Bank Street, N.W. Public Disclosure Authorized hgton, D.C. 20433, U.S.A. iews and interpretations in this document are those of the _s and should not be attributed to the World Bank, to its --flu~1ed organizations, or to any individual acting in their behalf. FI E C O P Y I The views and interpretations in L[k1b aocument are those of the author and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting in their behalf. rt~TuU~AtO~iALdOy IUN1D THE WORLD BANK joiNT LIBAAy Staff Working Paper No. 388 At DANl April 1980 AGRICULTURAL PRICE MANAGEMENT IN EGYPT Control over prices of farm products and inputs has been an important part of Egypt's development strategy during the past 25 years. These controls belong to a broader system of intervention that regulates agricultural production and the distribution of benefits. They are consistent with the theory and mechanisms for managing a centrally planned economy pursuing a course of accelerated industrialization. The commodities' prices boom on world markets in the early seventies highlighted certain weaknesses in the program leading to calls for change. This study brings together the available material to see if price controls and other interventions are reaching the targets for which they have been designed and measures the opportunity costs of the program. Using world prices as reference, the evidence indicates.that price intervention and the associated physical controls have not only affected prices adversely but also incomes, cropping patterns, growth in total production, input use, the pattern and level of investment in the sector and the performance of institutions. On the benefit side, the program assisted needed reforms in production conditions. For the first time inputs became available to all. Costs were kept low and stable with markets guaranteed. It provided a means to raise state revenue, protect industry and ensure cheap food. On the cost side, inflexible management ensured problems would arise as foreign and domestic market conditions changed. By 1976, the effects in terms of regressive income transfers, distorted cropping patterns, investment diversion, reduced technology diffusion and internal incompatability between parts of the program had become evident. Its complexity became a major impediment to policy restructuring. This study catalogues the program components and traces their effects ending with partial recommendations for change. Prepared by: William Cuddihy Agriculture and Rural Development Department Copyright Q 1980 The World Bank 1818 H Street, N.W. Washington, D.C. 20433 U.S.A. AGRICULTURAL PRICE MANAGEMENT IN EGYPT Table of Contents Page No. PREFACE ACKNOWLEDGEMENTS EXECUTIVE SUMMARY ..................... ..... .................. i-x I. INTRODUCTION ............ 1.... A. The Problem 1................ ......* ...... 1 B. Orientation of Study 2 ............ ...... 2 C. Aims of Study .... .... .. .*.. .. ... 2 D. Methodology 3.. ......... ..... *.* 3 II. ECONOMIC BACKGROUND ....... .................. 6 A. Economic Development in Egypt since 1952 ...o 6 B. Role of the Agricultural Sector ............ 7 III. AGRICULTURAL POLICY REVIEW .................. o... 11 A. Goals ............ o.................................... 11 B. Instruments .......... ........... .......... 11 C. Evaluation of Policy .... ........ ooo ...... 13 IV. PRICE RESPONSIVENESS OF EGYPTIAN FARMERS ....... 28 A. Rationale for Studying Price Effects ....... 28 B. Gross Margin rginAnalysis a ......i.....s...... 29 C. Time Series Analysis ........... .. oo .. o.... 32 D. Linear Programming Analysis ............. ... 42 E. Conclusions ......... ................ .. ..... 54 V. MARKET INTERVENTIONS AND THEIR EFFECTS ON PRICES-INPUTS o ...... ..... ...................... 57 A. Fertilizers .. ................. .o.. .......... 57 B. Fuel .. oooo ..... ..o ................. 65 Co Seeds .............. o .................... 67 D. Pesticides ..... ......... ............. 69 E. Credit ........ ..... 71 F. Plant and Equipment . ...... .. .. .. 74 G. Rent and Land Taxes . ..... o ....... .... 76 H. Irrigation Water Charges .............. .... 81 I. Trading Activities of the Credit Bank ...... 83 Page No. VI. MARKET INTERVENTIONS AND THEIR EFFECTS ON PRICES: COMMODITIES ....... 85 A. Cotton 1965-1976 ................ .......... 85 B Wheat 1965-1976 ............................. 90 C. Rice ................................... ... 95 D. Maize 1965-1976 .......... ................. 99 E. Animal Products and Fodder Crops .......... 101 F. Sugar 1965-1976 ..... ...................... 106 G. Other Crops ..... ................ .... ...... 110 VII. THE NET EFFECT OF MARKET INTERVENTIONS ... ..... 111 A. The Net Effect on Input Prices .... ........ 111 B. The Net Effect on Output Prices . .......... 114 C. Discussion of the Net Effects of Intervention ................ .................................116 VIII. POLICY CONCLUSIONS AND RECOMMENDATIONS ......... 119 A. Introduction . .......... .............. 119 B. Alternative Strategies and Policies . ....... 119 C. Recommendations ................... ........ 120 ANNEXURE - Statistical Tables and Calculation of Protection Coefficients ......................... 123 PREFACE This paper is one of a number of companion papers (see below), which report on the results of a research project -- Country Case Studies of Administered Agricultural Prices, Taxes and Subsidies, RPO 671-42 -- which commenced in the second half of 1976. The research, which included some desk studies besides the eight country case studies (Argentina, Egypt, Kenya, Mexico, Pakistan, Portugal, Thailand and Yugoslavia), was oriented towards eventually providing operational guidelines for country economic, agricultural sector and project planning work. Two of the country case studies involved the use of formal agricultural sector models (Mexico and Portugal), while the other six involved the use of a number of informal methodologies. An overview and integrated summary of the results of the six country case studies and the complementary desk studies given in: "Agricultural Prices, Taxes and Subsidies: A Review of Exp-ezience", a Staff Working Paper (forthcoming), ptepared by Gilbert Brown and Graham Donaldson. The informal methodologies ate lescribed, reviewed and evaluated in: "Methodologies for Measuring Agricultural Price Intervention Effects", a Staff Working Paper (forthcoming), prepared by Pasquale Scandizzo and Colin Bruce. Three other country case studies, in addition to the present one, are considered of significant individual merit and have also been published. These are: "Thailand - Case Study of Agricultural Input and Output Pricing", Staff Working Paper No. 385, prepared by Trent Bertrand (Consul- tant). "Argentina - Country Case Study of Agricultural Prices, Taxes and Subsidies", Staff Working Paper No. 386, prepared by Lucio Reca (Consultant). "Prices, Taxes and Subsidies in Pakistan Agri- culture, 1960-1976", Staff Working Paper No. 387, prepared by Gilbert Brown and Carl Gotsch (Consultant). ACKNOWLEDGEMENTS The linear program farm models used to study the structure of normative price response are the work of Ram Janakiram, Consultant Researcher. Sayeed Sadeq, Consultant Researcher, measured historical supply response to price changes. Professor David Throsby of Macquarie University, Australia, guided the study into its final shape and made valuable improvements in both substance and direction. Mr. Colin Bruce, Agriculture and Rural Development Department, rendered considerable help in restructuring and editing the final manuscript. The author thanks them for their significant contributions and patience while retaining full responsibility for errors and omissions. AGRICULTURAL PRICE MANAGEMENT IN EGYPT Executive Summary 1. Introduction i. For many years after the Revolution Egyptian agriculture has been associated with excellent yields and a well managed program of agrarian reform. Over the last ten years, though, growth rates in yields of many important crops like sugarcane and cotton have fallen and food import costs have become an important competitor for foreign exchange needed for industrial development. By 1976, the foreign exchange cost of agricultural imports was 70% more- than the foreign exchange earnings from agricultural exports. 1/ The Government's Five Year Plan, 1978-82, voices the official opinion that agri- culture has become a problem because its performance is consistently below expectations and has become increasingly difficult to administer. Public administrators complain of "peasant perversity" in not accepting new technology, in not cooperating with the State's production plans for the common good, and in not responding correctly to the price increases conceded them. Farmers complain of government interference in markets leading to low crop prices, fertilizer shortages and forced membership in unpopular cooperatives. ii. An earlier Bank analysis of Egypt's economy, "Economic Management in a Period of Transition", Johns Hopkins (forthcoming), identified market intervention as a key issue in explaining rural discontent. However, to go further and implicate intervention as a prime determinant of farm performance required measurement