FLEW COPY Agricultural Price Management in Egypt SWP388

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.

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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

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 agriculture 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 and analysis beyond the scope of that review. This paper is the result of a detailed examination of Egypt's use of market intervention as a major tool of economic management.

iii. The study approach consisted of five parts. The first was a general review of Egypt's development strategy and agriculture's part in it, followed by an analysis of sectoral characteristics relevant to price management and a review of policy performance. Secondly, the study examined the history and nature of market controls and measured their effects on prices. Thirdly, the price effects were examined for their impact on farmers' past decisions and their implications for future sectoral output. Fourthly, the study evaluated the efficiency of Egypt's use of market interventions to reach its consumption, investment, and distribution goals. Lastly the study involved the examination of policies and investments which would both end, in due course, the excessive discrimination against agriculture and provide signals and incentives more in keeping with Egypt's long-run comparative cost advantages and in keeping with higher productivity and improved living standards in the rural areas.

2. Sector Background

iv. Although Egypt has adopted a conscious policy of industrialization since 1952, the country remains essentially an agrarian one, and the industrial

1/ FAO, Trade Yearbook, Vol. 31, 1977. -ii-

drive has resulted in a non-competitive manufacturing sector which has failed to absorb sufficient labor migrating from the rural areas. The industrial development has been financed basically by taxing the agricultural surplus. A question which this study attempts to answer is: has the extent of taxation been such as to affect incentives, cropping patterns and reinvestment in agriculture, and what has been the effect on the distribution of income? v. Egypt's farmland is seen as an oasis in a large desert. Only three percent of the total land area is cultivated, and there is little scope for extending it. The population density relative to the arable area is very high (0.08 ha per capita), and the average size of holdings is very small at 1.47 ha. The cultivated area, however, has fertile soils--mostly riparian silts and clays of great depths and uniformity--and the land is well suited for irrigation from the abundant water of the Nile. The sub-tropical temperature and the long hours of sunlight permit excellent growth rates. The development of the irrigation network has resulted in cropping intensity of 190% in a complex rotational system. vi. ,a/ize and sorghum are the main subsistence crops, while wheat, beans, and onions are the leading winter cash crops and cotton and rice the main summer cash crops. Berseem has become an important cash crop for feed for draft animals, upon which Egyptian agriculture depends, and for beef feedlot operations. vii. Crop yields have either declined (cotton, rice, sugar and beans) or risen very slowly (wheat and maize). One result of this is that Egypt has changed from being a net exporter into a net importer of wheat, and cotton and rice exports have declined. viii. Farmers are organized in government operated cooperatives; they receive most of their inputs through the cooperative and have to sell varying proportions of their outputs to them. Evasion of planting requirements and sales quotas is believed to be widespread with many farmers prepared to pay the fines if caught. ix. Public investment in agriculture has been considerable since the revolution with most of the funds going to finance the Aswan High Dam and to opening up fringe desert areas for irrigation. The results of reclaiming marginal lands have been disappointing so far, and there has been too little investment in projects to raise productivity on the old lands. The major evidence for this conclusion is the lagging growth rates in yields for major crops and even declines in the yields themselves.

3. Goals and Policies x. Egyptian agricultural development stategy derives from two sets of policies, which this study shows have tended to conflict with each other. On the one hand the strategy is based on an industry-led policy of economic development which was fashionable in the 1950's. In turn that policy was based on the theory that, since productivity is generally higher in manufacturing than in agriculture, priority should be given to industrialization, and -iii-

other sectors will benefit from the trickle-down effects. The policy instruments for achieving the strategy have been (a) taxation of the agricultural surplus to provide the industrial investment funds; (b) protection for infant manufacturing industries; and (c) maintenance of relatively low industrial costs through cheap food and low wages. The policy instruments certainly worked: the agricultural surplus was tapped, industries were protected and the price of basic foods, particularly bread, was kept low, despite inflation. xi. The second set of policies are distributional in intention and were rooted in the revolutionary reaction to the onerous conditions in the country- side prior to the revolution. Thus, side by side with the land reform, a number of physical controls, state ownership and state production, private controls and subsidies were introduced. From time to time, in response to pressures and changing situations, additions and changes were made which have resulted in a patchwork of uncoordinated market interventions.

4. Effects of Policy Instruments

(a) Effect on Prices xii. Comparisons of import or export prices adjusted to the farmgate for transport, trade and processing costs (border prices) with prices actually paid to farmers indicate long run taxation of export crops, little distortion for basic foodgrains, and subsidization of meat and sugar production. Between 1965 and 1972 the tax rate measured in this way (nominal protection) was around 30% for the export crops of cotton, rice and onions. Wheat and maize prices were close to border prices whereas those for meat were well over twice the import equivalent. During this period world prices of sugar were very low. Processing costs occasionally exceeded the price of the final product. A marked discontinuity is shown between 1973 and 1976 when the world prices rose dramatically while Egypt's administrators kept local prices constant resulting in taxation of all products except meat. The tax rate on cotton, rice and onions peaked at 60%, 80% and 60% respectively then began to fall as domestic producer prices were increased and border prices started to decline. Wheat and maize price taxation reached 30% and the sugar subsidy became a 70% tax. Local price rises for meat matched foreign gains and the subs.idy rate remained constant. The spectacular widening of price distortions at that time led to markedly increased attention being paid to market problems. xiii. The tax rates on output prices as measured by nominal protection do not tell the full story since certain inputs and services are also provided at distorted prices. For instance, fertilizer prices have been kept constant since 1961 while import parity prices have fallen and risen. Between 1965 and 1973 this practice resulted in farmers paying up to 87% more for their fertilizer obtainable only from the state monopoly. Between 1973 and 1976, as world prices escalated, the same policy resulted in their paying only half the world price. For all the other purchased inputs there has been a subsidy for all years, mostly the result of rising world prices diverging from constant domestic prices. By 1976, fuel, pesticides, interest rates, tractor purchase, trading charges, rents and land taxes, were all subsidized by some 50%. Irrigation water was still free and improved seeds received subsidies - up to 30% for hybrid maize. The long run practice has been a net subsidy on inputs gradually rising to a weighted average of around 50%. -iv-

xiv. The effect of the distortions is a long-run net tax on the sector estimated at 30% of value added (see Section VII). Since the estimates of effective protection rates which ioclude input subsidies do not markedly differ from those for nominal protection which looks at output prices only, the value of input subsidies does not compensate for the value of product taxes. Direct support for this view can be obtained from the state budget where the cost of all direct and indirect producer subsidies between 1973 and 1976 is shown as LE 602 millions. This includes all explicit subsidies on all crops, the current expenditure of both the Ministry of Agriculture and of Irrigation to provide water and services, plus all state investment in the sector. The direct state revenue net of payments to growers from cotton sales alone was LE 892 million from use of the discriminatory overvalued exchange rate and from price differentials in terms of local currency. In other words, state revenues from cotton alone more than pay for all state expenditure in the sector. To the cotton revenue must be added the value of the 50% tax rate on rice and onion exports as well as the differentials on the value of orange exports. Similarly, the considerably implicit transfers to consumers by setting relatively low producer prices for wheat, maize and sugar in this period should be included as state revenue. xv. However, measurement of the effects of market intervention on farm prices is important only if prices matter. The planners' implicit assumption that prices do not matter, which is central to Egypt's policy planning, is based on the following reasoning: first, offsetting measures like consumer subsidies can be used to correct income imbalances. Second, non-price controls can be applied to restrict resource reallocation in response to price signals. Third, direct state investment can divert resources to projects regardless of market signals about profit expectations.

(b) Effect on Cropping Patterns xvi. The regression analysis of farmers' response to price changes over 25 years since 1952 identifies significant correlation between relative prices, yields and cropping patterns. The evidence is clear that the implied assumption that short-run supply controls can effectively determine the parameters of production independently of price relationships has been invalid over the long run. Both planted area, as a measure of land allocation, and yields, as a measure of the use of other inputs, have varied with changes in relative prices of outputs. However, short-run response is as much limited by rotational requirements, access to markets for high price perishable products, technology type, and quantity of farm resources as by policy controls on the supply of inputs and the pattern of production. The results are confirmed by field observations and are acknowledged by government. Secondary markets are active in reselling the fixed amQunts of fertilizer alloted each farmer on the basis of the expected area of each of his crops. Each year many thousands of farmers pay a fine rather than conform to the production plan set for them. For cotton the number reached 180,000 in 1974. Sugar producers at that time diverted some 40% of their production away from the lower priced official markets. The conclusion is that the evidence shows that prices have indeed mattered in influencing what was produced, how it was grown and what was marketed, but that the degree of response has been severely limited by non-price constraints. The complexity of the relationships is borne out by empirical results which show, for example, a high long run elasticity of area with respect to revenue for rice (0.91) and wheat (0.46) and a high cross elasticity (0.95) between wheat and cotton. On the other hand, while both maize and cotton showed negative area response to their own prices they both showed high yield response to output price changes. xvii. In order to understand the structure of the observed response, several one period linear programming models of typical farms, using actual 1977 field data, were constructed and validated. Parametric runs on the models under various price patterns were done to explore the likely effects on resource use and incomes under the assumption that growers will continue to respond to profitability criteria and use the same technology as they have in the past. The major results are the following. First, the effect of a move from administered prices to long-run market prices for all inputs and outputs would be to raise the total income of agriculture, but would also change its distribution depending on the cropping pattern and technology type. For instance, the move would lower incomes for grain producers because the derived value of straw would fall more than the grain income would rise. Fodder surplus farms and vegetable producers would lose because they use subsidized inputs and have protected outputs. Food deficit cotton producers, who are mostly the smallest farmers, would stand to gain most. Second, the change in farm-level cropping patterns is small in this one period model because of non-price constraints. For instance, the need to grow fodder and the farm family food requirement leaves only a part of the farm free for allocation of land for market surplus. Third, the most significant departure from the present cropping pattern would be a voluntary increase in cotton at the expense of berseem which is precisely the effect that increased controls have sought but failed to achieve. Fourth, a change in technology, such as a move from animal to tractor draft, results in a higher net farm income than a move to world prices even without any yield increase assumptions. In our model the net returns to imported factors rose by 13% and return on farm capital by 50% due solely to distributional changes. This is the combined result of a greater market surplus and a reallocation of part of wages to profits. Finally, the most privately profitable farm plan is full commercialization and mechanization, specializing in cotton and horticulture while paying border prices for all inputs and receiving border prices for all products. This plan increases net farm income by 40% over the basic plan and simultaneously maximizes economic surplus with a fall in domestic resource costs. xviii. The major conclusion of the study of price effects on the structure of production is that prices and policy controls have had a major impact on the composition of the marketed surplus as well as on the total cropping pattern. It is clear that the desired production plan at the national level could be achieved with a less complex system of offsetting market controls and distorted prices which would be easier to manage. -vi-

xix. Price effects on the efficiency of input use are clear. The evidence indicates that they have been important only in the case of irrigation where studies show that free water has led to considerable wastage. Of the other inputs, price ratios have had little effect in determining the choice of technique since quantities have generally been restricted to a level well below the point where the value of the marginal product equals the cost. Secondary fertilizer trading has also helped rationalize its use, application of cotton pesticide by government agencies is independent of farmer decisions and the supply of machinery has been restricted. The best example of the ineffectiveness of price measures to influence technology innovations, without attendant institutional change, is in the case of high-yielding grain varieties. Despite a seed price subsidy rising to 30% and an extension campaign to encourage its use, less than 1% of the rice area is under HYV varieties compared to 64% for the Philippines and 30% for India. For maize and wheat, the situation is similar. In the case of wheat, only 15% of total plantings were with HYVs, compared to 62% for India and Pakistan and 50% for the Sudan. The area under HYV wheat rose from 5% in 1973 to 37% in 1974 and dropped back to 13% in 1975. The reasons for rejection were, first, the grain quality was not acceptable to consumers. Second, the ratios of straw to grain was too low to meet anital fodder requirement. Third, local adaption by researchers was insufficient to make HYVs as disease resistant as local varieties. Fourth, the cultural demands of the HYVs do not fit into the common farm systems.

(d) Effect on Aggregate Output

xx. Over the long-run, technology and the resultant growth rate are not constant. The rate of change in technology and growth in aggregate output are functions of investment. Secular movements in commodity and factor prices determine the pattern and level of private sector investment allocation both within and between agriculture and other sectors. State investment has worked through direct resource allocation within the central plan. It is not independent of the prices it sets since prices determine the rate and origin of public savings mobilization from the sector and hence the degree to which public investment substitutes for private investment. Most of the relatively minor amount of private investment has been directed to orchards, with little or no price distortion on output, but considerable subsidies on inputs, and to meat production with subsidies on inputs and considerable product price protection. State funds have gone into infrastructure such as irrigation, drainage, lan)d reclamation, research and extension with mixed success. Technology changing investment in the traditional crops comprising most of the value of output has been relatively minor. The net result is that the long-run growth rate in aggregate production at constant prices has been low. The figure for Egypt is 1.3% per year while for that of the developing countries as a whole it has been 2.6% and of the developed countries 1.8%. Egyptian crop yields no longer lead the world in major crops as in the sixties. Under a different set of long-run prices it would be fair to expect a different pattern and level of investment and a different rate of growth in aggregate production. -vii-

(e) Effects on Incomes xxi. The income effects of price management have proven to be regressive. Despite the usual problems of measurement, the analysis clearly indicates a long-run average tax rate for the sector in the order of 30%. This is 20% higher than the average 25% tax rate as a percentage of GNP for the economy as a whole. Secondly, average incomes in agriculture are less than those for the rest of the economy by 25%. Despite the inexactness of some of the numbers involved, the orders of magnitude do indicate that the policy objective of equity between rural and urban areas has not been achieved by price management. Incomes in agriculture have been depressed by policy instruments. On the other hand, since agriculture is the largest sector, this is where the largest part of the tax base lies. The problem is in devising a tax system to achieve the revenue and equity goals simultaneously. Fortunately, the growth in earnings from the Suez Canal, and from the remittances of Egyptians working overseas etc, provide an avenue for relieving agriculture of part of its heavy burden. xxii. Perhaps more important is the taxation inequity within the sector. Because the tax incidence varies by crop, cotton-based farmers bear a greater tax burden than specialist meat producers or fruit growers. To move into the latter crops requires investment. Long-term farm credit has not been available since the early 1960s, and the practice ensures that only those with access to savings from outside the sector can exploit profitable opportunities made possible by the distorted price system itself. This effectively locks small farmers into a high tax cropping pattern. This conclusion is supported by field observation where orchards were commonly found to be owned by urban-based professionals and where cattle fattening feedlots were commonly found to be operated by the dominant farmer in the village. Besides requiring an investment outlay, orchards return no income from several years and feedlot contracts are given only if minimum scale of operation conditions can be met. This situation has occurred because of the inflexibility of price management to changing circumstances. The price control structure was developed around the "traditional" crops of most importance at the the time and no restructuring has occurred despite the rise in importance of higher profit "non-traditional" activities. The conclusion for welfare is that prices have mattered in determining relative incomes. Offsetting income inflows have been general to the economy and price management has been regressive both within agriculture and between agriculture and the rest of the economy.

(f) Effect on Institutions xxiii. The basic questions, though, still remain: Should the state have intervened to such an extent? Should more use have been made of alternatives to price interventions and physical controls? What have been the real resource costs? Following the revolution and with the implementation of the land reform, administrators were left with the task of reorganizing the agricultural sector. Most of the farmers worked small parcels, had little previous access to credit and their objectives were based on survival. Further, the conditions of serfdom had hardly prepared farmers for a free market system. -viii-

Thus, during the transitional phase to maturity the State has had little option but to at least fill some of the decision-making vacuum and to ration goods and services as widely as possible. Some efficiency losses can be ascribed to poor State control, such as the low cotton yields of 1977 due to a breakdown of the pest control operations; yet left alone the multitude of small farmers, faced with escalating pesticide prices, may not have fared much better. However, here is probably the intervention program's greatest social cost - there has been no way for farmers and institutions to learn from experience. The agricultural development strategy has put the system into a state of permanent dependence, with low accountability, poor motivation and with little interest in innovation other than to use the rules to advantage regardless of their intent. An example is the fragmentation of farmland into parcels of less than three feddans which was done in order to use the three feddan tax-exempt clause to avoid paying land tax. Less stress on price stability and more frequent changes in the face of rapidly increasing inflation might have resulted in a climate more responsive to change and conducive to development.

5. Evaluation of the Net Effects of Market Interventions xxiv. A full evaluation of the effects of administered farm taxes and subsidies must assess the effects of policy instruments on productivity and income distribution, not only in respect of the sector being examined but on other sectors as well. This requires comprehensive, sophisticated, dynamic programming modeling. However, such models are not available. Hence the analysis of market interventions in Egypt had to be based on partial equilibrium analyses. This introduces an element of incompleteness, but there can be little doubt that the patchwork of market interventions which have grown up in the years since the revolution have had very significant impacts on:

- productivity (lack of adequate investment in agriculture, particularly in respect of the old land);

- the output and export of crops (negative on wheat, cotton and rice; positive on livestock; berseem, fruits and vegetables);

- the crop mix;

- the use of inputs (e.g. water logging resulting from wasteful use of irrigation water);

- institutions, which have been unable to respond effectively to the balancing of supply and demand in product and factor markets (balancing which would otherwise be carried out by market forces);

- and income distribution both within agriculture and between agriculture and other sectors. xxv. The input subsidies have nowhere offset the taxes on producers as the table below illustrates in part. Moreover, although the agricultural surplus has been effectively taxed, most of the taxed surplus has not been used to -ix-

finance industrial investment as was intended, but was transferred to consumers by way of subsidies. Taxing the agricultural surplus, explicitly and implicitly, left too little for reinvestment in agriculture, and the share that did go to finance industrialization was not successful in creating new jobs in efficient manufacturing enterprises.

Table i: Consumer and Producer Transfers a/ on Major Crops - Egypt 1974-75 b/

(in LE million at parallel exchange rates)

Transfer from Transfers to Transfer Crop Producers Consumers to State

Rice -562 +518 + 44 Wheat - 78 +334 -256 Cotton -254 +122 +132 Sugar -400 + 40 +360 Maize -120 +249 -129 Meat +214 -242 + 28 Total -1.200 +1.021 +179 a/ Net of input subsidies b/ See Table VII.5 xxvi. Thus, although some of the market interventions were successful in the sense that the agricultural surplus was tapped, industry was protected and food costs were kept low, these instruments failed to achieve the objective of an efficient industry-led growth of the economy, and they conflicted with the policy instruments which were intended to improve income distribution, but which also failed to achieve their objectives. xxvii. Contrary to the planners' assumptions, the reactions of producers to prices have been significant. Area and output responses to the market price interventions were, however, limited by physical controls. But many farmers have been prepared to pay the price if caught evading the production and sales quotas, and the larger farmers and urban investors in agriculture were able to move out of the controlled crops into production of livestock and livestock feed, fruit and vegetables.

6. Policy Conclusions and Recommendations xxviii. There have been major benefits from the development strategy but these benefits tended to be "one-time" only gains which occurred in the years immediately following the revolution. Since then serious problems, particularly those connected with price controls have developed. xxix. What then are the options open to Egypt? It is suggested that there are three choices: to have more of the same, but to extend the coverage of physical controls to all agricultural products; and to make the policy instruments internally more consistent;

- to dismantle all controls, remove all taxes and subsidies and rely entirely on market prices; and

- to move gradually towards a position of fewer physical controls, less direct, more efficient state production, less discrimination against agriculture as a whole and more rational system of taxes and subsidies which would encourage Egyptian farmers to adopt cropping patterns, both more consistent with their own private needs and with Egypt's long term comparative cost advantages. xxx. The first two alternatives are extreme ones--in view of the failure of the existing strategy, more of the same is unlikely to be successful, and moving quickly to a freer trade position is politically unacceptable and likely to be disruptive in effect. Hence the third alternative is recommended. This would involve a carefully phased program to:

- provide a better information service, which would monitor and evaluate the working of the new strategy;

- commence reducing implicit export taxes and, to a lesser extent, input subsidies, and begin to free up the supply of agricultural inputs so as to make them readily available to farmers and thus enable them to respond to market prices and to policy signals operating through the remaining taxes and subsidies;

- adopt a policy of keeping remaining administrative prices more in line with inflationary trends by more prompt and frequent adjustments;

- strengthen the ability of the operating and central agencies to identify and prepare sound rural development projects, and

- give greater priority to investment programs designed to improve productivity on the old lands. Until a successful technology for development of marginal desert lands is found, activities in these areas should be experimental in focus and investment size. xxxi. Looking further ahead, it is important that (a) further research be undertaken to ascertain Egypt's longer-run comparative cost advantages and to change the policy instruments in accordance with these advantages; and (b) reduce the discrimination against agriculture and the net burden of taxation on farmers. Increased or improved taxes from the Suez Canal, tourist expenditures and remittance of Egyptians working abroad can make good the revenue lost from reducing taxes on agriculture. The increase in agricultural production and the increase in exports of cotton and rice should, in any case, compensate for any signficant reduction in tax rates and help to improve the balance of payments position. I. INTRODUCTION

A. The Problem

1.01 As one travels throughout Egypt it is difficult to believe that farm policy has been anything less than a full success. The funnel of rich land split by the Nile is crammed with generally healthy crops pushed to the desert's edge. Yet discussions with farmers and administrators reveal widespread dissatisfaction. Farmers complain of low returns from prices, fertilizer and labor shortages, and government interference. Administrators complain of farmers' perversity in not accepting new technology and of reluctance to go along with production plans for the national interest. This antagonism is best epitomized in the Price Planning Agency's report 1/ that in 1974 some 180,000 farmers refused to comply and had been cited for violations of the cotton production requirements for that year. Again in 1979, the Egyptian Gazette reported that the Ministry of Agriculture had decided to withhold fertilizer subsidies from farmers who had planted 100,000 feddans in maize instead of cotton. 2/ A few simple parameters help resolve the paradox between the healthy crops seen in the fields and the general dissatisfaction with a farm policy that has lasted twenty years largely unchanged. Growth rates in output for major crops (Table I.1) are low or declining and price rises averaging less than 10% per year do not compensate for inflation at perhaps twice this rate. The growth rate in aggregate production over the past 25 years has remained sluggish at some 1% - 2% per year. Real incomes in agriculture are falling and are still only one-third of those in industry.

Table I.1: ANNUAL GROWTH RATES OF YIELDS OF MAIN CROPS - Egypt 1971-1976

Annual Growth Crop Unit 1971/72 1973 1974 1975 1976 Rate (M)

Wheat Ardeb 8.69 9.82 9.17 9.72 9.36 1.9 Maize Ardeb 10.82 10.82 10.75 10.85 11.51 1.15 Rice Ton 2.23 2.28 2.13 2.3 2.12 -1.1 Bean Ardeb 6.92 6.51 6.20 6.14 6.32 -2.1 Unginned Metric Cotton Quantar 5.9 5.43 5.26 4.98 5.4 -2.1 Sugar Cane Ton 38.9 38 33.7 36.25 38.3 -0.38 Fruit Ton 5.0 5.57 5.73 5.80 5.80 4.0

Source: A.R.E. "The Five-Year Plan, 1978-1982," Volume IV.

1/ Price Planning Agency, Ministry of Planning, Cairo, Memo No. 86, 1975. 2/ EAyptian Gazette, Cairo, July 5, 1979. -2-

1.02 Government points to the significant producer subsidies, particularly for -fertilizers, and the need to provide food at prices consumers can afford. The combined consumer and producer subsidy program now amounts to LE 700 million in direct payments equal to some 10% of GDP by 1976. In that year the cost of farm imports at US$1.2 billion far exceeded the income from farm:exports of US$0.7 billion. Egypt can no longer feed itself either by direct production or through trade in farm products. The policy problem as seen by the government is how to stimulate the sectoral growth rate to become high enough to reduce the present food gap and keep up with population increases while generating sufficient revenues for industrial development without destroying incentives to produce and invest. This, however, begs the questions of the limits to performance even under the "best" policy scenario: the role of farm prices in determing production; whether industrial development policies are sound; and whether industrial development can be financed only by taking the agricultural surplus.

B. Orientation of the Study

1.03 Among the suggested constraints on growth, farm price management has been singled out as being of prime importance. In the short run, movement in the pattern of relative prices for inputs and outputs affect the supply of agricultural commodities to the market at the given level of technology. In the longer run, given the existence both of technological change and changes in the level of agricultural investment, secular movements in commodity and factor prices determine the allocation of resources not only within the agricultural sector but also between it and the rest of the economy. Further, at all times price policy affects income distribution. Given the substantial degree of intervention in the Egyptian economy we would expect the resultant price distortions to have profound efficiency and equity consequences. Our analysis is partial and begins by accepting stated or inferred national policy goals as the guiding criteria in looking at these effects. Existing policy situations and their outcomes are described and measured with conditional proposals on what is necessary, but not always sufficient to achieve exogenously determined objectives. Nowhere is it implied that price management is the sole or predominant variable in determining farm performance; equally important are the institutional impediments but price interventions and physical controls have not been adequately studied and evaluated.

C. Aims of the Study

1.04 A detailed descriptive and empirical examination of farm price management is given as a basis for broader policy studies. Such a basis is missing from the literature, particularly for the recent decade during which many problems have intensified. Although some policy studies have been done they are often inaccessible, generally being in the form of reports for limited distribution and in Arabic, such as the excellent papers of the Price Planning Agency. Our aim here is to take the analysis as far as possible and stimulate further structured discussion supported by data forthcoming from these reports. Sectoral goals are put into the national framework and the instruments of intervention described. These are evaluated with respect to achievement of specified targets. The costs of their use are considered and quantified wherever possible. Price-quantity relationships are first illustrated by -3- simple budgeting. Historical data are used to see how, in fact, farmers have behaved in response to price changes and a linear programming model is used to explore farm level decision-making. These exercises are intended to put into perspective the input and output price interventions in both the short- and long-run and to draw out their implications for the structure and level of production as well as the distribution of income. Attention is given to the period 1965 to 1976 during which international and domestic conditions changed markedly. The sections are then integrated with conclusions derived.

D. MethodoloRy

1.05 The methodology used here is the standard calculation of protection coefficients and of domestic resource costs. The approach is simply accepted as a convenient framework of analysis. Price distortions are defined as the divergence between the price of a good at the border and at the farm-gate adjusted for equivalent location and stage of processing. The distortions are expressed through the standard indicators of nominal and effective protection by commodities.

NPC X Pi Pb where NPC, = nominal protection coefficient of the ith commodity

d p = domestic farmgate price of ith commodity i

b p = border price of the ith commodity, being the foreign price times i the official exchange rate adjusted for internal trade and transport margins to the farmgate with further adjustments for processing equivalence.

This coefficient relates the price received to the price which would be received under the assumptions of free trade. Allowance is next made for distortions in input prices. This is measured by the ratio of value-added expressed in domestic prices to value-added expressed in border prices to give the effective protection coefficient. This indicates the net effect of taxes/subsidies on outputs and on inputs.

vad EPC = i Vai where: EPC, = effective protection coefficient in the ith activity

d b Vai, Va, = value addd in the ith activity at domestic and at border prices with adjustments for equivalence to the farm-gate. -4-

An NPC of one indicates no distortion on output prices, an NPC>1 indicates a subsidy and an NPC<1, a tax. Similarly for EPC, where a value of one shows no net transfer. Values either side mean that the farmer receives more or less income than his non-traded resources earn in that activity. A further measure of distortion is the "net nominal protection" coefficient which converts the border price into local currency at the shadow exchange rate. Here we use the devalued parallel exchange rate.

1.06 A convenient short method for estimating gross transfers is the calculation of "Subsidy Equivalents" developed by Josling. 1/ This method adds input subsidies to the farm gate price and compares the net receipts per ton with the border price to measure the distortion. It is similar to effective protection measurements but is a ratio of prices of the final product rather than a ratio of value-added.

1.07 Comparative advantage is examined in terms of value-added, at border prices, per unit of domestic resource with costs measured as marginal opportunity costs. This is expressed as a coefficient when both value-added and domestic resource costs are in local currency and as a partial exchange rate when value-added is expressed in US$ per LE I of domestic resources. Details of theoretical and empirical methods and discussions of the measures are presented in Chapter 5. 2/. The formula for the DRC as a partial exchange rate is given below: r

DRC - a*k . pdJ

i - Iij where MPPY = marginal physical product of the jth input in its best alternative use (y) Pd = domestic price of the yth output (best alternative use) y

pf ~ = foreign price of the ith output f Pf - foreign price of the jth input

J = 1 ... k = inputs of directly traded goods plus the traded elements of non-traded goods after decomposition

j = k+l...J = inputs of primary, non-traded factors--includes those obtained as a result of decomposition of non-traded goods.

1/ Josling, J. "Agricultural Protection and Stabilization Policies", FAO Report (C75/LIM/2), Rome, 1975.

2/ For a full treatment of the methodology see: Scandizzo, P.and Colin Bruce, Methodologies for Measuring Agricultural Price Intervention Effects, World Bank Staff Working Paper (forthcoming). -5-

k f E ia * p 41 in the denominator is the foreign value of the directly

traded inputs, plus the indirect, traded elements of non-traded items left

after decomposition. + aij . MPPy . P }n the numerator is the domestic

price, opportunity cost value of the direct, primary, non-traded factors, plus the indirect, primary, non-traded elements of non-traded items left after decomposition.

1.08 Our basic assumption is that the effective protection measure is useful to measure the net price distortions and income transfers via pricing. The further assumption is that the measures indicate the relative worth of producing a marginal unit more of one crop than of another. Economic surplus will be maximized when the structure of price and non-price variables produces a production pattern that equalizes the domestic resource cost of producing a marginal unit of value-added in border prices across all farm enterprises. Border prices are used for measurement of distortions. It is not suggested, however, that all departures from the border price reference points necessarily imply a misallocation of resources.

1.09 The relative importance of price and non-price variables in terms of their historical impact on the aggregate cropping pattern is examined via conventional time-series analysis. Normative measurements of cropping pattern gains and trade-offs are then tested using a single period linear programming model of a standardized small farm under alternative policy scenarios based on actual farm data. -6-

II. ECONOMIC BACKGROUND

A. Economic Development in Egypt since 1952

2.01 After 20 years of industralization Egypt remains agrarian. More than fifty percent of the people still live in rural areas and in the cities most inhabitants have retained strong rural linkages. Many are recent arrivals looking for something better than the poverty of their villages. Urban populations, particularly in Cairo and Alexandria, have grown faster than economic and social infrastructure facilities and services have been provided, so that the qcuality of the services has deteriorated.

2.02 The industralization drive has left Egypt with a generally high cost, non-competitive industrial base with a low capacity to absorb labor productively. L/ Agriculture remains the predominant employer and contributor to GNP and exports. This sector too, is plagued with problems of just too many people for its resources. Economic growth has been slow, while the population has. continued to increase at some 2.5% per year. Structural changes have followed the pattern of relative, though not absolute, decline in agriculture's position in the economy and a rise in the role of the industrial and services sectors. Low productivity work aggravated by a full-employment policy regardless of productive opportunities has led to static or declining standards of living barely sustained by massive consumer subsidies. The temporary decision to end the program led to the riots of January 1977 when some 80 people were killed, many more were injured and property was extensively damaged. Many of the 70% of Egypt's 8 million workers who earn less than US$300 per year (family income) felt that the subsidies on flour, sugar, cooking gas and other basic items did not merely supplement their standard of living but were necessary to enable them to survive.

2.03 To the subsidy payments, a further 15% of GDP must be added for military expenditure and the cost of external debt servicing. Together-these constitute a heavy burden which limit the expenditure on productive developments.

2.04 The distribution of poverty has not been equal between rural and urban areas nor within these groups. The benefits of trade liberalization following the introduction of the "Open-Door" policy in 1974 do not seem to have trickled down to the ordinary citizen. Ministry of Planning data show falling real incomes in large sections of the community including agriculture. Inflation rates during the 1970s based on administered prices are officially estimated at some 5% to 10% per year. Prices actually paid have been rising faster. 2/ Although GDP in real terms has been rising at some 2% to 8%

1 See Arab Republic of Egypt, Economic Management in a Period of Transition; Chapter 11; Industrial Development, Johns Hopkins (forthcoming).

2/ During the first half of 1977 the Consumer Price Index based on official prices rose at an annual average rate of 17%. Official prices under- estimate actual average prices. For instance, the price of unsubsidized rice rose to three times that of subsidized quantities in 1978. -7-

annually the money supply has continued to increase at 20% to 30% per year. The true inflation rate seems nearer to 20% per year which is in excess of farm-gate price and wage increases, thereby supporting the Ministry of Planning's view of falling real incomes.

B. Role of the ARricultural Sector

2.05 Egypt's farmland is an oasis in a large desert. Of its one million square kilometers only some 3% is arable. Although the land area is greater than that of-France, Italy and Greece combined, the farm and forest area is less than one-third that of Greece alone.

2.06 The arable soils are mostly riparian silts and clays of great depth, fertility, and uniformity. The topography is flat with gentle slopes such that erosion is not a problem. The land is well-suited to irrigation and abundant water of good quality flows down the Nile, distributed to farms through an integrated storage and distribution system. With negligible rainfall Egypt is spared the vagaries of rainfall variation and enjoys maximum sunlight and growth rates. The subtropical temperatures permit year-round plant growth. Such conditions allow cropping intensities of 190%, with high yields in a complex rotation of crops. Its resources and the system of multi-purpose cropping are well-suited to interproduct substitution.

2.07 Production is characterized by dualism. About 85% of farmers, using bullock and human labor, work their three feddans 1/ or less for both the market and their own consumption. The other 15% use various amounts of machinery and produce single-purpose crops specifically for sale. Except for some scattered Bedouin sheep flocks, there is no rangeland grazing, and animal production is not specialized. Although the gross value of animal production is only one-third that of crop production, most farm operations depend on animal power. Farmland is allocated to both fodder and food crops, and the choice among crops is often influenced more by whether they produce by-products suitable for animal feed, such as straw, than by limitations of soil or climate. The allocation process is further complicated by traditional two- or three-year rotational cycles and the crop quota impositions of the government. Use of purchased inputs such as inorganic fertilizer, certified seed, improved varieties -- especially for cotton -- and pesticides is quite high, but machinery is usually limited to community-operated threshers, sprayers, and some plowing services.

2.08 Wheat and berseem, which provide food for the farmer and his animal, are the leading winter crops. In the summer; cotton and rice are the most important cash crops, and maize or sorghum are the major subsistence crops. In the three-year system cotton is balanced by a legume, generally berseem and beans, for the first year. Berseem in winter is followed by maize or rice in summer in the second year. Wheat is followed by maize or rice for the third year. In the hotter areas sorghum or millet is substituted for maize, and barley has proven more successful than wheat under the scanty rainfall of the Mediterranean coast. Where the network supplies sufficient water, rice displaces maize. Vegetables usually fill small patches between crops but are rapidly becoming main crops where there is access to a market.

1/ One feddan equals 1.038 acres or 0.42 hectares. -8-

2.09 Over 90% of land titles are for lots of less than 5 feddans. Leasing is common on about 40% of farms so that the average farmed unit is 3.5 feddans (1.47 hectares). Since 1952 the Government has tried to overcome the problems of smallness and poverty by a series of land reforms, cooperative management of pooled farms, public sector investment, and a program to maintain farmers' incomes through price management. Previously 4,000 landlords owned the same amount of land as 2.64 million peasants, while another 1.2 million laborers were landless. The reforms eventually limited ownership to 50 feddans a person and land was distributed to those owning little or none. Land rents, tenancy conditions, and farm wages were changed. The average title rose from 0.8 feddans to 1.2 1/ feddans after the reform but the combination of a fixed area with an increasing population and lack of opportunities elsewhere began to reintensify the problems of smallness, fragmentation, and poverty.

2.10 Cooperative membership became virtually compulsory so that land could be farmed in blocks of contiguous areas, with machinery and extension services offered to the group. Cooperatives and the associated credit banks displaced private enterpreneurs in supplying inputs and became the major marketing channels for the most important crops. Cooperative production quotas were allocated by the state and are tied to the supply of inputs. Group marketing is at fixed prices in order to meet government targets.

2.11 Public sector investment in the sector has been considerable with such notable projects as the Aswan High Dam and the partial reclamation of fringe land for irrigation development. Construction of the High Dam, together with a system of barrages along the Nile, allowed extension of perennial irrigation but a serious drainage problem has arisen, manifested in high water tables. Extension of irrigation and service infrastructure into marginal soils on the desert fringes had added 0.7 million feddans of "new land" to the existing 5.6 million feddans of "old land" by 1976. Since large investments in capital-intensive industry over the last two decades generated only 20% of the total increase in employment most of the increase in the work force went into agriculture and services.

2.12 The pattern of employment generation has changed slowly. The economy still depends on farm work to support about 40% to 50% of the population as owners, tenants, and laborers. With the labor force in agriculture growing faster than output, labor productivity has fallen 2/. Wages in agriculture have remained at around one-third of the average of all sectors and have fallen in real terms. This has increased the importance of the cost-of-living subsidies in maintaining the standard of living. Although agriculture's share in employment has fallen from 54% in 1959 to 42% in 1977 (Table II.1) the absolute numbers have increased from 4.057 million workers in 1970 to 4.486 million in 1977 (Table II.2). This has happened in spite of rapid urbanization, conscription, compulsory school education and other major labor outflows.

1/ Refers to ownership of land. Leasing increases the size of farmed units up to a living area of some 3.5 feddans.

2/ Ministry of Planning estimates. -9-

Table II.1: PERCENT EMPLOYMENT BY SECTOR - EGYPT 1959-77

1959/60 1964/65 1969/70 1971/72 1973 1974 1975 1976 1977

Agriculture 54 50.9 48.9 46.2 46.2 45.8 44.7 43.9 42.9 Non-Agriculture 46 49.1 51.1 53.8 53.8 54.2 55.3 56.1 57.1

Source: Ministry of Planning.

2.13 Since the revolution the population has doubled, increasing by an annual rate of 2.5%. Total sectoral production in physical terms has increased by only 2% per year. Egypt no longer exports wheat but instead imports twice as much as is produced domestically; the quantities of cotton and rice available for export have declined. Although the contribution of agriculture to the general growth of the economy has varied, it has usually been below the average growth rate for the economy as a whole.

2.14 The three poverty groups are the small farmers, the farm laborers and the low level private sector workers (Table I1.3). The route out of poverty is via low level government service or, through education via the specialist levels. Even low paid jobs in the private sector are preferred to farm employment since urban areas offer more accessibility to consumer subsidies and other income transfers not related to employment. Income differentials have been translated into stigmas against working in the sector.

Table II.2: EMPLOYMENT BY ECONOMIC SECTOR - EGYPT 1970-77 (in thousands of persons)

End of Period 1970/71 1971/72 1973 1974 1975 1976 1977 /a

Commodity sectors 5.524 5.629 5,690 5,715 5.881 5.914 6,363.7 Agriculture 4,057 4,095 4,164 4,212 4,218 4,224 4,486.0 Industry, petroleum 1,078 1,120 1,140 1,150 1,175 1,209 1,320.3 and mining Electricity 30 34 35 38 41 47 49.8 Construction 359 380 351 315 447 434 507.6

Distribution sectors 1,226 1,257 1.321 1.280 1.371 1,439 1,711.4 Transportation, communica- 371 383 388 397 404 422 446.5 tion and storage Trade and finance 855 874 933 883 967 1,017 1,264.9

Service sectors 1,920 1.979 2,009 2,035 2.178 2.275 2,358.8 Housing 137 137 138 139 143 144 145.2

Public utilities 40 42 44 43 47 53 55.2 Other services 1,743 1,799 1,827 1,853 1,988 2,078 2,158.4

Total 8.670 8.865 9.020 9,030 9.430 9,628 10,433.9

/a Preliminary estimates. Source: Ministry of Planning. -10-

Table 11.3: PRELIMINARY VIEW OF THE DISTRIBUTION OF NATIONAL INCOME EGYPT, 1976

Number Total Income Average Annual (thousands) (LE millions) Income/Worker

Small landowners and Lessees 2,200 330 150 (less than 3 feddans) Landless farmworkers 1,000 140 140 Large landowners 800 400 500

Government workers 1,900 405 213 (lowest levels) Government workers 1,050 516 491 (higher levels)

Private sector workers 200 28 144 (lowest levels) Private sector workers 750 600 800 (higher levels)

Source: Five-year Plan 1978-1982, Egypt. III. AGRICULTURAL POLICY REVIEW

A. Goals

3.01 In attempting to evaluate policy performance we first tried to find what policy makers really wanted the price controls to do. The basic thrust of Egypt's economic policy was enunciated by President Nasser's "National Charter of Arab Socialism", in 1962. The goals were distributional and rooted in reaction to the inequity and poverty of pre-revolutionary conditions. Nationalization was chosen to block foreign expropriation of domestic wealth. Socialism was adopted to give direct control over the distribution of income. Preoccupation with distribution had continued since the first land reform in 1952. Growth and development goals were secondary until the forma- tion of the "First Five-Year Plan, 1960-1965". The Plan formalized the move to a strategy of import substitution via capital intensive industrialization. This first plan used a Harrod-Domar growth model in a Tinbergen planning framework with the global objective of doubling per capita income in 20 years, later changed to 10 years. 1/ This was later modified by Frisch to incor- porate dynamic linear programming of investment allocation among the 30 sectors. 2/ The consumer subsidy program which had been introduced before the revolution was continued to ensure universal access to basic needs, particularly wheat and sugar. Other targets were specified less accurately such as the full employment goal.

3.02 Agriculture was relegated to a secondary role along the lines of the familiar labor surplus view of Lewis. 3/ The sector's relative importance was expected to decline as it transferred resources to industry and provided markets for emerging enterprises while maintaining rural incomes and productive capacity. Derived goals such as the proposed 30% increase in sectoral output were specified to achieve basic objectives of fQod self-sufficiency. Other targets were calculated to meet an input requirement of an industry, for instance, cotton textiles, or to provide foreign exchange for imported inputs.

B. Instruments

3.03 The two broad groups of instruments are still used. The first is state investment in projects, either infrastructural like the Aswan High Dam and the New Lands scheme or directly productive like the dairy and poultry ventures. The second is state control over private sector farming through a price control system implemented through membership in cooperatives. Aggre- gate production directives are conveyed to the cooperatives and quotas allocated to farmers. This fixes the level and pattern of production. Purchased inputs are allocated to the cooperatives depending on local production and

1/ El-Edel, M.R., Economic PlanninR for Developing Countries--The Egyptian Experience, INP memo 1008, Cairo, 1972.

2/ Frisch, R., "Planning for the UAR," Economics of Planning, No. 1-2, Vol. 5, 1965.

3/ Lewis, W. Arthur, Theory of Economic Growth, London, Allen and Unwin, 1955. -12-

availability of foreign exchange. Fragmented holdings are pooled for certain cultural advantages such as cotton pest control. This decides the mode of production and level of protection of domestic industries selling to the sector. Fixed' proportions of major crops are compulsorily sold to the cooperatives with residual amounts going to free markets. The amounts vary according to export, urban consumption and industrial needs. Prices of all farm products are controlled directly or indirectly, either through price directives or market restrictions.

3.04 Interventions on the input side have been on the prices and quantities of fertilizers, fuel, seed, pesticide, credit, plant and equipment, land rents and taxes, irrigation water and trading commissions. The general policy has been to keep these inputs rationed where they are imported and freely available where domestically produced. Pricing has been kept stable resulting in implicit taxes during times of low international prices and subsidies during high external price periods.

3.05 Interventions on outputs have been concerned with the pricing and quantities of export crops, particularly cotton, formerly the country's major foreign exchange earner and with food crops such as wheat. Producer prices are determined on the basis of Ministry of Agriculture submissions being sub- jected to a political process that takes account of fiscal implications and equity impact. Major changes in price levels and relativities are generally crisis reactions, though there is an annual review. The methodology used by the Ministry for price submissions is a compromise between a detailed cost of production plus fixed profit margin approach and five other methods of pricing as listed below: 1/

(1) Cost of Production Approach. Cost of labor and all materials used (variable costs) are prepared as averages for each of the 17 governorates on a crop by crop basis. A "remunerative return" which may be twice the rental value is added to this.

(2) Parity Price Approach. Prices paid by farmers for consumption and production items are compared with prices paid to farmers to see if changes in both series are in the same direction and magnitude.

(3) Crop Income Equalization Approach. Net returns are equated across alternative rotations.

(4) Relative Price Approach. Relative profitability is adjusted to induce changes in commodity composition in line with aggregate production targets.

(5) International Price Approach. World prices of equivalent products are adjusted for transport and other off-farm costs back to the farm gate.

11 Hindy, K, A Short Note on Agricultural Prices and Subsidies in the A.R.E., Ministry of Agriculture, Cairo, 1976. -13-

(6) Consumer Price Approach. This starts with a price which the consumer is expected to bear and works back to a "fair share" farm gate price in the light of the fiscal burden on the treasury and the desired pattern of income transfers.

3.06 During most of the study period international transactions have been reserved for state monopoly agencies. Exchange rate policies have controlled the quantities of foreign exchange available and the rate to be used. The two exchange rates are the "Official Exchange Rate", of LE 1.00 US$2.56 and the "Parallel Exchange Rate", depreciated to LE 1.00 - US$1.41. Transactions have been gradually moved to the parallel rate and the official rate was finally phased out in January 1979. Transactions remaining longest on the overvalued schedule have mostly concerned agricultural products.

C. Evaluation of Policy

3.07 The major instruments of economic management became direct intervention in the factor and product markets and direct allocation of investment resources through the State Plan. Although rigorous policy evaluation with respect to reaching national goals is somewhat beyond the scope of this study some reflections can be made. After twenty years of policy implementation the characteristics of Egypt's economy remain the same, being, rural poverty, technological inefficiency, an agrarian dominated economy and reliance on foreign support. At least some of the failure to change may be relegated to a lack of coordination between the two major instruments of market interventions and direct resource allocation. The market interventions usually work outside the plan framework on an ad hoc political and fiscal basis separate from long- run development goals. The planning exercise itself seems to have been based on inadequate specification 1/ and data, embodying much of the usual problems with this type of approach, such as non-homogenity of capital and an inadequate institutional capability to manage the degree of centralization.

3.08 The effects on agriculture are examined in detail in subsequent chapters and are discussed here in general under price, investment and labor policies for convenience. The sectoral growth rates for Egypt shown in Table III.1, indicate that, despite the static view of high yields relative to other countries, Egypt's farm sector is performing poorly over time. Despite the usual problems of agricultural statistics it seems fair to conclude that growth in farm production in Egypt is lagging behind both that in developed and developing countries as aggregated groups. The growth rate even becomes a decline on a per caput basis. A comparison with food production growth rates show that Egypt is putting progressively more of its total farm output into a loosing battle of trying to feed itself. Under such circumstances fine tuning of policy variables such as price adjustments is inappropriate. A closer look at Egypt's application of the double development squeeze on agriculture seems in order.

1/ El-Edel, M.R., Economic Planning for Developing Countries - The Egyptian Experience, INP Memo 1008, Cairo, 1972. -14-

Table III.1: AVERAGE ANNUAL GROWTH RATES IN TOTAL AND PER CAPUT OUTPUT OF FOOD AND AGRICULTURAL PRODUCTION - 1967-1978 (as percentages)

All Developing All Developed Egypt Countries Countries

Agricultural Production Total 1.3 2.6 1.7 per caput -0.8 0.5 1.0

Food Production Total 2.0 2.6 1.7 per caput -0.2 1.0 0.7

Source: Computed from FAO Monthly Bulletin of Statistics, Vol. 1, Nov. 1978.

(i) Price Policy

3.09 In 1975 the Ministry of Planning 1/ conducted a series of studies into price related issues in agriculture. Their report estimated that in 1974 farmers had received 15%, 16% and 30% respectively of the actual export prices the State had received for their onions, rice and cotton. 2/ Sugar mills were found to be running at only 79% capacity as farmers refused to honor delivery contracts on 40% of the crop prefering to sell to small private sector cane presses at higher prices. Cotton growers were found to be consistently defaulting on quota obligations choosing instead to pay the resultant fines and grow alternate crops. Rice plantings which had been expanding at a fast rate suddenly dipped. Inputs, such as fertilizer, destined for use on specified crops were freely sold on the black market for use on other crops. Consumers complained 3/ of high food prices with rice selling at three times the official price. Yet at the same time the cost of the subsidy program had multiplied eleven times in four years. In 1972 the cost was US$100 million 4/. By 1976 the cost was US$1.1 billion. Clearly, the price policy instruments were not working as producers thwarted production goals and farm price increases failed to convince them to cooperate. The welfare thrust has not changed the basic characteristic of mass poverty. Further, input use problems - particularly with respect to

1/ Price Planning Agency, Ministry of Planning, Cairo, A.R.E. 1975 Reports No. 42, 46. 47.

2/ Adjusted for equivalence of location and stage of processing to the farm gate.

3/ Report of proceedings in the People's Assembly, Feb. 26, 1978, Egyptian Gazette.

4/ At the official exchange rate. -15-

drainage difficulties and declining standard of cotton cultivation - indicated the inability to reach efficiency targets. But the picture is not uniform because despite complaints of general unprofitability there has been speculative interest in farmland for investment in animal production, fruits and vegetables. These are the so-called non-traditional crops.

3.10 Because explicit targets have consistently not been met does not mean we can immediately conclude that the choice or management of policy instruments has been at fault. The targets themselves may have been set at levels unattainable under any policy scenario. For instance, during the First Five Year Plan (1961-1965) the sectoral growth rate at constant prices was only 1.5% per year as against the planned 5%. This target was "obviously out of touch with realities". 1/ Such overestimation of possibilities has been consistent in Egypt's planning perhaps because of the view apparent in all the national plans that output is a function solely of aggregate investment quite distinct from the necessity for associated adjustments in other variables.

3.11 Maintaining the objective of a low and stable cost of production had been reasonably simple until 1972 when world wide coincidences of commodity shortfalls began to appear. Prices for imports escalated to unprecedented heights. Wheat prices tripled from US$60/ton to US$180/ton and urea fertilizer prices quintupled from US$60/ton to US$315/ton within two years. During the same period the consumer price of wheat was kept constant at US$76/ton and the farm gate price of urea held at US$156/ton, both prices having been unchanged since the early 1960s. The fiscal impact of the state's continuing to absorb the differential is shown in Table III.2. Consumer subsidies rose from US$69

Table III.2: CONSUMER AND PRODUCER SUBSIDIES 1972-1976

Item 1972 1973 1974 1975 1976 1977

Direct consumer subsidies in millions of LE 30 89 330 491 321 313 Official exchange rate in US$ per LE 1 2.30 2.51 2.82 2.56 2.56 2.56 Direct consumer subsidies in millions of US$ 69 397 931 1257 822 801 Parallel exchange rate in US$ per LE1 a/ - (2.30) (2.51) (1.6) 1.5 1.41 1.41 Direct consumer subsidies in millions of US$ 69 397 515 737 453 441 Direct producer subsidies in millions of LE 14 16 13 102 57 NA Producer subsidies in US$ m. at OER 32 40 37 261 146 NA Producer subsidies in US$ m. at PER 32 40 21 153 80 NA a/ Figures in parenthesis are our estimates of shadow rates until actual introduction of the parallel rate in 1973.

Sources: General Authority for Supply Agricultural Prices Stabilization Fund. l/ Hansen, B., and Marzouk, G., Development and Economic Policy in the U.A.R., Amsterdam, 1966, p. 296. -16-

million in 1972 to peak at US$1.054 billion in 1975 then began to fall as import prices declined. Producer subsidies at US$32 million in 1972 rose to US$261 million in 1975 then fell to US$146 million in 1976.

3.12 Recalculation of the subsidies at the more realistic parallel exchange rate reserved for non-agricultural transactions reduces them by 45% yet they are still a major fiscal cost of achieving the goals of low and stable prices. The differentials between foreign and domestic prices also brought windfall gains to the state. The weighted average export price of cotton lint rose by 118%, from LE 550/ton f.o.b. in 1972 to LE 1201/ton in 1974. World prices for rice climbed from US$147/ton in 1972 to US$542/ton in 1974, a 268% increase. Meanwhile, farm gate prices for rice in 1974 had risen only by 3% in total over the whole period since 1968. Seed cotton prices rose 21% between 1972 and 1974 after a long period of slow increases.

3.13 The effects of price policy are examined in detail in sections V, VI and VII. Here we look at "first-approximation" estimates improved upon by more detailed analysis in later sections. More accurate estimates will be seen to reinforce these preliminary conclusions. The main aim in this section is to give an overview of the magnitude and direction of the transfers involved. A simple analysis of the net direction of policy transfers is shown in Table III.3. The transfers to Treasury from profits by the Cotton Organization summed to LE 348 million whereas the direct producer subsidies paid by the Agricultural Prices Stabilization Fund on all crops for all purposes amounted to only LE 187 million over the period. If one adds in the exchange rate gains, the transfers out on cotton alone more than pay for all the direct producer subsidies, all public sector investment in agriculture and all the current expenditures of both the Ministries of Agriculture and of Irrigation. We may conclude that the taxes on cotton cover all direct and indirect transfers into agriculture and still leave a transfer out. To this must be added the explicit output price flows gained from rice, orange and onion exports plus the implicit outflows on domestically consumed crops such as wheat, maize and refined sugar.

Table III.3: PARTIAL INCOME TRANSFERS EGYPT 1973-76 (LE millions)

1973 1974 1975 1976

Transfers to Treasury 65 137 54 92 Exchange rate gains 114 210 120 100

Total out (cotton) -179 -347 -174 -192

Producer subsidies, all crops 15.8 12.7 101.5 56.8 Sectoral investment (total State) 51.0 54.0 84.0 49.0 Current expenditure, Ministry of Agriculture 16.4 19.8 21.3 26.0 Ministry of Irrigation 18.4 19.9 26.0 28.8

Total in (all sectors) +101.6 +106.4 +232.8 +160.6 Net flow -77 -240 +59 -31

Sources: IBRD report, "Economic Management in a Period of Transition", Statistical Annexture. -17-

3.14 These years cover a period when transfers, both in and out reached a peak. Elimination of part of these transfers on the basis of a shock event temporarily disturbing a long-run price trend is justified. There is sufficient evidence, though, that world price trends have shifted upwards significantly.

3.15 The need for the State to raise taxes is not questioned but the method used obscures the quantities transferred and is unequal in its incidence among enterprises. This instrument has distorted resource allocation away from that targeted by policy. 1/ Internal and external conditions have changed since this rigid system was established. It is now impossible to implement it satisfactorily.

3.16 Intervention to protect citizens from the effects of random external price fluctuations is accepted as a valid role for the State. The policy problem is one of determining how much of the market changes should be allowed to flow to producers and consumers. Given that eventually restructuring has to occur, the longer the delay the more painful the adjustment is likely to be.

(ii) Investment Policy

3.17 Nationalization of industry and administrative control over agriculture left the state with responsibility for investment. Public investment was directly allocated on a project basis and the remaining private sector investment was influenced by managing the terms of trade and the flow of credit. Long- and medium-term credit to agriculture virtually disappeared as short term production loans expanded and then stagnated, declining in real terms. 2/ In 1960, investment credit to the sector was LE 1.5 million, ten years later it was LE 0.9 million and in 1974 was LE 1.3 million. Little internal savings were generated.

3.18 State investment in agriculture grew to LE 100 millions in 1963/64 during construction of the Aswan High Dam, not all of whose costs are attributable to the sector. Since then executed investments have amounted to some LE 50-60 million per year, Table III.4. Of interest is the allocation within

Table III.4: PUBLIC INVESTMENT IN AGRICULTURE EGYPT 1968 to 1976 (values in LE millions)

Category 1968 1969 1970 1971 1972 1973 1974 1975 1976

Reclamation of new lands 33 30 26 23 20 23 23 27 NA Irrigation and drainage 18 26 25 19 28 25 22 40 NA Agriculture (production) 4 5 7 9 10 10 10 15 NA

Total 55 61 58 51 58 58 55 82 99

Source: Ministry of Planning.

1/ For instance, see Section VI on sugar pricing. Low producer prices diverted some 40% of supplies into unofficial markets in the early 1970's resulting in low capacity utilization of milling plants.

2/ See section V, E, for a detailed description of farm credit. -18-

agriculture with 40% to 60% going to the reclamation of unpopulated marshlands and desert fringes covering an area of less than 1 million feddans. The decision -to build the High Dam was partly based on the view that more than 2 million feddans of arable land could be brought into production.

3.19 The opportunity cost of the program was virtual stagnation in the old lands. The benefit has been an added 621,000 feddans since 1959, (Table III.5), much of which is either not yet in production or has been abandoned. After almost twenty years of receiving half the investment funds, their contribution to the annual value of sectoral production is some 3%. The Ministry of Planning's "Five-Year Plan 1978-1982" 1/ identifies the problem as one of inadequate management and supervision. Infrastructural investments by their nature, such as the irrigation complex, must be done by government. Egypt has chosen to assume responsibility for more but the evaluation process which replaced market allocations seems deficient. One can certainly understand the policy makers' determination to expand the farmland base but growth of output in the new lands seems to have been a substitute for growth in the old lands with different implications for efficiency and income distribution. The potential for future growth in both the new and old lands is also hampered by past investment inactivity in research and extension. 2/

Table III.5: EFFECTS OF LAND AUGMENTING PROJECTS

Farmland Area Cropped Area (million feddans) (million feddans) Year Old New Total Old New Total

1959 5.6 0.079 5.679 10.269 0.1 10.369 1965 5.6 0.416 6.016 10.240 0.6 10.840 1970 5.6 0.560 6.160 10.613 0.9 11.513 1976 5.6 0.700 6.300 10.800 1.1 11.900

Sources: Ministries of Agriculture, Irrigation and Planning.

3.20 Within the private sector, investment is most active among those with access to non-farm funds. Interest is greatest in establishing orchards and other crops upon which the implicit tax via pricing is small or absent. For those with jobs outside the sector who are able to wait five years returns are high. There is no tax on agricultural incomes or on capital gains. Subsidized machinery and fuel encourage investment in capital intensive techniques.

1/ Five Year Plan 1978-82, Volume 4, August 1977, Chapter 1.

2/ USDA/Ministry of Agriculture of A.R.E., Foreign Agricultural Economic Report No. 120, "Major Constraints to Increasing Agricultural Produc- tivity". -19-

3.21 Price policy is affecting the level and pattern of investment as well as influencing who the investors will be and who will get the benefits. Through investment effects, pricing can increase or decrease the total resources available and hence total production. An overestimation of the optimum tax on agriculture will result in decreased ability to generate savings from within the sector and attract savings from without. If the funds extracted from the high productivity subsector are then invested by the state in a low productivity subsector a social loss will result.

(iii) Labor Policy

3.22 One of the most contentious issues for agricultural planning in Egypt is the resolution of the labor supply paradox. The economy is characterized as plagued by disguised unemployment 1/ and low productivity growth yet labor shortages are appearing in the farm sector. If this is a genuine shortage (with rapid urban and industrial development competing with agriculture for limited supplies of scarce labor), then a labor-substituting strategy makes sense. On the other hand, if policy intervention is in fact inducing labor to move into low productivity sectors such a strategy is likely further to decrease performance in the low productivity sectors, to reduce the overall growth rate in high productivity sectors, and either to widen income differences or to increase the burden on the income transfer mechanisms.

3.23 Policy interventions affecting the supply of labor to the agricultural sector include those concerned with full employment, education, land reform, military conscription and the consumer subsidy program. Let us look at each of these in turn.

(a) Supply of Labor

3.24 The full employment policy has guaranteed a job in the public sector to all college graduates and to those discharged from military service. Since most of the population lives in rural areas and most public sector jobs are located in the city, this policy has led to a large-scale movement of young people out of agriculture, thus affecting agriculture labor supply and the age distribution of farm workers. (Since the beginning of 1977, the automatic hiring of new graduates has been deferred.) Universal conscription into the military has had a similar effect.

(b) Education

3.25 The education policy, via its compulsory schooling provisions, has reduced the numbers available to work in the farm sector and has affected the age distribution of the agriculture workforce. In addition, policy has affected the quality of professionals employed in agriculture, since students with lowest scores in the university and college entrance examinations are allocated to agriculture faculties.

1/ IBRD Report," Economic Management in a Period of Transition", Vol. 1, para. 4.74. -20-

3.26 One of the effects of the land reform, coupled with increasing urbanization, has been a change in the structure of the farm work force away from contract labor groups with low opportunity costs and high mobility towards more workers simply looking for casual farm work as a supplement to other income derived from their own small holding, from periodic non-farm employment, from a military pension or other social service benefit, from remittances from relatives or from some other source. Further, these small landowners do not seek casual employment on large farms in other areas because of clashes with the seasonal land-use pattern on their own farms. Overall, labor mobility has been reduced by land reforms, and wage differentials between areas have been increased.

3.27 The latter effect has been compounded by the usual locational influence on farm wages exerted by proximity to urban areas. Farmlands adjacent to urban areas typically show higher wage rates as they compete with urban minimum wages during the peak seasons. During the slack seasons the differentials between urban-adjacent areas and non-adjacent areas disappear. In areas most remote from the cities that are not primarily land reform areas, casual workers have also begun to be in short supply since they have little chance to earn non-farm supplementary employment and have little incentive to remain. To illustrate these effects on wage differentials, the wage rates for the same task in 1975 (cotton land preparation) varied between 35 piastres for the Fayoum Governorate in the reform areas to 70 piastres for the Qalubia Governorate next to Cairo (Table III.6).

Table III.6: WAGE RATE DIFFERENTIALS IN LAND PREPARATION: COTTON: 1975

GOVERNORATE Piastres/man day Area Description

Qalubia 70 Adjacent to Cairo Fayoum 35 Land reform area Assuit 60 Remote from large cities Damietta 40 Dense smallfarmer area Kafr-al-Sheikh 40 Dense smallfarmer area

Source: Ministry of Agriculture.

3.28 Note, however, that productivity differentials between these areas would also contribute to the wage differentials; for example, the yield per feddan in Qalubia is 30% greater than in Fayoum, with constant technology.

3.29 Turning to the demand for labor in the agricultural sector, we may approach the question initially by calculating from farm level data the approximate labor requirement to operate a typical small farm. Table III.7, based -21-

on a 3 feddan farm in the Sohag Governorate suggests that about 300 days per year, sufficient to fully employ one adult worker, are required. If this figure is generalized we might conclude that some 70% of farms are potentially in labor surplus, this being the proportion of farms under 3 feddans in area 1/. In addition, of course, the existence of family labor will exacerbate the labor surplus problem. These speculations are consistent with the figure of 1.5 feddans on average per worker obtained by dividing the 6.3 million feddans of farmland in use in 1976 by the 4.223 million farm workers in that year.

Table III.7: DEMAND FOR LABOR ON A TYPICAL SMALLHOLDING: SOHAG: 1976-77

Crop Feddans /a Man Days/Feddan Man,Days/Year

WINTER: Wheat, barley 1.44 40 57 Berseem (1 cut) 0.90 12 11 Berseem (4 cuts) 0.66 40 27 3.00

SUMMER: Sorghum 1.74 45 78 Maize 0.51 45 23 Cotton 0.75 65 49 3.00

Total crop labor 245 man days Animal care labor (2 animals) 30 Capital maintenance labor 24 Total labor required per year per three feddan farm 299 man days

/a Based on actual land-use distribution in Sohag in 1976-77.

Source: Ministry of Agriculture and farmer interviews.

3.30 It seems safe to conclude overall that the supply of labor in Egypt's agricultural sector has exceeded demand, a conclusion which agrees with Hansen's 2/ review of the INP-ILO labor survey.. The determination of wage levels in the sector now needs to be explored, and the paradox of labor referred to above remains to be explained. To approach these questions in a systematic manner, a single analysis of the labor market in Egytptian agriculture is proposed in the following paragraphs.

1/ A.R.E. Five Year Plan 1978-82

2/ Hansen, B. "Employment and Wages in Rural Egypt", American Economic Review, 1966, p. 298. -22-

3.31 Secular movements in the equilibrium real wage may be explained in terms of movements in the marginal physical product of labor and in the real price of the output produced. Direct observations on trends in the marginal product of labor in Egyptian agriculture are not available, although it is known that average product has not risen over the long period, as suggested by the constant price series for value of output per worker in Table III.8. This tallies with the fact that both the farm labor force and the total physical product have been rising at the same rate of some 1.3% per year over the long run.

TABLE III.8: AVERAGE PRODUCTIVITY OF LABOR, 1965-1973 (in LE 1960-73)

Value of Output per Worker Current Constant Year Prices Prices

1965 238 141 1966 256 138 1967 262 138 1968 254 147 1969 267 147 1970 282 149 1971 294 153 1972 316 153 1973 349 152

Source: 'Ministry of Planning.

3.32 Looking at the trends in yields as tabulated in Table III.9 we note a slight rise for wheat and maize, but a decline for other major field crops. Given the general labor supply and productivity situation known to have existed in the sector in aggregate over the last 15 years, it would seem reasonable despite the lack of marginal productivity data, to conclude that the marginal physical product of labor in agriculture has been relatively low and has not been increasing over recent years.

Table III.9: ANNUAL GROWTH RATES, YIELDS OF MAIN CROPS

CROP UNIT 71/72 1973 1974 1975 1976 Annual Growth Rate

-Percent-

Wheat Ardeb 8.69 9.82 9.17 9.72 9.36 1.9 Maize Ardeb 10.82 10.82 10.75 10.85 11.51 1.15 Rice Ton 2.23 2.28 2.13 2.3 2.12 -1.1 Bean Ardeb 6.92 6.51 6.20 6.14 6.32 -2.1 Unginned Metric Cotton Qantar 5.9 5.43 5.26 4.98 5.4 -2.1 Sugar Cane Ton 38.9 38. 33.7 36.25 38.3 -0.38 Fruit Ton 5.0 5.57 5.73 5.80 5.80 4.0

Source: A.R.E. Five Year Plan 1978-1982. -23-

3.33 In relation to producer prices, we observe long term annual growth rates in current terms of about 4% for wheat, 5% for maize, 3% for cotton and 6.5% for rice since the mid fifties, with more rapid increases since 1970. When judged in terms of rates of inflation over these periods (see Section II.1), it is apparent that real farm prices for traditional crops upon which most growers depend have declined.

3.34 These two considerations taken together would suggest a secular decline in the real farm wage rate. Data for a restricted period (1966 to 1973) confirm this, as shown in Table III.10. Since 1973, money wages have at least doubled, but the trend in the real wage is difficult to determine owing to problems in estimating recent rates of inflation in Egypt. A roughly similar conclusion may be drawn from an inspection of trends in labor costs per LE 1 of output value for major crops, as shown in Table III.11. Secular movements in this ratio indicate whether money wages have been rising faster or slower than output prices under assumptions of constant technology and factor proportions. It is apparent that between 1969 and 1974 the ratio was roughly constant or even declining for traditional crops, though it generally increased in 1975. The figures highlight the financial attractiveness at the farm level of the horticultural crops.

3.35 Turning now to questions of seasonality in the wage determination process, we observe in practice the sorts of short-period fluctuations in wage rates that are expected when the short-run demand curve for labor is subject to marked instability. For example, in May-June when the farmer is busy planting rice and maize as well as cultivating his cotton, and when his hired labor is harvesting wheat, wage rates are at their peak. In January, when the water system is closed for channel clearance, labor is required only for capital maintenance and animal production, and the wage rate falls to a level at or near the reservation wage. The level of the latter may not be specified exactly, since it varies depending on individual circumstances.

3.36 The question remains as to the existence of disguised unemployment or underemployment in Egyptian agriculture. Two observations are relevant. Firstly, an indication of the existence of underemployment might be the willingness of certain groups to seek employment if their expectations of work at a wage greater than the reservation level would be realized. Although there are differences between family farms and commercial farms in their labor retention practices, 1/ it can be suggested that there does exist a potential supply of labor which does not appear in field surveys of unemploy ment, for example, camel owners who pasture their animals on the desert fringes during slack seasons, or women who do not seek work during these periods for cultural reasons.

3.37 Secondly, the extreme seasonality of labor demand may mean that shortage and surplus of labor may exist almost side-by-side over crucial peak

1/ See further in R.E. Mabro, "Employment, Choice of Technology, Sectoral Priorities" and A. Mohie-Eldin, "Underemployment in Egyptian Agricul- ture", in ILO/ECWA Seminar on Manpower and Employment Planning in Arab Counties (Beirut, 1975). -24-

Table III.10: DAILY WAGE RATE IN AGRICULTURE AT CONSTANT PRICES (1966/67 = 100)

AVERAGE DAILY MONEY WAGE AVERAGE DAILY 1OAL WAGE INDEX OF CONSUMER GOODS RATE RATE - PRICES IN2 , YEAR MEN NON-MEN* MEN NON-MEN* RURAL AREAS -

1966/67 25 12 25 12 100

1967/68 24.5 12 24 12 102

1968/69 24.5 12 23 11 106

1969/70 25.5 13 22 11 114

1970/71 25 12.5 21 10.6 118

1971/72 25.5 12.5 21 10.5 119

1972/73 27.5 13.5 21 10.7 126

* Women and Children

- These are money wage rates deflated by a cost of living index for rural areas. 2/ -' A new cost of living index for rural areas 1966/67 = 100. It is based on the family budget survey of 1965. See National Bank of Egypt, Economic Bulletin, Vol. 27, No. 1, Cairo, 1974

Source: Mohie-Eldin, A.,"Under-Employment in Egyptian Agriculture." Report of the ILO/ECWA Seminar on Manpower Planning in Arab Countries. Beirut, May 1975. ILO Geneva. Table III.11: LABOR COSTS PER LE 1 OF OUTPUT VALUE-_ (in LE sectoral Averages)

CROP 1969 1970 1971 1972 1973 1974 1975

Cotton 0.23 0.24 0.23 0.20 0.23 0.23 0.31

Maize 0.21 0.20 0.20 0.18 0.17 0.22 0.28

Rice 0.23 0.20 0.21 0.20 0.20 0.21 0.23

Wheat 0.27 0.15 0.15 0.15 0.13 0.13 0.15

Berseem -- - - 0.10 0.10 0.10

Vegetables - - - - 0.14 0.14 0.14

Fruit - - - - 0.14 0.14 0.14

Source: Computed from Ministry of Agriculture Data. Computed as follows:

Total labor costs per feddan for cotton, 1975 LE 40.70 Total crop income per feddan (yield times price) LE 128.00 Labor cost per LE 1 of output LE 0.31 -26-

periods. 1/ An example serves to illustrate this. A comparison between harvesting labor requirements of ordinary and HYV wheat on the northern delta suggests a total labor input of about 20 man-days per feddan in either case. However, the traditional method of harvesting small areas of wheat and planting rice immediately while the rest of the wheat crop stands over, which is satisfactory for ordinary varieties, does not suit the HYV wheat because much of the grain is lost by shattering during the stand-over period. In the HYV case the 20 man-days required would have to be characterized by 5 man-days of severe labor shortage and 15 man-days of apparent surplus and, in fact, these harvest labor requirements were critical in leading to non-adoption of high- yielding varieties under these conditions.

3.38 In short, the evidence suggests that the paradox of persistent labor surplus and/or shortage mentioned at the outset of this section can be explained largely in terms of particular factors relating both to the existence of disguised unemployment in the Egyptian agricultural sector, and to seasonal bottlenecks in the farm labor market. Government policies discussed above, including military conscription, guaranteed employment for large segments of the community, compulsory education, urban-based subsidies and so on, are tending to restrict farm labor supply. This does not imply, though, that the opportunity cost of labor at the margin over the total economy is high. Even the most ardent proponents of an emerging labor shortage in Egypt do not claim that economic output falls as the marginal worker emigrates.

3.39 We now turn to the longer-run question of labor policy in the context of planning for economic growth. In particular, we must examine the tradeoff between employment and productivity growth in the Egyptian agricultural sector.

3.40 It is apparent that a strategy of maximizing growth in productivity would require rapid mechanization along with an increase in fertilizer use and credit availability. This conclusion is reached as a result of arguments which have been discussed already. That is, Egyptian farms are predominantly small, with inadequate growth in the supply of land and capital resources for the given rate of growth in the supply of labor. If these constraints are fixed for reasons arising essentially outside the agricultural sector, the only avenue for productivity increase is intensification, including mechanization, together with increased use of complementary capital inputs.

3.41 If such a policy were implemented, however, the result without policy changes in other sectors would be a further massive increase in the urban subsidy and employment programs which are already an enormous fiscal drain on the economy. On the other hand, a strategy to maximize employment might be pursued through increasing supplies of fertilizer and credit without mechanization, at the same time reducing export taxes on labor intensive crops and reducing protection on animal production which has low labor requirements. Such a strategy would also result in some productivity increases but would not be expected to be as sustained as under mechanization because of differences in the savings/consumption composition of the final output. The rate of rural-urban migration would be slowed down as real returns to labor rose and the cropping pattern moved towards greater labor intensity.

1/ See, for instance, B. Hansen et al., "Underemployment in Egyptian Agriculture", in ibid. -27-

3.42 An appropriate strategy mix would depend on a number of factors, and would need to be assessed with due regard for linkages between agriculture and the rest of the economy. For instance, the net effect of a growth strategy on value-added would be negative if the incremental payments for imported machinery and the loss of exportable fuel revenue were more than the value of additional agricultural output plus the net change in output due to displacement of farm labor to new occupations. For a maximum employment strategy the total wages bill would increase, as would the demand for consumer goods in rural areas. Given the present structure of Egyptian industry this demand would have to be satisfied by imports, at least in the medium term.

3.43 The further ramifications of questions relating to labor and employment policy will be taken up in Section VIII. -28-

IV. PRICE RESPONSIVENESS OF EGYPTIAN FARMERS

A. Rationale for Studying Price Effects

4.01 Up to this section the key assumption has been that prices do matter. Whether and how farm prices matter is still at issue in the literature. 1/ On the one hand, prices are said to be of minor significance in influencing output because of real resource constraints. On the other hand, prices are said to be of major importance but empirical validation is difficult because of modelling problems. An examination of historical price response is important because Egyptian economic policy for agriculture is predicated on prices having a limited role. However, it is postulated and evidence will be offered that this underestimation of the role of prices in the Egyptian context is basic to much of the problem of sectoral management.

4.02 From the administration's perspective, production decisions are somewhat independent of prices and begin with the setting of the cotton quotas based on its analysis of international market opportunities. This implicitly decides the production of other complements in the rather rigid rotation. Quota shares are then allocated to cooperatives and through them to farmers depending on local conditions. Requirements are set for compulsory delivery to the cooperatives, usually being 100% of the cotton crop, some 40% for wheat, onions, rice, sesame, beans and so on. All of this is independent of prices and varies from time to time. Similarly, on the input side, water is allocated according to the requirements of the cropping pattern, already administratively set within the constraints of the supply system. Fertilizer and pesticide requirements and availability are also calculated by the state monopoly traders in consultation with concerned ministries. Supplies are then passed to farmers according to their needs as decided by the output quota system and fixed coefficients. In all, these prices to farmers do, indeed, play a minor role. The method is consistent with the commodity balances planning approach used in Egypt.

4.03 Farm prices have been used mostly to determine incomes and the rate of resource transfers to and from the sector. Prices are set by a system that is basically a cost of production method, (see section II.2). These costs are themselves administratively determined and net income is fixed. That supply and demand have a reduced role is confirmed by the fact that a fundamental consideration of price setting is to equalize returns across all cropping patterns. An example of the resource transfer function of prices is seen in the adjustment of the terms of trade between agriculture and the fertilizer industry. From 1961 to the early 1970s the infant domestic fertilizer industry was protected by a nominal rate of from 9% to 87%, (see section V, Table V.2). With the sharp rise in the world price of fertilizer farm incomes were maintained by an implicit subsidy on fertilizers reaching 60% in 1975. On the

1/ See for example Berhman, J., Supply Response in Underdeveloped Agricul- ture, North Holland, 1968. Also, Petersen, W.L., "International Farm Prices and the Social Cost of Cheap Food Policies", American Journal of Agricultural Economics, Vol. 61, No. 1, February, 1979. -29-

output side, much of the urban consumer subsidy program has been financed via implicit taxes on cotton, rice and other major crops. This practice is defended by the absence of income tax in the sector and the assumption of low price elasticity of supply. Another point said to be in its favor is the view 1/ that agricultural savings are small and declining farm prices result in lower industrial wages and higher industrial investment. In fact, the mechanism for farm price setting allows only for cost of production and consumption. Nothing is considered for savings and investment, seen as a state prerogative. Growth and development are not expected to come from farmer decisions.

4.04 We explore these issues at various levels in the following sections over both the short- and long-run for evidence of the effect of prices on the allocation of resources in the sector and on the growth in total production. The first level examined is gross margin analysis to illustrate the effect of interventions on the composition of inputs and products and possible decision variables. From this the effects on output mix may be inferred, and evidence is examined to see if actual changes did, in fact, follow the directions of change indicated. A more rigorous approach is then taken in the econometric analysis which looks at long run changes in sector-level production and tries to identify explanatory variables. Finally, a one period linear programming analysis of several farm sizes and technology types is used to explore the interactions of decision variables under various policy alternatives. It is stressed that all the conventional limitations of these systems are acknowledged together with the usual arbitrariness of assumptions and the problems of aggregation.

B. Gross Margin Analysis 2/

4.05 The ordering of gross margins for a typical farm is shown in Table IV.1. Gross returns are highest for fruits, vegetables, long season berseem and cotton with the grains being least attractive. Next we deduct those costs which are incurred directly as a result of the farmers decisions on what to grow. These are the standard variable costs that represent real expenses off the farm such as for fertilizer, pesticides and hired labor. Other costs such as rent, land taxes and overheads are not deducted since these have to be paid regardless of his crop choice. Family labor and animal draft costs are not deducted partly for somewhat the same reason but mostly because the net return will be compared to the amount of these "difficult-to-cost" factors that are used. As shown in Table IV.1, the ranking by gross margins essentially keep thfe crops in the same order as by gross returns. However, when the number of months for which the crop occupies the land and the amount of labor required are considered the ranking changes considerably. Cotton, in particular, slips from fourth to ninth and last place. If the assumption that farmers are not too different from the rest of us is accepted, then it seems

1/ INP Memo No. 1022, "Agricultural Prices, Bases of Setting and Control", Saad Taha Allam, 1972 and INP Memo No. 1177, "Agricultural Pricing and- Price Theory", W. Wunderlich, 1976.

2/ Defined as, gross return from production of a crop minus those costs directly attributable to its production and which vary with the amount produced. Table IV.l: GROSS MARGINS PER FEDDAN, MAJOR CROPS, EGYPT 1975/76 (values in LE/feddan/year)

Variable Gross Crop Gross Margin Labor Gross Margin - I/ Rank Crop Returns- Costsl/ Margins Rank Duration per month Reauired Der.man_dav (month) (man days)

6 Short Berseem 50 11 39 9 4 9.7 17 2.3 2.5 4 Wheat 106 38 68 8 7 9.7 27 8 Rice 110 40 70 7 5 14.0 48 1.5 9 Cotton 168 63 105 4 8 13.1 100 1.0 1 Long berseem 200 43 157 2 7 22.4 16 9.8 2.4 5 Maize 124 33 91 5 5 18.2 37 2.2 7 w Sorghum 110 30 80 6 5 16.0 37 2 Oranges 300 150 150 3 12 12.0 20 7.5 2.6 3 Tomatoes 300 129 171 1 5 34.2 66

1/ Total value of both primary and secondary products at market prices.

2/ Excludes fixed costs and family labor which is treated as a fixed cost.

Source: Computed. fig IV (1) AREA INDEX MAJOR FIELD CROPS EGYPT 1952 - 1976

200~~~ // ______- ~ ~ Sh 0~ -- ~~%.%% ->o '01~~~~~17

I - <--; q - - Oover t VI~~~~~~~~~~~~~~~~~~~~~IAIZE

____,- ==_.------=,__.._. ss--@@X=._I \__

.~~~~~ha -_ -____-_=_-_ - -a, - _ -_ -- 1 Wheat ~~~~~~~~~~~~~~~~~~~~~~~Cot.ont-

0 ~ 1950.64 1955-59 t960-64 1965-69 - 1970-72 1973.75 17 -32-

reasonable to expect that the output of berseem, fruit and vegetables would increase and that of cotton and rice would decline unless there were certain constraints. In Egypt's system of controlled prices these static relationships are proposed as reasonably representative of the long run period under discussion.

4.06 Actual changes in crop areas over the last twenty-five years are drawn in fig. IV (i). As shown, the area indexes for vegetables, fruit and long season clover have indeed expanded. Wheat and maize areas (also sorghum and millet areas) have remained fairly constant and that of cotton has declined. The slow decline of cotton is interesting because it has occurred despite the rigid quota system imposed to prevent such a decline. The one crop that does not fit the direction of change indicated by the gross margin analysis is rice. This is because the 1975/76 price used does not represent the long run relationship to other prices. From an initially attractive position of LE 30/ton in 1969 the farm-gate price of rice steadily declined to LE 27/ton by 1973 while the prices of all other crops rose. In 1974 the price was increased to LE 31/ton and then to LE 40/ton in 1975 and an area response appeared at the same time. In summary it seems as if farmers are adjusting relative areas of crops planted in response to administration adjustments in relative prices. Although the administration actually uses prices to encourage area response resulting from many previous experiments, the response in the short run has been mixed. We next examine the actual production responses of farmers to price changes over the past 25 years.

C. Time Series Analysis

4.07 Although the analysis of protection in sections V and VI indicates significant price distortions and the preceeding gross margin analysis suggests the direction of changes in resource use, we. still have to examine the empirical evidence to see if farmers have, in fact, reacted to price changes. Observations of farms suggest that the Egyptian small farmers, growing the traditional cotton-based rotation and using animal power are highly restricted in what they can decide to do. On the input side many supply decisions are already made for them - a fertilizer allowance is allocated by crop to each farmer and no more is available, irrigation is supplied abundantly and free of charge, pesticides for the cotton crop are applied to the plants by state agencies, rents are pegged regardless of crops grown or their prices and so on. A certain amount of forage has to be grown for animal draft and the smaller the farm the higher proportion is devoted to animal needs which considerations also influence crop varieties through the need for straws. Other output choices are limited because of home consumption needs for the family and the agronomic constraints of the three-year rotation. Finally, overlaying this are the quota obligations to grow cotton, wheat, and other crops. In all this, it is argued on the one hand, prices play a minor part. Indeed, the revealed attitudes of price management suggests that such a view is the basis of the farm price system. For instance, one of the methods of price setting is an income-equalization approach regardless of crops grown. Price management seems based upon the premise that physical controls regulate resource use and that, acting independently, prices determine incomes. This view is partly correct, but only for the short run as indicated by the better fit of the lagged price response models. -33-

4.08 On the other hand, as is well documented in reports of the Price Planning Agency and as quoted in parts of Section VI, evasion of official markets is common for sugar, rice and other crops. Rental law violations and quota defaults are normal. Secondary trading in fertilizer intended for cotton is common and animal power is gradually being replaced by diesel pumps and tractors. Further, the policy controls over what is grown relate to traditional crops. Investment in the sector from private sources external to it have rapidly expanded the area of "new" crops and would seem to indicate that the total level of resources and hence aggregate output may be influenced by this indirect influence of prices on profit and thus investment. These considerations are more relevant to long-run response.

4.09 Ex ante we would not expect to find large short-run elasticities but could expect significant long-run responses. We analyze 25 years of data for the five major crops occupying 75% of the cropped area. This period covers the years since the revolution during which agricultural policy and practice have remained essentially unchanged. These data are relatively reliable given that Egyptian agriculture occurs within a well defined area of somewhat homogeneous conditions of farm systems, marketing institutions and so on covered by cross referenced data series. Price data are deflated by a real wage index since labor is the largest single input accounting for over half of crop input costs. Since prices of fertilizer rents, irrigation water, credit and other items have remained almost constant and quantities rationed, most cost increases can be imputed to labor pricing. The output prices are the Ministry of Agriculture's price series which represent weighted average prices across all markets. Probably the marginal price for overquota amounts sold in village markets would have been better but this option was not relevant for many crops, e.g., cotton, and for many the divergence is known not to have been great over most of the period. Tree crops and vegetables were excluded because of the relatively small areas of a large number of well differentiated products. The data are listed in Annex 1, Tables 41 to 44.

(a) Model Formulation 1/

4.10 The basic model chosen is the partial adjustment model of the common form:

* Ait - Ai(t-1) = y[Ait - Ai(t-1)] + eit (1)

where the terms are the usual Ait = area actually planted of crop i in time t Ait = area intended to be planted t-1 = previous year et = residual in t y - area adjustment coefficient

1/ For a full treatment of the methodology see Scandizzo, P. and Colin Bruce, Methodologies for Measuring Agricultural Price Intervention Effects, World Bank Staff Working Paper (forthcoming). -34-

It is then hypothesized that the area the farmers intend to plant is a function of expected prices and yields:

Ait ' a + bPit + cY it (2)

where Pi ' expected price of crop i in time t

Yit = expected yield

Under Egypt's administered price system where stability has been a prime objective we may assume that the coefficient of expectation is equal to 1 for the sake of convenience. Although this introduces some error into the estimates, examination of the data streams indicates that for most of the period covered the changes in the announced prices have done little more than compensate for inflation. In other words, for the deflated prices, we assume: * * 3 Pit Pi(t- ) or Pit = a i pi i(t-j) J=l Where the i's are pre-established declining weights.

3 * * and Yit Y(t-) or Yit = aiYi(t-J) J=l By substitution in equation (1) we arrive at:

A - A ) . Y[a + bP,(t_,) + CY-(tA,) i(t_l)]

Ait . - (1 - Y)A 1) + Ya + YbPi(t-1) + YcY-(t-e (4)

In the reduced form and using more common notation the estimating equation becomes:

Ait bi + bi2 i(t-b) bi3i(t-) i4i(t-) +it (5)

This is then generalized to many crops to iden ify the area and yield (hence input) relationships between competing and complementary crops. The equation now takes the form which includes cross price effects and hypothesises that farmers react to changes in relative prices by varying input use among crops -35-

(using yield as a proxy) as well as by area substitution. This fits the Egyptian conditions where cropped area and aggregate input supply are relatively fixed: n n Ait b +bi2 Ai(t-1) b3 Pi(t-1) bi4 Yi(t-1) +it (6)

This is the final form for the estimating equations, using ordinary least squares under the usual assumptions that the residuals are randomly distributed with mean zero and fixed variance-covariance matrix.

4.11 It may be that farmers respond to revenues per unit area of each crop in their mix rather than simply to prices and that yields may, especially in the Egyptian circumstances, be themselves a function of previous prices through varying input use. In that case the price and yield terms may themselves be correlated. Equation (7) combines these two terms and hypothesizes area as a function of past revenues as well as of past area. This is in the estimating form: n

Ait i + bi2 Ai(t-1) E i3 Ri(t-) it (7) i-i Finally, to test whether, yields are correlated with prices and revenues in the manner earlier specified we hypothesize the estimation form:

it il ii i2 i(t-1) it

Using the data set described above the data are fitted to equations (6), (7) and (8). The results are described below.

(b) Results

4.12 The estimates of the coefficients of prices, yields and revenues with respect to planted areas are presented in Table IV.2a and 2b. The estimates of the coefficients of prices or revenues with respect to realized yields are given in Table 2c and the elasticity estimates for all models are in Table 2d. On the whole, the estimated area response models fit the data rather well with the revenue form giving somewhat better results. The major difference between the two forms is the inclusion of long season berseem (Egyptian clover) in the revenue model since separate price and yield data are not available for this crop. For this reason the revenue specification is preferred. Missing values indicate that a model has been rerun with the most insignificant terms excluded.

4.13 Turning to the revenue forms we were able to explain 70% to 90% of the planted area variation by our models except in the case of cotton which Table lV,2,a; LEAST SqUARES ESTIMATES OF AIREA RESPONSE MODELS FOR 1950-1975 - (with prices and yields as exogenous variables)

Estimates of Co-efficients of Estimates of Co-efficients of Area Form of Prices of Ylelds of Adjustment 2 Crop Equation Constant Wheat Rice Maize Cotton Wheat Rice Maize Cotton Co-efficient R

Wheat Linear 1229.2 29.537 -13.561 -97.955 1 0.784 (t) (7.079) (4.738) (-1.850) (-1.304) Rice Linear 162.4 13.791 7.383 -0.025 -7.010 -40.518 135.902 346.585 -338.632 0.65 0.867 (0.253) (0,768 (0,354) (-0,002) (-1.196) (-0.146) (1.127) (1.230) (-0.614) (0.870) Linear -438.6 249.912 533.406 0.87 0.861 (-2.421) (2.557) (3.901) (0.678) Maize Linear 704.2 26,331 -18.083 4.515 411.074 1 0.687 (2.568) (2.536) (-2.226) (1.402) (2,201) Cotton Linear 1433.4 -30.893 58.895 -3.294 -161.612 -755.877 829.251 0.58 0.621 (1.359) (-2.149) (2.637) (-0,485) (-0.610) (-2.706) (1.568) (1,904) Llnear 2225.1 -34.687 35.411 -606.110 0.88 0.558 (3.850) (-3,137) (2.147) (-3,325) (1.293) Table IV. 2.b: LEAST SQUARES ESTIMATES OF AREA RESPONSE MODELS FOR 1950-1975 (with revenues as exogenous variables)

Estimates of Co-efficients of Revenues Received from Sales of Area Ad- Form of Long ment Co- Croo Equation Constant Wheat Rice Maize Cotton Berseem efficient R2

'Wleat Linear 1172,0 25.848 -7,157 -9.642 1.144 -6.277 0.89 0.715 (t) (3.335) (3.417) (-1.324) (-1.068) (0.396) (-l.983) (0.508) Rice Linear 11,713 -11.655 7.455 6.247 0.689 4.951 0.30 0.779 (0.343) (-0,899) (1.028) (0.487) (0.162) (0.893) (2.908) Maize Linear 1549.1 29.085 - -17.985 4.801 1.241 0.822 (6.480) (4.937) (-3.627) (2.307) (1.446) Cotton Linear 1408.7 3.626 -2.742 -9.460 0.69 0.343 (2,825) (0.693) (-0.695) (-1.911) (1.453) Long Log- Berseem Linear 0,226 0.070 -0,044 -0.043 -0.070 -0.045 0.04 0.947 (0,268) (0.789) (-0.3537) (-0.452) (-0.883) (-0.663) (8.174) Log- Linear 1.920 0.053 -0.109 -0,245 -0.019 0.10 0.960 (2,533) (0,523) (-0.966) (-2w310) (-0,341) . (7v550) -38-

fits our expectations given the exclusion of data on quantitative controls. 1/ In general, the signs are in the right direction and the indicated relationships among crops are consistent with field observation. Looking at individual crop models, the significant terms correlated with wheat area are wheat revenues and berseem revenue2 for the previous year with an area adjustment coefficient of 0.89 and an R of 0.715. The negative sign of the berseem coefficient makes sense since the two are major competitors for winter land. Both the revenue and the price/yield specifications indicate that there may be some negative correlation between wheat and rice/maize. In other words, substitution occurs between summer grains and winter grains. Running the price/yield formulation with the low significance terms excluded indicates that most of the changes in planted rice area are correlated with changes in rice and maize yields. This is broadly consistent with a major constraint on rice area for much of the period being water availability though the sharp fall in planted area in 1974 led to a contraction away from the maximum possible set by water availability. This situation was reversed by a 60% price rise over the next two years. The maize area estimates are interesting because of the negative signs on the coefficients of both maize prices and revenues. Such an effect fits the common observation in Egypt of substitution of wheat for maize in consumption as real income rises. 2/ This appears to be affecting farm consumption and production decisions and is supported by the correct sign on the highly significant wheat term in both maize area models.

4.14 In the revenue equation for cotton area, long berseem is the only significant variable, with a negative sign on the coefficient consistent with the competitiveness of these two crops. In the price/yield specification, which does not include berseem, wheat competitiveness is correctly signified and cotton price is insignificant. Berseem area is correlated only with cotton revenue and negatively as we would expect from the discussion on cotton.

4.15 Close examination of the estimates reveal some problems such as symmetry of correlation between crops. In general, the main effects that we are looking for are consistent throughout our models through various runs and are consistent with field observations.

4.16 We now turn to input response to prices. Given the relative fixity of resource supply in Egypt the farmer has the option of varying input use

1/ For a production function approach including cotton quantative controls, see Hansen, B., Nashashibi, K., Foreign Trade Regimes and Economic Development: Egypt, NBER, New York, 1975. Their analysis presents an "...illustration of a methodology." p. 193.

2/ A treatment of this effect is given in, Bell, C., "A Note on Perverse Producer Response to Changes in Prices", in Agrarian Reform and Reformism, Ed. D. Lehmann, Faber, London 1974. Table IV,2,c; GENERALIZED LEAST SQUARES ESTIMATES OF YIELD RESPONSE EQUATIONS FOR 1950-1975

Estimates of Co-efficients of Prices Form of or Revenues for Crop Function Constant Whear Rice Maize Cotton

Wheat Linear (Revenbes lagged by 1 year) 2.096 0.023 -0.001 -0.014 -0.023 0.93 (t) (3.634) (1.568) (-0.104) (-0.642) (-3.993) Rice Linear (Revenues lagged by 1 year 1.418 0.040 0.013 0.041 0.026 0.96 (1.936) (2.481) (0.786) (1.693) (-1.712) Maize Linear (Prices lagged by 1 year) 2.388 -0.039 0.026 -0.015 0.98 (20.769) (-2.427) (2.471) (-5.784) Cotton Linear (Revenues lagged by 1 year) 0.736 (-0.024) -0.003 0.017 0.004 0.89 (2.365) (-2.528) (-0.314) (1.222) (1.011) Table IV.2.d: ELASTICITY ESTIMATES MAJOR CROPS (1950-1975)

Short-run Lon-run -crov ~ T~,heat Rice Maize Cotton 'Berseed Wheat Rice Maize Cotton Berseeii,

1. Area planted with respect to prices

_;>eaU 0.44 - -0.17 - 0.44 -0.17 - Ri.-0G.24 0.13 - -0.62 0.38 0.20 - -0,95 ?'a_ze Q.,5 ^ -0.19 0.21 0.31 - -0.19 0.21 C: -ton -0.37 0.51 - -0.14 -0.65 0.88 - -0.24

2. Arcea -lanted w:ith respect to revenues

0.41 -0.16 -0.16 0.04 -0.12 0.46 -0.18 -0.16 0.04 -0.13 .ice -0.32 0.28 0.15 0.04 0..14 1.05 0.91 0.52 0.15 0.47 Maize 0.41 - -0;29 0.13 - 0.33 - -0.19 0.13 - Cotton - 0.06 - -0.09 -0.13 0.95 0.09 - -0.12 -0.19 Berseem 0.05 - -0.10 -0.24 -0.02 0.05 - ' -0.11 -0.25 -0.02

3. withw:e1d respect to prices

'Whent 0.30 - - 1.18 Rice 0.43 0,19 0.40 -0.66 Maize - -0.48 0.39 -0.93 Cotton -0.72 - - 0.28 -41-

across crops even where physical controls on planted area exist. If it is accepted that land input use varies with product price then it is reasonable to expect that use of other inputs may also be affected. The results in Table IV.2.c fitting the lagged, price or revenue data to the yield response model are interesting showing from 89% to 98% yield variation explained by product prices. Our reasoning is that this is due to a relatively fixed amount of fertilizer and labor being allocated to crops in accordance with their relative profitability. This is substantiated by secondary trading of inputs, especially fertilizer. The interesting items are the negative correlations between the yields of wheat and cotton with each other's prices or revenues. In fact, the results clearly indicate significant relationships between returns to cotton and yields of all the crops studied. Again of note, is the positive correlation and significance of maize yields with maize prices. This is the reverse of the response of maize area. What appears to be happening is that as maize prices rise farmers reduce maize area and use more inputs thus maintaining output of maize while increasing farm income. In other words, credit substitutes for land as the cash flow improves.

4.17 The elasticity estimates (Table IV.2.d) for wheat and rice areas are positive with respect to their own prices and revenues. For maize, cotton and long season berseem the elasticity estimates are negative with respect to their own prices and revenues. Many of the cross elasticities are quite high and in all cases the yield responses values with respect to own price are positive. Despite problems of interpretation of certain cross elasticity estimates the values clearly lead us to reject the null hypothesis that there has been no response to price changes in Egypt.

4.18 In general, the supply response equations support the conclusions of the gross margins analysis that the areas and yields of the less profitable crops would be expected to decline relative to those of their competitors (see fig. IV(i)). They corroborate the results of the administration's "real world" experiments of encouraging output increases by granting price rises. The complexity of the estimated equations reflect the inter-product relationships correctly, particularly those among cotton wheat and berseem. As early as 1937 1/ the administrations drew attention to the fact that cotron yields were suffering because farmers who were short of animal fodder were leaving berseem in the ground past the date when it should have been ploughed out and planted to cotton. In other words, even if policy management could effectively prevent area response the farmers could still respond by changing the dates of their use of that area. Cotton yields are sensitive to the date of planting. Again, in 1955, Brown 2/ discussed the problem and commented, "It may even be for him (the farmer) the correct economic decision, in the sense that he gains more from his berseem than he loses by later cotton-planning". References to the same problem in the mid-1970s are in the Price Planning Agencies Memos discussed in section VI.

1/ Selim, H. K., Twenty Years of Agricultural Development in Egypt (1919-1939), Cairo, Government Press, 1940.

2/ Brown, C.H. Egyptian Cotton, London, Leonard Hill Books, Ltd. 1955. -42-

4.19 However, it is stressed that these results are positive (descriptive) and do not depend directly on behavioral assumptions as to maximization of a profit or consumption objective. If the rejection of the null hypothesis-- that there is no relationship between prices and production--is accepted then certain policy implications follow. These are traced under alternative policy scenarios and behavioral assumptions in the linear programming analysis in the following section.

D. Linear Programming Analysis 1/

(i) Introduction

4.20 The aim of this linear programming study is twofold. Firstly, we wish to establish the extent to which the typical Egyptian agricultural unit, operating within the technical, economic and social constraints placed upon it, might be expected to react to changing farm gate prices for its marketed output. Secondly, we wish to explore the implications of certain policy measures for resource allocation and for pricing of both factors and products in the Egyptian agricultural sector.

4.21 The use of the linear programming model to represent the farm firm under conditions of mixed subsistence/cash cropping and of family/firm inter- action is now well established. Further, the extension of the basic linear programming model to evaluate the effects of changing prices, profitabilities, constraint levels and/or technical coefficients through the use of various parametric programming procedures has also been widely demonstrated.

4.22 The model constructed in this study depicts a typical 3-feddan Egyptian farm consisting of interdependent farm family and firm units which share the same resource base. The household depends on the farm to provide its basic subsistence needs, while at the same time providing labor to the firm unit. Cash surplus generated by the farm firm provides for the purchase of essential production inputs and nonfarm consumption goods. On the whole our model makes the conventional assumptions as to the nature of the objectives, production conditions and constraints under which the enterprise operates. That is, it is assumed that farmers attempt to maximize expected net cash returns after minimum subsistence requirements have been met. Prices are exogenous and the expectations operator assumed is a simple one based on immediate past experience. The production function assumed is a static deterministic fixed-coefficients function of the standard type, and no nonlinearities or random elements are assumed to affect the objective function or the constraint set. It is assumed that farmers attempt to diversify the marketing risk by choosing a mix of crops based on minimum proportions of certain activities or groups of activities, regardless of relative profitability.

1/ For a formal statement of the model plus details of the numbers in the matrix and their justification see World Bank Staff Paper (forthcoming), on the L.P. analysis of farm price response in Egypt. Fig. IV (ii) gives a schematic representation of the model formulation. -43-

4.23 Two separate models are constructed corresponding to the two technological states found in Egypt. The first is an animal technology, where agricultural tasks are performed using oxen-drawn equipment. The second is a mechanized farm where tractors and associated implements are used. In addition to the small farm model representing 60% of the farms, two large farm models, 10 feddans and 30 feddans, representing 50% of the farmland are included.

(ii) The Model in General Terms

4.24 The model may be specified in terms of its objective function, its activities and its constraints.

(a) ObJective Function

4.25 The objective function of the linear programming model of the typical 3-feddan farm is maximization of the farmer's net profit, which is defined as gross value of production (value of sales of crops and livestock products and value of farm-produced consumption goods for the farm household) less input costs (costs associated with crop and livestock production inputs, viz., seeds, fertilizer, hired labor, etc.), costs associated with using animals, irrigation-pump and tractor services, and interest charges.

(b) Activities:

4.26 Five broad types of activities are considered in the model, relating to production, consumption, marketing, hiring and capital utilization.

(1) Production Activities

4.27 The production of field crops involves the performance of several agricultural tasks, which are carried on throughout the year. A task is defined as a distinguishable type of action required in the production process. The specific tasks identified for the crops are:

- Plowing and land preparation

- Planting

- Irrigation

- Fertilizer application

- Weeding

- Harvesting

- Winnowing and threshing

- Transportation. -44-

4.28 The following crops are considered in the model:

Winter crops: Wheat, short berseem, long berseem and vegetables

Summer crops: Sorghum, maize and cotton.

For each crop considered in the model, data on input costs, labor requirements, crop yield and any by-products associated with the crop were obtained from field observations and farm budgets.

(2) Consumption Activities

4.29 In a small-farmer economy, production of crops for domestic consumption plays an important role. These activities are those associated with the household's consumption of farm-produced outputs, mainly foodgrains, and fodder for animal feed. This food requirement for meeting domestic subsistence needs acts as a constraint upon the production of alternative and perhaps more profitable crops, and it diminishes the marketable surplus and hence income. In the farm models in this study, subsistence requirements have been incorporated as constraints on the allocation of land.

(3) Market-Oriented Activities

4.30 The market activities consist of the sale of crop and livestock products.

(4) Hiring Activities

4.31 The farm household is allowed to hire labor at the market wage rate to meet labor requirements at peak seasons. Also, hiring of machinery (thresher, tractor services) is included for mechanized farm models.

(5) Investment Activities

4.32 The investment activity provides the farmer with the option of borrowing capital to supplement the available operating capital on hand. It is assumed that capital can be borrowed at an interest rate of 5%.

The model is subject to the following constraints:

(1) Land Constraints:

4.33 The land is considered according to the two seasons, winter and summer. The basic farm model has a farm size of 3 feddans. Farm sizes of 10 feddans and 30 feddans are also considered in subsequent models. The government quota imposed on cotton acreage planted is incorporated in the land constraint. Further, the cotton area planted is equated to the area planted for short berseem to take into consideration crop rotation requirements. -45-

(2) Labor Constraints:

4.34 The labor requirements for the various crops are identified by month for each crop. An availability of labor is based on the assumption that the entire farm household (2 adults and 3 children) contribute a maximum of 30 man-days per month. Additional requirements for labor input are met through hiring labor at the market wage rate.

(3) Subsistence Requirements:

4.35 The subsistence requirements essentially consist of two parts, viz., those food crops needed for the farm household and the production of feed for draft animals. For farm household consumption, it is assumed that the total quantity of grains (wheat, maize and sorghum) consumed by an average family of 2 adults and 3 children is 1.9 kgms/day which makes an annual consumption of 0.7 tons. As regards the feed consumption by animals, it is assumed that a team comprising a pair of oxen consumes 13 tons of berseem, 3.6 tons of straw and 0.72 tons of grain per year.

(4) Hiring Labor Constraints:

4.36 The farmer is provided with the option of hiring as much labor as he needs to meet his labor requirement beyond what his household provides. The wage rate during the land preparation and harvest months (May, June, September and October) when the demand for labor is at its peak is LE 0.9 per day and LE 0.8 per day for the rest of the year.

(5) Operating Capital Constraint:

4.37 It is assumed that the farm household has some capital (LE 300 tcvr the basic 3 feddan model) at the beginning of the agricultural season to meet initial operating costs. Once this operating capital is depleted, the farmer has the option of borrowing capital at an interest rate of 5%.

(6) Marketing Constraints:

4.38 A limitation of 0.25 feddans of vegetables per 3 feddan farm was imposed to prevent the model from hiring unlimited labor at a constant price to produce only vegetables. The feasibility of this alternative is limited to areas close to Cairo only. It is assumed that no output is sold on the black market and that rationed inputs are not resold.

(iii) Mathematical Statement of the LP Model

Mathematically, the LP model of the typical 3 feddan farm could be formulated as follows:

MAX =iEP S.l+ P.F - ECiXii EWL iEEmiMi E_A - AH - El L Ey Bi iII i1 1 t itiit t t t tt -46-

Where:

R = farmer's net profit in LE.

P. = selling price for output i in LE.

S = quantity of ith output sold in tonnes.

F = quantity of grains retained for domestic consumption in tonnes.

C. = variable cash costs for production activity in LE/feddan.

Xi = production of output i in feddans.

Wt = wage rate per man-day in month t in LE.

H L = labor hired in month t in man-days. t mi = machine operating costs/hour for ith machine use.

M.i= use in hours of ith machine for production in season t. a = cash costs of animal feed in LE.

F A = animal draft use (owned) in month t in days. t-

a = cost of hiring draft animal use in LE/day.

H A = animal draft use (hired) in month t in days. t

1 = rent on land in LE/feddan.

Lt = land used in month t.

Yi = annual rate of interest in percentage for borrowing capital for production.

B. = amount of capital borrowed for various farm uses in LE.-

Subject to: A. Land Constraints

EXKi < AK

K Where Xi = crop production activity by season,

K = amount of land available by season in feddans. -47-

B. Labor Constraints

H F (i) El. X. - EL < Lt it I t -

(ii) LH < IH t - t

Where 1.it labor requirement in season.

t for activity i in man-days.

F Lt = exogeneously given amount of family labor available in season t in man-days.

Lt exogeneously given amount of hired labor available in season t in man-days.

C. Animal Draft Constraints

(i) E a. X. - EA < At

(ii) A < A t - t

Where sit animal power requirement in season t for activity i in days.

F A = exogeneously given amount of draft animal use (owned) available in season t in days.

At exogeneously given amount of draft animal power available for hire in season t in days.

D. Machine Power Constraints

Em.Xi _ Mt it

Where M = exogeneously given amount of machine power available in season t in hours. -48-

E. Subsistence Constraints

8 -s

Where C = quantity of jth output, viz, grains, animal feed and livestock J retained for domestic consumption in tonnes.

= exogeneously estimated quantity of grains, animal feed and ] livestock needed for meeting subsistence recuirements in tonnes.

F. Capital and Credit Constraints

H F H (i) EkiXi + EWtLt + EmMitMit + aAt EBA t ji 3. t it t t

(ii) B. < B.

Where ki - cash requirement for ith production activity. N = borrowing capital. K = initial operating capital available in LE.

C. Crop, Livestock Production Equilibrium Conditions

C + Ss - Y.X. < 0 1 1 11 -

Where Yi yield of output from ith production activity in tonnes/feddan.

(iv) Data and Experiments Conducted

(a) Data Summary

4.39 The data used are essentially those collected from Sohag Governorate in late 1977 augmented by Ministry of Agriculture statistics for the sector. Egyptian agriculture is relatively homogenous making the data fairly representative of the sector. The farms are fully irrigated and double cropped with yields applicable to the old lands of the Delta and the Nile terraces. Both primary and secondary products - such as wheat grain and wheat straw - are considered. The standard cotton-based rotation with cotton in the summer followed by wheat then maize, or sorghum followed by berseem then cotton or a summer grain again is used, supplemented by a small area of vegetables. Animal products - milk, cull and calf sales - are considered as by-products of draft power provision using standard Egyptian small farm coefficients. Fixed costs include rent, land taxes, animal health charges and a contribution to the community owned water wheel used for animal powered irrigation lift. ACTIVITIES

Production, consumption, sales, hiring, use, financial

OBJECTIVE FUNCTION

Net Revenues made up of gross margins, variable costs and prices

Resources & Constraints INPUT-OUTPUT Family Labor MATRIX Oxen Capacity Tractor Capacity Resources or constraints used or supplied by unit Crop Land of activity Grazing Land o a vM Working Capital Credit o4 SubsistenceLimit Constraints___ 4 Balances 0 Output Balances .. Feed Balances Intermediate Balances Hired Labor Oxen Tractors

-- E~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-

0 z -50-

(b) Experiments Conducted

4.40 Nine parametric runs were made on the basic model. Seven of the parameter changes represented a change in the value of a government control over production. The eighth represented a removal of the subsistence constraints and quota controls allowing specialization as a fully commercial farm. The ninth represented the basic model shifted from animal to mechanical power. The parametric runs were made over the three farm sizes and two technology types to measure size and technology effect on policy impact. The runs were as follows:

(1) Basic model:

4.41 Three feddan farm actual field situation with all interventions ruling in 1977/78, animal technology for draft.

(2) Parametric Runs on Basic Model

4.42 No. 1: Sales tax on cotton - removal of the differential between the actual farm-gate price of cotton and that derived from the export price minus full costs of processing, transport and selling.

4.43 No. 2: Differential exchange rates - removal of the dual exchange rate. Border prices given to cotton, wheat, maize and sorghum less processing and marketing costs.

4.44 No. 3: State TradinR - removal of foreign exchange controls for imports of animal products combined with border pricing of all outputs including animal fodder, and free trade.

4.45 No. 4: Input Subsidies - removal of subsidies on fertilizer, pesticide, irrigation water, interest rates and land taxes.

4.46 No. 5: Rent controls - removal of controls over the rent paid by tenant farmers to landowners. This approximates the doubling of official rents that eventuated in 1979.

4.47 No. 6: All price interventions removed - includes all changes so far plus increased wage rates to reflect rise in general price level.

4.48 No. 7: All interventions removed - includes all price changes plus removal of production quotas, marketing restrictions, huma9 and animal consumption constraints. -51-

4.49 No. 8: Quality controls on fertilizer lifted - as for basic model with 10% yield increase from convergence of recommended, assigned and actual fertilizer rates.

4.50 No. 9: Technology change as for basic model using tractor and irrigation pump.

4.51 The optimal solution for the basic model depicts reality fairly well. The resource allocation generated is in line with common farm practice and the production of the component crops approximates the sectoral mix. This is to be expected since actual farm data were used and the observable institutional constraints of the production quota and marketing system, the technical constraints of the rotation and the consumption constraints of the farm household restrict the freedom of allocation to an unusual degree. The net income generated in the basic model of LE 261 for the three feddan farm after costing all factors except land falls within the range shown in the Five Year Plan distribution of national income for this farm class and corres- ponds with farm survey data. Our model is acceptable as valid and implies that small farmers are optimizing within the limits of a closely constrained model. The model results are summarized in physical terms in Tables IV.4 and in financial terms in IV.5. In the following section we explore the implications of policy related changes on resource allocation and farm incomes in detail and on consumption, foreign exchange earnings, etc., in a more general way.

4.52 Because of the prominence of cotton in generating national income and foreign exchange the differential between farm prices and the export price minus all costs received by the State monopoly has received much attention. 1/ In the first run we remove the difference between the farm gate price and the- border price computed at the official exchange rate. This removes the implicit tax on cotton sales to the State according to the methodology in section VI.l. Holding all other conditions the same as in our basic run swings the cropping pattern into production of more cotton at the expense of its competitors - particularly berseem (parametric run 1). The response is dampened with respect to substituting for other competitors such as wheat, which, although technically possible, is kept constrained by the human and animal production requirements.

4.53 Next we extend this technique to the other traded products and recalculate the reference prices at the parallel exchange rate used for non- agricultural transactions until 1979. This once again switches the cropping

1/ For instance, Price Planning Agency Memo No. 86, "Economics of Cotton in A.R.E.", Cairo 1975. -52-

pattern into relatively more cotton 1/ at the expense of summer grains and long season berseem (parametric 2). To complete the output pricing analysis, adjustments are made for significant protection of animal production and hence for fodder. The net effect of distortion free output prices results in a doubling of cotton production over the current situation in the basic model and a more than halving of berseem production together with a reduction in that of summer grains (parametric 3). Once again, on-farm consumption requirements set lower limits to wheat and summer grains and the assumption of constant animal-based technology requires continued fodder and animal production.

4.54 The treatment of input prices in Section V reveals considerable subsidies on fertilizer, pesticides, interest rates and land taxes. In parametric run 4 of Table IV.4 the chief effect of removal of input subsidies while retaining the output price distortions is a substitution between the higher input-using maize and sorghum (where climate permits). Otherwise the results are the same as in the basic model where the minimum of the lower-bound constrained crops and the maximum of the upper-bound crops like vegetables are grown. The major impact is a 17% reduction in net returns and a halving of the net cash flow value (Table IV.5).

4.55 A question asked in the treatment of farm prices relates to the net effect of State intervention. We look at this in two stages. First, in parametric run 6, all prices are adjusted including an arbitrary 50% increase in wage rates to reflect the general rise in the cost of living associated with a move to unsubsidized food prices. The net effect in terms of resource allocation is the same as that as for adjustment of cotton prices alone demonstrating the dominance of that crop in contributing towards the achievement of the maximand and the absolute value of its price distortion. Second, in parametric run 7, the quota requirements and consumption constraints are lifted in the face of undistorted prices. This removes the lower limits on cotton, and grains. Finally market restrictions on vegetables - also used as a proxy for fruits, flowers etc., - are lifted. In this case the land moves completely into production of vegetables (beans, onions, etc.,) in the winter and cotton in the summer.

4.56 Farm incomes, of course, vary with the cropping pattern, the input use and the prices. Valuing production less intermediate items such as fodder consumed by the farm animals gives the value of final output. Sub- tracting the value of off-farm expenses results in the net returns to the land, labor and capital provided by the farmer. These are listed under the various options in Table IV.5 together with the cash flows. Deducting an opportunity cost wage gives a residual return to farm capital (including land) and an imputed rental value. A similar technique is used to derive an imputed wage rate as a measure of productivity.

1/ In a rice inclusive model the swing is towards that crop. The individual crops chosen here are components of the most common farm rotation and are meant as representatives of the group to which they belong. The substitu- tions between maize, sorghum and millet are not important whereas those between maize and cotton are so. -53-

4.57 One significant conclusion is that under the present price and market restrictions, leasing (parametric 5) is preferable to ownership (basic run). After accounting for all costs including an opportunity cost (5%) of the capital involved in a three feddan farm (LE 6000 for land and improvements) the residual profit accruing to labor is 68% higher for a lessee than for an owner operator. This supports the complaints of landlords who have allowed farms to run down because rents have been fairly constant for 25 years while other prices have risen considerably and was the justification for the recent major increase in official rent. The imputed rental value per feddan shown in item 3 of Table IV.5, column 1, shows that a rental of some two to three times the current fixed rent of around LE 30 per feddan is probably more equitable. In fact, this is the magnitude of the rent increases, which were finally conceded.

4.58 Again, under current conditions and static assumptions the farmer stands to gain more by mechanizing (tractor model) than by investing in output- raising inputs such as extra fertilizer (parametric 8). The gain comes from transferring returns to hired labor to returns to hired machinery and the farm resources. This illustrates fairly well the source of the demand for tractors especially from absentee landowners who see use of machinery and casual labor as an alternative to renting out their land.

4.59 Other inferences can be drawn from the exercise but it is of most interest to note that the model which maximized private profit and foreign exchange earnings through cotton and high value export crops is the intervention and constraint free parametric run 7. This model is least cost in terms of administration requirements and transfer payments.

(d) Discussion

4.60 Despite the usual limitations on the numbers used and the problems within models of this type the analysis is sufficiently robust over a wide range of assumptions for the relationships indicated to hold. Such an approach complemented by the other sections of this study and a sectoral model like that being constructed for the "Egyptian Water Master Plan" provides a powerful tool for examining likely responses to policy change.

4.61 A few general points may be made based on the analysis. First, price distortions have been shown to shift resources away from the free trade position but the effect depends on the technology used and market access as well as fertility requirements for the rotation. Under these circumstances the response to price changes in our static model is severely limited with most response being in farm incomes. Second, among the real costs of current distortions is that they induce investment in labor displacing technology, with little productive use for the freed labor resource, in preference to output raising measures. Third, adjustment of the price of a single commodity may move its production to the free trade position if a non-price factor is not binding but net income and the production of other outputs may be distorted even further along the lines of the familiar second best argument. -54-

E. Conclusions

4.62 Both our econometric and the programming approaches are subject to certain limitations. For instance, demand elasticities have been ignored. However, the analysis does shed light on the production side and point to the complexity of the farm system in Egypt with its opportunities for an unusual degree of interproduct substitution. Both methods show low short-run responses to price changes, and the time-series study indicates that considerable long-run responses have occurred. These are made possible by the gradual weakening of the programming constraints. For instance, many farmers cheat on cotton area requirements, certain farms are mechanized and land is taken out of production of the rotational crops.

4.63 Farm price management in Egypt has been implicitly based on short run view that approximates our programming model with the constraints taken as somewhat permanent. For the core of small farmers locked into the traditional patterns this view is correct. However, the rise of new crops and new technologies out of the range of administered controls has introduced new elements. The response of the controlled subsector is no longer the aggregate response of the sector as a whole.

4.64 Hopefully, our microeconomic analysis offers some complementary insights which are not picked up by standard sector models. The interactions warn against naive recommendations on how to adjust Egypt's farm prices. The income effects of policy changes for the traditional small farm, although large in relative terms, are still small in absolute amount. This lends weight to the view that the pattern of rural poverty would have remained under any realistic option, but poverty would have been lessened if the physical controls on acreage and in respect of the supply of inputs, had been absent. With the continuance of physical controls,agricultural policy adjustments can be only a partial solution to the problem of mass poverty without changes elsewhere in the economy. On the other hand, policy-induced suboptimality has distorted cropping patterns away from Egypt's probable long-run comparative cost advantages and stimulated growth of crops in a sub-sector of agriculture which raises the incomes of the richer farmers and urban investors in agriculture. This conflicts with the country's basic development objectives. Table IV.4: RESULTS OF THE LINEAR PROGRAMMING ANALYSIS UNDER VARIOUS SCENARIOS (in physical terms for 3 feddan Farms)

Tractor Base e------7------Parametric runs------Model run 1 2 3 4 5 6 7 8 9

1. Cropping Pattern, has. Wheat 0.80 0.80 0.80 0.80 0.80 0.80 0.80 - 0.80 0.17 Sorghum 1.06 0.74 - - 1.40 1.06 - - 1.06 2.25 Maize 1.19 0.52 1.82 1.27 0.85 1.19 1.27 - 1.19 - Cotton 0.75 1.73 1.18 1.73 0.75 0.75 1.73 3.00 0.75 0.75 Berseem, long 1.20 0.22 0.77 0.22 1.20 1.20 0.22 - 1.20 1.83 Berseem, short 0.75 1.73 1.18 1.73 0.75 0.75 1.73 - 0.75 0.75 Vegetables 0.25 0.25 0.25 0.25 0.25 0.25 0.25 3.00 0.25 0.25

2. Farm resources Land, has 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 Family labor, mandays 243.00 253.00 253.00 255.00 243.00 243.00 254.00 300.00 243.00 241.00 Hired labor, mandays 79.00 80.00 78.00 82.00 79.00 79.00 81.00 138.00 79.00 29.00 Animal draft, days 44.00 38.00 41.00 37.00 44.00 44.00 37.00 - 44.00 -

3. Crop production Wheat grain, tops 1.12 1.12 1.12 1.12 1.12 1.12 1.12 - 1.23 0.23 Sorghum grain, tons 1.70 1.19 - - 2.24 1.70 - _ 1.87 3.60 Maize grain, tons 2.13 0.94 3.27 2.28 1.53 2.13 2.28 - 2.35 - Seedcotton, tons 0.68 1.56 1.06 1.56 0.68 0.68 1.56 2.70 0.75 0.68 Berseem, tons 27.75 12.99 21.28 12.99 27.75 27.75 12.99 - 27.75 40.42 Vegetables, tons 1.50 1.50 1.50 1.50 1.50 1.50 1.50 18.00 1.50 1.50 Whleat straw, tons 2.00 2.00 2.00 2.00 2.00 2.00 2,00 - 2.00 0.42 Sorghum straw, tons 2.45 1.70 - - 3.22 2.45 - - 2.45 5.17 Maize straw, tons 1.60 0.71 2.46 1.71 1.15 1.60 1.70 - 1.60 - Cotton sticks, tons 1.13 2.60 1.77 2.60 1.13 1.13 2.60 4.5 1.13 1.13

4. Animal Production Beef, kg. 100.00 100.00 100.00 100.00 100.00 100.00 100.00 - 100,00 - Calves, units 1.16 1.16 1.16 1.16 1.16 1.16 1.16 - 1.16 - Milk, litres 600.00 600.00 600.00 600.00 600.00 600.00 600.00 - 600.00 - Table IV.5: RESULTS OF LINEAR PROGRAI*4ING ANALYSIS UNDER VARIOUS SCENARIOS (in value terms as LE for 3 feddan farms)

-…-_…-______…_____-ParametricRuns__. ___.__..…- _-____Tractor Base Model Run 1 2 3 4 5 6 7 e9

1. Gross value of production 1007 1179 1265 1107 1006 1007 1106 1851 1108 .869. - Livestock 206 208 228 143 207 206 1403 - 234 - - Value of output 801 971 1037 964 799 801 963 1851 '874 869 - Variable costs 186 201 194 204 255 186 334 954 196 257 - Fixed costs 106 106 106 106 124 298 196 196 106 36 = Net returns to uncosted factors 509 664 737 654 420 317 433 701 572 576

2. Value of output 801 971 1037 964 799 801 963 1851 '874 869 - On-farm consumption 329 329 370 285 330 329 286 - 329 63 Cash income from sales 472 642 667 679 469 472 677 1851 545 '806 - Cash costs 290 30? 300 310 379 484 530 1150 302 ,293 Net cash flow 180 335 367 369 90 -12 147 701 243 513

3. Net return 509 664 737 654 420 317 433 701 '57-2 576 - Imputed 248 248 251 '249 248 248 372 390 247 193 Residu2al return to farm capital 261 416 486 405 172 69 .61 311 325 383 = Percentage return on capital 4.3 6.9 8.1 6.8 2.9 leased 1.0 5.2 '5.4 6.3

- Imputed rental value per feddan 87 138 162 335 57 leased 20 104 112 128

4. Net return 509 664 737 654 420 317 433 701 572 '576 - Imputed capital charge 300 300 300 300 300 leased 300 300 300 300 - Imputed animal charge 53 45 49 45 54 53 45 - 53 - = Residual return to labor 156 319 388 309 66 264 88 401 219 276 = Imputed wage rate/man day 0.64 1.26 1.53 1.21 0.27 1.08 0.34 1.4 0.90 1.14

5. Ranking of Returns to 'Labor Under present policy 4 2 3 1 Under policy alternatives 5 3 1 4 7 6 2 -57-

V. MARKET INTERVENTIONS AND THEIR EFFECTS ON PRICES-INPUTS

5.01 The preceding discussions have sought to clarify the nature, mechanisms and effects of price controls in a general way. We now turn to a yearly examination of each major input and product to derive the empirical basis of the study.

A. Fertilizers

(i) Nature of Intervention

5.02 All production, importation and distribution of fertilizer in Egypt is controlled by the State. The Agricultural Credit Bank purchases domestically produced fertilizer from local manufacturers and imported supplies from public trading companies. The Bank then distributes fertilizer to the cooperatives, which retail it directly to farmers. The Ministry of Agriculture determines fixed application rates by regions and by crops; these rates are generally less than optimal economic rates because of constraints imposed by the availability of local supplies and by foreign exchange limitations. The Credit Bank in association with the local cooperative rations to each farmer an amount of fertilizer determined by his farm size and cropping pattern. The assigned amounts of fertilizer are recorded on the farmers's "cultivation card", but the actual usage of the fertilizer may subsequently differ from the assigned usage if the farmer reallocates his fertilizer to avenues where his profit at the margin is greater than that from the assigned plan.

5.03 Fertilizer prices are state-determined. The Agricultural Prices Stabilization Fund agency oversees imports and maintains a price equalizaticn scheme that imposes a tax or pays a subsidy accordingly as foreign prices fall short of or exceed predetermined levels set by the Ministry of Industry in cooperation with the Fund and the Ministry of Agriculture. These levels are related to prices for domestically-produced fertilizer, which in turn are set according to cost of production. The end-results are that the domestic fertilizer manufacturing industry is insulated from foreign competition, and retail prices are equalized across all areas regardless of source of supply.

(ii) Price History and Extent of Intervention

5.04 Retail prices of fertilizer have been held virtually constant in money terms over the long period. Table V.1 shows the trend since 1965 in farm gate prices for five major fertilizers; all have remained constant except for that of superphosphate which has risen slightly reflecting quality improvements. Over the same period world prices declined initially. reaching their lowest point in 1971. In mid-1972 they began to rise very rapidly (particularly those of urea and superphosphate), peaking In 1974-75, and then falling back to near their earlier levels. -58-

Table V.1 RETAIL PRICES OF FERTILIZERS* (Farm-gate Prices LE per ton)

Calcium Ammonium Urea Super- Potassium Year Nitrate Sulphate phosphate Sulphate 15.5% 20.5% 46% 15% 20.5%

1965 26.053 29.000 64.000 12.500 27.368 1966 26.053 29.000 64.000 12.500 27.368 1967 26.053 29.000 63.000 12.500 27.368 1968 26.053 29.000 64.000 12.500 27.368 1969 26.053 29.000 64.000 12.500 27.368 1970 26.053 29.000 64.000 12.500 27.368 1971 26.053 29.000 64.000 14.650 27.368 1972 26.053 29.000 64.000 15.650 27.368 1973 26.053 29.000 64.000 15.650 27.368 1974 - 29.000 64.000 15.895 27.368 1975 - 29.000 64.000 15.895 27.368 1976 - 29.000 64.000 15.895 27.368

* Not including the 5% discount to cooperatives.

Source: Choksi, A., Meeraus, A. and Stoutjesdijk, A. (1977), "A Planning Study of the Fertilizer Sector in Egypt", World Bank Staff Work- ing Paper No. 269, Washington DC.

5.05 The extent and implications of intervention in the fertilizer market can be analyzed as follows. In the short run, depicted in Figure I (i), the domestic supply curve (Sd) may be regarded as upward sloping to the point where the capacity constraint of the local industry becomes effective (K); thereafter domestic supply is perfectly inelastic. Foreign supply (Sf) is

infinitely elastic at the border price P . Demand is fixed by ministerial

fiat at a level greater than that which can be supplied domestically, q1, and is invariant with respect to price. A tax (t) is imposed on imported

fertilizer sufficient to raise the border price to P' , the point where b average costs of production of the local industry operating at capacity are just covered. This raises the foreign supply curve to Sf + t, which passes through K. The end-result is that a total quantity qI is demanded at an

internal price P , with an amount Oq2 being supplied by the domestic industry -59-

and q2ql, being imported. Foreign suppliers receive an amount measured by the area q2 NMqq, tax receipts are KLMN, the domestic industry is paid OPb Kq2 of which the portion below the supply curve represents resource costs and that above denotes producers' surplus. A symmetrical situation obtains when Sf lies above K and a subsidy is paid to reduce the border price to Pb. In the long run, the domestic supply curve could be depicted as upward-sloping and foreign supply as still horizontal. In these circumstances the familiar analytics could be applied to measure the welfare costs and benefits to consumers and producers of protecting the domestic fertilizer industry.

Figure I(i): FERTILIZER DEMAND, SUPPLY AND PRICES

Price Sd D

Pb~~~~~ LX

L --- _-- +t ….---- f

Pb Sf

q2 q0 Quantity

5.06 Quantification of the effects discussed above is curtailed by the extent to which the demand and supply functions involved can be measured. In fact we are limited to simple estimates of the direct costs of intervention, that is to measuring the volume of tax/subsidy transfers (the area KLMN in Figure 1.1 and its subsidy equivalent) in various years. Table V.2 shows aggregate tax receipts or subsidy payments by years to or from the stabilization fund, together with an estimate of the approximate rate of tax/subsidy, calculated as a percentage of the border price adjusted to farm-gate equivalence. It is apparent that tax receipts reached a peak in 1971 when world fertilizer prices bottomed, with a rapid turn-around in the ensuing five years. -60-

Table V.2: AGGREGATE TAXES AND SUBSIDIES ON IMPORTED FERTILIZER

Tax Subsidy Implied Tax/ Year Receipts Payments Subsidy Rate LE m. LE m X

1965 1.7 - 19 1966 1.0 - 9 1967 3.1 - 41 1968 6.4 - 58 1969 4.1 - 42 1970 8.8 - 85 1971 13.0 - 87 1972 - 0.02 0 1973 - - 0 1974 - 0.3 n.a. 1975 - 69.3 60 1976 - 29.9 50 1977 6.0 n.a.

Source: Calculated from data supplied by Agricultural Credit Bank and Agricultural Prices Stabilization Fund.

5.07 More detailed estimates of the tax and subsidy rates by individual fertilizers are contained in Tables V.3 and V.4. Table V.3 shows the calculation of rates of tax imposed in the years 1970-71 when, as mentioned above, tax rates were at their height. The c.i.f. import price is adjusted for insurance, duties, packaging, transport, communications and retail margins to give a border price equivalent at the farm-gate for each of four representative fertilizers. Comparison with fixed sales prices yields the tax or subsidy per ton, which may be expressed as a percentage of the border price equivalent. In that year it is clear that nitrogen, which accounts for about 85% of fertilizer usage, attracted a tax rate of around 90%. The receipts from this tax greatly outweighed the relatively small subsidy paid on superphosphate in that year, as indicated in the net transfer payments figures already discussed in Table V.2. At the other extreme, in the year 1975, subsidy rates for nitrogen ranged between 55% and 60%, as shown in Table V.4.

5.08 A qualification to the foregoing calculation of tax and subsidy rates needs to be borne in mind. The calculations were based on official exchange rates rather than the shadow price of foreign exchange. The effects of using the latter can be illustrated by an example. Take the case of ammonium sulphate in 1970-71, when the border price was US$18.67 per ton, and when the official exchange rate was LE 1 = US$2.4. Taking the depreciated "parallel Table V.3: TAXES ON IMPORTED FERTILIZER: 1970-71 (LE/ton)

Import Insurance, Total Price duties, Transport, Retail Cost at Sales Transfer Tax c.i.f. packaging Commissions Margins Farmgate Price to Fund Rate

Urea 46% 20.930 6.110 3.150 3.200 33.390 64.000 30.610 92% Ammonium Sulphate 20.6% 7.780 3.700 2.400 1.400 15.280 29.000 13.720 90% Superphosphate 15% 10.320 2.683 4.117 0.625 17.745 13.500 - 4.245 - 24% Potassium Chloride 60% 20.610 2.090 2.050 1.250 26.000 26.000 - 0%

Source: Computed from Choksi et al. Tables 5 and 6, and from the budget of the Credit Bank for that year. Table V.4: SUBSIDIES ON IFORTED FEftTLIZER: 1974-76 (LE per ton)

t______1974 _ 1975 1l976 lTotal Total Total Cost at Sales Transter Subsidy Cost at Sales Transfer Subsidy Cost at Sales Transfer Subsidy Farm-gate Price from Fund Rate 'Farm-gate Price from Fund Rate Farm-gate Price from Fund Rate

Urea 60% 124 64 60 48% 143 64 79 552 117 64 53 452 Ammonium I Sulphate 20.5% 54 28 26 48X 62 28 34 55% 29 28 1 3S Ammonium Nitrate 33.5% 95 44 51 54% 110 44 66 601 75 44 31 412 Potassium Sulphate 43 25 18 42Z 49 25 24 49S 53 25 28 532

Source: Principal Bank of Development and Agricultural Credit. -63-

exchange rate" of LE 1 = US$1.4, which was introduced in 1973, as a proxy for the shadow exchange rate, we may repeat the calculations of Table V.3 to obtain the tax rate per ton of ammonium sulphate when valued at the shadow rate. The net effect is, of course, a reduction in the apparent rates of tax as shown in Table V.5. In the symmetrical case, valuation at the parallel exchange rate could increase the apparent rates of subsidy.

Table V.5: EXCHANGE RATE EFFECTS ON FERTILIZER TAX RATES: AMMONIUM SULPHATE: 1970-71 (LE per ton)

Total Import Distrib. Cost at Sales Amount Tax Price Costs a/ Farm-gate Price of Tax Rate

At Official Exchange Rate 7.780 7.500 15.280 29.000 13.720 90% At Parallel Exchange Rate 13.336 7.500 20.836 29.000 8.164 39% a/ Strictly, these costs should also be revalued by decomposition into traded and non-traded components. Source: Computed from previous tables.

5.09 One way of avoiding exchange rate problems in looking at price distortion is to compute ratios between fertilizer prices and crop prices at both the border in original currency units and at the farm-gate in domestic units. Such an analysis is a partial terms of trade approach, under assumption of constant factor proportions. Ratios of wheat to nitrogen prices and rice to nitrogen prices are computed in Table V.6 for 1970 and 1974 when world prices of fertilizer were at their lowest and highest respectively. These ratios are considered useful indicators since fertilizers commonly account for some 50% of cash costs of production and nitrogen accounts for some 85% of fertilizer used. The most favorable border price ratios were in 1970 when they reached 0.949 and 1.430 for wheat and rice respectively to nitrogen. These had declined significantly to 0.372 and 0.731 by 1974 as fertilizer prices rose faster than grain prices. The domestic ratios in 1970 were less than one third of the foreign ratios indicating a significant net tax. In 1974 these ratios had improved only slightly to 0.350 and 0.376 despite the fact that policy had kept farm-gate fertilizer prices constant. This was because the wheat and rice prices had been increased by only a small amount when compared with external rises, as a means of protecting consumers. -64-

Table V.6: FOREIGN AND DOMESTIC PRICE RATIOS OF WHEAT AND RICE TO NITROGEN FERTILIZER (1970 and 1974)

cif/fob Farm-gate Ratio. Crop/N 1970 (US$) (LE) Border Domestic

1 kg Nitrogen 0.078 0.133 - - 1 kg Wheat 0.074 0.035 0.949 0.263 1 kg Rice (as grain) 0.112 0.040 1.430 0.301

1974

1 kg Nitrogen 0.752 0.133 - - 1 kg Wheat 0.280 0.047 0.372 0.350 1 kg Rice (as grain) 0.550 0.050 0.731 0.376

Source: Computed from trade statistics.

(iii) Effects of Intervention

5.10 It is clear from the foregoing analyses that government intervention in the fertilizer market has had a number of important effects. Firstly, it has enabled the establishment and expansion of the domestic industry, in particular the nitrogenous fertilizer producing sector, which has expanded so rapidly that imports are expected to cease during the 1980s. Secondly, it has provided farmers with stable supplies of fertilizers at declining real prices, 1/ though these prices have in general been above world parity over the last two decades. Thirdly, it has led to a net transfer of ftnds out of the agricultural sector over the long run.

5.11 The allocative effects of the price distortions introduced by this policy are seen in shifts in resource use on farms towards fertilizer substituting inputs, especially labor, and in lowered ability of the agricultural sector to exploit fertilizer-using innovations such as new seed varieties. The result has been a lowered rate of growth in output of the agricultural sector; thus, whilst diversion of resources towards import-substituting domestic fertilizer production has saved foreign exchange, it has also led indirectly to additional foreign exchange costs in some years since food imports on occasions have had to be greater than they would have been had farmers been able to purchase fertilizer at world-market prices in the years when these were below domestic levels.

1/ Declines in real prices did not result in increased use because of rationing. Secondary trading has increased prices to buyers in that market but no evidence is available as to its extent or net impact. -65-

5.12 The distributional effects of the fertilizer policy have resulted in increased returns to factors in the industrial sector at the expense of farm incomes.

B. Fuel

(i) History and Nature of Intervention

5.13 The petroleum sector in Egypt is state-controlled, with production and exploration being joint ventures between the state-owned General Petroleum Corporation and foreign partners. Refining, transport and distribution is through companies owned by the General Petroleum Corporation. The Ministry of Finance determines consumer prices.

5.14 Prior to 1974, the foreign price of crude oil was around US$3 per barrel, and no subsidy was paid on local consumption. Since then, substantial rises in export prices have enabled the Egyptian petroleum industry to become a net earner of foreign exchange. Consumer prices have been held at levels which are now well below border price equivalents and also below the cost of production at domestic prices. The subsidy resulting from the latter cause has been paid by reimbursing the supplying companies for the difference between domestic sales price and the total of production, refining and handling costs, including an appropriate profit margin.

(ii) Extent of Intervention

5.15 The actual reimbursement rates for a range of petroleum products in 1976 are set out in Table V.7. The more important of these products for the farm sector are diesel oil and gas oil as fuel for tractors and pumps respectively; these inputs received per unit subsidies of 19% and 15% respectively in that year. I

Table V.7: SUBSIDIES ON PETROLEUM PRODUCTS CALCULATED ON DOMESTIC REIMBURSEMENT 1976 (LE per unit)

Sales Full Subsidy Product Unit Price Cost Reimbursement Rate (%)

Kerosene 1000 liters 25.0 30.099 5.099 17 Gas oil " " 25.0 29.511 4.511 15 Diesel oil " " 21.0 76.058 5.058 19 Fuel oil ton 7.5 11.324 3.824 34 Butane " 5.2 18.002 12.802 71

Source: Ministry of Finance. -66-

5.16 The- figures in Table Vt.7 are based on cost of production at domestic prices; that is, they estimate the subsidy as the difference between the consumer price and the local full cost of production and distribution. An alternative estimate of implied fuel subsidies can be be obtained by valuing fuel at official or shadow exchange rates, and comparing this with border prices. Since world prices for crude oil at around US$11 per barrel at the end of 1976 are substantially higher than both domestic cost of production (estimated at US$1.40 per barrel 1/) and the prices charged to domestic re- fineries (about US$2-3 per barrel), it is clear that subsidy estimates based on these opportunity costs will be greater than those based simply on internal reimbursement formulae. Calculations are shown in Table V.8 for crude oil for

Table V.&': SUBSIDIES ON CRUDE AND PETROLEUM PRODUCTS CALCULATED WITH RESPECT TO WORLD PRICES SEPTEMBER 1976

Export Price/ Implied Domestic Price/Ton Ton Subsidy Rate US$ aj, US$ at % at % at LE OER - PER US$ OER OER

1. Crude Oil

General Petroleum' Company (Gharib) 11.90 30.46 17.90 67.50 55 73 Orienta Company 5.50 14.08 8.30 81.20 83 90 Gupco (Morgan, July Ramadan) 6.90 17.66 10.40 81.40 78 87 Wepco (Western Desert) 9.10 23.29 13.70 81.20 71 83

2. Petroleum Products

LPG 52.00 133.12 78.00 165.00 19 53 Regular Gasoline 86.80 222.21 130.20 257.60 14 50 Premium Gasoline 112.00 286.72 168.00 286.30 0 41 Naphtha 25.70 65.79 38.50 122.30 56 68 Kerosene 31.50 80.64 47.30 150.70 47 69 Gas Oil 21.00 53.76 31.50 115.30 53 72 Diesel Oil 24.60 62.97 36.90 114.40 45 68 Residual Fuel Oil 7.50 19.20 11.30 62.70 70 82 Lube Oil 250.00 640.00 375.00 1040.10 38 64 Bitumen 17.00 43.52 25.50 55.90 22 54

1/ Official Exchange Rate US$1 - LE 0.39. Parallel Exchange Rate US$1 = LE 0.67. Source: Egyptian General Petroleum Corporation.

1/ World Bank, Egypt: Bank Economic Report, Petroleum Sector, 1978. -67-

several companies and for a range of petroleum products. The implied subsidy rates are determined as the difference between domestic and border prices expressed as a percentage of border prices. The results show substantial benefits to consumers of petroleum products in Egypt at present prices compared to what they would pay were these products priced at or near world parity.

(iii) Effects of Intervention

5.17 The relatively low cost of production of oil in Egypt has enabled substantial foreign exchange savings to be made through import substitution, encouraging the industry to develop to the point where an exportable surplus is produced. The opportunity costs of a fuel policy which set prices at or near domestic costs of production in order to facilitate local consumption can be seen in foreign exchange earnings foregone by domestic usage rather than export of output. The rationale for such a policy lies in the fundamental importance of petroleum fuels to agricultural and industrial development. Nevertheless, a situation in which domestic prices are substantially out of line with border prices distorts the price ratios between fuel and other factors, notably labor and other energy sources. A full understanding of the efficiency and equity ramifications of such distortions requires a knowledge of industrial production functions, input demand functions, and distributional data, and is beyond our present scope. Suffice it to say that in relation specifically to the agricultural sector, the allocative effects of fuel subsidies are seen in a reduction in the cost of machine operation relative to labor costs, leading to a substitution of capital for labor with given plant size and acting as a stimulus to farm machinery investment. The distributional effects have been in favor of highly-mechanized producers vis-a-vis labor- intensive units.

C. Seeds

(i) History and Nature of Intervention

5.18 The State has full control over the distribution of cotton seed since all raw cotton goes to the public sector gins. When it arrives at the gin, the seed is selected for oil extraction or for planting. The planting seed is augmented by seeds of new varieties to be introduced; the seed is then certified and distributed to farmers at a price generally at or slightly below cost. Since 1960 the certified seed scheme has produced and distributed enough new cotton seed to plant all the cotton area every year.

5.19 The State also maintains a rigorous program of seed renewal for other crops, and operates a distribution program closely linked with the breeding program. Seed sufficient for one-third of the area of major field crops is distributed each year at subsidized prices.

(ii) Extent of Intervention

5.20 The total amounts of direct subsidy paid on the prices of agricultural seeds have been relatively small, amounting, for example, to only LE 1.5 m in 1977. Table V.9 shows the subsidies on seeds over the three year period 1974 Table V.9a SUBSIDIES ON SEEDS: 1974 to 1976 (LE per unit)

1974 1975 1976 Price Subsidy Price Subsidy Prlce Subsidy Cost Sales Differ- Rate Cost Sales Differ- Rate Cost Sales Differ- Rate Item Unit Price Price ential % Price Price ential z Price Price ential X

Seeds

1 Soybean ARDEB ' 17.290 14.00 3.290 19 18.883 18.00 .885 5 - _ _ Cotton 2.160 2.150 .010 - 2.200 2.20 - - 2.20 2.20 - - Mexican Wheat 9.815 9.815 - - 11.040 9.20 1.840 17 11.130 9.00 2.130 19 Local (Giza) Wheat 9.565 9.565 - - 10.530 9.20 1.330 13 10.110 9.00 1.110 11 Egyptian Beans 16.500 16.500 - - 17.855 16.0 1.855 10 18.775 17.0 1.775 9 Barley 8.100 8.100 - - 8.660 7.20 1.460 17 8.640 7.2 1.440 17 l Lentils 22.16 22.16 - - 26.220 23.0 3.220 12 26.440 25.0 1.440 5 Flax 18.9 18.9 - - 22.65 22.65 - - - - - _ Maize (Hybrid) 9.710 9.710 - - 13.330 10.0 3.33 25 14.545 10.0 4.545 31 Maize (North American Variety) 9.225 9.225 - - 10.785 8.5 2.285 21 12.065 8.5 3.565 30 Sorghum 8.215 8.215 - - 9.30 8.30 1.00 10 9.415 8.3 1.115 12 Sesame " 19.570 19.570 - - 23.465 22.465 1.00 4 26.0 25.0 1.0 4 Sunflower 7.030 7.030 - - 7.030 6.530 .500 7 6.540 6.040 0.5 8 Onions 2.025 2.025 - - 2.25 2.25 - - - - - _ Rice ------7.220 6.605 0.615 9

I/ ARDEB a 160 kg. clover 155 kg. beans 150 kg. wheat 140 kg. maize, sorghum 122 kg. lintseed 120 kg. barley, cottonseed, sesame

Source: The Principal Bank of Development and Agricultural Credit, Cairo. Preappraisal, Agricultural Development Project, 1977. -69-

to 1976, where the subsidy rate is calculated as the difference between cost and selling prices expressed as a percentage of cost price. Some seeds have received little or no subsidy, but subsidy rates of 10 to 15% are more common. The high subsidy on soybeans in 1974 was intended to encourage the adoption of this new crop.

(iii) Effects of Intervention

5.21 The impact of seed subsidies on aggregate farm costs has been slight. For example, take the case of hybrid maize In 1976. A subsidy of 30% was paid amounting to LE 4.545 per ardeb or LE 0.032 per kg. At a seeding rate of 25 kg per feddan, the cost reduction brought about by this subsidy amounted to LE 0.8 per feddan in a total cost of production of about LE 70 per feddan, that is a reduction of about 1%.

5.22 The policy goal of the seeds program has been to induce farmers to use improved rather than traditional varieties. It is difficult to assess the success of the policy since demand has been limited by broader problems relating to the acceptability of new varieties in the absence of major changes in farming systems. These problems have been particularly acute in the case of hybrid maize and short-straw wheat. In the latter instance, for example, new dwarf wheat varieties have not found ready acceptance amongst the dominant small farm sector dependent on animal draft, since wheat straw is a valuable by-product of traditional varieties. This situation is aggravated by a meat protection policy which produces a strong derived demand for animal feeds; under these circumstances, a 10% subsidy on the price of short-straw wheat seed is unlikely to be a significant incentive for change.

D. Pesticides

(i) History and nature of intervention

5.23 The control of pathogens in agriculture is of prime importance to the Egyptian economy. Crop failures due to pest infestation can be disastrous from local through to national levels. Egyptian agriculture is particularly susceptible to pest attack. Although the farm lands are protected by desert and water from disease encroachment, they are still affected by airborne spores and the international movement of plant material. Continuous cropping under constant irrigation provides ideal conditions for pathogen development. For example, during winter, when no cotton is grown, the cotton leaf worm builds up its numbers with three generations in berseem. If cotton is planted before the eradication of berseem the initial pest population is high and the infestation serious as it goes through another four generations then moves to maize and back to berseem. Laws have been implemented to forbid irrigation of berseem after May I to allow it to die in order to reduce the initial population of moths spreading to the cotton crop.

5.24 Most pesticides are imported, and the foreign exchange costs have grown substantially in recent years. In 1970 the value of pesticides imported into Egypt was $US14.7 million; by 1975 this had risen, mainly because of price rises, to US$85.2 million.l/

1/ F.A.0. Trade Year Book 1976, Vol. 30. -70-

5.25 Pest control is so important that the government has decided that it will bear the ultimate responsibility. For wheat, onions, maize, rice and most other crops the major thrust is biological through breeding disease resistant varieties. The cost of the research effort is an indirect subsidy. For cotton and sugarcane the state directly intervenes in field level pest control. Direct subsidies are provided by not charging full costs or by giving compensation for income lost while diseased crops are eradicated.

5.26 The cotton pest control program is the major effort and by far the most expensive. The Ministry of Agriculture monitors the pest density at the level of the cooperative block. When deemed necessary either a ministry- related spraying team contracts with the cooperative to do the necessary chemical applications, or it is done directly by a cooperative team. Between 1972 and 1978, half of the full cost of the operation has been charged to the cooperative members and the other half is borne by the state.

(ii) Extent of Intervention

5.27 Because of variation from year to year and within years in the formulation, concentration and methods of application of pesticides it is not possible to calculate a border price equivalent and a transfer value as for fertilizer. However, direct subsidy payments for cotton pest control may be listed, as in Table V.10, in terms of local currency and in US$ at both official and parallel exchange rates for the years since 1972 when the program commenced operation. The volume of cotton subsidy payments has more than doubled over the period 1972 to 1977, and even so has failed to keep pace with the rise in import values. This fact combined with the increasing importance of subsidies on some other inputs (e.g. fertilizer), has meant that pest control payments as a proportion of all direct farm subsidies have fallen from 85% in 1972 to less than 30% in 1975.

Table V.10: SUBSIDY PAYMENTS FOR COTTON PEST CONTROL

1972 1973 1974 1975 1976 1977 1/

LE millions 11.720 12.629 11.500 27.602 20.000 25.000 $US millions at OER 2/ 30.000 32.330 29.440 70.661 51.200 64.000 $US millions at PER 3/ 16.994 18.312 16.675 40.022 29.000 36.250

1/ Allocated. 2/ OER: US$1 = LE 0.39. 3/ PER: US$1 = LE 0.69.

Source: Agricultural Prices Stabilization Fund.

5.28 Compensation payments of some LE 0.5 m per year have been made to sugarcane growers since 1972 under a disease control project. Ratoon-stunting disease is controlled by eradicating infected stands and replanting with resistant hot-water treated cane. The grower incurs costs and looses income for which he is compensated. Other items identified as, "pest control, general", and, "disease compensation, general", are small and amount to some LE 10,000 per year. -71-

(iii) Effects of intervention

5.29 Given the externality component of the pest problem, government intervention on efficiency grounds is warranted and, in terms of the degree of control achieved, must be judged as having been successful. In purely practical terms, pest control over millions of fragmented land parcels had proven impossible and one effect of intervention has been an acceleration of the land pooling scheme for the cotton part of the rotation on a compulsory cooperative basis. The subsidies have resulted in substantial reduction in cash costs on farms at given rates of pesticide usage. For example, farm data for the Sohag governorate in 1977 indicate a reduction of chemical pest control costs from LE 32.20 to 16.10 per feddan after allowance for subsidies, leading to a reduction in total cash costs of about 25 %.

5.30 However, there have been interactions with other policy measures. For example, farmers often have delayed planting their cotton in order to extract a further cut from the high-profit forage. This has increased the stress on the pest control system, and explains much of the pest problems encountered in 1977.

E. Credit

(i) History and Nature of Intervention

5.31 In a farm system where perhaps 60% of all farms are barely able to provide the basic needs of a family, savings to finance cash purchases are virtually non-existent. Indeed, much of the basis for the 1952 Revolution that deposed the monarchy and substituted Arab Socialism was the human misery associated with rural debt. Institutional credit was denied to small farmers who then relied on money lenders charging monopoly interest rates. Many large landlords increased their holdings of land by foreclosing on non-payment of small debts. One of the first acts of the new republic was the changing of the lending policy for agriculture and the establishment of the associated cooperative system. The distinction between the State controlled Agricultural Credit Bank, virtually the sole source of farm finance, and the Cooperative Organization has not always been clear. Essentially the village cooperatives are the first line of state-imposed farmer organization, and it is to this cooperative group at the village level that the banks have usually lent. However, in 1977 some changes were introduced and some lending may now be made directly by the banks to farmers, though details are still not finalized.

5.32 The new credit policy of 1952 enabled all farmers to obtain credit solely on the security of their crops rather than their land. The cooperative system spread and loans became exclusively available through them by 1962. Although in theory membership was voluntary, no institutional credit was available to non-members.

5.33 Loans are advanced against farmers' accounts in cash and in kind to the value of a standard cost of production schedule. Repayment is made out of the book value of receipts by cooperatives from sales of that part of each farmer's crops that is compulsorily sold through the cooperatives. In 1977, these proportions ranged from 32% for rice and beans, through 42% for onions, 49% for peanuts, 57% for sesame, and 100% for cotton. -72-

5.34 The aggregate volume of loans made through the cooperative system is shown by input classification and by term in Table V.11 for the years 1965 to 1975. The majority of advances are for fertilizer purchase (44% in 1975) followed by insecticides (11%), and seeds (10%). Short-term loans comprise the great bulk of eooperative lending (99X in 1975>.

5.35 Credit policy is still implemented by the Agricultural Credit Bank, now known as the Bank for Development and Agricultural Credit, which has been under direct Ministry of Agriculture control since 1964. Although the Bank provides some subsidy for farmers through its trading operations, as discussed in a later section, its chief types of intervention are the rescheduling or forgiveness of debts.

(ii) Extent of Intervention

(a) Interest rate subsidies.

5.36 On short-term loans (up to 14 months) lending rates have varied. For a number of years the rate remained at 3% plus an additional charge to cover administrative expenses; in 1977 the short-term rate was raised to 4%. The 1979 State Budget announced that agricultural interest rates would be reduced to 3-1/2%. Since the Bank's borrowing rate for these funds has been around 8%, a subsidy is involved amounting to about 4% at present. On medium- term loans, the interest rate was 6% per annum up until 1977, when it was raised to 9%. However, reduced rates for special purposes have been common. For instance prior to 1979 loans to cooperatives to purchase tractors imported at the dearer parallel exchange rate have been advanced for medium-term periods at interest rates of only 3 1/2% as a direct subsidy on the purchase price.

5.37 The total value of the subsidy accruing to the farm sector through concessional interest rates can only be crudely approximated. Applications of the apparent subsidy rate to the total volume of short-term loans from Table V.11 yields an estimate of about LE 4 million per annum in recent years. An alternative view is provided by the recorded losses of the Credit Bank on its lending operation, which amounted to sums of LE 5.42, 6.99 and 2.07 million in the years 1974, 1975 and 1976 respectively. The fluctuations in these figures are explained by variations in the scheduling of borrowing and lending operations of the Bank, but their average of LE 4.8 million is roughly comparable with our earlier estimate when it is borne in mind that the loss figures include debts written off. Overall, it would appear that a transfer of about LE 4 m to LE 5 m per annum has been involved through state-controlled credit operations at least for these three years.

(b) Rescheduling of debt.

5.38 Over longer periods this has been allowed after crop failures or other disasters, such as war damage. By the end of 1976, as much as LE 37.7 m or 45% of the LE 83 m in loans outstanding to farmers had been rescheduled on government instructions for repayment over 15 years instead of 14 months with the interest rate kept at the short-term level. Table VA11: COOPERATIVE LOANS TO FARMERS, BY INPUT CLASSIFICATION AND TERM: 1965 to 1975 (LE million)

Loans by inputs Loans by term

Short- Medium- Year Fertilizers Insecticides Seeds Livestock Machinery Tractors Other Total term term Total (cattle)

1965 25.3 6.0 3.0 1.3 0.8 0.3 28.7 65.4 62.8 2.6 65.4 1966 34.7 7.8 4.6 1.9 0.9 1.2 28.3 79.4 78.1 1.3 79.4 1967 38.0 9.6 5.8 2.3 1.8 0.9 28.0 86.4 84.2 2.2 86.4 1968 35.9 7.2 8.9 0.9 1.9 0.8 23.0 78.6 76.3 2.3 78.6 1969 32.0 6.3 7.5 0.9 1.6 0.2 20.3 68.8 66.9 1.9 68.8 1970 35.0 9.2 7.3 2.3 1.5 0.6 24.9 80.8 79.0 1.8 80.8 1971 32.6 9.5 7.7 1.8 0.6 - 24.8 77.0 76.1 0.9 77.0 1972 30.8 12.0 7.5 2.2 0.7 0.5 24.3 78.0 77.1 0.9 78.0 1973 37.7 5.2 6.8 2.3 0.7 0.5 24.7 77.9 76.8 1.1 77.9 1974 37.7 6.8 6.7 3.2 - 1.0 28.3 83.7 82.4 1.3 83.7 1975 35.7 9.1 8.0 1.8 - 3.0 23.8 81.4 80.6 1.8 81.4

Sources: Egyptian General Organization for Agricultural and Cooperative Credit. Radwan, S., AIaria Reformand Rural Poverty. Egypt, 1952-1975, Table 6.2. -74-

5.39 Debts have been written off entirely for special purposes. For instance, in 1976 the Government asked the Bank to write off LE 13.4 m. A payment was made to the Bank by the Government to cover the loss but as a loan at 5% rather than as a grant. In 1971 on order of the Council of Ministers all debts of farmers whqse holdings were less than one feddan were written off and penalties for overdues were abolished for farmers with holdings of 5 feddans or less.

(iii) Effects of Intervention

5.40 The benefits to the agricultural sector of the Egyptian government's credit policy have been considerable. Small farmers have been enabled to finance the purchase of improved inputs, as have tenant farmers without standard collateral. Both of these groups would find access to credit difficult or impossible under strictly commercial conditions.

5.41 Nevertheless, there have been some problems. The Credit Bank has experienced some financial difficulties in its lending operations, causing the flow of loanable funds into the agricultural credit system from private sources to diminish as this avenue of investment grows less attractive to the private investor. Furthermore, the rationing of loans has not always achieved the objectives of credit policy. For instance, large farmers with their own investment funds have been able to use subsidized credit to finance their agricultural operations and to channel their own funds outside the sector. No credit has been available for high profit crops like vegetables. The Five Year Plan for 1978-82 calls for a rationing of subsidized credit to small- holders only, and for advancing loans at unsubsidized rates for vegetable growing. It also suggest loans should be made available only to those following the official rotation.

F. Plant and Equipment

(i) Nature of Intervention

5.42 The costs of buying and using farm machinery are subsidized in a number of ways, some of which have been discussed earlier. Mechanisms used include the following:

(a) purchase of imported plant and equipment has been possible at the official exchange rate rather than at the more realistic parallel exchange rate;

(b) purchase of capital equipment may be financed with subsidized credit (see section 5 above);

(d) operating costs of machinery are reduced through subsidies on fuel, oil and lubricants (see section 2 above); -75-

(e) in cases where machinery is rented from cooperatives, hiring rates may be subsidized.

(f) removal of customs duties on farm machinery and tractors (State Budget 1979).

(ii) Extent of Intervention

5.43 The difference between the official and parallel exchange rates (US$1 = LE 0.39 and 0.68 respectively) indicates that import purchases converted at the former rate will cost only 43% of the true cost measured at the shadow rate of exchange, (assuming that the parallel exchange rate is an approximation of the latter). Table V.12 illustrates this for some items of farm machinery.

Table V.12: EXCHANGE RATE EFFECTS ON FARM MACHINERY PRICES: 1978

Import Price Converted at Price 1/ OER PER US$ LE LE

Tractor, 65 HP 6,800 2,652 4,624 Mouldboard, plow, 3 x 14" 1,700 663 1,156 Leveller, 2 m 700 273 476 Furrower, 3 row 900 351 612 Thresher, 600 kg/hr 5,600 2,184 3,808 Sprayer, 600 liters PTO 1,000 390 680 Diesel pump, 5 HP 950 370 646

1/ c.i.f. Alexandria. Source: Machinery Dealers, February 1978, Actual quotes for large lot contracts.

5.44 The subsidy accruing through the fixing of dealers' margins and transport and handling charges may be measured as the difference between the estimated full cost of these services and the actual amounts charged. The former is estimated at about 30% of the landed import price; given that dealers' commissions are regulated by law at 5%, and that a further 10% is added for transport and handling, a remission of 15% of cost is implied.

5.45 Machinery hire charges for custom work done by the cooperatives are typically set by the Ministry at a price level that does not cover full costs, imposing a tax on cooperatives and providing a subsidy for farmers using hiring services. The transfers involved may be illustrated with respect to 60-65 hp tractors. The hourly cost of operation of these tractors to cover all costs including depreciation with a profit margin of 10% and valuing tradables at world prices, is calculated at LE 3.5 per hour. Private rental firms typically charge LE 2.7 per hour (where their costs are calculated at internal prices), and cooperatives charge LE 2 per hour, apparently -76-

because no depreciation allowance is included in their rental rates. The .mplied subsidy in rental of this type of machine is thus some 42% when hired from a cooperative and 22% when hired from a private firm.

(iii) Effects of Intervention

5.46 Although the Egyptian agricultural sector is under-capitalized, indiscriminate use of subsidies for plant and equipment purchase and operation distorts the price of capital relative to other factors, and directs investment capital to avenues where its productivity at the margin may not be the hiighest. Government controls on the allocation of foreign exchange through import licensing has not been able to remedy this situation. The distributional consequences of price distortions in the capital equipment market generally favor larger producers who are able, for example, to dominate the use of cooperative tractors to the exclusion of small farmers. Allocation of the services of cooperatively owned machinery is done on the basis of the fixed hire rate (below cost) plus an unofficial gratuity to the driver and the accompanying cooperative official. Such payments ensure continuation of an inequity that the system was designed to remove. Since many of these larger farmers have been able to gain exception from growing the more heavily taxed traditional crops such as cotton and are producing protected products, such as meat, or low tax non-traditional crops such as citrus fruit, the input subsidy is not offsetting an output tax. Nor can such subsidies help in the adoption of a "new" technology since the virtues of mechanization are well realized by Egyptian farmers. These reflections do not indicate an anti-large farmer bias in this study but rather are meant to support the view that the farm policy is internally inconsistent because larger farmers seem to be benefiting more from the income support programs designed to help the poor. In an economy with restricted job-creating capacity subsidies on labor displacing capital seem inconsistent with a full employment policy as discussed in Section II.3. In a sector characterized by dualism the taxing of a back- ward subsector to subsidize a forward subsector seems unlikely to maximize the stated social welfare function. A further effect of price intervention is the effect on the market for machinery. In 1977, while the dual exchange rate was still being maintained, tractors were entering Egypt at the two rates depending on trade agreements with the country of origin. While unsold inventories were increasing, the cheaper tractors were being distributed through a lottery system to intended buyers. With the unification of the rate in 1979, the unsold inventories tripled because of an arrangement whereby farmers can purchase tractors for sole use through the Cooperatives' Society free of customs duty. Why the import of unsaleable tractors continues is not entirely clear, but it appears that these are imported in knocked down condition and assembled locally at a State plant not always responsive to market signals.

G. Rent and Land Taxes

(i) History and Nature of Intervention

5.47 The government in Egypt intervenes in the market for agricultural land and affects land values in two major ways: by controlling the rental -77-

value of most farm land, and by levying land taxes on owners. The history of land tenure conditions as a cause of social unrest in Egypt goes back many centuries, as described in more detail in Section II.2 above. One of the prime objectives of the 1952 revolution was relief of rural poverty through agrarian reform. Since that time, some aspects of the land valuing and taxing system have remained unchanged, as discussed below, despite changes in the economic environment of the agricultural sector, with the result that a number of major reforms are now under consideration. Progressive introduction-of a major increase in the value of farmland began in 1979.

(ii) Extent of Intervention

5.48 The rental value of land is determined by the government as part of the process of price determination for agricultural commodities. In 1952 asses- sors valued the productivity of soils by districts using 1946 assessments. A rental value of one-tenth of the assessed capital value was calculated, with reassessments to be made every ten years or whenever a major change in productivity occurred. In principle the Ministry of Agriculture each year calculates the cost of production by crop and district using expected yields. A price per unit of output is set to give a "return to land and capital" equal to twice the rent after deduction of costs of purchased inputs and an imputed value of family labor. Tenant farmers pay one half of this surplus to the landlord as rent, retaining one half as their own "net income"; owner-operators retain the full surplus.

5.49 During the 25 years this system has been in operation, many changes have occurred in the physical and financial relationships of production, yet rental values have not been adjusted to reflect these movements. Reassessments have not generally been carried out and the current basis, until 1979, was the 1946 assess- ment, although partial readjustments have been effected as a result of major improvements such as the 1971 changeover in the Sohag governorate from basin to perennial irrigation. As a result of the failure of the system to adapt to changing conditions, the value of the rent is no longer equal to the "net income", as illustrated in Table V.13 where details for seven principal crops in the Sohag governorate are shown.

Table V.13: RENTS AND TENANTS' INCOMES FOR MAJOR CROPS, SOHAG: 1976-77 (LE per feddan)

Long Cotton Maize Sorghum Wheat Berseem Beans Onions

Gross Income 1/ 168.00 124.00 110.55 166.50 255.00 102.00 336.00 Less Wages 2/ 92.95 52.20 42.60 73.80 51.20 23.90 161.05 Materials 23.92 24.01 19.62 23.63 17.31 17.29 84.50 Rent 30.00 15.00 15.00 25.00 35.00 20.00 23.35 "Net Income" 21.13 32.79 33.33 44.07 151.49 40.81 67.10

Tenant's Income 3/ 114.08 84.99 75.93 117.87 202.69 64.71 228.15

1/ Includes both primary and secondary products at "announced prices for first grade" at the cooperatives. 2/ Family labor only. 3/ "Net income" plus book value of labor charge. Source: Calculated from Ministry of Agriculture data. -78-

5.50 Rents paid by tenant farmers are controlled on land growing most major crops, but are not controlled on land used for horticulure, beekeeping, livestock or poultry raising. On these lands rents are commonly over LE 100 per feddan per year, approximating the opportunity rental value of the land, whereas controlled-rent land used for, say, cotton, has its rent pegged at around LE 30 per feddan. As a result landowners are anxious to have their land exempted from the traditional rotation, so that it can be put to more profitable uses. Failing legal success, a common practice is simply to ignore the official directives and pay the resultant fines. For example, horticultural production may give an extra return of some LE 200 per feddan above the return on traditional crops; in these circumstances a possible fine of LE 30 is worth risking.

5.51 We turn now to the land tax, which is the most important explicit tax on agricultural production even though owners of 3 feddans or less, comprising 80% of all owners, are exempt from the tax. The rate is set as one-seventh of the rental value of the land and is paid by the landlord out of his rental receipts or by the owner-operator out of his cash surplus which has been calculated, as noted above, to contain a rental component. Since 1952 land taxes have changed little, apart from occasional productivity readjustments. 1/ In 1977 and 1978 a new general land reassessment for tax purposes was begun and interim submissions suggest that land taxes will be doubled or tripled if politically possible.

5.52 Despite the stability of the land tax itself, aggregate land-related taxes have not been constant, since several new taxes and charges have been imposed. These are:

(a) Municipality surcharge: 2.1% of land tax, paid by the landowner;

(b) "additional tax": 50% of the land tax, paid by the landowner;

(d) National Security Tax: 66% of the land tax, paid by the land user.

Landlords therefore pay a surcharge of 52.1% on their land tax payments, tenants pay the government an amount almost equal to the land tax in addition to paying their rent to the landlord, and owner operators pay a surcharge of 151.1% on their land tax to the state.

5.53 Initially the land tax was used to pay for investment, operation and maintenance of infrastructure and other services provided by state and local government, mainly relating to irrigation. However, aggregate revenues from land tax, which have remained constant at LE 15 m 2/, have not been sufficient to cover even just the operating costs of irrigation work which have

1/ For example, the reassessment following the change in irrigation practice noted above resulted in a 25% increase in the land tax from LE 3.92 to LE 4.90 per feddan. See IBRD Report on Upper Egypt Drainage I Project.

2/ World Bank, Economic Report on Egypt, May 1978, Vol IV, Para. 15.48. -79-

ranged from LE 20 m in 1968 to LE 28.8 in 1976, let alone make any contribution to capital costs. Land tax revenue now goes entirely to local government to finance general local infrastructure, and irrigation is financed from the central budget. The LE 15 m collected annually is less than the LE 24 m potentially available (estimated as LE 4 per feddan over some 6 m feddans) because of the three feddan exemption and a failure to collect the full amounts due from rateable land. In the latter respect it is estimated that in 1975 only about 80% of land tax payments due were actually collected.

(iii) Effects of Intervention

5.54 The structural rigidities and other factors noted above have led to substantial divergences in the assessed value of land, its productivity value and its actual market value. The inevitable result is a variety of ingenious methods to circumvent the law. As with urban house rentals, also rigidly controlled, there is a thriving black market despite legal penalties.

5.55 In 1949 some 61% of the farm land was rented. After the Land Reform the figure fell to 57%. 1/ Since then the rented area has stayed at about this level. Renting is essentially a method of rationalizing the size of farm units. Small farmers who own insufficient land can rent extra land to make up a subsistence area. Large landowners can take advantage of legalized low rents to aggregate holdings up to an economic size for mechanized operation. Although many who rent out their land to others are farmers whose area is too big for them to work, a significant new group of lessors comprises absentee owners of two types. One is the inheritor of a small parcel below a subsistence area, who is frequently able to get employment in the city and to retain ownership while leasing his plot to a family member. The other group is composed of urban-based owners of large landholdings near the legal maximum area who have had tenants on their land by tradition and are unable to displace them. Al- though default on rent payment is common, evictions for this cause are difficult. The result is that land without tenants may sell at LE 5,000 per feddan whereas similar land with tenants may sell at only LE 2,000. Devices such as payment to tenants to leave are common. Further, land owners under these circumstances are unwilling to invest improvements into land which yields a rent based on land values of LE 300-LE 400.

5.56 An effect of the control of land rental rates has been on the relative shares of tenants and of landlords in value-added. Table V.14 shows trends in the tenant's and the owner's share of value added for cotton since 1965. The owner's absolute return per feddan has declined in real terms, and his proportional share has also declined. In a situation where the opportunity rental value of the land is clearly greater than the controlled rates, a subsidy from owners to renters is implied.

1/ U.A.R. Yearbook 1959, p. 289. -80-

Table V.14: TENANT'S AND OWNER'S SHARE OF VALUE ADDED, COTTON (NATIONAL AVERAGES) 1965-75

Tenant's Share Owner's Share Year Wages Income Total % Rent %

1965 20.8 16.6 37.4 62 22.9 38 1966 1/ 23.9 -0.6 23.3 50 23.1 50 1967 24.9 16.5 41.4 64 23.3 36 1968 24.2 21.1 45.3 66 23.6 34 1969 24.1 13.8 37.9 61 23.9 39 1970 23.7 24.1 47.8 66 24.1 34 1971 25.1 22.5 47.6 66 24.2 34 1972 21.8 40.7 62.5 71 25.1 29 1973 24.4 36.7 61.1 71 25.3 29 1974 31.0 39.8 70.8 73 26.1 27 1975 40.70 21.8 62.5 71 27.0 29

1/ Poor crop year.

Source: Montasser, E. ARricultural Prices, Growth and Terms of Trade in Egypt, INP, 1975; Ministry of Agriculture.

5.57 Despite significant progress under the land reform, it is interesting to note certain similarities in the conditions of agriculture at the present time and just prior to the revolution. The official review of the land reform made in 1959 1/ drew attention to the large absentee ownership with low rates of investment and hence falling production that existed before the reform. Market rental values of LE 60 per feddan were said to be well above the productivity rental values of LE 28 per feddan. In fact, 25 years afterwards, the official productivity rental value is still set at around LE 28 per feddan and black market rents go well over LE 100 per feddan. During this period population has doubled, yields have increased, prices have changed for inputs and outputs, land values have climbed steeply, and productivity is again on the decline.

5.58 The implications of restricting rents and land taxes are considered further in sections VII and VIII below.

1/ U.A.R.. Year Book 1959, p. 290. -81-

H. Irrigation Water Charges

(i) History and nature of intervention

5.59 Egyptian farmers have not been charged directly for irrigation water, although in the past land taxes have been used in part to pay the costs of irrigation operation. The present situation appears to be that land taxes are used entirely to support local infrastructure. Assuming the benefits to farmers from these expenditures just cover their costs, there is no aggregate transfer element contained in them to be accounted for, although the distribution of benefits and costs amongst owners and tenant farmers may warrant future study. Nevertheless, it would remain that centrally financed irrigation operations are supplied at zero price to farmers, involving a sizeable transfer to the farm sector.

(ii) Extent of intervention

5.60 Table V.15 shows the costs of irrigation operation since 1974, and an annual charge repesenting capital repayments and interest charges on outstanding debt for capital works relating to irrigation and drainage. The totals of these two figures can be taken as the aggregate of water supply and drainage charges which farmers would have to bear if they were charged at full cost. In the absence of water pricing, the totals also represent the aggregate volume of subsidy to the rural sector from this source, other things being equal.

5.61 The amount of subsidy involved can be checked with reference to proposals to re-establish land taxes as the means of financing irrigation and drainage operations. The proposed threefold increase in land tax receipts would raise them to LE 45 million, an amount apparently judged sufficient to cover operating costs, interest payments and capital recovery components of aggregate state irrigation expenditures. This sum is broadly consistent with the figures contained in the bottom line of Table V.15.

Table V.15: SUBSIDIES ON IRRIGATION WATER: 1974 to 1976

(LE millions)

Item 1974 1975 1976

New Investment in Irrigation and Drainage 1/ 16.5 30.9 26.0 Annual Capital Charge 25.0 25.0 25.0 Annual Operation Costs 19.9 26.0 28.8 Total Capital and Operating Charges 44.9 51.0 53.8

1/ Excluding new-land works.

Source: Ministry of Irrigation. -82-

(iii) Effects of Intervention

5.62 During the past 80 years Egypt's public authorities have developed an intense network of canals and barrages to impound and distribute Nile water culminating in the construction of the High Dam at Aswan in the 1960s. A commensurate drainage system has not been provided nor a satisfactory water rationing system. Prior to the general expansion of the network, irrigation was only possible during the flood season when the Nile overflowed its banks. As the river level fell, the level of the water table in the soil fell two meters or more below the surface taking salts with it. Some of this ground- water was further drawn down by pumping from wells. With the control over the Nile waters almost complete all the farmland is irrigated for most of the year. The natural or the existing drainage systems have proved incapable of discharging the additional amounts of water flowing into the soil. The results have been plant damage from reduced soil aeration, build up of pathogens a d increased salinity. The incidence of water-borne bilharzia (schistosom iasis) has intensified among farm communities necessitating expensive con trol programs. Some quantitative controls are practiced such as the general seven days on - seven days off cycle of water provision, the four day cycle for rice and the January closing down for maintenance.

5.63 The effects are well documented. 1/ Although there is dispute over the magnitude of productivity increases with provision of drainage, official estimates of yield improvements of 20% to 30% have been measured. 2/

5.64 The reason for delaying drainage provision is clear. Not only is the cost involved enormous (ongoing drainage projects have been costed at some US$200 million) but the loss of farmland to open drains would amount to some 15%. With the successful introduction of subsurface tile drains an accelerated drainage program is being implemented.

5.65 However, the view of this study is that drainage projects are only a partial solution and simply treat the symptoms of overwatering. Some form of water rationing via pricing will be required otherwise the drainage network will allow increased wastage of a scarce resource. Already further salinity problems are being encountered as drainage waters are being mixed with irrigation water and used again downstream. Drainage charges are notoriously difficult to collect in Egypt. Despite the passage of Law Number 74 of October 1971 concerning irrigation and drainage cost recovery the actual collection rate for charges due ranges between 0-20% for various areas. Obviously a radical overhaul of the Egyptian irrigation system and its cost sharing is a major exercise with important ramifications. A consortium of national and international expert organizations have established a working group in Cairo - "The Egyptian Water Master Plan" - to study the problem.

I/ FAO., Research on Crop Water Use, Salt Affected Soils and Drainage in Egypt, Cairo 1975 and, El-Tobgy, H.A. Contemporary Egyptian Agriculture, Ford Foundation, Cairo, 1976. Chapter 4. Page 80.

2/ Egyptian Public Authority for Drainage, Evaluation Division, and Drainage Research Institute, 1978. -83-

I. Trading Activities of the Credit Bank

5.66 The trading activities of the Credit Bank, i.e. procurement and supply of inputs and collection and disposal of crops, are its predominant operations in physical and financial terms, amounting to about LE 300 m annually and occupying most of the staff time. Inadequate commissions have led to losses on some of these activities representing an implied subsidy to the farm sector. Table V.16 presents recent commission charges on inputs and the Bank's suggested charge to cover costs of operation. Assuming that the "suggested" figures in the table do not represent expected real cost increases over 1977, but simply the full cost of the trading and merchandizing functions performed in that year expressed as a proportion of suppliers' prices, we may calculate the implied subsidy as the difference between suggested and annual commissions, expressed as a percentage of the suggested figure. These calculations, shown as the last column of the table, indicate that a subsidy of from 17% to 50% has recently been given to farmers on the costs of marketing services supplied to them by the Bank.

Table V.16: COMMISSIONS ON TRADING ACTIVITIES: PRINCIPAL BANK FOR DEVELOPMENT AND AGRICULTURAL CREDIT: 1976, 1977

Implied Item Actual 1976 Actual 1977 Suggested Subsidy

Fertilizer 7% 10% 12% 17 Pesticides 7% 9% 12% 33 Seeds 190 m/ardeb 300 m/ardeb 500 m/ardeb 40 Packaging 7% 10% 12% 17 Animal feed 900 m/ton 1200 m/ton 1500 m/ton 20 concentrates Provisions 410 m/ardeb 750 m/ardeb 1250 m/ardeb 40 Cotton marketing 140 m/cantar 100 m/cantar 200 m/cantar 50 Onion marketing 250 m/ton 250 m/ton 500 m/ton 50

Source: Agricultural Credit Bank.

5.67 Despite these apparently high rates of subsidy, the extent of transfer to the rural sector in the recent past has not been great, as can be seen in Table V.17 where the Bank's financial results with respect to its trading operations are set out. Indeed, it seems that only in 1976 has there been a net transfer to the rural sector; in previous years a surplus in respect of some lines (e.g. fertilizer) has been sufficient to offset a deficit on others (e.g. seed). -84-

Table V.17: FINANCIAL RESULTS ON TRADING ACTIVITIES: PRINCIPAL BANK FOR DEVELOPMENT AND AGRICULTURAL CREDIT: 1974 to 1976

Activity 1974 1975 1976

Market of Export Crops -1.18 -1.34 -0.77 Procurement of Supplies 0.15 0.01 0.22 Storage Activities 0.09 0.06 0.16 Fertilizer Distribution 2.22 2.44 0.69 Seed Distribution -0.10 -2.95 n.a. Insecticide 0.52 0.47 0.23 Feed Concentrates Distribution -0.22 -0.30 -0.44 Jute Bags Distribution -0.58 -0.54 -0.69

Total 0.43 0.51 -0.59 1/

1/ Not including seeds.

Source: PBDAC, Preappraisal Report of Agricultural Development Project, 1977. -85-

VI. MARKET INTERVENTIONS AND THEIR EFFECTS ON PRICES: COMMODITIES

A. Cotton 1965-76

(i) Price History and Nature of Intervention

6.01 All cotton growing is closely regulated by the Ministry of Agricul- ture through the cooperatives to fill the requirements of the State Egyptian Cotton Organization. This Organization determines the amount and varieties required for export and domestic use. The Ministry of Agriculture then allocates production targets required from each governorate, at which level disaggregated targets are given to cooperatives to allocate among their members depending upon their farm size, previous production performance and any exemptions they may have. Plantings are measured and supervised. Co- operatives are required to consolidate all the cotton lands of their members into large contiguous blocks, while members still retain private ownership and cultivate separately. Pest control is carried out by the cooperative's management. Penalties are levied on members for default of the production requirement. Details of areas, yields, output and exports of cotton are shown for the years 1965 to 1976 in Table 1 of the Annex.

6.02 At harvest the seed cotton is delivered to cotton collection centers of the Cotton Organization where it is weighed, graded and entered on each farmer's account. A first advance payment is made at this stage, with final payment after ginning. Prices are set by the multi-ministry Higher Council on the basis of submissions from interested ministries. Prices vary by grade and by variety. Cotton varieties are classified and geographically separated on the basis of staple length with the finest, extra-long varieties coming from the northern Delta, with a gradual shortening in staple length to the south of the country. For each variety, farmgate prices are set according to the expected export price, the selling price to domestic mills, the transport, milling and other processing costs and the need to raise or maintain production targets. This last consideration is referenced to the prices of alternative production possibilities and farmers' costs of production and the State's revenue requirements.

6.03 Annex Table 2 shows average farm-gate, export and domestic prices for cotton for the twelve-year period 1965 to 1976. After a history of no significant price rise to farmers since 1950, prices began to move upwards in 1964 and have continued to do so. Despite these price rises, however, plantings have fallen below the 65-year average of 1.7 million feddans, and have continued to fall despite separate incentive payments to growers and renewed policing of physical controls. In 1976, after a 25 percent increase in farm-gate price, farmers reduced their plantings from 1.3 to 1.2 million feddans, thus falling well short of the official requirement of 1.5 million feddans.

6.04 The prices shown are weighted averages and considerable variation within one year exists across varieties and qualities and hence also locali- ties. For instance, in 1975 the average price was LE 162 per ton delivered to the village collection centre. During the same year the price for the highest -86-

quality cotton grown in Kafr-el-Sheik in the far north was LE 183 per ton, whereas in Qena in the far south the price was LE 130 per ton.

6.05 These variations are further illustrated in Annex Table 3, where buying prices, export prices and selling prices to domestic mills are shown for a range of representative cotton types for the years 1965 to 1976. Several observations should be made on the figures in this table. Firstly, the variations in export prices within a variety are explained by differences between prices paid by bilateral trade agreement countries and those paid by convertible currency countries. In 1970 some 95% of cotton exports went to clearing currency destinations whereas this share dropped to 40% in 1976 as these arrangements were being phased out. Secondly, the considerable subsidy to domestic mills can be seen since 1970, both for ultimate export as textiles and for local consumption. The steep rise in domestic consumption of some 20% per year has forced Egypt into importing shorter staples from the U.S.A. and the Sudan. Thirdly, the table shows the considerable stability in domestic prices in the face of extreme instability in foreign prices.

(ii) Measurement of Distortion - Protection and Domestic Resource Costs

(a) Empirical Assumptions and Analytical Procedure

6.06 The calculation of the nominal protection coefficients for cotton for the period 1965 to 1976 is shown in Annex Table 4. Seed cotton is decomposed into its tradeable components, lint and seed, and its non-traded components, scarto 1/ according to the following standard Egyptian measure:

I metric kantar of 157.5 kg. of seed cotton gives:

56 kg of lint; 100 kg of seed; 1.5 kg of scarto.

Lint is valued at the f.o.b. export price (Annex Tables 2 and 3) less an export commission of 3%, handling costs ex ginnery, ginnery costs, cooperative marketing costs and a 25% loading on total costs for administration and unspecified items. 2/ This gives a lint value in border prices at the village depot. Seed is valued at border prices less transport. Scarto is simply valued in domestic prices since its contribution is negligible. Prices are rounded to the nearest whole number.

6.07 Annex Table 5 shows the effective protection calculations. Inputs are decomposed into traded (at the border) and non-traded components and valued both at domestic and border prices according to the analyses of Section V

1/ Also known as linters, it is inferior fibres from around the seed.

2/ The major sources of cost data are the Price Planning Agency's Memos, Nos. 11 and 86, USDA Foreign Agriculture Service Circulars and miscella- neous Egyptian Government studies such as those of INP. -87-

above. 1/ Constant technology is assumed which is reasonable for the small farm sector since the mid-1960s, although a tractor model is developed later to explore the effect of changing technology. Irrigation costs are decomposed into a tradeable component comprising off-farm fuel and pump-station equipment used by the government in operation of the system, and a non-tradeable component which is the on-farm sunk capital in the water-wheel and such structures. It is assumed that the land-tax is levied to cover the above off-farm costs. In order to account for the factors mentioned in Section V.G, the nominal tax is doubled from 1965 to 1972 and trebled thereafter. The other major adjustments are those for fertilizers and pesticide, the costs of which are revalued at border prices.

6.08 In Annex Table 6 the domestic resource costs for cotton are tabulated. In this analysis, primary factors are the most difficult to deal with. For the small farms labor is costed at 50% of the market wage rate (see Section III.C). For mechanized large farms labor is costed at the market wage rate reflecting the importance of hired labor to this group. Draft animal power is simply entered at its financial price as the outcome is insensitive to the complex assumptions necessary for decomposition. Capital is fixed in the form of on-farm improvements such as buildings and farm tools embodying labor and primary materials. An arbitrary figure of LE 100/feddan depreciated over 15 years and proportioned to each crop according to the length of its growing season is used. It was not feasible in the context of this study to estimate the depreciated capital stock in agriculture, especially public sector capital. For instance, the multi-purpose Aswan High Dam presents formidable problems of sectoral cost apportionment. The opportunity cost of capital also presents difficulties of interpretation with rates of return in Egyptian enterprises adjusted for distortions ranging between -10 to +20%. A weighted average might give an expected return to a marginal investment in those enterprises of around 10%. On the other hand, if the distribution of investment was to be concentrated only on those avenues yielding the best return the opportunity cost of capital would be nearer 20%. However, this is an unrealistic assumption in the Egyptian context.

6.09 Land valuation at domestic prices is the distorted rental value (Section V.G). At opportunity cost prices it is the uncosted residual return to land in the alternative use, wheat. Although cotton is grown in summer and wheat in winter the crops preclude each other since the wheat is not yet ripe when the cotton has to be planted.

6.10 Where possible sensitivity analyses have been made on the value of difficult-to-estimate items and alternative results presented.

(b) Results and Discussion

6.11 The results are summarized in Table VI.1, and show a considerable stability in the various protection coefficients.

1/ The sources of data generally originate in the Ministry of Agriculture's Economics Research Unit but much of it is via other studies such as E. Montasser, ARricultural Prices. Growth and Sectoral Terms of Trade in Egypt, INP Memo Cairo, 1975. -88-

Table VI.1<:' MEASUREMENTS OF PRICE DISTORTIONS AND COMPARATIVE ADVANTAGE Cotton 1965-1976

Coefficients 1965 1968 1971 1972 1973 1974 1975 1976

Nominal Protection 0.66 0.68 0.69 0.74 0.57 0.39 0.45 0.65 Net Nominal Protection 0.66 0.68 0.69 0.74 0.30 0.19 0.22 0.35 Effective Protection 0.62 0.65 0.62 0.71 0.54 0.36 0.44 0.68 Domestic Resource Cost 0.21 0.28 0.39 0.35 0.47 0.37 0.26 0.25 Implicit Exchange Ra*te 10 8 5 6 5 7 9 10 (in US$/LE 1)

Source: Annex Tables- 5 and 6.

At the "officia-l exchange rate" of LE 1 U$2.56 the implicit price tax rate has been kept at 30-40% except during the atypical commodity prices boom of 1974 and 1975. At the "parallel rate" of LE 1 = US$1.5 beginning with the increasing overvaluation of 1973 the protection coefficients are almost halved corresponding to an implicit increase in the tax rate on producers of export crops of some 70-80%. Most of the variation in the coefficients is explained by movements of world prices. As expected the effective protection coefficients do not differ much from those for nominal protection since our basic model is a small non-mechanized family farm whose purchased inputs are of low value at domestic or world prices when compared with the value of output at world prices. Also since the effective protection coefficient is a ratio of value-added at two prices then it will not differ very much from the nominal protection coefficient if the relative changes in the values of inputs and outputs at both prices are of approximately the same magnitude. For instance, during 1974 and 1975, when the world price of cotton rose those of fertilizer and pesticides did likewise while domestic prices of the three items remained fairly constant. Consequently, the ratios between the values of inputs and outputs/feddan at both prices remained about the same.

6.12 The domestic resource cost coefficients vary between 0.21 in 1965 up to 0.47 in 1973 and then decline again to 0.25 in 1976 mainly because the world price of wheat doubled between 1972 and 1973, a full year before that of cotton. The results are far more sensitive to the assumption of valuing the land at the surplus to wheat, the opportunity cost of growing cotton on wheat land, than they are to assumptions of opportunity-cost pricing of labor. The implicit partial exchange rate for this commodity is an average LE 1 - US$8 and emphasizes the extreme comparative advantage Egypt has in cotton production across a wide range of assumptions about valuation of factors.

6.13 Technology effects are illustrated in Annex table 7 where the effective protection and domestic resource cost coefficients are calculated for a mechanized farm. Data for only a single year (1976) were available for this exercise. Since labor and draft power are regarded in this model as traded inputs rather than as domestic resources, value-added at both prices -89-

drops but once again the ratio of value-added does not change and the effective protection coefficient stays the same as for the unmechanized farm. This is because the ratios between the value of traded inputs for both technologies stay about the same at border or domestic prices. Because of the drop in value-added the domestic resource costs rise 25% with mechanization, from a coefficient of 0.25 to one of 0.31. Nevertheless, the results still show a very competitive sector.

6.14 The measurement of subsidy equivalents using the Josling methodology is shown in Annex Table 8 for 1974. It is calculated that the total net producer transfer was LE 254 million at the official exchange rate and LE 409 million at the parallel rate. Of this transfer, LE 122 million went to consumers and LE 132 million to government when measured at the official rate of exchange. It is of interest to note that Ministry of Finance data for that year show a provisional profit transfer from the Cotton General Organizat'on to the Treasury of LE 136.8 million. The producer subsidy equivalent of -50% differs from the effective protection rate of -64% since the former expresses the net transfer as a percentage of the total value of output and the latter as a percentage of value added, both at border prices.

(iii) Effects of Intervention

6.15 At the national level, intervention through state trading of cotton enables Egypt to follow monopoly pricing practices. The Egyptian and Sudanese long staple crop accounts for 80% of world trade in this commodity with Egypt setting the price levels for each season. Since the small country assumption no longer holds, the international prices to which domestic prices are referenced are determined to a large extent by the State Cotton Organization. Our measurements of distortion from the free trade position are thus biased because our numeraire is itself distorted. If we accept that Egypt's cotton trade practice maximizes total foreign exchange revenues by imposition of an optimum tariff on foreign buyers then the bias overestimates distortion-free prices and revenues. In the absence of suitable data this source of implicit protection is not estimated. With this reservation in mind it is reasonable to conclude that Egypt has a strong comparative advantage in long staple cotton growing indicated by DRCs consistently below 0.5 over 11 years under a wide range of assumptions. Complementary demand analysis is needed before much more can be concluded.

6.16 At the sectoral level, the state has a legitimate responsibility to raise taxation revenue from its farmers and it has considered the price tax on export crops as an appropriate measure. The effective protection rate averaging some -35% does discriminate against cotton growers since the overall average tax rate is some 25%. This discrimination, is regressive in view of the stated equity objectives (see Section III.1) given the depressed level of rural incomes, averaging LE 192 compared with the urban average income of LE 384 in 1976. 1/ Such fiscal practices run counter to the efforts

1/ Ministry of Planning, A.R.E., The Five Year Plan 1978-1982, Volume I, Chapter 2, August 1977. - 90-

6.17 At the farm level the positive disincentive vis-a-vis other crops explains why cotton growing is so unpopular among farmers (see Section IV.2). The decline in acreage despite policing of quota requirements suggests that farmers are responding to price signals (see Section IV.3 and 4). National production targets for this highly competitive crop are thwarted by an inconsistent incentive structure implicitly based on the premise that non-price controls are preventing supply response to prices. The series show that between 1965 and 1972 farm prices in nominal terms increased roughly in line with world prices but thereafter diverged significantly with windfall gains to the State. Over the period farm prices of cotton rose at an average of 10% per year. Since the inflation rate of the 1970s has been in the order of 20% per year 1/ real prices have fallen.

B. Wheat 1965-1976

(i) Price History and Nature of Intervention

6.18 Wheat is the major winter cereal and references to State control, national or foreign, over its production, pricing and distribution are common throughout ancient and medieval literature. In modern times Egypt changed from an exporter to an importer in 1940. Because World War II disrupted international trade, production controls were put on cotton to restrict its area and force farmers into wheat growing at a time when cotton growing was more profitable. The two crops are incompatible because the optimum cotton planting date in February/March is some two months before wheat harvesting.

6.19 No direct acreage controls have been applied to wheat. Control is managed by allocating production quotas in ardebs 2/ per feddan planted, to be delivered to the cooperatives at the fixed price. Generally, the quotas ranged from 25% to 40% of total production depending upon consumption targets. In 1976, quotas were abolished, then reapplied in the same year and again abolished in 1977, even though cooperatives continued as active wheat buyers on behalf of the government. The over-quota amounts are sold generally, but not always, at a higher price in the free market. For instance in 1977 a premium of LE 1.00 per ardeb was given by cooperatives over the village price for certain HYV varieties the government wished to promote. This encouraged farmers to sell wheat to the cooperatives while buying their wheat consumption needs from free markets (i.e. village markets). Of course, the "free-markets" are not free of intervention since they are heavily influenced by the quantities required by the State and the prices set through the cooperatives on the one hand, and the quantity and prices of grain and flour allocated to the district by the Ministry of Supply from imports. The wheat production policy is tied closely to the consumer subsidy program which has made wheat and its products available at low fixed prices in virtually unrestricted supply. The price of the standard loaf of bread has remained unchanged since the 1930s.

6.20 Details of areas, yields, production and imports of wheat are shown for the period 1965 to 1976 in Annex Table 9, various price series over the same period are given in Table 10.

1/ Official estimates based on the "official" prices are in the order of 10%. Alternative estimates based on actual market prices gives nearer 20%.

2/ 1 ardeb = 150 kg of wheat. -91-

(ii) Measurement of Distortion

(a) Empirical Assumptions and Analytical Procedure

6.21 The methodology used is the same as that for cotton. Land is valued at its opportunity cost in cotton production. Two specific problems of measurement are the valuation of imports and the treatment of by-products. Two series are shown in Annex Table 10 for wheat imports. One is the official government series, the other is the USDA series. The two series begin to diverge significantly in 1968 when the official series underestimates imports by 0.5 million tons. In the subsequent years underreporting increases to up to 1 million tons per year. The preferred series used here is the USDA estimate based on suppliers exports by country of destination rather than the official series based on customs records. For instance, Table VI.2 compares the sum of known exports of wheat and wheat flour to Egypt in 1975-76 with the "official" figures for Egyptian imports; it is clear that the USDA figure must be closer to the true value. Two reasons exist for the discrepancy. First, supplies from Australia enter via Red Sea ports and are trucked directly to Upper Egypt. Customs records there seem to be inadequate. "Temporary Admissions" procedures are in effect in Alexandria which allow physical entry prior to customs recording to relieve port congestion. Second, it is not known whether grain imports for military consumption are recorded in the published series. The net result is that dividing the value of imports by the quantity does not give the average import prices. Out analyses have used the USDA quantity series and the World Bank prices series for international grain movements given in the Commodity Trade and Price Trends Reports.

Table VI.2: WHEAT AND FLOUR EXPORTS TO EGYPT 1975/76 (July to June in '000 tons)

Total Grain Equivalent Country Grain Flour USDA Official

Australia 1,008 0 USA 972 256 Canada 0 3 Argentina 63 0 Others 736 725

Total 2,716 984 3,800 2,920

Source: USDA, Foreign Agricultural Circulars FG-5-78, March 1978 and FG024066, December 19, 1977.

6.22 The second measurement problem with respect to wheat is the treatment of wheat straw. Because of the critical shortage of summer fodder, wheat straw produced over the previous winter is in great demand as a major feed for draft animals which are still the dominant power source in Egyptian farming. -92-

Protection of meat production via import controls (see Section VI.E) coupled with stimulation of domestic demand via consumer subsidies and relatively high public sector wages is giving a further demand for fodder for meat production. Between 1965 and 1976 the share of straw in the total value of output per feddan doubled from 20% to 40%. In border pricing straw, two alternatives were used. The first simply valued straw at its domestic price. The second valued straw at 50% of its domestic price.

6.23 Annex Tables 11 to 13 show the calculation of nominal and effective protection and of domestic resource costs for wheat for the period 1965 to 1976.

(b) Results and Discussion

6.24 The results from Annex Tables 11 to 13 are summarized in Table VI.3. It will be seen that both nominal and effective protection coefficients remain fairly stable over the period indicating that domestic prices were adjusted roughly in line with world prices converted at the official exchange rate. Except during the commodity prices boom of 1973-1975 the nominal coefficients were very close to or slightly above 1. Given the problems of data accuracy noted above, it seems fair to conclude that import parity pricing calculated at the overvalued exchange rate has been followed. The effect of the exchange rate distortion is to reduce the protection coefficient by almost one half from 0.96 to 0.54 in 1976 and indicates substantial implicit taxation.

Table VI.3: MEASUREMENT OF PRICE DISTORTION AND COMPARATIVE ADVANTAGE WHEAT 1965-1976

Coefficients 1965 1968 1971 1972 1973 1974 1975 1976

Nominal Protection 1.2 1.5 1.2 l>q 0.7 0.7 0.9 1.0 Effective Protection 1.1 1.3 1.1 1.1 0.8 0.8 1.3 1.3 Domestic Resource Cost 4.3 3.1 1.9 2.4 1.3 2.0 3.4 3.7 Implicit Exchange Rate (in US$/LE 1) 0.53 0.72 1.16 0.93 1.90 1.30 0.74 0.68

Source: Annex Tables 11 to 13.

6.25 Effective protection estimates diverge more from nominal protection than is the case for cotton because the larger size of the value of inputs relative to the value of output makes the result more sensitive to input price distortions of the same size. Before 1972 effective protection coefficients were below nominal protection coefficients mostly reflecting the implicit tax on fertilizer prices and above them thereafter mostly reflecting the fertilizer subsidy resulting from fluctuating world prices and stable domestic prices. The effect of excluding straw values increases the effective protection coefficient for 1976 from 1.3 to 1.6 and the effect of revaluing straw at one-half its market price is to increase the coefficient to 1.4. Since the results are more sensitive to inclusion of straw than to the pricing of straw -93-

between 50% and 100% of its market price the preferred coefficients are those with straw included at market prices. The domestic resource cost coefficients vary between 4.3 and 1.3 indicating that Egypt clearly does not have a comparative advantage in wheat production across a wide range of assumptions and with a broad allowance for estimation errors. The partial exchange rates per LE vary between US$0.53 to US$1.9 compared to the official exchange rate per LE 1 of US$2.56 and US$1.41 at the parallel rate. However, the results are overwhelmingly determined by the valuation of land as the residual return to cotton and the choice of exchange rate.

6.26 The subsidy equivalents shown in Annex Table 14 estimate the taxes on producers at 30% and the subsidy to consumers at 66% measured as value of output at border, producer and consumer prices for 1976. The total transfers from wheat farmers for that year were LE 78 million. Transfers to wheat consumers were LE 113 million on domestic wheat and LE 221 million on imported wheat totalling LE 334 million with the difference between producer and consumer transfers of LE 256 million being borne by the state. The actual direct subsidy payments for wheat trading losses to the General Authority for Supply Commodities for that year were LE 190 million. 1/ Their losses on imports were LE 120 million and losses on domestic purchases were LE 70 million. The difference between our calculated estimate of LE 334 million and the above LE 190 million is due to the latter estimate being for explicit transfers only and the former being for both explicit and implicit transfers.

(iii) Effects of Intervention

6.27 At the national level the intervention effects of the wheat policy have been most noticeable on the consumption side. The consumer subsidy program, most of which is concerned with wheat, has become unmanageable both in terms of logistics and financing, absorbing 10% of GDP and 30% of Govern- ment revenue in 1976. Growth in wheat consumption has resulted not only from population increases but also from changes in diet away from maize to wheat accompanying urbanization. The subsidized wheat and flour has been indis- criminately available to all, including luxury hotels and livestock.

6.28 With the degree of intervention in the wheat market noted above and with the empirical uncertainties involved, it is difficult to apply conventional comparative static analysis to depict the welfare effects of the consumer subsidy program. Under certain simplifying assumption, however, we could suggest the situation obtaining in the mid-1970s might be roughly as in Figure VI.1. The medium-run demaud and final domestic supply curves,are shown as D and Sd respectively, and the foreign supply curve, assumed infinitely elastic, is shown (at the parallel exchange rate) as Sf at the import price Pi. Suppose the administered pricing arrangements with respect to farmers'

1/ General Authority for Supply Commodities. -94-

payments are such that the average farmgate price is at pf yielding a domestically supplied quantity of qf. The consumer subsidy program is sufficient to raise the domestic demand curve to D', at which point consumption is q , with a price to consumers of p . The quantity qi =Oqc -0qf is imported. The aggregate supply curve is ABCF. Consumers receive a subsidy measured by area P Pi EC, of which Pf Pi CB is a transfer from producers and HCEG plus P Pf BH is the budget cost. In 1976 the values of the prices involved (in LE) were p 87, p = 49, p = 29, and quantities (in million tons) i f c were q = 5.8, qf 2.0, and qi = 3.8.

FiRure VI.1: WHEAT SUPPLY, DEMAND AND PRICES p D'

Sd D

c F Pi1

PC~~ ~~~1 G A

0~ qf ~ 4CP ~ a

q, 6.29 Econometric estimation of demand and supply functions would be required for a proper measure to be made of the changes in producer and consumer surplus. Nevertheless some observations may be made about conditions in the market from a national policy viewpoint. Farm prices for wheat which were nearer to import parity would stimulate production but only at the expense of reduced cotton output. With long-run DRC coefficients for wheat well above unity and those for cotton well under 0.5, such a shift would not appear to be sensible, cetris paribus, from an allocational point of view. In other words, this is the familiar second-best problem, where partial removal of price distortions could raise more problems than it solves, emphasizing the need for coordinated overall policy measures. -95-

6.30 Reduction in the consumer subsidy program resulting in a rise in consumer prices for wheat would have substantial adverse distributional consequences in a situation where the fight against poverty is a prominent national objective. A tripling of consumer prices and almost doubling producer prices for wheat would have an enormous effect on wages and other prices.

6.31 At the farm level, growers have not reacted against wheat growing to the same extent as for cotton. Nevertheless, wheat quotas, recently removed, have long been in force to ensure compulsory delivery of a large part of the crop to the state. Planted areas have declined 15% since the 1950s yet yield increases have kept production increasing slowly. The basic difference between cotton and wheat growing is that all the cotton must pass through the cooperatives, compared with some 40% of the wheat, the cash cost inputs for cotton are much higher and the labor requirements for cotton are double those for wheat. Further, the wheat straw for animal feed is a basic necessity to ensure draft power without which there is no farming.

C. Rice

(i) Price History and Nature of Intervention

6.32 Rice production plays a key role in the government's strategy for feeding the urban population and earning foreign exchange. Increasing urbanization has been accompanied by a shift from maize and millet consumption to that of rice and wheat. Exports of rice are used to pay for part of the wheat imports. The strong growth in rice production of the 1960s mainly due to area expansion has now stopped and the volume of exports has fallen by 60% since 1969 as a larger percentage of the crop is consumed locally. The amount of wheat imported continues to grow, with the total value of cereal imports, mostly wheat, reaching US$564 million in 1976 1/ whereas the total value of cereal exports, mostly rice, was only US$79 million. Egypt's share of the world rice trade had risen to 11% in the late 1960s but fell back to under half of this by the mid-1970s.

6.33 Control of the upper limit of rice production has been through water allocation to delineated areas since rice requires special provision of water on a four-day cycle as distinct from the general seven-days-on, seven-days- off cycle provided for other crops. As a summer cash-crop rice competes with cotton which is a more important foreign exchange earner. As a summer grain it competes with maize which is the preferred staple of the farmer. The multiple trade-offs impose difficult decisions with respect to production targets.

6.34 As with wheat, a "surplus" is requisitioned through a minimum quantity to be delivered to the cooperative stores at a fixed price with fines for default. Quantities over this amount may also be sold to the cooperative

1/ Actual value of wheat imports in 1978 was US$731 million with the official estimate for 1979 at US$850 million. The value of all farm commodity exports in those years was US$525 million and US$600 million respectively, with overall trade deficits in each year at around US$3.6 billion. -96-

at a marginally higher price or sold to private merchants at a substantially higher price. In 1977 the delivery quota was equivalent to 32% of each farmer's crop with a 15% price differential for overquota cooperative purchases. Total purchases by the cooperatives fell from 51% of the crop in 1967/68 to 40% in 1972/73. No data are given for the price of rice sold to merchants but in February 1978 1/ the Minister of Trade and Supply answered questions in the People's Assembly as to why the actual retail market price was three times the price fixed by the Government. Under conditions of such shortages and given the large number of millers and merchants it is a fair proposition that the farmer receives considerably more than the 15% price premium for over-quota sales offered by the cooperatives. An earlier study 2/ reports a difference in price of 100% between cooperatives and merchants which is not shown in the Ministry of Agriculture's rice price statistics. The official statistics show only a minor difference between the quota price and the weighted average price over all grades and markets.

6.35 Between 1966 and 1968 the average farm-gate price of paddy increased by 20% and the area planted increased by 50% as the extra water from the High Dam became available. However, the average price then fell 15% and the area declined 11% soon after and by 1975 the Ministry of Agriculture 3/ pointed to low fixed prices as the cause of "...resentment of farmers to expanding the areas of cotton and rice". Planted area again rose but only by 5% despite a price rise of 73% even though more than a 0% increase in area was possible before the limitations of the irrigation system were reached. This indicates that supply was influenced by more than just the price of the crop and by technical constraints in that period.

6.36 In 1975 a little over 7% of the crop was exported, continuing the decline from 50% exported in 1969. Average prices for exports expressed in LE/ton have been some 20% higher for sales to bilateral trade agreement areas than to convertible currency areas.

6.37 Full details of rice production and disposal are given in Annex Table 15, for the years 1965 to 1976. Price series for rice are shown for the same period in Annex, Table 16.

(ii) Measurement of Distortion

(a) Empirical Assumptions and Analytical Procedures

6.38 Although the price series are those from official sources there are variations among different official export series depending on the origin. However, the results are not significantly affected by which alternative series is chosen. The "average" farmgate price is the weighted average of

1/ Egyptian Gazette, February 27, 1978, People's Assembly Report.

2/ Abdel-Fadil, M., Development. Income Distribution and Social Change in Rural Egypt (1952-70), Cambridge 1975, p. 88.

3/ Hindy, M. K., A Short Note on Agricultural Prices and Subsidies in the Arab Republic of Egypt, Economics Research Unit, Ministry of Agriculture, 1975. -97-

quota and overquota sales to the cooperatives plus the free market sales at the "official" price; the resultant series underestimates the true weighted average since it does not include black market sales. Consumer prices for rice in 1975 varied seasonally from LE 55/ton after harvest to a peak of LE 80/ton before the next crop appeared. Resultant producer price variations are not included. A milling rate of 63% was used which is applicable mainly to larger mills processing grain on government account. Over the study period this figure varied between 59% and 65% and accounted for between 30% and 53% of the crop. The rest went to private millers with a wide spectrum of milling techniques and efficiencies. The border price is obtained by converting the US$/ton price into LE/ton at the official exchange rate and deducting export margins, transport and milling costs on the basis of 1.58 tons paddy giving I ton of rice plus bran and waste at the values shown. Cooperative marketing costs are deducted to give a border price equivalent at the village.

6.39 Annex, Tables 17 to 19 report the calculation of nominal protection, effective protection and domestic resource costs respectively. The same general approach and assumptions are used in these calculations for rice as were used for cotton and wheat above.

(b) Results and Discussions

Table VI.4: MEASUREMENTS OF PRICE DISTORTION AND COMPARATIVE ADVANTAGE RICE 1965-1976

Coefficients 1965 1968 1971 1972 1973 1974 1975 1976

Nominal Protection 0.70 0.76 1.30 1.35 0.66 0.24 0.30 0.55 Net Nominal Protection - - - - 0.37 0.13 0.16 0.31 Effective Protection 0.62 0.71 1.43 1.62 0.68 0.18 0.27 0.53 Domestic Resource Cost 0.72 0.46 1.16 1.3 0.98 0.30 0.28 0.56

Implicit Exchange Rate (in US$/LE 1) 3.2 5.1 1.9 1.7 2.6 8.4 9.2 4.6

Sources: Annex, Tables 17 and 19.

6.40 The results summarized in Table VI.4 indicate that the rice coefficients generally follow the same pattern as those for cotton, the other major export crop. Rice has been very competitive except during 1971 and 1972 when world prices were unusually low, the DRC coefficient rose from 0.46 in 1968 to 1.3 in 1972.

6.41 During the 1960s the implicit tax on rice exporters of around 25% indicated by nominal protection coefficients of around 0.75 does not seem to be out of line with the general tax rate. However, after the quantum -98-

jump in world rice prices from 1973 onwards when f.o.b. prices of Thai 5% broken rose from US$147/ton to US$350/ton between 1972 and 1973 the implicit tax rate, of 50% to 70% at the official exchange rate and up to 87% at the parallel rate does seem unduly oppressive and would explain much of the sudden slow down in the strong growth in rice production. Once again the estimates for effective protection are not very different from those for nominal protection and in no case swing an implicit tax into an implicit subsidy. The implicit partial exchange rate for rice varied between US$1.7/ LE 1 in 1972 to US$9.2/LE 1 in 1975 and generally kept well above the official rate of US$2.56 and the parallel rate of US$1.41.

6.42 Using Josling's subsidy equivalent method for 1974 (Annex Table 20) the producer tax equivalent on total value of output at border prices was 70%. The producer tax per ton was LE 106 on a border price equivalent of LE 151. The total producer contributions to the treasury and to consumers on the rice crop for that year was LE 259 million. The consumer price/ton was LE 55 with a subsidy of LE 209 to give a 79% subsidy rate. The total consumer transfer was LE 253 millions. Once again it must be stressed that the transfers discussed here are only partly explicit and budgetary figures will capture only a fraction of the full explicit and implicit transfer.

(iii) Effects of the Intervention

6.43 The price distortions revealed above have forced ricegrowers to finance the rice consumer subsidy program and to contribute a substantially higher proportion of their incomes to the treasury. Since it is a reasonable judgement that world rice prices are not likely to return to the level of the 1960s some significant restructuring of farmgate prices as distinct from marginal adjustments seems due. On the production side the present system rewards those who sell on the black market, promotes farmer resentment and is inconsistent with government's production targets. On the consumption side the system has led to increased consumption and reduced exports. How- ever, the same caveat is noted as for wheat. A major adjustment in producer and consumer prices in too short a period without corresponding removal of other distortions elsewhere would be undesirable. Yet the need for a changed approach was stressed in the Price Planning Agency's report on "Rice Economics", March 1975, Memorandum No. 42 (in Arabic). The report stated that the major problems were (1) that farmers felt unfairly treated by the cooperatives paying them the low price set by the government, (2) that payments were delayed with confusion of accounts, complications of delivery and weight measures, (3) too many commissions and agencies involved, (4) lack of direct contact between the farmer and the millers, (5) the use of the cooperative marketing system to collect outstanding farmer's debt, and (6) the lack of price and non-price competition between the cooperatives and merchants. Further, private merchants will advance payment against a crop at prices higher than the cooperatives. Given the high income elasticity of demand for rice in Egypt - estimated at 0.47 by the Price Planning Agency - it can be expected that the exportable surplus will disappear in the near future, continuing the decline. In fact, it could even be that Egypt may eventually become a rice importer in the manner of the turn-about in its wheat trade in the 1940s unless a radical restructuring of the system of intervention occurs. -99-

D. Maize - 1965-1976

(i) Price History and Nature of Intervention

6.44 Maize is the major coarse grain in Egypt and is the staple food of the poorer country people. Less than half the crop is marketed, the rest being consumed on the farm. It is also used for blending with wheat in bread and small amounts of the grain are fed to farm animals. Another major use is in intensive poultry and cattle feeding, with imports mainly for this purpose of almost one-half million tons per year. The leaves of the growing plants are an essential source of green summer forage despite the depressing effects of this practice on grain yields. In fact, higher-yielding hybrid varieties have not been readily accepted by farmers because of the lower quantity of forage produced.

6.45 Maize is not a requisitioned crop since it is not exported or consumed to a large extent in urban centers. The Supply Authority has, on occasions, purchased in the local markets but most of its purchases are as imports, particularly for stockfeed. In 1974, 1975 and 1976 maize imports jumped from a level equivalent to 2% of production to a level of 15% of annual output despite increased local supplies. Annex 2, Table 21 shows maize production and disposal from 1965 to 1976.

6.46 Prices at the farmgate changed very little during the sixties and early seventies, yet since 1972 they have doubled. The major intervention mechanisms are the importation and distribution of competing supplies solely by the state and the effective prohibition of exports through the use of the official exchange rate. At the latter exchange rate maize could not be exported profitably, whereas it could be exported profitably at the parallel rate which is used for most trading activities.

6.47 During the stable price period of the mid to late 1960s maize revenues rose dramatically. The 60% yield increases were enabled by the changeover of the growing season from autumn to summer as a result of the increased water from the newly opened Aswan High Dam. Details of maize prices for the period 1965 to 1976 are given in Annex, Table 22.

(ii) Measurement of Distortion - Protection and Domestic Resource Costs

(a) Empirical Assumptions and Analytical Procedure

6.48 The calculation of nominal and effective protection and of domestic resource costs is shown in Tables 23 to 25 of the annex. The same general assumptions and procedures are used as set out for cotton and the other crops considered above. Some problems of measurement arise because of the low proportion of the crop marketed, the differentiation between hybrid and local maizes and the dual purpose nature of the plants. Most of the maize is grown by non-mechanized small farmers who use the leaves of local varieties for forage yet most of the marketed surplus may come from mechanized larger farmers more responsive to grain prices. The estimation of net nominal protection assumes no significant overvaluation until 1973. -100-

(b) Results and Discussion

Table VI.5: MEASUREMENT OF PRICE DISTORTION AND COMPARATIVE ADVANTAGE MAIZE 1965-1976

Coefficients 1965 1968 1971 1972 1973 1974 1975 1976

Nominal Protection 0.84 1.00 1.03 1.06 0.81 0.69 0.79 0.88 Net Nominal Protection 0.84 1.00 1.03 1.06 0.45 0.38 0.44 0.48 Effective Protection 0.86 0.94 1.02 1.27 0.83 0.76 0.90 1.03 Domestic Resource Cost 1.40 2.30 0.86 0.73 0.77 3.40 3.80 1.80 Implicit Exchange Rate (in US$/LE 1) 1.60 1.00 2.70 3.10 2.50 0.75 0.67 1.40

Sources: Annex Tables 23 and 25.

6.49 Table VI.5 summarizes the results for maize. The nominal protection figures indicate that there has been no significant price distortion apart from the 50% tax since 1973 implied by the divergence of the two exchange rates. Effective protection estimates generally show an increased value indicating that the farmers' share in value-added at domestic prices when compared with world price equivalents is higher than the ratio of domestic to world prices. This is due to the weightings of input subsidies. In only one case did the result change a tax to a subsidy, namely in 1976 with a nominal protection coefficient of 0.88 and an effective protection coefficient of 1.03.

6.50 The domestic resource cost coefficients show that for five years out of eight maize has not been competitive to rice except during the period of low world rice prices in 1969 to 1972. These estimates are valid only for the Delta and Fayoum where rice can be grown in place of maize under the present technology. For other maize areas land should be valued as a residual return to cotton and in Upper Egypt the equivalent comparison is between sorghum and cotton.

6.51 The subsidy equivalent estimates of Annex, Table 26 give a producer tax rate of 38% for 1976 and a consumer subsidy rate of 68%. The total transfers from farmers for that year was LE 165 millions and to consumers was LE 249 millions. Care has to be taken in interpreting these figures since the majority of maize consumers are also maize producers, which is not the case for other crops.

(iii) Effects of Intervention

6.52 The effects of the program have probably not been great since the main determinant for maize production is its place in the small farm system. Partial budgets show the advantages of higher grain yielding hybrids yet because they do not fulfill the farmers' multiple objectives as well as the traditional varieties their acceptance has stagnated at less than one third of the total crop. Basic changes in both production and consumption systems would have to occur before public price management can have the desired effect. -101-

E. Animal Products and Fodder Crops

(a) Price History and Nature of Intervention

6.53 The major livestock feed is berseem (Egyptian clover - trifolium alexandrinum) supplemented by wheat and rice straws, maize leaves and stubble, and concentrates based on grain and cotton seed meal. The price of berseem during the study period has risen some 20% per year, that of wheat straw by 30% per year, (Table VI.6). Meat 1/ production has increased by 2.4% per year whereas imports have grown by an annual average of over 150% mostly since 1973 to give a total growth rate in supplies of 5% per year.

6.54 Despite three meatless days per week, demand has been pushed by a growth rate in population by 2.5% per year, aggravated by changing meat consumption patterns accompanying accelerated urbanization and subsidized wages. The State intervenes by importing to make up the deficit and by subsidizing sales of these quantities through ration shops at almost one half of the free market price. In 1978 the ration for a family of five was 3 kg/month at LE 0.68/kg as beef. The cost at the shops to the Supply Authority for imported boneless supplies was about LE 0.58/kg including margins. The free market price of similar beef at the same time was LE 1.70/kg. The ration price has been unchanged for several years during which the price divergence between the two markets has widened to 150%.

6.55 Prior to the introduction of the "own exchange" import facility in 1973 all importation was done by the State. Since then private trade has been increasing but the limitations on foreign exchange availability and import license restrictions have provided the major protection mechanisms. With the Supply Authority's foreign purchasing decisions being the major quantity determinant. A further restriction on "own" exchange imports is the lack of a privately owned refrigerated transport and distribution system.

6.56 Other interventions are, contractual arrangements with custom fattening enterprises, cattle production on State farms and provision of subsidized concentrate supplies. The Ministry of Agriculture supplies yearling calves which would otherwise be slaughtered and contracts to buy them back at predetermined weights and prices. In 1977 the contract price was LE 0.60/kg liveweight compared with a market price of LE 0.70. However, the contract allows farmers to buy increased supplies of concentrate feed, otherwise strictly rationed, at LE 30/ton instead of at the unsubsidized price of LE 70/ton.

6.57 The constraints on increased domestic supplies are the absence of rangelands necessitating displacement of crops to grow fodder and the predominant dual purpose animal system. These result in feed shortages and low meat production performance since meat is mainly a by-product of animal draft power. The continuing imbalance in the supply of feed during the year as well as the overall shortage explains the coexistence of strong increases in fodder prices with slow growth in animal output.

1/ Meat here refers to cattle and buffalo. -102-n

(b) Measurement of Distortion

(i) Empirical Assumptions and Analytical Procedures

6.58 Unofficial meat slaughter is variously estimated at between 30% and 50% of that slaughtered on official premises. The figures used here are calculated on the basis of 30% unofficial slaughter. This probable underestimation together with the need to supply several hundred thousand draft animals in cities would also account for much of the disparity in the growth rates in fodder prices compared to meat prices. Fodder prices themselves are difficult to estimate. For instance in 1976 the berseem price/ton freshweight (wilted) was LE 8.00 in urban feedstores whereas it was LE 5.00 in rural markets.

6.59 The procedure followed for nominal protection is the standard comparison of border price with farm gate price for equivalent products. For effective protection the dual purpose production system was traced. Feed requirements for an adult cow were estimated and priced. Culled weight was 310 kg liveweight, at eight years age annualized to 21 kg of dressed weight per year, at the Cairo abbatoir dressing percentage average of 55. Five calves were assumed over 8 years to give 31 kg/year of dressed weight. The animal milk yield equivalent over 8 years from 5 lactations was 380 kg. Milk was priced at its domestic market value as the results are not sensitive to a wide range of milk prices. The price of cull meat used was LE 1.22/kg DWT and that for calves was LE 1.30/kg DWT. Traded inputs were considered as those used to produce the fodder, plus animal health costs. Because of the complexity of the procedure and data difficulties, effective protection, domestic resource costs and subsidy equivalents were calculated for 1976/77 only. The border price equivalent was derived from the weighted average c.i.f. prices plus a distribution margin of 25%, except for 1977 where actual prices of all types are shown (Annex Table 30).

(ii) Results and Discussions

Table VI-6: MEASUREMENT OF PRICE DISTORTION AND COMPARATIVE ADVANTAGE MEAT 1975 - 1977, EGYPT

1965 1968 1971 1972 1973 1974 1975 1976 1977

Nominal Protection 1.7 3.1 2.4 1.9 2.0 2.6 2.4 2.6 2.6 Net Nominal Protection - - - - - 1.4 1.3 1.4 1.4 Effective Protection ------2.8 2.8 Domestic Resource Cost ------2.4 2.4 Implicit Exchange Cost ------1.04 1.04 (in US$ per LE 1)

Sources: Computed from Annex Tables 27 to 33. -103-

6.60 The nominal protection coefficients ranged between 1.7 and 3.1 both of which figures remain significantly greater than 1 over a wide range of assumptions and errors of estimation. The divergence has increased steadily as both import and domestic price trends have been rather stable over the long run with domestic prices increasing faster. Using the devalued parallel rate the distortion still remains but would have reduced the protection coefficient from 2.6 to 1.4 in the mid-1970s. Input subsidies further increase the coefficient values to 2.8 in 1976/77. In short, the numbers indicate strong positive incentive for beef production. In fact, this is readily observed as animal fodder displaces feed crops and interest in contract fattening escalates. The trend can clearly be traced to price management. The problem for policy planning is whether this makes sense given Egypt's high quality farmland with a high opportunity cost of growing beef. The opportunity cost is low for countries with less fertile crop land and abundant rangelands. The answer as indicated by the domestic resource cost coefficient of 2.4 in Table VI.6 must surely be no. (We may recall here that a DRC coefficient > 1 means that the marginal opportunity cost of growing the meat is greater than the value added by domestic resources.) The implicit exchange rate from meat production is US$1.04/LE 1 which is less than the parallel rate of US$1.40/LE 1 and the official rate of US$2.56/LE 1. This may be compared with an implicit and partial exchange rate from cotton production of US$10/LE 1. Meat production under the test of gains from trade can be expanded only at a net economic loss and does not justify further investment. On the other hand, meat production that is a necessary by-product of draft animals warrants improvements in efficiency. The issue of specialist meat production and meat production as a draft animal by-product is explored in the next section.

(iii) Effect of Intervention

6.61 The effects of intervention are traced in fig. VI.2 below.

Figure VI.2: MEAT SUPPLY, DEMAND AND PRICES

D S

- - - -…d------c

a ~~~~b

PW ' I/ - '-

L 0w qd q, -104-

The domestic supply curve Sd is composed of meat that is a necessary by-product of draft animal provision, that is, cull cows and calves, as well as specialist meat production. The curve bends steeply upward to the right as increased production can only be got at the expense of increasingly more productive crop land. The quantity 0 q is draft animal meat and is low cost because much of its cost of production is allocated to necessary power production. The quantity q d is high cost specialist meat production produced at the expense of crops and this quantity would have been imported at price pw which is less than the cost of production. The quantity qmqd = 60,000 tons in 1976 was imported and sold at pw = LE 680/ton in the ration shops at a cost of LE 469/ton at the official exchange rate. Consumers paid a total of qdq cb = LE 40.8 million for the rationed supply and 0 pddqd = 389.3 million for the free market quantity of 229,000 tons at LE 1700/ton. The tax on consumers is p pd db = LE 233.6 million using the subsidized price as the bench- mark and LE 281.9 million using the actual border price plus mark-ups to sale. Farmers receive a subsidy of p pd db, that is, the same amount as the consumer tax. The import bill is qdqmcb, that is, the cost of rationed amount (on the assumption that all imports and no domestic production domestic production are sold through ration shops). The area abd represents the extra cost to the economy of producing q qd which could have been imported below the cost of d6mestic production. The increase in producer surplus is the area p cpd d less the area pCPW a. The decrease in consumer surplus is pwPd dc less bdc, that is, the area p wpd db.

6.62 In the absence of intervention, domestic production would contract to Oq , imports would increase by qwqV and domestic prices would fall to p . Farmers' incomes would drop by the difference between area OPd dqd and area area opw aqws less the income received from devoting the resources formerly used in producing wq d of specialist meat to crop production. Foreign exchange earnings or savings would accrue from this incremental crop produiction. Finally most of the resultant rise in the consumers' real incomes represented by area P pd db would shift the demand curve to the right and increase imports and foreign exchange costs. -105-

6.63 Much of these illustrations can be observed in reality. Domestic meat production is recognized as very profitable and is untaxed yet its expansion is limited by lack of grazing lands. Production targets are not being met as farmers take land out of cotton and put it into fodder production (mostly berseem) despite policing and fines. Short straw but higher grain yielding varieties of wheat are not acceptable to farmers as they decrease forage supplies. Acceptance of hybrid maize is low and grain yields are depressed as farmers strip leaves from the growing plant. Under the impact of political pressure the State subsidizes incomes of urban workers. Their growing real incomes have forced an increase in meat imports from 4,000 tons in 1974 at a cost of US$4 million to an estimated 59,250 tons in 1977 at a cost of US$72.43 million.

6.64 The Egyptian Government sees the solution in a combination of mechanization and specialist meat production. -However, this would put all, domestic meat production into the high cost area under. the curve between *q and q in fig. VI.2. This can be tested empirically since underfoptimum w d conditions actual feed costs per kilogram liveweight gain are between 25 to 30 piastres. With concentrates priced at LE 70/ton.instead of LE 30/ton, the subsidized price, the cost of feed rises to 35'p'iastres/kg liveweight gain without charges for land, labor or capital. A figure of 40 piastres/ kg. liveweight at full cost makes the operation profitable at the domestic price of 70 piastres/kg. liveweight at the farm gate. However, imported beef converted at the parallel exchange range to a liveweight basis costs 25 piastres/kg and 30 piastres/kg if a 20% price increase is allowed for stated preference for local supplies. A further social loss would occur from the net loss of foreign exchange needed to import foodgrain which was displaced to produce domestic animal fodder or from'the net foreign exchange losses from displaced export crops. On the ground of the stated food security objective the displacement of meat by fodder crops and meat does not seem consistent. On the grounds of economic efficiency the displacement of cotton with a domestic resource cost of LE 1 per US$10 of value-added earned, by meat production with a domestic resource cost of LE I per US$1.04 of value-added earned, does not seem desirable.

6.65 The meat consumption and production policies are confused and contradictory with no satisfactory analyses of the efficiency and transfer costs. On the face of it the State is heavily subsidizing both meat production and consumption from the Treasury. In fact, using 1976 as an example, the figures derived in Table 34 of the annex for actual transactions repriced at the parallel rate indicate that consumers are providing almost all of the producers' LE 190 million income transfer. In return, the consumers receive only LE 12 million as the subsidy on the rationed supplies. The crucial point is that the consumer subsidy on the rations is explicit while the producer subsidy on free market quantities are implicit. The net effect is to lower the meat purchasing power of the poor and middle income groups which is the opposite of the consumer subsidy objective. The completion of the move of all transactions to the parallel rate in 1979 should remove much of the obscurity. -106-

F. Sugar 1965-1976

(i) Price History and Nature of Intervention

6.66 Sugar replaces cotton as the key crop in the rotation in the south. The area planted has risen steadily over the study period from 129,000 feddans to 242,000 feddans while average farm-gate prices have more than doubled from LE 2.82 per ton of cane to LE 6.5. However, during this time yields have fallen from some 40 tons of cane per feddan to 35 tons due to ratoon-stunting disease aggravated by chronic drainage problems.

6.67 The state fully regulates the industry and is the monopoly miller and trader, offering mill contracts to growers. Cane prices were fairly static at around LE 2.9/ton from 1965 until 1971 when prices of sugar traded internationally began to rise (fig. VI.3). Since 1972 annual increases in cane prices have been granted by the state, the most substantial being 50% in 1974 over the previous year.

6.68 Consumer prices are split between those for rationed quantities and those for non-rationed. From 1961 until 1973 the prices of both lines were kept constant at LE 70/ton for rationed supplies and LE 160/ton for over quota amounts. In 1973 prices were increased to reach LE 100/ton and LE 245/ton by 1975. Approximately 40% of sugar sold is at the rationed price with the balance at the free market level. Per capita consumption is low at 21.4 kg/year but in line with that for other countries at roughly the same per capita income.

6.69 Egypt is a net importer of sugar but exports refined sugar from imports of raw sugar surplus to its needs. Such trading is profitable and lowers average manufacturing costs through using excess refining capacity. The import and export prices of sugar have moved cyclically in line with those shown for "world, raw, bulk" in fig VI.3, and listed in Table 36, annex.

(ii) Measurement of Distortion and Discussion of Results

Table VI.7: SUGAR, NOMINAL PROTECTION, EGYPT 1965-1976 (values in LE)

1965 1968 1971 1972 1973 1974 1975 1976

Border price/ton raw sugar 35 32 51 111 168 537 338 216 Costs of milling (excluding cane payments to growers) 65 65 70 75 77 71 73 71 Value of 7 tons cane at border price equivalent -30 -33 -19 36 91 466 265 145 Value of 1 ton cane at border price equivalent -4.3 -4.7 -2.7 5.2 13 66.6 37.9 20.7 Farmgate price/ton cane 2.8 2.9 2.9 3.2 3.9 4.8 8.4 9.7 NPC (negative value 0.62 0.30 0.07 0.22 0.47 added)

Sources: Price Planning Agency Memo No. 47, FAO Trade and Production Yearbooks. Ministry of Agriculture. Computed from Tables 35, 36, annex. -107-

Figure VI.3: SUGAR COSTS AND PRICES

(YEARLY AVERAGE) US CENTS/KG 100 90 _ 80 70 60 50

40 _ 40 C~~~~~~O-ffS-uMefI=rce, unrat oned

30 _

Egypt, Cost of Production

V/ORLD, RAW, BULK 3

10 I I I I I I I I I I I I I I I I 1950 1955 1960 1965 1970 1975 -108-

6.70 For the period 1965 to 1971 when world sugar prices were at their lowest for 20 years the value added by the Egyptian sugar industry was negative. The payments to farmers by the state were calculated to cover costs of production to enable domestic production to continue without incomes to growers falling. After 1970, as world prices climbed above the cost of milling and growing, the stable farm gate price ensured that the implicit protection turned into an implicit taxation. By 1974 when world prices peaked farmers received 7% of the value of their cane priced at the border less milling and transport costs. As world prices began to fall, domestic cane prices were increased and the implicit tax rate fell to 53% by 1976. The domestic cane price rise of 1975 over 1974 was twice that of the whole previous decade. Estimates of effective protection have not been given and would not be expected to change the overall picture.

6.71 During the period 1965-1970 when net economic returns to cane growing were negative and cane growers' incomes were being maintained well above what they would have been in the absence of intervention, supplies of cane to mills dropped off. The Price Planning Agency's, Memo. No. 47, of 1975 described how only 56% of the crop was being delivered to millers in the late sixties and 67% by 1974 after small price rises. These should be compared with a delivery rate of 84% in the early 1960s. These delivery defaults were being channeled to private sector cane presses and then consumed locally. By 1973 the idle milling capacity represented 21.5% of that available. The reasons offered were that private millers offered higher prices, paid without delay and in cash, did not use complex pricing formulae and did not deduct outstanding debts of farmers from the payments. The later substantial price rises by the State have improved the situation somewhat.

6.72 These observations are interesting for our study because it is clear that cane farmers were oblivious to the fact that their incomes were being heavily subsidized with respect to border prices. What mattered were the alternatives.

6.73 Similarly, it is Interesting to examine the price of sugar to the consumer with respect to import/export prices. As shown in fig. VI.3 the consumer has been taxed heavily even on rationed supplies. Over the 13 years that the rationed supply price was LE 70/ton, equivalent to 16.1 US cents/kg, the import price varied between 4 to 18 cents/kg with a median of around 9 US cents/kg. On the unrationed quantities, 60% of the total, the price has been three to four times that of import equivalent. Only during the period 1972 to 1976 has there been a true subsidy on the rationed supplies. In the Egyptian context the terms "rationed" and "subsidized," are clearly not syno- nymous. Even when rationed, the price may contain a significant element of transfer to the Treasury or to producers. In 1973 when losses on trading of rationed sugar at the lower price amounted to LE 19 million, profits on trading of unrationed supplies amounted to LE 22.6 million. Usually, only the losses are quoted. Only in 1974, 1975 and 1976 is there a net transfer to consumers.

6.74 In order to gain some idea of the magnitude of the transfers involved Table VI.8 is presented below. In 1974, total cane produced was 7.018 million tons for which growers were paid an average price of LE 6.5/ton -109-

to give a total payment on that crop of LE 45.6 million. At the border price equivalent as derived in Table VI.7 the crop was worth LE 463.2 million. The transfer to the Treasury was thus some LE 400 million. The General Authority for Supply made losses of LE 69 million on trading of rationed sugar in that year and a profit of LE 36 million on the non-rationed sugar to give a net consumer transfer of some LE 33 million. The State gained a net transfer of more than LE 360 million under these assumptions. Using explicit transfers only, the transfer to the state is simply minus LE 33 million. These numbers are, of course, open to revision depending on one's acceptance of the assumptions. Also the distinction between transfers to consumers and the state is arbitrary. However, the magnitudes will remain of the same order.

6.75 There are pros and cons in respect of the sugar price management policy, which has been similar to that followed by many sugar producing countries. Sugar is a medium-term crop in that the cycle before replanting is about 3 years--one plant crop plus two ratoons. Some protection against violent short-term fluctuations is, therefore, desirable. The Egyptian pricing policy has had a beneficial effect in restraining a rapidly rising per capita consumption--crops have a high income elasticity of demand--that has nevertheless resulted in Egypt turning from being a net exporter to a net importer. In the absence of intervention, the domestic industry would have been destroyed during the late 1960s, with the consequent loss of foreign exchange through higher imports. On the other hand land might well have been released for more profitable--both to farmers and the country--production of export crops (cotton and rice) or import substitution crops (maize). Looking at the management policy from a different point of view and assuming that Egypt does have a comparative cost advantage in producing sugar, paying domestic producers so much less than the border price has resulted in black market operations and under-utilization of sugar milling capacity. Finally, from equity standpoint, it would have been less regressive if some means could have been found to subsidize consumers by income demand.

Table VI.8: INCOME TRANSFERS VIA SUGAR 1974

Value Item (LE millions)

Production, 7.018 m tons cane Farm-gate price/ton cane, LE 6.5 Value of crop at farm-gate price 45.6 Value at border price/ton cane, LE 66 463.2 Transfer to Treasury, implicit 417.6 Profits on non-rationed sugar sales 36.0 Losses on rationed sugar sales 68.9 Net transfer to state 384.7

Sources: Computed from text. -110-

G. Other Crops

6.76 If one examines the market closely enough interventions can be identified in the case of almost all crops. For instance, exports of oranges, potatoes and onions are generally sold via a state export authority. The authority accepts the contract from the foreign purchaser at a dollar value which is then converted into local currency at the overvalued official exchange rate and a percentage of that price is offered to domestic suppliers. Some exceptions are made for direct contracting in the case of joint ventures and the exchange rate differential was discontinued in early 1979.

6.77 Domestically consumed small crops are sold principally through municipal wholesale markets. An association of municipal authorities and wholesalers meets weekly to set prices based on supplies. A fixed mark-up for sale to retailers is added. The effect of these interventions is such that in early 1978 wholesalers were trying to keep tomatoes and other vegetables off the Cairo markets in protest over price controls. Shortages of oranges, bananas and tomatoes in the city resulted, with a black market for tomatoes at illegal prices developing even though supplies were available from farms.

6.78 For most of the study period onions have been the third most important export crop following cotton and rice. Table VI.9 shows the differential between average farm gate price and export price.

Table VI.9: ONION PRICES, EGYPT 1965-1976 (in LE/ton)

1965 1968 1971 1972 1973 1974 1975

Farm gate price 13.15 14.00 15.78 13.63 19.47 19.04 24.58 Export price (fresh) 30.10 52.30 51.50 43.0 104.00 73.0 99.8 Nominal Protection Coefficient 1/ 0.86 0.54 0.69 0.60 0.56 0.52 0.48

1/ Includes 100% mark-up for transport and losses. Source: Price Planning Agency, Memo No. 94, March 1977. Cairo.

Even if one allows a mark-up of 100% to cover packaging transport and waste the export tax is some 50%. Currently, the compulsory delivery quota to the cooperatives is 42% of the onion crop.

6.79 Other delivery quotas are 32% for beans, 57% for sesame and 49% for groundnuts. Farm gate prices for oilseeds generally rose some 14% per year between 1971 and 1976 while import prices rose at 70% per year. Con- sumer prices were held constant. For instance, imported vegetable oil cost LE 76/ton in 1971 and increased to LE 347/ton (c.i.f.) in 1976. The consumer price for rationed supplies remained at LE 49.7/ton and for unrationed supplies at LE 100/ton. -111-

VII.. THE NET EFFECT OF MARKET INTERVENTIONS

A. Net Effect on Input Prices

7.01 Physical controls over the supply of most of the important farm inputs prevented the input subsidies from having the 'distortion' effects they would otherwise have had. Nevertheless the subsidization of farm inputs has been substantial. The domestic prices of nitrogen fertilizer, diesel fuel, insecticides and machinery were found to be about one-half of their free market price during 1974 to 1976. Land taxes, rents and interest rates were also subsidized substantially. The subsidies have varied'from 100% for irrigation water at one extreme to 10% for seeds at the other extreme. The subsidy rates are summarized in Table VII.1.

Table VII.1: PRICE DISTORTION OF MAJOR INPUTS EGYPT 1974-76

Subsidy Rates as Percentages of Reference Price

Item 1974 1975 1976

Nitrogen fertilizer 45 55 45 Diesel fuel 45 45 45 Wheat seed 0 13 11 Pest control 50 50 50 Interest rates 30 30 50 Trading charges on inputs 40 40 50 Tractor purchase 40 40 40 Tractor rental 40 42 42 Land rents, land taxes 45 50 50 Irrigation (off-farm costs) 100 100 100

Source: Sections V.1 to V.9.

7.02 In general, our analysis does not show any significant discrimination by crop, with the net reduction in costs per feddan varying from 44-54% for the five major commodities (Table VII.2).

Table VII.2: SUBSIDIES ON TRADED INPUTS - EGYPT 1975 (values in LE)

Value/fed. Total Subsidy Border Domestic Subsidy/ Area Subsidy as % of Crop Prices Prices fed. m.fed. (millions) Border Price

Rice 54.4 24.5 29.9 1.0 29.9 54 Wheat 43.5 19.7 23.8 1.4 33.3 54 Cotton 56.0 29.0 27.0 1.3 35.1 48 Maize 31.8 17.5 14.3 1.8 25.7 44 Meat (ton) 30.1 12.6 17.5 0.5 8.7 48

Total, subsidy (implicit) 132.7 Subsidy rate on cost of traded inputs 51%

Source: Calculated from Section V and VI. -112-

7.03 The econometric analysis of Section IV shows that farmers were price responsive. Hence, with the costs of inputs reduced approximately half, one would have expected input use would rise significantly. However, this effect occurred only in the case of water where the supply was relatively plentiful, whereas the availability of other inputs was restricted by physical controls. These resulted in further market distortions. For instance secondary or informal markets for fertilizers and land developed; long-run credit has virtually disappeared; and there has been a build-up of unsold farm machinery while shortages of equivalent equipment developed elsewhere. The one input that required careful rationing for technical reasons was virtually the only one not limited, and the failure to ration water and its delivery at no cost to users resulted in serious efficiency losses from waterlogging. In no other case can an efficiency loss be ascribed to an input subsidy because of physical controls. Nor could any effect be found on the level of aggregate production or the cropping pattern, except where the physical controls were removed. Availability of inputs rather than price remains the problem. In fact, at the current levels of avaKlability, distortion-free prices between 1974 to 1976 could have been expected to lead to significant losses as farmers probably would have cut back on fertilizer use and pesticides in the absence of compulsory use, such as government implemented pest control in cotton.

7.04 Why, then, have these subsidies been maintained? There are probably two reasons: first, income support and, second, stable production costs. In respect of the first, however, the analysis of input/output prices shows that the input subsidies did not offset the lower prices paid to farmers. Yet, in respect of the second, while price intervention kept the costs of manufactured inputs reasonably stable, all other prices and the relationships between farm input costs and output prices and the relationships between farm input costs and output prices changed rapidly; this produced a large divergence between administered and efficiency prices which became a serious budgetary problem to maintain and a serious political problem to remove.

7.05 By 1975, direct subsidies accounted for 23% of total state expenditure. Together with the heavy military expenditure they led to the inability of the public sector to generate savings with a consequent decline in the ratio of investment financed from domestic savings to that financed from abroad. In January 1977 the government decided to pass much of the burden of price realignment to consumers without any phasing of the change. This resulted in riots and recision of the price increases. Since then, the subsidies have risen from LE 622 in 1975 to LE 660 million in 1978 with LE 1.25 billion budgeted for 1979. Most of this increase is due to the absorption of price rises in local currency terms due to the effective devaluation and the abolition of the previous system of dual exchange rates. In dollar terms the subsidy level remains about the same.

7.06 Direct producer subsidy payments started in 1968 (LE 5.3 million), grew steadily through 1974, and jumped up to LE 101.5 million in 1975, when: fertilizer and cotton production increased substantially. Until the early 1970s, the purchase-sale price differentials earned by state trading were less than the value of indirect subsidies, particularly the cost of the 11 Table VII.3: DIRECT PRODUCER SUBSIDY PAYMENTS- EGYPT 1967-1977 (in LE millions)

Item 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 19772/

Fertilizer, local - - - - - 0.8 0.2 - 0.5 3.0 7.7 Fertilizer, imported ------0.3 69.3 29.9 6.0 Gypsum - - - - - 1.1 0.6 0.4 0.6 0.7 0.8 Commissions to importers - - - 0.4 0.3 0.2 Maize production - - - - - 0.2 - - - 0.1 Seeds ------1.2. 0.1 1.2 1.1 1.3 Cotton pesticide - - - 11.6 11.6 11.7 12.6 11.5 27.6 20.0 25.0 Sugarcane disease compensation ------0.5 0.2 0.5 0.6 0.7 Animal feeds ------0.1 0.5 0.7 0.8 Cotton incentives - - - - - 0.2 - - - - 3 Balanciug amount / - 5.3 6.3 0.3 0.3 0.2 0.6 0.1 0.9 0.5 0.2 F

Total 0 5.3 6.3 11.9 11.9 13.8 15.9 12.7 101.5 56,8 42.8

1/ Refers only to direct payments passing through the Agricultural Crops Stabilization Fund, mostly to the Bank of Agricultural Credit.

2/ Budget allocation.

3/ This balancing item represents the sum of payments less than LE 100,000 from 1970 and payments not identified by item prior to 1970.

Source: General Authority for Agricultural Crops Stabilization Fund. -114-

100% subsidy on irrigation water. As shown in Table VII.3, the very sharp rise in the total value of subsidies in 1975, followed by a considerable fall, but not back to 1974 levels, follows the pattern of import prices. Input use has been kept fairly constant by absorbing the price rise so as to fulfill the stable cost objectives. It seems reasonable to conclude that prior to the early 1970s there was little net effect on input prices. After that date market intervention produced market divergences in favor of the farmer with cost reductions being in the order of 50%.

B. The Net Effect on Output Prices

7.07 The summary table of our estimates of nominal protection coefficient (Table VII.4), shows that over the long run, exports have been taxed heavily, and either the production of import substituting fkad-crops has been subsidized or their price has not been distorted by taxes. This' is a familiar pattern in developing countries and follows from the implementation of Egypt's overall economic strategy. Two distinct periods emerge. One is the relatively low world price period between 1965 and 1972. The other is the relatively high world price period between 1973 and 1976. The net effect of maintaining relatively low and stable domestic prices during both periods was to give a windfall gain to the state during the later period, and even to tax food crop production. The one exception is the meat industry. Meat at all times has enjoyed an extraordinary degree of protection, needed because of the high cost of animal production on prime crop land.

7.08 During the early period farmers received prices for export crops which were, on average, some 30% below those of our reference price. During the later period the implicit tax rate rose to 60% for cotton, 80% for rice and 50% for onions. Wheat production was subsidized in the early period but taxed 30% in the later period. Meat received a producer price subsidy of over 100%. Whereas the prices paid to sugar producers have been heavily subsidized during periods of world slumps and taxed during the boom periods, in 1975 producers were paying a 70% implicit tax.

7.09 During the initial years of policy management the market interventions were more or less consistent with objectives. The effects on cropping patterns and incomes were probably not as great as one would expect from examining the nominal protection coefficients. Thus, although the price of a particular product was low compared to its border price, probably it was more profitable to produce that product relative to an alternative whose price was higher than its border price. This is the reason for the popularity of growing rice, although rice was heavily taxed. In addition, as discussed in Section IV, cropping patterns were also determined by area quotas, delivery requirements, institutional and other non-price factors, tending to affect farmers' response to input and output taxes and sbusidies. However, some long-run changes in cropping patterns and in production began to change; these were intensified by the sudden widening of price divergences after 1972. The most important reason for this was the differential tax on the output of various crops. Since price control was limited to traditional exports (like cotton) and food crops (like wheat), the smaller farmers bore the heavier tax burden while cropping patterns shifted in favor of untaxed "new" crops (like horticultural produce). The emerging cropping pattern so induced was inconsistent with the explicit State production plan. Table pII.4: SUMMARY ESTIMATES OF THE RANGE OF NOMINAL AND EFFECTIVE PROTECTION COEFFICIENTS AND DOMESTIC RESOURCE COSTS EGYPT 1965-1976

Item NPC EPC DRC 1965-1972 1973-1976 1965-1972 1973-1976 1965-1972 1973-1976

1. Export Crops Cotton 0.6-0.7 0.4-0.6 0.6-0.7 0.4-0.7 0.2-0,4 0.3-0.5 Rice 0.7-1.3 0.2-0.6 0.6-1.6 0.2-0.7 0.5-1.3 0.3-0.9 Onions 0.5-0.9 0.4-0.5

2. Food Crops Wheat 1.5-1.0 0.7-0.9 1.1-1.3 0.8-1.3 1.9-4.3 1.3-3.7 Maize 0.8-1.1 0.7-0.9 0.9-1.3 0.8-1.3 0.7-1.4 0.8-3.8 llent 2.5-2.9 2.1-6.5 - 4.1 (1976) - 3.5 (1976) Sesame 1.0-1.1 0.7-0.9 - - Sugar (infinite) 0.3-0.5 - -

Source: calculated in section VI. -116-

C. Discussion of the Net Effects of Intervention

(i) Income Effects

7.10 Similarly, we can detect income effects also inconsistent with strategy objectives. Earlier it was pointed out that it is mostly the smalleryfarmers who are locked into the production of traditional crops. The windfall gain from the commodity price boom went to the state in the case of traditional crops and to the producers in the case of the "new crops", who, by and large, are the larger farmers and urban investors.

7.11 The fast growth of an uncontrolled parallel agricultural subsector with economic, social and insitutional barriers to entry, no implicit output taxes, full access to input subsidies and no tax on agricultural incomes or a capital gains tax, side by side with a poor subsector bearing the brunt of the consumer subsidy program, is a situation not foreseen at the time the policy was established. A further regressive feature as it has developed over the years is that depressed farm incomes increase the rate of migration to cities which have long since reached the limits of their ability to absorb more people, partly because of size dimensions and partly because of lack of appropriate infrastructure investment.

7.12 One argument commonly put forward in defense of output taxes is the offsetting effect of income transfers via input subsidies. But the rationale is not clear, for if input subsidies completely offset output taxes, what is the point of having either? In point of fact in Egypt the input subsidies in no way offset the output taxes, since the effective protection coefficients are not markedly different from the nominal protection coefficients (Table VII.4). This can be cross-checked by a simple example: a 50% subsidy on the per feddan costs of rice inputs in 1975 added LE 30 to the farmer's income, whereas the difference between the price he actually received for his crop and that revalued at border prices (world price) equivalent was LE 210. The net effect was lower production of paddy and a reduction in his income by LE 180 per feddan.

7.13 The size of the aggregate income transfers is measured in Table VII.5, below, by major crop and by origin and destination for 1974/75. Overall, farmers' incomes were reduced by LE 1.2 billion, while consumers gained LE 1.021 billion and the State gained LE 179 million. Since some farmers do not grow all their food, they benefited from the low food prices but typically it was the urban consumer who gained most. Although these transfers are implicit, the estimate of a state payment of LE 256 million to wheat consumers for 1974/75 is close to the actual figure of LE 259 million shown in the operations of the Supply Authority for that year; and the estimate of a State gain of LE 132 million on cotton operations is close to the transfer by the Cotton Authority to the Treasury of LE 137 million for that year. Nevertheless, because of the difficulties in tracing implicit transfers, by definition not easily identified, our estimates are given to provide an order of magnitude and the broad direction of income flows rather than precise, quantitative assessments. The conclusion is inescapable: the agricultural sector has been significantly discriminated against and has contributed substantially to domestic savings via state management of the agricultural/non-agricultural terms of trade. Yet the social costs of this transfer appears to have been unnecessarily high due to the relative failure of the industrialization program. -117-

Table VII.5: CONSUMER AND PRODUCER TRANSFERS L ON MAJOR CROPS - EGYPT 1974/75

(in LE millions at parallel exchange rates)

Producer Consumer Transfer Crop transfer transfer to State

Rice -562 +518 444 Wheat -78 +334 -256 Cotton -254 +122 +132 Sugar -400 +40 +360 Maize -120 +249 -129 Meat +214 -242 +28

TOTAL -1,200 +1,021 +179

/1 Net of input subsidies.

(ii) Efficiency Effects

7.14 We have traced various aspects of the performance of agricultural price management in Egypt and found a pattern of price incentives/disincentives different from those which would prevail under freer trade. Agriculture has been taxed partly to raise revenues, partly in conformity with the prevailing economic and political theories that farmers had to be taxed to provide the capital for industrial development and partly on equity grounds. Quite clearly the system as it has worked in practice has not achieved the established development goals. And it has not been costless in terms of failure to achieve other goals. For example, departure from efficiency pricing for water has been shown to be associated with a fall in the efficient use of land, fertilizer and other inputs. Further losses in the efficient use of basic resources - land, labor and capital - can be identified from Table VII.4, where price incentives are shown to be in favor of food crops and against export crops, yet this same pattern is pulling resources away from those crops Egypt can grow best. Other things being equal, the domestic resource cost coefficients (DRCs) indicate that growing more rice and cotton, discouraging meat production and importing wheat would maximize surplus. However, other things may not be equal. Food security may be regarded as of equal importance as maximizing the efficient use of scarce resources, but experience has shown that the pattern of non-price controls over cotton, rice and onions, which sought to maintain and increase the output of these crops, did not work. This may be because the total agricultural sector was not controlled and an important, uncontrolled sub-sector was allowed to grow up, which has caused agricultural output to shift towards such products. Moreover, some of the reasons for intervening in the market so much are are no longer valid. (iii) Institutional Effects

7.15 Although not discussed at length here, the losses in terms of institutional performance are not trivial. Use of the cooperatives to implement unpopular price administration has effectively destroyed the evolution of a genuine cooperative movement with proven advantages. The difficult task of extension, plagued by low budgets and status, has not been helped by having to work in a climate of farmer antagonism and positive disincentives against technology diffusion. We have also seen that the Agricultural Credit Bank has not been permitted to function as a genuine financial intermediary. The net result has been an obvious immaturity in these organizations. -119-

VIII. POLICY CONCLUSIONS AND RECOMMENDATIONS

A. Introduction

8.01 The benefits of the overall development strategy, of which market interventions have been a part, have been significant: land reform has been achieved; some outmoded institutions have been swept away; some prices have been stabilized; credit for working capital has been provided; dispersed farmers have been organized; guaranteed markets have been provided and generally rural conditions have been improved over what they had been. Yet most of these improvements came within the first decade following the revolution. It is now the third decade since then, conditions are different and lessons have been learned about this approach to sector management both in Egypt and elsewhere.

8.02 Agricultural price intervention has been a common component of general economic policy in both developed and developing countries. In the former, market interventions are used to increase farm incomes which typically lag behind those of industry and services due to a lower rate of productivity increase or a failure to adjust to new market conditions. In the latter countries, it is used to transfer domestic savings, where most of the initial resources are located, to the infant industrial sector. This was the standard approach to development of the 1950's, upon which Egypt's strategy was modeled. As in other countries, price controls have been accompanied by quantitative trade restrictions, import and export tariffs, state marketing boards aftd trading corpora- tions with monopoly/monopsony powers, maintenance of multiple markets for inputs and outputs, government determined cropping patterns, forced delivery quotas, direct state farming and other measures. Where undesirable effects are obvious, offsetting devices have been applied. Not only does the number of interventions grow but also the number of implementing agencies. The sector and subsector tend Lo become isolated and get out of step with the rest of the economy, with a resultant serious problem of management and coordination of policy measures. Our study has shown that many of the agricultural strategies and policies adopted in Egypt have not succeeded in reaching their objectives. It is believed also that the study shows that the strategies and policies themselves may well be unworkable and in need of restructuring.

8.03 Of course, much of this is not news to those responsible for agricultural administration. Why, then, has so little been done? Firstly, different groups have only a partial, though detailed, appreciation of the problem; as a result they have come up with incompatible policy recommendations. Secondly, the externalities involved require attention to the multi- sectoral tradeoffs at levels above that of sectoral ministries. The agricultural administration has not been in a position to make a strong case against the discrimination against agriculture partly because the information flows required to evaluate the costs and benefits of the options have not been generated. Hopefully, this report goes some of the way towards removing this obstacle to a thorough review of agricultural development strategies and policies within Egypt's overall development framework.

B. Alternative Strategies and Policies

8.04 What then are the options open to Egypt? It is suggested that there are three main ones. One is to extend the coverage of physical controls and -120-

other market interventions to cover the entire agricultural sector and try and make the various components of the intervention system more internally consistent. The problems with this alternatives are (a) that its basic strategies and policies have not worked well in the past; (b) it would involve more bureaucracy and more central control to assure consistency; (c) it would isolate Egyptian agriculture even more from world trends; (d) it provides inadequate signals to the planners to balance supply and demand in terms of alternative uses; and (e) it is inequitable in its application.

8.05 A second alternative is to go to the opposite extreme and dismantle immediately all controls, remove all taxes and subsidies which discriminate against agriculture as a whole and which work against optimal cropping patterns, and rely entirely on market forces to allocate resources. The riots which followed the temporary, sudden removal of subsidies in 1977 indicate that this alternative is a non-viable political option; it is also undesirable on other grounds: too sudden and too drastic changes are likely to cause disequilibrium and other undesirable effects.

8.06 A third alternative is to gradually move towards a position of fewer physical controls, less discrimination against agriculture as a whole and a more rational system of taxes and subsidies which encourage Egyptian farmers to adopt cropping patterns more consistent with Egypt's long-run comparative cost advantages and their own welfare. It is important for this approach that a management information system be introduced to monitor and evaluate the effects of the new strategies and policies adopted. This third alternative is made more feasible by the fact that it is no longer necessary to tax agriculture so heavily in order to provide the domestic savings to finance other sectoral development because there are other sources. But changes in the agricurtural sector will also affect the non-agricultural sector, and may not have the full beneficial effects they could have if the intervention strategies and policies in the non-agricultural sectors were also reviewed and brought into harmony with the proposed new agricultural strategies and policies. With this caveat in mind, it is recommended that the third alternative route be chosen and gradually implemented.

8.07 Assuming that this third alternative is accepted, the following sections spell out in greater detail what might be done in a carefully phased action program.

C. Recommendations

8.08 The first step needed to move towards a sounder agricultural development strategy is to devise and introduce an improved agricultural information service (AIS), which would provide initial baseline data in respect of farm budgets and rural incomes and expenditures and which would be kept up to date. AIS would provide both the means to monitor and evaluate intervention policies and measures and the basis for improved project identification and preparation. There is little point, however, in collecting and analyzing information on a regular basis unless the procedures are introduced to ensure that the analyzed data is fed to those responsible for setting policies. This is not the place to propose organizational changes, but clearly the organization responsible -121-

for AIS must be "outside" and "above" the sectoral ministries, although working closely with them, and it must have direct access to the policy makers (e.g. attached to the Higher Planning Council).

8.09 Second, it will take time for AIS to be established and working properly and some actions need to be taken sooner than this. It is suggested that a start is made as soon as possible to (a) reduce export taxes and make equivalent reductions in production subsidies; and (b) free-up the supply of agricultural inputs so as to make them more readily available through alternative (private) channels, and thus enable farmers to respond to market forces and to policy signals operating through the remaining tax and subsidy interventions.

8.10 Third, take steps to ensure that administered prices are not permitted to get way out of step with market, particularly overseas prices. A degree of stabilization is desirable, but in severe inflationary periods, such as the present, delays in adjusting centralized prices to inflationary trends make it much harder and more painful to make the inevitable adjustments. To the extent that controls are kept, the system has to be made much more flex- ible, with changes made at more frequent intervals.

8.11 Fourth, action needs to be taken to strengthen the capacity of the operating agencies to undertake better project planning, particularly to identify and prepare projects which will improve small farm productivity.

8.12 Fifth, greater priority should be given to projects and programs designed to improve productivity of existing developed land, and less on opening up new lands. Of particular importance in this connection, is the need to find some means to cut the wasteful use of irrigation water and thus limit the need for heavy expenditure on drainage schemes.

8.13 Turning now to a consideration of a fundamental and longer term approach to improving agricultural development strategies and policies, the following are put forward for consideration.

8.14 First, the demands on the sector simply have to be reduced and its limited potential recognized. For example, there is simply no way Egypt can become self-sufficient in food under any system of known technology. If all the cotton area of 1.2 million feddans were put into cereals, the increase in production of grain would replace only one half the grain imports at the present population level. The implication for a country that has-to be trade dependent, in any case, is that it should choose policies consistent with that reality, i.e. agricultural policies should seek to maximize growth within a trade framework. This brings us back to the question of comparative advantage, and it is difficult to see what better option Egypt has than to pay much more attention to her long-run comparative cost advantages. Egypt's soils are not wheat or grazing lands but are capable of producing the world's finest cotton and horticulture crops. For Egypt to continue to opt for the food security approach would be to lock the country into a low growth path with even heavier dependence on trade. Further the labor requirements of the traded and horticultural crops are higher and are more likely to realize the employment objectives than the food security approach. -3.22-

8.15 Second, the basic premise of the existing development strategy -- that agriculture has to be taxed in order to generate the domestic savings needed for investment elsewhere because this is where most taxable resources exist, no longer holds. Now that revenues from oil, the Suez Canal, tourist expenditure and remittances from workers abroad have become so substantial, the source of potential public domestic savings has shifted away from the agricultural sector and this should be recognized and reflected in changed policies.

8.16 As for private savings, there is now a considerable body of research from Asia and elsewhere showing that voluntary savings by small farmers can be considerable and can successfully be mobilized through rural banks. Moreover, if one looks at the disposition of the savings extracted from agriculture in the past, one is skeptical of the validity of the transfer argument anyway. Much of the savings went, not to investment, but to the consumLer subsidy programs, and the industrial sector is not generally known for either its efficiency or its capacity to absorb large amounts of labor. For the strategy to have succeeded, the growth rate in the agricultural sector would have had to be high enough so that per capita consumption would not fall and so that the sector's investment needs would be met, not only to finance innovation but also to maintain productive capacity. The evidence is there that none of these conditions have been or are being met. Parts of this strategy have been successful in other land-scarce countries such as Japan, Korea and Germany. The basic difference, however, was that their per capita growth rate in output was around 2.5% per annum during the development period, while the figure for Egypt, in real terms has been negative. Clearly, the potential for the success of a development strategy based on the existence of a mobilizable surplus in agriculture in Egypt was low.

8.17 To conclude, although this study has stressed the importance of a new approach to market interventions in general and to price policy in particular, it has also drawn attention to the many interdependent considerations. In the short-term, the effect of a change in farm policy is unlikely to be great. Just like the land reforms, a reallocation of insufficient resources cannot, in itself, solve the problem of mass poverty in the rural areas, and it is not suggested that changing the agricultural development strategy and policies along the lines suggested above is a sufficient condition for significant poverty reduction. It is, however, a necessary condition, and reducing discrimination against agricu]ture and within agriculture and getting cost-price relationships right could do much to improve the productivity and living conditions of the poor in the rural areas. -123-

ANNEX 1

STATISTICAL TABLES

AND

CALCULATION OF PROTECTION COEFFICIENTS -124-

Table 1: COTTON PRODUCTION AND DISPOSAL EGYPT 1965-1976

Yield Seed Cotton Export Year Area Seed Cotton P?oduction Lintl/ million feds. tons/fed million tons 000 tons

1965 1.9 0.791 1.5 330 1966 1.8 0.693 1.3 348 1967 1.6 0.743 1.2 296 1968 1.5 0.827 1.2 269 1969 1.6 0.912 1.5 253 1970 1.6 0.863 1.4 289 1971 1.5 0.929 1.4 333 1972 1.5 0.917 1.4 295 1973 1.6 0.855 1.3 285 1974 1.4 0.828 1.2 232 1975 1.3 0.800 1.0 185 1976 1.2 0.820 0.9 165

1/ Some of the export decline is due to substitution of processed lint exports as textiles in place of raw lint exports. However, most of the decline is due to increase in domestic fi-nal consump'tion.

Sources: Ministry of Agriculture. Technical Secretariat for Cotton. FAO Trade Yearbooks. -125-

Table 2: AVERAGE COTTON PRICES. EGYPT 1965-1976

Consumer Exchange Price - Farmgate/ Export/ton 1/ Export/toni1 rate for to mills/ Year Seed Cotton Lint Lint LE 1 ton lint LE LE $ LE

1965 100 442 1018 2.30 290 1966 102 412 948 2.30 302 1967 108 411 946 2.30 302 1968 111 405 932 2.30 294 1969 114 515 1185 2.30 294 1970 115 518 1192 2.30 294 1971 116 525 1207 2.30 -314 1972 126 549 1264 2.30 314 1973 124 678 1704 2.51 314 1974 149 1091 2793 2.56 314 1975 162 1085 2778 2.56 314 1976 203 938 2400 2.56 314

1/ Some discrepancy occurs since the average export price/ton lint is occasionally above the individual prices shown in Table 3, as in 1965. This is probably due to exchange rates chosen for bilateral barter agreements.

2/ See Table 3 for prices by grades and varieties.

3/ Dandara variety of long-staple cotton.

Sources: Ministry of Agriculture. General Organization for Cotton. FAO Trade Yearbooks. Table 3: COTTON PRICES!/ BY TYPE (LE/ton)

1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976

BUYING PRICES Extra-long staple Giza 45 360 360 360 372 412 440 542 542 566 566 596 696 Menoufi 308 308 318 342 374 398 456 456 480 480 510 565

Long staple Dandara 290 290 290 302 302 302 342 342 352 352 392 392

Medium staple Ashmouni 287 287 287 299 315 315 371 371 411 411 451 461

EXPORT PRICES_/ Extra-long staple Giza 45 435 416 404 458 532 512 592-596 604-628 604-884 1276-1352 1144, 905 Menoufi 392 371 416 416 460 460 520-524 528-548 528-808 1200-1276 1068 829

Long staple Dandara 326 296 280 310 328 316 404-406 434-464 428-728 1068-1144 844 677

Medium staple Ashmouni 306 404 376 384 ------Giz n.a. n.a. n.a. n.a. n.a. n.a. 360-364 392-420 384-684 1044-1120 820 -

SELLING PRICES TO DOMESTIC MILLS3/ Extra-long staple Giza 45 420 420 420 420 420 420 472 472 472 472 472 472 Menoufi 374 375 375 375 375 375 392 392 392 392 392 392

Long staple Dandara 290 302 302 294 294 294 314 314 314 314 314 314

Medium Staple Ashmouni 302 302 302 302 302 302 322 322 322 322 322 322

1/ Prices are for grade "fully good". Years are marketing years ending August 31. 2/ Export prices are averages of prices at the beginning and end of the marketing year. 3/ Since the beginning of 1974/75 the difference between buying prices and selling prices to domestic mills has been paid by the Treasury.

Source: Technical Secretariat for Cotton Sector. Table 4: COTTON, NOMINAL PROTECTION EGYPT 1965-76 (Values in LE unless otherwise shown)

1965 1968 1971 1972 1973 1974 1975 1976

1. Lint Border price f.o.b./ton 4A42 405 525 549 678 1091 1085 93 Less Export margin 13 12 16 16 20 33 33 28 Handling ginnery to port 20 30 40 40 40 52 60 60 Ginning costs 22 32 50 50 50 70 80 80 Coop. marketing 2 2 3 3 3 5 5 6 Sundries 14 19 27 27 28 41 45 44 Total Costs farm to port 71 95 136 136 139 203 -222 218 Border price equivalent/ton 371 400 389 413 539 888 863 720 Border price equivalent/56 kg. 21 22 22 23 30 50 48 40

2. Cotton seed Border price f.o.b./100 kg. 2 2 3 3 4 7 7 8

3. Scarto Domestic price/1.5 kg. 1 1 1 1 1 1 1 1

Total Lint + Seed + Scarto Border price equivalent of seed cotton at farm gate/kantar 24 25 26 27 35 58 56 49 Actual price of seed 4 cotton at farm gate/kantar 16 17 18 20 20 23 25 32

Nominal Protection Coefficient 0.66 0.68 0.69 0.74 0.57 0.39 0.45 0.65 Net Nominal Protection Coefficient 0.66 0.68 0.69 0.74 0.30 0.19 0.22 0.35 Table 5: COTTON EFFECTIVE PROTECTION '1965-1976 (Values in LE)

1965 1968 1971 1972 1973 1974 1975 1976

1. Traded inputs/feddan a) Valued at domestic prices seeds, 1 1 1 2 2 2 2 2 fertilizer. 5 7 8 8 8 9 8 9 pesticide 4 8 15 5 5 16 9 16 bags, small items 2 2 2 4 5 6 6 6 off-farm irrigation costs- 3 3 3 4 4 4 4 5

total 15 21 29 23 22 37 29 38 b) Valued at border prices at OER seeds 1 1 1 2 2 2 2 2 fertilizer 3 4 6 4 8 18 17 14 pesticide 4 8 15 10 9 32 19 32 bags, small items 2 2 2 4 5 6 6 6 off-farm irrigation costs 6 6 6 8 12 12 12 15

total 16 21 30 28 36 70 56 69

2. Value of Output/feddan at domestic prices 80 92 102 113 113 124 153 201 at border prices 120 131 146 154 203 313 336 309

3. Effective Protection Value added/fed, domestic prices 65 71 72 90 91 87 124 163 value added/fed, border prices 104 110 116 126 167 243 280 240 effective protection coefficient 0.62 0.65 0.62 0.71 0.54 0.36 0.44 0.68 Table 6: COTTON, DOMESTIC RESOURCE COSTS, 1965-1976 (Values in LE unless otherwise shown)

Item 1965 1968 1971 1972 1973 1974 1975 1976 1. Primary factors/feddan valued at domestic prices labor 20 24 25 24 24 31 41 47 animal draft 1 1 2 3 3 3 3 9 capital depreciation 1 1 2 2 2 2 2 2 land, rental value 23 23 24 25 25 26 26 30

total 45 49 53 54 54 62 72 88

2. Primary factors/feddan valued at marginal opportunity cost labor 10 12 13 12 12 16 20 15. animal draft 1 1 2 3 3 3 3 9 capital depreciation 1 1 2 2 2 3 3 3 land as residual return in wheat 10 17 30 27 61 67 49 34 I

total 22 31 47 44 78 89 75 61

3. Value-added/feddan at OER US$ 239 253 267 290 419 622 717 614 implicit exchange rate US$ per LE 1 10 8 5 6 5 7 9 10 DRC coefficient 0.21 0.28 0.39 0.35 0.47 0.37 0.26 0.25

4. Residual return to land in Cotton 82 79 69 82 89 154 205 179 -130-

Table 7: COTTON MECHANIZED FARM EFFECTIVE PROTECTION AND DOMESTIC RESOURCE COST 1976

Value in LE at at Domestic Border Item Prices Prices

1. Effective Protection Traded inputs/feddan seeds, 60 kg 2 2 fertilizer N, 175 kg used plus 9 14 fertilizer P, 100 kg superphosphate pesticide 16 32 factor costs 5 10 pump costs 8 12 off-farm irrigation costs 5 15 bags, small items 6 6

total value of traded inputs 51 91

value added per feddan 150 218 effective protection coefficient 0.68

2. Domestic Resource Cost/feddan labor 30 30 capital 2 3 land 30 34

total 62 67

implicit exchange rate US$ per LE 1 8

DRC coefficient 0.31 -131-

Table 8- COTTON, SUBSIDY EQUIVALENTS, VJ.974

Item Value in LE

Border price equivalent per feddan of aeed cotton 313.00 actual farm-gate price 124.00 domestic price support -4i9.oo input subsidies 33.00 net transfer per feddan -156.00 (a) producer subsidy equivalent -50% prt-e per ton of lint to domestic mills, Dandara variety 314.00 export price for above 1068.00 consumer transfer per ton 754.00 (b) consumer subsidy equivalent 70% total production area 1.346 million feddans total value at border prices 421 million LE total value at actual prices 11S7 " (c) producer transfer - 254 " total domestic mill consumption 215,.000 tons total value at border prices 190 million LE total value at domestic prices 67 million LE (d) consumer transfer 122 . -13 2-

Table 9: WHEAT, PRODUCTION AND DISPOSALI/ EGYPT 1965-1976

Imports, tons millions Area Yield Production Official Year m. feddans tons/feddan m. tons Series USDA series

1965 1.144 1.11 1.272 2.07 2.07 1966 1.291 1.14 1.465 2.27 2.34 1967 1.245 1.04 1.291 2.68 2.49 1968 1.413 1.07 1.518 2.28 2.78 1969 1 246 1.02 1.269 1.51 1.94 1970- 1.304 1.16 1.516 1.23 2.20 1971 1.349 1.28 1.729 2.41 2.57 1972 1.239 1.39 1.616 1.68 2.67 1973, 1.248 1.47 1.837 1.81 3.04 1974- 1.370 1.30 1.884 2.61 3.18 1975 1.394 1.46 2.033 3.40 3.49 1976 1.396 1.40 1.960 2.92 3.80

Source6:-Ministry of Agriculture. Ministry of Trade and Supply. USDA Foreign Agriculture Service.

1/ Wheat plus flour expressed as wheat.

Table 10: WHEAT PRICES EGYPT, 1965-1976

Import Exchange Import Consumer Farmgate Price/ton Price/ton Rate Price/ton Price/ton Year Quota Average US$ LE LE US$ per LE 1 LE LE

1965 27 30 58 2.30 25 29 1966 33 33 62 2.30 27 29 1967 37 37 62 2.30 27 29 1968 33 32 59 2.30 26 29 1969 33 33 57 2.30 25 29 1970 33 38 57 2.30 25 29 1971 33 35 62 2.30 27 29 1972 33 35 69 2.30 30 29 1973 33 38 137 2.51 55 30 1974 43 47 178 2.56 69 30 1975 47 51 138 2.56 54 28 1976 47 47 123 2.56 48 29

Sources: Ministry of Agriculture. Ministry of Trade and Supply. World Bank, Commodity Trade and Price Trends. -133-

Table 11: WHEAT, NOMINAL PROTECTION EGYPT 1965 to 1976 (values in LE unless shown otherwise)

Item 1965 1968 1971 1972 1973 1974 1975 1976 c.i.f/ton at port ($US) 58 59 62 69 137 178 138 123 exchange rate/LE 1 2.30 2.30 2.30 2.30 2.51 2.56 2.56 2.56 c.i.f./ton (LE) 25 26 27 30 55 69 54 48 add handling port to Cairo 2 3 4 4 5 6 6 7 less cooperative marketing 2 2 2 2 3 3 5 6 border price equivalent at farm 25 27 29 32 57 72 55 49 actual farm price 30 39 35 35 38 47 51 47 nominal protection coefficient 1.21 1.50 1.20 1.09 0.66 0.66 0.93 0.96

Source: Calculated from Tables 9 and 10. -134-

Table 12' WHEAT, EFFECTIVE PROTECTION EGYPT 1965 to 1976 (values in LE)

Item 1965 1968 1971 1972 1973 1974 1975 1976

1. Traded inputs/feddan (a) domestic prices seeds, 75 kg 2.9 2.9 3.1 3.1 3.2 3.6 4.7 4.8 fertilizer, 31% N 7.1 7.1 7.1 7.1 6.5 8.3 7.1 11.4 bags, small items 3.5 3.5 4.0 5.0 5.5 5.5 5.5 5.5 off-farm irrigation costs 2.0 2.1 2.2 2.2 2.2 2.4 2.4 2.4 total costs 15.5 15.6 16.4 17.4 17.4 19.3 19.7 24.1

(b) border prices seeds, 75 kg 2.8 1.9 3.9 3.9 9.6 12.8 12.5 11.6 fertilizer, 31% N 5.8 2.9 3.9 7.1 6.5 17.9 17.8 19.5 bags, small items 3.5 3.5 4.0 5.0 5.5 6.0 6.0 6.0 off-farm irrigation costs 4.0 4.2 4.4 4.4 6.6 7.2 7.2 7.2 total costs 14.1 12.5 13.2 20.4 28.2 43.9 43.5 44.3

2. Effective protection (a) grain value at domestic prices 33.0 41.0 45.0 46.0 56.0 64.0 75.0 65.0 value added at domestic prices, grain 17.5 25.4 28.6 28.6 38.6 44.7 55.5 40.9 grain value at border prices 28.0 27.0 37.0 42.0 84.0 98.0 80.0 68.0 value added at border prices, grain 13.9 14.5 23.8 21.6 55.8 54.1 36.5 23.7 effective protection coefficient 1.2 1.7 1.2 1.3 0.7 0.8 1.5 1.7

(b).Straw value at domestic prices 8.0 12.0 17.0 17.0 22.0 28.0 28.0 30.0 value added at domestic prices, grain plus straw 25.5 37.4 45.6 45.6 60.6 72.7 83.5 70.9 value added at border prices, grain plus straw 21.9 28.5 40.8 38.6 77.8 82.1 64.5 53.7 effective protection coefficient 1.1 1.3 1.1 1.1 0.8 0.9 1.3 1.3 -135-

Table 13: WHEAT, DOMESTIC RESOURCE COST EGYPT 1965-1976 (values in LE, unless shown otherwise)

Item 1965 1968 1971 1972 1973 1974 1975 1976

1. Primary factors/feddan domestic prices labor 7 7 7 7 7 9 13 19 animal draft 4 4 4 4 4 4 4 5 capital depreciation 1 1 1 2 2 2 2 2 land rental value 14 16 16 16 16 16 17 17 total 28 28 28 29 29 31 36 43

2. Primary factors/feddan at marginal opportunity cost labor 4 4 4 4 4 4 7 9 animal draft 4 4 4 4 4 4 4 5 capital depreciation 4 4 4 5 5 6 6 8 land, residual return to cotton 82 79 69 82 89 154 205 179 total 94 91 81 95 102 168 222 201

3. Value added/feddan at OER in US$ 50 66 94 89 195 210 165 137 Implicit exchange rate US$ per LE 1 0.53 0.72 1.16 0.93 1.90 1.30 0.74 0.68 DRC Coefficient 4.3 3.1 1.9 2.4 1.3 2.0 3.4 3.7

4. Resudual to land in wheat 10 17 30 27 61 67 49 A4 -136-

Table 14: WHEAT, SUBSIDY EQUIVALENTS 1976 (Grain only)

Item Value in LE border price equivalent/ton wheat in US$ 123.00 parallel exchange rate in US$/LE 1 1.41 border price equivalent/ton in LE 87.00 farmgate price/ton 47.00 input subsidies/ton 14.00 producer subsidy/ton -26.00 (a) producer subsidy equivalent -30% price/ton to consumer 29.00 border price equivalent/ton at parallel rate 87.00 consumer transfer/ton 58.00 (b) consumer subsidy equivalent 66% total production, m tons 1.96 total value at border prices, millions 170.00 total value at farmgate prices, millions 92.00 (c) producer transfer, millions -78.00 total value at consumer prices, millions 57.00 (d) consumer transfer on domestic supplies, millions 113.00 total imports, m tonsl/ 3.80 total value at parallel rate, millions 331.00 total value at consumer prices, millions 110.00 consumer transfer on foreign supplies, millions 221.00 total consumer transfer, millions 334.00

1/ USDA estimates. -137-

Table 15: RICE PRODUCTION AND DISPOSAL EGYPT 1965-1976

Production, Production Export Consumption Year Area Yield, paddy Paddy Rice Rice Rice '000 feds. tons/feds. '000 tons '000 tons '000 tons '000 tons

1965 848 2.10 1788 1072 330 742 1966 844 1.98 1679 1009 347 660 1967 1075 2.12 2279 1367 435 932 1968 1204 2.14 2586 1551 570 981 1969 1191 2.14 2557 1534 772 762 1970 1142 2.29 2605 1563 654 909 1971 1137 2.23 2534 1520 515 1005 1972 1146 2.19 2507 1504 456 1048 1973 997 2.28 2274 1364 298 1066 1974 1053 2.13 2247 1348 136 1212 1975 1053 2.31 2423 1454 104 1350 1976 1078 2.13 2300 1380 211 1169

Sources: Ministry of Agriculture. Ministry of Planning. FAO Production and Trade Yearbooks. -138-

Table 16: RICE PRICES EGYPT 1965-1976

Farmgate price Export Price Exchange rate Export Price Year per ton paddv per ton grain per ton grain Quota Averaael/ US$ LEl-US$ LE

1965 21 21 138 2.30 60 1966 25 27 141 2.30 61 1967 25 30 158 2.30 68 1968 30 32 182 2.30 79 1969 30 31 165 2.30 72 1970 27 28 120 2.30 52 1971 27 27 110 2.30 48 1972 27 27 111 2.30 48 1973 27 28 221 2.51 88 1974 32 36 677 2.56 265 1975 40 40 601 2.56 235 1976 40 40 376 2.56 147

1/ Average refers to sales to cooperatives at quota and overquota prices.

Sources: Ministry of Planning. Ministry of Agriculture. FAO Trade Yearbooks. Table 17: RICE, NOMINAL PROTECTION, EGYPT, 1965-1976 (values in LE unless otherwise shown)

Item 1965 1968 1971 1972 1973 1974 1975 1976

1. Border Price average f.o.b./ton rice, port, US$ 138 182 110 111 221 677 601 376 exchange rate, official/LE 1 2.30 2.30 - 2.30 2.30 2.51 2.56 2.56 2.56 average f.o.b./ton, port LE 60 79 48 48 88 264 235 147 value of by-products/1.58 tons paddy 1 2 2 2 3 7 7 7 border price of 1.58 tons paddy equivalent 61 81 50 50 91 271 242 154

2. Less Processing and Transport export margin, 3%/ton rice 1.8 2.4 1.5 1.5 2.7 8.1 7.2 4.6 transport ex-mill/ton rice 2.0 3.0 4.0 4.0 5.4 5.4 6.0 8.0 milling costs/ton rice 8.0 8.0 10.0 12.0 16.0 17.3 19.0 25.0 cooperative marketing costs/1.58 tons paddy 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 total marketing costs/ton rice 12.8 14.4 16.5 18.5 25.1 31.8 33.2 28.6

3. Equals Adjusted Border Price border price of 1.58 tons paddy, farmgate 48 66 33 31 66 239 208 115 border price/ton paddy 30 42 21 20 41 151 131 72 actual average farmgate price/ton paddy 21 32 27 27 27 36 40 40

4. Nominal Protection Coefficient 0.70 0.76 1.30 1.35 0.66 0.24 0.30 0.55 Net Nominal Protection Coefficient - - - - 0.37 0.13 0.16 0.31

Source: Computed from Tables 15 and 16. Table 18: RICE, EFFECTIVE PROTECTION, 1965-1976 (values in LE)

Item 1965 1968 1971 1972 1973 1974 1975 1976

1. Traded Inputs/feddan (a) domestic prices seeds 3.9 3.8 4.3 6.3 8.3 10 10.6 12.0 fertilizer 5.3 5.6 5.4 5.4 5.9 10 6.4 6.7 bags, small items 1/ 1.0 2.0 3.0 4.0 4.0 5.5 5.5 5.5 off-farm irrigation costs- 1.3 1.3 1.6 1.6 1.8 1.9 2.0 2.1 total 11.5 12.7 14.3 17.3 20.1 27 24.5 26.3

(b) border prices at OER seeds 3.9 3.8 4.3 6.3 12.3 16 30.0 16.0 fertilizer 3.5 3.5 4.0 4.0 8.0 19 12.9 13.4 bags, etc. 1.0 2.0 3.0 4.0 4.0 5.5 5.5 5.5 off-farm irrigation costs 2.6 2.6 3.2 3.2 5.4 5.7 6.0 6.3 total 11.0 11.9 14.5 17.5 29.7 47 54.4 41.2

2. Value of output/feddan yield/feddan, paddy 2.10 2.1 2.2 2.2 2.3 2.1 2.3 2.1 value at domestic prices 44 68 60 59 63 76 92 85 value at border prices 63 89 46 43 93 322 302 153

3. Effective Protection value added, domestic prices/feddan 33 56 46 42 44 49 68 59 value added, border prices/feddan 52 78 32 26 64 276 248 112 effective protection coefficient 0.62 0.71 1.43 1.62 0.68 0.18 0.27 0.53

1/ Fuel, pump stations etc. see cotton estimation. Table 19: RICE, DOMESTIC RESOURCE COSTS, 1965-1976 (values in LE)

Item 1965 1968 1971 1972 1973 1974 1975 1976

1. Primary factors/feddan, domestic prices (a) labor 13.2 15.1 12.6 12.2 13.3 16.3 18.5 21.0 draft animal power 1.0 2.0 2.0 2.0 4.0 6.0 8.0 9.0 (b) capital depreciation 2.0 .2.0 2.0 3.0 3.0 3.5 4.0 6.0 (c) land, rental value 9.8 10.8 11.1 10.9 11.9 13.4 13.6 14.0 total DRC at domestic prices 25.0 29.9 27.7 28.1 32.2 39.1 44.1 50.0

2. Primary factors/feddan, marginal opportunity cost (a) labor 6.6 7.6 6.3 6.1 6.6 8.1 9.2 10.5 draft animal 1.0 2.0 2.0 2.0 4.0 6.0 8.0 9.0 (b) capital depreciation 2.0 2.0 2.0 3.0 3.0 3.5 4.0 6.0 (c) land residual value for maize 28.0 24.0 27.0 24.0 49.0 66.0 48.0 37.0 total DRC at marginal opportunity cost 37.6 35.6 37.3 35.1 62.6 83.6 69.2 62.5

3. Value added at border prices/feddan at official exchange rate, US$ 120 179 74 60 160 705 635 287 Implicit exchange rate in 3.2 5.1 1.9 1.7 2.6 8.4 9.2 4.6 US$ per LE 1 DRC Coefficient 0.72 0.46 1.16 1.3 0.98 0.30 0.28 0.56

4. Residual return to land in rice 42 66 22 15 49 257 227 86 -142-

Table 20: RICE, SUBSIDY EQUIVALENTS, 1974

Item Value in LE at OER at PER border price equivalent per ton of paddy 151.36 286.31 actual farmgate price 36.00 36.00 domestic price support -115.36 -250.31 input subsidies 8.90 26.16 net transfer/ton -106.46 -224.15 (a) producer subsidy equivalent -70% -78% total production, paddy tons millions, 2.247 total value at border prices, millions 340.10 643.33 total value at actual prices, millions 80.90 80.90 (b) producer transfer, millions -259.20 -562.43 export price/ton of rice 264.00 483.00 consumer price/ton rice 55.00 55.00 consumer transfer/ton 209.00 428.00 (c) consumer subsidy equivalent 79% 89% total consumption, tons millions, 1.212 total value at border prices, millions 319.9 585.4 total value at consumer prices, millions 66.7 66.7 (d) consumer transfer, millions 253.2 518.7 -143-

Table 21: MAIZE PRODUCTION AND DISPOSAL EGYPT 1965-1976

Year Area Yield Production Imports '000 feds. kg/fed '000 '000 tons

1965 1450 1476 2141 137 1966 1575 1509 2376 166 1967 1485 1456 2163 201 1968 1554 1478 2297 133 1969 1484 1594 2366 43 1970 1502 1592 2393 73 1971 1522 1539 2342 39 1972 1531 1579 2417 87 1973 1654 1515 2507 67 1974 1755 1505 2640 388 1975 1830 1520 2781 418 1976 1891 1610 3047 459

Sources: Ministry of Agriculture. Ministry of Trade and Supply.

Table 22: MAIZE PRICES/TON EGYPT 1965-1976

Year Farmgate Consumer Import Exchange Rate Import LE LE US$(c.i.f.) per LE 1 LE (c.i.f)

1965 27 31 70 2.30 30 1966 32 37 65 2.30 28 1967 37 35 65 2.30 28 1968 29 31 61 2.30 27 1969 33 30 65 2.30 28 1970 33 30 61 2.30 27 1971 33 30 66 2.30 29 1972 37 30 64 2.30 28 1973 45 33 94 2.51 521/ 1974 51 33 160 2.56 71 1975 50 33 166 2.56 59 1976 50 33 171 2.56 53 (1977 76 33)

1/ The General Authority's average import prices for 1973-76 are different from those derived from custom's records. The Authority's figures are based on contract prices and are preferred.

Sources: Ministry of Agriculture. General Authority for Supply Commodities. Table 23: MAIZE, NOMINAL PROTECTION EGYPT 1965-1976 (Values in LE, unless shown otherise)

Item 1965 1968 1971 1972 1973 1974 1975 1976 c.i.f./ton 30 27 29 28 52 71 59 53 add handling, port to Cairo 4 4 5 6 6 6 8 10 less farm to market costs 2 2 2 2 3 3 5 6 border price equivalent at farm 32 29 32 32 55 74 63 57 actual farm price 27 29 33 37 45 51 50 50 nominal protection coefficient 0.84 1.00 1.03 1.6 0.81 0.69 0.79 0.88 net nominal protection coefficient 0.84 1.00 1.03 1.06 0.45 0.38 0.44 0.48

Sources: Tables 21 and 22. USDA, Ministry of Agriculture, Egypt. -145-

Table 24: MAIZE, EFFECTIVE PROTECTION EGYPT 1965 to 1976 (values in LE)

Item 1965 1968 1971 1972 1973 1974 1975 1976

1. Traded inputs/feddan (a) domestic prices seeds, 25 kg 1.2 1.2 1.3 1.6 1.9 1.9 2.0 2.0 fertilizer, 225 kg 3.6 6.2 6.8 7.3 7.2 7.6 7.6 9.81 bags, small items 3.5 3.5 4.0 5.0 5.5 5.5 5.5 5.5 off-farm irrigation costs 2.0 2.1 2.2 2.2 2.2 2.4 2.4 2.4

Total Costs 10.3 13.0 14.3 16.1 16.8 17.4 17.5 19.7

(b) border prices seeds 1.2 1.2 1.3 1.6 3.8 3.8 4.0 4.0 fertilizer 2.9 2.5 3.1 7.3 7.2 15.2 15.1 16.8 bags, small items 3.5 3.5 4.0 5.0 5.5 5.5 5.5 5.5 off-farm irrigation costs 4.0 4.2 4.4 4.4 6.6 7.2 7.2 7.2

Total costs 11.6 11.4 12.8 18.3 22.1 31.7 31.8 33.5 2. Effective Protection grain value/feddan, border prices 47 43 49 51 83 111 96 92 value added/feddan, border prices 35 32 36 33 61 79 64 59 grain value/feddan, domestic prices 40 43 51 58 68 77 76 81 value added/feddan, domestic prices 30 30 37 42 51 60 58 61 effective protection coefficient 0.86 0.94 1.02 1.27 0.83 0.76 0.90 1.03 Table 25: MAIZE, DOMESTIC RESOURCE COST' EGYPT 1965-1976 (Values in LE, unless shown otherwise)

1965 1968 1971 1972 1973 1974 1975 1976

1. Primary factors/feddan at domestic prices labor 8 10 10 10 11 14 18 23 animal draft 2 2 3 3 4 4 5 7 capital depreciation 1 1 1 1 2 2 2 3 land, rental value 11 13 12 12 13. 13 15 19 total 22 26 26 26 30 33 40 52

2. Primary factors/feddan at marginal oDportunitv cost labor 4 5 5 5 6 7 9 12 animal draft 2 2 3 3 4 4 5 7 capital depreciation 1 1 1 1 2 2 2 3 land, residual return to rice 42 66 22 15 49 257 227 86 total 49 74 31 24 61 270 243 108

3. Value added/feddan at OER in US$ 81 74 83 76 153 202 164 151 Implicit exchange rate US$ per LE 1 1.6 1.0 2.7 3.1 2.5 0.75 0.67 1.40 Coefficient 1.4 2.3 0.86 0.73 0.77 3.4 3.8 1.8 DRC

4. Residual to land in maize 28 24 27 24 49 66 48 37 -147-

Table 26: MAIZE, SUBSIDY EQUIVALENTS 1976

Item Value in LE border price equivalent/ton maize in US$ 146 parallel exchange rate in US$/LE 1 1.41 border price equivalent/ton in LE 104 farmgate price/ton 50 input subsidy/ton 14 producer subsidy/ton -40 (a) producer subsidy equivalent/ton -38% price/ton to consumer 33 border price/ton at parallel rate 104 consumer transfer/ton 71 (b) consumer subsidy equivalent/ton 68% total production, m tons 3.047 total value at border prices at parallel rate, million 317 total value at farmgate prices, millions 152 total value at consumer prices, millions 101 (d) consumer transfer on domestic supplies, millions 216 total imports, m tons 0.459 total value at parallel rate, millions 48 total value at consumer prices, millions 15 consumer transfer on foreign supplies, millions 33 total consumer transfer, millions 249

Sources: Computed from Tables 21 to 25. -148-

Table 27: ANIMAL FEEDS - AREA, PRODUCTION, PRICES-1 EGYPT 1965-1976

Wheat Maize Rice Year Berseem Straw Stubble Straw Price Area (m. fed) (LE/ton) 4 month2 7 month (value/feddan in LE)

1965 1.85 1.31 1.18 - - - 1966 1.99 1.29 1.24 - - - 1967 1.67 1.24 1.47 - - - 1968 1.58 1.18 1.50 - - 1969 1.74 1.20 1.58 12.1 4.9 2.8 1970 1.91 1.23 1.52 19.0 4.1 2.5 1971 2.67 1.18 1.58 16.9 5.5 2.7 1972 3.33 1.23 1.59 16.8 6.4 2.5 1973 4.17 1.28 1.59 22.3 8.2 3.4 1974 5.00 1.17 1.62 39.6 8.5 3.9 1975 5.80 1.12 1.69 38.6 9.2 5.8 1976 6.40 1.11 1.70 4.40 9.6 6.3

1/ For assumptions see text. 2/ Berseem may be plowed under after 4 months and followed by cotton in February. It may also be left until May and be followed by rice or maize. The short duration crop yields 6 tons and the long duration crop yields 20 tons/feddan.

Sources: FAO/INP, "Progress Report on Agricultural Sector Analysis of ARE", Rome 1973. Ministry of Agriculture, Cairo. -149-

Table 28: MEAT - PRODUCTION AND IMPORTS OF CATTLE AND BUFFALOS, EGYPT 1965-1977

Year Production Imports as Beef Total Consumption (000's tons DWT) (000's tons DWT) (000's tpms DWT)

1965 182 2.74 185 1966 185 11.17 196 1967 189 0.99 190 1968 201 11.77 203 1969 200 - 200 1970 210 3.14 313 1971 220 3.10 223 1972 222 4.03 226 1973 225 5.93 231 1974 225 4.16 229 1975 230 7.21 237 1976 229 35.55 265 1977 235 59.25 294

1/ This is a mixture of bone-in and boneless beef. Prior to 1975 the underestimation by assuming the total as bone-in weight is not important. See discussion in text.

Sources: Ministry of Agriculture. FAO Production Yearbooks. USDA, Foreign Agriculture Service Reports. -150-

Table 29: MEAT PRICES/TON - CATTLE AND BUFFALO Egypt 1965-1977

Farmgate Import (c.i.f.) Import Year Liveweight Dressedweight Dressedweight Plus 25% marketing Margin (LE) US$ (LE)

1965 382 707 759 412 1966 403 746 649 352 1967 410 759 557 303 1968 419 776 458 249 1969 450 833 - - 1970 478 885 572 311 1971 483 894 686 373 1972 502 929 886 482 1973 551 1020 1009 502 1974 612 1133 889 434 1975 643 1190 996 486 1976 660 1222 961 469 1977 700 1296 1015 496

1/ At Official exchange rate.

Sources: Ministry of Agriculture. Cairo and Alexandria Abattoirs. FAO Trade Yearbook, Ministry of Supply. -151-

Table 30: BEEF IMPORTS, EGYPT 1977 (Actual Contracts)

Supplier Type Quantity Price (tons) (US$/ton c.i.f.)

Australia Bone-in 1,000 1,178 Boneless 2,000 1,355 3,000 1,264 3,000 1,360 8,000 1,529 850 1,445 400 1,475 2,000 1,468 2,000 1,187 2,000 1,187 3,000 1,201

Total 27,250 tons US$37.09 millions

Argentina Boneless 2,000 1,468 Bone-in (quarters) 6,000 1,100 2,000 1.135

Total 10,000 tons US$11.80 millions

Uruguay Bone-in (quarters) 2,000 875 1,000 930 1,000 935 2,000 98 4,000 1,025 2,000 1,060 8,000 1,060 2,000 1,152

Total 22,000 tons US$23.54 millions Table 31: MEAT, NOMINAL PROTECTION - EGYPT 1965-1977 (values in LE)

Item 1965 1968 1971 1972 1973 1974 1975 1976 1977 c.i.f./ton bone-in beef- 412 249 373 482 502 434 486 469 496 Farmgate price/ton DWT equivalent 707 776 894 929 1020 1133 1190 1222 1296 Nominal protection coefficient 1.7 3.1 2.4 1.9 2.0 2.6 2.4 2.6 2.6 Net nominal protection coefficient - - - - - 1.4 1.3 1.4 1.4

1/ Includes 25% marketing margin.

Source: Computed from Tables 27 and 28. -153-

Table 32: MEAT, EFFECTIVE PROTECTION EGYPT 1976/77

Item 1976/77

1. Feed ration/dual purpose cow tons berseem, 32 kg/day for 185 days 6.00 wheat straw, 4 kg/day for 180 days 0.72 maize stubble and forage, 4 kg/day for 180 days 0.72 concentrates, 1 kg/day for 180 days 0.18 area required to maintain 1 adult beast 0.66 fed.

Domestic Border 2. Traded inputs/beast/year Prices Prices long berseem, 1/3 feddan seeds 2.1 2.1 fertilizer 0.7 1.4 off-farm irrigation costs 2.4 7.2 concentrates, 180 kg 5.4 14.4 animal health and sundries 2.0 5.0

Total 12.6 30.1

3. Value of Output/beast/year meat, annualized at 21 kg/yr DWT over 8 years, culled 25.6 9.8 meat, annualized at 31 kg/yr DWT from 5 calves at 49 kg each 40.3 14.6 milk, annualized at 380 kg/from 5 lactations over 8 years 38.0 38.0

Total 103.9 62.4

4. Value-added value of output 103.9 62.4 value of traded inputs 12.6 30.1 value added 91.3 32.3 effective protection coefficient 2.8 -154-

Table 33: MEAT - DOMESTIC RESOURCE COST EGYPT 1976/77 (in LE)

Marginal Domestic Opportunity Item Prices Cost

1. Non-traded Inputs (a) berseem, 1/3 feddan labor, 12 man days @ LE 0.8 7.20 3.65 animal transport, 6 days @ LE 1.0 6.00 6.00 animal draft, 2 days @ LE 1.0 2.00 2.00 land 6.00 35.00

(b) wheat straw 0.72 tons 8.64 8.64

(d) labor for animal care, 24 days/year 19.20 9.60

Total 64.04 78.89

2. Value-added/beast at OER in US$, at border prices 82.68 implicit partial exchange rate in US$/LE 1.04 domestic resource cost coefficient 2.40

Table 34: MEAT, SUBSIDY EQUIVALENTS 1976

Item Values in LE border price/ton, dressed weight, at parallel rate 469 farmgate price/ton 1,222 output subsidy/ton 753 input subsidy/ton 90 total transport/ton 843 total production, millions tons 0.23 (a) total producer transfer, millions 194 price/ton to consumer, rationed quantity, boneless 680 import price/ton, boneless beef at parallel rate plus 25% 886 consumer transfer/ton 206 total imports, millions tons 0.06 total consumer transfer on imports, millions 12.36 consumer price/ton boneless, free market 1,700 border price/ton at parallel rate plus 25% margin 886 consumer transfer/ton -814 total production, m tons 0.235 total consumer transfers on domestic supplies, millions -191.29 (b) overall total consumer transfer, millions -178.9 -155-

Table 35: SUGARCANE, EGYPT 1965-1977

Year Area Yield Production 0008 feddans tons/fed 000s tons

1965 129 37 4747 1966 133 39 5200 1967 137 38 5269 1968 156 39 6083 1969 170 40 6878 1970 186 37 6945 1971 193 39 7498 1972 202 38 7713 1973 198 37 7349 1974 208 34 7018 1975 218 36 7902 1976 242 35 8446 1977 249 34 8379

Source: Ministry of Agriculture, Cairo.

Table 36: SUGAR PRICES, EGYPT 1965-1977

World Consumer in US¢/kg Producer Average Consumer Exchange in LE per Year US¢/kgi/ Piastres/kg Rate Rationed Unrationed ton of cane

1965 4.5 7.0 2.3 16.1 36.8 2.8 1968 4.2 7.0 2.3 16.1 36.8 2.9 1970 8.1 7.0 2.3 16.1 36.8 2.9 1971 9.9 7.0 2.3 16.1 34.5 2.9 1972 16.1 7.0 2.3 16.1 34.5 3.2 1973 20.3 10.0 2.51 17.6 62.7 3.9 1974 65.4 10.0 2.56 25.6 64.0 4.8 1975 44.9 10.0 2.56 25.6 62.7 8.4 1976 25.5 10.0 2.56 25.6 62.7 9.7 1977 17.9 10.0 2.56 25.6 62.7

1/ World Bank, Commodity Trade and Price Trends, 1978 edition, ISC quotes. This series is used rather than Egypt's trade statistics which show different c.i.f. and f.o.b. prices for the same product in the same year. Egypt has been active in spot buying and reselling usually accompanied by domestic refining and exports of imported raw sugar. -156-

Table 37: PRICE DISTORTIONS ON MAJOR INPUTS EGYPT 1974-76

Subsidy Rates as Percentages of Reference Pricel/

Item 1974 1975 1976

1/ Nominal rates of protection such as 45% of reference prices.

Source: Section V.1 to V.9.

Table 38: SUBSIDIES ON TRADED INPUTS - EGYPT 1975 (values in LE)

Subsidy/ Subsidy Value/fed. fed Area Total as % of Border Domestic Subsidy Border Crop Prices Prices m. fed. (millions) Price

Rice 54.4 24.5 29.9 1.0 29.9 54 Wheat 43.5 19.7 23.8 1.4 33.3 54 Cotton 56.0 29.0 27.n 1.3 35.1 48 Maize 31.8 17.5 14.3 1.8 25.7 44 Meat (ton) 30.1 12.6 17.5 0.5 8.7 48

Total, subsidy (implicit) 132.7 Subsidy rate on cost of traded inputs 51%

Source: calculated from sections V and VI. Table 39: DIRECT PRODUCER SUBSIDY PAYMENTS- EGYPT 1967-1977 (in LE millions)

Item 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977-/

Fertilizer, local - - - - - 0.8 0.2 - 0.5 3.0 7.7 Fertilizer, imported ------0.3 69.3 29.9 6.0 Gypsum - - - - - 1.1 0.6 0.4 0.6 0.7 0.8 Commissions to importers ------0.4 0.3 0.2 Maize production ------0.2 - - - 0.1 Seeds ------1.2 0.1 1.2 1.1 1.3 Cotton pesticide - - - 11.6 11.6 11.7 12.6 11.5 27.6 20.0 25.0 Sugarcane disease compensation ------0.5 0.2 0.5 0.6 0.7 Animal feeds ------0.1 0.5 0.7 0.8 Cotton incentives ------0.2 - - - - Balancing amount3 / - 5.3 6.3 0.3 0.3 0.2 0.6 0.1 0.9 0.5 0.2

Total 0 5.3 6.3 11.9 11.9 13.8 15.9 12.7 101.5 56.8 42.8

1/ Refers only to direct payments passing through this agency, mostly to the Bank of Agricultural Credit.

2/ Allocated.

3/ This balancing item represents the sum of payments less than LE 100,000 from 1970 and payments not identified by item prior to 1970.

Source: General Auth'rity for Agricultural Crops Stabilization Fund. Table 40: SUMMARY OF ESTIMATES OF RANGE, NOMINAL AND EFFECTIVE PROTECTION, DOMESTIC RESOURCE COSTS EGYPT 1965-1976

Item NPC EPC DRC 1965-1972 1973-1976 1965-1972 1973-1976 1965-1972 1973-1976

1. Export Crops Cotton 0.6-0.7 0.4-0.6 0.6-0.7 0.4-0.7 0.2-0.4 0.3-0.5 Rice 0.7-1.3 0.2-0.6 0.6-1.6 0.2-0.7 0.5-1.3 0.3-0.9 Onions 0.5-0.9 0.4-0.5

2. Food Crops Wheat 1.5-1.0 0.7-0.9 1.1-1.3 0.8-1.3 1.9-4.3 1.3-3.7 Maize 0.8-1.1 0.7-0.9 0.9-1.3 0.8-1.3 0.7-1.4 0.8-3.8 Meat 2.5-2.9 2.1-6.5 - 4.1 (1976) - 3.5 (1976) Sesame 1.0-1.1 0.7-0.9 - - - Sugar (infinite) 0.3-0.5 - - -

Source: calculated in section VI. -159-

Table 41: PRICES RECrIVED bY FARNIERS FOR WHEAT, MAIZE, AND COTTON IN EGYP'T, 1950-1975 Year Wheat Maize Rice Cotton ...... LE/Metrlc Ton.

1950 21.33 16.43 17.46 95.50 1951 21.33 16.43 16.08 95.50 1952 21.33 16.13 L5.87 95.50 1953 30.33 16.93 12.28 95.50 1954 30.26 17.73 16.90 95.50 1955 26.60 21.53 17.99 95.50 1956 26'.0 26.00 17.99 95.50 1957 26.60 22.00 17.99 95.50 1958 26.60 22.00 17.99 95.50 1959 26.60 23.33 18.02 95.50 1960 23.61 27.85 18.02 95.50 1961 2S.35 26.28 18.02 92.57 1962 28.55 25.42 18.0; 94.22 1963 28.75 22.92 18.02 96.76 z564 27.35 26.85 19.18 106.92 1965 30.22 27.92 21.33 102.25 1966 32.82 26.78 26.85 101.90 1967 37.35 31.92 30.17 108.89 1968 32.22 36.84 31.58 110.06 1969 32.75 28.92 31.00 114.54 1970 38.69 32.70 28.41 115.49 1971 35.40 23.49 27.54 115.81 i972 35.07 34.33 26.83 125.,77 1973 38.13 42.06 28.09 123.37 1974 46.93 42.07 36.00 149.21 1'375 51.33 42.08 45.00 161.90

'ource: .inistry of Agriculture -lbU-

Table 42: YIELD PER FEDDAN: WHEAT, MAIZE, RICE COTTON, AND BERSEEM IN EGYPT, 1950-1975

Year Wheat Maize Rice Cotton e.g.... Cg,/Feddan......

1950 742 900 1,776 620 1951 808 858 1,275 589 1952 777 882 1,381 693 1953 865 920 1,541 695 1954 961 823 ;,835 647 1955 953 932 2,179 541 1956 982 399 2,280 583 1957 97S 848 2,335 649 1958 991 899 2,083 681 1959 974 206 2,108 745 1960 1,029 929 2,05 737 1961 1,037 1,009 2,126 506 1962 1,095 1,094 2,456 806 1963 1,110 1,085 2,31.3 806 1964 1,158 i,165 2,117 891 1965 1,111 1,476 2,109 791 1966 1,135 1,5C9 1,989 693 1967 l,035 1,456 2,121 743 1968 1,074 1,478 2.147 &.7 t969 1,01s 1,594 2,146 912 1970 1,163 1,592 2,230 863 1971 1,2S2 1,539 2,223 929 1972 1,304 1,579 2,'h9 917 1973 1,472 1,515 2.221 855 1974 1,375 1.505 2,129. 328 1975 1,459 1,520 2,314 788 -161-

Table 43: LE/PER FEPDD.N RECEIVED BY FARMERS

Short 1/ Loug Year Wheat Maize Rice Cotton Berseem Berseem

1950 15.83 14.79 31.01 59.2 6.75 18.00 1951 17.23 14.10 20.50 56.2 6.75 18.00 1952 16.57 i4.23 21.92 66.2 7.40 19.92 1953 26.23 15.5a 18.92 66.3 7.08 18.38 1954 29.08 14.i9 31.01 61.8 6.71 17.88 1955 .5.35 20.07 39.20 51.6 6.75 18.00 1956 2'.12 23.37 40.08 55.6 6.75 18.00 957 2'6.01 18.66 42.01 61.9 6.80 18.12 1958 26.36 19.78 37.47 65.1 6.66 17.76 t959 25.91 18.80 37.99 71.7 7.77 20.72 1960 29.A4 25.87 37.93 70.4 7.65 20.40 1961 29.40 26.52 38.31 46.8 11.96 21.40 1962 31.26 27.81 44.26 '75.9 9;60 25.60 1963 31.91 24.87 41.68 77.9 13.01 34.68 '964 33.99 31.28 40.60 92.5 15.38 41.00 1965 33.57 41.21 44.98 80.9 i6.65 44.40 1966 37.25 40.41 53.40 70.7 17.94 47.84 1967 38.69 46.48 63.99 80.9 15.00 40.00 1968 34.060 54.45 67.80 91.0 14.25 38.00 1969 33.34 46.10 66.53 104.4 15.69 41.84 1970 45.00 52.06 64.77 99.6 17.25 46.00 1971 45.38 51.54 61.36 107.6 24.00 64.00 1972 45.73 54.21 58.73 115.3 '30.00 80.00 1973 56.13 63.72 64.07 105.9 37.50 100.00 1974 64.53 63.32 76.64 133.5 45.00 120.00 1975 83.45 63.96 96.03 127.5 52.50 140.00

1/ Prices Der cut are availale for some years enly. For the missing ye£rs the price series computed by the FA0/1"? using the meat price index has been tJz;ken. See FAO/r.NP Progress Reports on agricuitura. sector aualysis of the Arab Republic of Egypt.

Source: Ministry of Agriculture -162-

Table 44: RURAL REAL WAGE PRICE DEFLATOR EGYPT 1950-1974 (base year, 1938=100)

Money Wage Cost of Living Real Wage Year (piastres) Index Index Index

1950 11.6 387 264 147 1951 12.6 420 263 160 1952 12.0 400 265 161 1953 12.0 400 269 150 1954 n.a. n.a. n.a. n.a. 1955 n.a. n.a. n.a. n.a. 1956 10.0 333 342 97 1957 n.a. n.a. n.a. n.a. 1958 n.a. n.a. n.a. n.a. 1959 12.5 417 334 124 1960 12.5 417 337 123 1961 12.3 410 358 113 1962 14.0 450 367 122 1963 15.0 480 377 127 1964 19.0 609 438 138 1965 22.0 704 519 135 1966 25.0 801 468 170 1967 24.5 784 479 162 1968 24.5 784 499 156 1969 25.5 817 536 151 1970 25.0 801 576 138 1971 25.5 817 580 140 1972 27.5 880 613 143 1973 29.2 930 661 140 1974 32.2 1001 792 125

Source: Radwan, Samir, "Agrarian Reform and Rural Poverty, Egypt 1952-1975", ILO Geneva, 1977 -163-

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