An ICT Economy Interaction Model for Egypt “ Impact on Growth and Productivity ”

In recognition of the potential of information and communication technology (ICT) and its important role to enhance the productivity of economic sectors and improving the welfare level of its citizens, the government of Egypt is developing both medium and long term plans to cope with the Information and knowledge Society in the 21st century. ICT in Egypt – as well as other developing countries - has become a prerequisite and a critical factor in achieving socioeconomic development objectives. The rapid spreading out of ICT services in Egypt, and the need to assess its economy wide impact, has triggered a demand for an issue-oriented ICT-based social accounting matrix (SAM) and an ICT economy wide interaction modeling tool. The constructed issue-specific SAM can serve as a consistent accounting framework and a comprehensive database for a wide range of ICT economic interaction models. In order to assess the impact of the ICT sector an extended economy wide model needs however to be developed. This model should capture the interaction within the Egyptian Economy with a special emphasis on the role and contribution of the ICT sector. According to the international standards, ICT sector can be disaggregated into seven activities: ICT manufacturing industries; ICT trade industries; software publishing; telecommunications; computer programming, consultancy and related activities; data processing, hosting and related activities; web portals and Repair of computers and communication equipment. This classification scheme is applied to the production activities and various commodity groups within the SAM and Model. Final consumption of ICT services by households and government sector is computed based on detailed information from the Ministry of Finance and the Household budget survey. Finally, the exports and imports data are obtained from the balance of payment statistics of the central bank publications. Total ICT turnover reaches EGP 46.7 Billion in 2007-2008. The gross value added of the sector at current prices is EGP 31.7 Billion in the same year with an annual growth rate of 7.1 percent which is higher than the average growth of the Egyptian economy. As a percent of Egypt’s GDP, the ICT sector accounts for around 3.6%. ICT can be viewed as a capital intensive sector. As a percent of ICT value added, the operating surplus reaches 51%. Furthermore, its gross saving represents around 48% of total income of the sector. Household spending on ICT accounts for 12% of aggregate private income. Finally, investment expenditure on ICT commodities is 6.3 percent of total gross fixed capital formation. The considerable growth of the ICT sector in Egypt over the last decade coupled with its country wide dissemination, necessitates a shift in focus from making the technology work and keeping it working (operations) to understanding, predicting and influencing the contribution of ICT on individuals, organizations and the economy as a whole. In today’s knowledge society - largely dependent on ICT- it is not only just the technical dimensions of ICT that need to be considered but also the macro-economic effects of ICT diffusion. In this paper, an issue oriented social accounting matrix (SAM) and an aggregate computable general equilibrium (CGE) model are developed to assess the economy wide impact of the sector on the behavior of the economy as a whole as well as the performance of its sectors and institutions. The aggregate SAM and model are broken down into two activities, four commodities with each of them disaggregated into ICT and non-ICT sectors, five domestic institutions, four tax accounts, one saving-investment account and the outside world. The paper is organized around five sections. The first section outlines the major characteristics of the information economy where information and communication technologies are undeniably gaining ground, even in the remotest corners of the world. This section also thoroughly explains why there is a consensus in the economic literature that measuring the economic impacts of the information economy is highly problematic. Finally, the authors of the paper will review the world wide efforts exerted by several international organizations - such as the OECD - to improve the ability of its member countries to measure the socioeconomic impacts of the new evolving information economy. In the second section, the economic rationale, structure and components of an aggregate ICT/Non ICT Social Accounting Matrix (SAM) for Egypt are introduced. The main purpose of this matrix is to identify the relative weight - as well as the role - of the ICT sector in terms of its interaction with the rest of the economy. Despite its aggregate nature, it can be viewed as reasonably efficient analytical tool to handle the specific issues of the ICT activities and their interactions with the other sectors of the economy. In the third section, an aggregate economy wide model is constructed, calibrated and validated using the base year social accounting matrix and the principal aggregates of national accounts published by the ministry of economic development. The model follows the computable general equilibrium (CGE) tradition with special emphasis on the ICT sector along with its role in economic development. In order to capture the impact of the ICT on the economy wide performance, growth prospects and effectiveness, the CGE model is particularly designed to consider two different effects; a) the economy wide impact resulting from the contribution of ICT on intermediate and final demand for goods and services, employment of labor and capital factors, income distribution patterns and the external balance. This first type of effect is normally handled by any classical CGE model based on the SAM structure and; b) the indirect impact of ICT sector on enhancing the total productivity of the economy and the efficiency of factors. This type of effect is captured in the suggested ICT economy interaction model by developing a special purpose production functions that embody these overall productivity and efficiency of factors. The fourth section is mainly directed to using the constructed ICT economy interaction model to carry out policy experiments aiming at the estimation and isolation of the economy wide impact of the ICT sector. Finally, the last section summarizes the findings of our exercise and suggests a number of policy recommendations in light of the experimental results of the model. See above See above