A Multi-sector ICT Economy Interaction Model for Egypt- the Path to Information Society

In recognition of the important role of information and communication technology (ICT) in transforming developing countries into modern knowledge societies in the 21st century, the government of Egypt has developed both medium and long-term sector specific plans. 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. In this paper, a disaggregated issue oriented social accounting matrix (SAM) and an extended multi-sector computable general equilibrium (CGE) model are developed and implemented in order to assess the economy wide impact of the ICT sector on the behavior of the whole economy as well as its sectors and institutions. The disaggregated SAM and model represent an economy with eleven activities including detailed specifications of ICT sectors, five factors of production broken down by economic activity and institution, four domestic institutions and the outside world. According to the international accounting standards, ICT sector is 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 or the Model. Non-ICT activities/commodities are broken down into primary production, manufacturing, productive services and social and community services. Institutions include households and unincorporated business, general government as well as ICT and Non ICT corporations. The model is composed of four groups of commodities (composite, domestic , imported and exported goods and services) with each of them broken down by type of production activity. Finally, the model includes a disaggregated capital account with investments distributed by origin and destination of capital good. The ICT-based SAM includes two investment matrices covering the structure of gross fixed capital formation for both the ICT and the non-ICT sectors. The developed model follows the computable general equilibrium (CGE) tradition with special emphasis on the ICT sector along with its role on economic development. In order to capture the impact of the ICT on the economy wide performance and growth prospects, the CGE model is used to estimate two different effects; a) the economy wide impact of ICT on the demand for intermediate and final consumption goods and services, the effect on the structure of labor and capital factors, and the change in the patterns of income distribution and the external balance with the outside world. This first type of effect is normally handled by a classical CGE model based on a SAM with disaggregated ICT sector and; b) the indirect dynamic impact of the ICT contribution to enhancing total productivity of the economy and the efficiency of factors of production. 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. Based on the above rationale, the model was mainly used to conduct policy experiments directed to test alternative ICT strategies that allows Egypt to be an information-based economy and a knowledge-based society. Against this background, the government of Egypt is assumed to implement an ambitious ICT strategy composed of four policy components which are: (i) to Increase the growth rates of gross fixed capital formation with special emphasis on purchasing ICT investment commodities, (ii) to adopt various measures to increase the output, value added and factors income of the ICT activity, (iii) to implement a national training, reorientation and capacity building ICT programs to enhance factor productivity and labor efficiency of all non ICT sectors, and (iv) to apply an ICT export promotion policy. The application of the ICT economy interaction model to assess the impact of the adopted ICT development strategy revealed a number of analytical points. First, the ICT sector benefits mainly from the direct effect of increasing its production and investment whereas the impact on non ICT sectors become apparent only via the indirect longer effects of enhanced labor efficiency and total factor productivity. Second, The analytical results show that the longer term indirect effects of increasing productivity of factors represent the most important determinant of the impact of any suggested ICT strategy on the growth prospects of GDP. Third, the adoption of the suggested ICT strategy would affect both the domestic and foreign demand for commodities. Since the increase in gross output of ICT and non ICT sectors exceeds the growth in domestic demand, excess production is channeled to the outside world in the form of additional exports this result can be partially explained by the effect of the adopted export promotion policy. Fourth, on the macroeconomic level, gross national product (GNP), gross national income (GNI) and national savings are expected to witness a moderate increase due to the implementation of the ICT strategy. Fifth, the experimental analyses show a clear improvement in the balance of the Egyptian economy with the outside world as a result of applying the ICT new strategy . This improvement is more apparent in exports, trade balance and the current account surplus. Sixth, the savings of households, ICT companies and non ICT corporations increase due to the adoption of the ICT new strategy. Similarly, government current deficit is expected to decrease over time when the ICT enhancement scenario is applied. Seventh, The enhanced growth environment of the economy would slightly increase government capital income and transfers from non government domestic institutions, and considerably improves tax income.