Egypt’s Post Revolution Development Path From A Dynamic Economy Wide Model "A Goal seeking Analysis"

Since January revolution of 2011, Egypt is witnessing a slowdown of its economic growth, a drop in domestic and foreign direct investments, a considerable decline in industrial production, a notable deterioration in foreign reserves and a growing government deficit. To overcome these unfavorable effects of the post revolution transition period, the Egyptian government decided to formulate a 10-year socioeconomic development plan (2011-12- 2021-22). To support the post revolution development planning process, an extended dynamic economy wide model is constructed and implemented. The model is designed to capture on the one hand, the behavior of the economy wide variables during the recovery period of the economy and to project on the other hand, its growth prospects up to 2021-22. The purposes of the paper are: (i) to assess the current status of the Egyptian economy and its post revolution performance., (ii) to briefly describe the accounting framework, economic rationale and mathematical structure of the dynamic economy wide model, and (iii) to outline the main findings of using the model to carry out goal seeking analysis . The paper is organized around five sections. After an introductory part, the second section outlines the accounting structure of the model. Section three explains the economic rationale and structure of the model. Section four analyzes the obtained results. The last section highlights the main findings with special emphasis on the achievement of the planning targets. The general hypothesis of the 10-year plan is that Egypt will succeed to double its real Per-Capita GDP, reduce the unemployment rate to only 4% and considerably improve welfare level of its citizens. To achieve these goals, the plan relies primarily on enhancing the investments environment. It is assumed then that the gross fixed capital formation in real term will witness a gradual increase with the objectives of raising its share in GDP to around 32 percent at the end of the planning period. The plan assumes as well a considerable increase in foreign direct investments (FDI) and a novel role of government with respect to investment spending, employment policy, encouraging private initiative and promoting exports. When these policies are coupled with improved external balance and enhanced factors productivity, the hypothesis of doubling income and reducing unemployment rate to 4% is expected to be realized. To allow for testing the plan assumptions and main hypotheses, an extended three-sector five-institutions medium/long term economy wide model was constructed and implemented using GAMS. The model follows the computable general equilibrium (CGE) tradition with enhanced inter-period dynamics and detailed treatment of the saving-investment relations. It is developed around a consistent social accounting matrix (SAM) using national income accounts, public finance indicators, balance of payments data and labor market survey The model is used to generate two development paths; the first path (Investment growth) relies on gradually increasing investment spending and attracting more direct foreign investments (FDI). The second development path (Investment growth with productivity) adopts – in addition to investment growth measures - a comprehensive policy package for enhancing total factor productivity. Based on the adopted policy packages, the development paths of the economy can be explained as follows: First, The two tested scenarios have considerably improved the performance of the economy and accelerated its return to normalcy, particularly with respect to the growth, employment and welfare prospects. Both scenarios succeeded also to accelerate the economic recovery period. The investment growth scenario failed however to achieve the planned target of doubling the real per-capita income. Second, the model results suggest that an enhanced investment growth policy should be coupled with a comprehensive package to enhance total factor productivity in order to reach the target of doubling the per-capita income. In light of this finding, the growth of per-capita real GDP – under the two scenarios –is expected to witness an overall increase of 49 percent and 105 percent, respectively. Third, achieving the plan targets is expected to contribute to a structural changes reflected in the relative weights of GDP uses. Fourth, the above results depends to a great extend on the success of the Egyptian government to mobilize domestic and foreign resources in order to achieve a surge in investment spending and a sizable growth in total factors productivity.