Egypt’s Post Revolution Development Path From A Dynamic Economy Wide Model "A Three-Year Economic Recovery Plan"

The Egyptian revolution broke out in January 25, 2011, a revolution that sparked the national movements in the Arab world, and impressed the world as a model of an unprecedented popular peaceful uprising included all the spectrums of Egypt's society. It revolution addressed all forms of corruption and tyranny as well as to lift the banner of freedom, justice and democracy. In June 30, 2012 Mohamed Morsi was elected as a president of Egypt for a mandate of 4 years. Despite the people's aspiration for a better future, the continuation of the political instability, social injustice and economic problems during the year following the election have generated an increased feeling of insecurity and discontent. In June 2013, the Egyptian people decided to rebel against the unsatisfactory performance of the new political regime and succeeded to isolate the president with a support from the national military force. Since January revolution of 2011 and during the following transition period, Egypt continued to witness a considerable slowdown of its economic activity, a drop in domestic and foreign direct investments, a sizable decline in industrial production, a notable deterioration in foreign reserves and foreign exchange revenues and a growing government deficit. In January 2014, Egypt's socioeconomic indicators are still showing a declining trend reflected in; i) less than 2 percent increase in GDP coupled with a stagnated per capita real income, ii) an investment rate fluctuating around 16% of GDP compared to 22% in 2008, iii) a continuing low rate of national savings, iv) a sizable decline in the foreign direct investment flows - which amounted to about U.S. $ 2 billion per year - compared to an average of 13 billion dollars during the 1990 decade and the begin of the current century, v) an exacerbation of the unemployment problem, especially among youth and educated women with an average unemployment rate of more than 13% compared to 9% or less five years ago, vi) a high poverty rate accounting to more than 25% of the total population compared to less than 17% at the beginning of the third millennium, vii) a continuing budget deficit and unprecedented levels of domestic public debts exceeding 80 percent of GDP in June 2013, viii) A trade deficit in the current account of the balance of payments showing a continuous declining trend and ix) an upward rising trend of inflation derived by the prevailing increase in the state budget deficit. Against this background, the Egyptian Cabinet approved in 28/08/2013 an urgent plan to stimulate the economy during the period from July 2014 until June 2017 (3 years). The overall objectives of this medium-term plan is to achieve a GDP growth rate between 5% and 7% and reduce the unemployment rate to less than 9%, which represents the prevailed rate before January 25. The plan primarily depends on improving investments environment by relying on private, public and foreign direct investments (FDI). The plan suggests also an increased role of government in revitalizing the economy, with respect to investment spending, employment strategy and exports promotion policy. To support the development and follow up of the three year stimulating plan of the Egyptian economy and to determine the required investment allocation and government spending policies, a three-sector five-institution economy wide model is constructed, implemented as an analytical tool for formulating and testing alternative socioeconomic development policies and scenarios. The constructed model reflects the structural features of the Egyptian economy and its modes of functioning and it is implemented using the general algebraic modeling system (GAMS) software. It is particularly designed to project Egypt's socioeconomic indicators and assess the impact of alternative policy measures and external conditions including: (1) Investment spending policies explained in the allocation of private and public gross fixed capital formation, (2) foreign direct investment (FDI) flows needed to complement domestic investments in support of the growth prospects of the economy, (3) government spending policies broken down into government wage bill, final consumption spending and transfers to domestic and foreign institutions, (4) government fiscal policy including various tax and subsidy programs, (5) export promotion policy, (6) total factors productivity and labor efficiency policies, (7) external balance policy reflected determined by investment income from abroad, worker remittances, interest on foreign assets and foreign transfers from abroad , (8) wage rate and commodity pricing policies and finally (9) alternative population, labor force and unemployment policies. The development planning model represents an economy with three productive activities (primary, industrial and services activities), six institutions (urban and rural households, private and public corporations, and general government) and the outside world. Domestic institutions have both current and capital accounts. Factors of production include labor and capital services. Labor factors (or compensation of employees) are broken down by economic activity ( private, public and government labor) and household area (urban and rural). Capital services include both public and private accounts. Commodities are composed of domestic, imported, exported and composite (including both domestically produced and imported goods ) with each of them divided into primary, industry and services. Gross capital formation is composed of private (households and private companies) and public ( government and public enterprises) investments as well as foreign direct investments (FDI). Government account disaggregates tax income into direct and indirect taxes and subsidies. Finally, the rest of the world account includes net transfers from abroad in the form worker's remittances, investment income, foreign direct investments and other current transfers to domestic institutions as well as imports and exports of goods and services. The Planning model is viewed as a consistent economy wide simulation model - following the general equilibrium tradition - and it is equipped with a set of dynamic adjustment mechanisms to ensure the generation of the future path of the economy. The model adopts an investment/saving macroeconomic closure rule that treats public and private gross fixed capital formations as exogenous variables, gross savings as an endogenous variables and the foreign savings that clear the macroeconomic system. Production sectors apply a flexible price clearing mechanisms with an imperfect substitution between domestic and imported goods. Distribution of gross output between domestic sales and exports is based on a constant elasticity of transformation (CET) function. Transfers from the rest of the world are fixed in foreign currency whereas transfers of the domestic institutions to the outside world are a function of their disposable income. Exports of commodities are computed as the equilibrium quantity between supply of and demand for exported goods and services. The ratio of domestic to world price of commodity and the elasticity of trade determines world demand for exports. Government income is composed of direct and indirect taxes, public enterprises transferred operating surplus and transfers from domestic and foreign institutions. Government final consumption spending is fixed in real term and public savings are computed as a residual. Households and companies expenditures are computed as a fixed share of their nominal income and household final consumption spending is computed by a linear expenditure system (LES) . The model is equipped with institutional capital flows matrix that balances exogenous investments with savings and capital transfers. Given market imperfection and high unemployment rates, wage rates are fixed within period but change between periods based on employment and wage policy. Natural growth rate of population and labor participation policies are used to dynamically adjust population and labor force size between periods. The dynamic adjustment of capital stock between periods - by production activity - is based on the initial capital stock, gross fixed capital formation in real term and the consumption of fixed capital. Similar dynamic adjustment mechanisms are derived for investment income from abroad and foreign direct investments (FDI). The purposes of the paper are: (1) to assess the economic impact of the revolution and highlight the principal economy wide challenges facing the Egyptian economy, (2) to develop the accounting framework, economic rationale and mathematical structure of the economy wide model used to test the development policies of the stimulating plan, (3) to use the developed model to simulate the behavior of the economy under the selected policy measures and development choices of the three year plan, and (4) to suggest appropriate action plans and implementation programs to achieve the purposes of the three-year economic recovery measures. Based on this rationale, the paper is centered around five sections. After an introductory part describing the post revolution economic performance and the most important challenges facing the Egyptian economy, the second and third sections outline the accounting framework, economic rationale, overall structure and disaggregation level of the model as well as the policy measures amenable to analysis based on its structure. The fourth section describes the results of applying the model to assess the impact of the three year stimulating plan with special emphasis on the capacity to reach the planned targets and the feasibility of the selected policy measures. Highlights of policy recommendations and suggestions are introduced in the last section.