A MODEL FOR FEASIBLE GROWTH RATES

Now that we understand that agricultural growth is not only important to growth in national income, but also absolutely vital to growth in employment and reduction of poverty, we turn to look at what can happen in Egypt under various conditions of management, policy change, commodity choice and use of technology. A model system 279 demonstrates these effects for Egypt in tables 1 to 10. This “model exercise” is intended to determine feasible growth rates that will have a substantial effect in raising employment growth rates.

“Model Exercise” Evaluates Feasible Growth Rates

Farmers make decisions about resource allocation among specific commodities. Much of investment, institution building, and policy are also commodity specific. The importance of each commodity group in the overall growth rate is a function of two factors: (1) the base weight; and (2) the growth rate. Very high growth rates are often possible for commodities that have only lightweight in the base. In those cases, even a high growth rate has little effect on the overall growth rate. The five agricultural commodity groups into which agriculture is divided for this assessment are (1) cotton; (2) cereals; (3) horticulture; (4) livestock; and (5) other crops. Miscellaneous is a mixture of diverse crops ranging from sugar cane to oilseeds to berseem (which is in effect covered by livestock). The commodity chain analysis treats each of the four commodity groups and will demonstrate the need for integrated policies specific to each commodity group. For each commodity group, different judgments are made about the composition of that growth.

For all of these commodity groups, two inputs, water and fertilizer, are particularly important to achieve strong growth rates. Fertilizer is already used at very high rates in Egypt. There is no scope for a major increase in production from radically increased rates of fertilization. But there is scope for significant increase in farm incomes through increased efficiency of fertilizer use even as total usage increases modestly. Increasing the efficiency of fertilizer use will favor higher farm incomes as well as being environmentally sound. Efficiency of water use is also critical to achieve strong growth rates.

Reaching Income Growth of 4%

Using the base weights of each of five commodity groups as a percent of agricultural GDP and the target growth rates for each commodity group (Table 1) leads to a weighted average for the growth rates of 4.8 percent. That is an agricultural growth rate consistent with a 7.1 percent rate of growth of GDP as well as with 2.4% increase in employment. It is far higher than Egypt has achieved in recent decades. That growth rate, will increase employment at a rate more than two percentage points faster than the labor force growth rate (4.4% employment growth rate compared to 2.2% growth in labor force). It would be expected to provide rapidly rising real wage rates within 10 years.

Simplistically, the commodity groups are differentiated according to whether they are tradable commodities (the market is global) or non-tradable (the market is domestic) (Table 2). Cotton, Cereals, and Other Field Crops are designated tradable commodities. In theory, for these crops, demand at current prices is not a constraint because the global market is available, in the form of exports or displacement of imports. In that case, production forces determine growth. However, even on the international market, there are complex marketing problems that must be solved, including reducing transaction costs and providing the product quality demanded in the international market.

Horticulture and Livestock/Fisheries are classified (Table 2) as non-tradable. They represent well over half of value added in agriculture and a much higher proportion of employment. They are in need for integrated technical assistance that cuts across both the production and the marketing functions.

In the case of non-tradable commodities, it is growth in domestic demand that sets a rough ceiling on output growth (Table 3). With the non-tradable, lower consumer prices are required if consumption growth is to exceed the growth rate of domestic demand. The production target for livestock is consistent with the demand growth rates, and that for horticulture assumes sufficient relative price decline to allow consumption growth one percentage point faster than demand growth.

For horticulture, exports of new or non traditional crops now make up an insignificant 4 percent of production. Although exports are targeted to grow rapidly, the bulk of production is unsuitable for export markets. Thus, the determining constraint on output growth is domestic markets. As success is achieved on export markets with non traditional crops, horticulture will become increasingly a tradable commodity with demand not constrained by the domestic market. Horticulture uses rather little land relative to its value of output, thus increasing area at the rate shown is not a substantial constraint if farmers find the crop profitable.

Domestic demand growth is estimated for Horticulture and Livestock/Fisheries (table 3). The domestic demand is calculated as a function of the population growth rate, per capita income growth, and the income elasticity of demand. Rapid agricultural growth is in part dependent on balanced growth. The export-driven urban sector must grow rapidly not only for its important contribution to GDP growth, but also to help provide effective demand for large nontradable elements of the agricultural sector.

Livestock/Fisheries (because of the very rapid growth over the past decade, fisheries now make up about one-third of the total) is clearly non-tradable. There are imports, but they are only a small percent of domestic production and concentrated in specified sub-sectors. The difference between import parity prices and export parity prices largely stems from costs of marketing. 282 The income elasticity of demand is for Egypt as a whole and is derived from an IFPRI household survey. Income Elasticity of Demand measures the rate of response of quantity demand due to an increase (or decrease) in a consumers income.

The formula for the Income Elasticity of Demand (IED) is given by: % Change in Quantity Demanded)/(% Change in Income).

The per capita income growth estimate is based on the GDP growth rate of 7.2 percent (Table 9) and is only slightly higher than the 7.0 percent rate taken by the World Bank as a reasonable future target, population growth rate of 2.2 percent, and a 20 percent marginal savings rate on the per capita income. That provides a per capita income growth rate of 4.0 percent. That of course is very high compared with that of the past. However, this exercise is intended to determine feasible growth rates that will have a substantial effect in raising employment growth rates. This is a conservative estimate, given the assumption of a fastgrowing agricultural sector; the strong multipliers to the large, employment-intensive, rural non-farm sector; and a high, export-driven growth rate for the urban sector.

Sources of Output Growth

A plausible breakdown of sources of output growth (Table 2) is divided into yield, area, and increased unit value, largely because they relate to different sets of interventions. For the tradable commodities, such estimates of what can be achieved on the production front indicate the volume for which marketing problems must be solved.

MALR has estimated past yield increases (output per unit area of land) at only 0.4 percent per year for the crop sector. Table 2 targets much higher growth rates in yields: 4.5 percent for cotton and 3.0 percent for each of the other crop commodity groups, and 4.0 percent for livestock 283 (output per animal.) A technologically mature country such as the United States can expect continuing research and its application to provide on the order of a 1.5 percent rate of growth of yields. However, even though high in general, Egyptian yields lag well behind what can be achieved with current technology. Thus, an additional 1.5 percent rate of growth of yields is postulated, in a sense representing catch-up with the current global state of technology. That would close the yield gap with more advanced countries by only 16 percentage points in 10 years. Nevertheless, to achieve this objective requires a substantial effort and focusing of the agricultural research effort. It probably also presumes a significant foreign private sector input.

In the case of cotton research, it has for over 20 years only maintained yields. Yields have not surpassed the levels of the early 1980s. The rest of the world has experienced steady increase in cotton yields. Thus, an additional 1.5 percentage points of catch-up growth is postulated. That comes to a very rapid 4.5 percent rate of growth. At that rate, it would take nearly 9 years to reach the current Israeli level of cotton production (table 4), by which time Israel would have moved onto substantially higher yields. To achieve this high growth rate in yields is not possible with a business-as-usual approach to cotton research. Considerably greater focus and expenditure are needed. The present research system has been effective in maintaining yields in the face of the usual forces tending to reduce them. It must now focus additionally on what is needed for rapid yield increase.

Similar statements can be made for other internationally traded commodities. Israel out produces Egypt in maize; Namibia in wheat and Australia in rice. These other three countries also have dry, sub-tropical climates, similar soils, and irrigation based agriculture. The yield differentials run from 17 percent higher than Egypt for rice to 45 percent higher for cotton.

Area expansion is targeted as important for cotton and for horticulture: 2.5 percent rate of growth of area for cotton and 2.0 percent for horticulture (table 2). In effect, it is assumed that those increased areas are comparable to the increased area from new lands that the government targets, net of losses of land to agriculture from urbanization and such forces. Thus, compensating decline in area of these crops is not shown. That in effect means that something on the order of 0.75 percent points, or 15 percent, of the 4.8 percent growth rate is attributable to the new lands. The importance of new lands is even greater, given the significant loss of land to non-agricultural uses that is netted out of the new lands in these calculations. In the case of horticulture, a shift to higher value components may be more important than increased area.

Cotton versus rice

Analysis by the GOE predicts the cotton area increasing by one-third in the near future and rice area declining commensurately. For that to happen will require major policy changes. A low point in cotton area was reached in recent years at less than half the area planted in the early 1980s. There has been some recovery from those low points, but recovery of past peaks would represent a nearly two-thirds increase in area from current levels. Reaching the commonly quoted government objective of 1 million feddans planted to cotton would require a one-third increase from present levels. Of course, the decline in area planted is a response by farmers to the relative profitability of cotton, particularly relative to rice. That is despite the very strong comparative advantage of Egypt in cotton production. Thus, much needs to be done with respect to policy if these targets are to be reached. It should be noted that cotton generates a far higher value added per unit area of land than the other field crops, so raising cotton production is important to the overall growth rate and to employment. It is assumed that Egypt will develop its absolute and comparative advantage in finer grades of 5 cotton and increase the share of output from those higher value components. Egypt has a strong comparative advantage in extra-long staple cotton. Demand in the world is moving strongly toward high quality products and to some extent to natural products as well. That is a favorable environment for market development for extra-long staple cotton.

Constraints for livestock

Livestock production is shown to grow largely by increased productivity per animal, implying a doubling in animal productivity over an 18-year period. That is important to increasing competitiveness of the sector. Increasing production per animal also would increase feeding efficiency. In addition, there would be an increase of concentrate feeding, possibly from increased imports. Thus, what happens to the berseem area is indeterminate, particularly because berseem yields should also be presumed to increase at a 3 percent rate, as for the other field crops. With that rate of yield increase for berseem, some relative increase in concentrate feed use, and an increasing feeding efficiency, it is unlikely that berseem area would have to expand to match the livestock growth. Again, however, there is a heavy burden placed on productivity-increasing research and its application to small farms. Livestock output is in terms of value added, that is net of the feed consumed.

Production and marketing constraints

The high-income elasticities assumed for livestock and horticulture are mirrored by high-price elasticities. (% Change in Quantity Demanded)/(% Change in Income) That means that if the production and marketing constraints are not removed, the consumer price will rise and consumers will shift readily to other, largely nonagricultural commodities. Given the labor intensity of livestock and horticulture and the strong employment multipliers, that lost opportunity will be paid largely in the form of less growth in employment and less decline in poverty.

Conversely, if production costs can be reduced substantially, that benefit can be shared with consumers, with the lower prices increasing consumption and providing the possibility for a higher growth rate. International competitiveness requires steady, substantial reduction in production costs.

Growth in farm incomes of the magnitude required for rapid growth in employment cannot occur without large increases in farm output. However, the marketing of that increased production, even in global markets, will not occur automatically. In both the global and the domestic markets, there are a myriad of complex marketing problems that must be solved.

Response to technology and globalization

Egypt has highly productive agricultural resources that are reflected in high crop yields. Such conditions are normally highly responsive to the new opportunities offered by technological advance and the forces of globalization.

A common means of measuring comparative advantage is to compute the domestic resource cost of production. The domestic resource costs (DRCs) computed specifically for this assessment are summarized in Table 5. A country has a comparative advantage if the DRC is less than one. All the crops in Table 5 show a DRC of less than one.

The two horticulture crops, potato and tomato, undoubtedly are representative of a wide range of vegetables and fruits, reflecting extremely high comparative advantage. They also show by far the highest returns to water. Hence, the future is bright for major expansion in these commodities. The proportion of area planted to these crops is very small compared for example with that of Southern California, with its comparable climate, soils, and water.

Cotton and wheat show very low DRCs of 0.61 and 0.65. Short season berseem, which is in part a proxy for livestock, shows an exceptionally low DRC of 0.37. Maize also shows a highly competitive DRC of 0.81. Rice, Sugar Cane, and Sugar Beet show competitive DRCs, comparable to that of Maize. However, as shown in the last column of Table 5, the returns to water for these very water using crops is very low, at one-third or less that of cotton. At such time as water becomes more scarce than at present, these high water consuming low returns to water crops will become less and less competitive for resources. An area of rice much less than at present, but nevertheless substantial, will remain competitive because it is grown on very heavy soils, ill suited to other crops, and much less demanding in water use.

A separate calculation in a World Bank study, for livestock, shows DRCs of 1.0 or lower for poultry, both home and commercial; buffalo; and exotic cattle (Table 6.) It is notable that Baladi (local) cattle show negative returns— but that is most likely a reflection of farmer’s willingness to take well below market wages for work on cattle. That suggests that the real profitability of cattle to farmers is much higher than shown in Table 6.

Opportunities and Constraints per Commodity

The next section discusses opportunities and constraints for each commodity group. The following brief exposition points out critical differences among the commodity groups in constraints to be removed.

Cotton

In the target growth rates presented in Table 2, cotton accounts for only 11 percentage points of the increments to 288 agricultural production. That is because of its low weight in the base of production and that in turn is because the area and production of cotton have declined precipitously over the past few decades. That decline does not represent lost comparative advantage (as shown by the DRCs in Table 6) but unfavorable policies. Thus, the 9.0 percent growth rate for cotton is very rapid by normal crop growth standards but not unreasonable considering how powerful the negative policy effects have been. Note that Pakistan, also a large producer of cotton under conditions similar to those of Egypt, sustained a 16 percent growth rate in cotton production for well over a decade in the 1970s and 1980s.

Cereals and other Field Crops

Cereals account for 7 percent of incremental growth in the scenario set forth in table 3. In the recent past, rice has expanded its area substantially at the expense of cotton. That would be reversed by change in policy. Yield growth depicted requires attention to research and extension. Other Field Crops are depicted as growing at three percent per year, only because of increased yields.

Horticultural Crops

A growth rate of 6 percent is shown for horticulture but that will not be easy to achieve. First, a vigorous research and extension effort is needed to bring down cost of production. Second, massive barriers to competitive marketing must be removed. Thus, although the large-scale farms on the new lands can blaze a path, the large number of smallholders in the Delta must be included. That very much affects the approach to both extension and marketing. Finally, although the bulk of horticulture production will continue to be non-tradable on quality and transaction cost grounds, the export sector must grow quickly and increase the proportion of total production made suitable to the export market. In the long run, a high proportion of the Delta needs to be brought under horticulture production and that 289 means small holders must be brought into the process. In Egypt, 15 percent of the cropped area is under vegetables and orchards. That compares with more than twice that proportion in the San Joachim Valley counties of California.

Livestock

Finally, livestock are produced primarily on small farms, and women play a major role in livestock production and marketing. Smallholder livestock is highly labor intensive. There is some view that the smallholder sector is inefficient. That is partly an image problem because the small farmer uses less capital and much more labor in the production process. It is also a reality because smallholders do not receive significant research, extension, and market development attention. But with 27 percent of incremental value added projected to come from livestock, and that amount only matching demand growth, it is essential to income and employment growth that this potential be realized.

Efficiency of Input Use

Fertilizer

Typically in high-income countries value added in agriculture rises more rapidly than gross value of output. In contrast, in low-income countries the reverse is the case. That is because of the rapid increase in fertilizer use with little attention to the management-intensive practices that increase the productivity of fertilizer. Three hypothetical cases illustrate the third situation which represents Egypt (Table 7). Because the efficiency with which fertilizer is used is decreasing with growth in use, value added grows substantially less rapidly than total output. The countries that achieve faster growth in value added than in gross value of production have substantial research and extension programs focused on increasing input efficiency. It is value added that matters to farm incomes, which in turn drives rural employment. Thus, Egypt, which uses fertilizer at rates far higher than typical low-income countries (but of course still less than in the high-income countries), has considerable scope to increase the productivity of fertilizer. It should be noted that in effect the employment impacts shown below presume that value added will grow as rapidly as gross value of output, Situation 2 in the table, which in turn presumes an effective effort to improve the management of inputs, especially fertilizer.

Water

The targeted growth rates presume that the cultivated area will continue to expand at about the same rate as in the past few decades. In those calculations, the government’s targets for new irrigated area have been accepted and then the historical rate of loss of agricultural land netted out; that leaves a net growth rate of about 0.75 percent. There is an implicit assumption that new lands will be allocated optimally and will be comparable in quality to past additions. It also is assumed that sufficient increase in water use efficiency will occur to meet the rapidly growing urban needs without productive loss in agriculture. These are all heroic assumptions. For them to become reality will require continuing attention to water use policy and the making of hard decisions about where new water will be allocated. In this context, difficult conflicts between the best allocation for employment and national income growth and broader national objectives will have to be resolved.

Achieving the Comparative Advantage

The assumptions stated above provide an agricultural growth rate of 4.8 percent. That is in the mid range of the 4-6 percent growth rates typical of the high-growth-rate countries (Mellor 68). That is a reasonable position for Egypt’s highly biological technology-responsive agricultural resources. As is shown in the next section, that growth rate makes a major contribution to employment growth and poverty reduction. The contribution of agriculture is a function of the per capita rate of agricultural growth. Thus, with a 2.2 percent population growth rate and a 4.8 percent agricultural growth rate, reducing the agricultural growth rate by one percentage point reduces the total output growth rate by about 20 percent but the growth rate per capita by nearly 40 percent. Thus, there is urgency to finding the means to meet the high growth rate target. The comparative advantage is there. The need is for the investment, the institutions, and the policies delineated in detail in the following sections.

Investment and Institutional Development

If this high agricultural growth rate is to be achieved, specific investment and institutional development efforts must be made in each commodity group. This assessment recommends that USAID play an important commodityspecific role in the two most important commodity groups for achieving the high growth target—horticulture and smallholder livestock.

Policy Changes

Of perhaps even greater importance than the commodity-specific efforts is a large, continuous effort to realize the policy changes that are needed at the macro level, at the general agricultural level, and at the specific commodity level. That effort requires continuous analysis of the changing policy needs, related to the priorities for achieving the overall growth rate, an effective implementation of policy change, and continuous monitoring and evaluation of progress made. The last is of special importance because of the dynamic nature of the changes and the need to understand the shifting policy priority needs in the context of a dynamic technological and commodity growth situation.

The Effect of Not Achieving the Comparative Advantage

If in each category in Table 1 the growth rate dropped in half, except for cereals for which the growth rate would be maintained at 3 percent per year due to increased new lands, but reduced yield rate growth. The overall growth rate would be 2.7 percent—comparable to the growth rate in previous slow agricultural growth periods and a level just keeping up with labor force growth. The difference in impact between the 4.8 percent and the 2.7 percent growth rates is calculated in Table 10.

The growth rate of GDP would fall little: by only 12 percent from 7.2 to 6.3. That is not surprising because agriculture is a small part of the total economy. However, most important, 329,000 fewer jobs would be created. Job formation would decline by 33 percent, compared to the decline in GDP growth rate of 11 percent. Because it is assumed that the growth rate would not decline in the urban sector, 56 percent of job formation would be in the urban sector, primarily in the metropolitan areas that are dominant in exports and only 47 percent in the rural areas. Rural urban migration would be much greater than under the fast agricultural growth scenario.

The rural economy would be devastated by slow agricultural growth. With agriculture growing at 4.8 percent and high employment growth, the farm population would decline on the order of 0.5 percent. Farm incomes would rise by a full 5 percent per year; they would double in 14 years. With 2.7 percent growth and slow growth in employment, the farm population would probably increase by nearly the amount of population growth and hence farm incomes would not increase at all.

With the low-growth rate, rural areas would experience both stagnant farm incomes and 329,000 fewer jobs created each year. The consequent rural-urban income differentials would certainly result in massive rural-urban migration. Many of those migrants would flood into urban slums and wait for considerable periods for the better-paying urban jobs. That would be one of the most important causes of increased urban poverty and slums.

If agriculture grows at only the labor force growth rate and the urban sectors grow as above, the overall employment growth rate drops to 3.4 percent or by nearly 30 percent. It would then take nearly 17 years to absorb the same pool of underemployed as would be absorbed in 5 years in the fast agricultural growth strategy.

Summary—Providing 1,000,000 New Jobs per Year

Thus, the solution to Egypt’s employment problem can be met only with major efforts in agricultural employment as well as accelerated growth of the urban, tradable goods and services sector. It is not a matter of one or the other, it is a matter of the total of both sectors. The urban is essential because it has a large share of GDP and accounts for substantial employment, and also because it is important to growth of the non-tradable sub-sectors of agriculture— particularly livestock and horticulture.

In contrast, agriculture’s small share of GDP looms large as a share of employment. In turn, each commodity group within agriculture has a significant role to play in employment growth. Failure to move any one brings a significant effect on employment growth, but none is so dominant that one can concentrate on only that group. Thus, the place for priorities is emphasizing the large components within each sub-sector and diagnosing the few priorities for advancing each sub-sector. Remembering that the policy environment must be favorable to advancements in the scientific disciplines that will provide the technology needed for an efficient food and fiber system. The importance of the task is challenging and enormous. A recent statement from the Office of the Minister of Commerce and Industry of Egypt in July of 2007 estimated that onemillion new jobs are needed in Egypt each year.

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