Chapter IV: a statistical projection model for the East African economies

·~ _•

UNITED JIATIONS

AFRICLN INSTITUTE FOR ECONOMIC DEVELOPMENT AND PLANNING

3J g

t _~ J]

REPRODUCTION/006-78

D~K.ü.R

CHAPTER IV: ^A ST.ATISTICAL PROJECTION MODEL FOR THE EAST AFRICAN ECONOMIES

1

EXTRi&CT FROM: DEVELOPMENT PUNNING IN EAST AFRICA

by

Paul G. Clark

MARCH 1978

REr: :.WDUCTION/006-78

...

Page 1

CHAPTER IV: A ST~TISTICAL PROJECTION MODEL FOR THE EAST .AFRICAN ECONOMIES

Starting from· the statua· of ·dev.el'opmen't planning in -"the q~d pla~s"·, and gi ven th·e des.ire of the ·East African governrnents to accelera te recent rates of economie growth substaritially through more comprehensive · planning, the most. import~nt improvement . immediately attainable is .. to in- troduce more inclu~ive ·and ·coheren·t 'aggregative plan .framewot:"ks. JJ.s noted . i~ the first chapte~,· the aggr~g~ti~e ~nalysis should prbvide a cset of aggregative t~rgets f6r .the 'economy during =the .plan-consistent with each· other, compatible.with past econo~i~ ~elatioriships ·or identifiable changes in them due to poiicy measures, and judged to be the maximum att~inable: during the current pian-p'eri.ôd. The targ.ets specify such economie varia- bles as national inco'me and prod.uct, totàl exporte and iinpot'ts, governrnent tax revenues, capital formation'by'government, public agencies, and ,Private enterprlses, total' bor~o~ing ~nd assistance from' abroad, non-agricultural ernployment, output of major agricultura·l products and total ·supply of .edu- cated manpower. Defining the set of aggregat:ive targets sbould first pose,.

ànd then be based upon, the key strategie deci·si.ons which .the government

. -~

has to make 'in establishing a viable dev~lopm~~t plan. The set of targets

• l , :

ih

·turn provides the plan framework toward which .ali specifie dev~lopment

activities are dir~cted. . • · · . .

The purpose of this chapter is to present an.aggregative.~odel .

.

.

for the East African economies which can be used in making this. k~nd .. of

. . ·• '} t~:; ' !. . • ~ . j

aggregative proJection for development planning, which· can be calcqlated wi th avaflabie statistical · sE:ries, and which can be· applied in comparisons among th~ three economies.· The model will thèn be applied. in the n.ext., chapter to making a projection of the Ugandà economy to• -1981, .. ~ui·te:ble ·for defining at least ~n tni tial draft floamework for the new ·Ugan®. pl;an,. and

. .... ·-···- .

-- ·--

in the f_ollowing chapter to analysi~g the new Tanzania and. Keny~ P,la~s •

. • ,, · ..

.:• .

•• • 1

REFJO~UCTION/00~-78

Page 2

Desirable Characteristics

q'

a Model for East Africa1

The model should first of all be designed for making intermediate- term economic .. prdjections which will highlight the key stra1;eg~c decisions

neces~ary ·for the plan to succeéd • .. The mode! should ~pecify the network of linkages betwéen the desired objécti·ves fox:.; the ecqno,my as a who le and

...

the dàvelopment expenditures and policies subject to government decision. In principle·the model might be·used either to estimate, .from ^{giv~n objec~} . . ti ves, the ¹ requir·ed ¹ developmeilt expendi tures. and poli~ies to . a~.tain them, .. or from gi vËm development actions, . the 'expected' attainment of. obje~ti v_es.

In practice such;a model is commohly used· i~-a proc~ss ~f. successi~e. ap­

proximation; and the final· judment· that· the a~tions .. and. the. objectives are consistent and feasi"ble must include an admixt;ure ot: .,hunch. and h,ope ~s

well as the s~atisti~al calculations. T~e underlying proj~c~io~ model, however, shoU:ld inake explici t ,those structural aspects of -the economy which

r •

are believed to .. have a continuity of th·eir own, and .whi~h, t.h~,refore,,, im- pose tests of consistency and feasibility on the government's planned de-'

velopme"nt expendftures and policies.

A practical projection model must be adapted to available statis- tical series. In the· th.ree East' African countries ·thé main bodies of sta- tisticai information available for a model· are gross domestic product·:esti~

mates built up from the product side for various seetors,·merchandisec : export and import. data derived from customs operations, ~ather rough esti- mates of gross capi te.l formation wi th -little detail, centra.!. government revenue and expendi ture' accç)Unts us.fng· budgetary .defini ^tt~oa tor fiscal.

years and reported; employuient figures for. various sec tors.. Two,. major pieccs of statistical information which a:re frequ~ntly,. used i~ development niodels ·for higher-stage·. underdeveloped countries-, . as .. in Latin fune~ica,. are

lacking' herei ihdependent gross domestic product estimates )uilt up from

---

^{. ..}

^{. .}

1. Portions of this cha:pter have b~en ptiblished previously in my article.,:

"The Rationale and Uses of a Projection ft'lodel for the East African Eco- nomies", East African Economie Review, June, 1&65.

REP:1C~UC'!'ION/006-78

Page 3

the expenditure side for all final demands including household consumption, and input-output estimates linking final demanda, inte

.

^. rrnediate demands and gross product in the various sectors. However, for .the present stage of development in Eas~ Africa it may be possible to design a simplified pro- jection model which leaps ovcr the missing pieces and yet"is quite ·useful for analysis vith the observations we have.

In v~ew,of the present extensive econo~ic cooperation among the .. East African co~n~ries, and the. interest in furth~r c?ordination of deve- lopment efforts• it may be especially interest~ng to have a general projec- tion model

whic~

^{can be.}_-applied with a

limited · ~~mber adap~atioris ~o ~11

. . ^: ·. ' . . .

thre_e countries. This would permit standardi!!>ed comparisons of economie

. 1 ( '

structures,. of past _growth,. and of future plans.

Definition and Rationale of the Model

The model is presented systematically in algebraic form in.the Appendix to this chapter. Before, examining i t in detail, ,however, let us note certain general characteristics. First, it is.a sector model distin-.

guishi~g ~ix producing sectors of the economy, seven kinds of imports, two classes .of exports, four f?.rms o.f capital formation, four kinds_ of govern- mept -ta:x;e_s. and certain other variables. Thus i t embodies substantially '

.. ., "

more spe~ific in.formation than a purely aggre_gative_ model but still much less. deta.il than is invol,ved in planning development actions wi thin minis- tries. Second, i~ po~tra~s an economy in whic~ everything dep~nds, by way of the .structu_ral ~~-~ll1;.}onships ~ong i ~s pa~ts,_ upon five autonom~us va.ria- bles: t~e qu_anti ty of agricul tur_al expc;>rts, the priees of those_ exports, the value of manufa~t~r~d ~xports, import substituti~n in manufactured p~oductG

1. Sorne modification~ ·of the generai model may be app~op~iate for use in a · particular country,-or .course. .,C·.~t.; Howe and H. -Karani have appl ied what is :ln many _ways a more refined version of this model to Kenya. See theîr paper, "A Projection Model for the Kenya Economy", East African Economie Review, June, 1965. ·.For the sake of greater comparability-between countries, however, in this monograph 1 .have used the same model for Kenya as for

Uganda and Taniani~. ·

REPRODtJCTION/006:...78 ·

Page 4

and central. government current,expenditu~es .. In particular, it specifies that. required· capital formation is der,ived. wi thin· the. model from-implied increases in dornestic production. 'fhird,_ the parameters-describing the . structural relationships among par_:t~ .o,f ~conomy must eac~:: be,,.p~_?jecte.d ini;o,. , the future. Som~ are assum~d to rernain unchanged or to follow a time-trend,

..

while others ar.e assumed to be adju~table by government policy. Fourth, i t

. . . . . . \

is a linear model; capital formation, though in princi~le n~~-linear~ ls

represent~d by ~ linear approximatlon depending on a teniativ~ initial estimate of rate C?f growth. Thu~ though the algebra is somewhat laborious, it is mathematically simple~ Finally, the model is designed ~o emphasize

.

.

three potential constraints on development expendi'tures and policfes:' the balance of trade, which depends mainly on the various impo.rt parameters';

the governrnent budget surplus or deficit, which depends 'mainly on the tax

. . .

revenue par'ameters; ·and the required saving, which d·epends mainly on the cap1 tal formation parameter·s. ·

The 37 variables of ih~ model are defined in the Iirst section of the Appendix~ and onl~ a f~w points of definition need 'comflent here.

Both import~ .and exports i~~lude interterritorial tra~e, and man~ transfera have _been made among the SITC classes of impor~s to arri_ve at somewhat more hornogeneous import c~tegories._ It is assumed that irnport substitution can affect food, consumer ' manufactures, intermediate goods, and construction materials, but not consumer ~ehicles, fue·i', and equipaeat. .Ligricultural

' • • ~ • \ • .. ... • • : ' • .' • 4 • • •

exports, agricultural product, and GDP are adjusted for changes in priees of

agri- ~ul tu~al e~po~t~

^..

~wh'i'.ch ·c~early

^{are a ;key}

phenomen~n

ⁱⁿ

t~.e

UgaJ1.~a

economy; ·given the ambiguity of information on domestic pric~s and -t;he; lack

. ^. .

of al}y pronouced general p:rice tré-nd 1954-62, however, no -other ·priee adj us-

. ^{. '} . ^{' .} . · .. . ·: .,· . .

ments ·seemed justified.. ·Gqvernment expendi ture and tax reven~e are fï"rst

•adjusted to exclude capital and transfer transacti6ns from the budgeta~y:

. . . -..

. , .. ·... ·r

data. Then the figures for the fiscal year beginning in any calendar year are used in conjunction with production and trade figures for the calendar year, to reflect crudely the lag of cash expenditures behind use of

REPRODUCTION/006-78 Page 5

resources and of revenues behind tax obligations. .â variable which· apl- .. , •:· :·· · pears in many rclationships is private income, defined as· the current.t>··~ ''>~·'i:

value of gross domcstic product less government tax revenue.

The model itself is presented jn the second section of the Appen- dix; there are 11 accounting identities and five autonomous variables, leaving 21 functional equations • . Let us examine the rationale of these functional equations with sorne care.

The gross pr.oduct variables for the various producing secto~s are treated either as functions of particular final demanda, or of private incarne and hence implicitly of consumer spending, or of gross product in other sectors and hence implicitly of intermediate demands. Thus govern-

~ent product and construction product are treated si~ply as proport ions of government current expenditure and construction investment, respecti•

vely. Agrtcultural product, measured in constant priees, is assumed to be a function primarily of the volume ·of agricultural exports, but·also; · .of man~factured exports and import substitution, reflecting agricultural

input~ into manufacturing, and of privete incarne, reflecting domestic consumer demanda. Manufacturing product is of course partly a function of manufactured exporta a~d import s~~stitution, but mainly of private

income.and hence domestic consumer demanda. Services product is. treated as entirely dependent o? private income. Transport pro~uct, on the other hand, is assumed to depend on.intermediate demands stemming from agricul- tural product at constant priee~ and manufacturing product. From the standpoint of methodology,. the fundamental question about the model is whether thes~ simpJified relationships !or the various ~roducing sectors adequately represent the more complex interconnections with final demande

. ' : ... . . . .

and intermediate demanda which actually exist.

. . .-· ' . . ·.-

. The seven import variables are also treated in a vari ety of ways.

, . . . . ~ . .

The three kinds of cons~me~~tm~orts~foo~, ~anufactures and yehiçl~s~are.

. ' 1: . ' . •• .

assumed to be functions simply of private income; the reason.for di~tin~

' . . . . . .

.

. ,. . .

.

. ~ ", ^"'

guishing the three kinds rather than combining them is to permit different

'.:: 't·

·: :

. ' .

RlfRt»WCIIONj006-78 ^{1:. ') •'! : .}

. ^{•' '(} .:. .~.

Page :.)

• . .. .t'

degrees of import substitution in projecting the import parameters. Inter- mediate importa are treated·partly as a function of manuractured exporta and import substitution, reflecting imported inputs directly into manufac- turing, but mainly _o, GDP volume. Fuel importa are related only to GDP volume. Construction Qaterial importa and equipment importa are assumed

' ^.

to depend upon construction investment and equipment investment, respecti-

f

velr; since th~se import parameters are co~paratively high and since the rate of investment in the model varies substantially with the ~~te of

&rowth of GDp, construction and cquipment importa are comparatively varia-

' . .

ble elements o.f the overall import bill. It may be noted that import

!

substitution ,must be esti_matcd independently before the mode! 'is ·used in

. 1 . •

projection, in _the course of specifying the future împort paranîeters; the changes in these parameters then de~ine the import substitution variable, which as we have seen affects manufacturing prdduct, agric~lt~rai produrit, and intermediate importa.

·construction investment and equipment investment, with the break- dawn between.public and private i~v~st~ent handled separately, are in prin-

·cipie functions· of marginal net capital-output ratios tied to increases

in gross product and of retirement coefficients tied to the level o~ gross

...

product. These non-linear functions a.re approximated,.however, by linear functions.: Thus construction investment and equipment investment are ac- tually projected in assumed. ~atio:s to gross _product, the ratios being raised or lowered according to the rate of growth which is expected to resul t from the projection; if. the expe.cted .rate of g~owth should prove to be substantially in ·,error, the .in.vestment parameter~. must be adjusted in a ~econd approximation~ . The 'm~del ,spec~fies that in~e~tment depends, not on GDP for the ·entire economy, but on urban gross produc~, the sum of

Page 7

·;·· . ..: ·· ·. · . .-.. l'r ·· •······) r· :·!~=

gross product in government, manufacturing₉ services and transport. Thus a smal l amount of capital formation in agriculture is ignored-Tanzania figure;s suggest no.t more than ten per cent of the total - but the model prope.rly emphasizes that required investment depends mainly on non- agricultural_expansion.

The four forma of government tax revenue are derived in the mo- dèl from revenue coefficients, in principles set in the tax laws , and appropriate tax base va~iables appearing in _the model. .Export tax reve- nue is treated as a function:of t~e current value of agricultural exi>ort"';.,

. ' "!

revenue thus varies proportionately with changes in quantity, _. but _{. r:.} the revenue coefficient must be adjusted independently for changes in agr~cul-

tural export priees. Customs revenue is treated sirnply as a proportion of the value of imports; the parameter can be, adjusted for changes _ ~n the mix of high-duty and low-duty irnports. Direct tax revenue and indirect

(i.e. excises and all other) tax revenue are related to private inco~~, ,..., . representing the tax base for the former and the presumed influence of consumer demands for the latter; in a projection the two coefficients can be adjusted separately for tax policy changes. 1

. .

Employment is no~ explicitly treated in the aodel as preeented here, but_ could be readily added as a supplementary variable ·o~ variables related to sector gross products, after allowance for trends in produc- tivity per employee.

The third section of the Appendix l ists the parameters of the

~n general th~y can be calculated from observed ratios in the

f . . ..

years 1954-62; in a projection they are either assumed to carry over un-

. .. ^',

~hanged, orto follow a s~mple time-trend, or to"be adjusted as

à

^result

~!-~~~~-~E~~ific policy influence like import substitution.

T wo

·further

t. -A nation~l.acebunting point m~y be noted herc. Customs and indirect -· tax reveàu~ are not included conceptually in GDP at facto~ cost, bui

consti~~te part of the.margin be~ween GDP at factpr ~ost and at_ ~~rket pric~s.· Thus ia principle we sh6uld deduct only dir~ct and export taxes from GDP at factor cost to arrive·at the variable ealled private ineome.

Since the East kfrican statistics do not provide an independent esti- mate of GDP at •arket priees on which to base the model, however; and since changes in customs duties and indirect taxes probably would affect consumer demands out of a given GDP at factor costf I have preferred in the mode! to subtract all taxes to obtain private income. I am in- debted to Brian Van Arkadie for clarifying discussion on this point.

. '

REPRO:OlJ'C'flON/006•78 Page 8

points about certain of the parameters may be noted. The parameters re- pr~senting the direct affect of manufactured exports and ~mport substitu- tion on manufacturing product, agricultural product, and interrnediate im- porta are estirnated roughly from proportions which appear to prevail for

·all manufacturing in the 1961 Kenya Census of Manufacturing. The retire-

ment coefficients for ·construction .and eqtiipment are estirnated ~n the basis of assumed useful lives, past rates of gro~th and past investment rates.

~hese retireme~t coefficients were th~n u~ed with actual gross investœent and ·actual •increasés in urban gross product during the two four-year periods 1954-S8 ·and 1958-62 to calculate marginal capital-output ratios. It was sorne comfort to find that for Uganda and Tanzania the results were not

dis~imilar in the two periods, even though the rate of investment and rate of growth were much lower in 1958-62; Kenya présumably built up even more excese capac1ty than the others in the retardation period1

The last sec.tion of the Appendix sets forth sorne of the algebraic relationships to be u~ed in calculations with the model. The algebra is somewhat simple,., . In the , . . . . endr , as shown . .. . · .. ip the last three reduced form equa- tions for ~DP, government tax revenue, and imports, all of the part~ of the

.,.

model depe~d on the five autonomous variables and linear combinations of the projected pararneters.

The conception of the development process in.East Africa which is embodied in the model has the following major emphases. Variou~ pro- ducing sectors, particularly agric~ltural and non-~gricultura~, .have dif- ferent effects on importa, invest~ent requirements and tax reven~es. Uhot happens domestically is influenced largely though not ent~rely by

1. For Uganda, the~~esults we~e 3.5 ~nd ·4.3 .. for co~str~ction. 1.4 and 1~0

for equi~ment, in the two p~rio~s; tor·:T~nzania, ~.9 ~nd 2~8 . for cons- truction, 1.8 and 1.4 frir :~4uipm~nt, respectively; for Kenya, 2.4 and 3~2 ^for const~uc.ti~n,, ;a,~,~· ~~~~ ljl);~ ^{.45 for} equfpment~ respecfively.

~ •• • ) • 1 • ; • • • • • • • • • : ' • 1 • • •

·' '

·' : ••. ·_z ... ••

1 -~:.

-

_{" 1} ^{·. --· .-. .} REFUOpUCTION/006-78

Page.9

agricultural export quantities and priees. Required capital formation both public and priva te is detennined by the rate of growth· of. dornes tic production, and the import bill is quite sensitive to variations.in ca.~i­

tal formatione Import .substituti9n in manufactures is a prime potentiel

• - J ~ •

source of structural cha,nge. Government dcvelopltient· actions can affect' :· .. _.

. . r ··=·r··.: . ... ^{= ,l} 1

slgnificantly government ·curre~t· expenditure, the share of public ihvest- ment, tax revenue coefficients and the e%tént of· import substitution, but not other structural parameters of the econorny. Finally, progress in development. le Umi ted by one' of thre-e potential constrainta.: the ;Qalance

~ .: • .. 1

of trade, the government budget suz-plus or deficit, and th'e ~a~ing irnpli.ed . by required · c'api tal formation~ ¹

Estimating Future Parameters and Autonomous Variables

Using the mode! to make .. ~ntermediate-tenn projections foJJ deve-

. . ....

lopment pl~nping involves two pr~paratory

.

^{. ..} sets.of-operations: ,estimating the 25 future parameters and proiectirig in~ependeritly the .fivè· autonomous

' "

variables. In ·sorne parts of the model the two .operations ,in.teract ..

l . • .• .•. > • ; • :. : \ ( •

Estimating the future parameters sho~ild in princip.le stick clo- sely to the observed past parame.ters, si nee these are concei ved to repre- sent those ~tructural aspects of the .economy which have a ·continuity bf . their own. :Adjustments of sorne past .parameters may be needed, however, to reflect three kinds of predi~tablé struct~ral change:. simple time ·' trends whi~h are observed in the. data and are compatible with our unders-

' ' ! • ' ; .

tandil)g· of' the economy, changes due to government po licy and expecte<;l al- terations in the growth of those autonomous variables whieh interact with

---~

.

.

^~- . ^~--

1. The fact that the model does not explicitly treat educâted manpower as a potentiel constraint · is-a weakness. Manp_()wer. needs can be examiil'cd, ho- wever, in a supplementary analysis'tied. to the model. See E. R. Rado ànd A. R. Jolly, "The Demand {or Nan power -· I~n East African ·Case study", Jour- nal of De_velopment Studies, f.1arch, 1965. :Bee: also Chapter V~ section·)

on manpdwer~ -~

i "

~ "c ^.i. ,~, ~,~,,., ~wu 'l'tl

Page 10

a few of the parameters.Table 1-V-t presents the observed para~~~etera for Ugauda for the three years 54·58 and 621 , and in the lnet two col~ns the sumed parameters for a 'moderate' projection and ¹ambitious¹ projection to 1981. The rationale for the latter set of parameters will be discus- sed in the next chapter. To illustrate the _procedure, howeyer, let us examine the logic suggested in the table for estimatir~g the future para- meters of the ¹moderate¹ projection.

Table IV~1. Comparison of .A.ct~al U.ganda Parameters 1954-62. and Iu;;sUJ'îed Parameters for ¹~1oderate' and ¹Ambitious¹ Projections

tMo.dera*.e'

(.

'AmJ:>i ti ons ¹

...

1954 1958 1962 projection projection

y" •

, a~ · (assumed) •• • • • • 1.0 1.0 1.0

t . o

^t.o·

a (assumed)

••

^{• • • • .3 .3 .3 o3} _'.t- ^.3

1!12= Pa*-al

..

~a*-a3(Em+8m)/Y: · .118 .0915 .131 . 131:"".: .131

Pg/G .426 • 514 .609 .74Qa . .740a

g =

•• •

^.

. . . .

m2 ( assur.Jed)

.. 0.

^{.5 .5 .5 o5 .6h}

ml= Pm-m2(F.It+Sm)/Y .C829 .0715 ~0649 .0649 .. 0649

s = Ps/Y •• .218 .240 .269 .313a .313 .

.

t = Pt/Pa*•Prn

. ..

^{.0957 .127 .132 .132 .132a}

h = Pk/K

. .

•• ^{0 •} .324 •. 364 .466 .546a .546 .. c1= It'la/Y

. .

••

. .

^{._0512 .0802 0618 .0558b .0309a}

c2= Mm/Y

. .

••

..

^{.165 ·.145 .157 .141b .785f}

c3= Mv/Y • • • •

..

^{.0411 o.0269e .O~:'i1 .0331 .(1331 f}

i3 (assurned)

.. .

^{.2 .2 .2 .2 .th}

il= Mi-i3(Em+Sm)/GDP*

..

^.0187 .0193 .0246 .022tb .0116f i2= Mf/GDP* •• ••

..

^{.0;210 .0241 .0217 .0217 .0217}

jl= Mk/lC .,. _•• .221 .225 .198 .178b .05g .. j2= MqjQ

..

• • .5850 .702 .689 .689 .689

k'= K/U • 0 • 0 .372 . ·.256 .158 .285C .355i q'= Q/U •• •• .196 .180 .135 .215c .245i

Pl~ Kp/K ••

. .

^{.653 .496 .458 .458 .458}

P2:;: Qp/Q • •

..

^{• 0 .891 .926 .944 .944 .944}

rl= Rd/Y

.. .

^{• 0}

..

^{.0398 .. 0496 ~0467 .0467 .0537k}

r2= Re/Ea

. . ..

^{.133 .122 .079.2 .139~ .16j}

r3= Rm/M

.. .. . .

^{• 146 .148 .228 .3o8a .354k .}

r4= Ri/Y

... ^.. .

•• .()78-4 .0787 .0841 .-090à

• io4 k

1:-Paraffiëïërs-ror intervening years were also examined,. but are not ·repro-

<!uced he re.

Notes.

(a) Assumes trend continues.

(b) Assumes 10% import substitution.

•

"".S-

(c) J..ssumes a 7% ayerage annual rate of. ·growth o'f urban gross product, coî.l- pared to about 8% in 1954-58 and 4% ·in 1958-62.

· ( d)' Assumes. 1963 ·parame.ter of .160 will de·cline wi th 1% per year priee fa llo

(e) Copsid~~ed.~nr~pre~ent~ti~e ~n relation to preceding or' following years. ( f) ·Assumes ~~ .• ll.'P<Jr.t subst·i tut ion. ,• ·

(g) Assumes 75~ import substitution.

(h) Assumes shift of 50% of intermediate imports from i3 to m2.

(i) Assumes as first aDproximation a 9% average annual rate of growth cf urban gross produc~.

(j) Assumes export tax rates raised 33%, offsetting 25% decline in priees, giving same effective tax rate as 1963.

(k) Assumes tax rates raised 15% in addition to trends irnplying rise of ~~

for direct taxes, 7% for indirect taxes, 35% for customs duties.

Overall rate rise for all taxes is about 30% including trends.

REF?.ODUCTION/006-78 t Page 11 ^{'.:' .. ~ .}

To begin with, the paramcters al, reflecting the relation between . egrtcultural exporta and agricultural product, both at constant priees, and a3, m2 and i3 reflecting the· direct impacts of manuf,actured e,cports and

.

^'

import substitution, are simply assumed from .independcnt e.vidence, le~ving

certain residuals to be explained by the calculated parameters. Among the six ·gross product parameters ₁ a2, ml:, and t- for agriculture, rna.nufacturing, and transport - show sorne variation over the years 1954-62, but this seems compatible with a presumption of constancy, so the future parametcrs are assumed the same as in 1962. The other gross product parameters, g, s, an.d·. ·h .. - t:o:r. ,government, services, and construction -show a reasonably clear upward time-trend 1954-62₁ and this is understandable as a rise in wages and ·profits relative to material inputs in these sectors, so the future pararneters are projected with a continuing trend.

Among the seven import parameters, c3, i2₁ and j2 - for vehicles, fuef, and equiprnent

a..J.'e

^{preaaAe4 IlOt tc:> be} 8Ubject to fmport substi tution₁ and as the observed parameters•1954-62 ·appear compatible·with this presurn-

ption~ their future values are assumed.to contin~e at t~e 1962 level. On the other hand, cl, c2, il, and jl - for food, consumer manufactures, in- termediate goods, and construction rnaterials are presumed to be ~ubject

to import substitution, and even though this was not reflected in the obser- vations for 1954-62~ a ten p~r cent fall in these coefficients is assurned for the 'moderate' projection. Such a change would depend on appropriate development policies promoting import substitution. in manufact~res, a~d a more refined assumption ough to take account of the specifie policie~

which the government expects to pursue. The value for the i~port substi~u­

tion variable Sm, implied by these. paramet~r: c.ltanges, is .about ~2 •. 3 million at 1962 levels of GDP.

Turning to the four tax revenue par,~et.ers, rl for direct taxes is sim·ply projected at the 1962 fi~ure; des pi te the progressive .structure of the persona! income tax rates, its narrow tax base, ~nd its modest yield

R~l::~GDUCTION/006':"'78

Page 12

relative to business income and graduated persona! taxes, do not seem to imply any significant change in· the direct tax parameter. On the other

,.

hahd; r3 and r4 for customs duties and indirect taxes are assumed to con- tinue to ri se in l i ne wi th the trends obse~ved in th~ calculatcd parame·~'··

ters 1958-62. This of course implics continuing changes in tax rates; it representa a judgment that raising additional revenue from thcse sources is politically and economically a~tr~cti~e, and that future Finance Winis- ters are likely to continue the pattern of behaviour of the recent past.

Finally, r2 for export taxes is estirnated on the basis of assumed eXport priees with present tax rates, which make yields highly elastic with res- pect to priees. Thus largely due to the fluctuation in coffee pr'tcee, the observed r2 parameter fell from about 12 per ce~t

1n

1958 to about 8 per cent in 1962, and then jumped to about 16 per cent in 1 63. The estima- ted future parameter starts from the 1963 level of agricultural export ,priees and assumes an average annual fall of .. 1 per cent from the 1C63

level. · From th.e standpo:_. iP.t o.f- mJ?thodolp.gy:·, .qJle. could· m,ake almost any. as-

·:

. sumption about future tax revenue pararneters, as they are clearly subject to government polie; decision. But it may be especially interesting to examine the budgetary implications of .these icxpected' .tax decisions in a context of resumed expansion of both government expenditure and GDP.

The investment parameters K' and q' -for constrùction and equi- pment, respectively- depend on the rate of growth of'U, ~rban gross pro- duct, and bence in a projection on the tentative initial estimate of this rate of growth derived -from the five autonomous variables. They cannot be estimated simply from past observed para~eters ~nless the past rate of growth is expected to continue unchanged. In the tables the assumption for the 'rnoderate' projection is that U recovers to a rate of growth a little below that of 1954-58, but nearly double that of 1958-62.

The other ·operatiori in using the model for projection is to pro- ject the fiv~ auio~~mous ·v~~iables =on the b~sis of ad hoc considerations.

~gricultural export ~olume, Ea•, depends ~~inly on domestic supply

REPRODUCTION/006-78 Page 13

conditions, and should be checked with past trends; in the ¹modernte' pro- jection a rate of grow.th of 4 per cent per annum is .assurned, which is ap- proxilliately· equal to ·the tren·d from 1949-50 average to ~96.2-63 average. On the cither band, the export priee adjustment, T, depends on world ~ar­

kets; here a decrease of 1 per cent per annum is assumed, which compares with 3 per cent 1954-63 and 0 per cent 1949-50 average to 1962-63 average.

Manufactured exports, Em, should consider both past trends and expected new deYelo~ents; in the circumstances of Uganda the range of products in- volvcd.in manufactured exports is sufficiently narrow that a main-product approach, particularly for copper, is feasible. Government current expen- diture, G, is in principle entirely a policy variable, though in practice it is reasonable to check its trend relative to that.of GDP. F·inally, the import substitution variable, Sm, is derived at the base-year· leve! of GDP from the assumed changes in import coefficients, which depend in principle on the import substitution policies p~rsued; the base-year va- lue must then be projected forward on the basis of the tentative initial estimate of GDP growth.

It is clear that at a number o~ points the two operetions - projecting the autonomous variables and estimating the future para~eters - interact with each other. ' in piadtice, the procedure is fi~st to project the autonomous variables, then to make a tentative iaitial eistiaate of the rate of growth of GDP which will result, based on their trends compared to the past, and then to use this initial estimate in·setting the-pal'ru:Ja-...

.

.

^{,; ,. ,.·}

térs, particularly _{. . ;} for .gross investment~ ·If when _t the project~on.is _{• .} actu_{. .} al- ly calfulated t~is initial estimate of:GDP growth_proves substantially ·in erηor₁ ^. further adjustments in the parameters and a revised ca.lcul~tion

would.have: to be made •

.. .. ...

·. ( .

;

Striiclure• ·oi'' the East· . .ld'ricall Ec-onom;i:es as Expr_es.sed in th~· _{!" ,-o . :} Mode!_{; . .} ." _{: .. :·~ :)}

' '

Once a statistical projection mode! has been -~fi'tted 'wi th¹

dàta ''

REPRODUCTION/006-78 Page 14

1.

for a country's economy' , i t can provide an illuminating picture of the

~conomic structure, either for changes over time or in comparison

.

with

other countries. This structural analysis can b~ carried out.at.three l evels of .. generality: at the lev~l of the principal variables of the model and the broad relattonships among them, at the level of the individual parameters and at the ·level of the reduced-form 'multiplier~' showing the direct and indirect effects ~f· the autonomous variables via t~e entire network of equations and parameters in the mo'del.'

Certain major features. of the t~ree ecdnomies are immediately àpparent in the principal variables pf the model and a few simple ratios arnong them .. These have been.summarise.d in ~eble II-1, ii-2, and II-3, and structural characteristics at this level of·generality have already been discussed in Chapter II.

Much m~re specifie structural comparisons can be made at the level of the .indi vi dual parameters, which a:re presented in Table IV-2 both as cal.culate.d for a recent y·ear and as as·sumed for projections. At the sal!le time, we must be cautions in interpreting individual parameters as calcu- lated, because even though they are conceptoallrlid~ntlbal, differences in definitions and estimating procedu~es~in the three countries' statisti- cal data (partic~larly in the national accounts) introduce varying degrees

• : .!' ^{.• :.: ~-.\ 1". f,'}

---~---

1. I am indebted to a number of people for contributing .to the statistical calculations. For Uganda, Isaiah Kinyenye, 'hen a student at Makerere, carried out much of the ~ata work. For Tanzania,

John

Kinyunyu, ecôno- mist at the Tanzania Directorate

ot

Development Planning, ·offered·extrc- mely valuable help and co-operatian. Noie that although the model wae applied only to Tanganyika, the mainland part of Tànzania~ the new narne is used in this and ~he following chapters. For Kenya, 1 am indebted to

c.w.

^{Howe and H. Karani} (article cited in footnote page 3)for. many of th• data sefiee~ and 'to Ann• Coo~er, · research as&istant at E.~.I.S.R., fer other data work and for fi tti~g the model.: . ·,

,., . ..