Price Competitiveness and Variability in Egyptian Cotton: Effects of Sectoral and Economy-wide Policies

This paper examines the role of price incentives in the observed decline in cotton production in Egypt during the 1980s and in the apparent improvement in recent years. The following determinants (in an accounting sense) of the changes in the relative producer price of cotton during 1980-92 are quantified: (1) changes in the foreign price; (2) changes in the real exchange rate; and (3) changes in nominal protection. An estimated model of the real exchange rate for Egypt is used to provide a further decomposition of the changes in the relative cotton price that isolates the effect of policy-related factors. The comparative effects of sectoral and economy-wide policies are analysed based on three alternative policy regimes in terms of the average price and variability of annual price levels over the period 1971-92. Government interventions are found to reduce both the long-run price incentive and short-run price variability in Egyptian cotton, sectoral policies having a more significant role than economy-wide policies.