Three essays on the Egyptian economy

In the present work, we show the results of three empirical studies conducted on the Egyptian economy. Our aim is to add a contribution to some fields of research where the debate is still open and the results are yet inconclusive. Indeed, according to the economic theory, higher levels of education and openness should have a positive effect on GDP. Surprisingly, the econometric studies do not always support the theory and furthermore give contradictory results. The implementation of more sophisticated econometric techniques sheds lights to the limits of previous works, thus suggesting that one of the main causes for unconvincing results may be the choice of an inappropriate econometric approach. Following such critics, Chapter 2 and Chapter 3 of this work deal with the effects of openness on GDP and implement two recent approaches to cointegration developed by Luetkepohl and by Pesaran et al respectively. In Chapter 1 we have instead studied the effects of education on GDP within the framework of a standard production function, though including an error correction term to account for long term effects. This work belongs to the field of studies conducted on time series, and therefore focuses on a single country with the purpose of accounting for country-specific variables or events that otherwise could not be included when dealing with cross-country data. Although Egypt and the neighbouring countries belonging to the so-called MENA region are quite ignored, in the recent decades they have implemented significant reforms, also with the support of international organization such as the IMF. Thus, we think that Egypt is an excellent case study to assess the effectiveness of the policies recommended by the economic theory. The first reform in chronological order was adopted in the 1960s to reach the goal of “free basic education for all”. It was then improved in the 1980s with the introduction of compulsory attendance at the preparatory level. In the 1990s the Government supported the shift of enrollments towards the vocational secondary school, in order to meet the firms’ needs. These two latter reforms seem to have reached the goal of increasing the productivity expressed as GDP per worker. Sure enough, we have found that the improvement of the quality of human capital in terms of average years of education had a positive effect on GDP per worker. It must be recognized that such result would not have been achieved without the first reform of the 1960s that paved the way to the subsequent reforms. Again in the 1990s, the IMF supported Egypt in a Structural Reforms Programme (ERSAP) that called for a progressive liberalization of trade and for more incentives to FDI. Although we might be able to assess a positive effect of trade on GDP when the time series is extended to a longer time period, at present our results support the opposite Growth-led Export (GLE) hypothesis. The analysis focused on trade with the European Union shows instead a bidirectional relationship. Yet, imports are fundamental for the assessment of such causal relationships. This suggests that Egypt could gain if she will be able to enhance her role of transformer of intermediate goods. With regard to FDI, we have not been able to detect any significant positive relationship from FDI to GDP. Egypt implemented important reforms in order to attract foreign investments, particularly she eased the legislation on labour and the bureaucratic procedures needed to establish a new enterprise. Thus, the country seems to be already prepared to attract FDI, and indeed they have increased significantly in the recent years. Unfortunately, they are mainly concentrated in the oil sector (about 80% of total FDI according to recent data from the Egyptian Central Bank), that is under strict governmental control, while the investors are multinational firms. In such a situation, the foreign investments do not seem to provide the expected widespread effects in terms of inflows of managerial skills or higher productivity of the local workforce. Yet, the country still has to deal with high levels of corruption, little transparency and accountability of the public sector. Although excluded by the analysis, the recent political events since 2011 have introduced an additional element of perceived instability, that will probably further affect negatively the attractiveness of the country for foreign investments in the coming years.