Following the Egyptian revolution in January 2011, the need for a new development approach has become essential. That is development with a human face. This study aims to contribute to the discussion on sustainable economic growth in Egypt by examining the interdependence of inclusive governance, economic and social inclusion, through empirically assessing the relationship between governance indicators and economic growth in Egypt. The study applied a vector error correction model (VECM) to assess the causal relationship between the two key variables, using Worldwide Governance Indicators (WGI) from the World Bank and economic indicators from Economic Intelligent Unit (EIU) database over the period 1996-2016. The results show that the Egyptian economy suffered during the study period from a significant decrease in the level of governance. The analysis indicated that most of the governance indicators have a causal relationship with economic growth except corruption control, while economic growth has a positive effect and contributes to the development of political stability and regulatory quality. The paper concludes that appropriate initiatives and efficient governance could play a significant role in influencing economic growth in Egypt. This is consistent with previous studies on the impact of institutions on economic growth and development. However, these results need further investigation to determine additional key variables that influence the growth of GDP in Egypt.
Egypt still suffers from numerous economic problems despite its development process starting several years back. In the 1990s and 2000s, the economic growth implications and attempts to reform, in addition to the emergence of a new development model was obvious [
Following the revolution, the need for a new development model has become essential, where issues of stability are not only addressed from a security aspect. It has been argued that a nation such as Egypt needs a new developmental approach that is capable of transforming the enormous potential and natural resources of the country into an inclusive growth base that respects human rights, reduces poverty, creates decent work opportunities and views social expenditure as a real investment in the future [
Over the last few years, economists have dedicated increasing attention to the impacts of political institutions and issues of governance in the process of economic growth. The burgeoning research on the topic has indicated a widespread consensus in that economic performance is not always warranted by economic features alone, but it is often formed by the political and institutional environment in which economic enterprises take place [
According to Globerman and Shapiro [
The rest of the paper is organised as follows: the second section is a brief overview of previous related studies, while Section 3 presents the methodology and model specification. Section 4 discusses the results of the analyses, with the last section concentrating on conclusions and policy implications.
Governance has its roots in the word “govern” and is usually thought of as “government” though it transcends the latter owing to its complexity and as a universal force existing in all societies. Governance is used to manage human interaction and activities with several realities of the term ranging from related notions such as state governance, corporate governance, local governance, global governance, etc. [
The United Nations Development Programme [
There are numerous theories of governance and development stemming from various disciplines in the social sciences, as well as from interdisciplinary perspectives. Overall, there are three main economic schools of thought on the role of governance in development (with several sub-schools of thought within each school] [
The first school of thought centres around shaping the governance and development agenda with a focus on key features and characteristics of a “successful society”. In other words, what key characteristics of governance in developed countries should be imitated, emulated or adapted by developing countries. The second school is informed by the interpretation of the dynamics of the relationship between governance and economic growth not only from increases in per capita income perspective but also enhanced governance is viewed to be at the heart of the development puzzle [
However, the common feature in these three schools of thought is that institutions do matter. Yet, the differences in each theory also lie in the perspectives on, as well as the context and approach to, institutions, societies and the dynamics of development progress. The current research argues that these schools complement each other in highlighting the role of governance and institutions in development. Moreover, the three schools describe the new institutional economics theory from strategies and operation levels. In other words, it presents the action plans for how societies transfer from basic level of resource allocation and employment to social embeddedness level in terms of the four levels of social analysis.
Empirically, numerous studies in the literature have assessed the role of institutions in economic development. The main conclusion that has emerged is that governance is positive and statistically significant determinant of economic growth [
Although the relationship between governance and economic growth is well documented, the positive associations are insufficient for establishing the direction of causality between the two variables because the cross-section nature of the technique employed in the literature does not allow different countries to exhibit different patterns of causality [
The first systematic study of causality between institutions and growth using time series analysis was conducted by Chong and Calderon [
Furthermore, some studies have used panel data analysis. For example, Lee and Kim [
Following these studies, this paper examines factors that boost economic growth in the Arab spring countries through verifying the nature of the causal relationship between governance and economic growth in Egypt. This is important given the limited studies in the Arab world and the recent Arab Spring, which was underpinned by the poor governance in those countries.
The study applied a combination of analytical and econometric methods to assess the indicators of Worldwide Governance Indicators (WGI) from World Bank and economic indicators from Intelligent Economic Unit (EIU) database over the period 1996 to 2016. The analyses also examine the trends and directions of the indicators, as well as correlations between them, and determine causation relationship between governance and economic growth.
A vector error correction model (VECM) is applied to assess the causal relationship between governance and economic growth following the study by Law et al. [
Governance indicators measure the state of governance in a country and are often narrowed down to specific characteristics such as levels of corruption, human rights, civil and political liberties. Until recently, obtaining quantitative measures for any characteristics of governance was impossible, and not a trivial matter as several of these characteristics are, in principle, multidimensional [
The World Governance Indicators dataset developed by World Bank researchers is the most comprehensive dataset on governance because it is an aggregation of a wide variety of data on 250 measures from 25 separate data sources including the Freedom House’s civil liberties and political rights indices, and the ICRG [
The aggregated WGI are measured in two ways: in the standard normal units of the governance indicator, ranging from −2.5 to 2.5. These six dimensions of governance should not, however, be thought of as being somehow independent of each other. One might reasonably think for example that better accountability mechanisms lead to less corruption, or that a more effective government can provide a better regulatory environment, or that respect for the rule of law leads to fairer processes for selecting and replacing governments and less abuse of public office for private gain [
Based on Appendix 1 and figures in Appendix 3,
CC | VA | RL | RQ | PS | GE | GDP Growth | |
---|---|---|---|---|---|---|---|
Mean | −0.59 | −1.05 | −0.20 | −0.42 | −0.76 | −0.46 | 4.40 |
Median | −0.62 | −1.08 | −0.11 | −0.41 | −0.63 | −0.39 | 4.37 |
Maximum | −0.41 | −0.77 | 0.02 | −0.05 | 0.05 | −0.22 | 7.16 |
Minimum | −0.78 | −1.23 | −0.66 | −0.92 | −1.64 | −0.88 | 1.78 |
Std. Dev. | 0.11 | 0.14 | 0.24 | 0.23 | 0.56 | 0.21 | 1.62 |
Skewness | −0.10 | 0.37 | −0.81 | −0.58 | −0.27 | −0.77 | 0.12 |
Kurtosis | 2.11 | 1.77 | 2.15 | 2.71 | 1.86 | 2.31 | 2.13 |
Sum | −12.42 | −22.00 | −4.19 | −8.92 | −15.89 | −9.63 | 92.34 |
Observations | 21 | 21 | 21 | 21 | 21 | 21 | 21 |
Source: Author.
Governance Indicators | 1996 | 2000 | 2005 | 2010 | 2016 |
---|---|---|---|---|---|
Voice and Accountability* | −0.88 | −0.79 | −0.95 | −1.15 | −1.23 |
Political Stability * | −0.58 | −0.01 | −0.65 | −0.91 | −1.42 |
Government Effectiveness* | −0.21 | −0.16 | −0.39 | −0.38 | −0.66 |
Regulatory Quality | 0.01 | −0.35 | −0.41 | −0.16 | −0.92 |
Rule of Law* | 0.05 | −0.01 | 0.03 | −0.12 | −0.41 |
Control of Corruption* | −0.07 | −0.39 | −0.52 | −0.55 | −0.63 |
Source: World Bank (2017). *The variable is significant to change as a function of time (P-Value <0.05) VA = 0.011, PA = 0.002, GE = 0.002, RL = 0.001, CC = 0.000, while RQ is insignificant = 0.57.
of the six governance indicators for Egypt over 1996 and 2016. Voice and Accountability started with a score of −0.88 in 1996 and continued to improve until it reached the highest score −0.74 in 2012 after the only free presidential election in the country but fell again ending with a score of −1.23 in 2016. Political Stability and Absence of Violence improved from −0.58 to −0.01 in 2000 and then started deteriorating until it reached −1.42 in 2016. Government Effectiveness started with a score of −0.21 in 1996 and improved slightly to −0.16 in 2000, deteriorated up to 2005, remained steady until 2010 with a score of −0.38, but deteriorating further reaching −0.66 in 2016. Regulatory Quality started with 0.01 in 1996 then decreased until it reached −0.41 in 2005, after that it showed a dramatic fall to −0.92 in 2016. Similarly, Rule of Law fluctuated between 0.05 and −0.01 between 1996 and 2000, improved between 2001 and 2005, but decrease after 2010 until it reached −0.41 in 2016. Lastly, Control of Corruption started with −0.07 in 1996 and fluctuated within the same negative index reaching −0.63 in 2016.
These indicators confirm that although economic underdevelopment was one of the causes of the Egyptian uprising in 2011, state corruption and mismanagement were the real reasons behind this underdevelopment. For instance, in 1990's when Egypt attempted to implement the structural reform program to liberalise its economy, the privatisation processes did not create a sustainable economic growth that could serve as the new beginning of legitimacy for the regime. Alternatively, poorly designed and inadequately implemented market reforms led to increased incidence of corruption and socioeconomic inequality, including creating a new class of super-wealthy entrepreneurs [
Remarkably, no changes were noticed in relation to the trend of all indicators after 2011, except a slight improvement in the rule of law and government effectiveness indicators, although to a much lesser extent than before 2011. However, six years since the revolution in 2011, the route to the modern democratic state in Egypt is filled with obstacles. The civil uprising could not resolve the problem related to alleged corrupt institutions and aspects of the former regime.
The root of this failure is strongly related to Mubarak’s era (1981-2011), during which Egyptians were deprived of their basic political rights. The emergency law had been imposed all the time, associated with an absence of pluralism, political freedom and freedom of expression and protest [
As mentioned earlier, ADF and PP tests are carried out to assess if the data is integrated of the same order. The following table shows the results of the ADF and PP tests. Based on the results all variables are non-stationary at the level but are stationary at 5% level of significance in the first difference. The exceptions are for GE and VA, which according to the results of PP in
Granger Causality is carried out to test the causal relationships between governance indicators and growth GDP (see Appendix 2). The results as summarised in
VA | PV | GE | RQ | RL | CC | |
---|---|---|---|---|---|---|
GDP Growth | −0.150 | 0.488* | 0.474* | 0.437* | 0.358* | −0.320 |
Note: *Denote significant at 5% level.
ADF | PP | ||||
---|---|---|---|---|---|
At Level | First Difference | At Level | First Difference | ||
GDPG | t-Statistic | −2.685 | −4.061 | −1.807 | −4.0623 |
Prob | 0.1008 | 0.0304 | 0.3634 | 0.0304 | |
CC | t-Statistic | −2.1767 | −4.4572 | −2.6052 | −9.0891 |
Prob | 0.2209 | 0.0157 | 0.1123 | 0.0000 | |
GE | t-Statistic | −3.3221 | −2.0968 | −1.1638 | −1.9037 |
Prob | 0.1004 | 0.0384 | 0.8831 | 0.0566 | |
PV | t-Statistic | −3.1889 | −2.6840 | −2.2523 | −2.6579 |
Prob | 0.1262 | 0.0110 | 0.4329 | 0.0117 | |
RL | t-Statistic | −2.5010 | −3.4913 | −0.1931 | −2.6038 |
Prob | 0.3227 | 0.0251 | 0.9214 | 0.0131 | |
RQ | t-Statistic | −2.1711 | −2.4012 | −2.3857 | −2.3177 |
Prob | 0.2231 | 0.0203 | 0.1605 | 0.0242 | |
VA | t-Statistic | −1.6505 | −2.0663 | −1.6509 | −1.9058 |
Prob | 0.4356 | 0.0408 | 0.4354 | 0.0564 |
Source: Author using EViews 8 (see also Appendix 1).
VA | PS | GE | RQ | RL | CC | |
---|---|---|---|---|---|---|
GGDP | ≠ |
Notes: X Y indicates X Granger causes Y. X Y implies that X and Y Granger cause one another or a feedback relationship. X ≠ Y indicates X does not cause Y. Source: Summary of Appendix 2.
As the GDP per capita increases, the wealth per individual also grows. This will improve the citizen’s access to financial and other resources to cover the essentials of life such as education and health, and help to enhance their standard of living. It would also create more political awareness and increase the number of participants in governmental elections, in addition to higher demand for more rights and freedom. These issues would not get the needed attention if people can barely cover the minimum standard of living.
This paper has empirically tested how the quality of governance explains economic growth in Egypt over the period 1996 and 2016. It has provided some justification for linking development problems to a crisis of governance and the current emphasis on strengthening the performance of governance in combating poverty. The Egyptian economy has suffered during the study period from a significant decrease in the level of governance, which has appeared in all the governance indicator scores. In addition, the analysis of the direction of indicators has shown a further deterioration of these indicators over time. This has negatively affected the rate of economic growth. Thus, the Egyptian economy has been under considerable pressure in the wake of its revolution.
Regarding the correlation relationship between governance and economic growth in Egypt, most of the governance indicators were associated positively with indices of economic growth except control of corruption and voice and accountability. The causality relationship tested has shown that most governance indicators cause economic growth, except corruption control variable, while economic growth has a positive effect and contributed to development based on political stability and regulatory quality indicators. These results are consistent with those of Chong and Calderon [
In conclusion, the study confirms that suitable initiatives and efficient governance could play a significant role in influencing economic growth in Egypt, which is consistent with previous studies on the impact of institutions on economic growth and development. That governance leads to enhanced economic activities, and improved economic performance also promotes institutional quality. The study confirmed a positive relationship between the level of institutions and economic growth in Egypt. A higher level of governance is associated with a higher level of economic growth. Similarly, a higher level of political rights and civil liberties stimulates investment and economic growth. However, these results need further investigation to determine why corruption control variable does not cause growth and what other variables cause GDP growth in Egypt.
The author would like to thank his PhD supervisor Associate Professor James Benhin for his unwavering support and assistance. The author also wishes to thank Dr Sherine Shawky from the Social Research Center at American University in Cairo for her valuable suggestions and discussions, and the anonymous reviewers for their very constructive comments on the paper.
Abdelbary, I. (2018) Governance Matters and Economic Growth: Beyond the Egyptian Revolution. Theoretical Economics Letters, 8, 741-754. https://doi.org/10.4236/tel.2018.84051
*constant 2010 US$. Source: World Bank, (2017).
Appendix 2. Granger Causality Test Results on Error Correction Models (ECM)Note: Values represent Chi-sq statistics and *denote significance at 5% level. Source: Author using EViews 8.
Appendix 3: Trend of Governance Indicators in Egypt (1996-2016)(a) Voice and Accountability (VA) & Political Stability and Absence of Violence/Terrorism (PV).
(b) Government Effectiveness (GE) & Regulatory Quality (RQ).
(c) Rule of Law (RL) & Control of Corruption (CC).