The Relationship between Export, Import, Domestic Investment and Economic Growth in Egypt: Empirical Analysis

Abstract

This paper investigates the relationship between exports, imports, domestic investment and economic growth in Egypt. In order to achieve this purpose, annual data for the periods between 1965 and 2015 was tested by using Johansen co-integration analysis of Vector Error Correction Model to explore the long run and the short run relationships between these variables. The empirical results indicate that in the long run domestic investment and exports have negative impact on economic growth, however imports have positive effect on economic growth. In the short run, empirical analyses show that only imports cause economic growth. These findings present the critical situation of Egypt, which requires an entry of urgent economic reforms.

Full text

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The Relationship between Export, Import, Domestic Investment and
Economic Growth in Egypt: Empirical Analysis
Sayef Bakari
1
Abstract: This paper investigates the relationship between exports, imports, domestic investment and economic
growth in Egypt. In order to achieve this purpose, annual data for the periods between 1965 and 2015 was tested
by using Johansen co-integration analysis of Vector Error Correction Model to explore the long run and the
short run relationships between these variables. The empirical results indicate that in the long run domestic
investment and exports have negative impact on economic growth, however imports have positive effect on
economic growth. In the short run, empirical analyses show that only imports cause economic growth. These
findings present the critical situation of Egypt, which requires an entry of urgent economic reforms.
Keywords: Domestic Investment; Export; Import; Economic Growth; VECM; Egypt
JEL Classification: F43
1. Introduction
Generally considered investing in various sectors essential factor in the advancement and accelerating
economic growth, in addition to that, it will help reduce the unemployment rate and realize the well-
being of individuals. It is well known, the proper investment positively affects the high productivity
ratio, which leads in turn to achieve self-sufficiency in the country. With the self-sufficiency of the
country, the proportion of exports going up due to the remaining productivity as a result of this output
rise for investment. Exports of goods and services are seen as an incentive of economic and social
development out of their strength to manipulate economic growth and to reduce poverty. In the other
hand, exports are also a fountain of foreign exchange outflows to transact with imports. Eventually, they
shape a potent ingredient of State revenue through customs duties they may hatch or when they are toted
out by public enterprises. In some situations, imports are seen as substantial instrumentations for foreign
technology and knowledge to ooze the national economy, as new technologies could be integrated into
imports of intermediate goods such as machinery and equipment and labor productivity could rise over
time as workers gain knowledge of the new incarnated technique. Egypt's economy is the most
diversified economies in the Middle East countries, where we found a lot of sectors like agriculture,
industry, tourism and services. The average number of workforce in Egypt, about 26 million people,
according to 2010 estimates, distributed in the service sector increased by 51%, and the agricultural
sector by 32% and the industrial sector by 17%. The country's economy depends mainly on agriculture
and Suez Canal revenues, tourism and taxation, cultural and media production and oil exports. But, and
despite the geographical breadth of its turf and many excellent economic characteristics such as the
enjoyment of a good climate, excellent natural resources and with demand, vast areas of agricultural and
fertile... But she is suffering a lot of economic and social problems. The general objective of this study
is to investigate the relationship among domestic investment, export, import and economic growth in
1
PhD Student, Department of Economics Science, LIEI, Faculty of Economic Sciences and Management of Tunis (FSEGT),
University Of Tunis El Manar, Tunisia, Corresponding author: bakari.sayef@yahoo.fr.

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Egypt. To achieve this objective, the paper is structured as follows. In section 2, we present the review
literature concerning the nexus between domestic investment, export, import and economic growth.
Secondly, we discuss the Methodology Model Specification and data used in this study in Section 3.
Thirdly, Section 4 presents the empirical results as well as the analysis of the findings. Finally, Section
5 is dedicated to our conclusion.
2. Literature Survey
2.1. Trade and Economic Growth
Among the studies that have shown that an expansion of trade has a significant positive impact on
economic growth are Michaely, (1977); Balassa, (1978, 1989 & 1995); Rahman (1993); Savvides,
(1995); Edward, (1998); Ram, (1987). On the other hand, others have concluded that the positive
relationship between international trade and economic growth does not exist during certain periods for
certain countries (Tyler (1981), Helleiner (1986), Ahmad and Kwan (1991).
Table 1. Empirical studies concerns the nexus between exports, imports and economic growth
No
Authors
Country
Methodology
Results
Period
1
Azeez et al (2014)
Nigeria
OLS
X => Y (+)
2000 - 2012
M => Y (+)
2
Zaheer et al (2014)
Pakistan
Cointegration Analysis
X => Y: LR (+)
2000 - 2010
VECM
M => Y: LR (-)
X => Y: SR (+)
X # M: LR and SR
3
Adeleye et al (2015)
Nigeria
OLS
X => Y: LR (+)
1988 - 2012
Cointegration Analysis
M => Y: LR (-)
ECM
X # M: LR and SR
4
Andrews (2015)
Liberia
Cointegration Analysis
M <=> Y (+)
1970 - 2011
Granger Causality Tests
X => M (+)
5
Gokmenoglu et al (2015)
Pakistan
Cointegration Analysis
X # Y
1967 - 2013
Granger Causality Tests
Y => M (+)
M => X (+)
6
Hussaini et al (2015)
India
Cointegration Analysis
X <=> Y (+)
1980 - 2013
VECM
M <=> Y (+)
Granger Causality Tests
X => M (+)
7
Tahir et al (2015)
Pakistan
Cointegration Analysis
M => Y: LR (-)
1977 - 2013
ARDL
M => Y: SR (-)
ECM
8
Albiman and Suleiman
(2016)
Malaysia
Cointegration Analysis
X => M (+)
1967 - 2010
VAR
Granger Causality Tests
9
Riyath and Jahfer (2016)
Sri Lanka
Cointegration Analysis
X => Y: LR (+)
1962 - 2015
VECM
M => Y: LR (-)
Granger Causality Tests
X => Y: SR (+)
M # Y: SR
M # X: LR and SR
10
Bakari and Krit (2017)
Mauritania
Cointegration Analysis
X => Y: LR (+)
1960 - 2015
VECM
M # Y: LR
Granger Causality Tests
M <=> Y: SR (+)
11
Bakari and Mabrouki
(2017)
Panama
Cointegration Analysis
X => Y: (+)
1980 - 2015
VAR
M=> Y: (+)
Granger Causality Tests

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12
Berasaluce and Romero
(2017)
Korea
Cointegration Analysis
M <=> Y: (+)
1980 - 2016
VECM
X # Y
Granger Causality Tests
13
Chaudhry et al (2017)
Pakistan
Cointegration Analysis
X <=> M: (+)
1948 - 2013
ARDL
VECM
Granger Causality Tests
14
Faisal et al (2017)
Saudi Arabia
ARDL
X => Y: (+)
1968 - 2014
Granger Causality Tests
M # Y
15
Ofeh and Muandzevara
(2017)
Cameroon
Correlation Analysis
X => Y: (+)
1980 - 2013
OLS
M => Y: (-)
Note: X means Exports, M means Imports, Y means Economic Growth, LR means Long Run, SR means Short
Run, (+) means Positive Effect and (-) means Negative Effect.
2.2. Domestic Investment and Economic Growth
Obtainable literature, including recent extensions of the neo-classical growth model as well as the
theories of endogenous growth has emphasized the role of domestic investment in economic growth.
Among these studies we can cite Romer (1986); Lucas (1988); Barro (1991); Rebelo (1991); Fischer
(1993). Other studies prove that domestic investment may not necessarily have a favorable impact on
economic growth Khan (1996); Devarajan (1996) and among others.
Table 2. Empirical studies concerns the nexus between domestic investment and economic growth
No
Authors
Country
Methodology
Results
Period
1.
Altaee et al (2016)
Saudi Arabia
ARDL
DI => Y: LR (+)
1980 - 2014
ECM
DI => Y: SR (+)
2.
Andrew and Bothwell (2016)
South Africa
cointegration analysis
DI <=> Y: LR (-)
1994 - 2014
VECM
DI <= Y: SR (+)
Granger Causality Tests
3.
Pegkas and Tsamadias (2016)
Greece
cointegration analysis
DI => Y: SR (+)
1970 - 2012
VECM
DI => Y: LR (+)
4.
Adams et al (2017)
Senegal
ARDL
DI => Y: LR (+)
1970 - 2014
5.
Bakari (2017a)
Gabon
Cointegration Analysis
DI => Y: LR (-)
1980 - 2015
ECM
DI => Y: SR (+)
6.
Bakari (2017b)
Malaysia
Cointegration Analysis
DI => Y: LR (+)
1960 - 2015
ECM
DI # Y: SR
7.
Bakari (2017c)
Sudan
Cointegration Analysis
DI # Y: LR
1976 - 2015
ECM
DI <= Y: SR (+)
8.
Epaphra and Mwakalasya (2017)
Tanzania
OLS
DI => Y (+)
1990 - 2015
9.
Idenyi et al (2017)
Nigeria
ARDL
DI => Y: SR (+)
1986 - 2016
Granger Causality Test
10.
Keho (2017)
Cote D'Ivoire
ARDL
DI <=> Y: LR
(+)
1965 - 2014
Granger Causality Tests
DI <=> Y: SR (+)
11.
Khobai et al (2017)
South Africa
Cointegration Analysis
DI => Y: LR (+)
1985 - 2014
ARDL
DI # Y: SR
12.
Jibiry and Abdu (2017)
Nigeria
Cointegration Analysis
DI # Y: LR
1970 - 2014
VECM
DI <= Y: SR (+)
Granger Causality Test
13
Mbulawa (2017)
Botswana
OLS
DI => Y (+)

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1985 - 2015
VECM
14
Sahoo and Sethi (2017)
India
Cointegration Analysis
DI => Y: LR (+)
1990 - 2014
VECM
DI <=> Y: SR (+)
Granger Causality Test
15
Siddique et al (2017)
Pakistan
ARDL
DI # Y
1975 - 2015
Note: DI means Domestic Investment, Y means Economic Growth, LR means Long Run, SR means Short Run,
(+) means Positive Effect and (-) means Negative Effect.
3. Data, Methodology and Model Specification
The analysis used in this study cover annual time series of 1965 to 2015 which should be sufficient to
capture the relation between Export, Import, domestic investment and economic growth in Egypt. All
data set are taken from World Development Indicators 2016. We will use the most appropriate method
which consists firstly of determining the degree of integration of each variable. If the variables are all
integrated in level, we apply an estimate based on a linear regression. On the other hand, if the variables
are all integrated into the first difference, we will use the model of Sims. When the variables are
integrated in the first difference we will examine and determine the cointegration between the variables,
if the cointegration test indicates the absence of cointegration relation, we will use the model VAR. If
the cointegration test indicates the presence of a cointegration relation between the different variables
studied, the model VECM will be used. The augmented production function including domestic
investment, exports and imports is expressed as:
  󰇛  󰇜 (1)
Where Y, DI, X, and M depict, respectively real GDP growth, real domestic investment, real exports,
and real imports
Generally, the equation of the production function is written as follows:
   (2)
The returns to scale are enclosed with domestic investment, exports and imports which are exposed
by, and  respectively. In addition “A” denotes the level of technology involved in the country
and which is feigned to be constant.
All the series are relocated into logarithms in order to process linear the nonlinear form of Cobb–Douglas
production. The Cobb–Douglas production function is carved in linear functional form as follows:
Log (󰇜  󰇛󰇜  󰇛󰇜  󰇛󰇜  󰇛󰇜   (3)
The linear model acting the influence of Domestic investment, exports and imports on economic
growth after maintaining technology constant can be recorded as follows:
Log (󰇜   󰇛󰇜  󰇛󰇜  󰇛󰇜   (4)
Where  is error term and  is time index.

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4. Empirical Analysis
4.1. Test for Unit Root
To determine the order of integration of each of the variables studied in our study, stationarity tests are
generally applied. In our case we will practice the most adopted test in the analysis of time series which
is the Augmented Dickey- Fuller test (1979).
Table 3. Test for unit root ADF
Null Hypothesis: D(Log(Y)) has a unit root
Augmented Dickey-Fuller test statistic
t-Statistic
Prob.*
-5.801350
0.0000
Test critical values:
1% level
-3.571310
5% level
-2.922449
10% level
-2.599224
Null Hypothesis: D(Log(DI)) has a unit root
Augmented Dickey-Fuller test statistic
t-Statistic
Prob.*
-4.836677
0.0002
Test critical values:
1% level
-3.571310
5% level
-2.922449
10% level
-2.599224
Null Hypothesis: D(Log(X)) has a unit root
Augmented Dickey-Fuller test statistic
t-Statistic
Prob.*
-6.013662
0.0000
Test critical values:
1% level
-3.571310
5% level
-2.922449
10% level
-2.599224
Null Hypothesis: D(Log(M)) has a unit root
Augmented Dickey-Fuller test statistic
t-Statistic
Prob.*
-5.842016
0.0000
Test critical values:
1% level
²-3.571310
5% level
-2.922449
10% level
-2.599224
The application of the ADF test proves that all the variables are stationary in the same order and exactly
in the first difference.
4.2. Lag Order Selection
The selection of the number of the lag is very important role in the conception of a VAR model. This
lag length is often selected tapping a fixed statistical criterion such as the HQ, FPE, AIC or SIC.
Table 4. Lag order selection
VAR Lag Order Selection Criteria
Lag
Log L
LR
FPE
AIC
SC
HQ
0
-79.04177
NA
0.000403
3.53
3.69
3.59
1
124.2674
363.3610*
1.40e-07*
-4.43*
-3.64*
-4.14*
2
135.9789
18.93
1.70e-07
-4.25
-2.83
-3.72
3
142.3685
9.24
2.67e-07
-3.84
-1.79
-3.07
4
154.8941
15.9
3.34e-07
-3.69
-1.02
-2.69

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* indicates lag order selected by the criterion. LR: sequential modified LR test statistic (each test at 5% level).
FPE: Final prediction error. AIC: Akaike information criterion. SC: Schwarz information criterion. HQ: Hannan-
Quinn information criterion.
It is very clear according to the results of the table above that all the criterion of selection of the number
of the retired show that the number of the optimal delays in our model is equal to 1.
4.3. Cointegration Analysis
As soon as the order of integration and the number of delays are determined. We will go directly to the
next step which consists in determining the verification of a cointegration or non-cointegration relation
between the different variables in our econometric analysis. In this situation, the Johanson test is applied,
which is the most efficient, including the determination of the number of cointegrated equations.
Table 5. Johanson test
Unrestricted Cointegration Rank Test (Trace)
Hypothesized No. of CE(s)
Eigenvalue
Trace Statistic
0.05 Critical Value
Prob.**
None *
0.500173
91.48151
47.85613
0.0000
At most 1 *
0.429652
58.19380
29.79707
0.0000
At most 2 *
0.353612
31.24138
15.49471
0.0001
At most 3 *
0.193060
10.29629
3.841466
0.0013
Trace test indicates 4 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
the analysis of cointegration proves the existence of four cointegration relations in this case we will
apply an estimate based on the VECM model, which will determine the relationship between domestic
investments, exports, imports and economic growth in the long run and the short run.
4.4. VECM Estimations
On the basis of the unit root and cointegration test outcomes, the following Vector Error-Correction
Model (VECM) is anticipated to fulfill the nature of the short-run and long-run relationships between
the variables. VECMs representations would have the following form, in equations:
󰇛󰇛󰇜󰇜  󰇛󰇜  󰇛󰇛󰇛󰇜󰇜    󰇛󰇛󰇜󰇜    󰇛󰇛󰇜󰇜
  󰇛󰇛󰇜󰇜 󰇜 󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜  󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜
󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜 󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜 󰇛󰇜 (5)
󰇛󰇛󰇜󰇜  󰇛󰇜  󰇛󰇛󰇛󰇜󰇜    󰇛󰇛󰇜󰇜    󰇛󰇛󰇜󰇜
  󰇛󰇛󰇜󰇜 󰇜 󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜  󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜
󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜 󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜 󰇛󰇜 (6)
󰇛󰇛󰇜󰇜  󰇛󰇜  󰇛󰇛󰇛󰇜󰇜   󰇛󰇛󰇜󰇜   󰇛󰇛󰇜󰇜
  󰇛󰇛󰇜󰇜 󰇜 󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜 󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜
󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜 󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜 󰇛󰇜 (7)
󰇛󰇛󰇜󰇜  󰇛󰇜  󰇛󰇛󰇛󰇜󰇜    󰇛󰇛󰇜󰇜    󰇛󰇛󰇜󰇜
  󰇛󰇛󰇜󰇜 󰇜 󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜 󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜
󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜 󰇛󰇜  󰇛󰇛󰇛󰇜󰇜󰇜 󰇛󰇜 (8)

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Table 6. VECM results
Independent Variables
Y
Dependent variables
DI
X
M
Y
-
0.2554
0.6135
0.2439
DI
0.1570
-
0.5984
0.6823
X
0.3545
0.1912
-
0.5738
M
0.0018
0.9012
0.4397
-
Lagged ECT
[-0.2665*]
[-0.0466]
[0.1334]
[1.020]
The results of VECM estimation show that there is only unidirectional causality relation from imports
to economic growth in the short run. However in the long run, we can see that domestic investment and
exports have negative effect on economic growth but we can see that imports have positive effect on
economic growth.
5. Conclusion
This paper is one of very few studies that have empirically analyzed the relationship between domestic
investment, exports, imports and economic growth in a large country rich in natural and human resources
in Egypt during the period 1965 - 2015. The properties of the unit root of the data were closely observed
using the Augmented Dickey Fuller (ADF) test after the cointegration and the error correction vector
model was performed. The empirical results show that all variables are stationary in the first differences.
The application of the cointegration test indicates the existence of co-integration relations, which
obviously forces us to apply the vector model of error correction. The estimation of our model shows
that in the long term, domestic investment and exports negatively affect economic growth. However, in
the short term, imports lead to economic growth. The security chaos and the continuation of terrorist
acts carried a message to the world that Egypt is not on the path of stability, which led to heavy losses
in investment in the tourism sector, causing a lot of bankrupt tourism projects. Other reason for this is
hindered by the scarcity of land, poor infrastructure, lack of electricity and industrial drainage networks,
and the bureaucracy in extracting project licenses for various sectors of investment, industrial, tourism
or residential. Government bureaucracy is also one of the most serious investment hurdles in Egypt. It
is characterized by tedious routine and complex procedures that are only useful in delaying and
complicating transactions. In light of the high population, most of these obstacles and problems make it
impossible for local investment to achieve prosperity and economic growth. As for exports, it also
suffers from many obstacles, including reasons related to the political and economic turmoil in the
surrounding countries, which is one of the most important countries that export the Egyptian state's
production, as well as the low exchange rates of the most important and largest countries. In addition,
the non-compliance with specifications and standards and procedures of quality control and high
production costs compared to developed countries because of the low level of technology and
productivity in Egypt and the high level of competition in international markets. There are also reasons
for the policies of the state that negatively affect the economies of operation as expressed by the
complaints of exporting companies, such as the high cost of storage, transport and shipping, the
bureaucracy in the work procedures, slow decision making, and the lack of full data to the regulatory
and government bodies to help them make sound decisions, imports for up to a month, which delays
meet the needs of factories, high fines for containers and land, and the accumulation of goods. For
imports, the situation is very different, because it has a positive impact on long-term and short-term
economic growth. This is simply explained by the content of these imports, which carry equipment
developed and advanced technological machinery commonly used in production, which encourages
investment by its ability to produce more at low costs and in short time frames. Egypt's economy is

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characterized by extreme diversity. The economy is based on different pillars of agriculture, industry,
tourism and services. The main element of the economy is agriculture, followed by Suez Canal income,
taxation, tourism, and remittances of workers abroad. The Egyptian economy has gone through many
stages, which cannot be mentioned, but Egypt's economic philosophy has changed from one regime to
another. It has been behind the socialist system and once again it is behind the capitalist system and once
again feels that the economy was without an identity. A great deal of corruption and randomness in
taking a lot of economic decisions and as a result of directing a lot of attention to the service activity,
tourism and media and the total neglect of the agricultural sector, the Egyptian economy is in a critical
situation and Egypt has become importing almost 90% of wheat, the Egyptian invasion, and in light of
the global inflation and the global economic crisis and in the absence of social support just for the poor
in Egypt has become the people of Egypt is suffering severe suffering. The Egyptian countries should
reconsider economic policies by seeking to secure and stimulate national capital to invest in the
homeland by achieving security and security for it and protecting it from extortion and aggression by
bribery, nepotism, bureaucracy and unfair taxation and giving it more incentives. In addition, officials
should enact investment strategies that seek to preserve the natural resources and resources from all
forms of abuse and exploitation, and to activate their control systems. These resources include: Nile
water, sea water, mineral wealth, agricultural and desert land, waterways, Protect those wealth. Finally,
the country must exploit its population inflation to strengthen investment and economic growth and
apply a rule: not gain without effort, and effort without gain.
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