Do Political Instability and Military Expenditure Undermine Economic Growth in Egypt? Evidence from the ARDL Approach

ABSTRACT

Previous studies have investigated the relationship between political instability and economic growth separately from the relationship between military expenditure and economic growth. Besides, they did not cover the period after 2011 (i.e. the Arab Spring and its consequences). Therefore, this paper attempts to empirically analyze the long-run and short-run impacts of both political instability and military expenditure on economic growth in Egypt. We estimate the autoregressive distributed lag (ARDL) approach using data on the Egyptian economy over the period 1982–2018. For the robustness of our results, we use the fully modified ordinary least squares (FMOLS) estimator. Results of the ARDL approach indicate a significant negative relationship between political instability and economic growth in both the long-run and short-run. Contrarily, military expenditure has an insignificant impact on economic growth, especially in the long-run. These results are confirmed by the FMOLS estimator. Moreover, the estimated coefficient on the one-period lagged error correction term (ECT_t-1) indicates that deviations from the long-run equilibrium relationship are corrected within a year.

KEYWORDS:

• Economic growth
• political instability
• military expenditure
• structural breaks
• ARDL
• FMOLS

Acknowledgments

We would like to express our gratitude to the two anonymous referees for their constructive and valuable ‎comments, which improved the article.

Disclosure of potential conflicts of interest

No potential conflict of interest was reported by the author(s).

Notes

1. Alesina et al. (1996) and Gyimah-Brempong and Traynor (1999) define political instability as those events that create a state of uncertainty which results in the tendency of the ruling political system and/or the government to collapse.

2. The Appendix provides further details about the Egyptian growth experience over the study period.

3. Mankiw, Romer, and Weil (1992) distinguish between labor force (L) and the effective labor force (A.L). Similarly, Romer (1990) distinguishes between unskilled labor (L), which used only in producing final output, and skilled labor (H) used in both producing final output (H_Y) and research (H_A).

4. Regarding the study of economic growth determinants, economists often differentiate, among other models, between two types of models: (1) the neoclassical growth models (Solow model) and (2) the endogenous growth models (the AK growth models and R&D-based growth models). For specifying whether the Solow model or the endogenous one fits the data, Cuñado, Gil‐Alana, and de Gracia (2009) and Jones (1995) indicate that if the GDP’s proxy is stationary at level, I(0), whereas the regressor of interest become stationary after the first difference, I(1), we can say that permanent changes in the regressor lead to temporary effects on the steady-state growth rates. Therefore, there is evidence in favor of the Solow model.

5. These variables will be defined in the next section.

6. As illustrated in the next sub-section.

7. The Appendix provides further details about the Egyptian growth experience over the study period.

8. The lowest values for the AIC, SBC, and HQ are 11.651, 13.518, and 12.296, respectively.

9. Results are available upon request from the authors.