Testing the Structural Empirical Dynamics of the Economic Growth Path of Egypt, 1950-1997

The objective of this research is to model and test aggregate production functions on the Egyptian economy and to analyze the effect of physical and human capital formation on the economic growth path of Egypt, using a vector-autoregressive (VAR) structural econometric approach. Economic data from 1950 to 1997 have been tested for unit roots, orders of integration, auto-regressive distributed lags, growth causation, weak & strong exogeneity, and co-integration, using a general to specific modeling technique. An error correction model utilizing all growth causation factors was estimated and tested using a model typology of simple dynamic systems. Factor inputs (physical capital, labor, human capital, and technological progress) and structural macroeconomic factors (inflation shifts and exchange rate adjustments) have been analyzed within a dynamic distributed lag system (ADL). Three inter-dependent models resulted in a nested VAR system describing the economy's balanced growth path: a conditional ADL model for long-run growth, a short-run co-integration model describing marginal rates of substitution, and a marginal model describing learning by doing effects in technology. The dynamics of the nested system show that the economy behaves with a relatively constant marginal rate of substitution between factor inputs and with production isoquants correlated with inflation, but these behavioral conditions are neither necessary nor sufficient for balanced sustainable growth. The solved long-run solution shows decreasing returns to scale in production, with quasiconcave output with respect to physical capital accumulation and strict concavity of output with respect to human capital formation, significant but weak learning-by-doing effects, positive output returns for primary-school educational attainment and expenditures, and negative returns for post-primary educational attainment, and the aggregate savings rate shown to follow a random walk process with no drift. Human capital was found to be a weakly exogenous factor to short-run output while maintaining a causal effect to long-run income. The allocative efficiency of physical capital accumulation along with marginal learning-by-doing effects in technology were shown to be the two significant driving forces to the growth of real income. Speeds of adjustments towards equilibrium levels show relatively high speeds of adjustment for physical capital with human capital shown to cyclically diverge from its equilibrium path. Among the different policy recommendations discussed, one policy target proposed has been to foster local competitiveness for capital-intensive technological innovations which can shift the economy‟s resource capacity constraint onto a higher welfare-enhancing production-possibilities frontier, for a more sustainable growth path for the economy.