Institutional governance priorities to foster exports in Egypt

Abstract

Purpose

The paper studies types and mechanisms of vertical and horizontal multilevel institutional governance (IG) (multilevel governance [MLG]). The relation with exports is reviewed and quantified to attempt prioritizing institutional reforms fostering merchandise exports in Egypt.

Design/methodology/approach

The paper studies data (from 1996 till 2020) to estimate impact of IG on Egyptian merchandise exports using two autoregressive distributed lag (ARDL) models: to test the World Governance Index (WGI) composite index, followed by its main indicators; and to determine governance priorities in Egypt. “Institutional” approach is adopted to assess mechanisms boosting Egyptian exports. Design comprises three sections – (1) conceptual and literature review, (2) main MLG mechanisms and (3) key findings of empirical results – to find out which institutional reforms enhance exports competitiveness in Egypt.

Findings

Among MLG different levels of governance, the macro level is highly related to boosting exports competitiveness. Institutional differentials between countries and regions affect competitive edge. In Egypt, results show that IG priorities that could foster exports are the rule of law, regulatory quality, government effectiveness and political stability and absence of violence.

Practical implications

By adopting IG mechanisms, i.e. legislative, organizational and digital; and instruments, e.g. National Single Window, Time Release Standards and others, Egyptian exports could reach new heights.

Originality/value

Exports competitiveness does not rely solely on monetary and fiscal factors; IG dynamics could be more important in Egypt. ARDL model for Egyptian merchandise exports using WGI 2021 dataset.

Citation

Abulata, N.N. (2024), "Institutional governance priorities to foster exports in Egypt", Review of Economics and Political Science, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/REPS-03-2021-0032

1. Introduction

Although the paper highlights different types of multilevel institutional governance (IG) (multilevel governance [MLG]), comprising micro, macro and regional/global levels, it focuses on the macro level to assist in enhancing competitiveness and exports growth. The paper aims to study the relationship between IG and merchandise exports, with special emphasis on Egypt, especially in the aftermath of the global pandemic. Hence, it is divided into three main sections. The first gives a synopsis on the conceptual framework and literature review. The second studies main mechanisms and tools of IG to boost export competitiveness, related to legislative, procedural and digital/quality infrastructure in Egypt. Then the third sheds light on empirical results and attempts to answer the question, which institutional priorities would increase exports competitiveness in Egypt?

2. Conceptual and literature review of institutional governance and exports

2.1 A. Definitions and types of multilevel governance

In spite of gaining much recognition and momentum since the end of the twentieth century, the rhetoric and definition of IG has not reached a global consensus. Its various legal, economic and developmental perspectives confirm that there is no one size fits all, as well. Nevertheless, “Encyclopedia of Governance” attempted to take forward strides to augment multidisciplinary aspects into the so called MLG. It is defined as “increased vertical dependence of actors at different levels and growing horizontal interdependence between stakeholders” (Bevir, 2007). Figure 1 illustrates the three main MLG vertical tiers, namely, micro, macro and regional/global levels.

• 1. MLG on the micro level. It is related to management oversight in private and state-owned enterprises (SOEs), in accordance to the Organization of Economic Cooperation and Development (OECD) Corporate Governance Principles and SOE Guidelines, issued in 2004 and 2005, respectively, and updated in 2019 in collaboration with G20 countries. It is worth noting despite the importance of the micro level; however, the paper focuses on the macro level for more comprehensive national exports competitiveness.

• 2. MLG on the macro level. Sometimes it is referred to as State/Public Governance, related to legislative, regulatory and procedural framework affecting operations and competitiveness of economic agents. Public Governance balances between (1) central vs decentral/local agencies, (2) revenues vs expenditures and (3) national vs international policies and vectors. It overlooks Local Governance, concerned with efficiency of decentralized procedures, infrastructures and services on geographic spectrum (Goss, 2001). Another type is called Joint Governance, in intersection with Public Governance: related to public private collaboration, nationwide. In 2019, the OECD has updated Public Governance principles to cater for maximizing value addition, fighting corruption, fostering public and private operations and thus enhancing national competitiveness at large (OECD, 2020a).

• 3. MLG on the regional and global levels. It is connected to Market Governance due to increasing international transactions and global/regional value chains. Hurdles facing exports may arise due to incompatibilities of legal, organizational and technological structures between countries and regions. Therefore, similar IG frameworks among countries would decrease time, costs and transactions uncertainties (Awan and Usman, 2015). Thus, Global Governance relies on numerous institutional instruments, e.g. conventions and treaties stipulations, arbitration and dispute settlements, international laws and codes of conduct … etc (Global Governance, 2020). In that respect, international organizations direct ample attention to MLG, namely, the OECD, World Trade Organization (WTO), World Customs Organization, International Trade Center (ITC), UN Commission on International Trade Law and others in order to assist countries to become at par with international practices boosting exports competitiveness. Therefore, WTO Trade Facilitation Agreement (TFA) highly commends countries to implement National/Regional Single Windows (NSW/RSW), Authorized Economic Operators (AEO), Mutual Recognition Agreements (MRAs), Advanced Cargo Information Systems (ACI), Time Release Standards (TRS) and other trade facilitation and exports enhancement instruments (OECD-WTO, 2019).

Noteworthy, the aforementioned MLG types are arranged in a vertical chronological order. Horizontal levels are observed between peer institutions, e.g. central banks, supervisory authorities, ministries, local municipalities and so forth. To sum up, MLG comprises three dimensions: (1) centralized vs decentralized, (2) state vs society/stakeholders and (3) national vs regional/international (Piattoni, 2009). In this context, the OECD adopted MLG mechanisms to assist countries implementing their national strategies. Figure 2 illustrates vertical and horizontal MLG levels and frameworks, e.g. political, fiscal and administrative, which are crucial in developing nationwide reform policies (OECD, 2017).

• 4. Institutional governance (IG). A relatively new terminology, defined as the general framework incorporating public and private governance types and mechanisms, aims to achieve enhanced competitive targets and value addition. It is a fusion between political economy and strategic management perspectives. Therefore, it strikes a balance between state intervention, market forces, integrated value chains and stakeholders through four main governance types: corporate governance, market governance, state governance and joint governance, as shown in Figure 3 (Griffiths and Zammuto, 2005).

IG systems vary among corporations, industries, countries and regions in accordance to paces and stages of legislative, regulatory and technological reforms (Pavan et al., 2018). It augments and overarches various types and levels of governance. Thus, IG is rapidly gaining recognition to enhance national competitiveness.

2.2 B. The relation between institutional governance and exports

This section sheds light on literature review of IG and exports on the macro level. Therefore, some theories are reviewed, i.e. contractual relations, transactions cost, information asymmetry and control of corruption, all of which directly affect exports procedures and competitiveness.

1. General framework. Nobel Laureate D. North, a pioneer in institutionalism, has affirmed the relationship between governance and its impacts on costs and exports competitiveness (North, 1990). Scholars emphasized the positive causality between IG and exports. It increases certainty and efficiency of the rule of law and decreases legal disputes and costs, thus boosting competitiveness (Iwanow, 2008; De Groot et al., 2005). On the contrary, some researchers questioned magnitude and direction of relation stating it could be mutual and not one-sided direction. The more complex and diversified exports would induce more sophisticated institutions. Others pointed to traditional factors that are vital to competitiveness, e.g. monetary, fiscal … etc (Álvarez et al., 2018). Hence, a consensus has not been reached, and debates between proponents and opponents of relationship direction still stand.

2. Contractual relations theory. Stemming from literature mainstream, the theory is concerned with the degree of contractual and legal compliance exerted by interconnected economic agents (Williamson, 1979). Institutional tools, e.g. rules, regulations, intellectual property rights, are considered important for exports competitiveness and market access. Coupled with instruments such as dispute settlements, arbitrations and others can mitigate contractual failures (Ranjan and Lee, 2007). It is worth mentioning that with the more intricate exports structure and the more engagement in local and global value chains, the need arises for stronger institutions and more efficient rule of law to ensure compliance of various exporting contractual forms.

3. Transactions costs theory. Linked to agency problem and theory of the firm, it examines different kinds of internal, external, formal and informal costs. It strikes a balance between expenses and revenues for profitability, competitiveness and market share (Williamson, 1979; Ranjan and Lee, 2007). Exporting would include internal administrative costs on firm level, production costs on domestic level and logistics costs on external level with trade partners. In-country costs diverge according to laws, regulations, readiness and operability of domestic infrastructure and logistics. Its negative effects could be dangerous in losing the competitive advantage in foreign markets. Scholars highlighted that good governance structures decrease costs of economic transactions, on the local and macro levels, thus improving national exports competitiveness in global markets (Anderson and Gatignon, 1986).

4. Transparency and information theory. Researchers pointed out that lack of transparency, incomplete market data and information asymmetry heavily hinder exporters' ability to acquire data in a timely and efficient manner to penetrate marketplaces. Also, if exporting countries give inaccurate or misleading information regarding products and compliance specifications, their reputation would be tarnished in global markets. Moreover, in less developed countries, weak institutions affect returns on exports which could face profit skimming by some influential economic agents, due to fable information infrastructure, while in developed countries, efficiently transparent and strong competent institutions would cater for more exports profitability and value addition (Levchenko, 2007; Aoki, 2000).

2.3 C. Determinants of exports competitiveness related to institutional governance

Historically, international trade theories evolved from Smith to Ricardo, Heckscher-Ohlin, Samuelson and others. Theories studied comparative advantage, opportunity costs and production factors differentials. Monetary, fiscal and technological aspects were introduced, supplemented by the New Trade Theory and New Economic Geography by Krugman. With upsurges of transactions on international arena, institutional mechanisms were emphasized. Intangible institutional factors (e.g. regulations, procedures, rule of law … etc.) and tangible ones (e.g. infrastructure, roads, ports … etc.) require effective national roles to foster exports competitiveness (Krugman, 1991; Kuznar, 2017).

Scholars iterate despite the importance of monetary and fiscal policies on exports performance, yet the “Institutional Factor” is of mounting significance, which impacts competitiveness (Parrinello, 2000). With rapid evolution of logistical and technological factors, ample strides by governments to develop institutional setups are imperative (Gaglio, 2015). Institutional determinants affecting exports comprise rule of law, regulatory quality, control of corruption, political stability, transparency mechanisms and others. Therefore, reform measures could differ between developed and developing countries, in accordance to various institutional readiness and developments (Álvarez et al., 2018; Gaglio, 2015; Krammer et al., 2017).

Important determinants fostering exports are the rule of law and regulatory quality including compliance tools of NTMs, which increases confidence in the business environment (Li et al., 2013). Sila (2016) analyzed the impact of IG on exports in East African countries during 1996–2014, relying on composite the World Governance Index (WGI) index and its six main indicators, to assess their effects on exports. Results indicate that the rule of law followed by regulatory quality have the most positive significance on exports. An increase in WGI composite by 1% increases exports by 4.5%. Efobi and Osabuohien (2016) measured the impact of regulatory quality on manufactured exports in 76 countries during 2000–2012, using gravity model and WGI indicators. Results showed exports growth is mostly affected by regulatory quality, infrastructure and trade facilitation, by 9–11%, 8% and 5%, respectively. Well-functioning logistics and quality infrastructure, e.g. ports, laboratories … etc., would boost exportation competitiveness.

The above are coupled with government effectiveness in implementing policies affecting exports, e.g. promotion strategies, sectorial and geographic exports development funds (Majid and Aulakh, 2012). State interventions have enormous influence on exporting sectors; hence, if agricultural or manufacturing is more exportable than services, then incentives ought to be directed to priority sectors. Institutional determinants play an important role in exports of economic complexity, e.g. engineering, electronics, chemicals … etc., especially in local/global value chains. Moreover, government effectiveness overlooks sustainable development standards and procedures to ensure that production and exportation processes are at par with internationally competitive best practices. Fanta (2011) stated that institutional differences between trade partners are favoring developed exporting countries. He studied WGI indicators to measure institutional quality, using the gravity model for 55 countries in the EU, USA and COMESA. Results indicated that countries of a similar institutional setup trade more among themselves than others. Each WGI indicator has a positive impact on exports, but the most influential is government effectiveness, which increases exports by 24% on average. Other studies highlighted good governance and control of corruption as important institutional determinants fostering exports competitiveness (De Groot et al., 2005; Fanta, 2011). Political stability is another determinant affecting regional/global value chains and related logistics. In cases of insurgences, exports routes could be hindered, putting extra burdens on costs and products diversity, which could result in severe detrimental effects on exportation flows and national competitiveness (CEPAL Organization, 2011).

3. Mechanisms boosting Egyptian merchandise exports

3.1 A. overview

In conjunction with MLG and institutional determinants, there are various mechanisms identified by international organizations to boost exports competitiveness, e.g., legislative, logistical, digital … etc. This part gives an overview of Egyptian merchandise exports and then highlights some institutional mechanisms affecting it. Despite economic, fiscal and monetary reforms carried over the past 3 decades, modest performance of merchandise exports has never been able to breakthrough beyond the level of US$30bn. Although it increased from US$3.3bn in 1993/1994 to the highest historical point of US$29.4bn in 2007/2008 and recently to US$28.7bn in 2020/2021 (CBE, 2021), in relative terms, as a percent of GDP, it has declined sharply from 18% to 9% over the years 2007/2008 compared to 2020/2021, respectively. Moreover, Egyptian merchandise exports to GDP is one of the lowest in the MENA region, compared to Jordan, Turkey, Morocco, KSA, Tunisia, Kuwait, Oman and the UAE, which recorded 19%, 23.7%, 24%, 33%, 38.5%, 48%, 51% and 92%, respectively (WB, 2021a).

In Egypt, limited exports spikes were connected to some institutional reforms, i.e. regulatory quality, government effectiveness, political stability and others, examples of which are (a) the issuance of Export Development Law 155/2002, Export and Import Executive Regulations 770/2005, Customs Law(s) 10/2006 and 207/2020; (b) the adoption of Export Promotion Strategies during the years 2001, 2005 and 2016–2020 (which slowed down by the pandemic) and (c) the inauguration of Egyptian NSW for Trade (NSW) in 2021, as shown on the timeline of Figure 4.

3.2 B. Legislative and regulatory mechanisms

Globally, effects of legislative barriers on trade and exports could be more harmful than tariff barriers. Therefore, legislative and regulatory are among the most important IG mechanisms. In this context, the OECD extensively promotes the adoption of regulatory impact assessment (RIA) which evaluates the impact of legislative reforms on economic, social, environmental and others at the macro level. Legislative reforms directly result in decreased time, costs and the number of procedures related to exportation process, thus boosting profitability, competitiveness and aggregate value addition (OECD, 2012). In line with national RIAs, there are domestic RIAs streamlining stipulations at the local level to avoid inconsistencies between border agencies. Domestic RIAs are vital for exports in value chains to avert unnecessary delays or costs at governorates. Unfortunately, RIAs are of limited prevalence in countries; with the exception of European Union Smart Legislations assessing impact trade in value added, goods and services, EU intratrade and exports (OECD, 2016, 2018). Legislative and regulatory mechanisms are pivotal for IG and exports setups and could be represented by “Rule of Law” and “Regulatory Quality” dimensions in WB WGI.

Nationally, for Egypt, over the years, legislative and regulatory mechanisms faced challenges regarding masses of overlapping trade laws and provisions, incompetent interpretations and sluggish enactments, e.g. MOF decrees no. 256/2015 reducing number of exports documents and no. 40/2017 regarding the Single Administrative Document, have consumed extensive time span to get into implementation (TPR, 2018; EEG, 2021). On the other hand, to overcome such legislative impediments, exports-related laws have been issued recently, on top of which is Customs Law 207/2020 and Executive Regulations 430/2021, aiming to strike a balance between trade facilitation and control and setting legalities of the new Egyptian Single Window (Nafeza), Advanced Cargo Information System (ACI), Trader Identification card (ACI-ID) and AEO, in order to foster Egyptian exports at fast tracks on international trade lanes (MOF, 2021).

It would be too early to evaluate the impact of such regulatory developments on exports competitiveness, especially in the aftermath of the global pandemic. Nevertheless, it is recommended to resume reforms of other tools which were not tackled in recent legislations, e.g. abolishing mandatory exports statistical forms, digitizing certificates of origin, enhancing exports appeal committees, setting stipulations of TRS and carrying out the multilevel RIAs to assess the impact of new legislative reforms on the macro and local levels in Egypt.

3.3 C. Organizational and procedural mechanisms

Governments and supervisory authorities ought to cater for conducive exports environment, through enhancing organizational and procedural mechanisms at the country level. In that respect, international organizations have launched numerous global agreements and initiatives, which are directly related to trade facilitation and IG determinants, on top of which, WTO TFA has come into force in 2016 to encourage member countries to develop such mechanisms, which are of institutional-related rather than tariff-related aspects. The WTO-WB Trade Facilitation Support Program assists governments to carry out modern expedited procedures, e.g. exports customs clearance, transparency of information and costs, risks management … etc. Those mechanisms are achieved by balancing streamlined procedures on the national level and enhanced cooperation among authorities on regional and global levels (OECD-WTO, 2019).

In the same context, organizational and procedural mechanisms related to non-tariff measures (NTMs) can severely affect exports competitiveness. Thus, in 2019, the UNCTAD issued the new NTMs International Classification, comprising exports-related instruments, e.g.: pricing, quotas, sanitary and phytosanitary, technical/non-technical barriers to trade, licensing, certification and others. NTMs could be associated with corruption, cumbersome delays and extra unforeseen costs. Accordingly, those instruments ought to be used with extra diligence by national authorities to maintain exports competitive edge and ability in crossing national borders, leave alone foreign ones. It is worth noting that during global pandemic, over 80 countries have imposed temporary NTM restrictions on their exports, mostly on agricultural and medical products, hence putting more pressure on fragile economies in Africa, Latin America and South Asia. Governments gradually lessened those restraints to avoid markets distortions in global value chains (WTO, 2020). Expedited NTM facilitation strides and accelerated procedures, e.g. “green corridors,” are urged for faster exports lanes to overcome effects of pandemic (ICC, 2020).

In Egypt, organizational setup is as important as legislative and regulatory ones. Studies show, similar to other developing countries, excess usage of NTMs is embedded in the Egyptian culture and could severely affect exports competitiveness. Evidence is shown in modest trade volumes of Egyptian and African countries (Ghali et al., 2013; Njuguna, 2013). Nevertheless, lessening NTMs would lower costs and increase Egyptian merchandise exports by 30% (Maskus and Konan, 1997). In that respect, ITC has carried out NTM survey in Egypt for 900 exporting companies, studying technical and non-technical barriers to trade. Results indicated, for industrial exports, that 30% of impediments related to licensing and certificates of origin, conformity assessment, laboratories, certification … etc., especially in engineering and chemicals sectors. For agricultural exports, 40% of NTMs obstacles are related more to technical barriers, e.g. SPS, testing, residuals … etc., carried in a prolonged manner, thus harming mostly perishable food exports. The survey stated that there were 465 procedures in Egypt, 25% of which are related to Customs Authority, followed by the General Organization for Import and Export Control (GOEIC) at 17%; and then Quarantine Authorities at Ministries of Agriculture at 9%, Health at 5% and others (ITC, 2016).

Some incidents were highlighted by export councils and businessmen associations that contradicting interpretations of NTMs might occur and thus procedures could differ from one customs zone to another. Some exporters also indicated that in addition to official costs, there are unofficial ones as well (Expolink, 2021; EEG, 2021). Those observations could be categorized under IG dimension in WGI “Control of Corruption” and “Regulatory Quality”. To overcome some organizational impediments, Egyptian authorities announced a number of procedures to foster exports competitiveness, e.g. Prime Minister decree 3053/2019 concerning joint inspection committees at ports, GOEIC allowing on-site inspection at premises, certification, and others additionally.

3.4 D. Digital and quality infrastructure mechanisms

• 1. Digital mechanisms are important pivots in implementation of IG vectors, which have been accelerated to face hurdles of the pandemic (WTO, 2021). It is concerned with digital connectivity and platforms, which are crucial for faster exports procedures to diminish time and costs. It is carried out through connectivity between (i) Government [G]: supervisory authorities, (ii) Business [B]: service providers and (iii) Customers [C], in the forms of G-2-G, G-2-B/B-2-G, B-2-C/C-2-B, respectively, for boosting agility and competitiveness. The importance of digital and technological infrastructure in exportation processes has been emphasized by the WTO, UNIDO and OECD.

Digital reform measures in trade would get TRS into new competitive heights. Thus, an increasing number of countries, signatory to WTO-TFA, have pledged adoption of innovative digital mechanisms, platforms and instruments, on top of which is the implementation of (NSW) inside countries as important building blocks to RSW for digital connectivity globally (OECD-WTO, 2019; OECD, 2020b).

In Egypt, the main challenges include (1) availability of technological infrastructure, (2) institutional transformation into paperless activities and (3) spatial digital divide between geographic areas nationwide (NMI, 2019). To overcome those hurdles, the Ministry of Communication and Information Technology (MCIT) has launched digital initiatives and reforms, e.g. cashless payments, electronic tokens and others, to enhance the fast-growing technological sector, marking 17% on average annual growth (MCIT, 2020).

On another note, as per Prime Ministerial decree, the Ministry of Finance in collaboration with other stakeholders has adopted NSW in Egypt. Digital connectivity of ports has been completed in Alexandria, Damietta and Sokna ports in 2021; other ports would be finalized in 2022. Moreover, the AEO system has certified around 125 operators to assist in fostering Egyptian exports in international fast tracks. AEO developments are being carried out to include more traders and exporters in Customs “White Lists”, via emphasis on more MRAs with main trading partners. In that respect, targeted digital connectivity is carried out with Agadir countries, EU and some African countries (e.g. Uganda, Burundi, Tanzania, Rwanda, Kenya and others, MOF, 2021) (COMCEC, 2018).

• 2. Infrastructure mechanisms are divided into two types: (a) quality infrastructure and (b) logistics infrastructure. Sound institutional quality infrastructure requires certification, accreditation, standardization, harmonization, market surveillance, notification bodies, conformity assessment and compliance standards to become at par with international best practices. On the other hand, establishment of well-connected logistics infrastructure, including renovated domestic roads, maritime and aviation ports, is imperative. Studies show that in some Latin American countries as a result of infrastructure improvement, transportation costs decreased by 10%; consequently, national exports increased between 10 and 15%, on average. In addition, a well-developed logistical infrastructure network would cater for a diversified exports base, e.g. engineering, agro-industries and others, especially if those sectors are connected to local, regional and global value chains (Blyde and Iberti, 2014; Helmy et al., 2018).

For Egyptian logistical infrastructure, there are limitations in inland transportation vehicles, docking and dwelling of vessels and handling and loading of consignments, which put extra costs on exporters (EEG, 2021). Hence, Egypt’s rank has declined in WB Logistics Performance Indicator (LPI) from 49 to 67 out of 190 countries, comparing years 2016 and 2018, respectively (LPI, 2020). In order to face such hurdles, reforms are being carried out, e.g. establishing logistics areas dedicated for production and exportation at the Suez Economic Zone, inaugurating shipping lines from Alexandria Port to European maritime ports North and to African dry and river ports South. Alexandria Port, which is handling almost two-thirds of Egyptian trade, has implemented a new initiative “Just-in-Time” (JIT) by the end of 2020, in order to allow vessels to directly go to docking stations and hence decrease waiting time outside port. Furthermore, the Ministry of Transportation has announced some related initiatives, i.e. exports services directory, disclosure of routes and costs of shipping agencies and others, to enable exporters to take the right and timely decisions for their consignments (MOT, 2021).

4. Methodology and empirical results

4.1 A. Related international indicators

IG indices are important, making reforms measurable and internationally comparable, e.g. WGI, which measures six main indicators within the country [1] and is concerned with effective implementation of policies (WB, 2021b). Some empirical studies relied on WGI to determine reform priorities, indicating OECD countries are the highest adopting governance, followed by Asian, Latin American, MENA and African countries. OECD members focus on political stability, voice and accountability, regulatory quality and rule of law. While MENA emphasizes regulatory and governmental procedures, Africa is the least in control of corruption and rule of law reforms (ADB, 2019). A consensus has not been reached on optimal prioritization globally. Others, i.e. International Country Risk Guide, consist of political, economic and financial risk indicators. OECD Trade Facilitation Indicators (TFIs) measure trade simplification aspects. WB LPI examines customs timeliness and logistical competence.

In this paper, it was opted to use WGI data to grasp overall effects of IG ambiance on merchandise exports in Egypt on a macro level, rather than using TFI nor LPI, only capturing specific aspects of customs and supervisory authorities' impact on exports. On another note, despite awareness of criticism regarding WGI data, multicolinearity, endogeneity and others. Nevertheless, those indicators are widely used by most empirical studies and international reports as the main proxies of IG measurements from legislative, political, economic or institutional perspectives.

4.2 B. Methodology

The paper aims to estimate the impact of IG on Egyptian merchandise exports. This association is given in the form of a linear empirical model that can be specified as

(1)lnEXPt=ß0+ß1lnGovernt+ß2lnSkillt+ß3lnGDPt+ß4lnREERt+ß5lnRWXt+et

where (ln) represents natural logarithm, (EXP) denotes Egyptian merchandise exports, (Govern) represents Governance composite index (WGI), (Skill) denotes the Human Capital Index (HCI), (GDP) is Gross Domestic Product in Egypt, (REER) represents Real Effective Exchange Rate, (RWX) denotes rest of the world exports and (e_t) is the error term. autoregressive distributed lag (ARDL) model is expressed as follows:

(2)∆lnEXPt=ß0+∑i=1Pß1i∆lnGovernt+∑i=1Pß2i∆lnSkillt+∑i=1Pß3i∆lnGDPt+∑i=1Pß4i∆lnREERt+∑i=1Pß5i∆lnRWXt+ß6lnGovernt−1+ß7lnSkillt−1+ß8lnGDPt−1+ß9lnREERt−1+ß10lnRWXt−1+ƟlnEXPt−1+∑i=1PƟ1i∆lnEXPt+et

F-test is of joint significance of lagged variables coefficients to verify long-term relation. Null hypothesis of no long-term association is tested. The decision of (H_o) is based on the following conditions: If value of F-test ˃ upper critical bound, then reject (H_o) and variables are co-integrated. If value of F-test˂ lower critical bound, then accept (H_o) and variables are not co-integrated. The error correction model (ECM) for estimation of the short-run linkages can be formulated as follows:

(3)∆lnEXPt=ß0+∑i=1Pß1i∆lnGovernt+∑i=1Pß2i∆lnSkillt+∑i=1Pß3i∆lnGDPt+∑i=1Pß4i∆lnREERt+∑i=1Pß5i∆lnRWXt+α1ECTt−1+et

Statistically significant and negative sign of (ECT_t-1) coefficient (α1) imply any short-run disequilibrium among dependent and independent variables will converge back to the long-term equilibrium relationship.

A further step is taken in order to attempt determining IG priorities. Therefore, another model is carried out to estimate impact of the six main indicators on Egyptian merchandise exports. This association is given as a linear empirical model that can be specified as follows:

(4)∆lnEXPt=ß0+ß1lnVAt+ß2lnPSAVt+ß3lnGEt+ß4lnRQt+ß5lnRoLt+ß6lnCoCt+ß7lnSkillt+ß8lnGDPt+ß9lnREERt+ß10lnRWXt+et

This model is in line with equation (1), yet the six main indicators replace WGI composite, where (VA) denotes voice and accountability, (PSAV) represents political stability and absence of violence, (GE) is government effectiveness, (RQ) denotes regulatory quality, (RoL) represents rule of law, (CoC) denotes control of corruption and (e_t) denotes the error term. Also, ARDL model and the ECM for the six WGI indicators are in line with equation (3).

4.3 C. Data sources and descriptive statistics

The paper studies data time series over the period 1996 to 2020. Quarterly data of Egyptian and World exports in (US$) and Real Effective Exchange Rate are from IMF database. Gross domestic product of Egypt is from the Ministry of Planning and Economic Development, using deflator to convert to dollars. HCI is based on years of schooling from Penn World Tables. Governance composite index and its main indicators are sourced from the WB–WGI database.

Appendix 1 shows descriptive statistics during 1996–2020, stemming from quarterly series, indicating the mean of Egyptian exports is US$11.5bn, varied between US$3.9bn and US$21.3bn and standard deviation US$6bn. HCI measures the quality of human resources in Egypt; when it increases, exports would increase. Its mean is 2.25 years of schooling, varying between 1.85 and 2.67 years. GDP measures the strength of the economy; when it increases, the country ability to export would increase. Egyptian GDP has witnessed increases with mean L.E.367 billion. World exports could act as a proxy for potential exports demand; when it increases, Egyptian exports would increase. Mean of world exports is US$3075bn, varying from US$1268.7bn to US$4909.5bn. As per previous empirical studies and literature review, the governance composite index could have a positive impact on exports. The mean of governance composite index is 31.96, with 40.04 maximum and 21.52 minimum scores, which still indicates a weak level of governance in Egypt. For IG indicators in Egypt during the study period, the mean of voice and accountability indicator is 17.60 with 25.82 maximum and 8.37 minimum score. As for political stability and absence of violence indicator, the mean is 23.23 with 47.62 maximum and 6.64 minimum score and standard deviation of 13.27, which indicates some improvements in Egypt. The mean of government effectiveness is 37.45 with 48.70 maximum and 20.19 minimum, indicating some efforts exerted. As for regulatory quality, the mean is 35.40 with 53.26 maximum and 17.31 minimum score. The rule of law indicator is the highest relative to mean, with 54.46 maximum and 29.33 minimum scores and control of corruption 42.42 maximum and 23.79 minimum scores.

4.4 D. Empirical results

Before applying ARDL technique, we check stationarity of data series using the Augmented Dickey Fuller (ADF) test under the null hypothesis that the variable has a unit root. Appendix 2 shows ADF results: all variables (except lnSkill) are non-stationary but become stationary in the first difference. As for lnSkill, it is stationary in level. Hence, ARDL is an appropriate estimation technique.

• 1. Results of the First Model Using WGI Composite Index

F-statistics result is shown in Appendix 3. The null hypothesis is of non-existence of long-run relationship, while the alternate is the existence of a relationship. F-statistic is 6.55 and greater than all the upper bounds at 1%, 2.5%, 5% and 10% levels. Therefore, null hypothesis is rejected, and alternate is accepted. So, there exists a long-run relationship between independent variables and the dependent one. Appendix 4 displays optimal ARDL specification (6, 3, 0, 2, 4, 0), which has been chosen based on Akaike information criteria (AIC).

Main findings, from Appendix 5 related to long-run parameters of ARDL model, show significant causal effects from lnRWX, lnSkill and lnGovern toward lnEXP, while lnGDP and lnREER are non-significant. The highest positive coefficients are 2.0 and 0.49 pertaining to lnRWX and lnGovern, respectively. When the composite governance index increases by 1%, exports increase by US$0.49, at 1% significance, inferring that institutional factors could be effective compared to fiscal and monetary ones. Appendix 6 shows ECM results. ECT is statistically significant with negative sign (−0.351), implying the existence of long-run relationship equilibrium between variables, meaning 35% of previous variation, between actual and equilibrium values, is corrected for each quarter.

CUSUM confirmed stability and accuracy of estimated ARDL model as there is no root lying outside significance levels. Results in Appendix 7, using LM test, confirm no serial correlation of residuals. Also, no heteroscedasticity is detected. For checking normality, the Jarque–Bera test is used. The probability (0.8043 p-value) highly recommends normality of residuals.

• 2. Results of the Second Model Using WGI Six Main Indicators:

Appendix 8 shows F-bound test result, the null hypothesis is rejected and the alternate hypothesis is accepted. So, there exists a long-run relationship between independent variables and the dependent one. Cointegration between variables has been confirmed. Optimal ARDL (3, 1, 3, 0, 2, 3, 0, 0, 0, 0, 0) specification has been chosen based on AIC, as shown in Appendix 9.

Findings in Appendix 10 show estimated long run from the ARDL model, which detect significant causal effects, directed from lnRWX, lnPSAV, lnGE, lnRQ and lnRoL towards lnEXP, while lnSill, lnGDP, lnREER, lnVA and lnCoC are non-significant. Results show that lnRWX has the highest coefficient of 1.2. Furthermore, rule of law, regulatory quality, government effectiveness and political stability have a positive impact on Egyptian exports. When each increases by 1%, merchandise exports increase by US$0.82, US$0.41, US$0.21 and US$0.09, respectively. The rest of WGI variables are not significant. Appendix 11 shows value of ECT (−0.552), indicating that 55.2% of previous quarter variation, between the actual and equilibrium value of exports, is corrected. CUSUM technique shows that the stability condition is satisfied and no root lies outside significance levels. Appendix 12 shows no heteroscedasticity in residuals. They are normally distributed as well.

Some curious results from regression, e.g. negative signs of lnVA and lnSkill and insignificance of lnGDP, lnREER and lnCoC, appear contrary to expectations from literature review. A possible explanation for sign reverse and insignificance could be multicollinearity. A correlation matrix in Appendix 13 detects lnGE is correlated with lnRoL and lnPS. lnRoL is related to lnAV. lnCoC is correlated with lnVA. Therefore, future advanced research could be conducted with ridge regression and variance inflation factor, testing several permutations and combinations, in order to detect the extent of multicollinearity affecting each independent variable. Nevertheless, most of the aforementioned ARDL results for the two used models, i.e. WGI composite/individual indicator, could be proxies for suggested reforms.

5. Conclusion and policy implications

IG is gaining much momentum and global attention, aiming to assist countries and regions to carry out related reform measures. Conceptual framework indicates vertical and horizontal MLG, comprising different types, i.e. micro, macro, and regional/global levels, which are coupled together in IG systems. Literature review highlights the importance of related mechanisms: legislative, organizational, digital and others, in order to decrease uncertainty, time and transactions costs, thus enhancing exports flows. Although magnitude and direction of relationship between IG and exports is debated, scholars concur that institutional quality and differentials are crucial in exports competitiveness. Important institutional determinants fostering exports are rule of law, regulatory quality, government effectiveness, control of corruption, political stability and voice and accountability.

Based on such mechanisms and determinants, numerous international reports and empirical studies relied on WB WGI index and related indicators as proxies to measure IG impact within a country on the macro level. Either using composite index or its six main indicators, studies debated which of those governance indicators has the highest impact on exports and mostly concluded that institutional priorities could vary among countries and regions, in accordance to paces and degrees of institutional reforms.

In case of Egypt, the paper highlights pivotal IG mechanisms related to Egyptian merchandise exports. Main empirical findings show that the composite governance index has a positive impact on merchandise exports, when it increases by 1%, exports increase by US$0.49. Further disaggregated results imply that chronological priorities of institutional determinants fostering exports in Egypt could be rule of law, regulatory quality, government effectiveness, followed by political stability and absence of violence. By joining those empirical findings with IG mechanisms in Egypt, main recommendations and policy implications could be grouped accordingly.

In order to boost exports competitiveness in Egypt, from rule of law perspective, it is worth noting although several trade-related laws and decrees have been issued recently; however, it would be too early to evaluate the impact of such institutional reforms on exports, especially in the aftermath of the global pandemic. Nevertheless, it is recommended to resume further legislative reforms which were not tackled in recent stipulations. Suggestions of additional reforms are abolishing mandatory exports-related paper forms, legislatively digitizing certificates of origin, enhancing exports appeal committees and carrying out the multilevel RIAs to assess impacts of new trade legislations, especially merchandise exports related decrees, on the macro, sectoral and local/geographic levels in Egypt.

From regulatory quality view point, NTMs instruments ought to be used with extra due diligence, to maintain Egyptian exports competitive edge. Accelerated NTMs facilitation strides and procedures, e.g. “green corridors”, are urged for faster exports lanes to overcome effects of pandemic and recent global turmoils. Results of previous survey screening NTMs in Egypt indicated, for industrial exports, one-third of suggested reforms related to licensing, certificates of origin, conformity assessment, laboratories, certification … etc., especially in engineering and chemicals sectors. For agricultural exports, NTMs reforms are related more to technical barriers, e.g. SPS, testing, residuals … etc., which ought to be carried in a more expedited manner, thus boosting related merchandise exports.

For government effectiveness, including digital and logistical institutional reforms, under the framework of WTO TFA, Egypt is currently implementing initiatives and instruments, e.g. NSW, Advanced Cargo Information System (ACI), AEO and others. However, innovative digital reforms in trade would get TRS of Egyptian exports into new competitive heights. Moreover, expedited targets of sound IG and export promotion strategies ought to be announced to business community and carried out for more agile exports flows. In addition, MRAs linked to targeted digital connectivity, with main trading partners, e.g. EU, Arab (pioneering with Agadir countries) and some African regions, would be important building blocks to boost Egyptian exports on regional and global trade arenas.

Those findings have only shed some light on suggested policy implications related to IG vectors, which could foster Egyptian exports competitiveness. In conclusion, in spite of the pivotal role of IG on exports, nevertheless, efforts to implement institutional reforms have not received ample attention. More strides are to be exerted in this front, in order to break through the new aspired heights of merchandise exports in Egypt.

Figures

Figure 1

Vertical MLG levels

Figure 2

MLG levels within global/regional, national and local contexts

Figure 3

Institutional governance system and types of governance

Figure 4

Timeline of merchandise exports surges related to institutional reforms in Egypt

Notes

1. 1: voice and accountability, 2: political stability and absence of violence, 3: government effectiveness, 4: regulatory quality, 5: rule of law, 6: control of corruption. It covers nearly 200 countries, including Egypt, ever since 1996 till the latest report issued in 2021.

Appendices

The supplementary material for this article can be found online.