The Impact of FDI On Income Inequality in Egypt: Hebatalla Rezk Goma Amer Nahla Fathi Sizhong Sun
The Impact of FDI On Income Inequality in Egypt: Hebatalla Rezk Goma Amer Nahla Fathi Sizhong Sun
The Impact of FDI On Income Inequality in Egypt: Hebatalla Rezk Goma Amer Nahla Fathi Sizhong Sun
https://doi.org/10.1007/s10644-021-09375-z
Received: 5 July 2021 / Accepted: 25 November 2021 / Published online: 20 January 2022
© The Author(s) 2022
Abstract
This study examines the impact of inward foreign direct investment (FDI) on income
inequality in Egypt over the period from 1975 to 2017. We find that a one per cent
increase in FDI inflows (as a percentage of gross fixed capital formation) results in
0. 0188 reduction of the Gini coefficient. The finding is robust to different specifica-
tions of the empirical model and potential endogeneity of FDI inflows. The nega-
tive impact of FDI inflows suggests that Egyptian policymakers shall continue and
strengthen the open-door policy, which has the added benefit of improving income
inequality.
1 Introduction
* Sizhong Sun
[email protected]
Hebatalla Rezk
[email protected]
Goma Amer
[email protected]
Nahla Fathi
[email protected]
1
Economics Department, Zagazig University, Zagazig, Egypt
2
College of Business Law and Governance, Division of Tropical Environment and Societies,
James Cook University, Townsville, Australia
13
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2012 Economic Change and Restructuring (2022) 55:2011–2030
capital development. On the other hand, despite FDI having played an important
role in advancing economic development, it is also accountable for deteriorating
income inequality, for instance, by aggravating wage differentials in host countries
and repatriation of FDI firms’ profit to the home countries.
Examining inequality issues is important because high levels of income inequal-
ity can reduce the effectiveness of developmental policies, for example poverty
alleviation (Kaulihowa and Adjasi 2018). In addition, rising income inequality
can lead to socio-political instability, which in turn reduces investment, economic
growth, and undermines sustainable development (Ravinthirakumaran and Ravin-
thirakumaran 2018). The global spread of social movements in the post-2008 global
financial crisis and the 2011 Arab Spring in the Middle East and North Africa have
made the issue of income inequality more prominent (Verme et al. 2014). Therefore,
investigating the relationship between FDI and income inequality will present poten-
tially important implications for policymakers.
This study examines the impact of inward FDI on income inequality in Egypt.
Since the mid-1970s, Egypt has introduced various legislations to open up its econ-
omy, resulting in a significant increase in the inflow of FDI. By the end of 2017,
Egypt became the largest recipient of inward FDI in Africa, with an inflow of $7.4
billion (CNUCED 2018). At the same time, the Egyptian economy suffered from
an increasing income inequality. According to the Standardized World Income Ine-
quality Database (SWIID), Egypt’s Gini coefficient (post tax and transfer) increased
from 36.7 to 41.9 from 1975 to 2017, reaching a peak of 42.8 in 2012. The con-
current upward trending of FDI inflow and income inequality in Egypt calls for an
investigation of their causality.
A number of studies have explored the impact of inward FDI on income inequal-
ity in Egypt, primarily in situations that use panel data,1 where Egypt is one member
of the cross-section. However, countries differ in terms of culture, social welfare
programs, and institutions, which may not be sufficiently controlled for in the panel
data estimations. In addition, it is likely that the impact of FDI is different across dif-
ferent countries. In light of these challenges, this research focuses on a single coun-
try, Egypt, from 1975 to 2017.
Our contributions are twofold. First, we study how FDI affects income inequality
in a single country. Utilizing the within-country variations to identify the impact,
rather than the cross-country variations of many previous studies. Second, the find-
ings from this study present significant policy implications for not only Egypt, but
also other developing countries.
The rest of the paper is organized as follows: Sect. 2 reviews the related litera-
ture; Sect. 3 presents a brief overview of Egypt’s FDI and income inequality; Sect. 4
discusses the method; Sect. 5 contains a description of the data, and the empirical
results are presented in Sect. 6; Sect. 7 draws policy implications and concludes.
1
See, for example, Kaulihowa (2018) and Pan-Long (1995).
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Economic Change and Restructuring (2022) 55:2011–2030 2013
2 Literature review
Empirical studies investigating the relationship between FDI and income inequality
have had mixed results. Some studies revealed FDI negatively affects income ine-
quality, while the others found a positive or statistically insignificant effect of FDI.
Below we briefly survey these studies and highlight the gap in existing literature.
FDI is found to negatively affect (reduce) income inequality in both within and
cross-country studies. For within-country studies, a significantly negative impact
from FDI on income inequality was found in Mexico from 1990 to 2000 (Jensen
and Rosas 2007), China in the period of 1985–2007 (Mah 2013), Turkey between
1970 and 2008 (Ucal et al. 2016) and the USA from 1977 to 2001 (Chintrakarn et al.
2012). These studies suggest that a negative impact of FDI on income inequality can
be observed in both developing and developed countries.
Compared with within-country studies, there are slightly more cross-country
studies that discovered a negative impact. Adams (2008) found that FDI is nega-
tively correlated with income inequality in 62 developing countries for the period
1985–2001. Similarly, Herzer and Nunnenkamp (2013) found that the long-run
effect of FDI on income inequality is negative in eight European countries from
1980 to 2000. Ridzuan et al. (2014) concluded that an increase in the FDI inflows
reduces income inequality in Malaysia, Indonesia, and Philippines between 1970
and 2008. In 13 Asia–Pacific economic cooperation developing economies over the
period 1990–2012, Ravinthirakumaran and Ravinthirakumaran (2018) showed that
FDI in the long run is negatively correlated with income inequality.
The inflow of FDI can also generate a significantly positive impact on income
inequality, namely worsen the income inequality, in the host economies. Similar
to the negative impacts, researchers have discovered such positive impacts in both
cross and within country studies. The cross country studies include Alderson and
Nielsen (1999) in 88 countries from 1967 to 1994, Alderson and Nielsen (2002)
in the OECD countries over the period 1967–1992, Reuveny and Li (2003) in 69
developing and developed countries over the period 1960–1996, Herzer et al. (2014)
in the selected Latin American countries from1980 to 2006, Choi (2006) in 119
countries from 1993 to 2002, and Grimalda et al. (2010) in the post-Soviet Union
countries.
For within country studies, Mah (2002) examined the issue in Korea over the
period 1975–1995, where he found the Gini coefficients tended to increase with
FDI inflows. Similarly, Nunnenkamp et al. (2007) found that income distribution
worsened with more FDI inflows in Bolivia. In China, FDI inflows were also found
to worsen the income inequality (see for example Wan et al. 2007; Yu et al. 2011;
Zhang and Zhang 2003).
A number of studies have found statistically insignificant effects of FDI on
income inequality, for example Pan-Long (1995), Mahler et al. (1999), Bussmann
et al. (2005), Milanovic (2005), Lee (2010), Sylwester (2005), and Wei (2009).
The impact of FDI on income inequality is likely to depend on some particu-
lar factors. Using an unbalanced panel dataset of 60 countries from 1970 to 1994,
Lee et al. (2007) found an inverted-U shaped relationship between FDI and income
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2014 Economic Change and Restructuring (2022) 55:2011–2030
inequality. The effect of FDI on inequality was positive at the low to intermediate
levels of government size, while it was substantially negative in societies with a
larger public sector. Using a panel of 73 developing and developed countries over
the period 1970–2005 and a threshold regression approach, Lin et al. (2013) showed
that FDI increased income inequality when a country achieves a threshold of human
capital between 6.0 and 6.7 years of secondary schooling. Below this threshold how-
ever, FDI improves income distribution.
Kaulihowa et al. (2018) found a u-shaped effect of FDI on income inequality in
16 African countries. The FDI inflow first alleviated the inequality of income distri-
bution. However, this effect diminished with further expansions of FDI inflow. Lin
et al. (2015) explored the role of financial development in moderating the effect of
FDI on income inequality in 42 developing and developed countries over the period
1976–2006, by employing a panel smooth transition regression technique. They
found a positive impact of FDI on income inequality, which became stronger as a
country’s financial development improves.
Studies that explore FDI in Egypt mainly focus on two aspects: the determinants
of FDI (for example Bhaumik and Gelb 2005; Naguib 2011), and the effect of FDI
on economic development, growth and specific macroeconomic factors in the econ-
omy (for example Hanafy and Marktanner 2019; Massoud 2008). There is a lack of
study that investigates FDI and income inequality in Egypt, despite some studies
including Egypt as a member of the cross-section in their cross-country panel data
estimations (see for example Kaulihowa and Adjasi 2018; Pan-Long 1995). Never-
theless, it may be preferable to consider countries separately because countries differ
in cultural norms, institutions, and social welfare programs, which makes it difficult
to control for in the panel data estimations (Ucal et al. 2016). Such kind of cross-
country differences likely contribute to contrasting findings in the previous studies.
In light of this, this paper adds to the existing literature on FDI and income inequal-
ity by analyzing the relationship between FDI and income inequality in Egypt.
Since the mid-1970s, Egypt has adopted an open-door economic policy, “Infitah",
which featured the Egyptian legislature issuing several investment laws. The first and
most prominent law, Law No. 43 (1974), aims at building an investment climate in
which Arab and foreign investments play an important role in creating new produc-
tion capacities and expanding existing production capacities, promoting the role of
the private sector in the economy, as well as diversifying and aligning Egypt’s eco-
nomic structure with the requirements of global economic and social development.
The other laws include Law No. 32 (1977), Law No. 59 (1979), Law No. 230
(1989), Law No. 8 (1997) (The Investment Guarantees and Incentives Law), Law
No. 83 (2002), Law No. 13 (2004), Law No. 94 (2005), Law No. 19 (2007), Law
No. 114 (2008), Law No. 133 (2010), Law No. 14 (2012) and Law No. 95 (2015).
These laws were issued with an aim to encourage FDI inflows into Egypt. For
example, the Law No. 230 (1989) provided a number of incentives to attract FDI
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Economic Change and Restructuring (2022) 55:2011–2030 2015
15000
10
8
10000
6
4
5000
2
0
0
1970 1980 1990 2000 2010 2020
inflows, the most important being tax exemptions for investment projects requir-
ing advanced technology and modern methods of production.
The open-door policy has helped to shape Egypt’s economy. In this section, we
discuss the trends of Egypt’s FDI inflows and income inequality (measured by the
Gini coefficient) and their correlation, which provides background information
for the subsequent empirical analysis.
Figure 1 exhibits the trends of Egypt’s FDI inflows in both current price and as a
percentage of GDP over the period from 1975 to 2015. Before 2003, the FDI inflows
in current prices are at a low and relatively stable level. In contrast, after 2003,
the FDI inflows increase, but become more volatile. The low level of FDI inflows
before 2003 suggests that despite the issuance of several investment laws that intend
to attract FDI, the macroeconomic and political instability appears to prevent them
from doing so. Such instability includes the high inflation (> 20%) and high unem-
ployment (> 10%) in the late 1980s, assassination of President Anwar Sadat in 1981,
decreasing share of Arab countries in attracting FDI as a result of disrupted politi-
cal relations following the Camp David in 1979, and recession in the beginning of
implementing economic reform in Egypt. In addition, the low level of FDI inflows is
also due to the events that Middle East witnessed in the beginning of 1990s (Iraq’s
invasion of Kuwait) and decreasing world FDI inflows from the slowdown in the
world economy and the event of September 11, 2001.
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2016 Economic Change and Restructuring (2022) 55:2011–2030
The FDI inflows grew approximately by 48 times from 2003 to 2007, reaching
USD 11,578 million in 2007, owing primarily to improvement in the investment
climate and improving macroeconomic environment in this period. For example,
Law No. 88 (2003) guarantees the right to repatriate income earned in Egypt.
Law No. 13 (2004) allows investors to start activities with temporary licenses,
before obtaining the required licenses. Law No. 91 (2005) provides an investment
incentive in the form of a discounted taxable net profits. Decree No. 548 (2005)
grants foreigners the same legal rights as Egyptian nationals with regard to own-
ership of residential units in the tourist areas of Sidi Abdel-Raman, Hurghada, the
Red Sea coast, including the beach resort of Hurghada, Ras Al-Hekma, and the
Mediterranean coast in Matrouh Governorate.
In 2006, the Egyptian government launched a new strategy of public–private
partnership to remove the barriers that prevent or discourage private investment
in such basic services as water, electricity, gas, waste management, road build-
ing and transportation. In addition, the Egyptian government has also signed sev-
eral inter-regional trade and investment agreements, for example with the Euro-
pean Union and Turkey. In 2004, the Ministry of Trade and Industry launched the
National Suppliers Development Program, which provide assistance to Egyptian
enterprises that supply multinational corporations operating in Egypt. These fac-
tors jointly promote FDI inflows into Egypt.
However, the increasing trend did not sustain, with the net FDI inflows drop-
ping to the bottom of US$ -483 million in 2011, owing primarily to the politi-
cal instability in 2011 (the Revolution of 25 January). The economic turbu-
lence results in real GDP growth decreasing sharply from 5.1% in the fiscal year
2009–10 to 1.8% in 2010–11. The banks and stock market were temporarily
closed, and manufacturers were unable to receive raw materials. Due to the dete-
riorating environment, many foreign investors halted the on-going investment,
and some left Egypt.
The FDI inflows recovered after 2011, as democracy was restored and the sub-
sequent stability improved investors’ confidence. Consequently, Egypt received a
positive FDI inflow of USD 6031 million in 2012, in contrast with the negative net
inflow in 2011. In addition, Egypt has taken further steps to improve the business
climate for foreign investors. For example, Law No. 12 (2012) allows foreign inves-
tors to invest in Sinai Peninsula under certain conditions. Decree No. 1115 (2012)
established a Governmental Group for Settlement of Investment Disputes. Chaired
by the Minister of Justice, the Group is authorized to investigate investors’ com-
plaints of public entities. In 2014, the Egyptian government invited foreign investors
to participate in projects that took place in the Suez Canal Economic Zone, a major
industrial and logistic services hub. The presidential Decree No. 17 (2015) permit-
ted the government to provide lands in certain regions, free of charge, to investors
meeting certain technical and financial requirements.
Regarding FDI as a percentage of GDP, it has a decreasing trend from 1975 to
2003, reaching 0.32% in 2003. The decreasing trend occurs as Egypt’s economy
grew while the FDI inflows remained relatively stable. After 2003, its trending fol-
lows that of the FDI inflows in current prices. From 2004 to 2006, the FDI as a
percentage of GDP exhibits an upward trend, reaching 9.32% in 2006. The upward
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Economic Change and Restructuring (2022) 55:2011–2030 2017
44
42
Gini coefficients
40
38
36
Fig. 2 Income inequality in Egypt Note Gini is post-tax and post-transfer. Source Standardized World
Income Inequality Database v 9.1
trend then reverses, falling to -0.21% in 2011, which however recovers back to
2.18% in 2015.
3.2 Income inequality
Since the open door policy in the mid-1970s, income inequality in Egypt, meas-
ured by the Gini coefficient sourced from the Standardized World Income Inequal-
ity Database (SWIID), has been on an increasing trend as exhibited in Fig. 2. The
upward trending consists of two periods, one from 1975 to 2000 with a linear trend
and the other from 2000 to 2017 with a nonlinear trend.
In the first period, the Gini coefficient increases from 36.7 in 1975 to 41.5 in
2000, following an almost linear upward trend. Thereafter, it becomes nonlinear,
with periods of decreasing Gini coefficient (namely improving income inequality).
In this period, the Gini coefficient peaks at 42.8 in 2012, suggesting a severe income
inequality in Egypt, possibly because gains from high economic growth during the
period 2004–2008 mostly benefited the wealthy and failed to significantly reduce
poverty, especially in rural areas. In addition, Egypt have been negatively affected
by the global financial crisis, followed by the political instability (the Revolution of
25 January) in 2011. Consequently, investment has decreased, and the unemploy-
ment rate has increased to 12.7% in 2012.
Figure 3 shows the scatter plots of FDI inflows (both in current prices and as a
% of GDP) versus income inequality in Egypt over the period 1975–2017, along
with their Median spline fitting curves, which present the association between
FDI inflows and income inequality. Regarding the FDI inflows in current prices
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2018 Economic Change and Restructuring (2022) 55:2011–2030
15000
10
FDI inflows in current price
6
4
5000
2
0
0
36 38 40 42 44
Income Inequality (Gini)
Fig. 3 FDI inflows versus income inequality Source UNCTAD FDI/TNC database (www.unctad.org/
fdistatistics) & Standardized World Income Inequality Database v 9.1
4 Analytical framework
2
For example, Azmeh (2015) argues that the rules of origin facilitated the integration of Egypt and Jor-
dan into the global value chains of Asian producers of textile and garments, after entering the qualifying
industrial zone agreement with the US and the free trade agreement between Jordan and the US.
3
We thank an anonymous reviewer for pointing this out.
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Economic Change and Restructuring (2022) 55:2011–2030 2019
and world-systems theory, which give different views about the effect of FDI on
income inequality (for more details see Roberts and Hite 2000).
The modernization theory, used to explain the process of societies’ gradual tran-
sition from traditional to modern, dates to the early 1950s, and argues that develop-
ing economies tend to benefit from economic linkages with advanced economies.
Through economic globalisation, for example FDI inflows, developing countries
gain access to export markets, capital, and technology, which are essential for devel-
opment (Mihalache-O’Keef and Li 2011).
Kuznets (1955) characterizes the link between economic development and
income inequality as an inverted U-shaped curve. As one component of economic
globalisation, the FDI inflows promote economic development, which in turn affects
the host countries’ income inequality through the Kuznets (1955) hypothesis (Kauli-
howa and Adjasi 2018). Even though FDI initially stimulates growth in some lead-
ing sectors and regions in the host economies, and provides benefits to some skilled
elites, eventually, growth in the leading sectors and regions facilitates more equal
income distribution within a country (Pan-Long 1995).
In contrast, the dependency and world-systems theory views the link between FDI
and income inequality from a core-periphery perspective, where the core is highly
industrialized developed countries with abundant skilled labour and the periphery
is developing countries with abundant unskilled labour. The theory emphasizes
that the international capitalists can distort the economies of developing countries.
Dependency theorists view the predatory behaviour of multinational enterprises
creates a neo-colonies’ economy through FDI. Thus, more FDI inflows in a coun-
try result in more foreign control of the host economy, and consequently a greater
degree of income inequality in the country (Roberts and Hite 2000).
4.2 Econometric model
where Gini represents the Gini coefficient; FDI stands for the FDI inflows; t is the
time trend; TO denotes trade openness; GDP represents the gross domestic product
per capita (constant 2010 US$); FD denotes financial development; INF stands for
the annual inflation rate, calculated from the GDP deflator; NSE represents the sec-
ondary school enrollment as a percentage of gross enrollment; URB is the urbaniza-
tion rate; DYear is a dummy variable, taking a value of 1 if it is after 2000; and ɛ is
the error term.
FDI is the variable of interest, and a negative estimate of its coefficient sug-
gests that FDI inflows reduces income inequality. The variable t captures the time
trend, as observed in Fig. 2. According to the Heckscher–Ohlin-Samuelson model
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2020 Economic Change and Restructuring (2022) 55:2011–2030
(with two types of labour), developing countries tend to specialize in producing and
exporting unskilled-labour-intensive goods because they are relatively well endowed
with unskilled labour, which would result in an increase in the wages of unskilled
labour relative to those of skilled labour, leading to a reduction in income inequality.
Hence, we expect trade openness (TO) to negatively affect income inequality. The
variable, GDP per capita (GDP), controls for the potential influence of economic
development on income inequality.
Conceptually, financial development (FD) is expected to affect income inequality.
An improvement in financial development can reduce income inequality, as better-
developed financial markets provide easier access of financial resources to the poor
population, which in return enables them either to start small business ventures or
increase human capital by investing in education for a better future (Shahbaz et al.
2015). However, the role of financial development is likely to depend on the level
of economic development. Greenwood et al. (1990) suggest that financial develop-
ment initially raises income inequality, and then reduces it as economic development
reaches a certain stage. At a low level of economic development, access to financial
intermediaries is restricted to a few people, mostly the wealthy households, because
of high (fixed) transaction costs. Hence, an improvement of financial development
benefits the wealthy and exacerbates income inequality. Nevertheless, as the econ-
omy develops over time, the poor households eventually gain financial access and
benefit from financial development, which helps reduce income inequality.
Cardoso et al. (1995) suggest that inflation (INF) can raise income inequality
in three ways. First, high wages have better indexation than low wages, and subse-
quently inflation affects low wage earners to a greater extent than high wage earn-
ers, resulting in an increase in income inequality. Second, the inflation tax increases
the number of poor by wiping out the savings of the middle class, exacerbating
income inequality. Third, inflation, particularly hyper-inflation, redistributes assets
in the financial markets between creditors and debtors, in favour of the more capable
group, which in turns affects income inequality.
Education (or human capital) is another factor that affects income inequal-
ity. Workers with higher education level (more human capital) tend to earn higher
wages. In Eq. (1), we control this factor by the secondary school enrollment as a per-
centage of gross enrollment (NSE). Urbanization (URB) increases income inequality
in the early stage of economic development, while in the latter stage it decreases
income inequality (see, among others, Adams and Klobodu 2019; Kuznets 1955;
Lewis 1954). In Eq. (1), we also include a dummy variable (DYear) to control for the
structural change of the trend of Gini coefficient, as can be observed in Fig. 2.
In estimating Eq. (1), there exists a likely reverse causality from income inequal-
ity to FDI inflows, resulting in FDI being endogenous. First, multinational enter-
prises (MNEs) can purposely locate themselves in countries with high/low levels of
income inequality (Jensen and Rosas 2007). MNEs can undertake vertical FDI and
(re)locate their low-skilled activities to countries with higher inequality, to benefit
from lower wages. Alternatively, MNEs may avoid countries with greater inequal-
ity due to concerns about social conflict, political instability, and limited effective
demand as a result of a compromised middle class from high inequality (Herzer
and Nunnenkamp 2013). Second, previous studies suggest that more equal income
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Economic Change and Restructuring (2022) 55:2011–2030 2021
5 Data
The data of FDI inflows are sourced from the United Nations Conference on Trade
and Development (UNCTAD). The Gini coefficient (post tax and transfer), measure-
ment of income inequality, is obtained from SWIID (version 9.1). The other data
come from the World Bank Development Indicators. Our sample covers the period
from 1975 to 2017, chosen based on data availability.
Gini coefficient is the most used measurement of income inequality. SWIID pro-
vides comparable Gini coefficients for 196 countries since 1960. For the Gini coef-
ficient in Egypt, the other sources, such as the World Bank database and the Central
Agency for Public Mobilization and Statistics of Egypt (CAMPAS), do not have suf-
ficient data, for example many years’ data are missing, making it unsuitable for our
estimations. In addition, SWIID data are fully comparable across countries and time
(for more details, see Solt 2020).
The FDI inflows (FDI) are measured as a percentage of gross fixed capital forma-
tion (the ratio of FDI inflows in current price against the gross fixed capital forma-
tion). Trade openness (TO) is measured as total imports and exports over GDP. The
GDP per capita (GDP) is in constant 2010 US$. We use domestic credit to the pri-
vate sector as a percentage of GDP to measure financial development (FD), which
is a standard measurement of financial development and has been used widely in
the empirical literature to examine the relationship between financial development
and income inequality (see for example Clarke et al. 2006; Jauch and Watzka 2016;
Seven and Coskun 2016; Shahbaz et al. 2015).
The secondary school enrollment as a percentage of gross enrollment (NSE)
controls for the influence of education (human capital). However, its time series
has missing values in the years 1998, 2005, 2006, 2007, and 2008, which we inter-
polate for the estimation purpose. The annual inflation rate (INF) is calculated,
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2022 Economic Change and Restructuring (2022) 55:2011–2030
3000
80
2500
60
2000
40
1500
20
1000
0
Fig. 4 Time series of explanatory variables Source World Development Indicators & UNCTAD FDI/
TNC database
based on the GDP deflator. The urbanization rate (URB) is measured by the per-
centage of the population living in the urban area. Table 1 shows the definitions
and summary statistics of these variables, and Fig. 4 presents their time series.
Table 2 reports the results of the augmented Dickey Fuller test and Phillips-
Perron test. Except for the inflation rate (INF), the time series of all the other var-
iables are I(1). The time series of inflation rate is stationary at the level, namely
I(0). Later in our regressions, we will check whether the regression residuals are
stationary or not. Stationary residuals suggest that income inequality and the
right-hand side variables are cointegrated.
13
Table 2 Unit root tests
Level First Difference
ADF PP ADF PP
Variables Constant Constant + Trend Constant Constant + Trend Constant Constant + Trend Constant Constant + Trend Results
GINI − 2.655 − 0.585 − 2.131 − 1.23 − 3.027 − 3.368 − 3.095 − 3.412 I(1)
FDI − 2.864 − 2.967 − 2.988 − 3.121 − 6.766 − 6.677 − 6.774 − 6.683 I(1)
Economic Change and Restructuring (2022) 55:2011–2030
GDP − 0.334 − 1.425 − 0.366 − 2.012 − 3.798 − 3.74 − 3.894 − 3.833 I(1)
TO − 2.066 − 2.26 − 2.474 − 2.654 − 4.91 − 4.855 − 5.004 − 4.953 I(1)
FD − 1.408 − 0.671 − 1.592 − 1.072 − 5.169 − 5.397 − 5.397 − 5.576 I(1)
INF − 4.982 − 4.971 − 5.159 − 5.157 − 9.648 − 9.525 − 12.067 − 11.917 I(0)
NSE − 1.835 − 1.933 − 1.827 − 1.999 − 5.255 − 5.264 − 5.18 − 5.18 I(1)
URB − 0.115 − 2.16 − 0.724 − 2.38 − 5.534 − 5.139 − 4.733 − 4.48 I(1)
ADF is the augmented Dickey Fuller test; PP is the Phillips-Perron test; The null hypothesis is that the series contains a unit root
2023
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Standard errors in parentheses; Standard errors are autocorrelation robust; URB, NSE, and GDP are pro-
jections of their original variables onto the subspace spanned by time (t) and a vector of 1 to account for
their high correlation with time; *** p < 0.01, ** p < 0.05, * p < 0.1
6 Estimation results
In estimating Eq. (1), it is likely that the right-hand side variables have multi-
collinearity issue. For example, the correlation between time trend (t) and GDP
per capita (GDP), secondary school enrolment (NSE), urbanisation rate (URB),
and they year 2000 dummy (DYear) are as high as 0.9921, 0.8741, -0.7994, and
0.8547, respectively. After regressing the Gini coefficient against all the right-
hand size variables, the variance inflation factors (VIF) for time trend (t), GDP
per capita (GDP), secondary school enrolment (NSE), are urbanisation rate
(URB) are as high as 546.79, 325.92, 17.93, and 12.39, suggesting existence of
multicollinearity issue. Hence, we first project NSE, URB, and GDP onto the sub-
space spanned by time trend (t) and a vector of one, and use the projection in the
regressions.
Table 3 reports the regression results where we assume FDI is exogenous. We
start from a minimal specification with only the time trend (t) and FDI inflows
(FDI), and gradually build up to the specification with full set of right-hand side
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Economic Change and Restructuring (2022) 55:2011–2030 2025
Standard errors in parentheses; Standard errors are autocorrelation robust; URB, NSE, and GDP are pro-
jections of their original variables onto the subspace spanned by time (t) and a vector of 1 to account for
their high correlation with time; *** p < 0.01, ** p < 0.05, * p < 0.1
variables. We also account for the potential autocorrelation in the error term by
computing the autocorrelation-robust standard errors in Table 3.
In each specification, we predict the residuals after regression and test its station-
arity by using the augmented Dickey Fuller test. In all regressions, the residuals are
I(0), suggesting a cointegration between income inequality and the right-hand side
variables. Note our regressions capture the long run relationship between income
inequality and FDI inflows (and other explanatory variables). We do not explore the
short run dynamics in this study due to the relatively short time frame of our sample.
As discussed in Sect. 4, FDI inflows (FDI) are likely to be endogenous, and we
use the FDI inflows in Morocco and Jordan as excluded instruments. Table 4 reports
the regression results with these excluded instruments, where we utilize the limited
information maximum likelihood (LIML) estimator in the estimations which is more
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2026 Economic Change and Restructuring (2022) 55:2011–2030
robust to the potential weak instrument issue. Same as Table 3, we follow a build-
ing-up-specification approach. In each regression, we test the stationarity of pre-
dicted residuals, which all reject the null hypothesis of unit root. The standard errors
reported in Table 4 are autocorrelation robust.
In each regression in Table 4, we conduct the under-identification test (Kleiber-
gen-Paap rk LM statistic) to check the relevance of instruments, weak identifica-
tion test (Kleibergen-Paap rk Wald F statistic) to check whether the instruments are
weak, overidentification test (Sargan statistic) to check the validity of instruments,
and endogeneity test to check whether FDI is endogenous or not. For example, for
column 2 in Table 4, the Kleibergen-Paap rk LM statistic for the under-identification
test is 8.59 with a p-value < 0.05, rejecting the null hypothesis of irrelevance at 5 per
cent level. The Kleibergen-Paap rk Wald F statistic for the weak identification test is
7.655, below the Stock-Yogo weak identification test critical value of 10% maximal
LIML size (8.68) but above its critical value of 15% maximal LIML size (5.33). For
the over-identification test, the Sargan statistic is 0.954 with a p-value of 0.3286,
failing to reject the null hypothesis of valid instruments at the 5 per cent level. The
endogeneity test fails to reject the null hypothesis of no endogeneity of FDI at the 5
per cent level, with a test statistic < 0.01 and the associated p-value of 0.9831. The
test results are similar in the other specifications, and therefore we use Table 3 in our
interpretation.
In column 2 of Table 3, the coefficient estimate of time trend (t) is 0.154, sta-
tistically significant at the one per cent level, confirming the time trend that can be
observed in Fig. 2. The coefficient of FDI, the variable of interest, is estimated to be
−0.0188, statistically significant at the one per cent level. Therefore, a one per cent
increase of FDI inflows (as a percentage of gross fixed capital formation) results in
a decrease of income inequality (Gini coefficient) by 0.0188. The statistically sig-
nificant negative impact of FDI inflows supports the modernization theory. As sug-
gested by Mihalache-O’Keef and Li (2011), FDI inflows can help developing coun-
tries gain access to export markets, capital, and technology, which in turn promotes
economic development and subsequently alleviates the income inequality issue.
In addition, it is likely that institutions play a role in the FDI-income inequality
nexus.4 As discussed previously, a number of investment laws have been established,
which facilitates foreign businesses to operate in Egyptian market and in turn can
promote transmission of the benefits of FDI inflows, leading to reduction of inequal-
ity. Egyptian government aims to reduce the poverty rate to 6 per cent by 2022, for
which a number of measures have been implemented, for example the direct assis-
tance to the poor through Ministry of Social Affairs, free social services such as
health and education, and support to work and income generating activities through
its Social Fund for Development. On the one hand, these measures promote income
equality directly, while on the other hand they indirectly influence the FDI-income
inequality nexus by promoting human capital which facilitates transmission of FDI
benefits.
4
Due to lack of data, we are not able to include institutions in the estimations.
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Economic Change and Restructuring (2022) 55:2011–2030 2027
The coefficient trade openness (TO) is estimated to be negative, but not statisti-
cally significant at the five per cent level. Conceptually, one expects that trade open-
ness allows Egypt to take a full advantage of its factor endowment and compara-
tive advantages, which promotes economic development and in turn reduces income
inequality in Egypt. The estimate of coefficient of DYear is negative and statistically
significant at the one per cent level, which is consistent with Fig. 2. It is clear in
Fig. 2 that after 2000, the Gini coefficient in Egypt displays a decreasing trend in
some years. Inflation rate (INF) and urbanisation (URB) appear not to exert statisti-
cally significant influence on income inequality.
The coefficient of financial development (FD) is statistically significant at the five
per cent level in column 2 of Table 3, which becomes not significant in the full spec-
ification (column 4). Hence, the role of FD is sensitive to different specifications.
The coefficient of GDP is not significant at the five per cent level, which occurs as
its effect is captured by time trend.
In the regressions of Tables 3 and 4, the dependent variable is the post-tax and
post-transfer Gini coefficient (SWIID 9.1), which is affected by the social spending
and other income redistribution measures.5 As a robustness check, we also use the
pre-tax and pre-transfer Gini coefficient in the estimations. We do not report these
regression results, in order to save space, which however are available upon request.
The point estimates of the coefficient of FDI continue to be negative and statistically
significant at the five per cent level, and the magnitude is within one standard error
of those in Table 3. Hence, the negative effect of FDI inflows is robust to alternative
measure of Gini coefficient.
The negative impacts of FDI inflows on income inequality in Egypt presents sig-
nificant implications for policymakers in Egypt and more broadly the Middle East
and North Africa (MENA) countries. While FDI can benefit economic development,
one frequently worries about its potential side effects, such as to exacerbate income
inequality in the host country. Globalisation (e.g. trade and FDI inflows that provide
preferential access to the USA, European and Chinese markets) does not automati-
cally promise a better living standard for working class in Egypt.6 Nevertheless, our
empirical estimations suggest that FDI inflows in Egypt lead to an improvement of
income inequality. In light of this relationship, policies that encourage FDI inflows
(e.g. the investment laws) have an unintended consequence of reducing inequality.
Hence, despite Egyptian government does not have a professed policy goal of reduc-
ing inequality, it is beneficial to continue and strengthen the open-door policy, which
has an added benefit of improving income inequality and can in turn contribute to
poverty alleviation in Egypt, one important part of “Egypt’s Vision 2030”.
5
We thank one anonymous reviewer for pointing this out.
6
We thank one anonymous reviewer for pointing this out.
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2028 Economic Change and Restructuring (2022) 55:2011–2030
7 Concluding remarks
Since the mid-1970s, Egypt has introduced various laws, increasing its openness
to foreign investors, thereby attracting substantial FDI inflows. At the same time,
Egypt’s economy suffers from an increasing income inequality problem. Never-
theless, little attention has been devoted to exploring the impact of FDI inflows on
income inequality in Egypt, despite some previous studies of the distributional effect
of FDI include Egypt as part of their panel data.
In light of this gap, this study extends existing literature by focusing on the effect
of FDI on income inequality in Egypt, using time series data from 1975 to 2017. Our
estimations find that FDI inflows significantly and negatively affect Egypt’s income
inequality, measured by the Gini coefficient, with a one per cent increase of FDI
inflows (as a percentage of gross fixed capital formation) leading to 0. 0188 reduc-
tion of Gini coefficient. The statistically significant negative impact of FDI inflows
is consistent with the prediction of the modernization theory. Our regressions are
robust to different specifications and potential endogeneity of FDI inflows.
Given our finding, Egypt’s policymakers should not be concerned about attract-
ing more foreign investment to take advantages of the benefit of FDI inflows (for
example transfer of management skills and modern technology, exporting market
access and human capital development), as attracting more foreign investment does
not conflict with reducing the gap between rich and poor.
Funding Open Access funding enabled and organized by CAUL and its Member Institutions. Hebatalla
Rezk acknowledges the funding support by the Ministry of Higher Education of the Arab Republic of
Egypt.
Open Access This article is licensed under a Creative Commons Attribution 4.0 International License,
which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as
you give appropriate credit to the original author(s) and the source, provide a link to the Creative Com-
mons licence, and indicate if changes were made. The images or other third party material in this article
are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the
material. If material is not included in the article’s Creative Commons licence and your intended use is
not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission
directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licen
ses/by/4.0/.
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