The causality relationship between FDI and economic growth in North African countries

Abstract

The purpose of the paper is to investigate the causal linkage between FDI and economic growth in North African countries. The paper uses bivariate vector autoregression and vector error correction models with annual time series data on FDI inflows, and GDP for six North African countries over the period 1970-2007. The results indicate the existence of long run causal bidirectional relationship between FDI inflows and real GDP growth rate for all North African countries except for Algeria. The paper shows that FDI inflows lead GDP growth rate and that economic growth leads FDI inflows in the long- run for all North African countries..As for the short –run causal relationship between FDI and real GDP growth rate, the empirical results show that GDP growth rate leads FDI inflows to Egypt, Libya, Morocco, Sudan and Tunisia by one year. FDI/GDP ratio positively leads GDP growth rate by one year in Egypt. However, the coefficient of the lagged FDI/GDP is negative and significant in the equation testing the causality from FDI to GDP in the case of Libya and Morocco suggesting that FDI causes the decline of GDP in the short run for these two countries. There is no causal short run relationship from FDI to GDP for Sudan and Tunisia. The Granger causality test results show that the causality runs from FDI to GDP in the case of Egypt, Libya and Sudan. However, there is neither, Granger causality running from GDP growth rate to FDI inflows nor Granger causality running from FDI to GDP growth rate for Algeria, morocco and Tunisia.