Abstract:
Abstract Egypt is a fairly large country with a struggling economy, like many others in the region. An improved economic performance in both Egypt and other countries in North Africa and the Middle East has the potential to raise the living standards of millions of people; this in turn could improve the region's political climate. Understanding how factors such as trade policy can affect Egypt is important for policy decisions in the US and Egypt. This issue is thus investigated in three essays that quantify the impact of a prospective bilateral Free Trade Agreement (FTA) between Egypt and the United States (US). In the first essay, I provide an econometric estimate of the effects of accessing the US market as well as the effects of Egyptian institutional quality on trade. I apply the gravity model to Egypt's trade flows for 2004 and find that the FTA could increase aggregate exports to the US between 140 and 157%. In the second essay, I examine the effects of participation in the FTA on the inward Foreign Direct Investment (FDI) to Egypt from the US and the rest of the world. I estimate gravity models of bilateral investment for 2005 and find evidence that this prospective FTA would be associated with a reduction of inward FDI to Egypt between 28% and 34% of the 2005 level. In the third essay, I investigate the current debate over US aid to Egypt, to identify whether participation in an FTA would be a complement or a substitute to US foreign aid. The analysis is based on a country-pair foreign aid difference regression model for 1980 and the years 2004 and 2007. The empirical evidence supports the complementary relationship between US foreign aid and this prospective FTA: The FTA would lead to increased foreign aid from the US to Egypt.
