Dynamic structural changes and sectoral linkages in Middle Eastern and North African economies: a Markov chains approach
2007
Dwikat, Y.
The GDP data by activity for Middle Eastern and North African (MENA) countries, as in the case of most developing countries, have been fluctuating sharply over the last few decades due to the unstable political and economical environment. Historical Data on GDP by sector, covering the period of the last three decades or so, were collected on a sample of 11 countries in the region representing its diversity. Our purpose was to identify structural changes (by tracing main breaking points) and to evaluate sectoral linkages in the economies of MENA in the last 35 years. Unlike most of the previous studies that have been using a traditional methodology of a descriptive nature, we applied an empirical method of Markov Chains, with new techniques. A Non-stationary transition probability matrix (NSTPM) for each of the 11 countries was the main outcome of running the Markovian process using the Maximum Entropy technique. The NSTPM can be used to shed light on the mechanism of transitions and links between sectors. The elasticity estimator was then generated from the NSTPM, for each sector of the GDP. Developing these new estimators will help to avoid the oscillation of the basic data when trying to capture breaking points in the MENA economies. All the empirical results were presented and discussed. Most of them were found to be significant in tracing and identifying the breaking points and shock that could cause structural changes in these sectors and economies in the MENA region. The results also shed light on the equilibrium points for the GDP structure in the long run.
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