The Effect of Domestic Risks and Arab Spring on Economic Risk in Northern African Countries: Findings From the First- and Second-Generation Panel Approaches

For decades, domestic risks belonged to the category of issues that are difficult to understand because information is fragmented or incomplete. However, paradoxically it has been suggested by many researchers that domestic risks involve complex combinations of structural and institutional weakness, bad governance, and regional contagion wrapped in a paradigm of high levels of trade, capital, and information flows, resulting in economic risk. This study employ first- and second-generation panel-based estimators—Westerlund cointegration, fully modified ordinary least square (FMOLS), dynamic ordinary least square (DOLS), and dynamic common correlated effects mean group (D-CCEMG)—to explore both short-run and long-run nexus between domestic risks and economic risks in Northern African countries from 1997Q2 to 2018Q4. To our knowledge, no study has applied these econometric techniques to investigate interlink-ages among domestic risks, economic risks, and as well as including dummy variable of Arab Spring in Northern African countries. Our empirical findings reveal that (a) financial and political stabilities positively affect economic stability, and (b) Arab Spring negatively affected economic stability. Our analysis confirms that domestic risks involve institutional weakness and bad governance region in regional contagion. Given this new insight on economic risk, policymakers should develop a strong financial system that promotes economic growth.