Energy Transition and Economic Diversification in Egypt: Resolving the Green Dependency Paradox for Long-Term Gains

Abstract

This study investigates the relationship between renewable energy (RE) expansion and economic diversification in Egypt over 1990–2023 using a nonlinear autoregressive distributed lag (NARDL) framework. Egypt’s fossil fuel share stands at approximately 93% of primary energy supply, yet the country has committed to a 42% renewable electricity target by 2035. Despite quadrupling utility-scale RE capacity from 2.8 GW to 11.2 GW between 2015 and 2023, the Economic Diversification Index (EDI) has remained broadly stagnant. The bounds test confirms long-run cointegration (F = 6.760), exceeding small-sample critical values at the 1% level. Long-run estimates reveal that positive RE shocks are associated with lower diversification (θ+ = −0.571, p = 0.035) and negative shocks exhibit a statistically similar adverse effect (θ− = −0.271, p = 0.024). Oil rents exhibit a positive long-run association (β = 0.145, p = 0.003). The error-correction term (−0.569) indicates approximately 57% annual adjustment. The Wald test provides marginal evidence against long-run symmetry (F = 2.999, p = 0.097). To complement the Granger causality analysis and address small-sample concerns, we additionally implement the Toda and Yamamoto augmented VAR procedure, which confirms robust unidirectional temporal precedence from LRE to LEDI (χ2 = 23.48, p < 0.001) without reverse feedback (χ2 = 2.25, p = 0.133). These patterns are interpreted through the lens of the Green Dependency Paradox—a conceptually distinct framework characterized by three mechanisms absent from classical resource curse theory: technology-mediated capital flight, procurement-induced deindustrialization, and policy-reversible lock-in operating under conditions of high import content, absent local content mandates, and fragmented industrial policy coordination. A tri-phase, evidence-grounded policy framework is proposed. All findings are explicitly conditional on Egypt’s current institutional context.