The determinants of economic growth in Algeria

Abstract

This study aims at investigating the key determinants of economic growth in Algeria by using time series data over the period 1970-2019. We are particularly interested in the extent to which foreign direct investment, gross domestic saving, government expenditure, degree of openness, labor force, and inflation affect economic growth. Autoregressive distributed lag bounds test was used to examine if there was a cointegrating relationship among these macroeconomic determinants under study in relation to economic growth in Algeria. The short-run and long-run relationship were also examined using the Autoregressive distributed lag model (ARDL) with error correction term. The ARDL bounds test shows that there exists long-run cointegration relationship between the variables. The long-run ARDL model shows that foreign direct investment, gross domestic saving, government expenditure and inflation have long-run positive impact on Algeria’s economic growth while degree of openness and labor force have negative impact. The short-run model shows all variables are significant; except foreign direct investment and government expenditure. The study concluded that gross domestic saving, foreign direct investment and government expenditure are the most important determinants of economic growth in Algeria. We also found some evidence that improving international trade policies, human capital development; and controlling the rate of inflation have positive impact on country’s economy.