The impact of government size on economic growth in Algeria: a threshold analysis

Abstract

This paper aims to examine the growth-government spending nexus for Algeria. Our empirical investigation follows the endogenous growth literature by using GDP growth rate as dependent variable and government expenditure as a share of GDP as the main explanatory variable. We then perform the Hansen’s (2317) regression kink model with an unknown threshold to estimate the optimal government size during the period 1973-2020. The obtained results confirm the validity of the Armey curve hypothesis in the case of Algeria, and suggest an estimated government size that maximizes economic growth around 30.4 percent of GDP. Accordingly, since Algeria has attained its optimal level of government size, it seems to be more important for authorities to improve the efficiency of government expenditure.