Dynamic Analysis of the Relationship Between Governance and Economic Growth in Algeria: An Empirical Study Using the Harvey Unobserved Components Model (UCM), 2000–2024

Abstract

This study aims to analyze the relationship between governance and economic growth in Algeria over the period 2000–2024. The study utilizes Harvey’s Unobserved Components Model (UCM) to separate the long-term trend from short-term fluctuations. Governance is measured using Kaufmann’s Worldwide Governance Indicators (WGI), which include government effectiveness, political stability, regulatory quality, rule of law, control of corruption, and voice and accountability. The results reveal a limited role for most governance indicators in explaining economic growth, with the exception of regulatory quality, which exerts a positive and statistically significant impact. Additionally, the findings show that control of corruption has a positive effect, albeit at a lower significance level, whereas the remaining indicators show no statistically significant impact. The results also indicate that growth dynamics in Algeria are influenced by long-term structural shocks and short-term fluctuations. Robustness checks confirm the stability of the regulatory quality results across two different sub-periods. Furthermore, model diagnostic tests support the adequacy of the estimation, indicating that the residuals are free from autocorrelation and normally distributed. The study highlights the importance of enhancing the regulatory framework as a key entry point to support economic growth in Algeria.