The aim of this paper is to examine the dynamic relationship between natural resource rents, government spending, government revenues and economic growth in Algeria during the period 1980-2011. The empirical results reveal a bidirectional causal relationship between economic growth and natural resource rents and another bidirectional relationship between total revenues and naturel resource revenues. We also find no cointegration between government spending and government revenues

HAMDI, Helmi

SBIA, Rashid

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MPRA
Munich Personal RePEc Archive
Natural resource rents, fiscal policy and
economic growth in Algeria
Helmi HAMDI and Rashid SBIA
2012
Online at http://mpra.ub.uni-muenchen.de/49910/
MPRA Paper No. 49910, posted 18. September 2013 12:53 UTC
1 
 
Natural resource rents, fiscal policy and economic growth in Algeria  
 
 
 
Helmi HAMDI
a
*, Rashid SBIA
b 
a 
Aix-Marseille University CERGAM (4525), France 
Corresponding author: helmi_aix@yahoo.fr, Tel +973.36003466 
b 
DULBEA, Solvay Brussels School of Economics and Management, Belgium. 
 
 
 
Abstract  
 
The aim of this paper is to examine the dynamic relationship between natural resource rents, 
government spending, government revenues and economic growth in Algeria during the period 
1980-2011. The empirical results reveal a bidirectional causal relationship between economic 
growth and natural resource rents and another bidirectional relationship between total revenues 
and naturel resource revenues. We also find no cointegration between government spending and 
government revenues.  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2 
 
1. Introduction  
Algeria is the largest country in Africa, the Arab world, and the Mediterranean Basin. As an 
OPEC member, Algeria was ranked in 2010 the fourth largest crude oil producer in Africa with 
around 1.5 million barrel per/day US (Energy Administration, 2010). Oil and Gas Journal (OGJ) 
estimates reveals that Algeria held approximately 12.2 billion barrels of proven oil reserves as of 
January 2012, the third largest reserves in Africa. Further, Algeria was ranked the eighth largest 
natural gas producer in the world in 2010 and the third largest gas supplier to Europe. In term of 
labor as factor of production, Algerian labor force reached 11.2 million in 2012 (World 
development Indicators).  
Until today, Algeria remains an enigma for researchers. In fact, despite the huge size of the 
country and its endowment with abundant naturel resources, including oil and gas, as well as an 
immense young labor force potential;  economic growth and development have never reached 
the expected level and precisely their potential level.  Analyzing the Algeria dilemma is the main 
contribution of this article. Precisely, we try to examine the dynamic relationship between 
government spending, government revenues and economic growth by adding natural resources 
rents in the multivariate framework. This variable is important in the model as roughly 70% of 
Algerian government revenues is natural resources revenues. This variable also indicates the low 
weight of private sector in Algeria and the need for further policy reforms. To the best of our 
knowledge, this issue has never been analyzed yet for Algeria context  despite the weight of the 
country in the global energy market. Therefore, this paper is the first attempt in empirical 
literature. Our empirical study uses the Granger no-causality framework due to Toda and 
Yamamoto procedure (1995). The advantage of using the Toda and Yamamoto procedure is that 
it improves the power of Granger-causality test (Rimbaldi and Doran 1996). Moreover, it is easy 
to perform as it does not required the several steps required in the basic Granger causality 
procedure. The main empirical results of the paper show despite the recent efforts of government 
to diversify the economy,  natural resources revenues remain the backbone of the development 
and the progress of Algeria.  
The remainder of the paper is as follows. Section two describes data and methodology, section 
three provides the empirical results. Section four concludes. 
2. Methodology 
2.1. Data  
The multivariate model includes four variables: real gross domestic product per capita (GDPpc) 
which is a proxy of economic growth, real total government expenditures (TEX), real total 
government revenues (TREV) and real natural resource rents (NRR) which include revenues 
from export of oil and gas. The time series data is annually, it covers the period from 1980 to 
2011.  The main source of our data is the World Bank’s World Development Indicators (WDI, 
2012).  All the variables are all transformed into log form  
 
2.2. Econometric approach 
The first step of our empirical model is to test for stationarity of the variables by the use of 
Phillips-Perron and Dickey-Fuller unit root tests. The second step is to identify causality between 
the variables by the use of Toda and Yamamoto procedure. This method aims at estimating the 
basic VAR by the use of a Modified Wald (MWALD) test for restrictions on the parameters of 
the VAR (k) model and then estimates a VAR [k+dmax], where k is the lag order of VAR and 
dmax is the maximal order of integration for the series in the model.  This procedure is easy and 
helpful as it does not require knowledge of cointegration properties of the model.  
3 
 
The model is expressed as follows: 
tit
dk
i
it
dk
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i
dk
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it
dk
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iitit TREVtTEXNRRGDPGDP 1
max
1
11
max
1
1
max
1
max
1
111 lnlnlnlnln   



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
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
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  
 
 
    (1) 
 
tit
dk
i
it
dk
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i
dk
i
it
dk
i
iitit TREVTEXNRRGDPNRR 2
max
1
11
max
1
2
max
1
max
1
222 lnlnlnlnln   










    
(2)
 
 
tit
dk
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iit
dk
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i
dk
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it
dk
i
iitit TREVtTEXNRRGDPTEX 3
max
1
1
max
1
3
max
1
max
1
333 lnlnlnlnln   









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  
 
 
 3)    
 
 
tit
dk
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iit
dk
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i
dk
i
it
dk
i
iitit TREVtTEXNRRGDPTREV 4
max
1
4
max
1
4
max
1
max
1
444 lnlnlnlnln   










  
 
(4) 
  
Where LnGDP is the logarithm of real gross domestic product; LnNRR is the logarithm of real 
natural resources revenues, LnTEX is the logarithm of real government expenditures and 
LnTREV is the real logarithm f total government revenues.  Basically, the Toda-Yamamoto 
method is performed in two steps.  The first step consists of determining the lag length (k) of 
VAR model and the maximum order of integration (d) of the time series variables in the system.  
After the selection of optimum lag length VAR (k) and the order of integration dmax, a level 
VAR is estimated with a total of [k+dmax] lags.  The second step requests the application the 
standard Wald tests on the first (k) VAR coefficient matrix to make Granger causal inference 
using a chi square (χ2) distribution. 
 
2. Empirical Results 
2.2. Unit root tests 
The results of the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) for the four 
variables of the model are presented in Table 1.  The results show that the null hypothesis cannot 
be rejected in each series in level where the series contain a unit root.  By testing through first 
difference, the results clearly indicate that the null hypothesis of non-stationary can be rejected.  
Hence, from all of the tests, the unit roots tests indicate that each variable is integrated of order 
one. 
Table 1. Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) Unit root tests 
 ADF                     PP Order of 
Integration 
  level 1st diff, level 1st diff,  
lnGDP -0.733352 -8.104605*** 1.733720 -7.270988***      I(1) 
lnNRR -2.210946 -5.875245*** -2.236562 -5.873774*** I(1) 
lnTEX -1.853621 -4.77835*** -4.77835 -4.832955*** I(1) 
lnTREV -2.021203    -7.279084*** -1.837478 -7.457412*** I(1) 
 
The result of selecting optimal lag length of VAR indicates that lag order of VAR (k) is 2  for 
multivariate VAR. In the next step we augment the VAR by the maximum order of integration of 
the series (dmax) and then performing the non-Granger causality tests. 
4 
 
 
3.2. The Granger non-causality tests 
The results of the Granger non-causality tests due to Toda and Yamamoto (1995) 
procedure are presented in Table 2. 
 
Table2. Toda and Yamamoto Granger non-causality tests 
 
 
lnGDP lnNRR lnTEX lnTREV 
lnGDP - 4.554 * 3.633 0.832 
lnNRR 7.202 ** - 0.799 11.679 *** 
lnTEX 16.489** 0.243 - 1.410 
lnTREV 5.962 ** 4.732 * 0.417 - 
  
Five major conclusions could be draw from the table above.   
First, Table 2 shows that the null hypothesis of Granger no-causality from natural resource 
rents to economic growth can be rejected at the 10 percent level of significance in the Algerian 
case.  Furthermore, the reverse result is also true.  Therefore, we can confirm the presence of a 
bidirectional causal relationship between natural resource rents (lnNRR) and economic growth 
(lnGDP).  This means that when revenues from natural resources increase, Gdp also increase and 
when Gdp increases, thanks to natural resources rents, the government would invest further in 
mining
1
 and would explore further natural resources and field tankers, especially oil and gas 
which may in turn create employment opportunities and increase the level of production. This 
strategy would promote Gdp per capita and improve the Algerian living standards.  
Secondly, the F-statistic results for the short-run dynamic reveal the existence of another 
bidirectional relationship between Total revenues (lnTREV) and Naturel Resource Revenues 
(lnNRR). This means that when natural resources rent increase, total government revenues 
increase too. This result is not surprising as like other oil-dependent countries, government 
expenditure is financed; mostly, though oil and gas exports revenues. Naural resources rents 
notably hydrocarbons revenues, have long been considered as the main engine of economic 
development.  
Thirdly, from table 2 we can also conclude that Granger no-causality from economic 
growth (lnGDP) to Total Expenditure (lnTEX) can be rejected at the 5 percent level of 
significance. That means when Gdp increases, government increases its public spending to 
improve the infrastructure by building new roads, hospital, schools and universities, etc. Algeria 
has followed expansionary fiscal policy for long periods. The first important one was in the 
afterward of the independence to rebuild the country from a long period of conflict and 
colonization.  Second, It is worth recalling that following the terrorism episode of mid-nineties, 
Algeria has increased significantly the spending in social and economic programs as well as the 
defense to fight violence and extremism and restore security and confidence. The successive 
economic development plans with massive government expenditure on education, health, social 
insurances and welfare services, housing and society development, economic services, and others 
contributed; largely, to increasing the economic growth rate and improving the life standard of 
the people.  
                                                 
1
  Most of Algerian territory is desert; hence investment in mining is the preferred strategy for Algerian government.  
5 
 
Fourthly, from table 2 we can also conclude that Granger no-causality from GDP to Total 
revenues can be rejected at the 5 percent level of significance. This means that when the 
economy is flourishing, mainly because of windfall of oil revenues, Algerian government collect 
more tax revenues from foreign enterprises, notably petroleum companies,  and from export of 
hydrocarbon. In the contrary, when the economy is in recession, due to the drop of oil prices,  tax 
revenues decrease and therefore total government revenues decrease automatically. The strong 
liaison between natural resource revenues and government revenues shows how much Algeria is 
dependent on oil and how much the it needs structural reforms to diversify its economy.  
Finally, from table 2 we observe that government spending and government revenues are 
not cointegrated. This means that Government expenditure and revenues are both determined by 
the long run economic growth reflecting the institutional separation between government 
revenues and expenditure. 
 
3. Conclusion and policy implications 
The main purpose of this paper was to investigate the dynamic relationship between 
natural resource rents, government spending, government revenue and economic growth in 
Algeria during the period 1980-2011. As explained Algeria has a huge potential to diversify its 
economy by investing more in Agriculture. Is worth mentioning that Algeria had a very 
developed agricultural sector before starting the industrial-based strategy in the 70s, which 
destroyed a big part of agricultural lands. Algeria was called “Al-Bahja” which means the green 
land and was supplying many Mediterranean countries before becoming an importer of 
agricultural goods. The tourism sector has also big potentials. With 1400 km cost line, Atlas 
Mountains and desert Algeria could be an attractive global tourism destination.  The Algerian 
government has to invest more on human capital, education and research and development. With 
political instability, Algeria has witnessed “Brain Drain” to Europe and USA. The health sector 
deterioration also needs to be tackled. With high rate of population growth the public sector 
could not satisfy the demand. Further, with low wage level citizens cannot afford treatment in 
private sector.   
 
References  
  
African Development Bank (2011), People's Democratic Republic Of Algeria. Dialogue Note 
2011-2012.  African Development Bank Group 
African Development Bank (2012).  Algeria Economic Outlook.  African Economic Outlook 
2012. 
Dickey, D.A. and Fuller, W.A., (1981), Likelihood Ratio Statistics for Autoregressive Time 
Series with a Unit Root, Econometrika, 49 (4), 1057 – 1072. 
Doran H E and Rambaldi A E (1996) Applying linear time-varying constraints to econometric 
models: With an application to demand systems. Journal of Econometrics. Volume 79, 
Issue 1, July 1997, Pages 83–95 
Johansen, S. (1988), “Statistical Analysis of Cointegrating Vectors”, Journal of Economic 
Dynamics and Control, 12, 231-254. 
6 
 
Johansen, S. and Juselius, K. (1990) “Maximum Likelihood Estimation and Inference on 
cointegration with Applications to Demand for Money.”  Oxford Bulletin of Economics 
and Statistics, Vol.52, May, pp. 169 – 210. 
Phillips, P.C.B. and Perron, P.  (1988), Testing for a Unit Root in Time Series Regression, 
Biometrika 75 (2) 336-346. 
Toda, H.Y. and Yamamoto, T. (1995) “Statistical inference in vector autoregression with        
possibly integrated processes” Journal of Econometrics, 66(1-2), 225-250. 
 
World Bank 2012, World Development Report, New York: Oxford University Press. 
 
 


Natural resource rents, fiscal policy and economic growth in Algeria

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Natural resource rents, fiscal policy and economic growth in Algeria

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