Income Inequality and Economic Growth in Algeria: Empirical Study during the Period 1980-2015

Abstract

In recent years, Algeria achieves significant progress in the economic and social condition of its population due to the improvement in most economic and social indicators, and the increase in the human development index from 0.577 in 1990 to 0.754 in 2018. However, this improvement is not equally shared between groups and different regions. Therefore, poverty and inequality persist and remain a major challenge of the Algerian government. In this paper, we attempt to study income inequality and its impact on economic growth in Algeria. To attend the aim of this study we explore the relationship between income inequality and economic growth over the period 1980-2015 based on the available data. Based on the recent theoretical and empirical studies, we use Autoregressive Distributive Lags (ARDL) model to explore the long-run relationship, and Error Correction Model (ECM) for the short-run dynamics, the results indicate that economic growth as measured by the annual per capita GDP growth rate is associated negatively and significantly with inequality as measured by Gini coefficient, implying that in the long run, a 1% increase in income inequality will hurt economic growth in Algeria by nearly 0.52% in the long-run. The result obtained from the ECM model shows that the coefficient is equal to -1.23 and highly significant; this implies that the deviation for the short-run in economic growth is corrected by 123% percent over each year in a long time. These findings confirm the hypothesis that high inequality hurts the economic growth in low- and middle-income countries. Therefore, the Algerian government must adopt policies that favor economic growth and achieve greater equity in income distribution to ensure sustainable and inclusive growth.