Structural Distortions, Macroeconomic Determinants, and Portfolio Allocation in the Maghreb Region: A Panel-Based Markowitz Mean-Variance Approach

Abstract: This paper applies modern portfolio theory to the Maghreb by treating national economies as assets in a regional macro-portfolio. Using annual real GDP growth for Algeria, Tunisia, Morocco, and Libya/Mauritania over 1990–2021, we estimate panel models (pooled, fixed, random effects) and find that foreign direct investment and governance quality significantly enhance macroeconomic returns, while cross-country diversification gains are limited by very high return correlations. Mean–variance optimization via quadratic programming shows that the minimum-variance and efficient portfolios collapse to a 100% allocation to Algeria, and unconstrained models with short-selling generate extreme, economically implausible positions. However, strategic analysis reveals that this dominance is a "structural illusion" rather than genuine economic efficiency. Algeria’s risk-adjusted superiority is deeply rooted in a rentier economy dependent on hydrocarbon revenues, translating this absolute allocation into severe concentration risk rather than horizontal competitiveness. Overall, the results emphasize that unlocking genuine regional diversification requires breaking rentier monopolies, enhancing the business climate, and pursuing deep institutional reforms to attract productive foreign investment. Dataset Details: This dataset (plm.csv) contains balanced panel data for Maghreb economies covering the period 1990–2021. Key variables include Real GDP growth, Foreign Direct Investment (FDI), Trade Openness, and institutional quality indices (Corruption, Government Stability, Democracy, Bureaucracy).