cAlgerians have paid a high price for growth in the last 20 years. Economic crises, plummeting living standards, a bloody and brutal civil war, and now painful economic restructuring and reform. What progress, then, has been bought?
There is no doubt that Algeria is dramatically different economically. Twenty years ago, economic activity outside the hydrocarbons sector concentrated around the state-owned heavy industrial base. Official policy marginalized the private sector, the import regime was government controlled, the state-owned banking sector was free from private and/or foreign competition, while the government remained the only source of foreign capital. Underpinning it all was oil, which at over 60% of total state revenue funded not only Algeria’s import bill but also nearly all domestic expenditure.
In 2003, deregulation legislation has opened nearly all economic sectors except hydrocarbons, including banking, telecommunications, pharmaceuticals, transportation, and heavy industry, to private and/or foreign investment and competition. For the first time, large private conglomerates have suddenly emerged, with interests in aviation, banking, industry and pharmaceuticals. A wide scale privatization program is under way, prompting a difficult and costly process of public sector restructuring, and the trade regime has been substantially liberalized with the signing of an Association Agreement with the European Union and the reduction of key tariff rates. A stock exchange has been established in Algiers along with a foreign investment agency designed to assist the process of investing in Algeria.
These changes have bought meaningful progress, notably that Algeria is significantly less vulnerable to external shocks than it was in the mid-1980s. Then, the sharp drop in oil prices, in tandem with a fall in the US dollar (the currency of international energy trading), more than halved Algeria’s foreign earnings, plunging the country into a financial crisis. The shortfall in earnings over the next several years was covered by a massive increase in debt – the debt service ratio topped 86% in 1988, up from approximately 20% at the beginning of the ‘80s – and a dramatic restriction of imports, a decision keenly felt at the popular level. However, with the decision to accept IMF assistance in 1994, along with the concomitant range fiscal and monetary reforms, Algeria is financially more robust. Despite a severe slump in oil prices between 1997 and 1999, national finances remained in check and the economy maintained sluggish growth. When world oil prices rebounded strongly in 2000 and 2001, the government’s finances responded spectacularly. Total foreign debt, as a percentage of GDP, is now at a 20-year low, the current account surplus is reaching 20% of GDP, while foreign currency reserves top $21 billion, over one third of GDP.

However, despite this success, many things remain the same. Algeria is still fundamentally a renter economy. The sale of hydrocarbon resources constitutes 95% of the Republic’s export revenue and 60% of total revenue; this ratio has not changed significantly since independence. While this means that Algeria’s finances continue to be dependent on world energy prices, it also underscores a more alarming problem: that in the 15 or so years since economic reform began, diversified economic growth outside the hydrocarbons sector has not genuinely taken place.
The decline in real growth is evident in a host of economic and social indicators. Overall economic growth has remained on average between 1% and 3% annually. More specifically, public sector industrial output has been in decline since the 1990s, while the agricultural sector – the economy’s most important employer – has also been performing adversely, made worse by poor weather conditions. Total foreign investment outside the oil and gas sector also remains limited, coming in at only $500 million in 2001. The failure of non-hydrocarbon sectors to grow in tandem with market liberalization has seen unemployment rise dramatically. Economists calculate that the number of unemployed increased by 190% between 1985 and 1991, while total unemployment in 2003 is estimated at approximately 30%, 70% of whom are under 30 and largely unskilled. Domestic demand, be it household consumption or domestic business investment, has declined to the extent that total imports in 2000 were lower than those of 1995.
The most worrisome outcome, however, is that this stagnation means that ordinary Algerians have not seen real returns from this period of economic reform. Market liberalization without a sufficient process of legislation, market oversight institutions, and regulation have seen the conspicuous growth of personal fortunes for a few (it is now estimated by the National Economic and Social Council (CNES) that 11% of the population control 89% of GDP) and the extension of the informal economy, economic crime, and corruption. (Some estimates place black market activity at up to 20% of GDP.)
 

Unemployed and have a good idea? Algeria is experimenting with venture capital backed by the government and corporations. For the youth… Perhaps the most tragic consequence of Algeria’s troubled reform process has been the country’s unemployment rate. At approximately 30%, it is one of the highest in the developing world. To make matters worse, Algeria’s high population growth rate means that 70% of this figure is comprised of those less than 30 years of age. In an attempt to expand the number of limited opportunities for Algeria’s youth, the government created the National Agency for Supporting Youth Employment (ANSEJ) in 1997. Its mission, according to Mr. Abdelghani Mebarek, the agency’s General Director, is to “mix and support the creativity of youth with the opportunities offered by our country.” Specifically, the agency acts as a venture capital firm, providing technical and financial assistance for youth business ventures. With a combination of self-funding, bank finance, and government aid, ANSEJ has assisted approximately 43,000 projects, offering 130,000 direct job opportunities and an estimated 370,000 in follow-up on employment.

Most Algerians, on the other hand, have had to cope with falling living standards in the last two decades. The National Population and Development Research Center calculates that one third of the population – 11 million out 31 million – is now below the poverty line, surviving on less than one dollar a day. Wages have not kept pace with inflation (a 66% rise in consumer prices since 1995 compared to a 44% rise in wages) while the privatization process has involved more liquidation - and the corresponding loss of approximately 200,000 jobs – than investment. Most severe, however, is the chronic shortage of housing, which continues to plague urban and rural dwellers alike. Algeria has one of the highest occupancy ratios in the world and demand far outstrips supply, leading to rampant property speculation and corruption in the construction sector.
The upshot has been increasing levels of social discontent. Unrest continued for its 22nd month in Kabilye – home to Algeria’s ethnic Berber community – while sporadic rioting extended to other regions of the country (mainly in the east) in protest against water rationing, public transport problems, and continued housing shortages.
 

GDP: GDP PER CAPITA: 2002 GDP GROWTH: EXPECTED 2003 GDP GROWTH: INFLATION: POPULATION: $55.4 billion $1,760 3.5% 4% 3.2% 32 million The year ahead Algeria benefited from a third straight year of high world oil prices, while the crisis over Iraq will make it four in 2003. The result is a very strong financial position, with currency reserves, at $21 billion, now larger than the Republic’s debt position. Economic growth as a whole, however, has remained intractable, being outpaced by population and unemployment growth.   Algeria’s financial solvency could lead to the elimination of external debt. As a percentage of GDP, Algeria’s debt is at its lowest point since economic reform began, while the Governor of the Central Bank has stated that foreign debt could reach a negligible $200 million by 2011 given the government does not resort to large-scale borrowing. TO WATCH 2004 presidential elections Incumbent president Mr. Abdelaziz Bouteflika will most likely be confronting his prime minister, Mr. Ali Benflis. The tense social climate of poverty, high unemployment, and labor unrest will highlight popular distrust in the economic reform movement, making forceful action on increased structural reform in 2003 a politically costly manoeuvre. Stagnant demand The absence of strong economic growth is evident in Algeria’s trade balance. While the value of Algerian imports has risen dramatically due to higher world oil prices, imports have remained largely static over the decade, reflecting the poor state of domestic industry and depressed consumer demand.

It is in this context that the government has had little appetite for pushing through the more difficult aspects of structural reform. Privatization, which is resisted by powerful union groups, members of the elite who have vested interests in state-owned enterprises (SOEs), and SOE managers themselves, has remained essentially static over the past several years. Despite being in place since 1994, the state has only managed one majority privatization so far. The much-hyped plan to liberalize the all important hydrocarbons sector – which has been pending parliamentary approval for over two years and crucial for attracting long-term foreign investment – has been shelved in the face of intense popular distrust. President Bouteflika’s negotiations with the World Trade Organization have also been criticized by employer and employee groups for lack of consultations regarding the “potential harmful consequences for the economy.”
In 2003 then, the government enjoys a strong financial position completely at odds with a stagnant domestic economy and a tense social climate. The response in 2002 was to take advantage of its financial strength to initiate a $7 billion expenditure program focusing on stimulating demand, promoting labor intensive activities, and embarking on large infrastructure projects. The government has not released current statistics for the expenditure program, making it difficult to gauge its impact on growth. The CNES, meanwhile, argues that while the program has served to stave off recession, the overall economic and social situation “has made no significant shift.” The government’s 2003 budget will continue the program, resulting in a total $3.11 billion deficit and a projected 4.5% economic growth rate.
Overall, most commentators argue that Algeria will only see the growth necessary to reduce poverty and unemployment while increasing living standards and foreign investment through more concerted structural reform. The IMF argues that Algeria must take advantage of the window strong energy prices has given it to accomplish more, particularly in terms of revitalizing the enterprise sector, promoting privatization and transparency, and continuing the costly reform of the banking sector, while at the same time improving the social safety net.
This will be difficult in the near term. The erosion of popular faith in economic reform will make calling for increased and tougher action on the economy a politically risky strategy for 2004’s presidential elections, where the incumbent, Mr. Abdelaziz Bouteflika, will mostly likely come up against his Prime Minister, Mr. Ali Benflis. In a move designed to influence the campaigning agenda, the UGTA, Algeria’s most powerful labor coalition, decided in early 2003 to call a general strike in opposition to the privatization process, liberalization of the oil and gas sector, and public sector job cuts.
In the end, the government has the unenviable task of making the best out of a chicken-and-egg argument: real progress in economic reform will require making real progress in popular living standards.