NS4301 Summer 2015 Algerian Economy

1. NS4301 Summer 2015Algerian Economy

2. Background I Setting • Algeria is rich in natural resources • The country is labor abundant • The economy is in an early stage of transition from an administrative economy to a market-driven economy • The country has achieved a remarkable turnaround since 1999 – due largely to favorable external factors. • Between 1999 and 2008 benefitted from a continuous oil boom that allowed the country to accumulate international reserves of around USD 200 billion at their height • Also generated unprecedented revenues for the state • This period was also one of relatively high growth, lower inflation and decreasing rate of unemployment

3. Background II • President Abdelaziz Bouteflika won a fourth term in April 2014 despite rarely appearing in public after a 2013 stroke. • After the Arab Spring protests in Tunisia and Libya the government introduced some political reforms including • an end to state-of-emergency restrictions on civil liberties that had lasted almost two decades • The socialist model adopted after independence from France has hindered development. • Formal sector unemployment remains persistently high and • There is a housing shortage • In 2010, the government began a five-year, USD286 billion program to modernize infrastructure, and appears to be trying to attract foreign and domestic private investment to diversify the economy.

4. Algeria: Recent Growth

5. Algeria: Patterns of Unemployment

6. Recent Developments I • The global financial crisis of 2008-09 has had limited adverse direct effect on the Algerian economy • Mainly remittances and slowdown in energy demand • Slight effect due to the limited integration of its financial system into the international one • However limited links to the global financial system may prevent country from circumventing some of the vulnerability arising from the global recession • Algeria is highly integrated into the global economy through commodity trade and migration. • Algeria’s trade-to-GDP ratio is well above world average. • Algeria’s lack of export diversification and its heavy reliance on food imports exposes the county to commodity price shocks • Algeria leads the world in its exposure to commodity price shocks

7. Recent Developments II • Algeria is also strongly integrated into the global economy through migration • Country has over 2 million emigrants abroad, representing 7% of its population • This is well above the average of about 4.5% for MENA countries • In addition to remittances migration has also provided a substantial outlet for local labor market imbalances in face of domestic and external shocks.

8. Algeria WEF I

9. Development Challenges I • Despite the country’s overall improvement compared to the 1990s Algeria continues to face several key development challenges • First challenge is the efficient use of hydrocarbon reserves for the long-term benefit of the Algerian population through investment in the non-oil economy • This will create permanent jobs thus reducing social tensions provoked by unemployment • Requires management of hydrocarbon revenues with a long-term perspective aimed at reducing the country’s vulnerability to world oil and gas prices • Need to management oil funds in a way that helps manage the unpredictable and volatile oil prices and saves for the coming generations. • Possibility: Fiscal rules based on reference price

10. Development Challenges II • In 2001 Algeria, like many other oil-exporting countries created a stabilization fund for two purposes • First to finance any fiscal deficit arising from an oil price that falls below the budget law reference price • Second to make advance payments on external debt principal • As a result of the external debt repayments Algeria has been (since 2008) a net creditor to the rest of the world with an external debt to GDP ratio at less than 3% • The effectiveness of such funds requires that objectives, rules and management are transparent and apolitical. • In Algerian case there are no mechanisms in place so far that prevent misuse of these funds

11. Development Challenges III • Another challenge is to speed up Algeria’s structural reforms • Country has not kept pace with worldwide and regional progress in this field • However trade reforms stand out as an area in which it has exhibited remarkable progress • Mainly motivated by Algeria’s bid to join the WTO and regional and bilateral agreements • In other areas of reform, Algeria ranks in the bottom of the world in terms of improvement across politically sensitive areas such as • Reform of the judiciary • Business and financial environment

12. Development Channels IV • Of greater concern is the lack of progress or even regression in the field of governance. • Although many facets governance comprises mainly two areas the quality of public services and accountability • The first area consists of : • Rule of law, • Protection of property rights including privacy • The control of corruption, • Efficiency of the bureaucracy and • Quality of regulations. • Algeria’s ranking in the World Bank’s Doing business • 154 out of 189 (2014) and 147 out of 189 (2015) • suggests the regime’s lack of will to create an environment that is conducive to investment

13. Government Effectiveness

14. Regulatory Quality

15. Rule of Law

16. Control of Corruption

17. Total Governance

18. Development Challenges V • The second area includes public access to information and citizens’ ability to hold public leaders accountable • Algeria like many MENA countries has recently experienced a marked deterioration relative to the progress made elsewhere • Especially the case with regard to public sector accountability • Although each area of reform is important in its own right, lack of progress and even deterioration, in governance reform critical because it usually impedes reform progress in other areas • International experience has shown • where social and political stability has improved and structural reforms have been successful, strong social and political movements for change

19. Development Challenges VI • The ability of such movements for change depends essentially on • Access to information, • Freedom to mobilize and • To contest government policies • So far Algeria lags far behind in this area of reform • This, in turn, has resulted in social and political instability, increasing corruption and inefficiency

20. Voice: Accountability

21. Political Stability

22. Development Challenges VII • Third challenge is to diversify the economy and exports • Algeria has one of the least diversified economies among middle income and oil-producer countries • Concentration and diversification indices of export products show Algeria’s indices much higher than the average for North Africa as well as the middle income oil-exporting countries • Hydro-carbon exports make up almost all merchandise exports – 98%, extremely high by international standards • Algeria’s heavy reliance on hydrocarbon exports has led to higher volatility and slower growth • International evidence on trade shows that • Level of export diversification raises productivity allowing for greater innovation and knowledge spillover to rest of economy • Highly concentrated exports are associated with lower growth

23. Development Challenges VIII • Historically only several hydrocarbon dependent economies have achieved some success in diversifying their economies – Mexico, Bahrain and Indonesia Options for Algeria • Invest in downstream activities – chemicals, fertilizers etc • Saudi Arabian Model • Invest in developed countries to generate future revenue streams • Kuwaiti model • Invest locally to develop export activities such as financial and trade services as well as tourism • Oman Model

24. Development Options I • Algeria’s strengths include • Tradition of high savings • Average educational attainment • Abundant natural resources • Strategically favorable geographical location • Should give the country the potential for rapid and sustainable growth • To achieve this aim will need to create a business environment conducive to the development of the emerging private sector • In addition to governance reform, the country will also have to make significant progress in competitiveness • Currently deficient in many areas:

25. Algeria WEF II

26. Algeria WEF III

27. Algeria: Economic Freedom I • Algeria’s economic freedom score ranks it 157th in 2015 • Lower than in 2014 due to declines in investment freedom and the management of government spending • Country ranked 14th among 15 countries in MENA region • Score considerably below regional and world averages • Algeria’s economy has been on declining path of economic freedom over the past five years • Country now rated “repressed” • As policies to sustain regulatory efficiency and open markets have been neglected or even reversed • Economy has become more dependent on the state dominated energy sector • Tariff and non tariff barriers coupled with burdensome business investment regulations

28. Algeria Economic Freedom II

29. Algeria Economic Freedom III

30. Algeria: Economic Freedom IV Specific areas of economic freedom • Rule of Law • Judicial system generally weak, slow and opaque. • Estimated one half of all economic transactions occur in the informal sector • Most government property remains in government hands. • Regulatory efficiency • Many bureaucratic impediments to entrepreneurial activity and economic diversification persist • Labor market remains rigid, contributing to high youth unemployment • Generous but unsustainable state spending on subsidies for food and fuel, price ceilings and redistribution schemes to control prices have been used to stave off political unrest. • Much government interference in financial system. State banks provide over 80% of loans.

31. Assessment • To meet pressing development challenges of creating sufficient employment opportunities and improving living conditions • Algeria will require higher growth • Depends on implementing broad structural reforms and improving governance to sustain growth opportunities outside hydrocarbon sector • Yet transition to market economy • has been proceeding slowly since 1998 • Since 2008 has been altogether shelved