Download Security Scenarios And The Global Economy

NS4301
Summer 2015
Algerian Economy
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
2
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.
3
Algeria: Recent Growth
4
Algeria: Patterns of Unemployment
5
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
6
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.
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Algeria WEF I
8
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
9
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
10
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
11
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
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Percentile: Government Effectiveness
Government Effectiveness
80
70
60
50
40
30
20
10
1996
2000
2003
2005
2007
2009
2011
2013
Country/Group
ALGERIA
EGYPT, ARAB REP.
MOROCCO
TUNISIA
Average
13
Regulatory Quality
60
Percentile: Regulatory Quality
55
50
45
40
35
30
25
20
15
10
5
1996
2000
2003
2005
2007
2009
Source: World Bank, Worldwide Governance Indicators, 2014
2011
2013
Country/Group
ALGERIA
EGYPT, ARAB REP.
MOROCCO
TUNISIA
Average
14
Rule of Law
65
Percentile: Rule of Law
60
55
50
45
40
35
30
25
20
15
10
1996
2000
2003
2005
2007
2009
Source: World Bank, Worldwide Governance Indicators, 2014
2011
2013
Country/Group
ALGERIA
EGYPT, ARAB REP.
MOROCCO
TUNISIA
Average
15
Control of Corruption
Percentile: Control of Corruption
80
70
60
50
40
30
20
10
1996
2000
2003
2005
2007
2009
Source: World Bank, Worldwide Governance Indicators, 2014
2011
2013
Country/Group
ALGERIA
EGYPT, ARAB REP.
MOROCCO
TUNISIA
Average
16
Total Governance
60
Percentile: Total Governance
55
50
45
40
35
30
25
20
15
10
1996
2000
2003
2005
2007
2009
Source: World Bank, Worldwide Governance Indicators, 2014
2011
2013
Country/Group
Algeria
Egypt
Morocco
Tunisia
Average
17
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
18
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
19
Voice: Accountability
Percentile: Voice and Accountability
45
40
35
30
25
20
15
10
5
1996
2000
2003
2005
2007
2009
Source: World Bank, Worldwide Governance Indicators, 2014
2011
2013
Country/Group
ALGERIA
EGYPT, ARAB REP.
M OROCCO
TUNISIA
Average
20
Percentile: Political Stability/Absence of Violence
Political Stability
60
50
40
30
20
10
0
1996
2000
2003
2005
2007
2009
Source: World Bank, Worldwide Governance Indicators, 2014
2011
2013
Country/Group
ALGERIA
EGYPT, ARAB REP.
M OROCCO
TUNISIA
Average
21
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 oilexporting 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
22
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
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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:
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Algeria WEF II
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Algeria WEF III
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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
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Algeria Economic Freedom II
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Algeria Economic Freedom III
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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 30
provide over 80% of loans.
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
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