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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. 7 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 12 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 23 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: 24 Algeria WEF II 25 Algeria WEF III 26 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 27 Algeria Economic Freedom II 28 Algeria Economic Freedom III 29 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 31