Download Algeria Oil Dependency

NS4054
Summer Term 2015
Algeria: Oil Dependency
Overview I
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Since independence, Algeria has spent nearly
25 years to build a model of socialist development
25 years to escape from socialist development
Country is at the heart of the debate on success or failure
of development strategies pursued by former colonies
• Use of non-renewable natural resources for development
raises questions of sustainability of choices made
• Challenges Algeria has to deal with rooted in
• The construction of the economy
• The way the ruling elite is selected and
• How the revenues from non-renewable energy sources are used
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Overview II
• Economy often characterized as
• Oil-based “rentier state”
• “Patrimonial state”, and
• “Authoritarian state”
• These characterizations underscore the extent of
corruption and patronage that affects the whole politicaladministrative mechanism
• Keeping the FLN at the head of the country for over 50
years raises questions as to the nature of political power
• Country neither a democracy, nor
• Full dictatorship
• Economic failure and political stalemate suggest FLN
destroyed its own dreams
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Model of Self-Reliance I
• Following independence in 1962
• Algeria introduced an introverted development strategy
based on Soviet socialist model underpinned by
• Single political party FLN
• Difficulty in correcting any errors (strong ideology and weak
opposition), and lack of appraisal of public policies
• Protectionism, state monopoly over international trade, absence
of export support mechanisms – desire for autarchy
• Centralized planning – centrally administered economy
• Priority given to heave industry
• Agricultural reform (collective farming)
• Transfer of agricultural resources to industry
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Model of Self-Reliance II
• Idea that
• economic independence would consolidate its political
independence
• Country should create a unified production mechanism by
developing its own industries financed by its own resources
• Model proved ill conceived
• Government’s investment in heavy industries – steel,
petrochemicals too ambitious with respect to size of the
domestic market
• As in soviet model, agriculture, consumer goods and housing
were sacrificed
• Resources drawn from sale of oil and gas were insufficient to
create the conditions for long-term economic growth
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Model of Self-Reliance III
• Algeria did not build up a sovereign fund to prepare for
the post-oil era
• There was a failures to back up the management of oil
sale revenues with a long term strategic vision
• Government tended to develop polices based on statallocated income rather than on the creation of new
production driven wealth
• Country suffered from the Dutch Disease – blockage of
industrialization process due to increases in prices of
raw materials
• Shift in labor force towards the expanding sector
• Increased salaries in this sector
• Growth in revenue leading to general inflation
• Rise in exchange rate which handicaps domestic industry
subjected to international competition
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Changing Economic Priorities I
• Oil drop of 1985/1986 cast doubt on
• government’s ability to support employment and
consumption through subsidies, and
• An industrialization model financed by revenue from oil
and gas.
• Illustrated country’s vulnerability leading to reforms
• Felt the need ro revise the role of the public sector in the
economy
• First reforms applied to national firms such as Sonatrach
• After nationalizing the oil industry forced to backtrack at
beginning of the 1990s to attract foreign investment
• Partial privatization introduced and the socialist areas
farming and state-owned industry were given greater
autonomy
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Changing Economic Priorities II
• Revised constitution 1989
• Got rid of all references to socialism, and
• Acknowledge the complementarity of private
entrepreneurship with the public sector
• The country officially began a vast-post-socialist reform
program
• Riots October 1988 and military coup in beginning of
1992 (Islamic group had won the elections) started the
civil war 1992-1999 between the military and Islamic
movements
• Left almost 100,000 dead
• Country could not service debts and in 1994 forced to
accept a IMF free market policy
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Changing Priorities III
• Despite repeated promises to liberalize energy market,
status quo of the patronage between Sonatrach and the
government continued
• Sontrach’s strategy remained pretty much the same
despite globalization of the oil and gas industry
• Government has been determined to keep its grip on the
sector
• Reason moves to liberalize industry have continually
been abandoned
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Assessment
• Today, Algerian economy is a service-based “rentier
economy”
• Over 83% of economy based on trade and small-scale
services
• Over 90% of industrial segment is made up of familybased SMEs
• Country owns the third largest oil reserves in Africa and a
third of the gas resources, but still does not have the
resources needed to build a modern economy outside the
oil and gas sector.
• In these conditions, Algerian population cannot take
advantage of its potential wealth.
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Algerian Population I
• Since beginning of the 1960s the Algerian population has
tripled to over 38 million
• For a while rentier economy neutralized drivers on
demographic transition
• With oil price drop 1985/86 – falling incomes and fertility
• In last few decades despite a redistribution of part of
revenue from oil
• Little sign of rising living stands of population
• However Algeria has steadily improved position in terms
of human development despite economic and political
turmoil
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Algerian Population II
• In 1990s Algeria confronted with an acute identity crisis
in religious, economic, social and cultural terms
• Crisis still reverberates today
• The armed conflict and economic crisis led to
• Destruction of key infrastructures
• High unemployment
• Poor working conditions and social services
• Exodus of top and middle managers – resulted in significant
demand for foreign skills
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Algerian Population III
• Gap remains wide between educational supply and
demand
• In most instances programs available in higher education
do not match requirements of business or the economy
• Skills are rare and firms find it extremely difficult to
recruit the right workers
• Higher education system managed in bureaucratic
manner – ill adapted to needs of business
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Uncertainties I
• Before the 2014-15 oil price drop
• Country’s financial situation was healthy
• Very little external debt – paid off early
• Country had around $200 billion in reserves
• Positioned with pipelines to supply gas to Europe
• However:
• Production structure distorted in favor of energy and at expense
of manufacturing – despite massive government investment in
industries
• Country lacked many crucial skills and had obsolete
infrastructures in key sectors.
• Led to a mass exodus of academics and top managers
• Number of administrative obstacles and low level of human
capital among young generations made it very difficult to start a
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business
Uncertainties II
Major issues for concern
• Absence of any real tourist industry – poor infrastructure
and closed economy after independence
• Little foreign investment – 49/51 regulation forbids
foreigners from having majority stockholding
• Some years Algeria imports over 40% of cereals placing
population in position of food dependency due to
• Choices made after independence
• Amount of land lying fallow
• Persistently poor harvests – little fertilizer
• Uncertainty over government policies
• All have prevented a genuine food supply chain from
being developed.
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Uncertainties III
• Lack of diversification in country’s exports
• Oil and gas revenues financing around 75% state budget
• Of 183 countries mentioned in WB Doing Business
Algeria ranks 137 position fallen steadily
• Also 111 out of 180 in Transparency International Report
• In building and civil engineering sector, local companies
unable to take part in major infrastructure construction
programs because
• Lack of a real human resource policy
• Lack of formalized skills identification
• Outdated recruitment with little or no consideration given to
qualifications and
• Sector very traditional – lacks any leading edge technologies
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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
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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
18
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
19
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
20
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
21
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
22
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
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Algeria: Recent Growth
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Algeria: Patterns of Unemployment
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Dual Gaps
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Post Arab Spring I
• Algeria remained on sidelines during Arab Spring years
2010-11 giving it appearance of stability
• Protests diffused with
• Wage increases
• Police presence and the traumatic memories of the civil war
• Many factors have led to present situation
• Government never managed to free itself from the war of
independence
• Power has remained in hands of a military clan which still rules
today and whose legitimacy linked to the armed struggle
• Leaders are former freedom fighters
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Post Arab Spring II
• Failure of economic development (initiated in 1962) and
the democratic transition (which began in 1980) are
directly linked to the incompatibility between
• On one hand system that clings to power by advocating inaction,
and
• On the other hand the legitimate changes expressed by civil
society
• Army remains real power in country but its status proses
a problem
• Is it in the service of a legal power? or
• Is it the power which defines what is legal?
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Post Arab Spring III
• In geopolitical terms, Algeria resembles a fortress under
siege
• Borders with Morocco have been closed since 1994, and
• Those in the south with Mali and in the East with Libya
are under high surveillance
• President is 78, in power since 1999 and in poor health
• Has urged Algerians to take their destiny into their own
hands insisting that a new generation must take over and
that his generation has had their day
• Still ran for reelection in 2014 paralyzing any potential for
real change.
• Next election 2019
• Country is in a deadlock and condemned to remain
immobile for many years to come
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Post Arab Spring IV
• Algeria’s long term prospects depend on government’s
ability to introduce real diversification into economy
outside oil and gas industry
• Make the private sector the new driver of growth
• Involves introducing a series of structural reforms that
have been put off for far too long.
• Most impotent
• Instruction of incentives in favor of entrepreneurship and the
creation of SMEs
• Algeria is attempting to move from a centralized to a
post-socialist economy, but reforms engaged to date
have been too timid
• Country caught in political stranglehold resulting in the
paradox of a rich country with a poor population.
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Future I
• Algeria is a large country run opaquely by a closed elite
and a powerful security apparatus.
• While the police state structure may seem like the key to
its stability, in fact, it is reason for its fragility.
• Without real avenues for
• inclusive governance and
• urgently needed political and economic reforms,
• The system will remain closed, potentially leading to civil
unrest as internal pressures grow.
• If oil prices stay low or fall further, the regime may be
forced into political and economic change more quickly
than it wishes.
•
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Future II
• Algeria's ability to reduce spending is limited by its
reliance on buying social peace with
• subsidies,
• grants,
• low interest loans and
• a large public sector.
• Although Algeria has substantial buffers
• its sovereign wealth fund as well as foreign reserves of more
than 200 billion dollars,
• in December 2014 the IMF stated that for first time in 15 years
Algeria's current account is expected to be in deficit.
• The fiscal deficit is set to grow in the medium term as oil
prices stay low and capital expenditure and public
spending commitments remain high .
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Future III
• Budgeted social transfers and off-budget implicit
subsidies have spiraled in an effort to avoid popular
revolt
• Subsidies amounted to $61.8bn in 2013 or 29% of GDP
• Energy subsidies represent nearly two thirds of total implicit
subsidies
• Have can only encourage wasteful consumption, and
• Smuggling into Morocco and Tunisia.
• Smuggling of oil products is estimated to cost over $1bn
• annually.
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Future IV
• Between 2003 and 2013, total energy demand grew at an
annual rate of 4.1%
• While supply declined by 0.8%.
• Exports took the brunt, contracting by 2.6% every year
• Led to growing concerns over depletion of oil and gas
reserves.
• Yet the revision of the rules of engagement offered to
international oil companies (IOC) in 2013 yielded a
meagre response.
• Out of 31 licenses auctioned in September 2014, only five
were submitted and four auctioned.
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Future V
• IOCs are not prepared to play the game by the rules set
by the Algerian government.
• The bear market further weakens its hand.
• In the context of heightened international concerns about
broader security in the region following the
unprecedented attack on the gas field of Tingentourine
by Islamist terrorists in early 2013, the country offers less
attraction than it has for years as a place to explore.
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Future VI
• The development of shale gas has received much
attention from the government as a possible means of
increasing natural gas production.
• Estimates suggest the s potential for the unconventional
resource at 1,000trn cu ft. This figure may be optimistic,
and commercial reserves could be much smaller.
• But tapping the gas would require foreign technology
and massive quantities of water, two issues that would
have to be overcome.
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Future VII
• Issue of shale even more complicated
• In early 2015 tens of thousands of demonstrators
mobilized in a succession of protests against plans to
exploit shale gas resources in the south of the country
• Protests were also over the stark lack of economic
development in the southern region.
• The shale gas protests, coordinated across several
towns,
• Became a rallying cry for those protesting what they see
as the authorities neglect of socioeconomic development
of the regions in favor of a focus on the northern coastal
belt.
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Future VIII
• Opponents of the regime sought to characterize the
protests as part of a more general failure of the
government to look after the interests of its people
• Also try to link this in with the Berber/Arab conflicts in
Ghardaïa
• The authorities' failure to address underlying social
problems, particularly in the regions, is concerning.
• The sharp decline in the international oil price over the
past year a reminder that the government cannot afford
to buy off social discontent indefinitely
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Assessment
• The preconditions to recasting Algeria’s economic policy
are simple. They include:
• Having an informed public debate, casting aside rigid and
traditions mindsets
• Allowing the private sector both domestic and foreign, a much
freer rein and
• Offering investors stable long term conditions which encourage
rational investment strategies and,
• Fighting corruption.
• If the government chooses to let matters drift, in the past
the consequences for Algeria could be dire.
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