The oil money is running out, the pressures are mounting, and the government's new development plan is looking doubtful.
- By Robert LooneyRobert Looney teaches economics at the Naval Postgraduate School in Monterey, California.
Algeria is North Africa’s oil superpower, but its years of steady production haven’t brought prosperity or development. Instead, the country is facing mounting economic, social, and political pressures. The quality of its public services, especially in such critical areas as education, healthcare, and housing, is in decline. The workings of the government in Algiers are opaque, and the country is perceived to be among the world’s 10 most corrupt. Unemployment, particularly among younger Algerians, remains at well over 20 percent. Many of the country’s educated youth say they would leave if they could.
In other countries in the region, similar challenges led to the fall of regime after regime during the tumultuous Arab Spring in 2011. That the Algerian government was able to escape a similar fate was due largely to widespread fears that a major political and economic upheaval would trigger a civil war similar to the one that ravaged the country during the “Black Decade” of the 1990s. The government was also able to placate its restive population with subsidies, government jobs, and public sector pay increases — all financed, of course, by oil.
After oil prices collapsed in 2014-15, however, everything changed. Oil revenues have fallen by more than 50 percent. Fiscal and trade deficits have shot up, international reserves are falling rapidly, and the currency has been devalued by nearly 30 percent. At the same time, the defense budget has more than doubled since 2004, ballooning to over $10 billion to counter instability stemming from the Libyan conflict in the east and terrorist incursions from Mali in the south. On top of all this, since the 1990s, more than 270,000 of the country’s best-educated workers have sought their fortunes abroad.
Desperate to create jobs and maintain GDP growth, which is forecasted to fall from 3.7 percent in 2015 to 1.9 percent this year, the country’s authoritarian government has proposed a new development strategy to replace its oil-based system of patronage. The plan — called the New Economic Growth Model — was launched in July. Its overriding goal is to diversify the country’s economy away from its overreliance on hydrocarbons, which accounted for about one-third of GDP, over two-thirds of government revenues, and over 95 percent of exports as of late last year. Unfortunately — thanks to a rumored power struggle in the inner circles of the government of the aging and seriously ill President Bouteflika — the plan’s precise details are still unavailable.
Among the main components of the new strategy is a law meant to incentivize investment in the non-oil sector by introducing tax breaks and loosening regulations. The hope is that “high value added” sectors such as agribusiness, renewable energy, and information and communication technology will be able to attract significant foreign direct investment. These investments, it is hoped, will generate enough tax revenue to offset what has been lost to the oil price drop. To reduce another costly drain on its budget, the government has also begun raising fuel and electricity prices for the first time in over a decade.
Will the new strategy be the stabilizing force the government needs? If Algerian history and international experience are any indication, the answer is no.
The fundamental problem is that — in a chronically misgoverned country — the new plan takes a highly centralized, bureaucratic approach to economic development, one that leaves no room for participatory methods that would let citizens ensure government accountability.
Development plans similar to the one being proposed, and which were successfully implemented in other countries (notably in Japan and Korea, but also in Ethiopia and Rwanda), were drawn up by highly competent technocrats with no vested interest in the envisioned investments. That doesn’t appear to be the case in Algeria. In fact, in Algeria, it’s not even clear who’s in charge of the plan — or, for that matter, of the country. While President Bouteflika is the official head of government, real power appears to lie behind the scenes with what Algerians call le pouvoir, an inner circle composed of the country’s military and security forces and supported by insider businessmen who are set to profit immensely from the plan’s investments.
Algeria is at the stage of development where the quality of governance begins to play a major role in determining economic success. Judged by that standard, though, it still has a long way to go. Of the North African countries, it consistently ranks below Egypt, Morocco, and Tunisia in most of the World Bank’s Governance Indicators. In fact, in terms of overall governance, it ranks in the bottom 25 percent of all the countries the World Bank assesses.
Algeria is particularly weak in rule of law, control of corruption, government effectiveness, and regulatory quality — all areas critical to successful economic development. These measures showed marked improvement from the late 1990s to about 2004, but since then they have largely remained stagnant or declined. Algeria’s score for regulatory quality, which includes such measures as unfair competitive practices, has declined so much since 2004 that it now ranks below Haiti’s. And there is no indication that the government has any plans to address these deficiencies, the results of which are all too evident. Algeria’s poor governance has made for inefficient and uncompetitive markets in labor, goods, and finance. This, of course, is mainly linked to the country’s all-pervasive corruption, where patronage jobs result in overstaffing so severe it exerts a drag on national growth.
Economic development plans are only as good as their assumptions, and one of the New Economic Growth Model’s major assumptions is that it will be able to attract enough investment from abroad. This would be a sharp break with past patterns, which show Algeria lagging considerably behind its neighbors, Morocco and Tunisia. According to the World Bank’s Ease of Doing Business rankings, foreign investors generally perceive the country to have an unfavorable business climate. This perception is reinforced by recent investment reforms that left unchanged a rule requiring majority national ownership and prohibiting formal foreign control of any enterprise or project. Furthermore, international experience shows that foreign direct investment tends to be more profitable as economic freedom increases. At present, the Heritage Institute’s Index of Economic Freedom characterized Algeria as “mostly unfree,” and the proposed reform plan contains no provisions for improvements in this area.
Poor security is another major factor discouraging investment. Algeria’s energy sector has been the target of several terrorist attacks, leading foreign companies to transfer their staff out of the country. Tourism has also been targeted, dampening interest in this ordinarily attractive sector. In addition, the development of the country’s shale resources has sparked protests, leaving few companies willing to risk investment in this area.
By attempting to boost economic growth while avoiding reforms that could lead the country down a more democratic path, the Algerian government is taking a major gamble. Without the necessary reforms to boost foreign investment, the new plan’s success ironically depends on oil — the very dependency the plan was intended to break. Unless oil prices recover in the next several years to facilitate the massive increase in domestic investment required to get the plan off the ground, Algeria’s current growth rate of 2.7 percent per year — the bare minimum required to maintain stability — will not be sustainable.
As in many other oil-based economies, Algeria’s hydrocarbon sector has facilitated the creation and maintenance of an authoritarian and patronage-based political system. Once oil-producing countries become authoritarian, as in Algeria’s case, it is very difficult to steer them back toward democracy, as too many vested interests with a stake in blocking economic, social and political reforms have been created. Since it appears that the new reform plan was designed precisely by such vested interests in the corrupt government inner circle, it is unrealistic to expect the plan to set off a virtuous circle of reforms.
If oil prices stay low, the Algerian government will, at some point, no longer have the resources to support its patronage schemes, which will likely lead to increasing instability, potentially ending in an Arab Spring-type uprising. The government’s only realistic option to guarantee the country’s stability and its own survival is to replace the New Economic Growth Model with a broad-based, community-oriented development plan subject to public oversight–perhaps along the lines of the plan successfully implemented in Morocco. Such a plan would not produce the economic windfalls previously provided by oil, but it could potentially set Algeria on a virtuous circle of growth and reform, rather than sinking it further. Due to its unrealistic assumptions, the current plan is a losing proposition that may soon leave Algeria with no option but to accept an International IMF austerity program similar to or harsher than the one recently imposed on Egypt. Should this occur, it is likely that another “Black Decade” will lie ahead.
In the photo, a demonstrator sits in the Sahara desert village of In-Salah, south Algeria, during a protest against the exploration of shale gas, on March 4, 2015.
Photo credit: FAROUK BATICHE/AFP/Getty Images