Economic Research Forum (ERF)

How to liberate Algeria’s economy

868
Algeria’s economy is growing far too slowly to provide enough jobs for a young, expanding and increasingly restless population. As this Project Syndicate column explains, the country's authorities need to boost competition, spur the creation of a digital economy and revamp state-owned enterprises.

In a nutshell

Algeria needs to build an advanced digital economy that could enhance growth and provide jobs for its cyber-savvy youth.

The authorities must improve broadband quality, make internet access more affordable, and create digital and mobile payment systems.

Private companies could help Algeria’s economy to make the technological leap needed to boost productivity.

Algeria faces the herculean task of transforming its economy to meet the pressing demands of a young, growing and increasingly restless population. Despite the country’s favourable demographics, its economy remains almost entirely dependent on oil and natural gas, which account for 95% of merchandise exports. To provide enough jobs for the millions about to enter the labour market, Algeria’s economy needs to grow by more than 6% annually over the next few years. But GDP growth was a paltry 1.5% in 2018 and is projected to stay below 2% for the foreseeable future.

The Algerian authorities must therefore take urgent steps to liberalise and strengthen the economy, and lay the foundations for greater social inclusion. In particular, they need to boost competition, spur the creation of a digital economy and revamp the country’s state-owned enterprises (SOEs).

Algeria’s economy has been running in place, with most major businesses and banks still in state hands. Moreover, measures to promote greater competition and establish an antitrust framework are in their infancy, and the legal and judicial system has been weak in enforcing them.

High barriers to market entry help explain why most Algerians work in the informal sector, for low wages and with no social insurance. The country’s impenetrable markets have also deterred foreign direct investment, especially in labour-intensive service sectors such as tourism and hospitality.

Instead, under a tired social contract that dates back to Algeria’s independence from France in the early 1960s, an inefficient form of redistribution has been the sole engine of economic development. But promotion and protection of so-called national champions, often SOEs, together with high levels of public employment and universal subsidies, has proven to be a frustratingly ineffective formula for sustained growth.

Market forces and more competition are essential for helping individuals and economies to reach their full potential. But as in other parts of the Arab world, this view has struggled to gain ground in Algeria. Too often, powerful elites have seized control of economic liberalisation attempts, weakening popular support for change. But market reforms, if accompanied by arm’s-length regulation and supported by a reinforced legal system, could prevent the perpetuation of such an oligarchy. This would help to promote equal opportunity and strengthen social cohesion.

Algeria also needs to build an advanced digital economy that could enhance growth and provide jobs for its cyber-savvy youth. Like their peers in other Arab countries, young Algerians are active on social media; nearly all have mobile phones or smartphones. But although they are intimately familiar with Facebook and Instagram, they have limited access to financial payment apps such as PayPal, because the country’s over-regulated banking and telecommunications systems favour existing firms, stymie competition and foster collusion. As a result, most Algerians cannot order goods and services online, and transfer money in the way their counterparts in advanced economies do.

Promoting a digital economy in Algeria requires an extraordinary ‘moonshot‘ effort. For starters, the authorities must improve broadband quality, make internet access more affordable, and create digital and mobile payment systems. These digital public goods are as important to a new service economy as utilities such as electric power plants are to a traditional one.

Increased connectivity will create new activities, tear down entry barriers – starting with the critical transport, distribution and logistics sectors – and help to develop e-commerce by bringing urban and rural areas closer to one another. Connectivity will also make it easier to track public spending, limit bureaucratic red tape and improve healthcare and education – in well-off and poorer regions alike.

Finally, Algeria must shake up its SOEs so that a genuine private sector can flourish. This will require reducing entry barriers in the utility sector and other areas, as well as establishing a dedicated regulatory body and credible legal enforcement to promote competition.

The authorities should be transparent about government transfers to SOEs and avoid the pitfalls of soft budget constraints that can result in higher-than-anticipated public spending. Policy-makers must also strengthen the governance of SOEs in order to improve managerial independence, accountability and efficiency. This, in turn, could reduce the potential burden that such enterprises impose on the budget through contingent liabilities, such as government loan guarantees that would come due in the event of a default.

Private companies could help Algeria’s economy to make the technological leap needed to boost productivity. Policy-makers need to encourage this, including through partnerships that pair private firms with SOEs.

Here, European utility giants could serve as a model to follow. Since the European Union began liberalising its electricity sector more than two decades ago, and also as a result of the 2015 Paris climate accord, these utilities have invested massively in generating renewable energy and digitising their services. By tapping into Algeria’s vast solar potential, utilities and SOEs could turn renewables into the new oil.

Algeria’s economic and social challenges are clear, and policy-makers must address them at a time of heightened political uncertainty. Given the country’s current mood, they may need to move fast.

This article was originally published by Project Syndicate. Read the original article.

 

 

 

 

Most read

EU climate policy: potential effects on the exports of Arab countries

The carbon border adjustment mechanism aims to ensure that Europe’s green objectives are not undermined by the relocation of production to parts of the world with less ambitious climate policies – but it could impose substantial costs on developing countries that export to the European Union. This column examines the potential impact on exporters in the Arab world – and outlines possible policy responses that could mitigate the economic damage.

Green hydrogen production and exports: could MENA countries lead the way?

The Arab region stands at the threshold of a transformative opportunity to become a global leader in green hydrogen production and exports. But as this column explains, achieving this potential will require substantial investments, robust policy frameworks and a commitment to technological innovation.

Financial development, corruption and informality in MENA

Reducing the extent of informality in the Middle East and North Africa would help to promote economic growth. This column reports evidence on how corruption and financial development influence the size of the informal economy in countries across the region. The efficiency of the financial sector in MENA economies reduces the corruption incentive for firms to seek to join and stay in the formal sector.

Freedom: the missing piece in analysis of multidimensional wellbeing

Political philosophy has long emphasised the importance of freedom in shaping a meaningful life, yet it is consistently overlooked in assessments of human wellbeing across multiple dimensions. This column focuses on the freedom to express opinions, noting that it is shaped by both formal laws and informal social dynamics, fluctuating with the changing cultural context, particularly in the age of social media. Data on public opinion in Arab countries over the past decade are revealing about how this key freedom is perceived.

Climate change threats and how the Arab countries should respond

The Arab region is highly vulnerable to extreme events caused by climate change. This column outlines the threats and explores what can be done to ward off disaster, not least moving away from the extraction of fossil fuels and taking advantage of the opportunities in renewable energy generation. This would both mitigate the potential for further environmental damage and act as a catalyst for more and better jobs, higher incomes and improved social outcomes.

Child stunting in Tunisia: an alarming rise

Child stunting in Tunisia seemed to have fallen significantly over the past two decades. But as this column reports, new analysis indicates that the positive trend has now gone dramatically into reverse. Indeed, the evidence is unequivocal: the nutritional health of the country’s youngest citizens is rapidly deteriorating and requires immediate and decisive action.

Exchange rate undervaluation: the impact on participation in world trade

Can currency undervaluation influence participation in world trade through global value chains (GVC)? This column reports new evidence on the positive impact of an undervalued real exchange rate on the involvement of a country’s firms in GVCs. Undervaluation acts as an economy-wide industrial policy, supporting the competitiveness of national exports in foreign markets vis-à-vis those of other countries.

New horizons for economic transformation in the GCC countries

The countries of the Gulf Cooperation Council (GCC) have historically relied on hydrocarbons for economic growth. As this column explains ahead of a high-level ERF policy seminar in Dubai, emerging technologies like artificial intelligence, blockchain and robotics – what some call the fourth industrial revolution – present a unique opportunity for the region to reduce its dependence on oil and make the transition to a knowledge-based economy.

Shifting public trust in governments across the Arab world

The Arab Spring, which began over a decade ago, was driven by popular distrust in governments of the region. The column reports on how public trust has shifted since then, drawing on survey data collected soon after the uprising and ten years later. The findings reveal a dynamic and often fragile landscape of trust in Arab governments from the early 2010s to the early 2020s. Growing distrust across many countries should raise concerns about future political and social instability.

Egypt’s labour market: new survey data for evidence-based decision-making

As Egypt faces substantial social and economic shifts, understanding the labour market is crucial for designing policies that promote employment and inclusive economic growth. This column introduces the latest wave of the Egypt Labor Market Panel Survey, which provides fresh, nationally representative data that are vital for examining these dynamics.




LinkedIn