ALGERIA: Oil revenues will not prevent social upheaval, says analyst

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[Editor’s note: Analysts of the Carnegie Endowment for International Peace are included among contributors to Babylon & Beyond. Carnegie is renowned for its political, economic and social analysis of the Middle East. The views represented are the author’s own.]

While Algerian President Abdelaziz Bouteflika’s recent announcement that he will end the country’s 19-year-old state of emergency law was welcome news, leaders must quickly address the major structural problems plaguing its economy and increase government oversight or risk continued unrest.
While socioeconomic conditions are similar in Algeria, Egypt, and Tunisia –- including high levels of unemployment, particularly among youth, widespread corruption and bureaucracy, and lack of transparency -– Algeria is different because of its rich petroleum and gas resources.

Algeria’s oil reserves exceed 10 billion barrels, with daily production estimated at 1.2 million barrels. But at a time when a barrel of oil fetches $100 on the global market, the average citizen sees slowing economic growth, spreading poverty and unemployment, declining purchasing power and unaffordable housing.

To help prevent further unrest, the government should address the multiple structural defects hurting Algeria’s economy.

One, Algeria relies excessively on the oil and gas sector and must diversify its economy. By the end of 2010, the hydrocarbon sector provided 35% of GDP but contributed less than 5% of job creation. Meanwhile, the GDP share of agriculture and industry is just 8% and 5%, respectively.

Two, Algeria’s government lacks a strategic vision to develop and modernize the economy. Its $286-billion, five-year economic program merges together a list of projects prepared by various government departments. A fragmented sectoral approach prevails at the expense of a globally consistent perspective.

Three, public investments, although necessary, will not lead to steady economic development. Sustainable growth depends on the private sector’s involvement in investment, production, and employment. The government must create a suitable legal environment to promote private initiatives and stimulate domestic and foreign private investments.

Four, effective public spending requires strong oversight and accountability mechanisms. Parliament’s oversight role must be strengthened by scrutinizing execution of financial laws and forming fact-finding commissions to investigate public finance scandals. The judiciary must also be able to fully investigate cases and punish wrongdoers.

Five, Algeria’s largely publicly owned banking sector provides credit to the private sector equal to just 24% of GDP. This hinders the private sector’s development and prevents potential entrepreneurs from making large investments, which would boost the economy.

Algeria’s oil and gas export revenues have enabled its government, until now, to buy social peace by subsidizing basic commodities, providing social benefits and increasing civil servants’ wages. However, the street is demanding more — including an immediate and fundamental review of policies, increased power for legislative and judicial authorities and a development strategy that trickles down to various social groups and regions. If these demands are not met, authorities may be forced to make concessions no less than what the Tunisians obtained and what the Egyptians are seeking.

-- Lahcen Achy in Beirut