What’s new? Since the 2014 oil price drop, Algeria’s economic model, which emerged from the civil war in the 1990s, appears increasingly unsustainable. Despite repeated reform promises, the political system remains paralysed, led by an aging and ailing president who seems primed to embark on another five-year term following elections in 2019.
Why does it matter? An adaptation of Algeria’s economic policy is long overdue. Yet uncertainty surrounding an eventual presidential succession and a state-dependent entrepreneurial class seeking to protect the status quo are hindering progress on imperative reforms needed to navigate the challenges of the decade ahead.
What should be done? Cautious initial steps could include improving transparency of public finances, launching a broader discussion on the challenges Algeria faces and how best to address them, and placing young Algerians – the bulk of the population, whose future is at stake – at the centre of discussions on reform.
Algeria’s longstanding need to diversify its economy away from hydrocarbons has gained fresh urgency since oil prices started falling dramatically in 2014. New financial realities have rendered the preceding decade’s high spending unsustainable, rapidly emptying state coffers and increasing the deficit. But despite successive governments’ vows to implement reforms and rebalance state finances, political paralysis has militated against decisive policy. Recent history – memory of the economic recession of the 1980s and the ensuing political instability which led to civil war in the 1990s – hinders government efforts to seek a political consensus on reforms and implement them. Yet a failure to reform could precipitate a new period of instability. To resolve this conundrum, the government should pursue greater transparency and better communication about the economic challenges the country faces, greater inclusivity vis-à-vis socio-economic stakeholders, and a sharper focus on the youth demographic in particular.
Two chief obstacles stand in the way. Politically influential vested interests seek to protect the status quo, which benefits a state-dependent business class. And political factors dampen enthusiasm for a more aggressive approach: memory of the political turmoil and bloodshed that followed austerity measures and political reforms in the 1980s and 1990s lingers. Acknowledgement that generous state spending helped pacify the country in the aftermath of the “black decade” of the 1990s, when as many as 200,000 Algerians died in fighting between the state and Islamist groups, has made the government understandably cautious to reverse it. And the question of presidential succession and what legacy Abdelaziz Bouteflika, president since 1999 and the architect of national reconciliation, will leave behind looms large. Bouteflika appears intent on running for a fifth five-year term in elections next April, despite his poor health and public calls for him to pass the torch to a new generation, a factor that contributes to a general sense of paralysis.
Despite an increase in revenues in 2018 due to a recovery in oil prices, a potential economic crisis could come as soon as 2019.
Despite an increase in revenues in 2018 due to a recovery in oil prices (which might not last), a potential economic crisis could come as soon as 2019. It could thus overlap with tensions surrounding the presidential election (which Bouteflika is expected to win easily should, as expected, he run again), and, beyond that, a looming leadership transition. To stave off a crisis, the government has carried out successive rounds of spending cuts, which will take time to deliver results, and implemented an expansionary monetary policy, which fuels inflation and merely serves to buy the government time without addressing underlying problems. Although officials have outlined a broader agenda of industrial diversification and subsidy reform, among other measures, both local and foreign experts say an overarching strategy for reform is still missing. Entrenched political and business interests have too many incentives against change and are squandering the opportunity to get ahead of the curve of a potential fiscal crisis that, if handled too late, will demand more painful and destabilising policies.
The political uncertainty surrounding economic policymaking was evident under Prime Minister Abdelmajid Tebboune in 2017, who was ousted after attempting aggressive changes to economic policy. His replacement, Ahmed Ouyahia, is a three-time former prime minister and a pillar of the establishment; what he lacks in novelty he makes up in experience and ability to navigate the government’s murky internal divides. Ultimately, however, any government is limited by the growing paralysis – whether on economic policy or elsewhere – of Algeria’s strongly presidential system, a reflection of Bouteflika’s health and the uncertainties around how his eventual successor will reshape the relationship between political power, the public sector and the private sector.
In time, Algeria will have to make more than marginal technical adjustments to its economic policy. It should seek to renegotiate an implicit social contract between the state and its citizens long constrained by the advantages (and disadvantages) of its oil-based “rentier” economy, namely that the state should provide and the people should abide. Cracks in that arrangement have become more apparent, manifesting themselves chiefly in frequent socio-economic protests across the country. However, since the late 1980s, contestation that expressed the desire for change – mass protests, calls for political reform and various other forms of activism that sometimes resulted in concessions from the state – often generated profound instability and conflict. Nearly twenty years after the end of the civil war of the 1990s, it is time to begin moving away from a model that, for all the stability and peace it brought, increasingly appears unsustainable.
In order to begin this process, the government should take modest steps to establish a roadmap for economic reform:
Be more forthcoming and transparent to the public on the state of public finances and how it intends to address it. The government should avoid introducing new policies without consulting with and preparing state institutions. It should also seek to address mounting public concern with corruption, for example by appointing a commission to review how to best curtail it through administrative and legislative reforms. This would be a more effective way to curtail corruption in the long term than through trials that the public perceives as politicised and doing little to deter future corruption;
Include a wider range of business and civil society actors in its consultations on economic policy, beyond the business associations and trade unions that are currently its chief interlocutors;
Put particular emphasis on youth, from jobseekers to entrepreneurs, in shaping a reform agenda. This could take place, to begin with, through surveying the needs of younger Algerians and creating consultation mechanisms to integrate their views into the development of the reform agenda.
Algiers/Brussels, 19 November 2018
Algeria faces two challenging transitions. The first, compelled by the drop in oil prices since their peak in the early 2010s, is a move away from an economic model based predominantly on oil and gas revenue and heavy government spending. The second is an uncertain presidential succession, as President Abdelaziz Bouteflika, 81 and severely weakened by a 2013 stroke, approaches the end of his fourth five-year term in 2019. These two transitions are related: the Bouteflika era coincided, until 2014, with a period of steadily increasing oil prices that boosted the economy as the country recovered from the civil war of the 1990s. Yet it also gave rise to an entrepreneurial class that stimulated growth but whose growing political clout and deepening corruption present obstacles to reform. Negotiating these twin transitions simultaneously will be crucial to sustaining Algeria’s relative stability in a turbulent region.
This report outlines why the current economic model is unsustainable, something authorities openly recognise but have difficulty addressing. This challenge is common in “rentier” states – countries overly reliant on oil income for their annual budget – facing the imperative of change: cutting state spending is unpopular with a public accustomed to subsidised fuel and other basic goods. In Algeria, the task is complicated by the tacit link between economic prosperity and the national reconciliation process undertaken since Bouteflika became president in 1999. The economic dimension of the post-civil war years, including a period of high oil prices that enabled both social spending and the development of a new business elite, helped avoid a reprise of violence. The lingering trauma of the civil war – which began as a popular movement for political and economic reforms and ended in widespread bloodshed – hinders reform, as does the ability of influential interest groups that have prospered in the Bouteflika era to block policy changes that could adversely affect them.
The 2011 Arab uprisings and their aftermath underlined the fragility of existing economic and political models across the region.
The 2011 Arab uprisings and their aftermath underlined the fragility of existing economic and political models across the region. Algeria sees itself as different from those countries in that it experienced and eventually overcame its own major political and social upheavals in the 1980s and 1990s. Largely as a result of this history and associated trauma, it saw no significant unrest in 2011, and the ruling establishment, while oft-criticised, retains historic legitimacy stemming from the war of national liberation with France as well as popular support, in part due to the absence of clear alternatives. Yet it shares many fundamentals with its neighbours, including a young population, a laggard economy resisting reform and an uncertain leadership transition on the horizon. Its sense of immunity from regional trends should not be cause for complacency.
This report is based on research conducted in Algeria in 2017 and 2018, including interviews with government officials, politicians, entrepreneurs, civil society actors, academics and journalists. It addresses how best to balance the prevailing desire to avoid a socio-economic shock at a time of political transition against the imperative to adapt to a rapidly changing economic environment and keep pace with Algerians’ expectations as the country faces the next decade.
A. A Dangerous Dependency on Shrinking Hydrocarbon Reserves
Algeria is over-dependent on hydrocarbons revenues. Oil and gas accounted for 97 per cent of total exports, two thirds of state revenues and one third of gross domestic product in 2014.[fn]Crisis Group interview, Amor Khelif, research director, Centre de Recherche en Economie Appliquée pour le Développement, Algiers, September 2017. See also Yanis Ainas, Nacer Ouarem and Said Souam, “Hydrocarbons: An asset or an impediment to Algerian development?”, Revue Tiers Monde, no. 210 (February 2012), pp. 69-88.Hide Footnote In better times, this resource wealth enabled the state to spend lavishly to buy elite loyalty and social peace. Oil revenues have for the most part insulated the government from popular demands for greater participation and transparency. When financial incentives such as generous subsidies and free housing proved insufficient in stifling popular dissent, these revenues helped the security apparatus acquire the coercive means to repress it.[fn]See Merouan Mekouar, Protest and Mass Mobilization: Authoritarian Collapse and Political Change in North Africa (New York, 2016), pp. 15-16.Hide Footnote
But a rentier economy has downsides. It has rendered the state complacent, protected a private sector in which state contracts are awarded based on personal connections rather than merit or efficiency, and propped up internationally uncompetitive industries. It also has fostered a sense of entitlement among the public. Together, these outcomes have left the country vulnerable to volatility in global commodity prices, which risks transforming a prolonged economic downturn since 2014 into a crisis of political legitimacy. Inefficiencies in the energy sector further hamper a sluggish economy. As a result, Algeria has become the only OPEC member to pump below its permitted quota as its production has declined, despite efforts to attract new investments.[fn]Since production peaked in 2005 – at 1.7 million barrels per day for oil and 8.8 billion cubic feet per day for natural gas – both have been in decline. See “Algeria is reforming its laws to attract foreign investment in hydrocarbons”, U.S. Energy Information Administration, 4 August 2015. Misleading public statements and a climate of opacity surrounding gas production statistics are further deterring investment. An analyst said: “Looking for gas production statistics feels like looking for a state secret”. Crisis Group interview, Geoff Porter, CEO, North Africa Risk Consulting, May 2017.Hide Footnote
Algeria’s proven energy reserves are also dwindling. Current estimates of extraction timetables – twenty years for oil, fifty for gas – mean that within one or two generations, barring significant new discoveries or major technological advances, there could be nothing left.[fn]Crisis Group interview, Algeria expert at an international financial institution, Washington, February 2017.Hide Footnote Meanwhile, decreasing international investment in the hydrocarbon sector and aging fields are taking a toll. Compared to 2007, when Algeria exported 85 billion cubic metres (bcm) of natural gas, the export target for 2018 is only 50 bcm. As domestic consumption rises (due to population growth and changes in consumption patterns), an increasing proportion of production stays at home, suppressing exports and therefore access to foreign currency to import goods.
Algeria is redoubling efforts to raise production, including through controversial techniques such as fracking.[fn]New shale gas initiatives risk provoking new rounds of unrest in the south, where its production has triggered protests in the past. See Crisis Group Middle East and North Africa Report N°171, Algeria’s South: Trouble’s Bellwether, 21 November 2016.Hide Footnote While official ambivalence about greater foreign participation in the oil and gas sector has repeatedly stymied legal reforms, the state might have to resort to more radical moves, such as making Algeria a more attractive investment destination for multinational corporations that can boost output of existing wells and develop new resources such as shale gas.[fn]An oil industry analyst said: “Previously the energy ministry and [national oil company] Sonatrach spoke about sector reform because it was the right thing to do. Now there is a sense of urgency that wasn’t there in the past”. Crisis Group interview, Geoff Porter, CEO, North Africa Risk Consulting, October 2017. For background on oil sector reform, also see Viktor Katona, “Why Algeria’s Oil Sector Isn’t Booming”, OilPrice.com, 6 September 2018.Hide Footnote The government’s plan to boost output by 14 per cent by 2019 and invest billions in exploration is unrealistic, in part because protracted corruption scandals have paralysed Sonatrach, the state-owned oil company; these were widely seen as a tug-of-war between officials and the intelligence services.[fn]In 2009 and 2010, the Département du Renseignement et de la Sécurité (DRS), the country’s intelligence service, accused top officials at the state-run oil company Sonatrach, as well as then Energy Minister Chekib Khelil, of graft. Many perceived the charges as an attack on the president, as Khelil is one of Bouteflika’s closest allies. See “Algerian leader spars with security chiefs”, United Press International, 3 February 2010; Mélanie Matarese, “L’entourage de Bouteflika éclaboussé par les affaires”, Le Figaro, 1 April 2013. Khelil, who denies the accusations, fled to the U.S. in 2013, returning to Algeria in April 2016 after Bouteflika dismantled the DRS. See Farid Alilat, “Algérie : Chakib Khelil, les secrets d’un retour”, Jeune Afrique, 14 June 2016. On the dismantling of the DRS, see Crisis Group Middle East and North Africa Report N°164, Algeria and Its Neighbours, 12 October 2015. Hide Footnote With four energy ministers and six heads of Sonatrach since 2010, erratic leadership has affected the oil sector’s stability. As an industry analyst put it:
It was a one-two punch. The 2010 scandal that disrupted Sonatrach and the energy ministry put everyone in a holding pattern. That holding pattern continued through the oil price collapse in 2014, and the collapse meant that even if oil companies were more comfortable with the above-ground risks in Algeria, such as leadership changes and the regulatory environment, they didn’t have the financial leeway to return to Algeria and start investing.[fn]Crisis Group interview, Geoff Porter, CEO, North Africa Risk Consulting, May 2017.Hide Footnote
B. The 2014 Oil Shock
In mid-2014, oil prices began a precipitous drop, plummeting from the $80-110 per barrel range in 2011-2013 to $40-60 per barrel throughout most of 2015-2017. Since then, Algeria has drawn down its $200 billion foreign-exchange reserves to shore up its economy, fuelling fresh scrutiny of its economic model’s structural weaknesses. The oil price drop took a heavy toll on state coffers: in 2007, Algeria’s revenues were $74 billion; in 2017, they totalled $24 billion.[fn]Crisis Group interview, Amor Khelif, research director, Centre de Recherche en Economie Appliquée pour le Développement, Algiers, September 2017.Hide Footnote Meanwhile, its fuel import bill tripled between 2016 and 2017 to a record $2.5 billion.[fn]“Algeria in talks with oil firms to set up trading venture”, Reuters, 24 July 2018.Hide Footnote
Even though oil prices stabilised in the $40-60 range in 2017 before rising again in 2018, this does not necessarily signal a long-lasting recovery. In any event, higher oil prices would only allow authorities to buy time to address underlying problems.[fn]An Algerian economist and retired policymaker said: “Even though it brought us a lot of money, the oil price rise in 2008 was a catastrophe; it was like opium or cocaine. The two times we felt this drug, in the beginning of the 1980s and in 2007-2008, the state started spending with reckless abandon and launching grand projects that are not profitable”. Crisis Group interview, Algiers, October 2017.Hide Footnote The state can no longer afford to postpone dealing with what economists call the “Dutch disease”: an overvalued domestic currency (due to a central bank policy of maintaining an artificially strong Algerian dinar) that makes exports more expensive and uncompetitive. This leads in turn to a decline in non-oil industrial productivity, fuelling unemployment and leaving the economy highly exposed to unpredictable fluctuations in global commodity prices (for example, of oil, minerals and cereals).
Successive Algerian governments have acknowledged this. Abdelmalek Sellal, prime minister from 2012 to 2017, called in 2016 for a “new economic model” that would reduce the state’s role while enhancing that of the private sector and limiting dependency on hydrocarbon revenues.[fn]See “Sellal présente les grandes lignes du nouveau modèle de croissance économique”, Radio Algérie, 5 June 2016.Hide Footnote His successors have repeated the same message.[fn]See “Ahmed Ouyahia: “L’Economie de marché est une fatalité irréversible”, Algérie1.com, 23 December 2017.Hide Footnote All have faced resistance from entrenched economic interests and institutional inertia, which forced them to backpedal on reform.
That said, Algeria still has considerable autonomy to devise a new approach, primarily due to its low foreign debt, which is less than 2 per cent of GDP. Its partners – particularly European countries that want strong states in the southern Mediterranean to cooperate on regional security and stemming migrant and refugee flows – are willing to provide support. Experts expect foreign currency reserves, though depleting, to fund government spending for roughly another two years. As an expert at an international financial institution put it:
The oil shock made the urgency of needed changes more apparent. The difficult question Algerian authorities face is pace: if they go too slow, adjustment could become disorderly. And if they go too fast, there will be social resistance. They have the means to walk this fine line; the question is where to find [that line].[fn]Crisis Group interview, Algeria expert at an international financial institution, Washington, February 2017.Hide Footnote
C. What Reform Agenda?
When oil prices collapsed in June 2014, Algeria had a comfortable cushion in the form of significant savings. It had $178 billion in foreign reserves and $37 billion in its sovereign wealth fund (Fonds de régulation des recettes, FRR, which is financed by surplus hydrocarbon revenues). Yet, at the beginning of 2018 only $97.3 billion of reserves remained, while the government had exhausted the FRR in 2017 to finance successive budget deficits.[fn]The government created the FRR in 2000 to invest surplus revenue and put it toward financing foreign debt. Experts have criticised its opaque management. See M. Hachemaoui, “la Corruption politique en Algérie : l’envers de l’autoritarisme”, Esprit, No. 6 (June 2011), pp. 111-135. For central bank reserve statistics, see Situation de la Banque d’Algérie, Banque d’Algérie, June 2018. There are fewer publicly available statistics regarding the FRR, but the fund is widely believed to have been exhausted in early 2017. See “Le Fonds de régulation des recettes épuisé depuis février”, Le Matin d’Algérie, 8 September 2017.Hide Footnote Authorities, optimistic that oil prices would rebound, calculated the state budget for 2017 on the basis of an oil price recovery to $70 barrel by 2020 – a level reached by the first quarter of 2018, but which may not be sustained.[fn]Crisis Group interview, Algerian finance ministry official, Algiers, December 2016.Hide Footnote
Cautiously and inconsistently, the government has acknowledged the crisis.
Cautiously and inconsistently, the government has acknowledged the crisis.[fn]As early as May 2015, Prime Minister Abdelmalek Sellal said “Algeria is not immune to a major economic crisis”. Quoted in “Crise économique : les aveux de Sellal”, Le Quotidien d’Oran, 26 May 2015. In September 2017, Prime Minister Ahmed Ouyahia told parliament: “Since 2014, Algeria has been hit with a long-lasting financial crisis, as there are no indications in the short or medium term of a significant recovery of oil prices”. Quoted in “Ouyahia dépeint un tableau sombre de la situation financière de l’Algérie”, Tout Sur l’Algerie, 7 September 2017. On 14 June 2017, Bouteflika released a communiqué stating “the crisis of oil prices is here for the long term”. https://www.tsa-algerie.com/document-le-communique-des-conseils-des-ministres/.Hide Footnote It introduced tentative austerity measures in the 2016 budget, trimming state spending by 9 per cent. At the start of 2016, it raised the prices of subsidised gasoline. Facing no significant opposition, it became more aggressive, adopting a budget in 2017 that reduced government spending by 14 per cent. It took other measures as well, introducing import restrictions and allowing a controlled depreciation of the Algerian dinar. The 2018 budget, adopted in December 2017, includes further cuts. These have been accompanied by a resort to “quantitative easing” – the increase of money supply by the central bank through issuing government bonds – to stimulate the economy.
These measures carried great risks. While some have praised them, the question remains whether they amount to an overall strategy for economic reform rather than a superficial response to an urgent crisis. Economic experts and financial institutions criticised quantitative easing in particular. An economist said the measure was “adding fuel to the fire” of inflation and would raise living costs, discourage foreign direct investment and possibly depress industrialisation efforts.[fn]He also said: “If businesses and jobs creation had some momentum, making more dinars available at a lower price might help spur growth. But Algeria doesn’t have a stable environment with that momentum. So unconventional financing will cause short-term damage and hamper long-term growth”. Crisis Group interview, Algerian economist, September 2017. The International Monetary Fund (IMF) has made similar criticisms of the government’s resort to quantitative easing rather than foreign borrowing.Hide Footnote A European diplomat summarised the criticism: “The purpose of quantitative easing is to buy time, not to implement change. It is just propping up liquidity at the risk of creating inflation”.[fn]The IMF has repeatedly raised this criticism since 2015, most recently in its 2017 Article IV Consultation, June 2017. It has warned that the government has implemented cuts with insufficient public buy-in and that this could slow the economy unnecessarily. It also said that the government should consider foreign borrowing as an alternative to quantitative easing, which has an inflationary impact. Crisis Group interview, Algiers, February 2018.Hide Footnote
Some officials say the government is intent on rationalising public spending by overhauling inefficient and wasteful subsidy programs, raising taxes on the rich, reducing and formalising the informal sector by making banking more flexible, and encouraging the growth of the industrial sector (which currently accounts for less than 5 per cent of GDP).[fn]Crisis Group interview, government economic adviser, Algiers, September 2017.Hide Footnote Experts and officials alike believe that diversifying the economy away from its overreliance on hydrocarbons for revenue, preferably through the increase of other exports, is essential, as is reducing the import bill.[fn]Crisis Group interviews, Algerian diversification experts, Algerian economic policymakers, Algiers, September 2017. Most experts say the government should pursue export-led growth rather than the import-blocking or import-substitution policies it has often adopted, which can cause shortages of both basic goods and industrial materials. See also Alan Gelb, “Economic Diversification in Resource Rich Countries”, part of seminar on “Natural Resources, Finance, and Development: Confronting Old and New Challenges”, by Central Bank of Algeria and IMF Institute in Algiers, 4-5 November 2010.Hide Footnote Officials have discussed plans to implement such major reforms for years, but without any concrete change.
D. The Trauma of the Past
One reason for this inaction is that the transition from[fn]state socialism to a more market-oriented economy from the late 1980s to early 1990s is intertwined in Algerians’ minds with the violence of the black decade that followed. When oil prices crashed in October 1985, revenues from gas and oil exports fell by more than 40 per cent. A crisis followed on multiple fronts: authorities shelved investment plans and cut back large-scale social programs. Unemployment rose and productivity plummeted as factories closed. And the government, believing that prices would soon rise again, dipped into its foreign reserves and borrowed externally to finance budget deficits.[fn]“When the debt crisis came in 1993 and we had $7 billion in revenues and owed $8 billion, we went to the IMF like the Eid sheep to the slaughterhouse”. Crisis Group interview, Algerian economist and retired policy adviser, Algiers, October 2017. The policies implemented at the time resulted in the closing of a thousand public enterprises and the firing of 400,000 salaried workers, facts authorities admitted only in 2017. See “Ouyahia défend ‘la légitimité de l’espoir et de l’espérance en l’avenir de l’Algérie’”, TSA, 27 September 2017. For background see G. Delhaye and L. Lepape, “Les transformations économiques en Algérie : privatisation ou prédation de l’Etat ?”, Journal des Anthropologues, no. 96-97 (2004), pp. 3-4.Hide Footnote Between 1985 and 1988, the debt-to-service ratio more than doubled, from 35 to 80 per cent.[fn]M. Majumdar, Transition and Development in Algeria: Economic, Social, and Cultural Challenges (Bristol, 2005), p. 49. The debt-to-service ratio is the ratio of debt service payments to a country’s export earnings.Hide Footnote
The social and economic crisis that followed the 1985 oil price collapse set the stage for the riots of October 1988, when thousands took to the streets to protest rising prices, unemployment and austerity measures. Starting in Algiers and spreading to other parts of the country, they were Algeria’s most serious riots since independence in 1962. The deployment of the army to put an end to the unrest resulted in clashes that killed 500 (mostly when the army fired upon protesters) and wounded over 1,000.These events precipitated the fall of the single-party system and, in 1991, the country’s first free elections, followed by a military coup that ushered in civil war during the so-called black decade. As a board member of the Forum des Chefs d’Entreprise (FCE), a business lobby, said, looking back on those times: “We can’t go back to the 1990s, when the country was ravaged by terrorism and people joined the rebels because they had no prospects and no visibility”.[fn]Crisis Group interview, senior FCE board member, Algiers, September 2017.Hide Footnote
The memory of economic collapse that preceded and exacerbated political violence haunts even the most pro-reform policymakers. Algeria’s last experiment in economic liberalisation and political democratisation ended with a decade of internecine slaughter. Today, authorities never publicly refer to the links between that economic crisis and the social unrest and political crisis that followed. But they clearly have its spectre in mind – especially the loss of sovereignty in managing reforms – as they try to avoid the mistakes made in that period.[fn]Crisis Group interview, senior economic policymaker, Algiers, September 2017. “We need to be careful with debt, because the 1986 crisis meant we had to divide by 10 our currency, close schools and hospitals. If you’re not solid monetarily, financially, you can really fall …. This explains the president’s extremely strong position against public debt. But we’re going to have to really accelerate the process of investing in productivity in this country, in agriculture, services, etc”.Hide Footnote
In the Bouteflika era from 1999 onward, Algeria has been able to avoid repeating such a scenario. Bouteflika’s first three terms represented fifteen years of recovery from civil strife, the restoration of security and stability, and mounting prosperity. Through his call for a “civil concord” Bouteflika offered Algerians a new social contract when he was first elected in 1999: forget the “black decade” and questions of accountability; instead, focus on economic development. Taking advantage of nearly two decades of buoyant oil prices,[fn]In the early 2000s, soaring oil prices and a recalibration of international alliances ushered in by the U.S. “global war on terror” helped restore economic prosperity, as Algeria shed its pariah status from the 1990s and restored trade ties and security partnerships with the U.S. and other Western countries. Buoyed by oil revenues, Bouteflika launched overlapping stimulus initiatives that pumped cash into the economy: a round of privatisations beginning in 1999 and an economic recovery plan (2001-2004) followed by a complementary growth support program worth $55 billion (2005-2009). The policies of building a new economic framework and implementing a post-conflict national reconciliation process were strongly intertwined. See T. Dahou, “Les marges transnationales et locales de l’état Algérien”, Politique Africaine : l’Algérie aux marges de l’Etat, no. 137 (2015), p. 11.Hide Footnote he gradually and partially shifted power away from the country’s entrenched establishment – the army, the Département du Renseignement et de la Sécurité (DRS, the intelligence service), and the Front National de Libération (FLN, the historic single party until 1989) – popularly referred to as le pouvoir. In its place, he restored the primacy of the presidency that had been eroded in the turmoil of the 1980s and 1990s, building a regime in which business elites gradually gained the kind of influence previously reserved for senior military officers and other officials.[fn]See A. Boubekeur, “Rolling either way? Algerian entrepreneurs as both agents of change and means of preservation of the system”, The Journal of North African Studies, vol. 18, no. 3 (2013), pp. 469-481.Hide Footnote
The Arab uprisings of 2011 provided the first real test of this new system. The government relied heavily on public spending to quell domestic discontent. This entailed lavish subsidies, infrastructure investments and an ambitious free housing program, embracing handout politics that offered economic security to many Algerians in exchange for continued social peace. In 2011, the government added thousands of new jobs, particularly in the security sector, and oversaw a 330 per cent increase over the previous year in interest-free cash loans distributed to young entrepreneurs through the Agence nationale de soutien à l’emploi des jeunes (ANSEJ). In such a context, popular concerns relayed by the media about corruption and wasteful spending did not gain traction, and Algeria weathered the region’s turmoil largely unscathed.[fn]Prime Minister Ahmed Ouyahia, answering a question in parliament on how oil money earned since 2000 had vanished, said: “The Algerian people know where the $1,000 billion were spent”. Quoted in “Ouyahia défend : ‘la légitimité de l’espoir et de l’espérance en l’avenir de l’Algérie’”, TSA, 27 September 2017.Hide Footnote
During his fourth term, from 2014 onwards, Bouteflika consolidated his new power configuration (particularly with the dismantling of the DRS). But this period was also marked by growing political uncertainty (especially over the president’s health and ability to govern) and renewed economic anxiety.[fn]See R. Tlemçani, “The purge of powerful Algerian generals: Civil-military reform or presidential power grab?”, Al Jazeera Centre for Studies, 12 February 2017.Hide Footnote
A. The Fashioning of Economic Policy
Algeria has a presidential system in which the head of state has the final say on economic policy. Since 2014, an economic policy advisory board works to produce compromises among three institutions collectively known as the Tripartite: the Union Générale des Travailleurs Algériens (UGTA, a trade union federation), the Forum des Chefs d’Entreprise (FCE, an entrepreneurs’ lobby) and the cabinet.[fn]The Pacte social et économique de croissance (Social and Economic Growth Pact) of February 2014 formalised this cooperation and elevated its role in policymaking.Hide Footnote In theory, this arrangement is inclusive and stabilising, bringing together ministers, an association of business leaders that has rapidly gained in clout since 2014, and the country’s most powerful and historically significant trade union federation. In practice, the Tripartite is top-down and imposes loyalty to the government as a precondition for participation in economic debate. The exclusion of important actors, such as autonomous unions and dissident entrepreneurs, limits the reach and scope of the policy debate.
The UGTA and FCE are both politically centrist: the FCE’s advocacy for business is tempered by an acknowledgement of the country’s socialist roots; the UGTA’s defence of labour is softened by its desire to support the emergence of a strong private sector and an affirmation of the typically pro-business sentiment that excessive bureaucracy is harmful to job creation and the business environment. Both perceive the Tripartite as a constructive form of social dialogue, and share the view that private enterprise is key to economic development. A UGTA leader said: “We may not have the high degree of social dialogue that the Scandinavians have but we’re doing our best to avoid violence. Both sides must listen and put forth proposals. We need to listen to one another”.[fn]Crisis Group interview, Algiers, September 2017.Hide Footnote Likewise, an FCE board member noted:
We don’t say anything against public enterprises, like Air Algérie which has 10,000 employees instead of 3,500 …. There is a need to strengthen the private sector, to make it stronger and more dynamic, so that the public sector can disappear eventually, except for certain core areas like gas, oil and utilities.[fn]Crisis Group interview, Algiers, December 2017.Hide Footnote
In an environment in which decision-making remains highly opaque, the leaders of both the UGTA and FCE – respectively Abdelmajid Sidi Said and Ali Haddad – enjoy a high degree of influence and prestige given their proximity to Said Bouteflika, the president’s brother and a senior adviser.
While the Tripartite appears to unite and stabilise the discordant leftist and liberal policy perspectives the two bodies represent, policymaking suffers from fits and starts and often is paralysed. There is weak coordination within, and among, institutions and policy can change arbitrarily.[fn]Some have noted the inconsistency of economic policy, as well as the government’s lackadaisical approach to attracting foreign investment. A European diplomat said: “No one seems to want to take the really hard decisions, and there have even been reversals on announced reforms. The most important thing for investors is predictability in decision-making. The Algerian government seems to think that other governments can steer foreign direct investment to come here, not that it is their job to create an attractive business environment. The ministry of foreign affairs threatens us that if they don’t get their way on economic issues, they will make conversations on other issues that we care about, such as migration, more difficult”. Crisis Group interview, Algiers, February 2018.Hide Footnote In Bouteflika’s fourth term, the government has rotated officials with unusual frequency, particularly in key ministries such as energy and industry. This has created confusion about the country’s priorities, which are set by the prime minister but can subsequently be reversed by presidential decree.[fn]When Sellal vowed to fast-track economic diversification in January 2015, there was no clear sector selection but rather a scattering of emphasis on diversification across economic activities. Countries that have successfully diversified tended to identify four or five key strategic sectors as priorities. Crisis Group interview, Algerian diversification expert, May 2017. Sellal appointed a six-member economic taskforce whose work was secretive and reportedly ultimately censored. Crisis Group interview, Algerian industrialist, Algiers, May 2017.Hide Footnote The opacity of the policymaking process and low levels of intra-governmental communications and cooperation reinforce this ambiguity: rather than working in coordination, ministries are mostly unaware of one another’s projects and approaches. An industrial policy specialist who worked with the government noted:
The policy environment is not conducive to diversification. Agencies that should be working together are not. I enquired about industrial policy design at each of the relevant ministries: the finance ministry told me they don’t deal with industrial policy; the industry ministry said to ask at the trade ministry; the trade ministry said they only deal with trade statistics, not design, and to go see the finance ministry.[fn]Crisis Group interview, Algerian diversification expert, May 2017.Hide Footnote
Sudden, unexpected turnover in senior leadership has added to the confusion and highlighted the role of influential entrepreneurs in politics. Bouteflika appointed Abdelmajid Tebboune, housing minister in the previous cabinet and a member of the FLN said to be close to him, to replace Sellal as prime minister in May 2017. As interim trade minister from January to May 2017, Tebboune made a name for himself as an establishment figure willing to challenge import barons – businesspeople with privileged political connections whose success depends on securing import licenses (and sometimes monopolies) in lucrative markets.[fn]An Algerian economist and retired policymaker said: “Import barons belong to important military factions. There are about eleven generals who control the most important import markets. These are people even Tebboune wouldn’t touch. Tebboune moves a lot, but what he does is shadowboxing”. Crisis Group interview, Algiers, May 2017.Hide Footnote To reduce a burgeoning trade deficit due to lower oil prices, he quickly moved to suspend a wide range of imports, sending prices up and freezing industrial investment. His open targeting of importers as a privileged and overprotected interest group raised hopes that his economic reforms would extend to addressing corruption.[fn]Crisis Group interviews, Algerian economists, Algiers, May 2017. In a speech before parliament on 20 June 2017, Tebboune said: “We will be careful to separate money from political power, and to ensure that each stays in its lane”. Quoted in Brahim Takheroubt, “L’impitoyable univers”, L’expression, 23 July 2017.Hide Footnote Tebboune tackled politically delicate issues ranging from import licenses to public land reform with a zeal that threatened the established order, in particular stepping on the toes of FCE leader Ali Haddad.[fn]See “Tebboune-Haddad, chronique d’une guerre intestine”, TSA, 31 July 2017.Hide Footnote
The Tebboune-Haddad standoff became a fixation for Algerian media: for example, photos showing Said Bouteflika warmly embracing Haddad and appearing to snub Tebboune at the 30 July funeral of former Prime Minister Redha Malek were widely shared and interpreted as foreshadowing the prime minister’s downfall.[fn]Crisis Group interviews, Algerian journalists, Algiers, August 2017.Hide Footnote When Bouteflika dismissed Tebboune on 15 August, the message he appeared to send was that the entrenched interests of business elites are untouchable, regardless of the urgency of economic reform.[fn]Crisis Group interviews, Algerian journalists, business leaders, experts, Algiers, September 2017.Hide Footnote
Even as it gained breathing space, the state has used veiled threats to defend its economic policy, including the suggestion that the violence of the 1990s might return.
Tebboune was succeeded by Ahmed Ouyahia, a seasoned apparatchik who previously served as prime minister on three occasions (1995-1998, 2003-2006 and 2008-2012) and was director of the presidential cabinet immediately prior to his appointment. A consummate insider, he is widely considered a compromise between competing interest groups and sometimes mentioned as a potential future president who many within the ruling elite could live with, despite his prickly public persona.[fn]Crisis Group interviews, Algerian journalists and political analysts, February 2018.Hide Footnote
Within weeks of his appointment, Ouyahia moved to implement quantitative easing, thus enabling the government to finance the budget and buy time, in part gambling that oil prices might soon recover. For the moment, the gamble appears to have paid off. The government has been able to avoid deeper cuts, while the rise in oil prices that began in early 2018 has relieved pressure on the budget.
B. Warding Off Unrest
Even as it gained breathing space, the state has used veiled threats to defend its economic policy, including the suggestion that the violence of the 1990s might return. In September 2017, defending his decision to implement quantitative easing, Ouyahia told parliament that without it the government would lack funds to pay civil servants’ salaries within two months, implying imminent unrest. In October 2017, the state television station ENTV broadcast, for the first time on Algerian television, explicit and deeply upsetting images of the slaughter of the 1990s. This was widely interpreted as a warning to the public to keep quiet and be grateful for the country’s stability.[fn]“Les images choquantes de la télévision gouvernementale fédèrent les Algériens”, Algérie Focus, 1 October 2017. https://www.algerie-focus.com/2017/10/decennie-noire-images-choquantes-de-television-gouvernementale-federent-algeriens. “They want us to shut up. They want us to stop asking how $1,000 billion [a reference to oil and gas earnings spent since 1999, a figure frequently touted by officials] went down the drain”, an Algerian wrote on Facebook, calling the state’s use of these images a form of “psychological terrorism”.Hide Footnote The intention appears to be, as it was in 2011, to warn the population against rocking the boat by protesting or otherwise challenging the state’s decisions.
Since the end of 2016, with the announcement of the trimmed-down 2017 budget, popular dissent against austerity has surfaced in multiple ways. Protests have mostly been spontaneous, lacking larger organisational frameworks and failing to mobilise large numbers, with a few exceptions.[fn]The number of Algerian protesta – micro-protests that make distributional claims on the state and are disconnected from political parties, unions or other associations – reportedly rose from 10,000 in 2012 to 14,000 in 2015. See R. Parks, “Voter Participation and Loud Claim Making in Algeria”, Middle East Report (Winter 2016), pp. 23-27.Hide Footnote After the approval of the 2017 budget, a five-day “stay at home” protest planned for 2-7 January, combined with calls for a general strike by a shopkeepers’ union in opposition to import restrictions, tax hikes and penalties, turned violent.
From 2 to 4 January, protesters clashed with security forces across multiple towns in the province of Bejaia in the eastern Kabylia region, as well as in Bouira and Ain Benian, both just outside Algiers. Young men attacked symbols of the state such as the Office of National Education, looted goods from technology stores and blocked roads. Security forces used teargas to disperse them and dozens of protesters were reported wounded, as well as 39 police officers in the Bejaia area alone.[fn]See “DGSN: 39 policiers ont été blessés lors des émeutes de Bejaia”, Algérie 1, 8 January 2017.Hide Footnote Security services diffused or disrupted several other marches.[fn]Within weeks of the Bejaia protest, three more protests took place. The Intersyndicale, a network of autonomous unions, held peaceful assemblies in front of the provincial government offices in Blida, Oran, Batna and Ouargla on 28 January 2017 to demand repeal of the new retirement law. Students at the Fine Arts school in Algiers went on strike, with seven undertaking a hunger strike on 6 February – for the first time in the school’s history – to protest mismanagement and underfunding. Numerous police units were deployed to the Algiers city centre on 15 February to prevent two protests planned by pharmacy and dental surgery students seeking better training and employment. The protests came after Sellal received their representatives on 5 February. “Contrary to what was announced, our grievances were not taken into consideration”, one of the students said. Quoted in “Sit-in des étudiants en pharmacie et chirurgie dentaire à Alger : La manifestation empechée”, Le Courrier d’Algérie, 15 February 2017.Hide Footnote Similar protests took place in 2018, with the notable case of a six-month doctors’ strike that ended with government concessions after they brought the public health sector to a near-standstill.[fn]See Zahra Chenaoui, “En Algérie, les médecins résidents suspendent leur grève des gardes”, Le Monde, 28 May 2018.Hide Footnote
During Bouteflika’s tenure, Algeria has invested much in reforming and professionalising its security services, rebuilding confidence both at home and abroad, in the realisation that forms of violence and surveillance seen as legitimate or necessary in fighting an insurgency are no longer so.[fn]Crisis Group interview, security services source, Algiers, February 2017. Despite the financial crisis, Algeria spent $10 billion on defence (24.4 percent of the state budget) in 2017 for the third year in a row, making it Africa’s largest military spender. See “Future of the Algerian defence industry to 2022 – market attractiveness, competitive landscape and forecasts”, BusinessWire, 22 October 2017. See also L. Martinez and R. Boserup, Algeria Modern: From Opacity to Complexity (London, 2016).Hide Footnote Pre-emptive arrests and targeting protest leaders with harassment and persecution are more effective in stamping out public dissent than other less discriminating methods, which encouraged escalation in the 1990s in Algeria and during the more recent Arab Spring uprisings elsewhere. But the state has not yet tested this change in policing tactics on a large scale, and accumulating resentment could erupt unpredictably. Authorities are exercising particular caution in handling protests in the south, a site of rising contestation.[fn]See Crisis Group, Algeria’s South: Trouble’s Bellwether, op. cit. In November 2016, protests against spikes in electricity bills following subsidy cuts mobilised thousands in southern cities such as Biskra and Ouargla, prompting the government to reduce their bills. See “Energie/Allègement des factures d’électricité pour les wilayas du Sud”, Algérie Focus, 14 November 2016.Hide Footnote
A. A Newly Relevant Political Class
The Forum des Chefs d’Entreprise’s (FCE) power has waxed since 2014 and it appears poised to gain even more political influence. Private sector growth is a welcome development that stands to bring jobs and a more diversified and competitive economy, but vigilance and oversight will be necessary to harness, coordinate and guide its growth. Critics see in the post-2014 rise of the FCE – which lacks the historical legitimacy of the military or FLN – the advance of a politically influential oligarchy more likely to shape state policy in line with its own interests than to develop the economy.[fn]Crisis Group interviews, Algerian economists and industrialists, Algiers, May 2017. An Algerian economist and retired policymaker said: “What we need is a productive economy. The only thing the FCE is good at is defrauding the state”. Crisis Group interview, Algiers, September 2017.Hide Footnote Although the FCE describes itself as a force lobbying for economic reform, its growing political influence has garnered more attention than its declared reform objectives.[fn]See “Algeria’s corporate barons cast themselves as saviours of the economy”, Heba Saleh, Financial Times, 12 July 2018; Leïla Beratto, “Algérie : Ali Haddad, un proche de Bouteflika, à la tête du patronat”, Radio France International, 2 January 2015.Hide Footnote
Since 2014, when Haddad financed Bouteflika’s campaign for a fourth term and then became FCE head, this business lobby’s influence has steadily risen.[fn]Haddad, a businessman from the Kabylia region, is CEO of the Entreprise des travaux routiers, hydrauliques et bâtiments (ETRHB) construction group which benefits from lucrative state contracts. He also owns two private newspapers, Le Temps d’Algérie and Waqt Eldjazair, and two television stations, Dzair News and Dzair TV.Hide Footnote It reached new heights in the public eye in December 2016, when – against protocol and after being denied permission to do so – Haddad insisted on speaking before Foreign Minister Ramtane Lamamra at the Algeria-Africa Business Forum, prompting a walkout by Sellal.[fn]This affair caused much consternation among public officials incensed by the high profile Haddad has sought. Crisis Group interviews, Forum organiser, Algiers, September 2017. In a separate incident related to tensions between Haddad and officials, Algeria’s ambassador to France, Amar Bendjama, abruptly announced his resignation on 5 December 2016, reportedly after a dispute erupted when he expedited dozens of visas for Forum invitees with views considered hostile to Algeria. “L’Algérie sans ambassadeur en France depuis plus de huit mois”, TSA, 6 August 2017.Hide Footnote For experts and society alike, Bouteflika’s decision to sack Tebboune in August 2017 – soon after the latter directly targeted Haddad’s construction empire – signalled that Haddad’s clout now trumped the head of government’s.[fn]Crisis Group interviews, Algiers, September 2017. On 15 July, Tebboune had Haddad expelled from a civil servants’ institution graduation ceremony; the next day, the government sent half a dozen official letters to the ETRHB, putting it on formal notice concerning delivery of various projects worth hundreds of millions of dollars. See “Haddad dit avoir ‘été victim d’une cabale’ de la part du ‘prédateur’ Tebboune, sans le nommer”, HuffPost Algérie, 21 October 2017.Hide Footnote Haddad’s influence derives principally from his real and perceived proximity to Said Bouteflika, the president’s brother; many Algerians noted that Tebboune’s sacking came just days after the two men were pictured in the media laughing together and entering a government vehicle.[fn]“Saïd Bouteflika et Haddad ont quittés ensemble El Alia : on ne touche pas à mon pote!”, Le Matin d’Algérie, 1 August 2017.Hide Footnote
The FCE’s rise echoes the growing political relevance of the entrepreneurial class generally. The May 2017 parliamentary elections marked the first time that business personalities ran directly as candidates, especially in the FLN and its partner in the pro-Bouteflika presidential coalition, the Rassemblement National Démocratique (RND).[fn]Ali Haddad’s brother, Mohand Haddad, was second on the FLN list in Tizi Ouzou; Tayeb Ezraimi, CEO of the Semoulerie Industrielle de la Mitidja group (a major food company), headed the RND list in Blida; Abderrahmane Benhamadi, chairman of the Condor Electronics and Electromenager group (an appliance retailer), headed the RND list in Bordj Bou Arreridj; and billionaire industrialist Issad Rebrab’s niece headed the Tajamoue Amal El-Djazair (TAJ) list abroad in Tunis. See “L’influence politique occulte des patrons algériens”, Orient XXI, 26 April 2017.Hide Footnote Their growing influence – in part paved by the open role several businessmen played in financing Bouteflika’s re-election campaign in 2014 – was perceived as a victory for representatives of business and, leftist critics say, a loss for representatives of the people.[fn]See Cherif Dris, “Algérie 2014 : De l’élection présidentielle à l’émergence des patrons dans le jeu politique”, L’Année du Maghreb, No. 13 (2015). Workers Party head Louisa Hanoune called for a fight against “dirty money” before the elections and linked the lack of popular interest in the polls to impunity for corruption scandals involving FLN and RND deputies. See “Appel à la sanction des députés de la majorité sortants”, Liberté, 11 April 2017.Hide Footnote This trend in recent years has made some Algerian commentators argue that, in future presidential elections, financial backing from the business community may become as important as the political backing of traditional power centres such as the military.[fn]For example, Nordine Grim argues: “The presidential election will be very costly for the candidate co-opted by the government’s hard inner core and it will be all-important to know whether he can guarantee the financial support of a handful of oligarchs who would help him win the poll through the millions they would make available to him”. “Politique et argent : Qui aura les faveurs des hommes d’affaires”, Algérie Eco, 15 August 2017.Hide Footnote
B. Whose Private Sector?
FCE leaders see themselves as the custodians of a transition from centralised statist socialism to a market economy that started in the late 1980s and was disrupted by the black decade. As a FCE board member put it:
There needs to be a peaceful transition from one system to the other without too great a social shock. We’re coming out of a very difficult period and we can’t go back to that. It took so little time to discredit Algeria and so long to rebuild trust for Algerians and foreigners. In 1992, we left a socialist economy. We didn’t really kick off the process of developing private enterprise until 2000, which makes us only seventeen years old. Two thirds of jobs and three quarters of value added derive from the private sector. Taxes on businesses should replace export earnings in the state budget.[fn]Crisis Group interview, FCE board member, Algiers, September 2017.Hide Footnote
The FCE considers knowledge and technology transfers from foreign investment key to building a strong private sector, and does not deem the requirement that at least 51 per cent of capital investments in any local business be locally owned as a deterrent, even though foreign investors often cite it as one.[fn]Businesses can circumvent this requirement; for instance, the 51 per cent can be divided among several Algerian partners to render the foreign shareholder dominant, or these entrepreneurs can conclude shareholder agreements in which the foreign partner has a majority of votes. Yet Algeria’s foreign partners complain that this requirement (believed to be imposed by Bouteflika himself) impedes foreign direct investment. Crisis Group interviews, EU and U.S. diplomats, Brussels and Algiers, November 2017. Many foreign investors nevertheless perceive Algeria’s large middle-class domestic market as an attractive enough asset to forego the controlling stake. Crisis Group interviews, Algerian economists and industrialists, Algiers, May 2017.Hide Footnote It lobbies for rationalising both social spending, which it deems highly inefficient, with a particular focus on subsidy reform for energy and housing. It also supports integrating the informal sector into the formal economy as a high priority: huge quantities of cash circulate in a massive informal economy, which is more flexible than the rigid, overly bureaucratic banking and finance sector, and has proven remarkably resistant to efforts to regulate it. The informal circulation of money not only denies tax revenues to the government, it also renders impossible the kind of detailed economic analysis necessary for planning.[fn]Crisis Group interviews, Algerian economists and policymakers, Algiers, September 2017.Hide Footnote
The need for foreign investment and partnerships to support private enterprise has endowed the FCE with a diplomatic relevance it has enthusiastically embraced. FCE delegations project an Algeria transformed since socialist rule, with new and dynamic private enterprises and strong untapped potential. It has identified Western countries and Japan as desirable investment partners, on account of the knowledge and technology transfer prospects they offer, and sub-Saharan Africa as an export market with strong potential. The FCE seeks to translate Algeria’s robust political and diplomatic relations with African countries into economic relationships.[fn]Crisis Group interview, FCE board member, Algiers, September 2017. Morocco, a diplomatic and economic rival to Algeria in West Africa, is doing the precise opposite far more efficiently, parlaying budding economic relationships with African partners into diplomatic ties it can then translate into political gains in the African Union. In terms of regional exports, Algeria brings a certain savoir-faire and competitiveness to the table in sectors such as pharmaceuticals and infrastructure. Since 2015, it has overseen a number of projects, including the electrification of the Chadian capital N’djamena. Crisis Group interview, FCE board member, Algiers, September 2017. The FCE-hosted Algeria-Africa Business Forum, launched in December 2016, attracted 300 business leaders from across the continent to a two-day event in Algiers aimed at bolstering relationships and producing trade deals. The Forum led to the signature of around 100 Memoranda of Understanding between Algerian and sub-Saharan African business leaders, which were welcomed by Algerian operators looking to be more active on the continent. Crisis Group interview, FCE member, Algiers, September 2017.Hide Footnote
Critics charge that the FCE embodies a backward rather than forward-looking aspect of Algerian private enterprise. An Algerian economic analyst said:
The FCE represents liberal interests, including those of import barons. Import barons don’t want diversification and domestic production; they want imports because these allow them to manipulate the hard currency market. Their business model depends on their ability to arbitrage [the buying and selling of assets to take advantage of differing prices for the same asset] the state by selling goods at inflated prices. They’re not real capitalist investors. They don’t produce anything. It was this group of economic actors that brought about the sacking of Tebboune.[fn]Crisis Group interview, Amor Khelif, research director, Centre de Recherche en Economie Appliquée pour le Développement, Algiers, September 2017.Hide Footnote
Government officials and FCE members seem aware that import barons must pivot toward more productive sectors. “Elites want to make a lot of money”, a government adviser said. “But we have no more foreign currency. Import barons need to be pushed into productive activity. Circumstances oblige us to get out of this Dutch disease”.[fn]Crisis Group interview, government economic adviser, Algiers, September 2017.Hide Footnote
The FCE has paid a cost for its increased political visibility: its critics now often paint it as a parasite granted special favours and playing a pernicious political role.[fn]Crisis Group interviews, Algerian economic analysts, Algiers, May-September 2017. “The FCE is a lobby. The principal contradiction of the FCE is that it seeks to extract fiscal and financial advantages from the state even as it lobbies for liberalising the economy”. Crisis Group interview, Algerian retired economic policymaker, Algiers, October 2017.Hide Footnote This is in part a caricature that does not reflect the diversity of its members, but is also the predictable result of its politicisation, which rewards business leaders for supporting the government and punishes others for challenging it. Independent-minded entrepreneurs are often actively obstructed, as the public tussle between the government and billionaire industrialist Issad Rebrab, whose Cevital group produces the majority of the country’s non-hydrocarbons exports, has shown.[fn]Issad Rebrab is the most striking example of the state obstructing entrepreneurs it views as too independent. He has consistently supported opponents of Bouteflika since 2004, when he fell out with the FCE over its decision to support Bouteflika’s second term. Rebrab’s business group immediately began to encounter problems with port authorisations and customs approvals. See Wikileaks, “Form over function: surviving as a newspaper in Algeria today”, 5 May 2008. Rebrab, whose Cevital Group is the largest private company in Algeria and who is Africa’s ninth richest man with an estimated net worth of $4.3 billion, has since faced significant state obstruction, including a refusal by the port of Bejaia to release Cevital industrial equipment for several months, sparking strikes and protests by workers, and a court cancellation of his purchase of El Khabar, a newspaper. Rebrab is rumoured to be considering a presidential run in 2019. See Skander Salhi, “Election présidentielle de 2019 : la candidature de Rebrab, le scénario qui fait peur à Alger”, Maghreb Intelligence (www.maghreb-intelligence.com), 10 May 2018.Hide Footnote
Algeria stands at a delicate juncture. Bouteflika’s administration, having leveraged Algerians’ past traumas into its own overextension, is unable or unwilling to confront succession. For several years, prominent Algerians have repeatedly and publicly questioned whether Bouteflika is governing the country in reality, and have become increasingly bold in demanding that he not run for a fifth term.[fn]See, for instance, “Algérie : trois personnalités politiques appellent à empêcher Bouteflika de briguer un cinquième mandat”, Jeune Afrique, 9 October 2017.Hide Footnote Important elements of the opposition have tried, in vain, to call for a negotiated transition that would also address pressing economic issues.[fn]An Algerian opposition leader said: “Between falling oil prices and growing domestic energy consumption, it will be increasingly difficult to export oil after 2025. In the face of this economic situation, there is no political opening. The problem is not one of policy but of governance: we have a government that is inefficient, opaque and almost impossible to hold accountable. We need a government of national unity, one that can make Algerians feel it is sincere about making the changes that are needed. Without engaging with social forces, the state cannot resolve the crisis”. Crisis Group interview, Algiers, February 2018.Hide Footnote Yet in the face of such calls, the presidency and the political coalition that supports it have chosen to either remain silent or double down on another extension of Bouteflika’s tenure as the glue that binds the system together. The latter build on a sense of confidence that many Algerians are grateful for the peace they have enjoyed since 1999 and are more worried about what an unknown future will bring.[fn]Crisis Group interviews, Algerian activists, academics and journalists, Western diplomats, Algiers, October 2017-February 2018.Hide Footnote
The result is an increasing paralysis, reflected not only in the political status quo dominated by the FLN and RND, but also in economic and foreign policy.[fn]Crisis Group interviews, Algerian activists, academics and journalists, Western diplomats, Algiers, October 2017-February 2018.Hide Footnote One consequence of this paralysis has been the stifling of an overdue debate about how to adjust to the decline in hydrocarbon revenues and reduce Algeria’s reliance on them. Such a debate needs to happen at two levels: between the elites – businesspeople, technocrats and politicians – that influence policy and the wider public, but also among these elites themselves.
Whether needed economic changes arrive suddenly in response to crisis or more gradually if higher oil prices can buy more time, a first step for the government is to improve its communications and outreach. This is necessary to explain the challenges ahead and the necessity of reforms – including some that may be unpopular – and what they are expected to deliver. In recent years, the government has tended to underestimate or obfuscate worrisome economic data, including the evaporation of export earnings for savings and investment.[fn]Then-Prime Minister Sellal, for instance, vowed in July 2016 that foreign exchange reserves would “under no circumstance” fall below the $100 billion threshold, yet this is precisely what happened at the end of November 2017. See “Sellal : les réserves de change ne baisseront pas en dessous de 100 milliards de dollars”, HuffPost Algérie, 14 July 2016.Hide Footnote An effort to be more transparent about the state of the treasury and how public money is spent would be important in explaining the country’s economic situation and avoiding the type of alarmist responses that can prevail when no reliable information is available.
A related issue is the need to address the distrust many Algerians harbour towards both the state and the private sector, given the public perception that a small elite has captured the state. Neither policymakers nor their partners in the private sector and labour movement should underestimate the role corruption plays in the popular imagination; the Khalifa Bank and Sonatrach scandals in particular have eroded trust among both Algerians and foreign investors.[fn]See fn. 7 above for more on the Sonatrach case. “Fresh trouble for Algerian oil and gas”, Forbes, 12 March 2013. The high-profile Khalifa bank scandal involved one of the largest private sector conglomerates, including a bank, an airline and a TV channel. In 2003, the bank declared bankruptcy, dissolving the savings of over a million customers, including state-owned companies. Proximity to the Bouteflika brothers was instrumental to Khalifa building his empire; a rupture with them is believed to have conditioned its fall. Crisis Group interviews, Algerian journalists, Algiers, September 2017. See also Renaud Lecadre , Florence Aubenas , José Garçon and Cédric Mathiot, “La face cachée de l’« empire » Khalifa”, Libération, 30 October 2002.Hide Footnote The seizure of over 700 kilos of cocaine in a shipment of frozen meat belonging to a well-connected businessman in mid-2018 provoked consternation about the alleged complicity of senior security officials in organised crime.[fn]See “Affaire des 701 kg de cocaïne : Complicités et dommages collatéraux”, El Watan, 11 July 2018. The scandal, which continues to be investigated, has led to the dismissal of a number of senior security officials and scrutiny over the businessman’s relations with a wide range of politicians, officials, and their families.Hide Footnote
Accountability for at least the most egregious of past excesses could be one option if policymakers want to address public concern about corruption, even if a politically fraught one because of the likelihood it will harm vested interests. An anti-corruption crackdown also runs the risk of becoming a politicised witch-hunt, particularly in the context of a looming leadership change. A more palatable option might be to lower the risk of repeating such occurrences, for instance by appointing a commission of experts to review existing legislation and administrative procedures and suggest reforms to improve oversight of public spending.[fn]One possible model for this is the Instance Nationale de Lutte Contre La Corruption (National Authority for the Fight Against Corruption, INLUCC) created after the 2011 uprising in neighbouring Tunisia, one of whose missions is to propose policy reforms to fight corruption. See Crisis Group Middle East and North Africa Report N°177, Blocked Transition: Corruption and Regionalism in Tunisia, 10 May 2017.Hide Footnote
Any renegotiation of the post-1990s social contract – lavish state spending, including on the cultivation of new economic elites, in exchange for political acquiescence in Bouteflika rule and impunity for the perpetrators of violence during the civil war – must be considered carefully. The generation born in the 1990s has little memory of the decade’s violence and will face rising prices of basic goods as the government phases out subsidies. Those younger than thirty – 70 per cent of the population – are now entering the workforce with bleak prospects and dramatically diminished state capacity to support them.[fn]Youth Policy Labs, Algeria factsheet, 2014. International Labour Organization, ILOSTAT database, March 2017.Hide Footnote While some resent the change in circumstances, others perceive it as an opportunity: there is a will among this group to carve out its own space and reduce dependency on the state. As Abdellah Malek, the 28-year-old head of a technology start-up hub in Algiers,[fn]Malek is unusual and quite popular because he is young, dynamic, comes from a poor background and is entirely self-made. Forbes recognised him in 2018 as one of the most influential African entrepreneurs under 30. While he may not be representative of the under-30 generation per se, he is an influencer and thought leader with popular legitimacy.Hide Footnote put it:
Most of society has been receiving things for free for twenty years. People need to work hard to navigate themselves out of dependency. If entrepreneurs are not able to do things on their own, they’ll always rely on the government for help; too much of society is already suffering from this mentality because of oil income.[fn]Crisis Group interview, Abdellah Malek, director, Sylabs, Algiers, September 2017. Malek hosted an Algiers start-up conference in 2016 that was well-attended by senior government officials and resulted in several large contracts. He said he was optimistic that dialogue between the government and young entrepreneurs would help the government better adapt its support efforts to the needs of young entrepreneurs, even if this support has focused too much on materials and cash loans and not enough on training and human resources. He also cited positive improvements in reducing bureaucracy; for example, a document it took four to six weeks to obtain in 2016 was available in 2017 in merely a week.Hide Footnote
Implementing a transition away from the current economic model will require more transparency and openness at all levels.
The question of the relationship between a handful of powerful officials and politically influential economic elites is intertwined with the wider public’s perception that corruption is widespread among a small power elite of entrepreneurs and officials. “Separating money from political power”, as former Prime Minister Tebboune promised to do and what many believe he was sacked for, is a politically charged slogan at odds with the reality that powerful businesspeople organise to defend both corporate and personal interests, and that the struggle against corruption is too often used to settle political scores. A better approach is to expand the number of stakeholders in the formulation of economic policy.
Part of the controversy about the FCE’s influence is ideological, reflecting typical right/left or liberal/statist divides that generally can be resolved through elite power rebalancing and electoral outcomes. But the FCE’s problem also largely lies in the perception that despite being the lead reformer, it embodies the interests of the establishment and a new elite rather than the economic interests of the country as a whole. As an economic policy adviser said: “The Tripartite should be widened. In terms of building a popular consensus around reforms, having representation be restricted to the UGTA and FCE has a negative impact”.[fn]Crisis Group interview, chief economic policy adviser, Algiers, October 2017.Hide Footnote Reaching out to outliers in the business world, including those seen as critics of the Bouteflika government such as Issad Rebrab, could not only infuse the debate over economic policy with different ideas but also defuse charges that it lobbies for a particular faction more than the interests of the private sector as a whole.[fn]Another example of a businessman trying to promote alternative views to the FCE is Slim Othmani, head of the NCA Rouiba beverages company and president of the economic think tank Cercle d’Action et de Réflexion autour de l’Entreprise (CARE). He has lobbied for a modernisation of thinking about the economy, using conferences and media outreach to push for less bureaucracy and more private sector autonomy, so far to little effect. Crisis Group interview, Slim Othmani, Algiers, October 2017.Hide Footnote
Algeria has a mixed inheritance from the black decade. It has learned some lessons about how not to liberalise too quickly under sudden pressure due to mounting foreign debt, and it has a strong will to avoid repeating past mistakes. It must now balance the need for an economic adjustment against vested interests that range from privileged businesspeople to elements of society who consider rapid and substantial changes to the redistributive model as too disruptive. That model, for all its inefficiencies, has lifted many out of poverty and helped stabilise a war-torn nation.
Implementing a transition away from the current economic model will require more transparency and openness at all levels, and more accountability from both state institutions and the private sector. Ultimately, the deep reform that Algeria needs requires a strategic opening, externally but also internally, to embrace a diversity of economic, political and societal actors in building a new model that can ensure both stability and growth. The government’s current attitude, be it toward making major economic decisions or tackling broader political and societal questions, is too often aloof, arrogant and at odds with Algerians’ expectations.
Despite the political uncertainty before the 2019 presidential election and, more generally, a looming presidential transition that may or may not align with the electoral calendar, some cautious initial steps are possible. They could include improving transparency on the state of public finances and widening the discussion on the challenges Algeria faces and how best to address them to a broader range of business and civil society actors than those currently involved in the policymaking process. Young Algerians in particular – who constitute the bulk of the population and whose futures is at stake – should be at the centre of any effort to define a long-term response to the country’s economic challenges.
Like many issues crucial to Algeria, questions of economic reform have tended to be postponed, with proponents of change waiting for a more forward-leaning political leadership. This may not emerge for some time, however, and today’s decision-makers should consider that getting ahead of the curve of a future crisis would be wiser – for their own sake as well as Algeria’s – than dealing with a shock when it comes. It is not too early to start widening the framework of a debate that is as much about how the Algerian social model should evolve as it is about technical steps toward remedial reform.
Algiers/Brussels, 19 November 2018
Source link : https://www.crisisgroup.org/middle-east-north-africa/north-africa/algeria/192-breaking-algerias-economic-paralysis
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Publish date : 2018-11-19 08:00:00
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