ALGERIA’S ECONOMY · 2016. 10. 10. · Algeria’s Economy: The Vicious Circle of Oil and...

ALGERIA’S ECONOMY:

THE VICIOUS CIRCLE OF OIL AND VIOLENCE

26 October 2001

ICG Africa Report N° 36Brussels

TABLE OF CONTENTS

EXECUTIVE SUMMARY AND RECOMMENDATIONS.................................................................... i

I. THE FAILURE OF STATE CAPITALISM ...................................................................................1

A. MACRO-ECONOMIC SHOCK......................................................................................................................2

B. THE CURRENT CRISIS...............................................................................................................................2

II. THE ILLUSION OF MACRO-ECONOMIC PROGRESS...........................................................4

III. MICRO-ECONOMIC STRESSES...................................................................................................6

IV. THE UNDERLYING CRISIS...........................................................................................................7

A. THE FOREIGN DEBT BURDEN...................................................................................................................7

B. THE ROLE OF THE PRIVATE SECTOR ........................................................................................................8

V. THE PARALLEL ECONOMY ......................................................................................................10

VI. SUBSTITUTES FOR THE STATE ...............................................................................................11

VII. LIMITED REFORMS .....................................................................................................................12

VIII. THE OUTLOOK..............................................................................................................................15

IX. INTERNATIONAL OVERSIGHT OF ECONOMIC REFORMS.............................................16

A. INTERNATIONAL FINANCIAL INSTITUTIONS...........................................................................................16

B. THE EUROPEAN UNION ..........................................................................................................................16

X. CONCLUSION.................................................................................................................................18

APPENDICES

A. MAP OF ALGERIA ...................................................................................................................................20B ABOUT THE INTERNATIONAL CRISIS GROUP .........................................................................................21

C. ICG REPORTS AND BRIEFING PAPERS....................................................................................................22

D. ICG BOARD MEMBERS ..........................................................................................................................26

ICG Africa Report N° 36 26 October 2001



EXECUTIVE SUMMARY AND RECOMMENDATIONS

The crisis in Algeria, now a decade old, is notmerely a consequence of the interruption of theDecember 1991 elections by an army-backedcoup to keep the Front Islamique du Salut (FIS:Islamic Salvation Front) from power. It is alsoan economic crisis. The same parties who havestruggled over the control of the state are alsoplundering Algerias resources.

The military leaders manipulate the atmosphereof fear and violence to accumulate funds,especially through commissions on trade, whichthey use to support an extensive politicalpatronage system that buttresses their hold onpower. The Islamists use the state of emergencyto fund their activities through extortion and theblack market. In between, both private andpublic sector interests exploit the gaps in anofficially sanctioned culture of corruption andprofiteering to make personal gains from theprivatisation process and prevent genuinecompetition in key sectors such as constructionand pharmaceuticals. The mass of thepopulation continues to be excluded from thebenefits that market liberalisation promised.

Pressures to open up politics and the economyare mounting but the authorities have failed torespond. The continuing violence financiallybenefits them, and their survival depends onavoiding the kind of settlement that wouldexpose their arbitrary political and economicpower. Especially in the current period of

international resolve against terrorism, fewserious demands have been placed on theAlgerian regime to negotiate with the Islamistsor engage in genuine democratic and economicreform.

Paradoxically, Algeria has never been betterplaced in macro-economic terms to promote thestructural and fiscal reforms the IMF amongothers has recommended for years. Even at theheight of violence in northern Algeria, thehydrocarbon sector of the southern Saharacontinued to attract capital from international oilcompanies, compensating for the dearth of localand foreign direct investment in other sectors.

Because the Saharan oil fields are far frompopulated centres, exploration and exploitationdeals have been sheltered from the conflict,almost as if they were offshore. SouthernEuropean demand for Algerian gas hassubstantially increased over the past decade,making this as much a strategic resource forEuropean neighbours as for Algerias militaryauthorities. Via pipelines, Spain imports 75 percent of its natural gas from Algeria, Portugal(through Spain) 100 per cent and Italy 54 percent. All three states and France for complexhistorical reasons are reluctant to disruptestablished relations with the Algerianauthorities.

However, the macro-economic picture disguisesa much grimmer micro-economic reality. In

Algeria’s Economy: The Vicious Circle of Oil and ViolenceICG Africa Report N° 36, 26 October 2001 Page ii

contrast to the booming hydrocarbon sector,which generates 97 per cent of foreign exportearnings, the domestic economy is stagnatingunder a lack of both private and public sectorinvestment, leading to official unemployment ofnearly 30 per cent. Under the influence of planspromoted by the IMF, World Bank andEuropean Union (EU), thousands of workershave been laid off as a consequence ofrestructuring industries for privatisation. Yet fewinvestors have taken over inefficient heavyindustry plants running at around 40 per cent ofcapacity for more than a decade. Socialinvestment in housing, welfare, infrastructureand transport has been neglected in favour ofimporting basic goods. The access of newcomersto the market, which, under agreements with theinternational financial institutions and the EU isbeing prepared for full trade liberalisation by2012,1 is severely restricted.

Popular discontent has been visibly rising sinceSpring 2001, but not, this time, because ofIslamist-inspired violence. Though armedIslamists remain active in rural areas, therallying cry of protestors from the Berber regionof Kabylia has been directed against hogra the neglect and contempt with which Algeriasrulers respond to the needs of the generalpopulation. There is growing realisation that thecontinuation of violence has actually bolsteredconcentration of economic and political power inthe hands of the military elite. Algerias rulershave engineered their own enrichment not onlyduring the last decades crisis, but because of it.

In the wake of the 11 September 2001 terroristattacks in the U.S., the international communitycan no longer ignore the demands of theAlgerian population for full participation in astable economy and democracy. Turning a blindeye to the countrys continuing violence couldfoster renewed recruitment to radical Islamistorganisations. The dearth of political andeconomic alternatives could also add weight tothe Islamists cause. It has already encouragedcriminality close to the EUs southern borders

1 2012 is the target date set by the Euro-Mediterranean(Barcelona) Partnership for a Mediterranean Free TradeZone between EU member states and twelveMediterranean partners, including Algeria.

and illegal migration northwards to Europe,often in conditions of hostility and desperation.Where Western governments and internationalfinancial institutions have sought to promotestability, a mafia-style regime has come toconstitute a factor of instability in itself.

RECOMMENDATIONS

TO THE ALGERIAN MILITARY AUTHORITIES

1. Respect the independence of the legislativeand executive branches of government.

TO THE ALGERIAN GOVERNMENT

2. Fulfil the promise to establish anindependent and effective judiciary.

3. Create effective organs for consultationbetween government, the labour force andthe private sector

4. Continue privatisation of state enterpriseswhile concurrently establishing safety-netprograms for employment.

5. Pursue fiscal reform, particularly ofindividual and company taxation.

6. Improve private sector access to funding bycontinuing banking reform.

TO THE IMF AND WORLD BANK

7. Recognise that the Algerian authorities arereluctant to implement the above prioritieson their own and tie cooperation, therefore,to progress toward genuine economic reformthat replaces personalised fiefdoms withautonomous institutional frameworks capableof releasing the countrys considerableeconomic potential.

TO THE EUROPEAN UNION

8. Conclude, in the framework of the Euro-Mediterranean (Barcelona) Partnership, anAssociation Agreement with Algeria thatclearly links closer economic cooperation topolitical reform.

Brussels, 26 October 2001

ICG Africa Report N° 36 26 October 2001



I. THE FAILURE OF STATECAPITALISM

For the past decade, Algeria has been trapped ina crisis that amounts to a virtual civil war. Sincethe army-backed coup in January 1992, whichfollowed the first round of the December 1991legislative elections in which the FrontIslamique du Salut (FIS) was set to win anabsolute majority in the National PopularAssembly, the gulf between government andpeople has steadily grown. The coupssuspension of the electoral process hascontributed to a situation in which the state hasbecome dysfunctional. Though violencedeclined in the wake of the six-month-longpartial amnesty between June 1999 and January2000, the underlying problems of populardisengagement from politics have not beenaddressed. The regime continues to operate as ifthe attitudes of the population were irrelevant tothat process

This political crisis has been most acute duringthe past decade but its origins lie in the originalconstruction of the Algerian state in 1962, afterthe War of Independence with France. Politicaland economic visions were closely intertwinedin the initial decisions as to what Algeria was tobecome. After Ahmad Ben Bella attained powerin July 1962, Algeria was based upon thehegemony of a single political party serving theinterests of an elite backed by the army.

As laid down in the Tripoli Program,2 theeconomy of this new state was to be grounded ona socialist precept in which the public sector,under tight administrative control, played theleading role in Algerias state capitalism.3Development was to be fuelled by oil exports,the dominant source of foreign exchangerevenues.

Over time the political elite created by theoriginal army-backed coup was paralleled by aneconomic elite, itself entrenched in the politicaland administrative structures created for thehegemonic state system. Increasingly, the twoelites merged as the technocrats whoadministered the state and its economy soughtbenefits in the private sector, and the rewards ofpower were more and more expressed ineconomic terms.

A fundamental promise of the Algerianrevolution was that delayed popular expectationswould eventually be satisfied throughredistribution of the benefits of economicdevelopment. Although this was honouredmainly in the breach, revolutionary tradition and

2 The Front de Liberation Nationale (FLN)'s Tripoliconference of 1962 set the parameters of party ideology,amplified in the Charter of Algiers in 1964. See MartinStone, The Agony of Algeria (Hurst & Co, London, 1997),pp.53-4.3 The term seems to have been coined by Raffinot andJacquemot, Le capitalisme détat algérien, Maspero (Paris,1977) and implies government control of the economythrough price control, investment and control ofproduction, even though a private sector may continue. InAlgeria, the private sector was conventionally 30 per centof the total economy.

Algeria’s Economy: The Vicious Circle of Oil and ViolenceICG Africa Report N° 36, 26 October 2001 Page 2

the charisma associated with a ruling elite whichderived its legitimacy from that traditioncontained discontent. By the 1980s, however,these constraints on popular resentment hadbegun to fade, and the inequalities and inequitiesin the Algerian economic model had becomeever more stark. The activities of an economicelite linked to the single political party, togetherwith the growth of a parallel trading economydependent on political protection and officialconnivance, were rendered more intolerable bythe ineffective economic liberalisation launchedunder the Chadli Bendjedid presidency.4

A. MACRO-ECONOMIC SHOCK

During the decade of the 1980s, Algeriasmacro-economic situation worsened, in largepart because oil prices declined steeply. Equallysignificant, however, the micro-economicsituation worsened as opportunities for migrationwere blocked by Western Europes reluctance toincrease the size of its immigrant labour force.The economic liberalisation program effectivelyenriched the elite without improving the lot ofordinary Algerians.5

After 1986, in particular, the situation worsenedrapidly as export revenues collapsed under thetwin assaults of a Saudi-inspired lowering ofworld oil prices and a dramatic decline in thevalue of the dollar, the currency in which theenergy trade was transacted. The domesticpolitical crisis sharpened in parallel. Protests inKabylia in April 1980 ushered in the BerberSpring. Popular support grew in the large citiesfor the nascent Islamist movement. The 1986riots in Constantine were followed by thecountrywide protests of October 1988, whichended the single-party state era.

4 Dillman B.L., State and private sector in Algeria: thepolitics of rent-seeking and failed development, Westview(Boulder and Oxford, 2000), p.7.5 Between 1985 and 1991 the number of unemployedworkers in Algeria grew by 190 per cent, eloquenttestimony to the economic crisis. Benachenou A. ,Inflation et chomage en Algérie: les aléas de ladémocratie et des réformes économiques, Monde Arabe -Maghreb-Mashrek 139 (January-March 1993), pp. 28-41.

This parallel activism was no accident. Therewas a direct relationship between the worseningeconomic situation and the mounting politicalcrisis. The ostentatious increase in private sectorwealth derived from economic liberalisation, thegrowth of the black market economy under statepatronage and the worsening employmentsituation inevitably increased populardisaffection. The regime resolutely turned itsface against genuine political liberalisation as itsinnately repressive tendencies intensified. Itsought to play off Berber-led demands forcultural and political change against Arab andpro-Islamist antagonism towards the Berberminority. These political tensions were, in turn,aggravated by the growing economic hardshipafter 1986 when worsening terms of trade led theregime to compress imports6 to avoid increasingcurrent account deficits and risking a default ondebt repayment.7

B. THE CURRENT CRISIS

This economic crisis lies at the roots of Algeriascatastrophic decade. Popular disgust with thestates failure to meet expectations caused urbancommunities, in particular, to seek alternatives inpolitical Islam. It also threw into high relief theelites who had benefited from the economicreforms of the 1980s. These elites could nolonger use the revolutionary tradition to justifyadvantages but were increasingly seen as linkedwith the former colonial power. Especially thearmy command, which rediscovered its politicalrole after 1990, was regarded as ever more underFrench influence.8

6 Dillman, op. cit., p. 86. In 1978, the state arrogated toitself the monopoly of foreign trade, so that the privatesector had to apply to state enterprises for essential inputs.This also meant that consumer supply could be controlledby the state at whim, if it wished to restrict import costs, asit did after 1986.7 The debt service ratio rose in 1986 to 68 per cent from 37per cent the previous year. Two years later it was 86 percent. Middle East Economic Survey, 13 April 13 1992.8 The new constitution introduced by the Chadli Bendjedidregime in 1989 reduced the armys role to one ofprotecting national territorial integrity. The armycommand was persuaded to abandon its direct involvementin the political process, which had been a leftover of theBoumediènne era. This new restraint was abandoned inJune 1991 when the army arrested FIS leaders during the


The ruling elite had long been a nomenklatura –closed to the outside, self-selecting, andarrogating to itself substantial privilege but,because of its economic advantage anduncontrolled political power, it also came to beseen as a mafia. As the army command becamelargely derived from Algerians who had servedFrance before they defected to the Front deLibération Nationale (FLN) near the end of theWar of Independence, belief grew that Algeriawas increasingly run by hizb fransa, the Party ofFrance, that was paralleled by and integrated intothe mafia and the nomenklatura.9 Objectivepolitical and economic realities were not, inthemselves, important to this analysis.Perceptions were sufficient to feed populardisaffection. .

Ironically, both the FIS and secular groups thatwished to restructure Algeria in the wake of theJanuary 1992 coup recognised that a resolutionof the political crisis required addressing theeconomic crisis as well. For the FIS, the latterwas part of a generalised moral crisis that hadalso generated the political troubles. Themovement considered that redistribution ofwealth and the need for legitimate and morallyacceptable government were intertwined, even ifit never developed a detailed economic reformprogram.

For secular groups within the elite, economicreform was necessary for many reasons, not allso doctrinal or morally founded. For themodernists, the economic collapse wassymptomatic of the bankruptcy of the socialistvision associated with the original revolutionaryideal. State capitalism had failed, and economic

general strike the movement called against the newelectoral law. This turned out to be the precursor togeneralised army involvement in political life once again,not as many hoped at the time merely an isolatedincident designed to highlight the danger the FISrepresented to constitutional government.9 As Bradford Dillman points out, op. cit., p. 134:

There are few parallels in the rentier word, saveperhaps in Nigeria and Indonesia, to the wide-scaleconversion of army officers and high-rankingcadres into pseudo-private entrepreneurs andpredators through privatisation, deregulation ofimporting, liquidation of local public companies,and joint ventures between multinationals and theremnants of state companies.

reform was seen as vital to genuinedevelopment. This argument was heightened byAlgerias massive foreign debt. Concern for lossof economic sovereignty delayed acceptance ofIMF- and World Bank-style economicrestructuring until 1994. However, politicalimperatives have prevented completion of theparallel institutional reforms necessary toachieve genuine economic reconstruction.10

There were other, less respectable reasons foraccepting the principle of economic restructuringwhile at the same time trying to preservepolitical control. As described below, the privatesector felt profoundly restricted by state controlof trade and finance. Many entrepreneurs whohad exploited political privileges now soughtprofitable investment opportunities for which aneconomic reform that destroyed state hegemonywas essential. Even the parallel economy soughtadvantages from privatisation. Although it hadprospered precisely because it could exploit thedifferential benefits provided by the statespolitical hegemony, its practitioners saw newopportunities

There were also those who considered a collapsein political authority the ideal chance to extendeconomic opportunity, quite apart from reformimplications. Those linked to the widespreadsmuggling that accompanied the paralleleconomy exploited the gaps in the statesprovision of basic goods, as well as theopportunities those activities offered particularlyunemployed youth. Crucially, for the Islamistmilitants of the Groupe Islamique Armée (GIA)and other armed groups, the parallel economyhas provided not only economic sustenance butalso a fertile recruiting ground.

Given the vast range of interests affected byeconomic reform and by economic chaosattendant upon political violence, it is necessaryto consider just how well Algeria has done in

10 IMF, Algeria: Staff report for the 1996 Article IVconsultation, (Washington, 1996); IMF, Algeria: Staffreport for the 2000 Article IV consultation, (Washington,2000). The blocked privatisation program indicates justhow great the difficulties in the path of institutional reformcan be (see discussion of Mr Boukhrouhs recentcomments in the main text).


changing from state capitalism to a free marketeconomy and to what extent the political crisishas determined this record.

II. THE ILLUSION OF MACRO-ECONOMIC PROGRESS

Most economic commentators consider that,having gone down the painful path of economicreform and restructuring, Algeria now stands onthe threshold of revival. Not only are theelements of a liberal, free market economy inplace, but oil and gas revenues, together withexternal account improvements, should meanthat an appropriate environment for foreigninvestors has been created. Even thoughremnants of the past decades violence linger,Algeria seems to offer enticing prospects not justin the oil and gas sectors but also in other partsof its economy.

Yet, despite the encouraging macro-economicindicators by 2000 the current account surpluswas U.S.$9.9 billion (17 per cent of GDP), andforeign exchange reserves had risen by U.S.$7.5billion to U.S.$12.03 billion, and, by the end ofJuly 2001, to U.S.$16.4 billion11 scepticismstill reigns. Foreign investment, including in theoil sector, has stubbornly remained belowU.S.$500 million annually with delays in thelong-promised privatisation program particularlyresponsible.12 In 2001, only one major industrialinvestment was approved.13

11 Unless otherwise stated, the economic statistics used inthis comment are drawn from IMF and IIF sources.12 Some 184 companies are due to be privatised by 2004.Institute of International Finance IIF, Algeria, EconomicReport, (Washington, 2001), pp. 11-12. Much store is setby the expected second GTM mobile telephone licencesale due in 2001, but this will only provide a one-timebenefit. One problem facing investors is that the Algerianbourse is hardly operating it handles four security issues:a bond issued by Sonatrach, the state hydrocarboncompany, shares in the partly privatised Eriad-Sétif foodprocessor, the partly privatised pharmaceutical company,Saidal, and the Hotel Aurassi in Algiers. The foodprocessor Eriad-Constantine is to join the list soon, as areindustrial gas, tobacco and wine producers, and there arerumours that the state airline now under considerablepressure from a new private airline, Khalifa Airways isto be privatised.13 It involved the majority take-over by a foreign investorof Algerias state-owned steel-making complex and itsport facilities. IMF, Algeria: Staff report for the 2001Article IV Consultation (Washington, 2001), Box 4, 22.


Unemployment remains high - from a low of 23per cent of the labour force at the start of the1990s, it rose to 28 per cent in 1998, fell slightlyto 26.4 per cent in 1999 and has risen againtowards 30 per cent.14 Over 450,000 workershave lost their jobs in the restructuring exercisesof the last decade, and three-quarters of theunemployed are under the age of 30.15

Frances authoritative Nord-Sud Export, part ofthe respected Le Monde group, commented inMay 2001:

The paralysis of the Algerian economy,outside the hydrocarbon sector, can beexpressed in one statistic - imports. In2000, a year in which external revenuesbeat all records (because of the rise in oilprices), external purchases only amountedto U.S.$9.2 billion, U.S.$900 million less,even, than in 1995 (U.S.$10.1 billion).The decline in domestic demand - whetherin household consumption (where livingstandards have continued to fall) or interms of companies (for production andinvestment) - is evident.

Furthermore, there has been no evidence oflocal production being substituted forimports; agricultural production fell by 5per cent in value in 2000, while, during thefirst nine months of the year, the non-hydrocarbon industrial production indexdeclined by 0.3 per cent. Even worse,output from all manufacturing industriesfell during the same period by 1.4 percent.16

This comment was made at a critical juncture inAlgerias recent history; during the riots inKabylia, which resulted in an official toll of 52dead and more than 1,300 wounded. Reliableunofficial sources claim that over 80 peopledied. Notably, these riots were the first exampleof public unrest not involving the Islamist crisis

14 IMF, Algeria: Staff report for the 2000 Article IVconsultation, (Washington, 2000), p. 48 and IMF,Algeria: Staff report for the 2001 Article IV Consultation(Washington, 2001), p. 8.15 IIF (2001), op. cit., p. 3.16 Nord-Sud Export, No:420, 11 May 2001.

for years. Instead, they were directed against theregime, over both Berber marginalisation and thegeneral issue of brutality against the civilianpopulation. It should be recalled that the April1980 riots, also in Kabylia, were precursors ofthe October 1988 riots that were the first overtsign of todays crisis.


III. MICRO-ECONOMIC STRESSES

In other words, despite the satisfaction felt in theWest over Algerias recent macro-economicperformance, the crisis is as bad as ever inmicro-economic and social terms. Indeed,opposition politicians and leading Algeriansoutside the country argue that it is worsening.17For them, the problems are structural and reflectyears of economic mismanagement and politicalcorruption due to the dominant role played bythe unaccountable nomenklatura.

There is little doubt about the misery thatAlgerians face today. Wage levels are low,particularly when contrasted with prices. Theminimum wage was raised by one-third, to theequivalent of U.S.$102 per month,18 in 2000only after a major dispute between governmentand the trade union federation, the UnionGénérale des Travailleurs Algériens (UGTA).Average public sector wages in 1997, the lastyear for which a household survey is available,19were U.S.$136 per month for a worker,U.S.$186 per month for a technician and $227per month for a manager. These wages havebeen increased by 10 per cent in response toinflation. However, overall, consumer priceshave risen by 66 per cent since 1995, whilewages have only risen by 44 per cent.20

Housing is inadequate and worsening. Algeriahas four million housing units for its 30-million-strong population one of the highestoccupancy ratios in the world.21 Some twomillion additional units are required but the statebuilds just over 130,000 per year, and the private

17 See, for example, the interview with Ghazi Hidouci, inthe Quotidien d'Oran, 3 April 2001. In a telling comment,Mr Hidouci points out that Algeria's levels of imports arenow below those of both Morocco and Tunisia, implyingthat its imported inputs are as well and that its domesticeconomy is less productive and smaller outside thehydrocarbon sector than those of its neighbours.18 AD8,000 per month, at the exchange rate of AD78.62 =U.S.$1 in the last quarter of 2000.19 Iradian G., Bazzoni S. and Joly H., Algeria, recenteconomic developments, IMF (Washington, 2000, p. 18.20 Inflation is now under control, having steadily fallenfrom 5.7 per cent in 1997 to 0.3 per cent in 2000.21 IMF (2000), op.cit., p. 38.

but largely publicly-financed auto-constructionsystem has fallen prey to massive speculationand scandal. Without adequate public housing,uncontrolled private construction has benefitedthe profiteers and speculators of the parallel,informal economy.22 Indeed, speculation,scandal and corruption are the leitmotiv of muchof the domestic and external economy.

The privatisation of the import trade in the 1990shas become a byword for this situation. Over24,000 import-export agencies were reported in1997, dealing mainly with imports on whichcommissions are skimmed.23 Today the numberis reported to exceed 27,000 and, in the words ofone commentator, "Now that administrativebarriers have been removed without having beenreplaced by the rules and institutions of themarket, corruption, offences and economiccrimes have no limits".24

In short, macro-economic rectitude has become acover for economic failure and exploitation, withlittle official motivation to redress non-performance of institutions or embark on majorstructural reforms such as those the IMF hasidentified.25 The explanation for this situation,however, long pre-dates the current crisis.

22 Additionally, decrepit water infrastructure, insufficientrainfall and illegal diversion have caused important watershortages to major urban centres, which have led theauthorities to tighten rationing. Under this rationing, wateris available in Algiers, as of October 2001, only everythird day. Pipeline leakage is said to be as high as 40 percent, with half the lost amount illegally diverted byfarmers and residents of towns located between the damsand Algiers. See The Maghreb Monitor, The North AfricaJournal, Issue 115, 20 October 2001.23 Dillman, op. cit., p. 94. Care must be taken overdefinitions, however; bona fide import companies at thesame date only number 3,000. Export activity is virtuallyconfined to the hydrocarbon sector, which is under statecontrol.24 Talahite F., "La corruption: le prix de la contre-réforme," Libre Algérie, 9-22 November 1998.25 IMF, Public Information Notice (PIN) No. 01/94 IMFConcludes 2001 Article IV Consultation with Algeria(Executive Board conclusions, 2001), p. 3.


IV. THE UNDERLYING CRISIS

The depth of the problem can hardly be over-stated. Real GNP declined every year between1985 and 1995 at an average rate of 0.1 per centwhile real GNP per capita declined at 2.5 percent annually. Apart from a brief rise in 1995and 1996, as hydrocarbon exports rose andharvests improved, the decline continued to2000. De-industrialisation followed a similarpattern, with non-hydrocarbon industrial output5.5 per cent lower in 1991 than in 1984. Thisdecline continued to 1998 20 per cent between1993 and 1996 alone. Unemployment rose 190per cent between 1985 and 1993, whilepurchasing power fell by 20 per cent between1989 and 1995. By 1998, 40 per cent of thepopulation was below the poverty line.26

The ostensible cause of the collapse from themid-1980s was the states dependence on oilrevenues.27 In essence, it was the states abilityto get funds from sale of hydrocarbons, whichstill generates 97 per cent of export revenues and58 to 60 per cent of government revenues,28 thatensured its ability to import as well as to funddomestic expenditure. The 40 per cent collapsein oil prices in 1985-1986 had a dramatic effecton Algerias external revenues, which declinedby 55 per cent (from U.S.$47 billion in 1985 toU.S.$21 billion in 1986).

26 Dillman, op. cit., p. 2.27 Crude oil formed 23 per cent of exports, condensate 20.3per cent, refined petroleum products 16.8 per cent, LPG9.7 per cent, LNG 15.4 per cent and natural gas bypipeline 14.8 per cent in 1999 (Iradian et al., op. cit., p. 86.Oil production is pegged by OPEC quota arrangements toaround 750,000 b/d (731,000 b/d in 1999), withcondensate adding a further 430,000 b/d and natural gasliquids another 155,000 b/d. Natural gas production (LNGand pipeline gas) runs now at around 73 billion cubicmetres per year (U.S. Energy Information Administration,Algeria, (Washington, March 2000), www.eia.doe.gov.28 The role of hydrocarbon revenues in governmentrevenues rose from 21 per cent in 1970 to 64 per cent in1997. Dillman, op. cit., p. 32. Non-hydrocarbon taxationgenerates approximately 29 per cent of governmentrevenues. IIF, op. cit., p. 7.

A. THE FOREIGN DEBT BURDEN

The Algerian government responded to thisshortfall in external revenues by severelylimiting imports. It also had to allow forrepayment of large foreign debts acquired in the1970s as part of its dash for growth, based onthe development of hydrocarbon industries. Thecosts of acquiring major fixed assets, such asstate-of-the-art gas liquefaction plants and exportrefineries, had been covered by foreign loans, tobe amortised by future oil revenues. By the late1980s, debt repayment was beginning to be aheavy weight, not least because the governmentrefused to turn to the IMF for help a refusaltightly bound up with the ideological identity ofthe Algerian state.

The debt service ratio the ratio of debtrepayment to export revenues generating theforeign exchange funding to repay the debt rose from 33 per cent in 1982 to 68 per cent in1986 and 86 per cent in 1988, the year in whichriots destroyed the post-independence Algerianconsensus. It remained near those levels29 untilthe government bowed to the inevitable andaccepted IMF help in 1994, along with theconcomitant demands for IMF-style economicreform and restructuring. The debt service ratiosubsequently hovered between 30 and 50 percent until it dropped to 20.9 per cent in 2000.30

The reluctance for so many years to acceptoutside help, together with the continued declinein imports that had a dramatic effect onconsumer supply, underlines the other half of theequation in Algerias economic crisis. This is

29 74 per cent in 1989; 69 per cent in 1990; 76 per cent in1991; 72 per cent in 1992 and 82 per cent in 1993.Dillman, op. cit., p. 34.30 Total foreign debt peaked at U.S.$33.679 billion in1996, falling to U.S.$31.265 billion in 1997, U.S.$30.865billion, U.S.$28.051 billion in 1999 and U.S.$25.030billion in 2000, equivalent to 47 per cent of GDP and itslowest level in absolute and GDP terms for ten years. It isexpected to fall to U.S.$24.753 billion in 2001 andU.S.$24.421 billion in 2002. The debt service ratiooscillated from 42.3 per cent in 1996 to 42.4 per cent in1997, 49.8 per cent in 1998, 39.1 per cent in 1999 and 20.9per cent in 2000. It is expected to rise to 22.6 per cent in2001 and then fall again to 20.3 per cent in 2002. (IIF, op.cit., Table 4 (Database).


the fact that, in the wake of independence, partlyout of necessity and partly from ideologicalconviction, the authorities opted for a dominantstate role in the economy.

This reached its apogee during the Boumediènnepresidency (1965-1978) when Algeria was aleader within the Non-Aligned Movement. In1974, it was Boumediènne who proposed a NewWorld Economic Order to the United Nations.This confidence was built both on both thelegacy of the War of Independence and thechoice by the single-party state of a socialistpattern for its economy.

In essence, under the development theoriesproposed by the French economist, Gerard deStanne de Bernis, this meant that the Algeria,using oil revenues, should construct a state-owned and operated basic heavy industrial base les industries industrialisantes - withessential transformation industries to be addedlater or left to the private sector. Agriculture,even though the major employer, was relativelyneglected, left to auto-géstion and privatepeasant farmers.31 The distribution of its outputwas, nevertheless, state-controlled, and thewhole sector was brought under overall statecontrol in 1971 by the réforme agraire.Algeria became the victim, in one scholarswords, of:

the developmental contradictions arisingfrom the relationship between a rentierstate a state that derives a largeproportion of its revenues from the sale ofnatural resources abroad rather thanthrough taxation of citizens and atributary private sector. [Algeriangovernments] built an enormously

31 Auto-géstion or workers self-management includedthe spontaneous take-over of abandoned agricultural andindustrial properties by their workforces. It applied toboth agricultural and consumer goods enterprises in 1962but, during the next four years, was gradually broughtunder state control. Between 1961 and 1962, 900,000people left Algeria, abandoning 2,000 industrial andcommercial enterprises and 200,000 homes, as well asoffices and agricultural properties. Raffinot M. andJacquemont P., Le capitalisme d'Etat algérien, Maspero(Paris, 1977), p. 55, quoted in Martinez L., The Algeriancivil war 1990-1998, (London, 2000), p. 24 n.12.

inefficient public sector while pursuingpolicies that inhibited productive growth inthe private sector. Accumulation processesin both sectors were closely linked but notsynergistic, leading to an unresolvedmisallocation and misappropriation ofresources. In the 1970s and early 1980s,these problems had been masked by oilrevenues and international loans; whenhydrocarbon rents plunged in late 1985,the economy went into crisis.32

A crucial part of that inefficiency lay in thestates control of the import trade. This had thedual effect of protecting the private sector, hencefostering its inefficiency and dependence on thestate for access to inputs as well as to domesticmarkets, and of linking Algerias ability tosatisfy import demand directly to exportrevenues. Other foreign currency sources,outside the control of government, did not exist.

When there were shortfalls, either official debthad to increase or, as happened in 1986 withconsequent impoverishment of the population,imports had to be reduced. In other words, socialstability was directly linked to the states accessto hydrocarbon revenues. This began to alteronly when the states control of foreign tradeended after 1993, with the dismissal of theBelaid Abdessalam government, but by thenother factors had worsened the situation.

B. THE ROLE OF THE PRIVATE SECTOR

The private sector which had continued torepresent about 30 per cent of the economy evenat the height of state capitalism was unable tosubstitute for the state in the process of capitalaccumulation needed to sustain growth throughinvestment. It had entered the rent-seekingcircuit itself, obtaining its inputs through thepublic sector, and was now chronicallyinefficient. Furthermore, the government lackedinstitutions through which to articulate itsgrowing desire that the private sector take overthe capital generation role (that is, generate

32 Dillman, op. cit.; p. 3.


adequate profits to allow for reinvestment) as theeconomy turned towards a liberal model.

To follow one observers argument:

A rentier state pursuing dirigiste policiesprevented a productive private sector fromemerging by monopolising resources andby failing to stem a drain of resources to aclientalistic private sector operating on thefringes of the formal economy. Structuraladjustment and civil conflict in the 1990saccelerated the destructive state-businessrelationship despite a formal shift to liberalpolicies.33

The situation was worsened because much of theprivate sector had traditionally been engaged incommerce rather than productive industry. Assuch, it primarily recycled domestic rents ratherthan generated capital accumulation. Nor wasthis simply a passive process. As early as theBoumediènne era, the technocratic elite hadbegun to transfer its allegiance from the public tothe private sector, so that many members had afoot in both camps. This facilitated transfer ofpublic resources into the private sector. Duringthe 1980s, the process was formalised as thegovernment started timid economic (but notpolitical) liberalisation, and freed-up capitalincreasingly leaked into personal consumption especially construction or was transferredabroad.

The very nature of the economic liberalisationprocess intensified the private sectors parasiticnature. Liberalisation of wholesale and retailtrade in agricultural produce and foodstuffscreated opportunities for massive personalwealth. Private sector traders captured control ofthe distribution circuits of state-subsidisedproduce, thus creating the phenomenon of thevegetable millionaires (milliardaires deslégumes).

Nor was this the only exploited opportunity. Theprivate sector had long used the paralleleconomy when its access to essential state inputswas constricted because there were no

33 Ibid, p. 4.

institutionalised means for communicating itsproblems to government. Until the reformprocess began in the early 1980s, there was not asingle operating institution that linkedgovernment and the private sector. Even whenthe Chambre Nationale de Commerce wasrevived, the state did not know how to use it tocontrol and encourage private sectorinvestment,34 despite its new private investmentcodes.

34 Ibid, pp. 38-59.


V. THE PARALLEL ECONOMY

The way in which, for political reasons, the stateencouraged the parallel economy ultimatelymade economic revival very difficult during the1990s. One consequence of the War ofIndependence and the creation of a single-partystate was the need to reward those who had takenan active part in the struggle. Many formerfighters obtained licences for private sectoractivity, and the state became a great source ofeconomic patronage for political purposes.During the Boumediènne period of rapidinfrastructure growth and economiccentralisation, such patronage was increasinglyimportant.

In fact, despite the impression of rapid economicgrowth and increased popular aspirations, theBoumediènne and Bendjedid eras saw evergreater economic inequality. Only 2.3 millionout of an 8 million-strong potential labour forceactually had jobs. It has been suggested that in1977 20 per cent of the population lived inabsolute poverty and 62 per cent in poverty, with11 per cent in the middle class and 6 per cent inthe upper class.35 This is hardly evidence of asuccessful redistribution within the single-party,supposedly egalitarian state. The economicliberalisation reforms of the 1980s merelyaccentuated these inequalities.36

In this context the states economic patronagebecame crucial, for it enabled those with suchaccess to obtain the authorisation essential toengage in private commercial activities, typicallyeither small-scale consumer production or trade.Thus, in parallel to the state-dominated tradingsector, a private trading sector grew up that, inpart, obtained goods from the state sector forresale. This sector became particularlyimportant after 1980, as the Bendjedidpresidency began to liberalise and after 1986,when the economic crisis began.

35 Martinez, op. cit., drawing on the work of AndréNouschi and Escalier.36 Those privileged by their access to the regime whetherthrough patronage or as part of the elite number 600,000to 800,000.

In effect, the private trading sector formed aparallel economy in the 1980s in whichcommodities normally only obtainable throughstate imports could be made available throughpartial liberalisation of the import trade sector.Additionally, Algerian migrants were able toimport goods back into the country. Asunemployment grew, a parallel trade based onsmuggled goods combined with access to statesupplies increased, producing the trabendophenomenon.37 This created the point at whichunemployed youth were drawn into the paralleleconomys distribution circuits.

The parallel economy, therefore, effectivelybecame an integral part of the domestic tradestructure, even though it lay outside its control.Originally dependent on the state, it increasinglytook on a life of its own as it remedieddeficiencies in the supply system and counteredthe adverse effects of unemployment. Thosepresent at its inception, usually because of oldWar of Independence or FLN ties, amassedconsiderable wealth. Later, this group came toinclude those who enjoyed connections to theadministrative elite or the army officer corps aswell as those indeed, they were often the sameindividuals who could exploit the state'swithdrawal from retail and wholesale tradetowards the end of the 1980s.38

Similarly the construction sector escaped statecontrol as it was liberalised at this time. Theprivate and parallel economies thus becameinter-linked and increasingly outside stateregulation or taxation. Yet, since the statecontinued to be the main source of access toforeign currency, both economies remainedessentially rent-seeking and parasitic. Neitheroffered an alternative way toward capitalaccumulation and re-investment or could be usedto finance the state through fiscal control.

37 From "contrabande", the French term for smuggling38 Dillman, op. cit., pp. 97-114.


VI. SUBSTITUTES FOR THE STATE

Because of its past dependence on state inputsand rent, the formal private sector was in poorshape to cope with the implications of economicreform in the late 1980s. It was given anartificial lease on life when the state rescheduledexternal debt and foreign investment began toflow into the oil sector in the first half of thedecade but this merely delayed the inevitableadaptation crisis.39 This is why the private sectorhas responded so sluggishly to the new liberalenvironment. It is also why there was anexplosion of interest in the import trade as thatregime was finally liberalised after 1993. It wasthe elite's ability to extract rent from theeconomy during this period due to the absence ofeffective public/private sector links that gave riseto the Algerian mafia as a parasite upon the bodypolitic.

The informal parallel economy fulfilled a similarfunction. As the ability of the state to controlpolitical and social life and its role in tradedeclined after 1988, the parallel economy movedin to replace it. The parallel and trabendonetworks became political and social as well aseconomic networks, providing a new mechanismthrough which collective life could be organisedin the absence of the authority of the state.

The first example was how the FIS manipulatedthese networks in creating its "Islamic souks"after the municipal elections in June 1990.However, with the 1992 coup and the banning ofthe FIS, alternative mechanisms took over.These often used violent coercion as theirorganising tool, justified by the rhetoric of Islam,so that the parallel economy became an intrinsicpart of the violence that swept Algeria after

39 Nor can military expenditures be blamed for theproblems faced by the Algerian state. In absolute termsthey were no higher in 1995 than they had been in 1988,although they rose from 1.9 per cent of GDP to 3.4 percent of GDP. Fontanel J. and Coulomb F., "The Algeriandrama: consequences of a bureaucratic-socialistexperiment" in Brauer J. and Hartley K. eds, Theeconomics of regional security: NATO, the Mediterraneanand Southern Africa, (Holland, 2001) pp. 169-177.

1992.40 It was socially sanctioned, initially atleast, because of a tradition of economicacquisition and redistribution through violencethat stretched back to the pre-colonial period.41

Islamic groups have been able to reach out tolarge portions of the population, notably youth,through active involvement in these trabendocircuits and other forms of the parallel economyincluding racketeering and smuggling. As thesegroups became more isolated politically andphysically in rural and mountainous regions, duein part to government military pressure, there isevidence that some converted themselves intoorganised criminal rings. Certain guerrillaelements have taken advantage of the Concordecivile to transform themselves into legalbusinesses.42 These businesses are in turnsuspected of being money-laundering fronts forstill active armed groups.43

The parallel economy has been most active inthe suburbs and periphery of major towns -precisely where violence has been most acuteand the security forces have faced their mostintense problems. It was also in these areas thatthe worst massacres of the late 1990s took place,often over issues that had little to do withideology whether Islamist or statist butwhere economic motivations were acute.

Economics, of course, cannot completely explainthe terrible violence of recent years but itundoubtedly played a significant role. Similarly,the rent-seeking traditions of the formal privatesector economy have both perpetuated itsineffectiveness in responding to opportunitiestheoretically offered by economic reform andensured the extraction of personal advantage by

40 This phenomenon is analysed in detail by Luis Martinez,op. cit.41 Ibid, pp. 5-19.42 For more information on the Civil Concord please seeICG Africa report N° 31, The Civil Concord: A PeaceInitiative Wasted, 9 July 2001.43 Jean-Michel Salgon, Stratégies et manipulations, leGroupe salafite pour la prédication et le combat (GSPC),les Cahiers de l’Orient, No. 62, avril juin 2001, pp. 67-68. The Salafist Group for Preaching and Combat (GSPC),which is particularly active in the east and in Kabylia, issuspected of controlling a sizeable share of the smugglingcircuits between Tunisia and Algeria.


a closed elite rather than productive investment.The state is relatively powerless to counter this,quite apart from its own structural deficiencies,because it lacks mediating institutions. It isforced to continue to oversee micro-economictransformation in response to macro-economicchange, even though the basic problem is notsimply economic but rather institutional.

VII. LIMITED REFORMS

Uppermost in radical institutional reformsneeded is that of the banking sector, if only toprovide a financing mechanism to which theformal private sector and the informal sector asit launders profits and seeks respectability canturn to escape dependency on rent. Years ofloans to loss-making state enterprises have madethe six public banks that dominate 90 per cent ofthe sector effectively insolvent despite repeatedstate bailouts since 1991 which averaged 8 percent of GDP up to 1999. A further AD285billion (approximately U.S.$3.88 billion) is dueto be paid into the sector as part of acomprehensive reform before new bankingstructures and practices can be introduced.Other macro-economic reforms favoured by theIMF and World Bank are also scheduled.44

Yet the government of Prime Minister Benflisknows that this is not enough since themobilisation of domestic and foreign fundsneeded to revive economic growth has notoccurred. It seeks to take advantage of itswindfall hydrocarbon revenues to promote a newmulti-year economic recovery plan through theend of 2004 that is to inject U.S.$10 billion intothe economy, U.S.$7 billion from domesticresources and the balance through foreigninvestment.

The money is to be directed towards easingdomestic municipal and agricultural debt,reviving the economy of the southern desertregion and modernising infrastructure. This is,unfortunately, an old prescription that offerslittle hope of stimulating private sectorproductivity and is likely to enjoy the same fateas the U.S.$17 billion already poured into theheavily indebted and inefficient public enterprisesector. Once again, macro-economic healthdepends on the hydrocarbon sector, and there islittle likelihood foreign investment will arrive inanticipated quantities.45

44 IIF, op. cit., p. 11.45 Le Monde (Economie), 22 May 2001; Nord-Sud Export,11 May 2001).


There is also privatisation a process thatreflects the nexus between economic change andprivate exploitation and which has frequentlybeen seen in Algeria as a panacea for reducingstate control and encouraging investment. Eversince the Hamrouche government in the early1990s, which sought an unambiguous marketeconomy solution to Algerias economicproblems, it has been an important catchword inthe rhetorical promotion of economic reform.

Indeed, the realisation that privatisation must bea key element in successful economic reformgoes further back. The Bendjedid regimerestructured the major state enterprises in themid-1980s into autonomous units theEntreprises Publiques Economiques (EPEs) controlled by a series of holding companies, as aprecursor to privatisation. Very little, however,was subsequently done, despite a privateinvestment law in 1982 that created new privatesector investment opportunities.

The Hamrouche governments term at the startof the 1990s was too short to begin resolving thefunding and output crisis in the state sector.Under the Ghozali government, in early 1992, itwas revealed that 90 per cent of the 189 EPEshad major financial problems, and non-hydrocarbon manufacturers were producing atonly 43 per cent of capacity. Even worse,between 1989 and 1994, the contribution of theprivate sector to non-hydrocarbon output fellfrom 27 per cent to 16 per cent46 an indicationthat private investment and the private sectoralone would not solve Algerias problems underthe existing institutional system.

Privatisation only became a real possibility forresolving the crisis in the state-run sector oncethe IMF had stepped in to ease the foreign debtproblem. The process, however, has beenprofoundly hampered by legislative andadministrative confusion, as well as employeeresistance through the trade union federation, theUnion Générale des Travailleurs Algériens(UGTA). Despite a privatisation law addressingthe EPEs in August 1995, no major EPE sale hastaken place, although small businesses in the

46 Dillman, op. cit., pp. 79, 82.

construction, electronics and services sectors,including tourist hotels, have been sold.

Distribution networks in the agricultural andfood sectors have also been privatised, as hasforeign trade. However, major scandals haveaccompanied the process in the pharmaceuticalssector. This is largely because privatisation therehas created an oligopoly in which businessmenare covertly tied to military elites andgovernment officials, who are the real financialbeneficiaries.

By 1998, this piecemeal privatisation had cost atleast 180,000 jobs while largely benefiting a newcommercial elite tied into the mafia.Concomitant private investment under the 1992law has been profoundly disappointing, andmuch significant privatisation is still impeded bythe tacit alliance between the UGTA and themanagerial elite within the EPEs. Foreigninvestors have frequently discovered thatproposed privatisation involves clandestinepayments to the sousmarins,47 the hidden bodyof patrons, often linked to the army, who controldecisions about the futures of individual EPEs.

Not surprisingly, these practices which oftenrun counter to anti-corruption legislation incountries such as the United States haveprofoundly hindered foreign involvement inprivatisation, while Algerian investors havetended to seek better outlets for their capitalabroad, often in France.

Local investors, many linked to hidden patronsof the private and public economies, have soughtnew opportunities, for example, in peripheralprivatisations like tourist hotels orpharmaceutical sector joint ventures. Majorpotential investors who already enjoyedprivileged access have exploited the newopportunities to compete with those existingmonopolies not controlled by a key patron. Thusthe Sahraoui family has come to dominate bigconstruction contracts, and the Khalifah familydominates air transport and has acquired large

47 Submarines the sobriquet given by Algerians to thefront-men who actually maintained contact with personalinvestors to establish commission levels and terms.


interests in the new private banking sector,where, after 1996, three private banks were setup with foreign and Algerian capital. .

On the whole, however, the privatisation processhas languished, despite the legal provisions andthe stringent measures taken to clean up thebalance sheets of major EPEs, with consequentheavy job losses. A privatisation program wasconstantly promised, particularly after PresidentBouteflika came to power in April 1999, but wasconstantly blocked from within the regime bymembers of the elite who had most to lose,particularly their access to and control of statesector rent.

Eventually, in August 2001, the privatisationminister, Noureddin Boukrouh a formerpresidential candidate and party chief close tothe army leadership announced a new programand private investment code. Under the latter,the distinction between foreign and Algerianinvestment disappeared thus enabling foreigninvestors to acquire majority holdings inhydrocarbon sector companies.48. The newprogram also promises creation of a body toguide investment on a one-stop basis through theAgence Nationale du Développement del’Investissement (ANDI). Although there wassuch a provision in the 1992 law,.Mr Boukrouhadmitted the old code had never worked.Although 43,000 investment projects worthU.S.$42 billion and promising 1.6 million newjobs were proposed, only a few were realised.

The minister also reported that pursuant toreforms undertaken since 1995, when the firstprivatisation law was issued, 1,000 small publiccompanies had been broken up, leading to a lossof 400,000 jobs and a halving of the publicsector labour-force in the non-oil sector.However, there had not been a single actualimportant privatisation, although four jointventures with foreign companies were created.

Mr Boukrough said that the public sectorpresently consists of Sonatrach, which controlsthe oil sector, and a further 83 EPEs and 377

48 The 1992 investment law permitted foreign majoritycontrol only in non-hydrocarbon sectors.

local companies. Together, those latter EPEs andlocal companies employ 430,000 people andcarry a debt burden of U.S.$9 billion. Theminister said that Sonatrach will remain underpublic control but is to be shorn of someperipheral companies and lose its licensingpowers to the oil ministry. He promised that theremainder of the public sector, and the debtburden it represents for the state, will beliquidated through privatisation.49

This is an optimistic projection. PresidentBouteflika would like to honour the promises hehas made to the IMF and the World Bank butthere is little evidence that his military backers who seem determined to block him and evenremove him from power will allow it,particularly if the ministers plans threaten theirprivate interests.

49 Agence France Presse, 22 August 2001.


VIII. THE OUTLOOK

Against a background of chronic violence, thecombination of ineffective administration andinstitutional mechanisms and institutional andregime corruption has caused investors to shyaway from Algeria. Foreign interest has beenhigh only for the hydrocarbon sector, where,however, bureaucratic reasons associated withSonatrachs restructuring have delayed jointexploration planned by BP-Amoco andAnadarko in 2001.

Former economics minister Ghazi Hidouciargues that the reluctance of foreign investors isno longer primarily due to the violence thatpermeates the country. "I do not see how thesecurity issue has prevented people fromworking and producing," he says. "Just look atthe War of Liberation; that was a great period foreconomic prosperity...!50 The real problem isthe lack of effective institutions and the rule oflaw within the Algerian state. In a recentinterview on the continued efforts to create newlegal structures to stimulate investors, formerPrime Minister Benbitour (he stepped down inAugust 2000) remarked,

I am perplexed. What is so wrong withexisting laws that they must be revised?Investors, whether Algerian, French orGerman, complain about this juridicaluncertainty and the proliferation ofcontradictory statements: after all, ifnothing is forbidden any more, nothing isformally permitted either and thisencourages arbitrary behaviour. The lackof a proper commercial law is aconsequence of an overall lack of the rule-of-law. Should one be surprised, therefore,that Algeria has lived under a state ofemergency since February 1992?51.

50 Le Monde, op. cit. This is, perhaps, a littledisingenuous. France, under the Constantine Plan in 1954and under the subsequent Soustelle Plan of 1955, pouredin money to keep the Algerian economy afloat during thewar. Nelson H.D. ed., Algeria, a country study(Washington DC, 1979), pp. 51, 117.51 Ibid.

The economic crisis is not, therefore,approaching its end. Unless there isfundamental institutional reform, positive micro-economic responses to macro-economic reformcannot be anticipated, and exploitation willcontinue. One experienced commentator notes:

The history of the 1970-1998 period is oneof incredible lost opportunities. Algeriahas condemned itself to repeat andcompound the same tragic economicmistakes it has made in the 1970s and1980s. A large public sector sufferingmassive losses and a subsidised privatesector with little regard for productivity,marginal gains, or other necessities ofdevelopment linger as its destiny, thoughnow accompanied by bloodshed and theshredding of the social fabric. Withoutinclusive democracy, it is hard to imaginehow synergistic relations among state,business and society will ever be rebuilt.52

In essence, the problem is not fundamentallyeconomic but institutional and political. Untilthese latter issues are addressed, there can belittle hope of economic prosperity outside thedestructive embrace of oil. Equally, there can beno real hope of an end to violence, fuelled as it isby private interests in an environment where therule-of-law does not exist. Little has been doneto respond to the basic fact that the Algeriancrisis is a consequence of frustrated popularexpectation, rampant economic exploitation byan elite entrenched within the ruling regime, andthe growth of a parallel economy that justifies itsown exploitation through violence.

52 Dillman, op. cit., p. 136.


IX. INTERNATIONAL OVERSIGHT OFECONOMIC REFORMS

A. INTERNATIONAL FINANCIALINSTITUTIONS

The reforms proposed by the IMF and the WorldBank have not addressed the simple truth thateffective economic reform in Algeria isdependent on creation of effective institutionsunder democratic control and the rule of law.The IMFs latest Staff Report issued on 3 August2001 following annual bilateral discussionsheld under Article IV of the IMFs Articles ofAgreement pointed to areas of serious concernbut not their underlying causes.

The rapporteurs did identify the clear linkbetween low growth rates in the non-hydrocarbon sectors and the excessively slowpace of structural reform.53 The Algerianauthorities halted completely efforts toimplement the changes needed to accelerateliberalisation at the end of the extended period ofIMF supervision in 1998.54 Few of the legalprovisions outlined in the economic recoveryprogram the National Assembly approved inOctober 2000 have actually been adopted.

Except for a second mobile phone licence sold toa foreign investor (for £737 million) and thetransfer of public assets in the steel sector to acompany majority-owned by a foreign investorin July 2001, the latest privatisation program hasyet to get off the ground. This is slow progressindeed for a government committed to marketliberalisation and major restructuring of theinternal economy.

It is perhaps a function of their inter-governmental nature that the IMF and WorldBank tend to avoid direct political criticism ofindividual members. Nevertheless, the IMFsfailure to identify the wider sources ofprivatisations damaging effects on employmentprospects and the welfare of the general

53 IMF, Algeria: Staff report for the 2001 Article IVConsultation (Washington, 2001), p. 16.54 No new major reform was introduced between May1998 and end-1999. Ibid, p. 15.

population is a key omission that reduces theprospects Algeria will ever actually implementits recommendations.

In the context of restructuring public enterprisesfor privatisation, the IMF recommended atemporary extension of the social safely net tohelp manage and reduce the social and humancosts of the transition,55 but no more permanentsolutions. The IMF staff in fact complimentedthe authorities on their increased willingness tofoster transparency, including their willingnessto reduce government intervention in theeconomy (banking reform and privatisation) andto promote a rule-based competitiveenvironment. It is, nevertheless, clear elsewherein the report where mention is made of taxevasion, the lack of transparency andaccountability of both local and centralauthorities, and severe delays and gaps in theavailability of statistical data that thiswillingness may be little more than verbal.56

Although the macro-economic indicators mayaccord with the assumptions that governeconomic orthodoxy at IMF headquarters, themafia’s exploitation and the violence attendanton the trabendo system block the anticipatedmicro-economic benefits, thus stalling themotors for economic growth the multilateralinstitutions have sought to create. As a result, therestructuring that has taken place has severelydamaged employment without creatingconditions for renewed investment to rebuild theeconomy. It is highly unlikely that continuedeconomic reform along the lines proposed by theIMF and the World Bank could correct thesituation, simply because the combination ofcorruption and violence ensure that investorswill turn elsewhere.

B. THE EUROPEAN UNION

This has serious implications also for theAssociation Agreement the EU is currentlynegotiating with Algeria. The EUs engagement

55 Ibid, p. 21.56 Ibid, p. 29.


with its Mediterranean partners57 is based on thepremise that the partner government iscommitted to the type of market liberalisationpromoted by the IMF and World Bank, andwhich the EU itself espouses. However, theAssociation Agreements, in keeping with theBarcelona Declaration that provides the templatefor the EUs Mediterranean policies, also containpolitical provisions committing the signatories topromote the rule of law, good governance,democracy and human rights. Commitment toone aspect of the policy (economicliberalisation) is intrinsically linked to progressand commitment in the other (rule of law). Thispromises a new kind of linkage in EU-Algeriarelations.

The European Commission has released verylittle information about the negotiations otherthan an outline of topics. This does not indicatethat the political and economic dimensions ofAlgerias current crisis have been broughttogether. Rather, it appears that the issues still tobe resolved relate to more technical aspects ofthe Association Agreement, which have beenraised largely by the Algerian authorities.

It would be surprising if the EU was not takingadvantage of the negotiations to engage Algeriaon key political issues. An opportunity offersitself in November 2001 when the EU Troika(Javier Solana, as common foreign and securitypolicy representative of the Council, ChrisPatten, as Commissioner for External Affairs,and Louis Michel, as the Presidency Belgian Foreign Minister) visit Algiers. And it would behugely disappointing if the EU were not to takeadvantage of the institutionalised politicaldialogue at Ministerial level that the eventualdocument will provide to advocate consistentlythe wider reform agenda on which Algeriaseconomic regeneration depends.

Algerias fortunes will only revive when the lackof investor confidence is addressed at its deeppolitical roots. The great majority of Algeriansare not budding terrorists, but rather budding

57 Algerias neighbours, Tunisia and Morocco, havealready signed such agreements. The EU and Algeriawant to conclude their negotiations by the end of the year.

democrats and market actors, whose voices havebeen silenced, whose poverty has beenincreasing, and whose options have beenseverely limited. This situation has arisen bydesign of Algerias leaders and the systemicfailures of the state. At the international level, ithas been reinforced by the unwillingness ofAlgerias partners to risk disturbing what is forthem a comfortable but probably short termstability.


X. CONCLUSION

The Algerian government should accept thenecessity for far-reaching political and economicreforms and then implement those reformsconsistently and consequentially. For theinstitutional and systemic reasons discussedabove, however, the government is not likely topursue such programs on its own initiative.Indeed, in the absence of sustained internationalpressure, the Algerian political system hasresisted the fundamental changes increasinglydemanded by the majority of its citizens.

More consistent international attention is thusneeded to shape policies that focus on thestructural political impediments to the economicrecovery program that the Algerian governmenthas itself outlined and to persuade the Algerianauthorities to carry out those policies.Reformulated IMF, World Bank and EU policyshould be based on the following factors:

! No economic reform can succeed withoutthorough political reform. The nexusbetween corruption and violence, withingovernment and Algerian society at large,must be broken. This requires restoration ofconstitutional democratic government inwhich the army command plays no part andrestoration of the rule of law. It also requiresmaking the security system accountable andseen to be accountable to a properlyappointed civil power. Such change can onlybe achieved if all sectors of society participateopenly in the political process, which meansIslamic movements representing theconstituency originally represented by the FISmust be permitted to resume legitimatepolitical activity.

! The legislative and executive branches ofgovernment must be autonomous from thearmed forces. Unless the army is removedfrom political control, it will not be possibleto create the climate that accountablegovernment and transparent economic activityrequire. The armys deep involvement through the mafia and sousmarin systems has frustrated genuine economic reformdespite adoption of formal patterns of

economic restructuring recommended by theIMF and the World Bank. Until this changes,foreign investors will continue to shunAlgeria.

! An independent, effective judiciary must becreated. Reform has been promised but thejudiciary is controlled by the politicalauthorities and so cannot provide theguarantees of property and contracts thatinvestors require or impartially protectindividuals from extortion and protectionrackets. Judicial reform is also closely tied tothe need to restore public confidence bymaking the police and gendarmerieaccountable.

! Effective organs for consultation betweengovernment, labour and the private sectorshould be created. The private sector is thekey to effective economic recovery in Algeria particularly at the level of small andmedium-sized enterprises, the core of anyviable economy but it lacks real input intothe administrative and legislative process.Similarly, given the likely short-term effectson employment, trade unions must beincluded in consultation processes,particularly as privatisation proceeds. Thesuccessful Egyptian example contains usefullessons.

! Privatisation is essential because of themassive inefficiency of the Algerian publicsector but the safety-net for employmentrecommended by the IMF should bepromoted with greater force. This requiresredundancy programs and retraining schemesas well as state-sponsored investment to helpcreate small and medium-sized enterprisesthat can soak up unemployment. Suchmeasures are essential to make economicreform acceptable and to ease the massivedistrust between population and government.

! Fiscal reform is needed, particularly ofindividual and company taxation. Algeriawill remain dependent on oil and gasrevenues for some time but these are aninsecure source for funding state expenditureas they are very sensitive to global demandand price. Fiscal reform will, in any case, be


necessary as part of the new Euro-Mediterranean Partnership with the EU.Proper company fiscal systems wouldundermine the corruption of the economicsystem because they require transparency.Properly designed new fiscal systems wouldalso reduce the problem of the paralleleconomy, which is untaxed and intrinsicallyviolent.

! Banking reform, to improve private sectorfunding access, should be continued. Thebanking system has been geared to the needsof the state sector and has not been able torespond to private investors. The statebanking system needs to be liberated fromgovernment control and encouraged to helpsmall-scale private investors. This requiresfundamental reform of the Central Banksrole and construction of a viable internalfinancial market.

! The EU and Algeria should sign anAssociation Agreement as rapidly as possible,but with explicit linkages between politicaland economic reform in its terms of reference,as foreshadowed in the Barcelona Declarationcommitments Algeria has made to goodgovernance, transparency and accountability.Algerias non-hydrocarbon trade is dominatedby the European relationship so it has aninterest in maintaining market access andensuring that its restructured industrial sectorcan compete with European industries. Thatand the economys need for the aid and softloans to encourage industrial conversion thatthe Association Agreement holds in prospectgive the EU leverage to push for meaningfulreforms.

Fear of Islamism no longer prevents broadelements of civil society from openlyquestioning the legitimacy of Algerias militaryrulers. The protests launched in Kabylia inspring 2001 and continuing into autumn mayspread if conditions worsen with weakening oilprices. For its own security, the EU above all hasa responsibility to act sooner rather than later toaddress the causes of this mounting tide ofinstability.

Brussels, 26 October 2001


APPENDIX A

MAP OF ALGERIA


APPENDIX B

ABOUT THE INTERNATIONAL CRISIS GROUP

The International Crisis Group (ICG) is a private,multinational organisation committed tostrengthening the capacity of the internationalcommunity to anticipate, understand and act toprevent and contain conflict.

ICGs approach is grounded in field research.Teams of political analysts, based on the ground incountries at risk of conflict, gather informationfrom a wide range of sources, assess localconditions and produce regular analytical reportscontaining practical recommendations targeted atkey international decision-takers.

ICGs reports are distributed widely to officials inforeign ministries and international organisationsand made generally available at the same time viathe organisation's Internet site, www.crisisweb.org.ICG works closely with governments and thosewho influence them, including the media, tohighlight its crisis analysis and to generate supportfor its policy prescriptions. The ICG Board -which includes prominent figures from the fields ofpolitics, diplomacy, business and the media - isdirectly involved in helping to bring ICG reportsand recommendations to the attention of seniorpolicy-makers around the world. ICG is chaired byformer Finnish President Martti Ahtisaari; formerAustralian Foreign Minister Gareth Evans has beenPresident and Chief Executive since January 2000.

ICGs international headquarters are at Brussels,with advocacy offices in Washington DC, NewYork and Paris. The organisation currentlyoperates field projects in nineteen crisis-affectedcountries and regions across four continents:Algeria, Burundi, Rwanda, the DemocraticRepublic of Congo, Sierra Leone, Sudan andZimbabwe in Africa; Burma/Myanmar, Indonesia,Kyrgyzstan, Tajikistan, and Uzbekistan in Asia;Albania, Bosnia, Kosovo, Macedonia, Montenegroand Serbia in Europe; and Colombia in LatinAmerica.ICG also undertakes and publishes originalresearch on general issues related to conflictprevention and management. After the attacksagainst the United States on 11 September 2001,

ICG launched a major new project on globalterrorism, designed both to bring together ICGswork in existing program areas and establish a newgeographical focus on the Middle East (with aregional field office planned for Amman) andPakistan/Afghanistan (with a field office plannedfor Islamabad).

ICG raises funds from governments, charitablefoundations, companies and individual donors. Thefollowing governments currently provide funding:Australia, Canada, Denmark, Finland, France,Germany, Ireland, Japan, Luxembourg, theNetherlands, Norway, the Republic of China(Taiwan), Sweden, Switzerland and the UnitedKingdom. Foundation and private sector donorsinclude the Ansary Foundation, the CarnegieCorporation of New York, the Ford Foundation,the William and Flora Hewlett Foundation, theCharles Stewart Mott Foundation, the OpenSociety Institute, the Ploughshares Fund and theSasakawa Peace Foundation.

October 2001


APPENDIX C

ICG REPORTS AND BRIEFING PAPERS∗∗∗∗

∗ Released since January 1999

AFRICA

ALGERIA

The Algerian Crisis: Not Over Yet, Africa Report N°24, 20October 2000La crise algérienne nest pas finie, rapport Afrique N°24,20 October 2000The Civil Concord: A Peace Initiative Wasted, AfricaReport N°31, 9 July 2001La concorde civile: Une initiative de paix manquée,rapport Afrique N°31, 9 juillet 2001

BURUNDI

The Mandela Effect: Evaluation and Perspectives of thePeace Process in Burundi, Africa Report N°20, 18 April2000LEffet Mandela: évaluation et perspectives du processusde paix Burundais, rapport Afrique N°20, 18 avril 2000Burundi: The Issues at Stake. Political Parties, Freedomof the Press and Political Prisoners, Africa Report N°23,12 July 2000Burundi: les enjeux du débat. Partis politiques, liberté dela presse et prisonniers politiques, rapport Afrique N°23,12 juillet 2000Burundi Peace Process: Tough Challenges Ahead, AfricaBriefing, 27 August 2000Burundi: Neither War, nor Peace, Africa Report N°25, 1December 2000Burundi: Ni guerre, ni paix, rapport Afrique N°25, 1decembre 2000Burundi: Breaking the Deadlock, The Urgent Need for aNew Negotiating Framework, Africa Report N°29, 14 May2001Burundi: Sortir de l'impasse. L'urgence d'un nouveaucadre de négociations, rapport Afrique N°29, 14 mai 2001Burundi: 100 Days to put the Peace Process back onTrack, Africa Report N°33, 14 August 2001Burundi: Cent jours pour retrouver le chemin de la paix,rapport Afrique N°33, 14 août 2001

DEMOCRATIC REPUBLIC OF CONGO

Scramble for the Congo: Anatomy of an Ugly War, AfricaReport N°26, 20 December 2000Le partage du Congo: anatomie dune sale guerre, rapportAfrique N°26, 20 decembre 2000From Kabila to Kabila: Prospects for Peace in the Congo,Africa Report N°27, 16 March 2001Disarmament in the Congo: Investing in ConflictPrevention, Africa Briefing, 12 June 2001

RWANDA

Uganda and Rwanda: Friends or Enemies? Africa ReportN°15, 4 May 2000International Criminal Tribunal for Rwanda: JusticeDelayed, Africa report N°30, 7 June 2001Tribunal pénal international pour le Rwanda: lurgencede juger, rapport Afrique N°30, 7 juin 2001Consensual Democracy in Post Genocide Rwanda:Evaluating the March 2001 District Elections, AfricaReport N°34, 9 October 2001

SIERRA LEONE

Sierra Leone: Time for a New Military and PoliticalStrategy, Africa Report N°28, 11 April 2001Sierra Leone: Managing Uncertainty, Africa Report N°35, 24 October 2001

ZIMBABWE

Zimbabwe: At the Crossroads, Africa Report N°22, 10 July2000Zimbabwe: Three Months after the Elections, AfricaBriefing, 25 September 2000Zimbabwe in Crisis: Finding a way Forward, AfricaReport N°32, 13 July 2001Zimbabwe: Time for International Action, Africa Briefing,12 October 2001

These reports may be downloaded from the ICG website: www.crisisweb.org

Sierra Leone: Managing UncertaintyAfrica Report N° 35, 24 October 2001 Page 23

ASIA

BURMA/MYANMAR

Burma/Myanmar: How Strong is the Military Regime?,Asia Report N°11, 21 December 2000

INDONESIA

Indonesias Crisis: Chronic but not Acute, Asia ReportN°6, 31 May 2000Indonesias Maluku Crisis: The Issues, Asia Briefing, 19July 2000Indonesia: Keeping the Military Under Control, AsiaReport N°9, 5 September 2000Aceh: Escalating Tension, Asia Briefing, 7 December 2000Indonesia: Overcoming Murder and Chaos in Maluku,Asia Report N°10, 19 December 2000Indonesia: Impunity Versus Accountability for GrossHuman Rights Violations, Asia Report N°12, 2 February2001Indonesia: National Police Reform, Asia Report N°13, 20February 2001Indonesia's Presidential Crisis, Indonesia Briefing, 21February 2001Bad Debt: The Politics of Financial Reform in Indonesia,Asia Report N°15, 13 March 2001Indonesias Presidential Crisis: The Second Round,Indonesia Briefing, 21 May 2001Aceh: Why Military Force Wont Bring Lasting Peace,Asia Report N°17, 12 June 2001Aceh: Can Autonomy Stem the Conflict? ICG Asia ReportN°18, 27 June 2001Communal Violence in Indonesia: Lessons fromKalimantan, ICG Asia Report N°19, 27 June 2001Indonesian-U.S. Military Ties: Asia Briefing, 18 July 2001The Megawati Presidency, Indonesia Briefing, 10September 2001Indonesia: Ending Repression in Irian Jaya, Asia ReportN°23, 20 September 2001Indonesia: Violence and Radical Muslims, Asia Briefing,10 October 2001Indonesia: Next Steps in Military Reform, Asia ReportN°24, 11 October 2001

CAMBODIA

Cambodia: The Elusive Peace Dividend, Asia Report N°8,11 August 2000

CENTRAL ASIA

Central Asia: Crisis Conditions in Three States, AsiaReport N°7, 7 August 2000ЦЕНТРАЛЬНАЯАЗИЯ: УСЛОВИЯ КРИЗИСА В ТРЕХ ГОСУДАРСТВАХ,Отчет МГПК по Азии № 7, 7 августа 2000 гRecent Violence in Central Asia: Causes andConsequences, Central Asia Briefing, 18 October 2000Islamist Mobilisation and Regional Security, Asia ReportN°14, 1 March 2001Incubators of Conflict: Central Asias Localised Povertyand Social Unrest, Asia Report N°16, 8 June 2001Central Asia: Fault Lines in the New Security Map, AsiaReport N°20, 4 July 2001Central Asia: Uzbekistan at Ten Repression andInstability, Asia Report N°21, 21 August 2001Kyrgystan at Ten: Trouble in the Island of Democracy,Asia Report N°22, 28 August 2001Central Asian Perspectives on the 11 September and theAfghan Crisis, Central Asia Briefing, 28 September 2001Le 11 septembre et la crise afghane vus de lAsie Centrale,Central Asia Briefing, 28 September 2001

These reports may be downloaded from the ICG website: www.crisisweb.org

Sierra Leone: Managing UncertaintyAfrica Report N° 35, 24 October 2001 Page 24

BALKANS

ALBANIA

Albania: State of the Nation, Balkans Report N°87,

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