Building Economic Diversity

Having used its vast oil wealth to head off the pro-democratic unrest that has engulfed much of the Middle East and North Africa, Algeria is continuing to achieve high growth as its government invests an unprecedented US$286 billion into infrastructure development. Marius Goubert investigates how record oil prices are supporting economic diversification, as well as the reconstruction of a country blighted by a decade of civil war and economic turmoil.

It was in October 1988 that crowds eager for democratic reform, and frustrated by the government’s inability to tackle spiralling rates of poverty and unemployment (which had been so exacerbated by the 1980s ‘oil glut’), descended upon the streets of Algiers. For six days Algerian youths fought running battles with state security forces loyal to the FLN (National Liberation Front): a party that had come to dominate the political sphere since Algeria broke free from 130 years of French colonial rule in 1962. Despite having played an instrumental part in the struggle for independence, the FLN had gone on to form a highly militaristic, one-party regime. And, by the mid-1980s, its unpopular socialist economic policies were providing fertile ground for revolutionary violence. Hundreds of protesters were killed during the ‘Black October’ riots. But the unrest also forced the government to fast-track democratic reform – even announcing the country’s first multiparty elections in 1992.

To Western media and political onlookers, Algeria stood out during the early 1990s as an Arab country that was taking its first concrete steps toward the establishment of liberal democracy. Yet, it would be a false dawn. The 1992 vote went on to instigate one of the most painful episodes in Algeria’s short history of independence. As religious fundamentalist movement, the FIS (Islamic Salvation Front), stood poised to achieve a landslide victory, the FLN declared the elections void, a move which sparked a seven year civil war of exceptional brutality. The turning point would not come until 1999 with the election of President Bouteflika. Upholding his pledge to restore peace, Bouteflika brokered deals with the numerous militant wings of the FIS, and implemented a series of prudent economic reforms. With this increased stability came a windfall from spiking oil prices that not only allowed Algeria to pay off practically all of its foreign debt, but also enabled it to develop a US$160 billion surplus. Ploughing these funds into some of the most ambitious infrastructure projects on the African continent, as well as new urban settlement projects that are seeing entire cities taking root in the barren Sahara, the country is finally rising from a decade of civil turmoil.

A time of transition

Yet, economic good fortune for oil-rich Algeria has always been dependent upon the revenue accumulated from hydrocarbon exports. The increased spending power of Bouteflika’s regime is little more than a symptom of the soaring price of crude oil over the last decade, with Algeria’s excessive dependance upon oil and gas leaving the country dangerously exposed to any fluctuations within the global energy market. The influx of an estimated US$55 billion from petroleum exports last year has also obscured deep rooted structural problems that continue to affect the country, as well as highlighting a general decline across other economic sectors. As oil prices surged, the GDP share of agriculture and industry dropped from 11 to 5 per cent. And while it might be the backbone of the economy, the petroleum industry contributes less than five per cent in terms of job creation.

Unemployment is therefore high, particularly amongst Algeria’s youthful population (50 per cent are under the age of 21), while economic mismanagement has seen the country’s vast oil wealth failing to impact a steady decline in living standards. The combustible nature of the situation was illustrated in January 2011 when youths, grappling with unemployment and angered by a record jump in food prices, once again took to the streets of Algiers. As regimes fell in Egypt and neighbouring Tunisia, Bouteflika’s government was tipped as being next in line. Yet, unlike his predecessor during the 1980s, the president was able to introduce a range of concessions, including government subsidises to offset the rising price of food staples. He also ended the ‘state-of-emergency’ that had prevailed since the civil war erupted 19 years earlier. For the short term at least, revolution had been averted, but to guarantee long-term stability, Bouteflika’s government is aggressively modernising as it seeks to diversify the economy, and wean Algeria away from its oil dependency.

Playing the post-colonial card

With its economy first stalling in the wake of rock bottom oil prices during the 1980s, and then shattering with the civil conflict of the 1990s, Algeria is clearly keen to make up for lost time. Public spending has soared over the last decade, with the government demonstrating a clear commitment to market reform and liberalisation: encouraging privatisation, foreign investment and dramatically increasing the education budget to drive the development of a skilled workforce. The country has also made significant progress strengthening ties with the US which, as of 2007, has invested more than US$5 billion in Algeria (mostly towards the development of the petroleum sector). But in this rapid drive for modernisation, it is China that has emerged as one of Algeria’s staunchest allies, with both developing countries using their shared post-colonial experiences to strengthen diplomatic ties. Five years before Algeria gained independence, China celebrated liberation from Japan and the West, with China’s people united in their support of Algeria as it too struggled to break free from Western imperialism.

In particular, Bouteflika’s regime has drawn inspiration from China’s successes as it attempts to breathe life into new sectors of the Algerian economy. Just as the construction of huge infrastructure projects became key catalysts in driving China’s exponential growth, Algeria is hoping to follow suit. The first of two five-year strategic plans were unveiled in 2005, featuring, amongst other projects, the development of infrastructure that included water desalination plants and thousands of state-subsidised housing units. The flagship project, however, was the US$11 billion East-West Highway: a 1,216km six-lane stretch of road running between the Tunisian and Moroccan borders, and linking all Algeria’s major coastal cities. Providing jobs for around 75,000 Algerians, the highway represents the world’s largest public works project, with Chinese enterprises having taken a leading role in its execution. A JV between CITIC Group and China Railway Construction Company (CRCC) were awarded the construction of 528km (the country’s longest stretch of highway, and a contract worth US$6.2 billion). Japanese consortium COJAAL was allocated a 399km stretch while the rest was distributed amongst local contractors.

Independent Chinese economic analyst, Andy Xie Guozhong, described the highway as a “platform for sustainable development”, and went on to say how roads are crucial for the transmission of exports, as well as important for attracting foreign investment by facilitating transport for international enterprises. China’s National Petroleum Corporation’s 2009 construction of an oil refinery in Algeria’s Skikda industrial zone at a cost of US$385 also offers an insight into the country’s intentions, with the vast potential of Algeria’s oil and gas reserves likely to play a prominent role as China moves to meet its insatiable thirst for fuel.

Shifting the balance

Mega infrastructure projects like the East-West Highway have been a prominent feature in Bouteflika’s most recent bout of investment. Under Algeria’s second five-year strategic plan (2010-2014), however, the government will look to boost investment potential by pouring US$286 billion into six strategic areas. Top of the agenda is ‘Human Development’, which is being vaunted as the most crucial pillar to economic reconstruction, with the government financing improvements across all tiers of education, as well as health, affordable housing and access to basic utilities. “We exclude in advance any recourse to borrowing from abroad,” announced President Bouteflika. “Every sector will present at the end of each year results on its progress regarding the implementation of its programme and each year we will assess the financial situation of the country to take our financial means into account.”

Relieving its over-burdened northern cities has also come to represent an underlying aim in this ambitious economic strategy. Algeria might be the second largest country in Africa, but two thirds of the population live on less than five per cent of the nation’s land. Over-population and urban sprawl are looming threats for the constellation of cities that cling to Algeria’s Mediterranean coastline. Again, it is the Chinese that are helping to redress the balance by supporting Algeria’s efforts to develop sustainable water resources to the South. The ‘Réseau de Collecte’ water transfer scheme, for example, has been earmarked as one of the government’s key infrastructure projects, and represents one of the biggest water projects ever undertaken in the Sahara region. The aim is to pump and deliver 50,000 cubic metres of water each day via a pipeline from the oasis town of In Salah to the expanding city of Tamanrasset. ABB is executing the Tamanrasset water collection solution in conjunction with the Chinese joint venture MCC-SOCOM, on behalf of Algérienne des Eaux (ADE): a state-owned utility under the management of the Algerian Water Resources Ministry.

It is the city of Boughezoul, however, located 160km south of Algiers, that represents one of the most ambitious attempts to balance the concentrated metropolises of the North with new settlements to the South. Boughezoul will be a ‘new city’ (a phenomenon not new to Algeria) and will rise near the site of the existing town, aiming to house some 350,000 residents by 2025. The success of this type of project has varied considerably, but the Algerian government has demonstrated its eagerness to embrace such ventures in the past. Ali Mendjeli, for example, was constructed in 1990 to offset the expansion of nearby Constantine, but descended into little more than a dormitory town. Yet Boughezoul, which forms part of the government’s national town planning scheme, is being vaunted as something far more promising. The city’s proposed economy will be based on high-technologies, bio-technologies, research and high-value services to help diversify Algeria’s oil dependent economy. The city is also more ambitious in the sense that it will not simply serve as an overflow, but will actually aim to change the national distribution of the population.

Paradox of plenty

The extent to which this development strategy will provide a sustainable blueprint for growth has drawn concern, however. The Algerian government’s vision for 2014 does, in essence, boil down to a long list of impressive projects prepared by a range of government departments. It is a somewhat fragmented approach, and one that does not address Algeria’s deep rooted institutional weakness, with decades of mismanagement having seen its population sinking ever deeper into poverty, despite the fact the government is accumulating vast wealth from an estimated 10 billion barrels in oil reserves. Ministerial weakness was highlighted in 2010 when an estimated US$10.5 billion was lost as a result of delays and poorly devised development programmes. Had it not been squandered, the money could have financed half a million housing units, and was almost equivalent to the entire budget earmarked for the construction of the East-West Highway.

However, the government is clearly committed to economic diversification. The recent unrest across North Africa and the Middle East has drawn attention to the plight of Algeria’s youthful population, particularly their anger over unemployment and desire for the country to embrace modernity. The challenge for the ageing leaders in Bouteflika’s two decade old regime is to look beyond unsustainable short-term solutions (subsidies and welfare programmes), which, as demonstrated during the 1980s, are completely at the mercy of the global oil market. The high potential of Algeria is clear, and something that is now drawing interest from overseas parties – particularly the Chinese. Long-term development, however, depends upon how effectively the country can utilise the current oil and gas boom to develop the skills and resources needed to stimulate growth in non-oil economic sectors, and create a more conducive climate for foreign investment.