Counting the Cost

Algeria economy: Where has all the money gone?

As Algeria’s oil wealth dries up and protesters demand change, we examine the economic challenges facing the country.

As Algeria’s oil wealth dries up, people are demanding to know where the money has gone.

Corruption, youth unemployment and inequality have been at the centre of protests against the 20 years of rule by Algeria’s president, 81-year-old Abdelaziz Bouteflika.

Despite agreeing not to stand for another term, Algerians have little faith in the business elite, military and politicians running the country.

The country’s wealth has been squandered. It had currency reserves of $179bn in December 2014, but that has shrunk to $79.8bn.

Rather than using the oil and petrol wealth to diversify the economy, more than a fifth of Algeria’s budget is used for subsidies.

The International Monetary Fund (IMF) says Algeria’s oil and petrol revenues account for 95 percent of its export earnings and 60 percent of its budget. But oil prices have been falling and the country’s oil and petrol production has also been in decline due to a lack of investment – meaning there isn’t the money to fill the coffers.

Unemployment in Algeria is running at 11.1 percent. But youth unemployment stands at 26.4 percent for the under 30s, who make up two-thirds of the country’s 41-million population.

Taieb Hafsi, strategy and society professor of management at the HEC Montreal, talks to Counting the Cost about the issues behind the protests and the challenges facing Algeria’s oil-reliant economy.

“The problem with oil is that it has generated a rent-seeking behaviour … and its not just the people at the very top who are rent-seeking. Bureaucracy is rent-seeking, private firms are rent-seeking, even the population is rent-seeking. So you have this incredibly lazy demeanour and of course that rent-seeking leads to corruption. As a result, if you will, it [oil] is a real curse … When you think about trying to diversify away from oil … then you have to realise that business is a source of power, so the government has been trying to keep it under control,” Hafsi explains.

“Algeria is one of the few countries in the world where you have to get permission to invest your money. No market behaviour, no discipline, so the result is no development … it’s no surprise. What’s happening in Algeria goes against all the norms of economic behaviour that we know about.”

However, Hafsi believes there is still a cause for optimism for Algeria’s economic future.

“The Algerian economy is really paradoxical … it’s very poorly managed and seemingly doomed, but also at the same time you see some very thriving segments,” he says.

“The real economy is mostly informal. About 60 percent of the economy is informal and it is not accounted for. How do firms actually survive in this very hostile environment? There are smaller firms all over the country trying to remain below the radar, if you will, but … succeeding. They are doing very well … They don’t rely on the state, they want to be excellent and often they become competitive on the world market. So in a sense, there is something happening bottom up that, in my opinion, is very promising.”

What will Rome get from Beijing’s Belt and Road Initiative?

Britain’s decision to join China‘s challenger to the World Bank drew a quick rebuke from Washington.

The US claimed the Asia Infrastructure Investment Bank would extend Beijing’s soft power.

Three years on, the decision by Italy’s new populist government to sign up for investment from Beijing has raised concerns in Western capitals.

The US National Security Council warned: Endorsing the Belt and Road Initiative lends legitimacy to China’s predatory approach to investment and will bring no benefits to the Italian people.

Those concerns are already playing out. China’s largess is entrapping vulnerable nations in debt. You may recall Sri Lanka fell behind with payments and had to hand over a vital seaport that had been built with Chinese loans, on a 99-year lease.

Pakistan’s attempts to negotiate an IMF loan have been complicated by Washington’s unwillingness for the money to be used to pay back Beijing’s loans to Pakistan. And in Djibouti where the US has a military base, China opened its first overseas base. At the same time, the country’s debts have soared to 80 percent of gross domestic product from 50 percent.

In Italy’s case, it has a debt of 2.3 trillion euro ($2.6 trillion) and pays 64 billion euro ($72.5bn) every year in interest payments. Should it get into trouble, the European bailout fund would not be able to save the country.

China’s President Xi Jinping hopes the two countries can work together on everything from ports to telecoms and pharmaceuticals to football.

But what is at stake? And what will Rome get from the Belt and Road Initiative? Greg Swenson, founding partner of Brigg MacAdam, talks to Counting the Cost.

“It’s fine that they are reaching out. China is a great market for them … but it’s important to keep in mind, their first relationship should be with the EU and also with the US, given the membership in NATO and in the G7. So I think that they’ve gone a little overboard. Is it the end of the world? I don’t think so,” says Swenson.

“The EU is the number one market for China in terms of exports and China is the number two market for the EU, and notably, the US is the number one market for the EU, so I think Italy just has to do a better job of being diplomatic with their allies before … over-reaching out to China. But it is quite natural to want to sell products.”

According to Swenson “just embracing China, borrowing more money is not the answer” to Italy’s economic woes.

“We will see what happens. I hope there’s a bit of a … pullback on the part of Italy. The Investment Bank that’s announced is controversial, [but] … I’m not that worried about it but I do think it’s a moment for the EU to embrace their strategic partners, notably the US, and really make some sort of pushback against this expansion by China, both militarily and economically. And I think that will work out and I think that the EU and the US will win.”