The Economic Performance of Algeria - Research Paper Example

?Table of Contents Table of Contents Algeria’s Economy Introduction Algeria is a North African country that borders Mediterranean Sea, Morocco, andTunisia. Most of the country land is plateau and desert with arid to semiarid climatic conditions. The Algerian economy is highly dependent on oil and natural gas export in addition to Agriculture. About 45% of Algerians live in urban areas. The performance of oil sector has a great direct consequence on the Algerian economy, since exports chiefly constitute of hydrocarbon, and contributes about two thirds of government revenues. The industrial sector, particularly oil mining, accounts for approximately a third of entire GDP. However, the sector does not provide enough employment opportunity for the large Algeria’s population, which mainly comprise of youths. Constant and rapid fluctuations in oil prices directly results in budgetary imbalances. This paper focuses on poverty levels, nutrition, and population growth, history of economic development and urban-rural issues, as well as land issues in Algeria. The paper also compares the economy and other aspect of Algerian economy to other countries in Africa, particularly in the North African region. Algeria’s Economy from the Beginning To 1960 By the start of 20th, Algeria was a French colony and was mainly dependent on agriculture for revenue generation. The settlers had invested in large agricultural territories, constructed manufacturing industries, opened up businesses, and made use of cheap available labor from the locals. The French colonial policies within Algeria calculatingly destroyed of the country’s native social system, which had been built to cater for society’s basic needs. The settlers owned most of the Agricultural land, which resulted in high poverty levels among the Algerians. In the 1940, the population grew vastly which endangered the livelihood of most Algerians. Before Algeria’s independence in 1960, Algeria depended vastly on agriculture in addition to oil export. After independence, Algeria’s agricultural growth slowed down and oil as well as other hydrocarbons became an important source of income. Between 1950 and 1960, new land rights were introduced in which land became nationalized (Colombo, Caridi, & Kinninmont, 2012). Algeria’s Economy between 1960 and 1980 Before its independence in 1962, the minority of European colonizers and their progenies controlled the Algerian economy. The Algerian economy has essentially depended on oil exportation for revenue generation hence for economy development. The economy is thus considered a market based economy. During the seventies, the economic policies were grounded on the command economy style (Paciello, Ayeb, Gillot, & Moisseron, 2012). The macroeconomic policies were flaccid and highly dependent on central organization and administrative guidelines. Market prices remained constant for long periods, while basic requirements were heavily subsidized, which resulted in repressed inflation and superfluous demand for the consumer goods. Public division investment was apportioned centrally by managerial schemes. Utmost investment funding was provided by the treasury and distributed to other subdivisions through the Algerian Bank for Development. The entire investment expenses in infrastructure, agricultural sector, and social schemes were dependent on the budget (Paciello, Ayeb, Gillot, & Moisseron, 2012). The distorted prices, poor infrastructure led to neglect of small enterprises. The industrial sector faced numerous managerial problems attributed to bureaucratic and inflexible management structures. Inadequate marketing facilities, poor transport systems, and unsuitable management resulted in widespread wastage of limited resources, which gravely impaired the long-term welfare of the Algerian economy (Europa Publications, 2012). Algeria’s Economy from 1990 Until Now Agriculture remains a highly valued economic activity in Algeria though it currently provides employment to a small percentage of about 5% of the population. The number of people employed within the Agricultural sector declined from 40 percent of the aggregate labor force in the 1960s to about 24% in the 1990s. In the early 1990s, about 22 percent of the population living in rural areas depended entirely on agriculture as a means of support. The percentage of population employed in Agricultural sector has declined greatly over the last two decades in Algeria and currently stand at 5 percent. Some of the factor that has led to decline in agricultural activities includes undependable rainfall patterns, frequent floods, as well as drought (Ray, 1998). Algeria's economy is currently largely reliant on hydrocarbons sector, which accounts for the largest percentage of export earnings, budget revenues, and the GDP. Additionally, Algeria supplies most of the natural gas used in the world as well as oil (Colombo, Caridi, & Kinninmont, 2012). Comparison between Algeria’s Economy and Other Countries’ Economy in Its Region Algeria is located in the North African region characterized long drought spells. Other countries this region include Egypt, Morocco, Tunisia, Libya. The North African region has witnessed positive economic growth over the past two decades with decreasing population growth trends. Recent rebellions in Arab countries such as Egypt, Libya, and Tunisia have resulted in reduction in credit rating in addition to decreased investments (Hasni, 2002). This is negative since there is need for increased investment in the region to decrease poverty in the region and heighten the economic growth rates to match the high population (United Nations Develpment Programme, 2012; Yamouri, 2011). Just like in Algeria, Morocco and Tunisia also have nationalized land rights while Egypt and Libya have limited land ownership. Some other African countries have colonial or Shariya land ownership. The North African region is characterized by more labor supply than the labor demand, which results in high rates of unemployment particularly amongst the youths. Just like in Algeria, African countries like Morocco and Tunisia lack appropriate montage institutions and credit facilities (United Nations Develpment Programme, 2012). Most African countries have high rates of youth unemployment. Morocco is a unlike most countries where there is a lesser amount of unemployed youths, which stands at 16 percent. Other countries such as Egypt guarantees employment only after accomplishment of a specified level of education (Europa Publications, 2012). Unlike most North African countries where employment in the agricultural sector has decline, Morocco agricultural sector currently employs about 45 percent of the total employed population, which is an increase from five percent in 2001 (Benhassine & World Bank, 2009).  Algeria’s Poverty and Nutrition Algeria like most countries in the North African spends quite a lot of time and resources dealing with insecurity issues, which are a great threat to foreign investment. Additionally, the credit services in Algeria are dismal, which results in high dependence in agriculture in rural areas. However, Algeria has recently registered considerable economic growth rates, which has resulted in improved living conditions for Algerians (Paciello, Ayeb, Gillot, & Moisseron, 2012). Algerians enjoy considerably high life expectancies thus it is presumed that most of them are able to access nutritious diet. Nevertheless, the 2008 global economic crisis greatly affected the North African region including Algeria. This resulted in adverse food shortages since Algeria highly depends on imported food. Poverty is quite rampant among Algerians and was ignited by the decline in international oil prices in the mid-1980s, which greatly affected Algeria since its economy greatly relies on oil export for revenue. Another factor is the frequent political turmoil since 1990s leading to instability complicating the situation further. There is great need deal with the adverse poverty in order to improve the living conditions of Algerians (United Nations Develpment Programme, 2012; Benhassine & World Bank, 2009).  The Agricultural resources such as land in Algeria are highly untapped, which results in inadequate food production thus the lack of self-sufficiency. The inadequate agricultural productivity is also attributed to poor credit services. Additionally, most Algerians do not invest directly, which contributes to high poverty levels. For sufficient agricultural development and production, Algeria and most North African countries will have to overcome obstacles such as water shortage, poor soil quality, and poor infrastructure, which lead to high transportation costs. The water scarcity can be resolved by establishing systems to facilitate storage and distribution of the little water that is available (Paciello, Ayeb, Gillot, & Moisseron, 2012; Yamouri, 2011). Like mentioned above, Algeria has poor soil quality, which cannot sustain agriculture. This has led to deforestation as farmers attempt to access better soils for agricultural purposes. In addition, sufficient supply of fertilizers, which could prevent deforestation, is lacking. This is because the Algerian agricultural sector is lacking appropriate coordination with the international market, which would enable importation of ample fertilizers at lower costs (Yamouri, 2011). The poor credit services make it hard for farmers to acquire funds to purchase the little available fertilizers. Another obstacle that makes it impossible for farmers to purchase fertilizers even in the local market is the poor transport system, which results in high transportation costs. To overcome the transport problem, there is need for the Algerian government to invest in improving the infrastructure to reduce transport cost, encourage improved agricultural production and help curb poverty and food shortages in the region. Reduced poverty will hopefully decrease the unrests in North African region (United Nations Develpment Programme, 2012). Demographic Transition and Economic Growth The population of Algeria chiefly consists of young people. The population growth rate has been ranging between one and three percent per annum for the last one decade. There has been a decline in births per woman. Currently, the births per woman stand at 2 to 2.7, which is inversely proportional to the rate of economic growth. About 35 percent of the population comprises of persons under the age of 15 and the portion of population that is above 65 years of age is about 4 percent. With such a population makeup, the Algerian government is currently facing challenges in creating employment opportunities to cater for the numerous youths. The fact that the Algerian government provides free education means that the large number of youths have attained considerable level of education. Unemployment and inadequate job opportunities are generally blamable for an Islamic rebellion that has disrupted the country from 1990’s (United Nations Develpment Programme, 2012). Income growth rate in Algeria currently ranges between zero and three and a half percent per annum. The Arab Spring is blamed for declined economic growth rate, since during that period, most North African countries witnessed close to negative growth. Current factors leading to slowed economic growth include the recent worldwide economic crisis, which led to high prices of food as well as other commodities. However, the stabilizing oil prices are expected to facilitate and accelerate the rate of economic growth in Algeria, which is a great oil producer. International Monetary Fund projects have grown to approximately 4.2 percent in 2012. Since the population growth rate is low, the increasing economic growth rate will result in improved employment as well as wages, which will reduce poverty level and inequality levels amongst Algerians (Paciello, Ayeb, Gillot, & Moisseron, 2012). Irrespective of the level of economic growth or national revenue, Algerian government is becoming increasingly challenged with the need to provide the basic requirements to its citizens especially the large number of unemployed people living in urban areas particularly in the slums. There is dire need for adequate housing, improved sanitation, better health care, education, in addition to job creation for the Algerian government to combat poverty, reduce the gap between the wealthy and the poor. It is only by so doing that the government will be in a position to improve the living condition (MENA regiona Strategy, 2011). Urbanization and Rural-Urban Issues Majority of population in North African region, inclusive of Algeria live in urban centers. About 59 to 68 percent of the total population resides in urban areas, which has contributed to adverse housing problems. The high rate of migration from rural areas to urban areas led to inadequate housing infrastructure and subsequent development of slums. Like in most countries, slum dwellers in Algeria are viewed as unlawful residents and the Algerian government has been looking for measures to prevent rapid migration to urban areas to reduce growth of slums. Alarmingly, the rate of rural-urban migration is expected to grow to about 70 percent by around 2015, which is expected to worsen the poverty levels and encourage growth of slums (Paciello, Ayeb, Gillot, & Moisseron, 2012; The World Bank Group, 2008; Tamirisa, 2011). Ongoing projects to improve housing infrastructure in the North African region, inclusive of Algeria include the International Bank of Reconstruction and Development (IBRD) and the International Development Association (IDA) projects, which have devoted $2.1 billion for urban development in addition to improvement of rural agricultural activities. The improvement of rural agricultural sector entailed advancing effective water usage in addition to improving the irrigation systems. This is to reduce the high food prices in the North African region, which is partly blamed for the “Arab Spring” uprisings (United Nations Develpment Programme, 2012). Most people living in urban areas and are formally employed work in service industries and comprise about 50 percent of the total population of employed persons. However, the number of people living in urban areas is quite high thus, a vast number of people remain unemployed. Additionally, part of the unemployed urban population lacks skills. To counteract this, the government has enacted policies to provide training to such persons. However, the level of urban unemployment is expected to remain high due to continued rural-urban migration (The World Bank Group, 2008). As much as there is considerably good agricultural production in rural areas, the poor infrastructure as mentioned earlier hampers transportation of food products to urban areas. Like in most countries in the North African region, the Algerian informal sector such as agricultural sector acts as a training ground for individuals before they venture into the formal sector. These acts to regulate migration to urban areas since rural residents first seek employment in the informal sector to gain experience, which later helps them obtain jobs in the formal sector (MENA regiona Strategy, 2011). Algeria’s Population Growth and Economic Development The mean age of Algerians is approximately 26 years. Algeria's population growth was about 3 percent in 1987 and slowed down to about 2.8 percent since the early 1990s. The go-slow is mostly attributable to decline in the birth rate, which is currently at about 2.15 children per family. In future, the population growth rate in Algeria is expected to decline further (Tamirisa, 2011). The attainment of the Algerian government's family planning plans can be attributed to broader access to contraceptives in addition to available family planning education. A factor contributing to high number of youth unemployment is the population boom that occurred in most North African countries in the 1970s (Paciello, Ayeb, Gillot, & Moisseron, 2012). Population growth and related difficulties such as unemployment as well as underemployment, failure of public services to be at par with hasty urban migration, insufficient industrial organization and productivity, and the poor transport and housing infrastructure remains a great problem affecting Algerian society. The government is focusing on macroeconomic steadiness and organizational reform to curb the challenges. The reform includes improvement of national infrastructure, creation of more job opportunities and increasing the housing facilities (MENA regiona Strategy, 2011). The Algerian economy is highly dependent on large, medium, and small enterprises for both revenue generation and as a source of employment for the large number of youths. Despite the fact that the government has been able to achieve some headway towards economic recovery and improvement, the country's disturbed economy remains to be heavily reliant on the unpredictable oil and gas for generation of revenue. Moreover, the sluggish speed of the transformation program, together with political commotion, resulted into less foreign investment in addition to insufficient creation of employment opportunities. The percentage of unemployment in 1999 was about 30 percent. The challenge to generate new employment opportunities for Algeria's young population has been one of the major challenges facing the government particularly in the last two decades (Europa Publications, 2012). Corruption is quite widespread especially in the public sector, which is largely attributed to the low wages, which are unparalleled to the high cost of living. The above mentioned International Bank of Reconstruction and Development (IBRD) and the International Development Association (IDA) projects are expected to increase investments in rural agricultural sectors and help reduce food shortages and make Algerians more self-sufficient. Algeria’s Role of Markets and Agriculture Like most developing countries, Algeria tends use large number of the population in agricultural production, which is unlike wealthy countries that invest more on intensive farming and thus require a small percentage of the population to sustain agriculture. The world’s arable land is currently almost fully exploited thus increasing farming land cannot significantly increase productivity. Countries should thus focus more on enhancing efficient use of existing agricultural land (MENA regiona Strategy, 2011). Although nearly 25% of Algeria’s population is involved in agriculture, only about 3% of Algeria's land is cultivatable. Generally, the soil in most regions of North Africa is infertile and easily eroded. Additionally, most regions of Algeria experience inadequate and irregular water supply. Rainfall and cropping patterns are important since differences in rainfall distribution, pattern, and amount greatly affect cultivation behaviors. Algeria lacks adequate rains and requires investing more in irrigation (Juma, 2011). Irrigation can help especially in regions with unpredictable rainfall patterns. However, the infrastructure remains underdeveloped such that farmers cannot access and purchase fertilizers or transport agricultural products to the market and most agriculturalists remain poor. Current Algeria government policy purposes to intensify use of fertilizers in addition to improving planting seeds. In addition, the government hopes to increase the production of cereals and other essential foods, to enable self-reliance in food production. Use of draft power for agricultural purposes reduces production. There is thus need for technical change to improve agricultural productivity (Ray, 1998; Juma, 2011). Agriculture plays a major role in the development of the market and the economy in general by supplying surplus food for local markets. The industrial in turn supplies machineries and other resources such as energy source for the agricultural sector. The dual economy that relies on both traditional agricultural and modern industrial sector forms the backbone of Algeria’s economy (MENA regiona Strategy, 2011). The traditional sector is regarded as a source of labor while the industrial sector produces the products such as oil and natural gas for export purposes (Juma, 2011). Algeria’s Land, Labor, and Credit After independence, Algeria like most African countries introduced new land ownership rights. Algeria’s land is nationalized. Rural land that is privately owned is prominently subdivided, which one of the factors contributing to food shortage not just in Algeria but in most African countries. In Urban areas, the population is very high and a considerable number of Algerians live in slums (MENA regiona Strategy, 2011). The high population has resulted in oversupply of labor and most youths remain unemployed. Like most countries, Algeria is a “right to work” state. About 31 percent of the unemployed people are youths, most of whom have attained considerably high education levels. Using labor in divisions where it is more effectual would help and contribute to economic as a whole. With an improved economy, it would be easier to invest more in the agricultural infrastructure to produce sufficient food and reduce unrest. Additionally a robust economy would enable creation of more job opportunities in most sectors. The credit facilities would also improve and most people would invest in small, medium, and large entrepreneurs (Farazi, Arvai, & Rocha, 2011). In Algeria, acquisition of loans is quite hard particularly for medium and small enterprises. This is because one is required to have connections in addition to collateral to be in a position to access loans. Only about 42 percent of large enterprises have access to loan and credit services. For medium and small enterprises, access to loans is even harder since most lack connection as well as collateral, which are prerequisite for right to obtain loans. Only about 20 percent of the small and medium enterprises access loans and thus mainly depend on internal funding (Farazi, Arvai, & Rocha, 2011). Microcredit to individuals is largely unavailable and limited to persons dwelling in rural areas. Additionally, most creditors and entrepreneurs lack adequate information on credit and creditors lack sufficient rights for collateral. Indefinable laws and regulations also characterize the credit sector (Ray, 1998). Conclusion Oil price fluctuations, external factors global economy greatly determine Algeria’s polices hence the economic performance. Lack of abundant foreign investment has resulted in slow economic development, which has contributed to high poverty levels among most people in the North African region. There is widespread poverty among Algerians with most of them living below the poverty line. Due to high level of unemployment, Algeria's young population has often been a spring of political volatilities especially in the early 1990s. The hydrocarbon as well as the agriculture sectors is incapable of providing adequate jobs opportunities for the large population thus Algerian government has been unable to counteract long-standing joblessness in the country. Factors that determine agricultural productivity include soil fertility, which varies from region to region within Algeria but are generally poor. In Algeria, acquisition of loans is quite hard particularly for medium, small enterprises and large enterprises, which cripples investment adding up to poverty amongst Algerians. References Benhassine, N., & World Bank, (2009). From Privilege to Competition: Unlocking Private-Led Growth in the Middle East and North Africa. Washington, D.C: World Bank. 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