THE BLOG
11/20/2014 04:59 pm ET Updated Jan 20, 2015

Property Rights Key to Reform, in Algeria and Across the MENA Region

Co-authored by Samy Boukaila, Founding Member and Treasurer, CARE

Algeria, the largest nation on the African continent, is pushing economic reforms in a process that is far from easy. The country's socialist economic doctrine in the 1970s shifted modestly to a liberal socialist model in the 1980s, only to open the market to foreign goods, services and direct investment in the late 1990s. With the election of President Abdelaziz Bouteflika in 1999, the country's macroeconomic strategy has been significantly re-evaluated. A balanced, free economy is taking root, alongside a model of corporate social responsibility.

The balance of payment, human capital development and increasing GDP growth to reduce unemployment are the current government's key concerns today.

The government's goal is to transition the Algerian economy from solely a hydrocarbon exporter to an industrially diversified, export-oriented economy with a self-sufficient agricultural sector. Algeria's "break-even" budget margin is set around US$120 per barrel. Yes, the country has vast reserves of oil and natural gas, but that cannot by itself subsidize the country's needs in the case of continued falling petroleum prices -- currently already below US$80 per barrel.

Based on a survey by the Algerian think tank CARE, among the top OPEC countries, Algeria still remains among the most dependent on oil and gas exports. In 1980, that dependence was 98.9 percent, falling only 0.3 percent in 2010 to 98.6 percent. Other oil producers -- Iran, Saudi Arabia, Oman, Nigeria, and Gabon -- have reduced their dependence in this period by 10 to 15 percent; the United Arab Emirates managed to reduce dependence on oil revenues from 88.3 percent to 35 percent. There is a healthy precedent for this kind of diversification.

When it comes to export of services, Algeria has achieved remarkably steady growth from US$700 million in 1995 to US$4 billion in 2013. Only Morocco and Egypt made greater progress in the region, jumping over US$10 billion in exports in the same period of time, according to the United Nations Conference on Trade and Development. When it comes to the export of agricultural products, Egypt has made remarkable growth, exporting now US$4 billion, including US$475 million in agricultural goods, compared with only US$345 million in 1995. Algeria, on the other hand, has achieved lesser growth in agricultural exports, from US$110 million in 1995 to US$405 million in 2013. It is clear, following these examples, that Algeria has plenty of room to boost its agricultural and service goods export sectors.

Economic Liberalization To Attract Foreign Investment

Fervent debate has been ongoing in Algeria on economic issues. Some advocate greater government involvement and the return of a public sector economy that already swallowed US$61 billion in resources to level off the losses accumulated over the last 25 years. (The 2008 global financial crisis was taken by socialist leaders in Algeria as proof of the failure of capitalism). Today's doctrine has shifted with the arrival of Abdelmalek Sellal's government, which took a more pragmatic and realistic approach to the economy, where the private sector is on board and is supported to grow, invest and prosper to enable job growth, add value to GDP and export revenues to the nation, and where the public sector is reinvigorated by a restructuring of the large industrial groups competing for international projects.

Algeria is ranked last among OPEC countries when it comes to economic diversity. In this context, the newly appointed Minister of Industry and Mining, Abdesslam Bouchouareb, is setting the new course for the country, looking for partnerships with industrial nations and companies seeking to expand internationally either to locate, relocate or co-locate their industries in Algeria. To attract international business, Algeria will soon revise its law requiring at least 51 percent Algerian ownership in businesses, allowing for the first time (on a case by case basis) majority ownership for foreign investors. This will remove the current status quo routine in conducting business and as a consequence, will also create a more flexible labor market, as advocated by leading Algerian NGOs like CARE and NABNI. The strategy is already bearing fruit: the French automaker Renault has just announced that it will open a new manufacturing line in Algeria.

Important Role of Growing Civil Society Sector in Algeria

CARE (Cercle d'Action et de Reflexion autour de l'Entreprise), an Algerian NGO committed to advocating structural reforms in Algeria, has launched the "Informal Economy Initiative" in partnership with the U.S. Chamber of Commerce-affiliated Center for International Private Enterprise (CIPE) and the Middle East Partnership Initiative at the U.S. State Department (MEPI). It is conventional wisdom in the West that market-based entrepreneurship and investment are the primary drivers of economic growth. For broad based growth to happen in the depressed Middle East and North Africa (MENA) region, the economic constraints that get in the way must be identified and removed. One of the key reasons why entrepreneurs and markets don't perform well in the MENA region is because they lack a critical precondition for creating wealth -- property rights. Only 8 percent of land in the MENA region can be used to collateralize credit. Only 15 percent of Arab enterprises and families have access to property rights that facilitate valuable combinations and protect them from the kind of arbitrary expropriation that triggered the Arab Spring in the first place. The average entrepreneur in the MENA region needs to present 57 documents and face two or more years of red tape to obtain legal claim to land or establish a business. If all these constraints were removed, annual growth could increase by 2 percent after five years. This applies to Algeria as well.

Notre Algerie Batie sur de Nouvelles idees (NABNI), another Algerian NGO, recently published "Education and Vision for Algeria 2020" outlining 50 items that the government needs to address: a constitutional commitment to break the link with the rentier economy (i.e., oil revenues) and invest it in a future generations fund, engage in fiscal reform, create a master plan for energy development (renewables, wind and solar), create a four-year framework to finalize reform in the financial sector, establish a new industrial policy, re-organize instruments to support employees, include economics courses as obligatory university subjects, privatize the health care system, improve living conditions in the villages and cities (by creating better infrastructure and housing), among others.

It is clear that in Algeria, awareness of the need to undergo substantial reforms is growing, both in the government and the civil society sectors. This rich country with vast natural resources may indeed become a major stability factor in the region. The U.S.-Algerian relationship is steadily moving upward. The international community should support, with a unified voice, the aspirations of Algerians to build a democratic and free-market oriented nation. Algerians are taking their destiny into their own hands, determined to modernize their country, and that in itself is something worth applauding.