Lyes Boudiaf. Founder & President of Isly Holdings. Algeria. Lyes Boudiaf has been decorated as knight of the honorary Order of Merit of the State of Portugal

1. Business School
W O R K I N G P A P E R S E R I E S
IPAG working papers are circulated for discussion and comments only. They have not been
peer-reviewed and may not be reproduced without permission of the authors.
Working Paper
2014-287
Industrialization and Economic Policy
in Algeria: a Synthesis over half a
Century
Frédéric Teulon
Dominique Bonet Fernandez
http://www.ipag.fr/fr/accueil/la-recherche/publications-WP.html
IPAG Business School
184, Boulevard Saint-Germain
75006 Paris
France

2. 1
_____________________________________________________________________________________________________________
Industrialization and Economic Policy in Algeria: a Synthesis
over half a Century
Frédéric Teulon
IPAG Business School, Paris
f.teulon@ipag.fr
Dominique Bonet Fernandez
IPAG Business School, Paris and CretLog, Aix en Provence
dominique.bonet-fernandez@ipag.fr
_____________________________________________________________________________________________________________
■ Abstract ■ Since independence, Algeria has spent nearly half of the last fifty years to build a
model of socialist development and the other half tried to escape, hampered by a system of
conservation of power, unable to spread the wealth and thus achieve a legitimate economic
growth. The objective of this paper is to identify the factors that led Algeria to an economic
paradox. Based on a synthesis of several studies on the economic and political situation in the
country since its independence, either directly (specific studies on Algeria) or indirectly (studies on
the development strategies of a patrimonial State) we present the model of development, the
shifts in economic policy, which led to the current situation.
■ Keywords ■ Algeria, dutch disease, socialist development.
■ Introduction ■
Algeria is at the heart of the debate on the success or failure of development strategies that have been pursued
since the independence of former European colonies. The use of non-renewable natural resources as a vector
for development begs the question of the sustainability of the choices made. The challenges Algeria has to deal
with are rooted in the construction of the nation, the way the ruling elite is selected, and how the revenues
from non-renewable energy sources are used (Lowi, 2004). As the economy is financed by oil revenues,
observers have called it a ‘rentier’ state (Beblawi, 1990), or a patrimonial state (Lowi, 2004), with general
consensus over the term “authoritarian state” (Addi, 2012), underscoring the extent of corruption and
patronage that affects the whole political-administrative mechanism. Field studies (Cheriet, 2013) have shown
the massive scale of corruption and fraud (both commercial and fiscal), as well as the institutionalisation of
illegal behaviour. “These fraudulent practices appear to be the way firms have adapted to a complex
administrative context, an unstable economic environment and an afflux of public moneys earmarked to
commission major projects” (Cheriet, 2013).

3. 2
Another debateable issue is the way the heads of state are chosen: thus, Chadli Boudjedid was given the post
of president of the Republic because he was “the longest-serving and most senior officer,” while Abdelaziz
Bouteflika was pushed to centre stage in 2014 as he was the least likely to upset anyone.
Keeping the FLN
1
at the head of the country for over 50 years raises questions as to the nature of the political
power (in one of his books, Ferhat Abbas speaks about “the confiscated independence”) in a country which is
neither a democracy, nor a true dictatorship (as there is a relatively free press and elections based on a
multiparty system façade). The economic failure and political stalemate suggest that the FLN destroyed its own
dreams.
In the second section we describe the development model in place since independence. In the third part, we
explain how this model has been reshaped. Section 4 presents the consequences of the situation on the
population. Section 5 argues that Algeria is now at a turning point in its history and that it faces a large number
of challenges.
■ II. - DEVELOPMENT BASED ON SELF-RELIANCE ■
Following independence in 1962, Algerian leaders had to learn from scratch how to govern and fill the gap left
by the French (Perroux, 1963). Under the leadership of Colonel Houari Boumediene, Algeria introduced an
introverted development strategy which prioritised the upstream sector based on the soviet socialist model,
and schematically underpinned by the following elements:
- a single political party (the Front de Libération National, FLN);
- difficulty in correcting any errors (strong ideology and weak opposition) and lack of appraisal of public policies;
- protectionism, state monopoly over international trade, absence of export support mechanisms (desire for
autarchy);
- centralised planning (the first quadrennial plan was launched in 1970) and centrally administered economy;
- priority given to heavy industry;
- agricultural reform (collective farming);
- transfer of agricultural resources to industry.
In the name of an economic independence supposed to consolidate its political independence, Algeria did not
want to use its comparative advantages to take part in the international division of labour, nor did it want to
specialise in tourism, and it eschewed industrial task-sharing, options considered demeaning for a socialist
country rich in raw materials. The country aimed to create an integral production mechanism by developing the
‘industrialising industries’ model conceptualised by Destanne de Bernis (1963 and 1966) and financed by its
own resources. This strategy aimed to create an integration model involving the whole economy (metal,
mechanical and electrical industries) in order to meet domestic demand (Aliouche, 2014).
However, this autarchic model proved ill-conceived. The government’s investment in heavy industries (steel
petrochemicals) was far too ambitious with respect to the uptake capacity of the domestic market. Given the
limited size of the population and the taxes levied on agents’ revenue to cover the costs, heavy industry had
limited internal opportunities (small domestic market). As in the soviet model, agriculture, consumer goods and
housing were sacrificed. Some authors, such as Andreff and Hayad (1978), highlighted the lack of coherence in
1 The National Liberation Front (FLN) is an Algerian political party. It was created in November 1954 in Algeria’s fight for independence
from France.

4. 3
the choices made (mismatch between the priority industries adopted in the Algerian plans and the hierarchy of
industrialising industries).
The resources drawn from the sale of oil and gas were insufficient to create the conditions for long-term
economic growth. Extracting oil from the country’s subsoil simply made the country poorer as it drew from its
non-renewable resources. In addition, unlike other oil-exporting countries (such as Qatar or the United
Emirates), Algeria did not build up a sovereign fund to prepare for the post-oil era. There was a failure to back
up the management of oil sale revenues with a long-term strategic vision.
In economics theory, exports of raw materials have often been considered as a factor of dependence, and
cannot be considered a promising avenue for development (Nurkse, 1953). One of the most surprising aspects
of economic growth in today’s world is that countries with the largest supplies of natural resources have a
lower growth rate than the others (Sachs & Warner, 1995). ‘Rentier’ states tend to develop policies based on
state-allocated income rather than on the creation of new production-driven wealth (Mahdavy, 1970; Luciani,
1987).
Moreover, Algeria was subjected to what economists call the Dutch Disease (Corden & Neary, 1982): i.e.,
blockage of the industrialisation process due to hikes in the price of raw materials. Growth in profitability in the
natural resource sector affects an economy in three ways: 1/ a shift in the labour force towards the expanding
sector and increased salaries in this sector; 2/ growth in revenue which leads to general inflation; 3/ a rise in
the exchange rate, which handicaps the domestic industry subjected to international competition.
From a study on the MENA countries (Middle East and North Africa), Apergis et al. (2014) identified a negative
link between oil revenue and added value from agriculture, a sector which struggled to return to equilibrium
with each hike in the price of oil. The authors accounted for the phenomenon by the reallocation of resources
into the oil and gas sector.
Algeria may be considered as a ‘quasi-rentier’ country since its income is not based uniquely on oil and gas
extraction revenues (high level of money transfer from expats) and because it does not systematically have a
surplus balance of trade. Moreover, the consensus obtained for the domestic plan did not stop the government
from developing a propaganda system, mobilising the masses and repression (Messiha et al., 2012).
■ III. – CHANGING ECONOMIC PRIORITIES ■
The oil counter-shock of 1985/1986 had a considerable impact on the country by significantly reducing its
export revenue. The sharp drop in income cast doubt on the government’s ability to support employment and
consumption through subsidies. The sudden fall in oil prices called into question the industrialisation model
financed by revenue from the oil and gas industry, exposing the country’s extreme vulnerability.
The first reforms and restructuration measures applied to national firms (Sonatrach,
2
Sonelgaz,
3
Sonacome,
4
etc.) date from this period. They were the precursors of a whole series of changes designed to revise the role of
the public sector in the economy. After nationalising the oil industry, Algeria was forced to backtrack at the
beginning of the 1990s to attract foreign capital. Partial privatisation was introduced and the socialist areas of
farming and state-owned industry were given greater autonomy.
The review of the constitution in 1989 was a real turning point. It got rid of all references to socialism and
acknowledged the interest of private entrepreneurship and its complementarity with the public sector.
Officially, the country began a vast post-socialist reform programme.
2 SONATRACH (national company for the processing and sale of oil products) is a state-owned Algerian company and a major player in the
oil industry.
3 SONELGAZ, the state-owned electricity and gas company, is responsible for the production, transport and distribution of gas and
electricity.
4 The industrial vehicles firm, also called Société nationale des véhicules industriels (SNVI) or the Société nationale de construction
mécanique (SONACOME), is a state-owned Algerian company specialising in the manufacture of lorries.

5. 4
Following the riots in October 1988, and the military coup which interrupted the electoral process at the
beginning of 1992 (after the Front Islamique de Salut had won the first round of elections), Algeria erupted into
civil war (the ‘black decade’: 1992-1999) between the military power and Islamic movements, leaving almost a
hundred thousand people dead. Destabilised by terrorist attacks and squeezed hard by the fall in oil prices,
Algeria suspended its debt service payment in 1994. Placed under the tutelage of the IMF (with the signing of a
structural adjustment plan), Algeria was forced to adopt a free market economy policy.
Despite repeated promises to liberalise the energy market industry, the status quo of the patronage between
Sonatrach and the government continued. The degree of liberalisation and control varied, depending on the
price of oil and internal pressure (Entelis, 1999).
In fact, Sonatrach’s strategy and global performance in Algeria’s oil and gas sector remained pretty much the
same despite the globalisation of the oil and gas industry. Algeria adopted a series of reforms that aimed to
enhance the country’s economic transparency and efficiency. These reforms encouraged more competition
and helped to improve the performance of the Algerian energy industry, but the government’s determination
to keep its grip on the sector explains why moves to liberalise the industry have continually been abandoned
each time the authorities believe that their power is being challenged.
The way a country opens up its market to the outside world depends on its sectorial organisation (types of
comparative advantage) and the cohesion of its policy-makers (Hall, 1997; Abbas, 2012). This type of change
could therefore only take place once protectionism – which oversaw the first decades of independence – lost
its legitimacy. Given the concentration of exports in oil and gas, the acceptable level of imports consequently
needs to be defined. As Abbas (2012) pointed out: “In the case of Algeria, where energy is the only export
sector, control over imports, but, above all, over the actors and the import networks, is a key factor in
managing global integration.”
Today, almost 50 years after independence, the Algerian economy is a service-based ‘rentier’ economy.
According to the national office of statistics, 83% of the economic fabric is based on trade and small-scale
services. Over 90% of the industrial fabric is made up of family-based SMI/SME structures. The country owns
the third largest oil reserves in Africa (12.2 billion barrels) and a third of the continent’s gas resources (4500
billion cubic metres) but still does not have the real aggregates needed to build a modern economy outside of
the oil and gas sector (Aliouche, 2014). In these conditions, the Algerian population cannot take advantage of
its potential wealth.
■ IV. - THE ALGERIAN POPULATION ■
Since the beginning of the 1960s, the Algerian population has tripled to over 38 million inhabitants. This growth
masks a substantial drop in the fertility rate (2.1 children per family in 2012 against 7.4 in 1970), partly due to
women marrying later and girls enjoying a higher level of education. Very few women go out to work, however
(20% of a 12 million-strong labour force).
For a while, the ‘rentier’ economy neutralised the drivers of demographic transition (Fargues, 2000). The oil
counter-shock of 1985/86, and the massive drop in oil revenues led to shrinking incomes and a general fall in
fertility throughout the Arab world. This phenomenon also affected other Muslim countries which were even
more closed, such as Iran (Ladier-Fouladi, 2005). In fact, fertility halved in one generation, a situation that
reflected a “complete demographic reversal” (Fargues, 2000). The demographic transition began late for the
Maghreb/Machrek countries compared to Latin America or Asia, but once it took hold, the mutation was rapid.
The fall in fertility is a sign of deep-seated changes to societies on the south of the Mediterranean (challenging
the patriarchy and a shift in the status of women).
In the last few decades, despite a redistribution of part of the revenue from oil, there is little sign of a rise in
living standards of people either in towns or in the countryside. However, despite its relatively modest rate of
GDP, Algeria has steadily improved its position in terms of human development, despite the economic and
political turmoil.

6. 5
Today, under 25 year olds account for the bulk of the population in the countries south of the Mediterranean,
or what we could call the “post-Islamic” generations (Roy, 2007) who are “detached from the nationalist and
anticolonial memories” (Stora, 2011) and have a strong leaning towards the consumer society.
In the 1990s, Algeria was confronted with an acute identity crisis in religious, economic, social and cultural
terms. This crisis had an extremely negative impact on its global economy, which still reverberates today at the
beginning of the 21
st
century. The damage includes the destruction of many of its infrastructures. However,
infrastructures were not the only aspects to suffer. In addition to the armed conflict, the economic crisis, high
unemployment, and poor working conditions and social services, there was an exodus of top and middle
managers which resulted in significant demand for foreign skills. Moreover, the gap remains wide between
educational supply and demand. In most instances, the programmes available in higher education do not
match the requirements of business, skills are rare and firms find it extremely difficult to recruit the right young
people. The higher education sector and course organisation is managed in a bureaucratic manner which is ill
adapted to the needs of business. Higher education is far removed from its main consumers, in other words,
business leaders, unions, and employer organisations. This leads to dysfunctional decision-making and
responses from the education system, which is poorly adapted to the development requirements of business
organisations or those of the country.
■ V. - MANY UNCERTAINTIES ■
The country’s financial situation is healthy: there is practically no external debt (it was reimbursed earlier than
planned) and the country has large foreign exchange reserves (200 billion dollars). The country experienced an
upturn in 2002, due to the rise in oil and gas prices as Algeria is a major exporter of both (thanks to its two
offshore pipelines which deliver gas to Europe). The production structure was distorted in favour of energy and
at the expense of the manufacturing industry which has continually lost ground despite the massive
government investment in industry to provide Algeria with “industrialising industries.”
Some large, private local groups are now developing, such as Cevital (which made headline news in France in
2014 with the acquisition of Fagor Brandt) and Soummam in the milk industry.
A certain number of infrastructures have been built, such as the underground in Algiers and the East-West
motorway, designed to cross the whole of Algeria alongside the Mediterranean coast. This motorway links the
town of Maghnia (on the Moroccan border) with El Tarf (on the Tunisian border), passing through all the main
Algerian towns including (from west to east) Tlemcen, Oran, Chlef Alger, Setif, Constantine and Annaba, and
covering a distance of almost 1200 km. However, Algeria lacks many crucial skills, with obsolescent
infrastructures in all of the country’s key sectors. This led to a mass exodus of academics and top managers
and, consequently, a call for foreign skills and competencies for major projects (Schiere and Walkenhorst, 2010;
Brahimi et al., 2011). In addition, the number of administrative obstacles and the low level of human capital
among the young generations make it very difficult to start a business.
Many issues are a cause for concern:
- the absence of any real tourist industry, due to the dilapidated state of a large number of tourist
infrastructures and the decison to close the country to foreign influence following independence;
- the economy has little foreign investment (the 49/51 regulation forbids foreigners from having a the
majority shareholding in a firm’s capital, which means foreign investors have to find a local partner);
- some years, Algeria imports over 40% of its requirements in cereals, placing the population in a
position of food dependency. This catastrophic situation is linked to: 1/ the choices made after
independence (Alpha et al., 2012; Bedrani and Cheriet, 2012); 2/ the amount of land lying fallow; 3/
persistently poor harvests (little use of fertilizers and lack of soil preparation); 4/ uncertainty over
government policies, and its inability to take a clear position (to maintain the state-owned land and
property system or to privatise farms). A genuine food supply chain still needs to be developed,

7. 6
although vertical integration of activities exists in some sectors such as milk and sugar (Achabou et al.,
2014) ;
- lack of diversification in the country’s exports, with oil and gas tax revenues financing almost 75% of
the state budget. The importance of natural resources and the public sector (Chauffour, 2011) appear
to be obstacles to regional trade integration in the Arab Maghreb Union (Algeria, Morocco and
Tunisia);
- of the 183 countries mentioned in the Doing Business report (World Bank business climate index),
Algeria ranks 137
th
, and it’s position has fallen steadily. It is also 111th out of 180 countries in the
Transparency International report that publishes an index on the perception of corruption.
- In the building and civil engineering sector, local companies are unable to take part in major
infrastructure construction programmes. As Brahili et al. (2014) explained: "Among the problems in
the building and civil engineering sector, we can mention (1) the lack of a real human resource policy,
(2) the lack of formalised skills identification, (3) anarchic recruitment, with little or no consideration
given to qualifications and even less to personal qualities such as know-how or motivation, and (4) the
building and civil engineering sector remains too traditional and consequently lacks any leading edge
technologies.”
The more liberal trade policy (initially imposed in 1994 through a structural adjustment programme designed
by the IMF), subsequently more or less well assimilated, shows that the governing bodies can change the rules
in order to hold onto power. This explains why the more liberal approach to international markets has not
changed Algeria’s integration in the global economy, and has not led to greater diversification in production,
imports or exports. The unfinished nature of the reforms, the absence of a real group of entrepreneurs
investing in industry (Aliouat, 2012; Grim, 2012), and the predominance of consumer goods in the import
structure can all be explained primarily by a distribution conflict regarding oil revenues. The protection of
property tights remains uncertain, even though there is consensus that the institutions are central to the
economic development process (World Bank, 2002).
Algeria remained on the side lines during the political turmoil that broke out in the first half of 2010 and led to
a significant shake-up of the North African countries, giving it the appearance of a model of stability. The
Algerians did not take part in the Arab Spring. As Martinez (2013) wrote: “In contrast to the security problems
in Libya and the Islamist leanings of the Tunisian and Egyptian regimes, Algeria continues to offer the old-world
charm of a nationalist and military republic model which delights western diplomacies, destabilised by the
irruption of Islamist parties and civil societies on North Africa’s political stage.” Protests were diffused by wage
rises, police presence and the traumatic memories of the civil war (Morin, 2012). Algeria appears as a barrier
against the influence of Saudi Arabia and the salafi and Wahhabi movements that have pushed Islam towards
greater radicalism. Preoccupied by its own domestic problems and fearing a ripple effect, the Algerian
government did not profit from the political shakeup taking place in the Arab world or the redistribution of the
regional cards to strengthen its own external influence.
■ Conclusion ■
Many factors have led to the present situation. Politically speaking, the government never managed to free
itself from the methods arising from the war of independence, and power has remained in the hands of a
military clan which still rules today, and whose legitimacy is linked to the armed struggle. Its leaders are former
freedom fighters (Ben Bella, Boumediene, Bendjedid and Bouteflika). The failure of economic development
(initiated in 1962) and the democratic transition (which began in 1989) are directly linked to the incompatibility
between, on the one hand, a system that clings to power by advocating inaction and, on the other, the
legitimate changes expected by civil society. The army remains the real power in the country, but its status
poses a problem: is it a force in the service of a legal power or is it the power which defines what is legal?
In geopolitical terms, Algeria resembles a fortress under siege, as its borders with Morocco have been closed
since 1994, and those in the south with Mali and in the East with Libya are under high surveillance. While

8. 7
President Bouteflika has repeatedly urged the Algerians to take their destiny into their own hands, insisting
that the new generation must take over and that his generation have had their day, this did not prevent the
president from being re-elected in the 2014 elections, paralysing any potential for real change. The country is
at a deadlock and condemned to remain immobile for many years to come.
Algeria’s long-term perspectives depend on the government’s ability to introduce real diversification into the
economy outside of the gas and oil industry, and to make the private sector the new driver of growth. This
involves introducing a series of structural reforms that have been put off for far too long already, such as
convertibility of the Algerian dinar, a more streamlined administrative system, more hotels and the
development of new tourist sites, the modernisation of logistics platforms (port terminals…), the introduction
of incentives in favour of entrepreneurship and the creation of SME (Guechtouli, 2014). In these conditions, the
Algerian population could perhaps at last attain greater well-being and more sustainable growth. Algeria is
attempting to move from a centralised to a post-socialist economy, but the reforms engaged to date have been
too timid. Over and above its economic problems, the country appears to be caught in a political stranglehold,
resulting in the paradox of a rich country with a poor population.
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10. 9
■ Appendice 1 - Chronology ■
1830 -- Algeria, Turkish colony for the XVI
th
century, becomes French.
1947 -- Adoption of a new status for Algeria.
1948 -- Discovery of oil in Sahara.
1962 -- Evian agreements. Political independence and exodus of the “pieds-noirs”.
1965 -- Putsch of Houari Boumediene and reversal of the government of Ahmed Ben Bella.
1969 -- Algeria in the OPEC.
1971 -- Nationalization of the oil sector (economic independence).
1975 -- Occidental Sahara crisis
1978 -- Death of Boumediene. Another colonel, Chadli Bendjedid, succeeds him.
1985 -- Collapse of the oil price.
1988 -- Riots.
1988 -- Agreement for the passage of an Algerian gas main by the Tunisian territory to
reach the Italian market.
1989 -- New constitution which authorizes the multiparty system and which deletes
any reference to the socialism.
1989 -- Creation of the UMA (“Union du Maghreb arabe”).
1991 -- The FIS wins the first round of the elections.
1992 -- Resignation of president Chadli. Suspension of the process of democratization.
1992/99 -- Civil war.
1994 -- Plan of structural adjustment developed by the IMF. Dinar’s devaluation (40%).
1999 -- Election of Abdelaziz Bouteflika (he is reelected in 2004, in 2009 and in 2014). The civil
war is closed.
2002 -- The beginning of the rise of the oil price, pulled by emerging countries.
2013 -- Terrorist attack (Tigantourine)
2013 -- President Bouteflika is a victim of a cerebral vascular accident. The politics’ calendar
is dominated by the question of the leadership at the top of the State.