Development and Economic Policy in Algeria: A Saga of Elite Power

by Lisa Sandoval

May 16, 2018

After a long and bloody war of independence, Algeria emerged on the world stage in 1962 as an independent country. Under the leadership of its first president, Ahmed Ben Bella, the country oriented itself towards self-determination, despite remaining dependent on France due to previously established economic linkages. Algerian officials deemed economic independence to have been achieved in 1971 when the last of France’s oil interests in Algeria were nationalized. Algeria then officially emerged as a Third World leader by hosting the fourth conference of non-aligned countries in Algiers in 1973. As such, it showed great promise as a developing nation and a country that had survived colonialism, and served as an example to other developing nations.

Economically, Algeria pursued a strategy of industrialization, nationalization, and agrarian reform. Algeria’s GNI per capita rose from independence in 1962 until 1987, when it took a sharp turn for the worse and dropped, despite continuous population growth, until 1997 (The World Bank). In 1987 the government began a program of economic reforms and liberalization, in spite of which economic conditions remained critical, spurring mass protests in 1988. During this downturn, Islamist fundamentalist forces began to gain power and a civil war broke out between Islamic rebel groups and the military government in 1991 and the fighting continued through 2002, causing huge destruction and loss of civilian lives. Since the turn of the century, the violence has reduced and economic growth has returned, although widespread economic prosperity remains elusive.

At first glance it appears that Algeria followed the trend of some Third World countries towards socialism in its early years of independence and later joined the Washington Consensus bandwagon of free market policies. As is the case in many other developing countries, neither of these trends led to notable success in terms of increasing the standard of living of the population as a whole. The question is not which approach - collective ownership, state ownership or free markets - is better, since it is increasingly becoming clear around the world that extremes of state control on the one hand and complete liberalization on the other hand consistently fail to enrich populations in an equitable and sustainable way. The question is rather which policies and what level of state intervention produces the best results for developing countries. In the case of Algeria, the emergence after independence of a bureaucratic and technocratic elite and the military as new leaders of the country and their division internally into factions struggling against each other for power and privilege seems to have led to an entrenchment of political interests in Algerian economic policy, which made pursuing the best interests of the population as a whole difficult at best.

Autogestion

A form a socialism emerged naturally at the end of the war of independence in the form of autogestion, or self-management. After the flight of the pieds-noirs[1], who had controlled most enterprises, Algerians took over these abandoned industrial and agricultural businesses and formed committees to run them, sharing profits equitably amongst themselves (Byrne, 2009). President Ben Bella, who had long admired Fidel Castro and Josip Bros Tito’s socialist programs, opportunistically commended these acts of cooperation and together with like-minded advisers, called for widespread nationalization of lands and enterprises that had belonged to Europeans. Soon after he called for the nationalization of all businesses (Byrne, 2009). This allowed the new government to quickly remove assets from foreign control and to consolidate its own position as a legitimate leader. These actions were easily justified in the context of assuring national independence.

Socialism was a strategic ideology for a newly independent nation like Algeria to adopt. French attempts to co-opt resistance during the war through offers of aid and economic and political reforms came too little, too late, and “infected liberal democracy and global capitalism with the taint of ‘neocolonialism’” (Byrne, 2009, p. 446). After the war, the United States supported French interests while trying to woo Algeria with an attractive aid package, from Algeria’s perspective further casting a negative shadow on the capitalist world. In negotiating the Evian Accords, the French wanted to keep their economic interests in Algeria (especially oil) intact and offered in exchange a development aid package. Thus, it became clear to Algerian officials that complete decolonization could not be achieved without economic decolonization. Meanwhile, “the Communist countries offered living examples of rapid industrialization” and created many opportunities for diversification of Algeria’s economic relationships, until then entirely focused on France (Byrne, 2009, p. 446). French colonialism had created a dual economy comprised of a modern sector run by Europeans and a more backward sector where Algerians were obliged to scrape a living off of small plots of land or to work as laborers in European-owned businesses, so the country had everything to gain by a radical restructuring of the economy. During the war, the Front de Libération Nationale (FLN), the party that led the Algerian opposition, derived considerable inspiration - as well as practical advice - from Chinese and Soviet advisors. In this way, socialism represented a legitimate path forward for the nation and the FLN adopted a rhetoric of “revolution” instead of merely a struggle for “liberation” or “independence.”

State Capitalism

At the same time as autogestion, and especially with the takeover of the presidency by Houari Boumédiène in a coup in 1965, the state began building state-owned enterprises (SOEs) to run the newly nationalized strategic industries. The hydrocarbon sector (oil and natural gas) offered the most hope for short-term growth in the devastated economy and was thus envisioned as the central pillar of everything to follow (Entelis, 1999). In 1963, the government founded a state-owned company, SONATRACH (Société Nationale pour la Recherche, la Production, le Transport, la Transformation, et la Commercialisation des Hydrocarbures), to completely monopolize the hydrocarbon industry when the last of the French oil interests were nationalized, as they were in 1971. The income generated by this industry allowed the government to provide social services and to fund “industrializing industries,” the development of other heavy industry. World Bank loans also contributed to this purpose.

The rise of state capitalism resulted from a new elite class of people that formed during and immediately after the war of independence and subsequently served to further entrench the privilege of this population. William H. Lewis wrote in 1965 about the creation of this “new elite” of 310,000-355,000 people - “government officials and bureaucrats, army and security services, professional and other middle class, socialized agricultural workers and socialized industrial workers” (quoted in Farsoun, 1975, p. 26). This group is appropriately characterized as a social class of its own because according to Farsoun (1975), they controlled the means of production, lived a socially and materially privileged lifestyle, and were positioned to benefit from upward mobility in the state organization. Given the very low literacy rates in the country at the time of independence, it is not surprising that so many Algerians were excluded from participation in this social class.

While some accounts state that autogestion failed, others concede that political powers assisted in its demise. It is probably true that the workers lacked the ideological orientation and skills to carry self-management forward indefinitely in the factories and farms. Yet, it is also true that the very existence of autogestion rendered the new elite and their management and technical skills superfluous. The state authorities responded to this threat to their legitimacy by “deliberate interference and mismanagement” (Farsoun, 1975, p. 27) of the self-management efforts in the early 1960s and although they gave lip service to an eventual return to the model once state capitalism had laid a proper foundation to the economy, this was never undertaken (Byrne, 2009).

The elite themselves, by their internal conflict and competition, may have stood in the way of successful development policies (Farsoun, 1975). The Algerian political elite were “composed of numerous clans, factions, and cliques” (Quandt, quoted in Entelis, 1999, p. 12) and despite their common goal of independence and common enemy in the French, “the bloody war of independence … exacerbated and extended existing tensions, rivalries, and differences” (Entelis, 1999, p. 12). Thus, the elite class was characterized by an internal struggle for “patronage, privilege, and power” (Entelis, 1999, p. 10). As Farsoun (1975) writes, the state officials who ran the SOEs amassed considerable power, as did the professionals who had a monopoly on scarce knowledge and expertise, and this group would oppose any change that could “threaten their class hegemony” (Farsoun, 1975, p. 29).

When all major economic decisions converge in the hands of a select, centralized group of people, those people’s decisions take on an importance far beyond their capacity for foresight and awareness of risk. One of the critical failures of central planning and state ownership in Algeria was the neglect of agriculture. State officials poured most of their investments into hydrocarbons and heavy industry, leaving a smaller share for agriculture. The population was growing rapidly but agricultural production was not. The country relied on food imports and farmers were impoverished. In fact, food production decreased by an average of 8.7% annually from 1970 to 1976 (Magland & Rangel-Mantilla, 1982) while the population increased at an average rate of 2.8% during that time (The World Bank). When the state did launch an “Agrarian Revolution” in 1971, it was not sufficient to greatly increase production, enrich the peasant population and reduce the income and geographic inequalities between peasants in the countryside and workers in industrial enclaves (Magland & Rangel-Mantilla, 1982). In addition, some elites stood directly in the way of economic reform that could have introduced more balance into the economy by prioritizing the agricultural sector. Farsoun (1975) describes that large landowners had a vested interest in maintaining their land and power in the countryside and therefore preferred politicians to focus on industrialization elsewhere. Many of these landowners had positions either in the state bureaucracy or were related to people who were and had a real influence on policy choices.

A second crucial failure of the early government was the choice to rely mainly on heavy industry for economic growth, because this was a capital-intensive as opposed to labor-intensive industry and failed to provide adequate employment (Magland & Rangel-Mantilla, 1982). Unemployment in 1973 was estimated at 43%. It was not until this time in the mid-1970s that plans for greatly expanding intermediate and light industries were introduced (Farsoun, 1975, p. 19). Without adequate employment, the purchasing power of the society at large could not increase. A third critique of Algerian state policy brought by Magland & Rangel-Mantilla (1982) and Farsoun (1975) concerns the strategy of industrializing and increasing production far beyond what the effective domestic demand could absorb and relying on exporting the surplus, when such an export market was not always assured for Algerian products due to, among other factors, a lack of competitiveness of Algerian goods vis-à-vis other countries’ exports. Intra-elite conflicts and the interests of those in power got in the way of needed adjustments (Farsoun, 1975; Entelis, 1999; Magland & Rangel-Mantilla, 1982). The same groups of people who ran the SOEs also ran the government, and so to act in the interests of the large peasant population in a way that could reduce the government’s revenue or impinge the power or privilege of those in charge would have been difficult.

Retrenchment

The Algerian government permitted more foreign investment and partnerships over the years, but the switch towards a market economy did not begin until prompted by crisis. The SOEs gradually became grossly inefficient, bloated with redundant workers, yet were protected from the economics consequences of such inefficiency due to government subsidies and loans (Ruppert, 1999). But the game changed in 1986 when oil prices dropped, oil tax revenue fell by 50%, and the government was faced with a serious balance of payments problem, including potential loan default (Kerzabi & Kerzabi, 2016; Akacem, 2004). There truly was no choice but to retrench and reform, so began a slow process of allowing companies to carry out layoffs and transitioning businesses to complete or partial private ownership, as part of submitting to a structural adjustment program (SAP) with the International Monetary Fund (IMF).

Kerzabi and Kerzabi find that until today, Algerian state efforts to reform the economy correspond with drops in oil prices, indicating that the government’s motivation for reform derives from a threat to its revenue as opposed to some more proactive reason. Likewise, Elizabeth Ruppert (1999), in her evaluation of Algeria’s retrenchment program for The World Bank Economic Review, finds that reforms were “stop-and-go” from their initiation in the late eighties until 1992, when they were completely dropped (p. 155). In that year, Belaid Abdessalam - a nationalist leader in the FLN during the war and minister of industry and power during the state capitalism period of Houari Boumédiène - became prime minister (Akacem, 2004). Then in 1994, as the result of another drop in oil prices, another balance of payments crisis and the threat of foreign bank default returned and motivated a return to structural adjustment, a process frequently as traumatic to a population as neglect. In all this time, however, the government has held onto SONATRACH. Entelis states, “Indeed, so long as Algeria continues to be governed by the army in an authoritarian manner, it seems unlikely that the state will formally relinquish control over the most valuable resource of its political economic power” (Entelis, 1999, p. 12). The interests of the ruling elite remain paramount.

Conclusion

This paper has argued that in Algeria, pursuing the best interests of the population though economic policy was rendered difficult by the entrenchment in economic policy of the political interests of an elite group of bureaucrats, technocrats, and military figures, with the conflicts between them often preempting the possibility of a coherent development policy. Given the extreme imbalances of the colonial economy, the level of its destruction after the war, the gaping political and administrative void left by the departure of French pieds-noirs, and the ideological underpinnings of the day, it is understandable for the government to have taken such a heavy hand in the beginning. It is with the benefit of hindsight that we can say it may have been better to prioritize agriculture and employment more and allow more room for entrepreneurial initiative, while still making use of the hydrocarbon sector.

One other insight emerges from this analysis in addition to the observation of the elite stranglehold on the economy, and that is the unique role of oil as a commodity. Oil has been the only commodity that has successfully benefitted from a global cartel, and as such, it is unlike any other raw material export. The unfortunate extension of the power of oil is described in a rather scathing critique by Kerzabi and Kerzabi (2016), who state that “Arab oil countries ‘do not need the values of freedom and democracy to reproduce their political and social system’” and “‘They are an exception to the global movement towards modernity’” because their oil revenue allows them to “den[y] that there is a social contract between the state and society based on historical and cultural values” (p. 153). Certainly, many authoritarian regimes have persisted in non-oil exporting countries, but the fact remains that this lucrative industry is both a blessing and a curse to those countries who have it.

Note

[1]The term for French settlers in Algeria during colonization.

References

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Byrne, J. J. (2009). Our own special brand of socialism: Algeria and the contest of modernities in the 1960s. Diplomatic History33(3), 427-447. doi: 10.1111/j.1467-7709.2009.00779.x

Entelis, J. (1999). The political economy of an Algerian state institution. Middle East Journal53(1), 9-27. Retrieved from http://www.jstor.org/stable/4329281

Farsoun, K. (1975). State capitalism in Algeria. MERIP Reports, 35, 3-30. Retrieved from http://www.jstor.org/stable/3011457

Kerzabi, A. and Kerzabi, D. (2016). Oil income, liberalization and state intervention: The case of Algeria. Economic and Social Development: Book of Proceedings; Varazdin, 144-154. Retreived from ProQuest Central

Magland, F. and Rangel-Mantilla, B. (1982). Quo vadis, Algeria? Evaluation of a development model. Rivista di Studi Politici Internazionali, 49(2), 179-206. Retrieved from http://www.jstor.org/stable/42735655

Ruppert, E. (1999). The Algerian retrenchment system: A financial and economic evaluation. The World Bank Economic Review, 13(1), 155-83. Retrieved from https://elibrary.worldbank.org/doi/abs/10.1093/wber/13.1.155 

The World Bank. (n.d.). Data - Algeria. Retrieved on May 16, 2018 from https://data.worldbank.org/country/algeria