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A history of industrial development in Algeria

Article - June 28, 2012
The economy in Algeria today is still under the influence of the country’s history, the current environment being the result of choices made in the past

In the years following Algeria’s independence, President Ben Bella’s government created a Soviet-inspired socialist regime, largely preventing the development of private companies. It was thought that economic growth and development had to be achieved through a strong public sector. The Marxist doctrine implied an overall and prominent role for the State, which had to be as strong as possible and involved in every area of the economy. The government’s belief was that growth had to be based on strict heavy industry planning; agriculture and trade were the only sectors left open to private initiative.

Algeria’s first decisions were to nationalise the exploitation of its natural resources: President Ben  Bella declared that all agricultural, industrial, and commercial properties previously owned and operated by Europeans were now assets of the state. The government also nationalised the oil and gas fields. The Algeria of the 1960s and 70s became a typical centrally-planned economy, featuring massive investments and the birth of national heavy industry, with economic planning and the development of the country based on successive five years plans.

This vision led to the creation of a very small number of very large industrial structures of questionable efficiency. By the beginning of the 1980s, the lack of results of the planned economy made the need for change obvious. The system had reached its limits, as oversized companies and heavily bureaucratic organisations struggled to meet the country’s needs. In response, the government dismantled the largest structures into smaller units, though this reorganisation was implemented within the same framework and with the same mindset of national planning as had existed since the early days of the independency. 

Reorganisation of  industries

The reorganisation of national industry actually had little effect on the root cause of the economic situation, namely a lack of competition, dynamism and enterprise. The administration and its bureaucracy remained focused on keeping the private sector under scrutiny and control, while the newborn companies created by the splitting of larger national entities were not a success. In the process, skills and assets were lost and the overall production capacity of industry was dramatically diminished. The building sector, for instance, lost more than 90 per cent of its productivity.

To add to the pain, in 1986 oil prices and subsequently gas prices collapsed. Algeria’s reliance upon the exploitation of natural resources and international oil prices left it confronted with catastrophic national debt. Every sector, especially industry, was affected. On a positive note, the oil price collapse pointed to the need for diversification in the economy and the need to upgrade the nation’s manufacturing base and workers’ skills, as well as the country’s infrastructure. Subsequently, developing small businesses and reducing Algeria’s dependency on imported goods has been at the heart of government policies.

Towards a market economy

By the end of the 80s, the government belatedly decided to support the development of private initiative and a more open-market approach to the economy. Unfortunately, this welcome change of attitude came too late to salvage the ravaged economy and coincided with the onset of the ‘Black Decade’ and civil war. These crises, and IMF intervention in 1994, forced the country to take better-advised measures to address its predicament. From then on, Algeria opened its market to private and foreign investment, with the public sector only in control of strategic or non-competitive activities.

In the early days of reform, public companies found competing in a more open market virtually impossible. Unemployment figures rocketed as 400,000 people were laid off and salaries were often not paid for 12 to 20 months. However, although this process was extremely painful initially,  it was a turning point for the economy and its future growth: by the end of the 90s, all of the country’s macroeconomic indicators were positive.

In 1998, heartened by signs of recovery and improvement, the State took another step towards a market economy by encouraging the Management Buy Out (MBO) process, allowing small business firms to be sold to their employees. The first wave of privatisation focused almost exclusively on profit-making enterprises in the tourism, transport, food and construction material sectors – and the programme proved to be extremely successful. The next step was then to privatise larger businesses and the large national companies such as Annaba Steel were sold. Then followed the creation of a stock market. 

So, by the year 2000, every step for the development of a market economy had been taken. The government also set up a new national infrastructure development programme, which in itself further stimulated the economy. This scheme was subsequently followed by two additional, equally ambitious programmes.

Internationally, Algerian trade negotiations gained new impetus. As part of the MEDA countries (Algeria, Egypt, Israel, Jordan, Lebanon, Malta, Morocco, Syria, Tunisia and Turkey), Algeria agreed on trade liberalisation agreements and on a free trade agreement with the EU from 2007 to 2017 – the idea being to encourage foreign investment in the country.

SGPs: The Portfolio Management Business model

In April 2002, public holdings were reorganised according to the new SGP (Société de Gestion de Participations) business model, which provides for increased flexibility and competitiveness. Twenty-eight SGPs were created from five holdings and – for the first time – each was obliged to deliver results. SGPs operate as holding companies, while supervising operations in their sector and those of the firms under their control. Granted a considerable degree of autonomy by the Algerian government, they were key to establishing partnerships and allowing foreign investors to take part in Algerian business. New rules enable partnerships to be created more quickly and ensure at least a degree of local market access.

Major state enterprises were reformed and opened to the private sector and foreign capital. The State accepted the public companies’ consolidation plans and reviews of their financial situations, often waiving vast debts – but on condition that they find an international technology partner. Not only was this of benefit to foreign investors, but also to local industry capacity development. The Ministry of Finance has stated: “Three major successive public equipment programmes have been carried out since 2001 and the latest will end in 2014. They are the tools we are using to improve the situation of private business firms, in parallel with the reduction of fiscal pressure, they support the development of our national market demand. The building industry, healthcare sector, infrastructure and railroad industry have all benefited from these plans, and now have the capacity to access foreign markets.”

The situation for local investors has also dramatically improved: tripartite meetings between the fiscal administration, labour unions and employers have been fruitful, with the government paying attention to the needs of local investors and Algerian businessmen. A new threefold approach has been adopted which firstly considers small and medium businesses to be key to the economy’s development; secondly, that this is the area in which the greatest job creation opportunities lie; and finally, that encouraging SMEs will lead to the diversification of an economy far too dependent upon oil and gas revenues.

Algeria has always enjoyed a number of assets, with its abundant supply of oil and gas, and unique geographic position as a gateway to the Middle East and Africa. It now also has a progressive, forward-thinking administration, and the coherence between a growing economy, a new generation of educated and energetic CEOs, and business-oriented policies makes the country a genuine land of opportunity.