Pilot Investment Climate Assessment

Algeria Investment Climate Assessment

June 2002

Contents

Preface Acknowledgments Acronyms and Abbreviations Executive Summary 1 Algeria’s Economy: Overview and Recent Developments

ii

v vi viii xi

The enterprise sector

4

The growth challenge

6

8

A closer look at the main constraints to doing business

11

Productivity and the investment climate

31

The view of foreign investors

34

3 Looking Ahead: Short- and MediumTerm Strategies for Fostering Private Sector Development

37

Designing a private sector development strategy: a tradeoff between comprehensiveness and realism

38

Initiating a dynamics of reform and working on a medium-term agenda

39

Annex 3.1 A private sector development strategy for Algeria: medium-term policy strategy 44 Appendixes 1 Investment Climate Survey Methodology and Sample

56

2 Technical Appendix on Data Analysis

61 73

Boxes 2.1 Lack of access to industrial land a constraint to a firm’s ability to invest and grow

3.1 A private sector development strategy for Algeria: short-term action plan for “quick wins”

40

Figures 2

3 Cross-Country Investment Climate Indicators and Macroeconomic Performance Indicators

23

1

Growth record and recent economic developments

2 The Investment Climate in Algeria as Lived by 562 Local Firms

2.2 On the interpretation of survey data on corruption, illegal behavior, and informal activities

17

1.1 Annual change in selected economic indicators, Algeria, 1974–2000

3

1.2 Terms of trade volatility, selected countries, 1974–2000

3

1.3 Average unit labor costs in public and private manufacturing enterprises, 1998–2000

6

2.1 Most severe obstacles to doing business, Algeria

9

2.2 Most severe obstacles to doing business for old and new firms, Algeria

10

2.3 Most severe obstacles to doing business for private and public firms, Algeria

10

2.4 Most severe obstacles to doing business for small and medium-size enterprises and large firms, Algeria

10

2.5 Sources of working capital finance in previous three years by type of firm, Algeria

12

2.6 Sources of investment finance in previous three years by type of firm, Algeria

12

2.7 Delay in obtaining last loan approval by type of firm, Algeria

13

2.8 Share of firms required to provide collateral for last loan by type of firm, Algeria 14 2.9 Collateral required as a share of investment loan value by type of firm, Algeria

14

2.10 Average time required for banking operations, Algeria

15

2.11 Firms’ sources of finance, selected countries

15

Contents

2.12 Firms looking for land or offices and length of search, Algeria 2.13 Share of firms that are land tenants or owners, Algeria 2.14 Firms’ reasons for choice of location, Algeria 2.15 Delays in obtaining administrative or public services, Algeria

iii

17 17 17 17

2.26 Bribes, kickbacks, underreporting, and informality, Algeria

24

2.27 Firms’ perception of the judiciary, Algeria

26

2.28 Reasons cited by firms for recruiting problems, Algeria

27

2.29 Average education of textile industry workers by occupation, selected countries

27

2.30 Competitors, suppliers, and clients of private and public firms, Algeria

28

2.16 Delays in obtaining administrative or public services for small and large firms, Algeria

19

2.31 Distribution of sales by type of firm, Algeria

29

2.17 Power outages and ownership of generators by type of firm, Algeria, 2001

19

2.32 Decisionmaking horizons of managers of small and large firms, Algeria

30

2.18 Water supply interruptions and ownership of wells by type of firm, Algeria, 2001

20

2.33 Productivity of large firms and small and medium-size enterprises, Algeria

31

2.19 Share of firms with own generator or well, selected countries

20

2.34 Productivity of public and private firms with size controlled for, Algeria

32

2.20 Interruptions in telephone and natural gas service by type of firm, Algeria, 2001

21

2.35 Productivity of new and old firms, with size controlled for, Algeria

32

2.21 Mobile and mainline telephones, selected countries, 2001

2.36 Productivity of firms by region, Algeria

33

21

2.37 Median value added per worker in the garment industry, selected countries

33 34

2.22 Average and longest waits for imports to clear customs by type of firm, Algeria, 2001

22

2.38 Median wage paid by firms in different investment climates, Algeria

2.23 Average and longest waits for imports to clear customs, selected countries

22

Tables

2.24 Main constraints in dealing with the tax administration, Algeria

23

1.1 Output, prices, and unemployment, Algeria, 1990–2002

4

2.25 Firms’ use of informal payments and connections to obtain services, Algeria

24

1.2 Formal enterprises and employees by sector, Algeria, 2001

5

iv

What is an investment climate assessment? Investment climate assessments systematically analyze the conditions for private investment and enterprise growth in a country, drawing on the experience of local firms to pinpoint the areas where reform is most needed to improve the private sector’s productivity and competitiveness. By providing a practical foundation for policy recommendations and involving local partners throughout the process, the assessments are designed to support policy reforms that can speed the private sector’s growth, leading to faster economic growth and poverty reduction. Produced by the World Bank Group in close partnership with a public or private institution in each country, the investment climate assessments are based on a survey of enterprises to find out what difficulties they encounter in starting and running a business—and, if the business fails, in exiting. The survey captures firms’ experience in a range of areas—financing, governance, regulation, tax policy, labor relations, conflict resolution, infrastructure services, supplies and marketing, technology and training. These are areas where difficulties can add substantially to the costs of doing business. The survey attempts to quantify these costs. Using a standard methodology, the assessment then compares the survey findings with those in similar countries to evaluate how the country’s private sector is faring and how well it can compete. The findings of the survey, combined with relevant information from other sources, provide a practical basis for identifying the most important areas for reform aimed at improving the investment climate. The assessments look in detail at policy, regulatory, and institutional factors that hamper the provision of goodquality infrastructure services and the functioning of product, financial, and other markets, linking the constraints to firms’ costs and productivity. In each country the investment climate assessments draw on the guidance and expertise of local partners in government and the business community. The findings and policy recommendations emerging from the assessments are discussed extensively with the private sector and other stakeholders in the country. This broad dissemination of the findings is aimed at engaging not only policymakers but also business leaders, investors, nongovernmental organizations, and the donor community in shaping the national private sector development strategy, forging consensus on the priorities for reform of the investment climate, and laying the groundwork for concrete responses to the problems identified. Updates of the assessment can help track progress in improving the investment climate. Recent investment climate assessments include those for China, Eritrea, India, Morocco, Mozambique, and Pakistan. This report benchmarks Algeria mainly against China, India, and Morocco, countries for which comparable survey data are available. While the selection of comparators is largely a matter of judgment and data availability, international benchmarking against the achievements and constraints of economies at similar levels of development (such as Morocco) helps in inferring what is feasible—or imperative—in Algeria’s economy or in its policy reform.

Preface

This investment climate assessment is part of a series of analytical works on Algeria prepared by the World Bank to lay out the basis for its Country Assistance Strategy for that country. The assessment is based on three pieces of work undertaken in parallel between January 2002 and March 2003: •

•

An investment climate survey of 562 Algerian firms in nine wilayas (administrative regions). The survey covered formal private and public enterprises with at least five employees, operating in the main urban centers and in 10 sectors in industry, construction, and services. The sample excludes agriculture, the trade sector, and the hydrocarbon (oil and gas) sector as well as government agencies, universities, and research centers (see appendix 1 for details on the sample and methodology). A series of four missions to Algeria to assess the main institutional issues underpinning the constraints to private sector development. Combining the survey results with this policy work led to the private sector development strategy summarized in chapter 3 of this report and detailed in the World Bank’s “Algeria Private Sector Development Strategy Note” (Washington, D.C., 2003).

v

•

A survey of 57 foreign investors from France, Italy, and Spain. All had recently expressed interest in investing in Algeria but had not yet invested, either because they had delayed their decision or, in a few cases, because they had abandoned their investment project. This survey used the standard foreign investors questionnaire developed by the Foreign Investment Advisory Service. The main survey findings are summarized in this report and detailed in “Algérie: enquête d’image auprès d’investisseurs étrangers potentiels” (World Bank, Middle East and North Africa Region, Finance, Private Sector, and Infrastructure Group; and Foreign Investment Advisory Service, Washington, D.C., 2003).

The report also draws on international comparative studies and indicators as well as some World Bank reports. In particular, the macroeconomic overview in chapter 1 draws from the World Bank’s “Medium-Term Macroeconomic Strategy for Algeria” (Washington, D.C., 2003) and its April 2003 Algeria Economic Monitoring report.

Acknowledgments

This investment climate assessment was prepared by Najy Benhassine and Christian Schmidt of the World Bank’s Middle East and North Africa Region, Finance, Private Sector, and Infrastructure Group. Geneviève Boyreau-Debray of the World Bank’s Development Economics Research Group conducted the productivity analysis and the international comparisons and wrote the corresponding sections of the report. Research assistance and data analysis were provided by Nabila Assaf (Middle East and North Africa Region, Finance, Private Sector, and Infrastructure Group), Antoine Frédéric Bozio (Harvard University and Ecole Normale Supérieure, Paris), and Sergio Kurlat (Development Economics Research Group). Albert Zeufack (World Bank, East Asia and Pacific Region, Poverty Reduction and Economic Management Sector Unit) provided guidance in the initial stages of the survey launch. Peer reviewers were Uma Subramanian (World Bank, Private Sector Advisory Services, Investment Climate Unit) and Samy Boukeila (of the Algerian business association Cercle d’Action et de Réflexion autour de l’Entreprise, or CARE). The survey was conducted by the National Center for Population and Development Studies (Centre National d’Etudes et d’Analyses pour la Population et le Développement—CENEAP) between June 2002 and March 2003, in collaboration with and under the supervision of the World Bank. Mohammed-Cherif Belmihoub (Graduate School of Public Administration —ENA, Algeria) contributed to its preparation and launch. The database was provided by the Algerian National Office of Statistics. Enumeration was conducted by a group of about 50 graduate students contracted by CENEAP. The United Nations Development Program office in Algiers funded part of the survey. And the World Bank liaison office in Algiers provided logistical assistance. Parts of the report build on the “Algeria Private Sector Development Strategy Note” (World Bank, Washington, D.C., 2003), written in parallel by the

vi

same team along with Patrick Tardy (consultant) and Mohammed Bekhechi (World Bank, Legal Department, Environment and International Law Unit) as the main authors. That document includes details on the institutional background, policy issues, and policy recommendations that are not reproduced here (except for the summary policy matrix in annex 3.1). The report also draws from “Algérie: diagnostic sur le climat de l’investissement etranger” (Foreign Investment Advisory Service, Washington, D.C., 2002) and “Algérie: enquête d’image auprès d’investisseurs étrangers potentiels” (World Bank, Middle East and North Africa Region, Finance, Private Sector, and Infrastructure Group; and Foreign Investment Advisory Service, Washington, D.C., 2003). The foreign investors survey was conducted in France, Italy, and Spain during the spring of 2002 by a team of graduate students from HEC Junior Conseil (a students’ consulting arm of Ecole des Hautes Etudes Commerciales, France). The team was led by Brice Garnier and Ngoc Tram Lai and carried out its work under the supervision and guidance of Najy Benhassine. Enumeration in Spain and Italy was contracted out by HEC Junior Conseil to its counterparts at the Bocconi University Business School (Milan) and ESADE Business School (Barcelona). The team benefited from the support and guidance of many government officials in Algeria, including staff from the Ministry of Small and Medium-Size Enterprises (the official counterpart); the Ministries of Industry, Finance, Participation and Investment Promotion, Commerce, Labor, and Justice; the one-stopshop investment promotion agency (Agence Nationale de Développement de l’Investissement, or ANDI); and the wilayas of Algiers and Annaba. Moreover, the team benefited from extensive advice and comments during presentations at different stages of the project at the World Bank and in Algeria. Participants included more than 100 business owners; representatives from most Algerian banks and the

Acknowledgments

Algerian bankers association (Association Algérienne des Banques et Etablissements Financiers); business associations (CARE, Forum des Chefs d’Entreprises, Confédération des Entrepreneurs et Industriels de la Mitidja, Association des Entrepreneurs de la Vallée du M’Zab, and Savoir et Vouloir Entreprendre, an association of women entrepreneurs); the chambers of commerce and industry of Algiers and Annaba; and re-

vii

search and academic institutions (CENEAP, CREAD, the University of Algiers, and the business schools of Institut Supérieur de Gestion and Ecole Supérieure de Commerce d’Alger). Steve W. Wan Yan Lun, Lin Wang Chin, and Mehdi Benyagoub contributed to the production of the document.

Acronyms and Abbreviations

ANDI CALPI CARE CENEAP CNAS CNRC

viii

Agence Nationale de Développement de l’Investissement Comité d’Assistance pour la Localisation et la Promotion des Investissements Cercle d’Action et de Réflexion autour de l’Entreprise Centre National d’Etudes et d’Analyses pour la Population et le Développement Caisse Nationale de l’Assurance Sociale Centre National du Registre de Commerce

CPE CREAD EGZI GDP HEC SGP ZAC

Conseil des Participations de l’Etat Centre de Recherche en Economie Appliquée au Développement Entreprise de Gestion des Zones Industrielles gross domestic product Ecole des Hautes Etudes Commerciales (France) Société de Gestion des Participations Zone d’Activité Commerciale

Currency equivalents (As of March 9, 2004) Currency unit: Algerian dinar (DA) Exchange rate: US$1 = DA 78.17

Weights and measures The metric system is used throughout this report.

Fiscal year July 1–June 30

Vice president Sector director Country director Sector manager Task team leaders

Christiaan J. Poortman Emmanuel Forestier Theodore Ahlers Zoubida Allaoua Najy Benhassine Christian Schmidt

Algeria’s Investment Climate at a Glance

ix

Algeria’s investment climate at a glance Algeria Indicator

Morocco

India

China

1995

2000

1995

2000

1995

2000

1995

2000

5,110

5,840

2,860

3,320

1,850

2,340

2,650

3,929

28.06

30.4

26.40

28.70

0.28

3.18

1.13

3.71

Macroeconomic environment Gross national income per capita (PPP U.S. dollars)a Population (millions) Average annual growth of GDP (percent)b

929.00 1,016.00 5.20

5.70

1,205.00 1,262.00 12.10

8.20

Imports and exports as a percentage of GDP

57.90

63.77

61.50

68.58

25.70

30.50

45.70

49.10

Private investment (percentage of GDP)c

21.86

13.51

17.75

20.74

18.20

17.00

18.60

17.30

Public investment (percentage of GDP)c

7.27

8.03

—

—

8.40

7.30

22.20

19.90

0.00

0.75

0.97

0.43

0.60

0.50

5.10

3.60

—

27.00

—

19.50

—

9.20

—

9.30

Average wait to clear customs

—

11.70

—

5.40

—

10.45

—

7.49

Longest wait to clear customs

—

44.40

—

23.20

—

21.20

—

12.50

Net foreign direct investment inflows (percentage of GDP) Unemployment rate, 2001 (percent) Microeconomic environment Import delays (days)

Export delays (days) Average wait to clear customs

—

8.60

—

1.69

—

5.07

—

5.49

Longest wait to clear customs

—

14.21

—

2.75

—

9.29

—

8.13

Skilled professionals

—

9.40

—

8.00

—

11.30

—

—

Unskilled workers

—

5.00

—

5.50

—

9.50

—

—

—

13.65

—

47.39

—

18.34

—

44.49

—

135.51

—

78.77

—

82.76

—

87.45

—

31.84

—

16.30

—

27.17

—

69.61

—

29.00

—

17.00

—

69.00

—

16.00

Average years of education by occupation

Labor Share of permanent workers who are female (percent) Desired workforce as a percentage of current workforce Share of firms offering formal training (percent) Infrastructure Share of firms with own generator (percent) Share of firms with own well (percent)

—

32.00

—

29.00

—

51.00

—

16.00

Mainline telephones per 1,000 people, 2001

—

60.00

—

39.00

—

34.00

—

138.00

Mobile telephones per 1,000 people, 2001

—

3.00

—

157.00

—

6.00

—

112.00

—

37.50

—

77.40

—

—

—

21.80

—

39.60

—

25.50

—

—

—

29.70

—

50.40

—

45.10

—

—

—

57.00

Finance Share of firms with an overdraft or line of credit (percent) Share of credit currently unused (percent) Share of firms with a loan from a bank or financial institution (percent)

continued . . .

Algeria’s Investment Climate at a Glance

x

Algeria’s investment climate at a glance (continued) Algeria Indicator

Morocco

India

China

1995

2000

1995

2000

1995

2000

1995

2000

—

82.39

—

—

—

—

—

82.97

—

184.57

—

—

—

—

—

88.87

—

11.25

—

—

—

—

—

6.58

—

95.71

—

28.86

—

44.33

—

42.13

Retained earnings

—

71.60

—

62.00

—

30.40

—

51.50

Banks and other financial institutions

—

7.00

—

19.60

—

36.10

—

20.60

—

23.00

—

—

—

—

—

4.70

Share of loans requiring collateral (percent) Average value of collateral required (as percentage of loan) Average interest rate on loan (percent) Equity and retained earnings as a percentage of total liabilities Sources of finance (percent)

Days for clearing a check through financial institution Share of land that is owned (percent)

—

62.00

—

—

—

—

—

53.98

Share of land that is leased or rented (percent)

—

19.30

—

—

—

—

—

25.23

—

72.51

—

—

—

—

—

54.91

Governance Share of revenue typically reported for tax purposes (percent) Control of corruption

—

–0.62

—

0.44

—

–0.39

—

–0.30

Rule of law

—

–0.97

—

0.46

—

0.23

—

–0.19

Political stability

—

–1.27

—

0.16

—

0.39

—

–0.05

— Not available. a. PPP U.S. dollars are adjusted for purchasing power parity. b. The data shown for 1995 refer to 1991–95; those shown for 2000 refer to 1996–2000. c. Gross domestic fixed investment. Source: World Bank investment climate surveys, World Development Indicators.

Executive Summary

Based on large reserves of oil and natural gas, Algeria’s economy depends on the hydrocarbon sector for 95 percent of exports and about 30 percent of GDP. Its growth performance has thus fluctuated with the price of oil in recent decades. Still, Algeria performed relatively well in the second half of the 1990s, achieving economic and political stabilization followed by a recovery of growth. But attracting muchneeded local and foreign private investment outside the hydrocarbon sector will require a significant improvement in the investment climate. Sharply reducing the unemployment rate, now hovering around 26 percent, also must be high on Algeria’s economic agenda. With an accelerated transition to the market and a better investment climate, strong, private sector–led investment could generate the jobs needed to absorb the growing number of young Algerians entering the labor market every year. Constraints to private sector development and economic growth Algeria has made a transition from an economy of shortages to one of constraints to growth. A few years ago entrepreneurs complained about the lack of raw materials and other inputs; today they report shortages of skilled labor and industrial land. The investment climate survey (covering 562 Algerian firms), the survey of potential foreign investors, and the results of focus group meetings with stakeholders all point to the same main bottlenecks to the development of enterprises: •

•

Constraints relating to factor markets—with credit and land topping the list, followed by the labor market with its lack of qualified workers, the poor infrastructure, and the lack of reliable business information. Constraints relating to governance, market institutions, and economic policy—competition issues,

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policy uncertainty, corruption, and dealing with the public administration, the tax authority, and the judicial system. In addition, firms in France, Italy, and Spain that have expressed interest in investing in Algeria, but have so far shied away from doing so, cite security as a prominent issue, despite significant improvements in the situation in recent years. Consider the implications of some of these bottlenecks. On average, firms are able to finance only 11 percent of their working capital and 16 percent of their investments through bank credit, and thus must rely on retained earnings for almost 74 percent of all financing. Some 37 percent of firms have been searching for an industrial plot to create a new venture or expand their business—and have been looking for five years on average. Registering a firm takes 18 steps and 93 days on average, obtaining a construction permit 130 days and other licenses or permits 35 days, and getting a telephone line installed 238 days. Not surprisingly, different types of firms both perceive and experience the constraints in the investment climate in different ways. Small firms suffer more from the poor business environment than do large firms. Public firms have better access to infrastructure services and appear to have better access to public procurement contracts, while private firms (especially large ones) appear to have better access to credit. And among private firms, older, established ones complain more about unfair competition than do more recently created ones. The constraints in the business environment are reflected in productivity. Relative to comparator countries, Algeria has the lowest value added per worker and lowest total factor productivity in the garment industry (selected for ease of comparison). Within Algeria, firms facing a better investment climate have higher value added per worker and higher total factor productivity—and also pay higher wages.

Executive Summary

Toward reforms in support of private sector development To increase investment in Algeria in the medium term, the government strategy should address the constraints to enterprise development while simultaneously launching reforms to tackle the underlying institutional issues. Even so, the strategy should prioritize and sequence the reforms on the basis of the political and institutional context in Algeria and the challenges implied by second-generation reforms. In doing so, the strategy should take into account five issues: •

•

• •

•

Some reforms are politically sensitive and require significant consensus building and strong political will, both of which have been lacking or inconsistent in Algeria (in part because of the political dynamics, but also because pressure for reform has fluctuated with oil prices). In contrast with first-generation macroeconomic reforms, the second-generation reforms for private sector development require a lot of capacity building in public agencies to equip them for their new regulatory roles, particularly at the local government level. They also involve much learning and fine-tuning during implementation. Some reforms involve great uncertainty in outcome and in the effects on different groups. Despite progress in some areas, the government reform agenda has poor credibility in the eyes of both local and foreign investors. Since private sector development is a theme rather than a sector, responsibilities in this area are spread among at least five ministries and one public institution. The government has no single champion of reform and no natural home for coordination and advocacy of private sector development.

Taking into account these five issues, a private sector development strategy has been devised that addresses the political uncertainty and capacity con-

xii

straints. The proposed strategy consists of two prongs: a short-term (one- to two-year) action plan with 20 items—all “quick wins”—and a detailed, medium-term (two- to five-year) policy strategy. Short-term action plan—“quick wins” The short-term action plan includes measures that would require simple regulatory changes or legislative amendments, as well as limited short-term reforms such as regional pilots. Only one major reform is proposed, the privatization of a public bank in one to two years—a reform that, in addition to its effect on the banking sector, would send an important signal to foreign investors and improve the government’s credibility on its reform agenda. Beyond producing immediate effects on the business environment, these measures are aimed at: •

•

Initiating a dynamics of reform by helping to strengthen the government’s credibility and establish a visible track record of successful actions— or quick wins. Building capacity, support, and knowledge for implementing reforms.

Medium-term policy strategy The medium-term strategy covers seven areas of reform: the public enterprise sector, the industrial land market, the financial sector, administrative constraints to doing business, the tax system, infrastructure, and the legal and judicial system. The government of Algeria is already implementing many of the policy measures in the medium-term strategy, with varying speed and success. The intent of the proposed strategy is not to deny this progress, but to stress the need for greatly accelerating the reforms and supporting them with a broader range of complementary policy measures, without which they may have only a marginal impact. Achieving the reforms to promote enterprise development will require changing the role of the state.

Executive Summary

Beyond sustaining strong political will to spearhead and champion the reforms, the state will need to confront the dual challenge of expanding its role as a regulator while reducing its role as an interventionist. That will entail increasing its capacity to regulate markets, enforce decisions, and ensure a level playing field for all market participants by providing strong, effective, and reliable public services and market institutions (such as the customs, tax authority, antitrust agency, and judicial bodies). It will also mean allowing the private sector to play a stronger role in land and credit

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markets, in the investment process, in the provision of services to enterprises and the provision of infrastructure, and in the production of goods and services exhibiting no public good or strategic features. The coming years will be crucial for Algeria’s unfinished transition to a market economy. With rising political competition foreshadowing the 2004 presidential elections, the economic reform process seems to have slowed recently. An improved business environment could play a crucial part in that process.

1. Algeria’s Economy: Overview and Recent Developments

Growth record and recent economic developments

2

The enterprise sector

4

The growth challenge

6

1

1. Algeria’s Economy: Overview and Recent Developments

Successful economic and political stabilization and resumed growth—but a complex political economy of reforms hindering investment After gaining independence in 1962, Algeria adopted a centrally planned economic system and nationalized most economic activities, including agriculture and the hydrocarbon (oil and gas) sector.1 The country used its fast-growing oil and gas export revenues to finance a development strategy of import substitution based on large investments in heavy industry. In parallel, heavy public spending in the social sectors led to big improvements in human development, particularly in health and education. Private entrepreneurs were discouraged and marginalized, but some were still able to coexist with the state economy. Often close to the state “intelligentsia,” these entrepreneurs depended on the public sector for all economic activities (imports, raw materials, distribution, demand, and the like). Most suffered from state controls, such as administered prices and investment caps. But some flourished in the shadow of the socialist economy, thanks to trade protection, low competition, monopolies in niches left by the public sector,2 and state-guaranteed markets and demand for their products. Early signs of backtracking from this socialist strategy appeared in the early 1980s, with the first reforms of the public sector. The government also reduced its regulation of private activities, particularly investment. Though still heavily regulated, private investment increased and a small class of “socialist era” entrepreneurs emerged. The reforms were accelerated after the decline in oil prices in 1986 and the dramatic drop in public investment that followed. This background on the development of the enterprise sector is important in understanding Algeria’s economy today. In contrast with Eastern Europe’s transition to the market, Algeria’s has been extremely slow and has coexisted with an old private sector that sur-

2

vived—and often benefited from—central planning. As the results of the investment climate survey show, the “old” private sector firms appear to differ significantly from more recently created firms, both in their perception of constraints and in their business environment. The old and new firms also differ in structure and productivity. This divide probably goes much further than that between public and private enterprises in explaining the political economy of the slow reforms to improve Algeria’s poor investment climate.

Growth record and recent economic developments Algeria’s economy grew an average 2.2 percent a year in the 1960s and 5.1 percent in the 1970s.3 But in the past two decades its growth has been disappointing, averaging –0.2 percent a year. Growth collapsed during the decade after the mid-1980s— because of the adjustment to the oil price slump, disruptions associated with the slow and difficult transition from the command economy to the market, and a political transition that turned violently unstable during the 1990s. Poor productive efficiency also contributed to the protracted collapse in growth. Growth in total factor productivity remained negative from the late 1970s to the mid-1990s as a result of large relative price distortions in the command economy and limited openness to trade and foreign direct investment outside the hydrocarbon sector. The drop in productivity growth accounted for about half the 4.2 percentage point decline in annual GDP per capita growth between 1985 and 2000 relative to the previous 15-year period. Shrinking public sector investment in the face of the slump in hydrocarbon revenues accounted for the rest of the collapse in growth (figure 1.1). Algeria’s excessive exposure to oil shocks is among the defining features of its economy (figure

1. Algeria’s Economy: Overview and Recent Developments

3

Figure 1.1 Annual change in selected economic indicators, Algeria, 1974–2000 %

Capital stock

8

4 Human capital 0

–4 GDP

Total Factor Productivity –8 1974

1977

1980

1983

1986

1989

1992

1995

1998

Source: World Bank; International Monetary Fund.

1.2). Indeed, its external vulnerabilities have increased over time because the country has been unable to diversify its exports. With non-oil exports accounting for less than 3 percent of the total, Algeria’s

exports are among the least diversified among middle-income countries (mostly as a result of years of overvalued real exchange rates, lack of foreign direct investment outside the hydrocarbon sector, and dis-

Figure 1.2 Terms of trade volatility, selected countries, 1974–2000 Standard deviation of annual percentage change in terms of trade Terms of Trade

40

30

20

10

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n Hu

Algeria’s Economy: Overview and Recent Developments

torted price policies). Half its exports are chemical and plastic goods, a quarter steel and mechanical goods, and the rest a mix of agricultural, mining, and transformed goods. Three-quarters of its non-oil exports go to only five countries, most in southern Europe. Most enterprises producing exportable goods are state owned, enjoying high protection. Reforms accelerated in the 1990s—in the midst of political instability, macroeconomic turmoil, and unsustainable debt service. Embarking on a series of ambitious reforms, the government achieved much success in macroeconomic stabilization in the face of volatile oil prices, and some progress in structural reforms, including liberalization of prices, trade, and investment. These reforms laid the foundation for a recovery in growth. GDP grew an average 3 percent a year in 1999–2002, and the non-hydrocarbon, nonagricultural sector turned in a similar growth performance, led by 5 percent real growth in value added in private manufacturing (table 1.1). Higher oil prices and tighter demand management turned fiscal and current account deficits into sizable surpluses by 2001, the balance of payments averaged a surplus of 11 percent of GDP in 2000–02, and inflation fell from more than 20 percent in 1994 to 1.4 percent in 2002. Growth in the non-hydrocarbon sector remains fragile, however; fueled mostly by public investment, it is vulnerable to oil price swings. And constraints to doing business, particularly the high administrative

4

barriers and the poorly functioning credit and industrial land markets, have weakened the private investment response to the improved macroeconomic situation. Algeria’s association agreement with the European Union offers a tremendous opportunity for integration in global trade markets, with new export opportunities in the emerging Euro-Mediterranean free trade zone. But it also raises important challenges. Once the DAP tariff (droit additionel provisoire)— a temporary additional tariff—is removed, importcompeting industries will be exposed to greater competitive pressures. To withstand competition, companies in these industries—especially public enterprises—will need to restructure and to improve their efficiency. Algeria has moved toward competitive unit labor costs in a number of labor-intensive industries important for job creation. Consolidating its competitive position will require a conducive business environment to promote investment and foster productivity growth.

The enterprise sector Obtaining accurate data on the enterprise sector in Algeria is a challenge. The many different databases on the sector are unreliable, and none are linked. Data on the formal sector from the social security administration (CNAS), by far the best source of information

Table 1.1 Output, prices, and unemployment, Algeria, 1990–2002 (percent) Indicator

1990–95

1996

1997

1998

1999

2000

2001

2002

Real growth of GDP

0.3

4.1

1.1

5.1

3.2

2.4

2.1

2.1

Real growth of non-hydrocarbon GDP

0.1

3.1

–1.3

5.7

1.7

1.2

4.2

5.5

27.3

18.7

8.4

2.3

2.7

0.3

4.2

1.4

23

28

28

28

29

29

27

27

Inflation rate (consumer price index) Unemployment rate

Source: World Bank; International Monetary Fund, National Office of Statistics.

Algeria’s Economy: Overview and Recent Developments

on the formal enterprise sector, show that construction and industry are predominant (table 1.2). Trade and commerce remain underdeveloped, though many individuals and small firms probably operate informally in these sectors. Some 95 percent of formal enterprises have fewer than 10 employees.4 These enterprises employ 44 percent of all registered labor. Among all enterprises, the number of employees averages only 4. Only 518 private enterprises have more than 100 employees. Enterprises are concentrated along the coast. Algiers is by far the most important economic center, with 28 percent of registered firms, followed by Oran (7 percent) and six wilayas, or administrative regions (Setif, Tizi Ouzou, Chlef, Constantine, Bejaia, and Blida), each accounting for around 4 percent. The South accounts for only 11 percent of enterprises. Algerian businesses are small family affairs, mostly closed to outside investors. Only 3 percent are joint stock companies, 53 percent are limited liability companies, and the rest are partnerships or singleowner firms.

5

One consequence of this enterprise structure is that most firms focus on their local market. On average, the 562 firms surveyed transact 60 percent of their sales in the local market and 39.2 percent in other regions, exporting only 0.7 percent. Very few firms have developed a national distribution network. Retail distribution is undeveloped. The public sector has a large (though declining) role in the non-hydrocarbon economy. In 2000 it accounted for 57.8 percent of total value added, but only 23.8 percent with hydrocarbons excluded. Nonetheless, it still dominated industry, with 65 percent of value added. But the private sector’s role has grown over the past decade, as made clear by national accounts data for 1990–2000 from the Algerian National Office of Statistics: •

Outside the hydrocarbon sector, private enterprises have been generating more value added than the public sector.5 While the non-hydrocarbon value added of public enterprises stayed

Table 1.2 Formal enterprises and employees by sector, Algeria, 2001 Share of total (percent) Sector

Firms

Workers

Firms

Workers

Construction

51,873

209,621

28.8

28.4

Manufacturing

40,744

189,507

22.6

25.7

Services

36,110

130,783

20.1

17.7

Trade and commerce

29,070

116,982

16.2

15.9

Transport and communications

16,015

38,682

8.9

5.2

5,258

38,830

2.9

5.3

Mining

485

4,860

0.3

0.7

Water, energy, and energy services

338

7,797

0.2

1.1

179,893

737,062

100.0

100.0

Agriculture and fisheries

Total

Source: Algeria, Caisse Nationale de l’Assurance Sociale.

1. Algeria’s Economy: Overview and Recent Developments

•

•

flat after 1995, it grew steadily in the private sector. In the early 1990s public enterprises paid more than twice the aggregate wages paid by the private sector. But by the end of 2000 the aggregate wages were about equal (though public enterprises still pay much higher unit wages, about twice as high as those in private enterprises). Except in 2000, private firms always generated a higher operating income (in aggregate) than public firms. In several sectors—such as textiles, services, agro-industries, mechanical industries, and leather and shoes—public firms regularly made losses. By contrast, the private sector never showed a loss in any sector except in textiles in 1993–94.

Unit labor costs in manufacturing are lower on average in the private sector, reflecting higher productivity—especially in light industries such as textiles and leather and footwear (figure 1.3).

6

The growth challenge At the top of the economic agenda for Algeria is drastically reducing the unemployment rate, estimated at around 27 percent in 2001 (based on data from the National Office of Statistics). With an accelerated transition to the market, strong, private sector–led investment could generate the jobs needed to absorb the unemployed as well as the growing number of young Algerians entering the labor market every year. But accelerated growth in the non-hydrocarbon sector will ultimately be sustainable only if Algeria reduces constraints to the efficient use of all production factors and lessens its exposure to oil price volatility. Only then will the high structural unemployment be reduced, paving the way for better living conditions for Algerians in the medium term. Thus structural and macroeconomic policies need to address two simultaneous challenges. First, fostering private sector development by improving the investment climate and reducing con-

Figure 1.3 Average unit labor costs in public and private manufacturing enterprises, Algeria, 1998–2000 0.5 0.45

Public

Private

0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 Food processing

Textiles and clothing

Leather and footware

Source: Algeria statistical office.

Wood Chemicals, Fabricated Construction Other products rubber, metals and materials industries and paper plastics machinery

1. Algeria’s Economy: Overview and Recent Developments

straints to the efficient use of resources. Public services and markets for labor, credit, land, and information all suffer from severe inefficiencies, leading to the underutilization of production factors and a growing informal sector. The structural reforms needed to correct these inefficiencies call for fundamentally redefining the state’s role in the economy. And that entails two major policy shifts, actions on which Algeria has made little progress: •

•

Increasing the state’s capacity to regulate markets, enforce decisions, and ensure a level playing field for all market participants by providing effective public services and market institutions. Reducing the state’s intervention in areas where private operators should progressively take over, particularly in the land and credit markets, the provision of infrastructure, and the production of goods and services with no public good or strategic features.

Second, strengthening the fiscal framework to better manage volatility and secure medium-term fiscal sustainability. Strengthening fiscal management calls for a multiyear, integrated fiscal framework aimed at delinking spending from the volatile hydrocarbon revenues while saving excess revenues for the future within an appropriate asset and liability management strategy.

Notes 1. The analysis, figures, and estimates in this introductory section are based on World Bank,

2.

3.

4.

5.

7

“A Medium-Term Macroeconomic Strategy for Algeria” (Middle East and North Africa Region, Social and Economic Development Group, Washington, D.C., 2003). Private monopolies existed particularly in the poorly capitalized, high-profit sectors where demand was not being met. Private enterprises dominated such sectors as retail, services (restaurants, small hotels, computers), printing, leatherwork, hardware, land transport, tailoring and hosiery, finishing work in construction, and processing of plastics. These enterprises generally supplied, subcontracted for, and handled retail sales for public enterprises (which concentrated on industry, raw materials processing, and air, rail, and maritime transport). The analysis, figures, and estimates in this section are drawn largely from World Bank, “A MediumTerm Macroeconomic Strategy for Algeria” (Middle East and North Africa Region, Social and Economic Development Group, Washington, D.C., 2003). However, regular inspections of a sample of 7,779 enterprises in 2001 by the Labor Inspectorate of the Ministry of Labor showed that 41.45 percent of employees were not properly registered. However, public enterprises still generate more value added (in aggregate) in some industrial sectors (mechanical industries, building materials, chemicals, paper and wood).

2. The Investment Climate in Algeria as Lived by 562 Local Firms

A closer look at the main constraints to doing business

11

Productivity and the investment climate

31

The view of foreign investors

34

8

2. The Investment Climate in Algeria as Lived by 562 Local Firms

Different stories for old and new entrepreneurs, for small and large firms, for publicly and privately owned enterprises Clearly identifying barriers to enterprise development and their relative priority is the necessary first step toward defining a strategy and action plan for improving the business environment in Algeria. The investment climate survey, the survey of foreign investors, and the focus group meetings with stakeholders all point to the same main bottlenecks to the development of enterprises—whether private or public, foreign or local (figure 2.1): • •

Constraints relating to access to factor markets— credit and industrial land.1 Constraints relating to governance and economic policy issues—with unfair and informal sector competition topping the list, followed by the tax rate, policy uncertainty, and corruption.2

Businesses also cite other issues as severe obstacles (giving them the highest ranking on a scale of 0–5), but less often than the most important constraints. These issues include the administration, public services and the infrastructure, the judiciary, and

9

access to information. Some of these are crosscutting themes that lie at the heart of the priority problems above. For example, because the public sector and the administration play the dominant role in managing and allocating resources in Algeria, complaints about the credit and land markets—and about corruption and unfair competition—are directed in part at the public agencies in charge. Similarly, weaknesses in the judiciary and poor access to market and legal information are among the main causes of the poor functioning of the credit market and the development of the informal sector and noncompetitive markets. A comparison of these results with those of a similar study conducted in 1998 suggests that there has been a shift in recent years from an economy of shortages toward one of constraints to growth (for example, almost 40 percent of firms in the sample claim to be seeking industrial land to expand their business).3 This shift probably reflects renewed optimism among investors. Nonetheless, it still calls for urgent and deep structural reforms to reduce the constraints. Not surprisingly, different types of firms cope differently with the investment climate. More interestingly, they differ not only in how they perceive the intensity of the constraints they face, but also in how they rank constraints. For example, “old” firms—those that were

Figure 2.1 Most severe obstacles to doing business, Algeria % 30

20 28.8

28.2

10 12.9 0

Access to/ cost of credit

Informal unfair competition

Access to land

Source: Algeria Investment Climate Survey (2003)

12.1

Tax rate

7.1

6.3

Policy uncertainty

Corruption

2. The Investment Climate in Algeria as Lived by 562 Local Firms

created before 1990 and grew during the centrally planned era or the years of reform in the 1980s4— complain more than “new” firms about unfair and informal sector competition (figure 2.2). For the old firms, these complaints probably reflect in part the rise of a more competitive environment than they had experienced during the early years of reform. In addition, old firms complain less about access to credit and about corruption. These interesting results resonate in the policy debates of a divided private sector in Algeria and reflect the complex political economy of reform in the country.5 Differences in perception and experience with the investment climate also emerge between private and public firms—and between small and medium-size enterprises and large firms.6 A much larger share of public firms (36 percent) than private (19 percent) cite access to or cost of credit as their most severe constraint (figure 2.3). This difference probably reflects recent gains in the independence of public banks, which dominate the Algerian financial sector. These banks appear to be allocating credit on a more commercial basis, shifting from their traditional client base of state-owned enterprises to the private sector. Meanwhile, private firms complain more about the tax rate (tax evasion, prevalent only in the private sector,

Figure 2.2 Most severe obstacles to doing business for old and new firms, Algeria

10

Figure 2.3 Most severe obstacles to doing business for private and public firms, Algeria % 35.7

Private Public

30 20

19.1 9.4

10

3.6

4.9 1.8

0 Access to/ cost of credit

Tax rate

Corruption

Source: Algeria Investment Climate Survey (2003).

is high) and are more concerned about corruption (which appears to affect proportionally more smaller firms, which are usually private). Interestingly, large firms (those with 100 or more employees) complain much more about unfair and informal sector competition than do small and mediumsize enterprises (those with fewer than 50 employees): 29 percent of large firms rank this as the most severe obstacle, compared with 19 percent of smaller firms (figure 2.4). Part of the story may be that large firms, like old firms, face increased competition from small and medium-size enterprises—new competition that

Figure 2.4 Most severe obstacles to doing business for small and medium-size enterprises and large firms, Algeria % 30

%

25.8

24.5

20 15.9

16.8

28.6 Old New

20

19.2

SME Large

10

10

5.4

5.6 3.7

1.1 0

0 Unfair comp./ informal sect.

Access to/ cost of credit

Corruption

Source: Algeria Investment Climate Survey (2003).

Unfair comp./ informal sect.

Corruption

Source: Algeria Investment Climate Survey (2003).

2. The Investment Climate in Algeria as Lived by 562 Local Firms

they may perceive as unfair or as dominated by the informal sector.

A closer look at the main constraints to doing business The following sections on the constraints to enterprise development roughly reflect their ranking in importance, with a closer look at cross-cutting themes like the administration and public services, governance, and infrastructure. Each gives a short overview of the main issues at hand, presents the survey evidence on the extent of the constraints while emphasizing the difference in effects for different types of firms, and briefly summarizes the main reform challenges (for greater detail, see annex 3.1 at the end of chapter 3). The discussions on access to finance and access to industrial land are more detailed than others, since these constraints are particularly acute. Access to finance Algeria’s financial sector has seen much progress in the past decade, including the entry of many small private and foreign banks.7 But it remains largely dominated by the state, with the seven public banks accounting for 90 percent of bank assets. Obtaining access to credit, including short-term working capital finance, is difficult and time consuming. Leasing, factoring, venture capital, and export financing instruments are all undeveloped. State-owned banks—the only ones with a network large enough to serve small and medium-size enterprises, which make up most of the enterprise sector in Algeria—are bureaucratic, unfriendly to business, and lacking modern information and payments systems. Their staff lack qualification in modern lending techniques and in assessing project risk and return. And they have little incentive to take responsibility or manage risk, in part because of the bureaucratic human resource management but also because of con-

11

straints (explicit or implicit) imposed by the banks’ state shareholder.8 The public banks have complex and highly centralized decisionmaking processes. And they suffer from a long tradition of state intervention in credit allocation. Although systematic credit allocation to state-owned enterprises appears to have diminished significantly in recent years, this practice has a lasting impact on the way banks conduct business. The structural problems of the banking sector explain part of the poor functioning of the credit market for enterprises. There are also problems on the borrowers’ side. The following issues are particularly constraining for bankers: •

•

•

•

Absence of reliable market information. The Algerian credit market has frequent episodes of “herding,” where bankers and many investors over invest in a few activities because they lack sectoral information and base investment decisions on imitation. Underdevelopment of the risk and credit information system. The credit information databases of the Central Bank are still in development. Lack of qualified financial managers among most small and medium-size enterprises and a tradition of secrecy among family-owned firms. Most firms underreport sales (see section on corruption and illegal practices in this chapter) and have no certified balance sheets, self-selecting out of the formal credit market. Major deficiencies in the judicial system, which lower the value of collateral or guarantees given to bankers in case of default. In particular, the judicial system is very slow; most judges lack training in commercial matters, and the Ministry of Justice’s retraining program needs to be scaled up; judges are said to systematically take the side of debtors; and there are no mechanisms of alternative dispute resolution and only a few separate commercial courts (see the section on the judicial system).

2. The Investment Climate in Algeria as Lived by 562 Local Firms

•

Inefficiencies in the land and housing markets, particularly relating to titling and property rights. These inefficiencies trickle down to the credit market, since many creditworthy small and mediumsize enterprises that own assets that could be pledged as collateral cannot do so.

12

percent of investments (figures 2.5 and 2.6). Almost 74 percent of all financing came from retained earnings. As expected, things are worst for small firms (those with 5–19 employees): banks financed only about 7 percent of their working capital and 13 percent of their investments—compared with 13 percent and 29 percent for large firms. Moreover, only 23 percent of small firms have overdraft facilities with their banks, compared with 69 percent of large private firms. Public enterprises used bank credit less than did large private firms (since most public enterprises are large, they need to be compared with equally large

Survey evidence Access to credit. The results of the investment climate survey reflect the difficulty of obtaining credit. Asked about sources of financing in the previous three years, firms reported that bank credit financed only 11 percent of working capital on average, and 16

Figure 2.5 Sources of working capital finance in previous three years by type of firm, Algeria % 100 10.9

13.7

7.3

7.6

13.3

11.0

16.0

Other

80 Friends family

60 40

73.9

73.7

77.0

74.1

72.3

72.7

71.1

Commercial bank Supplier credit

20 0

Auto financing All

Old (1990–)

New (1990+) Small (