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Algeria's Economy: The Vicious Circle of Oil and Violence


The crisis in Algeria, now a decade old, is not merely a consequence of the interruption of the December 1991 elections by an army-backed coup to keep the Front Islamique du Salut (FIS: Islamic Salvation Front) from power. It is also an economic crisis. The same parties who have struggled over the control of the state are also plundering Algeria’s resources.

The military leaders manipulate the atmosphere of fear and violence to accumulate funds, especially through commissions on trade, which they use to support an extensive political patronage system that buttresses their hold on power. The Islamists use the state of emergency to fund their activities through extortion and the black market. In between, both private and public sector interests exploit the gaps in an officially sanctioned culture of corruption and profiteering to make personal gains from the privatisation process and prevent genuine competition in key sectors such as construction and pharmaceuticals. The mass of the population continues to be excluded from the benefits that market liberalisation promised.

Pressures to open up politics and the economy are mounting but the authorities have failed to respond. The continuing violence financially benefits them, and their survival depends on avoiding the kind of settlement that would expose their arbitrary political and economic power. Especially in the current period of international resolve against terrorism, few serious demands have been placed on the Algerian regime to negotiate with the Islamists or engage in genuine democratic and economic reform.

Paradoxically, Algeria has never been better placed in macro-economic terms to promote the structural and fiscal reforms the IMF among others has recommended for years. Even at the height of violence in northern Algeria, the hydrocarbon sector of the southern Sahara continued to attract capital from international oil companies, compensating for the dearth of local and foreign direct investment in other sectors.

Because the Saharan oil fields are far from populated centres, exploration and exploitation deals have been sheltered from the conflict, almost as if they were offshore. Southern European demand for Algerian gas has substantially increased over the past decade, making this as much a strategic resource for European neighbours as for Algeria’s military authorities. Via pipelines, Spain imports 75 per cent of its natural gas from Algeria, Portugal (through Spain) 100 per cent and Italy 54 per cent. All three states – and France for complex historical reasons – are reluctant to disrupt established relations with the Algerian authorities.

However, the macro-economic picture disguises a much grimmer micro-economic reality. In contrast to the booming hydrocarbon sector, which generates 97 per cent of foreign export earnings, the domestic economy is stagnating under a lack of both private and public sector investment, leading to official unemployment of nearly 30 per cent. Under the influence of plans promoted by the IMF, World Bank and European Union (EU), thousands of workers have been laid off as a consequence of restructuring industries for privatisation. Yet few investors have taken over inefficient heavy industry plants running at around 40 per cent of capacity for more than a decade. Social investment in housing, welfare, infrastructure and transport has been neglected in favour of importing basic goods. The access of newcomers to the market, which, under agreements with the international financial institutions and the EU is being prepared for full trade liberalisation by 2012, is severely restricted.

Popular discontent has been visibly rising since Spring 2001, but not, this time, because of Islamist-inspired violence. Though armed Islamists remain active in rural areas, the rallying cry of protestors from the Berber region of Kabylia has been directed against ‘hogra’ – the neglect and contempt with which Algeria’s rulers respond to the needs of the general population. There is growing realisation that the continuation of violence has actually bolstered concentration of economic and political power in the hands of the military elite. Algeria’s rulers have engineered their own enrichment not only during the last decade’s crisis, but because of it.

In the wake of the 11 September 2001 terrorist attacks in the U.S., the international community can no longer ignore the demands of the Algerian population for full participation in a stable economy and democracy. Turning a blind eye to the country’s continuing violence could foster renewed recruitment to radical Islamist organisations. The dearth of political and economic alternatives could also add weight to the Islamists’ cause. It has already encouraged criminality close to the EU’s southern borders and illegal migration northwards to Europe, often in conditions of hostility and desperation. Where Western governments and international financial institutions have sought to promote stability, a mafia-style regime has come to constitute a factor of instability in itself.



1. Respect the independence of the legislative and executive branches of government.


2. Fulfil the promise to establish an independent and effective judiciary.

3. Create effective organs for consultation between government, the labour force and the private sector

4. Continue privatisation of state enterprises while concurrently establishing safety-net programs for employment.

5. Pursue fiscal reform, particularly of individual and company taxation.

6. Improve private sector access to funding by continuing banking reform.


7. Recognise that the Algerian authorities are reluctant to implement the above priorities on their own and tie cooperation, therefore, to progress toward genuine economic reform that replaces personalised fiefdoms with autonomous institutional frameworks capable of releasing the country’s considerable economic potential.


8. Conclude, in the framework of the Euro-Mediterranean (Barcelona) Partnership, an Association Agreement with Algeria that clearly links closer economic cooperation to political reform.

Brussels, 26 October 2001

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