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Where Algeria's future lies Where Algeria's future lies
by Joseph Gatt
2019-03-31 09:50:09
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Algeria's main challenge is satisfying a young population with high unemployment rates. The other, more minor challenge is the high trade deficit. I'll discuss both problems briefly.

If Algerians are demonstrating, the main claim is a high unemployment rate among a young population. The claim, or mistaken belief, is that unemployment is caused by the embezzlement of large portions of the oil revenue which could have been used to create jobs. But that's oversimplifying the problem, or can even be misleading.

alger0001_400_02Truth is, large unemployment rates and underemployment rates among the youth, and older people, are largely due to the absence of a private sector economy. There's the oil and gas sector which hires a limited number of people. Then there's the government which hires a limited number of people. Then there's a marginal private sector that hires a limited number of people.

So why is there no private sector in Algeria? There are multiple causes, but two main causes: low education levels among the population, and rigid bureaucracies that don't allow the private sector to breathe. Other minor causes are lack of infrastructure and transportation, high rent costs, and unreliable clients and partners in the private sector.

Let me break those down. Low education levels among the population are first and foremost due to linguistic factors and low budgets in the education system. Arabic is the language of choice in education, the curriculum is largely based on Arab and Islamic values, but the general population does not speak literary Arabic at home or in public. That means Algerian students have to dish out the same efforts French students would studying an all-English curriculum in France, or Korean students studying an all-Mandarin Chinese curriculum in Korea, in countries where no one speaks English or Mandarin Chinese. Or imagine kids in New York City speaking English at home or in public but having to study everything from science to math to history in classical Greek.

The education system has its set of other problems. The absence of books or a literary field, teachers that lack training and professional development opportunities, teachers that focus on discipline rather that teaching content, structural problems such as no special classes for highly promising students or remedial classes for problem students. To top that off, the education system mainly focuses on testing, but grade inflation has been the norm in the last 20 years or so. There are other problems which I won't discuss here.

Higher education also has its set of problems, including a shortage of professors holding Ph.D.s a shortage of classrooms, frequent strikes, very rigid university bureaucracies, a high university drop-out rate, and other problems.

So that's your first reason for the absence of a private sector. No qualified human resources, which means even though with all the internet information transfer of technology is rather easy, no one actually comes up with business ideas, and when Algerians do come up with business ideas, they have no one to help them implement their business ideas.

Now to a whole different problem. Rigid bureaucracy. When you start a business in Algeria, it's almost like big brother is watching you. You have little room for trade secrets, little room to focus on doing business because you constantly have to run around filling out forms, getting forms, signing forms, year in and year out. Starting a business requires a pile of forms to fill out, and maintaining the business requires many additional forms.

The bureaucracy is also opaque in some cases, and seems to improvise in other cases. Bureaucrats themselves don't always know exactly what forms need to be filled.

Now to another important factor: the banking system. The banking system is part of the bureaucracy, and banks are heavily regulated. No transfer goes unnoticed or unchecked. Every transfer has to be justified. Big brother is watching your money in Algeria, which discourages businesses to even start a business. Many small businesses simply do not put money in the bank because of banks' tendency to lack discretion.

There are other major problems that discourage the emergence of a healthy private sector. Transportation means are scare, logistics are scarce, some raw materials lack, and more importantly, business partners and clients tend to be unreliable. That is you might try to rely on someone to provide raw materials you need or to make orders from your company, only to see the partners or clients disappear or back away from their original plan.

Now high youth unemployment is not the only problem, lack of housing and lack of entertainment venues and other problems exist in Algeria. Housing prices are similar to the prices you will find in European cities, and how do you expect young unemployed people to buy or rent such housing? The healthcare system also has its problems, along with the transportation sector. Street crime has significantly diminished over the last 20 years, crime rates are rather low, and there is a heavy police force in Algeria.

In sum, you have young people who tend to dream about becoming millionaires like they do in most countries yet can't even find a decent job anywhere. Not only was the youth often not trained with marketable skills, but there is no market even when they have the necessary skills.

The other problem is the high trade deficit which I'll only discuss briefly. Now since the country does not have a private sector to produce the necessary goods, most necessary goods are imported. This means a lot of the oil money is spent on imported goods, and the trade deficit tends to grow as oil prices fall, but there have been cases of a trade surplus when oil prices rise.

Algeria avoided Venezuela's situation for two reasons. First Algeria repaired all its foreign debt when there were successive years of a trade surplus. Now I hear the streets starting rumors that billions and billions of dollars disappeared from state coffers, but those dollars did not disappear, but were used to repay the debt. Second reason Algeria avoided being Venezuela is because Algeria stacked up on cash reserves. Cash reserves started out being around 200 billion US dollars in 2012, shrinking to around 40 billion in 2019, mainly because of the trade deficit.

How do you fix all this mess. Of course you would have to start by fixing the education system. But trying to fix the education system tends to lead to instances of civil war, or riots at least, as you have radical Islamic families who want their children to be educated in literary Arabic, which would be the equivalent of students in New York City speaking English at home but having all their classes in public school taught in Latin. One way to fix the education system would be to allow private schools to teach in French, or start teaching in Algerian Arabic or local languages, but every time someone hints at this, there are riots in the streets. There are other ways to fix the mess, which I'll save for another date.

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