Realizing the Aspirations of All Algerians

Townhall speech by Christine Lagarde,
Managing Director of the International Monetary Fund
Algiers, Thursday, March 14

As prepared for delivery

Introduction

Governor, honorable participants. Bonjour. As-salaam ‘alaykum. I am delighted to be here this morning. Let me begin by thanking the Algerian government for inviting me to your spectacular country. I am also very grateful to His Excellency, Governor Laksaci for organizing today’s event.

This is not my first visit to Algeria. In fact, Algiers was the destination for my first trip abroad as French government Minister for Foreign Trade in 2005. I remember that visit fondly—the generosity and warmth of the people, and the natural beauty that abounds.

Now, as Managing Director of the IMF, I am fortunate enough to be back. Algeria has mesmerized me once more.

It is the heart of the Maghreb, the hub where cultures meet.

It is the bridge between old and new, between the ancient culture of the Mediterranean and the dynamic frontier of modern Africa, between past legacies and a hopeful future.

And Algeria is positioned to thrive in a region and a world that is on the move.

The past few days I have gained a deeper insight into Algeria’s aspirations—and also the challenges in reaching that hopeful future.

Today’s event is a wonderful way to conclude my visit. Most importantly because it is an opportunity to hear your perspectives.

Let me first offer some reflections on how Algeria can realize the aspirations of all Algerians. I would like to talk about three things:

(i) The value of reinforcing the policy foundations to secure prosperity;

(ii) Creating a dynamic for even greater prosperity; and

(iii) The importance of inclusion and more widely shared prosperity.

I. Reinforcing the policy foundations for prosperity

Let me begin with the policy foundations to secure prosperity.

Algeria’s economy has performed well over the past decade, and often in the shadow of global uncertainty. Sensible macroeconomic policies, especially managing oil and gas revenues cautiously, helped Algeria navigate the global crisis as well as regional uncertainties.

This helped make Algeria’s economy more resilient in several ways. Few countries can boast external debt of less than 2 percent of GDP or international reserves that would cover 40 months of imports. The other example I have in mind is the decision to build a sizeable oil stabilization fund for a ‘rainy day’.

This was a wise decision. It helped shield the country from sudden declines in international oil prices, such as in 2009. It also meant that the government was able to meet the pressing social needs of Algeria’s people during the global crisis.

In short, Algeria’s natural blessings have been nurtured into the buffers that can help ensure economic stability. Yet the goal of continued stability—and certainly the hope for more broadly shared growth—cannot be assumed or taken lightly.

Today we see pressures that will test stability. What do I have in mind?

For one, those from the world around you. The advanced economies are still struggling to remove the shroud of crisis. Financial conditions may have stabilized, but the real recovery is still too timid, growth still too sluggish

While global growth will be around 3½ percent this year, the advanced economies will more likely grow by just 1½ percent—and much less still in Europe. This is unlikely to provide the most fertile ground for continued strong prices or export growth in Algeria’s oil and gas sector—and policy will need to be able to guard against this risk.

The economic tests to Algeria’s stability are not all external. Some pressures are emerging here at home.

Inflation has been on the rise, reaching nearly 9 percent last year—a 15-year high. And the weaker fiscal position has raised concerns about sustainability. Each is worrying in its own right, even more so when so many Algerians are out of work.

These pressures risk undermining growth and, along with it, the jobs people need. And those who are already vulnerable will be the ones most harmed if inflation is not kept in check. Inflation has been called the worst ‘tax’ on the poor.

So, macroeconomic stability is absolutely essential. It is the core building block for future prosperity. Without this secure foundation, it will be increasingly difficult to achieve people’s aspirations.

It will take the right combination of policies to tackle inflation. Fortunately, steps in the right direction have already been taken, both with this year’s budget and the decision to tighten monetary policy last May.

Still, securing the goal of lower inflation will not be easy and other actions will be needed. I am thinking particularly of further monetary policy tightening, as well as resisting any added pressures to increase the government’s current expenditures. Easing supply-side constraints will also help, both to reduce inflation and foster competition —I will say more on this issue later

The government’s intention to move toward better and more sustainable fiscal policies is also important. A primary objective should be to reduce Algeria’s vulnerability to fluctuating commodity prices and set aside savings for future generations.

In sum, policymakers face a delicate balancing act: reinforcing the fiscal buffers that have served Algeria well, while also using the resources available for high quality spending that can promote widely shared growth and employment.

II. Openness and creating the dynamic for even greater prosperity

On that note, let me turn to my second main point: how to expand the possibilities for employment, growth and prosperity.

The oil and gas sectors have served your country well. Yet, the country’s reliance on them is almost unparalleled.

Oil and gas account for around 40 percent of total GDP. 98 percent of Algeria’s exports. And about two-thirds of budget revenues. At the same time, these sectors only provide jobs for about 2 percent of the population.

This cannot provide a lasting basis for jobs or for raising the living standards of the wider population. The issue is how best to use these natural blessings to spark lasting and inclusive growth that creates good jobs for all Algerians.

The truth is that many countries have struggled with this issue and few have handled it well.

However, you now have an opportunity to create a uniquely Algerian success story.

I am reminded of an Algerian proverb: يد واحده ما تصفق [Yedd ouahda ma tsafek] — Une seule main ne peut applaudir — One hand cannot applaud alone.

Our real successes are often born of harmonious partnerships.

This means having a vibrant private sector alongside a responsible public sector.

It means opening up to reach out to global markets and to also let some of the world in—for investment, trade, and expertise.

It means creating a more diverse economic structure where many sectors enrich the overall economy.

This type of transformation will not happen overnight. So I am pleased to see that this issue is part of the government’s—and society’s—hopes for the future.

How can these hopes become reality?

I have already mentioned the importance of macroeconomic stability. I see two other policy dimensions that will help to build a stronger and broader private sector.

First: improving the business environment and facilitating access to finance.

Complex regulations have held back private sector job creation and growth. Despite government steps to address some issues, there is, quite simply, still too much red tape. Let me give you a couple of examples. It takes 14 procedures and 25 days to start a business. 451 hours each year for a business to pay its taxes. And 630 days to enforce a contract.

More extensive reforms are needed, especially reforms that will make it easier to start and to manage a business. This will go a long way toward allowing entrepreneurial spirit to flourish, including for small and medium-sized enterprises.

To grow, private enterprises will also need the support of a modern financial system. This means moving away from a system dominated by public banks, and allowing private banks to develop and play an active role in providing credit to businesses and individuals.

The second policy dimension is greater openness and integration.

I realize that people are sometimes wary of opening up their economies. Trade and financial links can carry risks—you have experienced this in the past when oil prices have tumbled. A more diverse economy is exactly what is needed to manage those risks.

To shut out global connections can also shut out a world of opportunities.

Easing the restrictions on foreign investment—which are among the most restrictive in the world—is an important element to improve opportunities for the private sector. Not only can this help finance new projects, it can help boost innovation, productivity, competitiveness—and create jobs.

Much the same way, trade integration can deliver growth on a scale that would create enough jobs and prosperity for Algeria’s young and growing population.

We have seen this with other commodity exporters. Chile is a striking example. It was essentially a copper-only exporter in the early 1970s. But following an aggressive policy of trade openness and wide-reaching reforms, Chile now has a wide and diverse export base, and the highest per capita income in Latin America, along with a very low unemployment rate.

Asia is another example. Trade integration—in particular, intra-regional trade—was and continues to be at the core of Asia’s growth success.

The same could be true within this region. Analysis conducted by the IMF suggests that, if the Middle East and North Africa on were to be as open as emerging Asia, annual growth of per capita GDP could increase by almost a full percentage point.

And for the Maghreb countries, trade could bring an additional 2-3 percentage points to growth should these countries opt for deep, multilateral trade integration.

A more open economy is certainly needed to bake a bigger pie. But what ultimately matters is that all Algerians get their fair share of the pie.

III. Promoting inclusion and more widely shared prosperity

This brings me to my third and final main point: the importance of inclusion and more widely shared prosperity.

Algeria’s most precious asset is its people. Growth that includes them, growth that cultivates the jobs that people need can in turn yield growth for the years ahead.

In fact, IMF research shows that a more equal society is also more likely to achieve lasting growth. But, quite simply, inclusive growth is a matter of social responsibility and human dignity.

So what are the priorities for generating more inclusive growth?

Above all, this hinges on putting in place modern and transparent institutions to encourage accountability and good governance. This will promote public responsibility and, ultimately, fair treatment for businesses and individuals.

There are two other critical elements: creating jobs and protecting the most vulnerable.

The importance of creating jobs is something I have mentioned several times today. On that score, Algeria has come a long way—a decade ago, youth unemployment exceeded 50 percent. Compared to many countries, Algeria’s record on unemployment has been moving in the right direction.

However, we should not take too much comfort from this. At 10 percent, the overall level of unemployment is still too high. And it remains more than double that for young people, with many more young adults soon to be looking for work.

Another complication: too few Algerians are seeking work. Some figures put labor force participation at less than half the working age population. And the situation is especially dire for Algeria’s women. They are well educated, but with only 14 percent participation in the formal job market, men have employment rates five times higher than women.

Coupled with policies to support a more dynamic private sector, labor market reforms will help generate the job opportunities that all Algerians need.

You might think that, coming from the IMF, this means pay cuts. Well, the world has changed and the IMF has changed.

I think we can agree that pay increases should be better matched with improvements in productivity. But the bigger issue here is that people rely on the government as the employer of choice. Mindsets need to change.

I have been lucky enough to work in both the public and private sectors. I know public service is a noble thing, but the next generation of Algerians should also aspire to be doctors or lawyers or engineers. Policy can give them a helping hand.

One step would be changing labor laws and regulations that make it hard for the private sector to employ people. The goal must be to reduce disincentives to hiring, while still protecting workers.

More active labor market policies—such as jobs-based training for young graduates or job placement programs—can also help, particularly with better matching worker skills to the needs of the labor market.

As much as jobs matter, steps can also be taken to protect the most vulnerable and create opportunities for the disadvantaged.

Today, a significant share of the public resources is devoted to subsidizing prices. However, subsidies are very costly and do a bad job of supporting the poor. For oil and gas, implicit subsidies may be as much as 12 percent of GDP.

Unfortunately, most of these subsidies benefit those people who do not really need them: people who are more privileged and who consume much more than the poor. At the same time, this steals precious resources away from other spending priorities.

Subsidies should be made explicit and better targeted to the people who really need them.

Hope of a more inclusive Algeria is a hope for all Algerians. And while it may be a goal for the future, it is one deeply embedded in tradition—ummah—the sense of community, the bond between people.

Conclusion

Let me finish with this thought from Albert Camus: “Real generosity towards the future lies in giving all to the present.”

Creating a more prosperous and more inclusive Algeria will take time. And, at times, the way forward may not be easy. But you are not alone.

Some of the issues I have mentioned today—inclusion, jobs, a more flourishing private sector—are just as pressing for your neighbors in the region.

We all must do our part to tackle these issues together.

The IMF can help. We are working to provide financial support where it is needed—Egypt, Morocco, Tunisia. And just as important is our policy advice and technical support, which draws on the collective experiences of the IMF’s 188 member countries.

And the IMF is equally committed to Algeria. We are your friend, your partner.

We are especially grateful for your support to the IMF—it demonstrates your leadership in the region—and I assure you, Algeria’s faith in us will be repaid in full.

And, for our part, we are here to listen and to give our all to the present as we work toward a better future for all Algerians.

Thank you.



IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs    Media Relations
E-mail: publicaffairs@imf.org E-mail: media@imf.org
Fax: 202-623-6220 Phone: 202-623-7100