Ministry of Strategy and Finance Government Complex 2, Gwacheon, 427-725, Republic of Korea Tel. 82-2-2150-7732 www.mosf.go.kr Korea Development Institute 130-740, P.O.Box 113 Hoegiro 47 Dongdaemun-gu, Seoul Tel. 82-2-958-4114 www.kdi.re.kr
Knowledge Sharing Program, Center for International Development, KDI ● P.O. Box 113 Hoegiro 47 Dongdaemun-gu, Seoul, 130-740 2012 ● Tel. 02-958-4224 MINISTRY OF STRATEGY ● cid.kdi.re.kr ● www.facebook.com/cidkdi AND FINANCE Korea Development Institute
KSP����������_�������.indd 1 2012.6.20 12:2:4 PM Algeria: Establishment of National Vision 2030 Algeria: Establishment of National Vision 2030
Project Title Algeria: Establishment of National Vision 2030
Prepared by Korea Development Institute (KDI)
Supported by Ministry of Strategy and Finance (MOSF), Republic of Korea
Prepared for The Government of Algeria
In cooperation with Ministry of Prospective and Statistics (MPS)
Program Directors MoonJoong Tcha, Executive Director, Center for International Development (CID), KDI Taihee Lee, Director, Division of KSP Consultation, CID, KDI
Program Officer Joo Won Park, Research Associate, Division of KSP Consultation, CID, KDI
Project Manager Hong Tack Chun, Senior Fellow, KDI
Authors Myungho Park, Professor, Hankuk University of Foreign Studies Wankeun Oh, Professor, Hankuk University of Foreign Studies
English Editor Minah Kang
Government Publications Registration Number 11-1051000-000257-01 ISBN 978-89-8063-624-2 94320 978-89-8063-657-0 (set)
Copyright ⓒ 2012 by Ministry of Strategy and Finance, the Republic of Korea Government Publications Registration Number 11-1051000-000257-01
Knowledge Sharing Program
Algeria: Establishment of National Vision 2030
2012
MINISTRY OF Korea Development STRATEGY AND FINANCE Institute Preface
In the 21st century, knowledge is one of the key determinants of a country’s level of socio- economic development. Based on this recognition, Korea’s Knowledge Sharing Program (KSP) was launched in 2004 by the Ministry of Strategy and Finance (MOSF) and the Korea Development Institute (KDI). KSP aims to share Korea’s development experience and knowledge accumulated over the past decades to assist socio-economic development of the partner countries. Former high-ranking government officials are directly involved in policy consultations to share their intimate knowledge of development challenges, and they complement the analytical work of policy experts and specialists who have extensive experience in their fields. The government officials and practitioners effectively pair up with their counterparts in development partner countries to work jointly on pressing policy challenges and share development knowledge in the process. The Program includes policy research, consultation and capacity-building activities, all in all to provide comprehensive, tailor-made assistance to the partner country in building a stable foundation and fostering capabilities to pursue self- sustainable growth.
Year 2011 is the fourth to conduct Knowledge Sharing Program with the People’s Democratic Republic of Algeria. During the eighth meeting of Korea-Algeria Task Force on Economic Partnership, the Minister of Prospective and Statistics of Algeria requested to launch a new KSP with Algeria under the subject of ‘the establishment of mid- and long-term development plan.’ In the year of 2011, Policy Seminar & Policy Practitioners’ Workshop and Demand Survey was held as a preparatory stage for 2012 KSP with Algeria, and further study will be conducted in the following year.
I would like to take this opportunity to express my sincere gratitude to Project Manager Dr. Hong Tack Chun, as well as all the project consultants including Prof. Myungho Park and Prof. Wankeun Oh for their immense efforts in successfully completing the 2011 KSP with Algeria. I am also grateful to Executive Director Dr. MoonJoong Tcha and Mr. Taihee Lee, Program Directors, Program Officer Ms. Joo Won Park, and all of the members of the Center for International Development, KDI, for their hard work and dedication to this Program. Lastly, I extend my warmest thanks to the Ministry of Prospective and Statistics of Algeria, and other related ministries, program coordinators and participants for showing active cooperation and great support.
In your hands is the publication of the results of the 2011 KSP with Algeria. I sincerely hope the final research results including in-depth analysis of Algerian economy could be fully utilized to help Algeria in achieving economic development in priority areas in the near future.
Oh-Seok Hyun President Korea Development Institute Contents
2011 KSP with Algeria 013 Introduction 016
Chapter 1 Algeria in the World
1. Algeria’s Status 020 2. Algeria and the Major Regional Economic Trends 023 3. Algeria’s Relative Standing 031
Chapter 2 Current Status and Challenges of Algeria
1. Algeria in the point of Natural Resource Rich Countries 040 2. Algeria’s Economic Status 046 2.1. Income 046 2.2. Inflation 049 2.3. Unemployment 050 2.4. Investment & Government Spending 051 2.5. International Economy: Current Account, International Reserves, External Debt 053 2.6. Export and Import 055 3. Challenges Ahead 058 3.1. Need for Reforms in front of Challenges ahead of Algeria 058 3.2. Political Economy of Natural Resource Rich Countries 059 3.3. Challenge 1: Structural Transformations 061 3.4. Challenge 2: Equity 063 Chapter 3 Algeria and Role of Korea
1. Comparison between Algeria and Korea 067 1.1. Economic Growth: GDP, GDP per capita and Growth Rate of GDP per capita 067 1.2. Population 069 1.3. Performance Evaluation of Algeria and Korea: Growth Accounting 070 2. Korea’s Economic Development and Role of Government 072 2.1. 1960s ~ 1970s 073 2.2. From 1980 to the Economic Crisis of 1997 075 2.3. From the Economic Crisis to the Present (1997-2009) 077 3. Industrialization through Globalization 079 3.1. Early Stage of Industrialization and International Policy Making (1960s and 1970s) 079 3.2. Economic Liberalization and Globalization (from 1980 to present) 081 3.3. FTA and FDI 082 3.4. Economic Cooperation 083 4. Lessons from Korean Experiences 084 4.1. Both Industrialization and Globalization 084 4.2. Elimination of Trade Barriers 085 4.3. Concluding Remarks 086
Chapter 4 Vision Analysis: Case Study
1. Korea Vision 2030 090 1.1. Korean Economy facing Challenges Ahead 090 1.2 The Broad-based Growth as a New Development Paradigm 092 1.3. Overall Scheme, Strategies and Policy Agendas 092 1.4. Fiscal Outlook and Future of Korea 096 Contents
1. Industrial Transformation 104 2. Education Reform 108 3. Openness and Globalization 111 4. Territorial Development 113 5. Health Reform 114
Chapter 6 Conclusion
1. Implications 118 2. Lessons 119 References 121 Contents | LIST of Tables
Top 10 Countries and Algeria’s Ranking in Key Indicators - GDP, Population 021
Top 10 Countries and Algeria’s Ranking in Key Indicators - GDP per capita, Export 022
Top 10 Countries and Algeria’s Ranking in Key Indicators - R&D Expenditure, School Life Expectancy 023
Average Annual Increase of the Periodic and Regional Real GDP 025
Annual Growth Rate of the National and Regional Population 027
Growth Rate of the National and Regional GDP per capita 028
Indicators for Standing and Sources 031
GDP 032
Productivity 033
Macro Stability 033
Openness (Economy) 034
Economic Safety (Unemployment) 034
Household/Government Size 035
Level of Democracy 036
Government Effectiveness 037
WEF Global Competitiveness Index 037
Composition of Total Wealth and Natural Capital 041
Share in Exports by Industry (1995, 2010) 057
Mineral Fuels, Lubricants and Related Materials (1995, 2010) 057
Growth Accounting 071
Major Indicators of the Korean Economy in the 1990s 077
50 Core Action Agendas of Vision 2030 095
Projection of GDP and Other Important Figures 096
Share of Exports by Industry (1995, 2010) 105
E-government Development Index 106
Internet Users 106 Contents | LIST of Tables
Mobile Cellular Subscriptions 107
Computers per capita 107
HDI 108
Employment Rate 109
GDP per person employed (productivity) 109
Level of Education 110
Share of Trade 111
FDI 112
Regional Disparity 113
Life Expectancy at Birth 114
Mortality Rate, infant 115 Contents | LIST of Figures
Real GDP (1960-2008) 025 Population (1960-2008) 026 GDP per capita (1960-2008) 027 Population Growth Rate vs. GDP per capita 029 FDI Net Inflow (1990-2009) 030 Trade Ratio (1990-2009) 030 Economic Safety (Youth Unemployment) 035 Natural Capital and GDP per capita 043 Natural Capital Ratio and GDP per capita Growth Rate 043 Natural Capital Ratio and Doing Business Ranking 044 Natural Capital Ratio and HDI 044 Natural Capital Ratio and Government Effectiveness 045 Natural Capital Ratio and E-readiness Index (2005) 045 Real GDP Growth of Algeria (1961-2010) 046 Hydrocarbon, Non-hydrocarbon and Growth 047 Share in GDP by sector(1960-2009) 047 Sector Contribution to Real GDP Growth, 2003-10 048 GDP per capita Growth Rate (1981-2010) 049 Inflation Rate (1970-2010) 049 Inflation in CPI Components (2007-2010) 050 Unemployment Rate of Algeria 051 Gross Capital Formation (1960-2009, % of GDP) 051 Government Wages and Salary Expenditure (2005-2010) 052 Productivity Growth Rate (1981-2008) 053 Current Account and International Reserves 054 Government and External Debt 054 Export and Import (1966-2010) 055 Share in Hydrocarbon and Non-hydrocarbon Exports (1966-2010, %) 056 South Korea, North Korea and Algeria’s GDP (1960-2008) 067 Contents | LIST OF Figures
South Korea, North Korea and Algeria’s GDP per capita (1960-2008) 068 Growth Rates of GDP per capita (1960-2008) 069 Population Trends in South Korea, North Korea and Algeria (1960-2009) 070 Export and Import 074 Debt-to-equity Ratio and Interest Coverage Ratio 077 Share in Value-added by Sector 080 Overall Scheme and Contents of the Vision 2030 093 Staged Approach of Vision 2030 094 School Life Expectancy vs. GDP per capita 110 FDI Inflows by Sector 112 Life Expectancy at Birth vs. GDP per capita 114 2011 KSP with Algeria
In May 2011, the eighth meeting of Korea-Algeria Task Force on Economic Partnership was held in Algiers, Algeria. During the meeting, Abdelhamid Temmar, Minister of Prospective and Statistics of Algeria, requested to launch a new KSP with Algeria under the subject of ‘the establishment of mid- and long-term development plan’ as soon as possible. In response to the request, however, the Ministry of Strategy and Finance and KDI mentioned that development partner countries for 2011 KSP had been already selected and thus, a new KSP with Algeria would be launched in 2011, in cooperation with the African Development Bank (AfDB). With regard to this, the Ministry of Prospective and Statistics proposed cost-sharing scheme in order to carry forward the project, without further cooperation with AfDB. After the meeting, the subject for 2011 KSP with Algeria was determined as ‘the establishment of mid- and long-term development plan’ as requested. Considering that it had started later than 2011 KSP with other countries, 2011 KSP with Algeria has proceeded as a preparatory stage for 2012 program.
As the first step of the program, from October 23rd to 28th 2012, the Algerian delegation composed of 12 members from relevant Algerian ministries visited Seoul for the Policy Seminar and Policy Practitioners’ Workshop. During the policy seminar held at Korea Development Institute (KDI), Korean experts presented lectures on Korea’s National Vision Planning and Socio-economic Development Strategies, and Algerian government officials’ presentation on Algeria’s Current Socio-economic
2011 KSP with Algeria·013 Status was followed on the next day. Besides the two-day seminar at KDI, the Algerian delegation had opportunities to visit organizations and institutions such as Statistics Korea, Daedeok Innopolis, SK Energy, Hyundai Motors Plant, Hyundai Heavy Industries, Office of Policy Analysis and Evaluation at Prime Minister’s Office, Ministry of Knowledge Economy (MKE). These visits enhanced Algerian officials’ understanding of Korean development experience. In addition to the seminar and field visits, Mr. Hong Tack Chun, Mr. Taihee Lee, Mr. Rafik Boumghar and Mr. Mohammed Benaouda Kefif had a discussion on detailed plan for 2011 KSP with Algeria and promised for continuing cooperation between the two countries.
One week after the Policy Seminar and Policy Practitioners’ Workshop, Ministry of Prospective and Statistics sent a list of preferred topics for 2011 KSP with Algeria. The topics are as follows: (1) Integrating various sectoral plans (2) Reforming mid-term financial management plans (3) Transformation to knowledge-based economy (4) Improving economic governance (5) Territorial development. With these topics in mind, a team of Korean experts headed by Dr. Hong Tack Chun visited Algiers, Algeria from 21st to 26th of November to conduct Demand Survey & Pilot Study for 2011 KSP with Algeria. The objective of this visit was to identify the detailed needs of Algerian side under the title of “the establishment of mid- and long-term development plan.” During this visit, the delegation held meetings with Algerian government officials from Ministry of Prospective and Statistics, Ministry of Finance, Ministry of Energy and Mines, Ministry of SME and Investment Promotion, Ministry of Posts, Information, Technology, and Communication, Algerian Central Bank, and Ministry of Agriculture and Regional Development. In addition to the visits to relevant ministries, the Korean delegation had a meeting with Minister Temmar, during which Minister Temmar expressed his high expectation for KSP and promised for his interest and cooperation for the success of KSP with Algeria.
Based on the activities mentioned above, Dr. Hong Tack Chun, Prof. Myungho Park, and Prof. Wankeun Oh conducted a research on Algeria’s socio-economic status based on Korea’s development experience, and this report presents the result. After the visit to Algeria, the Korean experts finalized the consultation topics and selected Korean experts as well for 2012 KSP with Algeria. The details are shown in the following table.
014·Algeria: Establishment of National Vision 2030 Consultation Topics Korean Researcher
Prof. Myungho Park Scenario for Algeria’s Vision 2030 Prof. Wankeun Oh
Transformation to Knowledge-based Economy Prof. Jongil Kim Education Development Plan Prof. Jae Eun Chae Heath System Reform Prof. Soonman Kwon Institutions and Economic Governance Prof. Hyeon Joo Park Dr. Min-Ah Choi Territorial Development Dr. Hyun Joo Lee Dr. Hyungtai Kim
In 2012, the research on the aforementioned topics will be carried out by Korean experts.
Joo Won Park Program Officer for 2011 KSP with Algeria
2011 KSP with Algeria·015 Introduction
Hong Tack Chun (Korea Development Institute) Myungho Park (Hankuk Univ. of Foreign Studies) Wankeun Oh (Hankuk Univ. of Foreign Studies)
The content of the 2011 report is as follows. First, in Chapter 1, “Algeria in the world”, Algeria’s relative status is identified by examining changes of typical economic variables such as GDP, GDP per capita, growth rate, population, etc., by main regional groups. Specifically, the extent of Algeria’s development is determined comprehensively by comparing it to the region’s strongest countries (Big 4) such as the U.S., Japan and Germany, natural resources-rich countries such as Norway and Chile, and Korea. Algeria’s relative status is diagnosed through a time-series analysis and cross-sectional analysis based on the socio-economic index system developed by researchers. In Chapter 2, current issues of Algeria’s economy are examined and, as a natural resource-rich country, the features of Algeria’s economy are considered. On the basis of this result, Algeria’s challenges are proposed in order to prepare for Vision 2030. Next, Chapter 3 answers the question as to why Korea should work on Algeria’s vision. Both Algeria and Korea have a common history of long colonial rule and had similar economic accomplishments until the mid-1970s. However, over the past half century, Korea has recorded remarkable accomplishments in pursuit of its industrialization and liberalization strategy. It is therefore natural that Korea should participate in establishing Algeria’s vision from the point of view that the strategy Algeria needs most in preparing for 2030 is industrialization through liberalization, which Korea has already sought in the past. Therefore, Chapter 3 focuses on providing the implications of Korea’s economic development process and the role of the Algerian government. Chapter 4 examines the meaning of the vision based on Korea’s experience. Korea also has prior experience with creating Vision 2030. In this chapter, the process of creating a vision is introduced and the importance of working on the vision is considered through the cases of Korea and other developed
016·Algeria: Establishment of National Vision 2030 countries. Chapter 5 deals with the main strategies for each policy project. While the 2012 report mainly focuses on specific strategies for each policy project, the 2011 report only raises several issues on the five policy projects. Finally, Chapter 6 closes the report by providing a conclusion.
Introduction·017
Algeria: Establishment of National Vision 2030 Chapter 1
Algeria in the World
1. Algeria’s Status 2. Algeria and the Major Regional Economic Trends 3. Algeria’s Relative Standing ■ Chapter 01
Algeria in the World
Hong Tack Chun (Korea Development Institute) Myungho Park (Hankuk Univ. of Foreign Studies) Wankeun Oh (Hankuk Univ. of Foreign Studies)
Two approaches are taken in order to understand the current status of Algeria in the world. The first approach looks at the flow of key indicators relevant to Algeria since the 1990s in order to see how Algeria stands in the global economy. In particular, the unique characteristics of Algeria have been derived from a comprehensive comparison of data from all around the world to identify Algeria’s achievements. The second approach takes into consideration that Algeria is typically characterized as a natural resources-rich country, with resources such as petroleum and gas. Hence, the general characteristics of natural resources-rich countries have been considered by utilizing data for the ratio of natural resources to total asset from the World Bank. This helps analyze the relationship between the ratio of natural resources and GDP, economic growth rate, HDI, information index, etc.
1. Algeria’s Status
First of all, the key indicators relevant to GDP, population, export, R&D, education, and more for the top 10 countries around the world have been compared to Algeria and Korea in order to identify the current status of Algeria. To begin with,
shows that the US, Japan and China stand in order in the rankings of the real GDP size in 2009 and the total global GDP sums up to US$ 396,410 billion. Among these, Korea is ranked 10th with approximately US$ 7,540 billion (1.9% of global GDP), and Algeria is ranked 49th with US$ 76 billion (0.2%). In addition, the GDP of Morocco, Libya and Tunisia, which are referred to as the Maghreb countries, are US$ 570 billion
020·Algeria: Establishment of National Vision 2030 (53rd), US$ 490 billion (57th) and US$ 320 billion (62nd) in size, respectively; thus, the GDP of Algeria is the largest out of all of the Maghreb countries. In terms of population, the world population was around 6,764 million in 2009, and China, India and the U.S. are respectively the top three in the rankings of population size. Korea is ranked 25th with 49 million (0.7% of the world’s population) and Algeria is ranked 35th with 35 million (0.5%).
Top 10 Countries and Algeria’s Ranking in Key Indicators-GDP, Population GDP, 2009 Population, 2009 (constant 2000, billion US $) (million) Rank Country Value Ratio Rank Country Value Ratio 1 United States 11,260 28.4 1 China 1,331 19.7 2 Japan 4,817 12.2 2 India 1,155 17.1 3 China 2,940 7.4 3 United States 307 4.5 4 Germany 1,996 5.0 4 Indonesia 237 3.5 5 United Kingdom 1,677 4.2 5 Brazil 193 2.9 6 France 1,463 3.7 6 Pakistan 170 2.5 7 Italy 1,111 2.8 7 Nigeria 154 2.3 8 India 885 2.2 8 Bangladesh 147 2.2 9 Brazil 852 2.2 9 Russian Federation 142 2.1 10 Canada 846 2.1 10 Japan 128 1.9 11 Korea, Rep. 754 1.9 25 Korea, Rep. 49 0.7 49 Algeria 76 0.2 35 Algeria 35 0.5
Source: World Bank WDI database1 Note: The rankings include all countries out of the 216 countries in the world, except counties with no data. The ratio is weight to the world.
Next,
specifies the top 10 countries around the world and the rankings of Algeria and Korea in terms of GDP per capita, implying earnings level, and the amount of exports, indicating the trade size. Qatar is followed by Luxembourg and Norway from the highest in the rankings, while Korea is ranked 29th with US$ 25,525 and Algeria is ranked 88th with US$ 7,410, which illustrates that the level of earnings per capita in both Korea and Algeria can be considered somewhat low. The GDP per capita of the Maghreb countries are US$ 15,361 (50th) for Libya, US$ 8,347 (83rd) for Tunisia and US$ 4,119 (113th) for Morocco, indicating that the GDP per capita of Libya and Tunisia are higher than that of Algeria. In terms of exports, the total global export is US$159,280 billion, and the U.S., Germany and China stand at
1) Http://databank.worldbank.org/ddp/home.do
Chapter 1 _ Algeria in the World·021 the top in the rankings. Korea is ranked 9th with US$4,150 billion (2.6% of global exports) and Algeria is ranked 47th with US$570 billion (0.4%). With regard to the exports of the Maghreb countries, Libya is ranked 41st with US$620 billion (statistics in 2008), Tunisia US$190 billion (68th) and Morocco US$260 billion (59th), indicating that the amount of exports by Libya is the largest and is followed by Algeria, Tunisia and Morocco.
Top 10 Countries and Algeria’s Ranking in Key Indicators-GDP per capita, Export GDP per capita, 2009 Exports, 2009 (PPP, constant 2005, $) (current billion US $) Rank Country Value Rank Country Value Ratio 1 Qatar 73,196 1 United States 1,583 9.9 2 Luxembourg 68,188 2 Germany 1,384 8.7 3 Norway 47,118 3 China 1,333 8.4 4 Macao, China 46,295 4 Japan 636 4.0 5 Singapore 46,211 5 France 613 3.8 6 United Arab Emirates 45,202 6 United Kingdom 609 3.8 7 Brunei Darussalam 45,156 7 Netherlands 546 3.4 8 United States 41,378 8 Italy 504 3.2 9 Hong Kong, China 39,353 9 Korea, Rep. 415 2.6 10 Switzerland 36,978 10 Hong Kong, China 408 2.6 29 Korea, Rep. 25,525 47 Algeria 57 0.4 88 Algeria 7,410
Source: World Bank WDI database Note: The rankings include all countries out of the 216 countries in the world, except counties with no data.
Lastly,
illustrates the relative weight of R&D expenditure to GDP and school life expectancy, which is closely linked with national competitiveness. In terms of R&D expenditure to GDP, Israel is followed by Finland and Sweden at the highest in the rankings, Korea is ranked 5th with 3.4% and Algeria 0.1% (104th). Compared to the proportions of global R&D expenditure, 2.06% (World Bank, Statistics in 2007) as well as the other Maghreb countries such as 1.0% (33rd) for Tunisia and 0.6% (48th) for Morocco, Algeria’s proportion is at a considerably low level. In terms of school life expectancy, New Zealand, Australia and Ireland are the top 3 in the rankings, while Korea is ranked 17th with 17.0 years and Algeria is ranked 64th with 13.6 years. The global average school life is 11.2 years and the statistics for the Maghreb countries are as follows: Libya at 16.6 years (Statistics in 2003), Tunisia of 14.5 years (47th) and Morocco of 10.4 years (128th).
022·Algeria: Establishment of National Vision 2030
Top 10 Countries and Algeria’s Ranking in Key Indicators - R&D Expenditure, School Life Expectancy
R&D Expenditure, 2008 or recently School Life Expectancy, 2009 or recently (% of GDP) (Primary to tertiary, years) Rank Country Value Rank Country Value 1 Israel 4.3 1 New Zealand 20.2 2 Finland 4.0 2 Australia 19.2 3 Sweden 3.6 3 Ireland 18.3 4 Japan 3.4 4 Iceland 18.3 5 Korea, Rep. 3.4 5 Cuba 17.4 6 Denmark 3.0 6 Norway 17.3 7 Switzerland 3.0 7 Korea, Rep. 17.0 8 Germany 2.8 8 Slovenia 16.9 9 United States 2.8 9 Finland 16.8 10 Austria 2.8 10 Denmark 16.8 104 Algeria 0.1 64 Algeria 13.6
Source: UNESCO2 Note: The rankings include all countries out of the 216 countries in the world, except counties with no data.
In summary, not only is Algeria ranked 49th in the GDP rankings, which is the largest out of the Maghreb countries, it is also 47th in export rankings, which is the second largest among them. However, in terms of GDP per capita, Algeria is ranked 88th behind Libya and Tunisia, and is the lowest (104th) in the rankings of R&D expenditure among the Maghreb countries. Also, Algeria falls behind Libya and Tunisia with regard to school life expectancy.
2. Algeria and the Major Regional Economic Trends
As mentioned above, the recent status of Algeria in the global economy has been examined with regard to key indicators. Next, the changes in Algeria’s economy are looked into through trends in key indicators. Specifically, comparing the changes in trends of developed countries, oil-producing countries, the Maghreb countries, and Korea, the similarities and differences that exist, will be observed. To this end, the statistics of the following countries are used: 34 OECD (Organization for Economic
2) http://stats.uis.unesco.org
Chapter 1 _ Algeria in the World·023 Cooperation and Development) member countries3, 12 OPEC (Organization of Petroleum Exporting Countries) member countries4 and UMA (Arab Maghreb Union; L’Union du Maghreb Arabe)5
To begin with, the data of A. Maddison (2010)6 has been used for the long-term time-series changes in population, GDP and GDP per capita from 1960 to 2008.
illustrates the long-term time-series changes of the national and regional real GDP and
points out the average annual increase of the periodic and regional real GDP. Algeria’s real GDP demonstrates the annual growth rate of 3.5% over the past 48 years, from US$ 227 billion in 1960 to US$ 1,188 billion in 2008, which falls slightly short of the global GDP growth rate. In the case of Korea, the annual growth rate rose to the highest level, 7.4%, over the same period compared to other countries such as the OPEC member countries, 4.1%, and the OECD member countries, 3.4%.
As illustrated in the respective periods, the global real GDP growth rate reached the highest, 5.0%, in the 1960s and then continued to fall to 3.1% in the 1990s, increasing to 4.2% in the 2000s. As for the OECD member countries, which mainly include developed countries, the real GDP growth rate also hit the highest level, 5.1%, in the 1960s and then similarly decreased to 2.7% in the 1990s. However, it dropped to 2.1% in the 2000s. In the case of the OPEC member countries, the real GDP growth rate reached the highest level of 7.1% in the 1960s and continued to remain at a high level of 5.1% until the 1970s. However, it stayed at 0.5% in the 1980s and recovered to 2.5% to some extent, then increasing to 4.9% in the 2000s. Korea demonstrated very different aspects from the 1960s to 1980s, which is that Korea enjoyed rapid growth of up to 8.4%~9.1% from the 1960s to the 1980s and then has maintained a steady growth of 6.1% in the 1990s and 4.4% in the 2000s.
Compared to those of other regional groups, Algeria experienced a relatively low GDP growth rate. Since then, its rate reached 6.6%, a high level, recovering a growth trend. However, similar to other Maghreb countries, Algeria’s GDP growth rate declined gradually to 1.7% in the 1990s and then regained itself at 4.0% in the 2000s. Nonetheless, it is slightly lower than the rate of other countries, such as the OPEC member countries, which is 4.9% and the Maghreb countries, which is 4.6%.
3) 34 OECD member countries: Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, South Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States 4) 12 OPEC member countries: Algeria, Angola, Ecuador, Iraq, Iran, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela 5) 5 UMA member countries: Algeria, Libya, Mauritania, Morocco and Tunisia. 6) http://www.ggdc.net/MADDISON/oriindex.htm
024·Algeria: Establishment of National Vision 2030 Real GDP (1960-2008)
Source: Angus Maddison (2010) Note: OECD, the world is in the right axis. Based on Maddison (2010), the figures have been estimated for OECD including the 32 OECD member countries except Iceland and Luxembourg, the 12 OPEC countries and the UMA 5 countries, and Maddison (2010) proposed the figure for the world.
Average Annual Increase of the Periodic and Regional Real GDP Period Algeria Korea OECD OPEC UMA World 1960-1970 3.2 8.7 5.1 7.1 6.0 5.0 1970-1980 6.6 8.4 3.5 5.1 5.5 3.8 1980-1990 2.2 9.1 3.0 0.5 2.1 3.1 1990-2000 1.7 6.1 2.7 2.5 2.3 3.1 2000-2008 4.0 4.4 2.1 4.9 4.6 4.2 Whole Period 3.5 7.4 3.4 4.0 4.1 3.8 (1960-2008) Source: Estimated based on Angus Maddison (2010)
and
present the trends and growth rate of the national and regional population. Algeria’s population increased from 1,090 million in 1960 to 3,377 million in 2008 with an average annual growth rate of 2.4%. This figure is slightly higher than the global population growth rate of 1.7% and the highest among other comparable countries except the OPEC member countries. The lowest of the OECD member countries was 0.9% and that of Korea was 1.4%, a relatively low level, over the same period.
Chapter 1 _ Algeria in the World·025 As illustrated in the respective periods, the population growth rates of all comparable countries and groups have gradually declined after they peaked in a specific period. In cases of Korea, OECD and the world, the population growth rates have continuously decreased since the 1980s. This is also illustrated in the cases of OPEC and Algeria since the 1970s as well as in cases of the Maghreb countries since the 1980s. However, there are some differences in degrees of decline with regards to population growth rate. The population growth rate of Korea was the lowest, 0.4%, in the 2000s, followed by OECD member countries, 1.0%, and the global population growth rate, 1.2%. Those of the OPEC member countries and the Maghreb countries are 1.8% and 1.5%, respectively, in the same period, which are higher than the global population growth rate. In addition, that of Algeria is 1.3%, which is slightly higher than the global population rate but lower than those of the OPEC member countries and the Maghreb countries.
Population (1960-2008)
Source: Angus Maddison (2010) Note: OECD, The world in the right axis
026·Algeria: Establishment of National Vision 2030
Annual Growth Rate of the National and Regional Population Period Algeria Korea OECD OPEC UMA World 1960-1970 2.5 2.7 1.2 3.0 2.5 2.0 1970-1980 3.0 1.7 1.0 3.2 2.6 1.9 1980-1990 2.9 1.2 0.8 3.1 2.7 1.7 1990-2000 1.9 0.9 0.8 2.1 2.0 1.4 2000-2008 1.3 0.4 0.6 1.8 1.5 1.2 Whole Period 2.4 1.4 0.9 2.7 2.3 1.7 (1960-2008) Source: Estimated based on Angus Maddison (2010)
Lastly,
and
display the trends and growth rate of the national and regional GDP per capita in order to examine the time-series changes for the level of earnings. Algeria’s GDP per capita has increased from US$ 2.088 in 1960 to US$ 3,520 in 2008, with an annual growth rate of 1.1%, which is lower than the global annual GDP growth rate of 2.1% and the lowest growth rate out of the comparable country groups. Over the same period, the GDP per capita growth rate of the OECD member countries is 2.4%, which is higher than the global growth rate and, specifically, that of Korea is 5.9%,a very high level. As for the Maghreb countries, the growth rate of 1.8% is higher than that of Algeria but is inferior to the global GDP per capita growth rate.
GDP per capita (1960-2008)
Source: Angus Maddison (2010)
Chapter 1 _ Algeria in the World·027
Growth Rate of the National and Regional GDP per capita Period Algeria Korea OECD OPEC UMA World 1960-1970 0.7 5.9 3.9 4.1 3.4 3.0 1970-1980 3.4 6.6 2.5 1.8 2.8 1.9 1980-1990 -0.7 7.8 2.2 -2.5 -0.5 1.3 1990-2000 -0.3 5.1 1.9 0.4 0.3 1.6 2000-2008 2.6 4.0 1.5 3.0 3.1 2.9 Whole Period 1.1 5.9 2.4 1.2 1.8 2.1 (1960-2008) Source: Angus Maddison (2010)
As illustrated in the GDP per capita growth rate in the respective periods, the global GDP per capita growth rate peaked 3.0% in the 1960s, declined steadily to 1.3% in the 1980s and increased again to 1.6% and 2.9% in the 1990s and 2000s, respectively. The rates of the Maghreb countries also showed a similar tendency. However, as for the OECD member countries, the growth rate was 3.9%, a comparatively high level in the 1960s, and after it gradually slowed down to 1.5% in the 2000s. In Korea, the growth rates were 5.9%, 6.6% and 7.8%, very high levels in the 1960s, 1970s and 1980s, respectively. Since then, it has steadily decreased to 5.1% in the 1990s and 4.0% in the 2000s, which are still relatively high.
As for Algeria, the growth rate was as low as 0.7% in the 1960s, but in the 1970s it increased to 3.4%, which is the highest during the period analyzed. Moreover, except Korea, Algeria had the highest rate among the other county groups in terms of GDP per capita growth rate in the 1970s. However, it declined to -0.7% and -0.3% in the 1980s and 1990s, respectively, which means that the level of earnings decreased with negative growth. In the 2000s, it regained the growth rate of 2.6%, which is still somewhat lower than the global GDP per capita growth rate and the growth rates of the OPEC member countries as well as the Maghreb countries.
According to the figures shown above, Algeria’s population growth rate was comparatively high, although the GDP growth rate was not relatively high as of the 1960. Therefore, Algeria’s GDP per capita growth rate must be relatively low. The population growth rate has a weak correlation with the GDP per capita growth rate as well as the level of GDP per capita. As shown in the following , there are many countries in which the GDP per capita is low out of the countries illustrated, where the population growth rate has been high over the past 50 years.
028·Algeria: Establishment of National Vision 2030 Population Growth Rate vs. GDP per capita
Source: World Bank WDI database Note: The solid line is linear fitted values and the dashed line is quadratic fitted values.
and demonstrate the FDI net inflow and trade ratio of Algeria, Korea, developed countries, oil-producing countries and Maghreb countries in 1990, 2000 and 2009 in order to identify the time-series changes of economic opening to the world.
In terms of the ratio of FDI net inflow to GDP, it was common for the global ratio of FDI and the ratio of FDI for the OECD member countries to increase greatly in 2000 and then decline again in 2009. Korea also demonstrates trends similar to this. However, in the OPEC member countries, the Maghreb countries, and Algeria, the ratios of FDI net inflow rose steadily. Especially in Algeria, the ratio of FDI net inflow was insignificant in 1990, increasing gradually at a level similar to the OECD member countries.
Chapter 1 _ Algeria in the World·029 FDI Net Inflow (1990-2009)
Source: Estimated based on the data from World bank WDI database
As for trade ratio to GDP, there is a trend that the ratios are generally on the rise. Particularly in Algeria and Korea, the trade ratios increased steeply to 76.5% and 95.8%, respectively, in 2009, which is relatively high compared to the global trade ratio of 54.3%, OECD 48.3%, OPEC 66.1% and Maghreb 62.8%.
Trade Ratio (1990-2009)
Source: Estimated based on the data from World Bank WDI database Note: Trade is the sum of imports and exports.
030·Algeria: Establishment of National Vision 2030 3. Algeria’s Relative Standing
The indicator system, which distinguishes economic and social standing, helps examine Algeria’s relative standing in detail. Algeria’s status is examined through a comparative analysis of time-series data with developed countries (the U.S. in the Americas, Japan in Asia, Germany in Western Europe and Sweden in Eastern Europe – the Big 4), examples out of resource-rich countries (Norway and Chile), and Korea.
illustrates the indicators and sources used in this report. Some of the indicators do not have comparable data between countries, so they are not included in the 2011 report, but are to be included in the 2012 report.
Indicators for Standing and Sources Indicator Variable Source GDP per capita World Bank, World Development GDP (constant 2005, PPP $) Indicators GDP per person employed World Bank World Development Productivity (constant 1990 PPP $) Indicators Inflation, GDP deflator World Bank World Development Macro Stability (annual %) Indicators World Bank World Development Openness (Economy) Trade (% of GDP) Indicators Openness (Life) Distribution
Quality of Life (Index)
Economic Safety Unemployment, total World Bank World Development (Unemployment) (% of total labor force) Indicators Life Safety (Security) Household / General government Household/Government World Bank World Development final consumption expenditure (Size) Indicators (current US$) World Bank World Development Business Environment Doing Business Indicators Transparency Index Corruption Perception Democratic Level Freedom in the world Index Freedom House Reward System World Bank World Development Government Effectiveness Government Effectiveness Index Indicators Financial Efficiency Taxation Transparency Financial Reform WEF Global Competitiveness Global Competitiveness WEF Global Competitiveness Index (2006-2011)
Chapter 1 _ Algeria in the World·031
indicates the level of GDP per capita of Algeria and other comparable countries. Algeria’s GDP per capita was US$ 7,410 in 2009, which is the lowest among comparable countries and reflects the annual growth rate of 1.99% since 1995. Korea’s GDP per capita was US$ 25,525 in 2009, which is slightly lower than developed countries, but the annual growth rate was 2.5% in 2009, which showed the fastest improvement. Among the resource-rich countries, Norway’s GDP per capita was US$ 47,118, which is the highest among the comparable countries, and Chile’s GDP per capita was US$ 13,044, a somewhat low level. However, the annual GDP per capita growth rate of Chile was 2.57% during the same period, which is the second highest after Korea.
GDP
GDP per capita, PPP Annual Country Group (constant 2005 international $) Change Growth Name 1995 2009 Rate (%) - Algeria 5,626 7,410 1,784 1.99 - Korea 15.761 25.525 9.764 3.50 United States 33,874 41,378 7,504 1.44 Japan 27,593 29,372 1,779 0.45 BIG 4 Germany 27,822 32,176 4,354 1.04 Sweden 24,629 32,251 7,621 1.94
shows the comparison of the regional characteristics to productivity, one of the policy objectives that Algeria attaches great importance to. In Algeria, the GDP per person employed was US$ 8,051, which is very low compared to the minimum US$ 30,000 of comparable countries, and the productivity decreased, compared to that of 1995.
032·Algeria: Establishment of National Vision 2030
Productivity GDP per person employed Annual Group Country (constant 1990 PPP $) Change Growth 1995 2008 rate (%) - Algeria 8,327 8,051 -276 -0.24 - Korea 26.624 40.261 13.637 3.00 United States 51,455 65,480 14,025 1.74 Japan 38,765 45,587 6,822 1.16 BIG 4 Germany 37,566 42,588 5,022 0.90 Sweden 37,929 48,987 11,058 1.84 Natural Norway 44,368 51,736 7,368 1.10 resource rich Chile 25,690 30,457 4,767 1.22
Source: World Bank, World Development Indicators
represents the level of the inflation rate and the variability of the inflation rate in each period to identify the level of macro stability. Algeria’s inflation rate was 29.8% in 1995 and 5.7% in 2009. The inflation rate in 2009 was slightly higher than that of comparable countries and the variation of inflation rate was the highest between 1995 and 2009. However, in terms of the variation change of the inflation rate, the variation of inflation rate decreased in the 2000s compared to the late 1990s, indicating that macro stability has greatly improved. Currently, Algeria’s inflation rate remained high with two-digit figures from the early 1990s to 1996, and a stable inflation rate has been maintained since it turned into a one-digit inflation rate, 5.7%, in 1997.
Macro Stability Inflation, Country consumer prices Variation Variation Variation Group Name (annual %) (95-00) (00-09) (95-09) 1995 2009 - Algeria 29.8 5.7 10.46 1.66 7.49 - Korea 4.5 2.8 2.11 0.78 1.52 United States 2.8 -0.4 0.59 1.15 0.98 Japan -0.1 -1.3 0.79 0.72 0.79 BIG 4 Germany 1.7 0.3 0.45 0.61 0.59 Sweden 2.5 -0.5 0.84 1.11 1.10 Natural Norway 2.5 2.2 0.55 1.02 0.87 resource rich Chile - - - - - Source: World Bank, World Development Indicators Note: Variation is the standard deviation of annual inflation rate per period
Chapter 1 _ Algeria in the World·033
shows the weight of exports and imports to GDP in order to examine economic openness. Algeria’s trade ratio was 76.5% in 2009, which is higher than those of other resource-rich countries and the increase in the ratio was higher than in 1995.
Openness (Economy) Trade / GDP Country Change Group (%) Name (%p) 1995 2009 - Algeria 55.2 76.5 21.3 - Korea 58.7 95.8 37.0 United States 23.4 25.3 2.0 Japan 16.9 25.0 8.1 BIG 4 Germany 46.9 78.9 32.0 Sweden 72.6 90.1 17.5 Natural Norway 69.8 69.7 -0.1 resource rich Chile 56.4 70.2 13.8 Source: Estimated based on the data from World Development Indicators Note: Trade is the sum of imports and exports.
presents the unemployment rate in order to understand the level of economic safety for comparable countries. Algeria’s unemployment rate was 11.3% in 2009, which is the highest among comparable countries, but the degree of improvement of the unemployment rate is notably high.
shows that the unemployment rate of Algeria has been improved since 2000 and youth unemployment has considerably decreased as well. However, the youth unemployment of Algeria exceeds 20%, a high level.
Economic Safety (Unemployment) Trade / GDP Country Change Group (%) Name (%p) 1995 2009 - Algeria 27.9 11.3 -16.6 - Korea 2.1 3.6 1.5 United States 5.6 9.3 3.7 Japan 3.2 5.0 1.8 BIG 4 Germany 8.1 7.7 -0.4 Sweden 9.1 8.3 -0.8 Natural Norway 4.9 3.2 -1.7 resource rich Chile 4.7 9.7 5.0 Source: World Bank, World Development Indicators Note: using data from 2008, not available from 2009
034·Algeria: Establishment of National Vision 2030 Economic Safety (Youth Unemployment)
Unemployment(rates,(2001-09 (In(percent) 60.0
50.0 Total(unemployment(rate
Youth(unemployment(rate 40.0
30.0
20.0
10.0
0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: IMF (December 23, 2010), ALGERIA Staff Report for the 2010 Article IV Consultation
presents the household consumption expenditure and government consumption expenditure of each country. Algeria was the third lowest, behind Sweden and Norway, with 2.2 times that of comparable countries in 2009 in terms of household/government size. Compared to 1995, the size decreased by 1.1 times so that the portion of households dropped sharply along with Korea and Chile.
Household/Government Size Household / Government final Country Group consumption expenditure Change Name 1995 2009 - Algeria 3.3 2.2 -1.1 - Korea 4.7 3.3 -1.4 United States 4.4 4.1 -0.4 Japan 3.6 3.0 -0.7 BIG 4 Germany 3.0 2.9 -0.1 Sweden 1.9 1.8 -0.1 Natural Norway 2.3 1.9 -0.4 resource rich Chile 5.9 4.3 -1.5
Source: World Bank, World Development Indicators
Chapter 1 _ Algeria in the World·035
shows the changes in the Freedom in the World Index in order to identify the level of democracy in each country. Despite the slight improvement from 6.0 in 1995 to 5.5 in 2009, Algeria was still being classified as “Not Free.” All other comparable countries were classified as “Free,” falling below the Freedom in the World Index of 1.5 during the same period. Algeria, Korea, Germany and Chile have each proven that they have improved their degree of democracy.
Household/Government Size
Country Freedom in the World Index Group Change Name 1995 2009 - Algeria 6.0 5.5 -0.5 - Korea 2.0 1.5 -0.5 United States 1.0 1.0 0.0 Japan 1.5 1.5 0.0 BIG 4 Germany 1.5 1.0 -0.5 Sweden 1.0 1.0 0.0
Source: Freedom house Note: According to Freedom in the World Index, 1.0 - 2.5 stands for “Free” and 5.5 - 7.0 stands for “Not Free”.
presents the figures of Government Effectiveness Index in 1996 and 2009, which indicates the level of government effectiveness. Algeria’s Government Effectiveness Index has substantially improved to -0.66 in 2009, which is still the lowest among comparable countries. Among the countries, Sweden is at the top, with 2.04, and Norway the second with 1.75. Korea’s Government Effectiveness Index is 1.08, which is relatively lower than that of developed countries.
036·Algeria: Establishment of National Vision 2030
Government Effectiveness
Country Freedom in the World Index Group Change Name 1995 2009 - Algeria -0.95 -0.66 0.29 - Korea 0.63 1.08 0.45 United States 1.70 1.40 -0.30 Japan 0.99 1.33 0.34 BIG 4 Germany 1.84 1.57 -0.27 Sweden 1.99 2.04 0.05
Source: World Bank, Worldwide Governance Indicators7 Note: The values of Government Effectiveness Index range from -2.5 to 2.5, which means the higher they are, the stronger governance performance is indicated.
shows WEF Global Competitiveness Index indicating national competitiveness. According to WEF Global Competitiveness Index, Algeria’s index was 3.96 in 2011, which is the lowest among the comparable countries except Libya.
WEF Global Competitiveness Index WEF Global Competitiveness Index Country Group 2003 2011 Name Rank Score Rank Score Rank Change - Algeria 3.39 74 3.96 87 -13 - Korea 5.07 18 5.02 24 -6 United States 5.81 2 5.43 5 -3 Japan 5.25 11 5.40 9 2 BIG 4 Germany 5.24 13 5.41 6 7 Sweden 5.80 3 5.61 3 0 Natural Norway 5.33 9 5.18 16 -7 resource rich Chile 4.86 28 4.70 31 -3 Libya - - 3.74 100 - Maghreb Morocco 3.77 61 4.16 73 -12 Tunisia 4.49 38 4.47 40 -2 Source: World Economic Forum, the Global Competitiveness Index Each Year Report
7) http://info.worldbank.org/governance/wgi/
Chapter 1 _ Algeria in the World·037
Algeria: Establishment of National Vision 2030 Chapter 2
Current Status and Challenges of Algeria
1. Algeria in the point of Natural Resource Rich Countries 2. Algeria’s Economic Status 3. Challenges Ahead ■ Chapter 02
Current Status and Challenges of Algeria
Hong Tack Chun (Korea Development Institute) Myungho Park (Hankuk Univ. of Foreign Studies) Wankeun Oh (Hankuk Univ. of Foreign Studies)
1. Algeria in the point of Natural Resource Rich Countries
A predominant feature of Algeria is that it is a natural resource rich country. In order to examine the distinctive features of natural resource rich countries, we look at the interrelationships between natural resources among natural resources, GDP and national wealth and GDP growth rate, business environment, HDI, government effectiveness and informatization. In addition to the status of Algeria and Korea, we examine the status of Chile and Norway, which are classified as countries that have successfully overcome the resource curse.
Chile and Norway have adopted different paths to avoid the resource curse. In Chile, the shares of mineral resources, such as copper, Chile saltpeter and iron ore have been very high. Chile has successfully diversified its industries and became an export-oriented country so that it could realize economic growth. Norway, one of the major oil exporting countries, experienced low oil prices during the mid-1980s. After that period, it established the Petroleum Fund and accumulated revenues from oil exports since the 1990s. The fund has invested its money in overseas stocks and bonds. This allowed it to reduce the negative effect of high oil prices on its economy and continue to earn capital gains. The gains can replace oil revenues in the future.
040·Algeria: Establishment of National Vision 2030
Composition of Total Wealth and Natural Capital Machinery, equipment, and structures Produced capital Urban land Energy resources (oil, natural gas, hard coal, lignite) Mineral resources (bauxite, copper, gold, iron, lead, nickel, phosphate, silver, tin, zinc) Timber resources Total Natural capital Non-timber forest resources Wealth Crop land Pasture land Protected areas Net foreign assets Total assets - Total liabilities Residual: Total Wealth - (Produced capital + Natural capital Intangible capital + Net foreign assets)
Source: World Bank (2011), Appendix A.
We take the total wealth and natural capital developed by studies of the World Bank in 20068 and in 20119 to examine the role of natural resources in the economic growth of natural resource rich countries. The total wealth and natural capital are illustrated in
.
Total wealth is calculated in the percentage rate as the sum of consumption for a given period, as in equation (1). Here, Wt indicates the total value of wealth or capital at time t, C(s) indicates consumption at time t, and ρis a pure rate of time preference. The World Bank (2011) assumes that ρis 1.5% and sets an initial level of consumption as a five-year centered average to solve the volatility of consumption problem. The time horizon is set at 25 years.
Equation(1)
8) World Bank (2006), Where Is The Wealth Of Nations? : Measuring Capital for the 21st Century. 9) World Bank (2011), The Changing Wealth of Nations: Measuring Sustainable Development in the New Millennium.
Chapter 2 _ Current Status and Challenges of Algeria·041 This measure of total wealth is calculated from a perspective of consumption. This view can be appropriate for developed countries, where the share of produced capital and financial assets are high. However, it might not be a good measure for resource-rich countries where the share of natural capital is dominant. Even though it may have a shortcoming, we use this calculation for the purpose of international comparison.
shows the positive relationship between natural capital and GDP per capita. Countries rich in natural resources have higher income. There are exceptions. Japan and Switzerland are in the high-income country groups with scarce natural resources. On the other hand, the Algerian income is relatively low with abundant natural resources. This fact suggests that natural resource is helpful for economic growth but it is neither a either necessary or sufficient condition.
shows a negative relationship between GDP per capita and the share of natural capital out of total wealth. In the period from 1980 to 2005, the rate of economic growth in the low share countries was faster than that of the high share countries. This indicates the resource curse, which means the abundance of natural resources can be harmful to economic growth in the long run.
The following figures, to , show a negative relationship between the share of natural capital and business climate, HDI, government effectiveness and informatization.
As discussed above, the relationship of natural capital and the share of natural capital in total wealth imply that natural resources are not the only factor that determines the level of per capita income. Therefore, Algeria needs to stay vigilant to avoid the resource curse.
042·Algeria: Establishment of National Vision 2030 Natural Capital and GDP per capita
Source: Natural capital per capita is taken from the World Bank’s The Changing Wealth of Nations (2011). GDP per capita, PPP (constant 2005 international $) is also from World Bank, WDI. Note: The solid line represents linear fitted values and the dashed line represents quadratic fitted values.
Natural Capital Ratio and GDP per capita Growth Rate
Source: Natural capital ratios are taken from the World Bank’s The Changing Wealth of Nations(2011). GDP per capita, PPP (constant 2005 international $) is also from World Bank, WDI. Note: The solid line is linear fitted values and the dashed line is quadratic fitted values.
Chapter 2 _ Current Status and Challenges of Algeria·043 Natural Capital Ratio and Doing Business Ranking
Source: Natural capital ratios are taken from the World Bank’s The Changing Wealth of Nations(2011). Doing Business ranking is from the World Bank Group Note: The solid line is linear fitted values and the dashed line is quadratic fitted values.
Natural Capital Ratio and HDI
Source: Natural capital ratios are taken from the World Bank’s The Changing Wealth of Nations (2011). HDIis from UNDP Note: The solid line is linear fitted values and the dashed line is quadratic fitted values.
044·Algeria: Establishment of National Vision 2030 Natural Capital Ratio and Government Effectiveness
Source: Natural capital ratios are taken from the World Bank’s The Changing Wealth of Nations (2011). Government Effectiveness is from Worldwide Governance Indicators of the World Bank Group12 Note: The solid line is linear fitted values and the dashed line is quadratic fitted values.
Natural Capital Ratio and E-readiness Index (2005)
Source: Natural capital ratios are taken from World Bank’s the Changing Wealth of Nations (2011). E-readiness is from Economist Intelligence Unit’s the 2005 e-readiness rankings (2005). Note: The solid line is linear fitted values and the dashed line is quadratic fitted values.
12) http://www.doingbusiness.org/
Chapter 2 _ Current Status and Challenges of Algeria·045 2. Algeria’s Economic Status13
2.1. Income
The GDP of Algeria experienced a negative growth rate during the late 1960s, the late 1980s, and the early 1990s. Its economy, however, has shown a positive growth rate since 1995 and performed very well in the early 2000s. The Algerian economy is heavily dependent on hydrocarbon. The hydrocarbon sector, with a low share of the total economy, has shown a positive growth rate, whereas its non-hydrocarbon sector, with a large share of economy, has decreased since 2006.
Real GDP Growth of Algeria (1961-2010)
Source: World Bank, WDI
13) An in-depth study will be presented in the 2012 report.
046·Algeria: Establishment of National Vision 2030 Hydrocarbons, Non-hydrocarbon and Growth
Source: IMF(December 23, 2010), ALGERIA Staff Report for the 2010 Article IV Consultation
Algeria’s composition of GDP shows that the share of household consumption has moved downward from 50% in 1999 to 30.1% in 2009. Instead, the share of net export has increased to 23.4% in 2008, but sharply fell to 4.3% in 2009 due to the global financial crisis. Although the share of investment had maintained approximately 30%, relatively speaking it continued to increase to 41.2% in 2009 due to the current decline of net exports and household consumption. Finally, the share of government consumption has steadily maintained 10~20% and remained slightly low, increasing again after 2008 and attaining 13.9% in 2009.
Share in GDP by sector (1960-2009)
Source: World Bank, WDI
Chapter 2 _ Current Status and Challenges of Algeria·047 shows sector contributions to real GDP growth. Investment contribution decreased from 2004 to 2006, but reversed its trend until 2009. Also, the contribution of non-government consumption has continuously increased since 2006. Government consumption has positively contributed to real GDP growth and its contribution remains steady and relatively small.
Sector Contribution to Real GDP Growth, 2003-10
Source: IMF(December 23, 2010), ALGERIA Staff Report for the 2010 Article IV Consultation.
Meanwhile, the GDP per capita growth rate has been positive since 1998. The rate, however, has been below 2% since 2006, even though its level of GDP per capita is relatively low.
048·Algeria: Establishment of National Vision 2030 GDP per capita Growth Rate (1981-2010)
Source: World Bank, WDI
2.2. Inflation
Algeria’s inflation rate in the 1990s was very high, but has been steady under the control of a successful macro stabilization policy in the 2000s. Despite an export increase caused by high oil prices, this is a result of the effective execution of the stabilization policy. In addition, the inflation rate of fresh food dominated the overall increase of prices when we examined the current inflation, item by item, since 2007.
Inflation Rate (1970-2010)
Source: World Bank, WDI
Chapter 2 _ Current Status and Challenges of Algeria·049 Inflation in CPI Components (2007-2010)
Source: IMF (December 23, 2010), ALGERIA Staff Report for the 2010 Article IV Consultation
2.3. Unemployment
The positive aspect of the unemployment rate is its downward trend, a result of the increase of an economically active population and high economic growth rate. The unemployment rate, especially the youth unemployment rate, is a major problem in Algeria. Although the high rate of youth unemployment is common in developing countries, the Algerian case is relatively higher, compared to those of the other MENA countries and transition countries. The unemployment rate of those younger than 30 years old is 21.1%, which is more than twice the total unemployment rate and three times the average unemployment rate of 7.1%. In particular, the unemployment rate for a college graduate is 21.4%, that is, double the average unemployment rate, a result of a lack of quality jobs. In terms of the difference in the unemployment rate between the sexes, the unemployment rate of 19.1% for women is more than twice the unemployment rate, 8.1%, for men. Similarly, in terms of the big difference of the unemployment rates for college students, 33%, for women is more than three times of that of men, 11%.
050·Algeria: Establishment of National Vision 2030 Unemployment Rate of Algeria
Source: Algerian authorities (2005): World Bank (2005): and IMF estimates.
2.4. Investment & Government Spending
Investment has two sides: a component of current demand and growth engine for the future. Investment is the most critical factor for economic growth. The share of investment out of GDP was above 50% in the late 1970s and decreased continuously to 20% in the late 1990s. During the mid-2000s, its investment rate remained around 30% and exceeded 40%. Based on these high investments, the economic growth of Algeria has continued.
Gross Capital Formation (1960-2009, % of GDP)
Source: World Bank, WDI
Chapter 2 _ Current Status and Challenges of Algeria·051 One concern is the expenditure of wages. Government expenditure on wages out of non-hydrocarbon GDP is high and shows an upward trend. The share of government expenditure in 2010 is higher than that in 2005, which is the opposite of other countries. The high share of expenditure improves consumption in the short run, which is allowed by the high price of hydrocarbon. If the price of hydrocarbon is lowered in the long run, the increased consumption cannot decrease proportionally, compared to an expansionary period. Therefore, the savings rate will decrease and, accordingly, the investment rate will decrease. It may cause the income level to lower in the long run as well. This chain of decreases may result in the resource curse in the country.
Government Wages and Salary Expenditure (2005-2010)
Source: IMF (December 23, 2010), ALGERIA Staff Report for the 2010 Article IV Consultation
052·Algeria: Establishment of National Vision 2030 Labor productivity measured by GDP per capita is shown in the subsequent figure. The rate of labor productivity has been negative except in 1982-1985 and 2002-2005. This means the rate of real wages is higher than that of labor productivity. This gap pressures inflation and brings a recession to the non-hydrocarbon sector. This may cause the resource curse to occur in the dynamics of industrialization.
Productivity Growth Rate (1981-2008)
Source: World Bank, WDI
2.5. International Economy: Current Account, International Reserves, External Debt
Algeria has successfully managed the macro policy for the period of the 2000s. As a result, it performs very well in terms of current account, international reserves, government and external debts. Algeria’s current account has maintained 20% since 2005, but it fell sharply to 1% in 2009 because of the financial crisis. However, it regained 7% in 2010. As the net export, which is export minus import, has constantly been positive, international reserves, which were approximately 1,600 billion in 2010, have been well managed.
Chapter 2 _ Current Status and Challenges of Algeria·053 Current Account and International Reserves
Source: IMF (December 23, 2010), ALGERIA Staff Report for the 2010 Article IV Consultation
Although the percentage of external debt in GDP exceeded over 60% in the late 1990s, it constantly declined to 5% due to high oil prices, remaining stable after 2006. The percentage of government debt in GDP decreased to less than 20% after 2007, so the management of internal and external debt continued smoothly.
Government and External Debt
Source: IMF (December 23, 2010), ALGERIA Staff Report for the 2010 Article IV Consultation
054·Algeria: Establishment of National Vision 2030 2.6. Export and Import
The most distinctive feature of the Algerian economy is that it is heavily dependent on hydrocarbon. The share of hydrocarbon exports out of total exports reached 98.3% in 2010. Based on the high international price of hydrocarbon, its net export showed a huge surplus in the 2000s, reaching US$ 39.8 billion. As the global crisis occurred in 2008, hydrocarbon exports began to shrink and its surplus decreased sharply to only US$ 5.9 billion. This fact suggests that Algeria strongly needs export diversification.
Export and Import (1966-2010)
Source: UN COMTRADE DB
While the share of hydrocarbon exports exceeded 98.3% in 2010, exports of non- hydrocarbons have drastically decreased, from 40.7% in 1966 to 2.7% in 2010. The share of the manufacturing sector in its total imports has increased from 20.4% to 24.0% in 2010. Both the increasing shares of hydrocarbon exports and manufacturing imports imply that it is highly possible that the resource curse, called the “Dutch Disease”(the phenomenon wherein the existence of natural resources could harm a manufacturing industry, based on the experience of the development of natural gas along the coast of the Netherlands, which resulted in the shrinking of its manufacturing industry in the 1960s) may occur in Algeria. That is to say, as a natural resource rich country, Algeria imports a variety of products, including manufactured products, for local consumption. The higher the degree of dependence on imports, the more the internal manufacturing industry shrinks. Taking into consideration the fact that the manufacturing industry exploits up-to-date technical advances, a country that depends on the import of manufactured products does not benefit from
Chapter 2 _ Current Status and Challenges of Algeria·055 them and there is the high possibility that a lower growth rate will be experienced than in natural resource poor countries. Specifically, as the economy has developed, it is obvious that technical advances lead to economic growth rather than labor or capital, so it is not easy for Algeria, a natural resource-rich country, to become a developed country under the current situation.
Share in Hydrocarbon and Non-hydrocarbon Exports (1966-2010, %)
Source: UN COMTRADE DB Note: Hydrocarbon Exports is based on the Chapter 3. Mineral fuels, lubricants and related materials industry exports in SITC Rev.1.
056·Algeria: Establishment of National Vision 2030
Share in Exports by Industry (1995, 2010) (million $, %) Industry Export Import Trade surplus (SITC Rev.3) 1995 2010 1995 2010 1995 2010 99.8 281.4 2,700.9 5,720.2 0. Food and live animals -2,601.0 -5,438.8 (1.1) (0.5) (25.0) (14.0) 10.5 29.0 84.4 263.8 1. Beverages and tobacco -73.9 -234.8 (0.1) (0.1) (0.8) (0.6) 2. Crude materials, inedible, 40.3 94.4 415.3 888.9 -375.0 -794.5 except fuels (0.4) (0.2) (3.9) (2.2) 3. Mineral fuels, lubricants 8,909.0 56,087.3 115.7 867.3 8,793.3 55,220.0 and related materials (95.2) (98.3) (1.1) (2.1) 4. Animal and vegetable oils, 0.0 9.5 351.8 667.3 -351.8 -657.8 fats and waxes (0.0) (0.0) (3.3) (1.6) 5. Chemicals and related 114.0 311.8 1,217.9 4,451.8 -1,103.9 -4,140.0 products, n.e.s. (1.2) (0.5) (11.3) (10.9) 6. Manufactured goods 135.8 205.7 2,204.8 9,832.7 -2,069.0 -9,627.0 classified chiefly by material (1.5) (0.4) (20.4) (24.0) 7. Machinery and transport 35.4 14.1 3,292.3 16,715.6 -3,256.9 -16,701.5 equipment (0.4) (0.0) (30.5) (40.8) 8. Miscellaneous 11.7 9.6 399.1 1,592.3 -387.4 -1,582.7 manufactured articles (0.1) (0.0) (3.7) (3.9) 9. Not classified elsewhere in 0.0 8.2 0.3 0.0 -0.3 8.2 the SITC (0.0) (0.0) (0.0) (0.0) All Industries 9,356.7 57,051.0 10,782.4 40,999.9 -1,425.8 16,051.1 Source: UN, COMTRADE DB Note: Values in parenthesis indicate the shares in the total industry
Mineral Fuels, Lubricants and Related Materials (1995, 2010) (million $, %) 1995 2010 Industry Share Share Share Share (SITC Rev.3) Export in total within Export in total within export industry export industry 3. Mineral fuels, lubricants and 8,909.0 95.2 100.0 56,087.3 98.3 100.0 related materials 32. Coal, coke, briquettes 0.0 0.0 0.0 0.0 0.0 0.0 33. Petroleum, petrol. product 6,056.0 64.7 68.0 33,620.0 58.9 59.9 34. Gas, natural, manufactured 2,840.6 30.4 31.9 22,461.9 39.4 40.0 35. Electric current 12.4 0.1 0.1 5.4 0.0 0.01 All Industries 9,356.7 100.0 57,051.0 100.0 Source: UN, COMTRADE DB Note: Values in parentheses indicate the shares in the total industry
Chapter 2 _ Current Status and Challenges of Algeria·057 3. Challenges Ahead 3.1. Need for Reforms in front of Challenges ahead of Algeria
In an uncertain international context, Algeria continues to show strong economic performances, supported largely by public investments, even though the real GDP growth rate (4.0%) of Algeria does not reach the world average (4.2%). The country’s macroeconomic performance over the past decade has been solid. Because of relatively high oil prices combined with prudent macroeconomic policies, Algeria was able to achieve relatively strong growth, low inflation, and a sharp reduction in public and external debt. It has also accumulated large external reserves and budget resources in an oil stabilization fund, which helped to shield the country from the decline in international hydrocarbon prices. The overall unemployment rate has declined, but remains high for certain segments of the population, especially for the young, woman and particularly the highly educated.
Despite progress in recent years with respect to macroeconomic stability, Algeria faces several challenges. A perennial challenge for commodity exporters has been how to manage the impact of volatile commodity prices on macroeconomic and financial stability. Even though commodity prices have stabilized somewhat since the Great Recession, volatility will certainly return. This underscores the importance of having the right macroeconomic policies to manage this volatility. Another challenge is how to increase competitiveness. Everybody is familiar with the “Dutch Disease”, the phenomenon of large commodity exports leading to an appreciation of the real exchange rate, which in turn slows productivity growth in other sectors of the economy. This weakens competitiveness, and holds back economic diversification, leaving the economy overly dependent on the natural resource sector. Perhaps the most fundamental challenge is how to ensure that natural resource wealth is used wisely and shared fairly across society. Algeria’s natural resources should be used to tackle constraints on growth and development, to create the decent jobs needed to raise living standards. The challenges enumerated above are typical phenomena, mostly seen in natural resource abundant countries. Before attacking the challenges Algeria is now facing, major characteristics of the natural resource abundant countries will be examined.
058·Algeria: Establishment of National Vision 2030 3.2. Political Economy of Natural Resource Rich Countries
3.2.1. Four Channels of Transmission to Poor Economic Performance
As illustrated in Section 2 of this Chapter, in most countries that are rich in oil, minerals, and other natural resources, economic growth over the long haul tends to be slower than in other countries that are not as resource endowed. According to Gylfason(2001), four main channels of transmission from abundant natural resources to sluggish economic growth have been identified.
First, natural resource abundance often results in an overvaluation of the national currency. This is a symptom of the Dutch Disease: a natural resource boom and the associated surge in raw-material exports drive up the real exchange rate and real wages, thus hurting other exports. Moreover, recurrent booms and busts tend to increase exchange rate volatility. Sometimes this is enough to reduce total exports. Sometimes it just skews the composition of exports away from high-tech and other manufacturing and service exports that are particularly conducive to economic growth. In either case, economic growth is likely to slow down because exports and, generally, openness to all kinds of trade with the rest of the world are good for growth. The “Dutch disease” problem is not insurmountable. An endowment of natural resources did not stop several countries from reaching economic success.
Second, natural resource-rich economies seem especially prone to socially damaging rent-seeking behavior on the part of producers. This can take many forms. For example, the government may be tempted to offer tariff protection to domestic producers, among other privileges. Rent seeking may also breed corruption in business and government, thereby distorting the allocation of resources and reducing both economic efficiency and social equity. Empirical evidence suggests that import protection and corruption both tend to impede economic growth.
Third, natural resource abundance may imbue people with a false sense of security and lead governments to lose sight of the need for good and growth friendly economic management, including free trade, bureaucratic efficiency, and institutional quality. Incentives to create wealth tend to become too blunted by the ability to extract wealth from the soil or the sea. Rich parents sometimes spoil their kids. Mother Nature is no exception.
Fourth, nations that are confident that their natural resources are their most important asset may inadvertently and perhaps even deliberately neglect the development of their human resources, by devoting inadequate attention and expenditure to education. Their natural wealth may blind them to the need for
Chapter 2 _ Current Status and Challenges of Algeria·059 educating their children. Therefore, it is perhaps no coincidence that school enrollment at all levels tends to be inversely related to natural resource abundance, as measured by the share of the labor force engaged in primary production, across countries.
Consequently, Algeria has to overcome the Dutch Disease in order to enhance industrial competitiveness. Among other things, prudent macroeconomic policy must be followed to stabilize the exchange rate and wages. At the same time, Algeria needs industrialization through globalization to make national industries competent in the global market.
3.2.2. Institution matters
Good policies can turn abundant natural resource riches into an unambiguous blessing. Norway, the world’s second largest oil exporter after Saudi Arabia, is a case in point. As Norway’s oil wealth is a common-property resource by law, the Norwegian government takes in about 80 percent of the oil rent through taxes and fees. The government invests the revenues from oil in foreign securities in order to divide the oil receipts fairly between the present generation and future generations as well as to shield the domestic economy from too much income too quickly. The Norwegians show no signs of neglecting educationon the contrary, the proportion of each cohort attending colleges and universities in Norway rose from 26 percent in 1980 to 80 percent in 2010. Economic policies are generally sound. Yet, Norway’s total exports of goods and services are no larger in proportion to national income than they were before the oil fields were discovered in the North Sea. In other words, Norway’s oil exports have crowded out its non-oil exports krone for krone, leaving total exports stagnant relative to national income for a generation.
The problem is not the resources themselves, but how the proceeds or rents are handled. Governments, especially in poorer countries, do not always handle them well. If governments spend the money on public investment, they need to pick the right projects generating the best social returns. They do not always have the capacity to do this, particularly in the early stages of development. All require governments and companies to remain open and transparent, disclosing the sums they pay and spend so the nation knows where its wealth is going. First, governments must decide how to allocate the rights for exploration and development of their oil fields, mineral deposits, and so on. They must also decide how to tax the earnings the concessionaire makes. These two decisions together determine the flow of rents to the country and how those rents adjust to changing global prices. The next issue is where the rents should flow. There is a plethora of options. The money can be consumed at home, or invested at home, either by the private sector or the public sector. Alternatively, it can be invested in overseas deposits, bonds, or other financial
060·Algeria: Establishment of National Vision 2030 instruments. These choices will determine how the rents are distributed across generations. The calculations can become quite complicated and there is a need for a simplified framework to guide sensible choices.
Economic institutions and economic reform are also main drivers for economic and political development after the discovery of valuable natural resources. Empirical studies14 show how institutional rules limit the political abuse of power, balance political power, and enhance growth. Strong institutions will play a critical role in ensuring that well-designed policies are indeed effective. Strong fiscal institutions help prevent excess spending in times of plenty, thus leaving enough resources for times of want. And strong financial institutions help manage the impact of spikes in capital inflows on the broader economy. Sound management of foreign exchange reserves is a critical complement in this regard. Unfortunately, strong institutions have been missing in many resource-rich economies. As a result, economic performance in many countries with abundant natural resources has been quite poor. And even worse - the blessing of resource riches has too often turned into the curse of conflict.
A strong commitment to good governance lies at the heart of responsible management of natural resource wealth. Good governance with transparency helps ensure that commodity revenues can benefit all in a society. This is why institutions with a high level of accountability are so important. The experiences of countries like Botswana, Chile, and Indonesia show the important role that strong, independent, and accountable institutions can play in resource-rich countries. 3.3. Challenge 1: Structural Transformations
The Algerian economy is dominated by its oil and gas resources, which account for 98 percent of the country’s exports. The hydrocarbon sector represents about 40~45 percent of total GDP and about two thirds of budget revenues. Another key feature of the economy is the predominant role of the state. Ninety percent of the country’s banks are public, the hydrocarbon company is state owned, and government spending represents two-thirds of non-hydrocarbon GDP.
A sound economy needs a broad base of manufacturing, trade, and services to be able to offer the people a steadily improving standard of life. Therefore, it needs to find ways of diversifying its economic activity away from too much dependence on a few natural resources that tend to stifle or delay the development of modern manufacturing and services. To function well, the national economy also needs broad political participation and a broad base of power in order to beable to offer the
14) Collier and Hoeffler (2009)
Chapter 2 _ Current Status and Challenges of Algeria·061 citizenry an efficient and fair way of exercising its political will and civil rights through free assembly, free elections, and such. Without political democracy, bad governments tend to last too long and do too much damage. The need for diversification is especially urgent in resource-rich countries because natural resource wealth is concentrated in the hands of relatively small groups that seek to preserve their own privileges by standing in the way of both economic and political diversification that would disperse their power and wealth. Rent seekers typically resist reforms, both economic diversification and democracy, that would redistribute the rents to their rightful owners.
Diversification is the backbone of the country’s economic strategy. Economic diversification encourages growth by attracting economic activity from excessive reliance on primary production in agriculture or a few natural-resource-based industries, thus facilitating the transfer of labor from low-paying jobs in low-skill- intensive farming or mining to more lucrative jobs in more high-skill-intensive occupations. Political diversification encourages growth in a similar way by redistributing political power from narrowly based ruling elites to the people, thus in many cases replacing an extended monopoly of sometimes ill-gotten power by democracy and pluralism. The essence of the argument is the same in both cases: diversity pays.
Diversified economies perform better over the long term. One explanation is that engaging in manufacturing enables dynamic learning-by-doing gains that raise productivity and income. A related argument is that diversification exposes producers to a wider range of information, including about foreign markets, and so raises the number of opportunities for producing countries to discover their own untapped potential. Capability in one sector can open the way to others, especially those that use related knowledge. This leads to the question of whether the benefit from exporting depends on which products are exported. Certain products are close to each other in product space in the sense that the ability to export one can easily lead to a small jump in capability to produce and export the other. A country that can make toasters, for example, would have the capability to move speedily to a range of other white goods, then perhaps to microwaves and electronics. There may therefore be a greater externality from encouraging investments in such dense sectors in product space than in encouraging products that are on the periphery without clear knowledge, skills, or market relationships with other sectors. It is also preferable if a country’s export bundle resembles those of countries with higher levels of productivity and income. Otherwise, the country risks being locked into low-wage competition with poorer countries.
Diversification helps form industrial clusters. Recently, the importance of industrial clusters has been discussed with regard to Apple, the United States’ biggest
062·Algeria: Establishment of National Vision 2030 corporation as measured by market value. The Times15 recently reported that Apple employs only 43,000 people in the United States, a tenth as many as General Motors employed when it was the largest American firm. Apple does, however, indirectly employ around 700,000 people in its various suppliers. Unfortunately, almost none of those people are in the United States. Why does Apple manufacture abroad, especially in China? According to Krugman, the advantages of industrial clusters play a definite role in which producers, specialized suppliers, and workers huddle together to their mutual benefit. He emphasizes that successful companies don’t exist in isolation. Prosperity depends on the synergy between companies, on the cluster, not the individual entrepreneur.16 Efforts are needed in Algeria to form industrial clusters through diversification.
Greater integration of the Algerian economy into the world will offer hopes for boosting growth and employment, especially in the Maghreb, if countries are able to put aside their historical differences. As Strauss-Kahn, former Managing Director of the IMF said, “Tunisia, Algeria, and Morocco have a lot to gain from working together more, … the benefits are so great that, frankly, there’s no choice … Because Algeria is not only the biggest country but also the most central country, geographically, of North Africa, the links that could be created would benefit the whole region,”17 in the process of economic integration in the Mid East, Algeria is expected to play a pivotal role in overcoming the region’s current difficulties.
The country also needs a business climate that is more conducive to private sector development. This was high on the agenda in the first part of the decade, but the priority shifted to delivering large public investment programs. The Algerian authorities should continue to review their strategy about how to allow a stronger and broader private sector to emerge. In 2009, the government adopted new regulations for foreign direct investment that limit the participation of foreign investors in new projects. While the point of these regulations was to encourage new partnerships with domestic investors, it could be a significant decline of already scarce foreign investment flows to Algeria. 3.4. Challenge 2: Equity
The most fundamental challenge facing Algeria is to ensure that natural resource wealth is used wisely and shared fairly across society. Algeria’s natural resources should be used to tackle constraints on growth and development, to create the decent jobs needed to raise living standards.
15) The Times, 2012.1.22 16) Paul Krugman, Jobs, jobs and cars, IHT, 2012. Jan. 28-29. 17) Dominique Strauss-Kahn, Statement by Dominique Strauss-Kahn, Managing Director of the International Monetary Fund, on the Occasion of His Visit to Algeria, 2010
Chapter 2 _ Current Status and Challenges of Algeria·063 The Middle East is being hit by a food and fuel crisis just as it is grappling with the economic effects of the unrest. While the region’s oil exporters like Algeria would benefit from the rising price of oil, oil importers would be hurt. Social unrest in Algeria earlier in 2010 was triggered by significant price increases of basic food items, including sugar and oil. But the authorities were able to take rapid measures to reduce these prices with the temporary elimination of custom duties and the value- added tax on those items. Nevertheless, there are still some underlying tensions related to high unemployment among youth. If there is the perception that the country’s oil wealth is not benefiting all segments of the population, this could strain things further.
After unrest erupted in Tunisia and Egypt, every government in the region should focus much more on inclusive growth and give better-targeted help to poorer households. These events in the neighborhood would clearly have a negative economic impact in the short run, but, over the longer term, they could position Egypt and Tunisia to better exploit their potential to achieve higher standards of living and employment for all segments of the population.
Unrest in the Middle East has highlighted the need to look beyond traditional measures. The usual macroeconomic indicators such as growth, inflation, fiscal deficits, and other gauges are not sufficient to assess the true health of a country. Countries such as Egypt and Tunisia have performed relatively well on a macroeconomic level in recent years. But strong overall growth masked a serious problem of inequality within those economies. Since inequality can lead to unrest, which, in turn, leads to macroeconomic problems, more attention should be paid to the distribution of income and not just the aggregate results. In this sense, Dominique Strauss-Kahnis right to say “we have to take into account the fact that what could be de-stabilizing for growth is not only the situation of the banks, inflation, the asset bubble, the fiscal deficit, the current account deficit, but also things that have to do with the distributional effect.”18
18) Dominique Strauss-Kahn, Statement by Dominique Strauss-Kahn, Managing Director of the International Monetary Fund, on the Occasion of His Visit to Algeria, 2010
064·Algeria: Establishment of National Vision 2030 Algeria: Establishment of National Vision 2030 Chapter 3
Algeria and Role of Korea
1. Comparison between Algeria and Korea 2. Korea’s Economic Development and Role of Government 3. Industrialization through Globalization 4. Lessons from Korean Experiences ■ Chapter 03
Algeria and Role of Korea
Hong Tack Chun (Korea Development Institute) Myungho Park (Hankuk Univ. of Foreign Studies) Wankeun Oh (Hankuk Univ. of Foreign Studies)
In this chapter, the reason why Korea should work on establishing Algeria’s vision is examined. Both Algeria and Korea have a common history of long colonial rule. Although the colonial period in Algeria was much longer than that in Korea in terms of the length of rule, Korea experienced all aspects of political, economic and social collapse when it went through the Korean War immediately after its 36 years period of colonial rule. As such, Algeria and Korea share the pains caused by colonial rule as well as by civil wars. From the point of view of GDP per capita, both Algeria and Korea had a similar level, a little above US$2,000 in the early 1970s. However, Korea has consistently implemented industrialization as well as liberalization, which has resulted in its current noteworthy accomplishments, whilst Algeria has not yet achieved an economic shift and cannot without first overcoming the curse of natural resource rich countries.
Recently, the Algerian government has expressed interest in establishing a long- term vision toward the year 2030, presenting its view of Algeria’s future to the Algerian people in more detail and seeking a national consensus. Korea has had experience in establishing Vision 2030 before. In particular, from the point that both Algeria and Korea aim for industrialization through liberalization in target of the year 2030, Korea’s previous work on the vision is expected to directly help establish Algeria’s Vision 2030. As a result, it seems natural that Korea would participate in establishing Algeria’s vision. Firstly, the economic level of the two countries will be identified and compared, identifying what conditions existed during Korea’s economic accomplishments. The fact that Korea’s development strategy was achieved through industrialization and liberalization will also be taken into consideration from
066·Algeria: Establishment of National Vision 2030 all side aspects. Finally, the implications of Korea’s economic development on Algeria will be described.
1. Comparison between Algeria and Korea 1.1. Economic Growth: GDP, GDP per capita and Growth Rate of GDP per capita
When looking at the changes in GDP among Algeria, North Korea and South Korea (South Korea referred to as ‘Korea’), Korea’s GDP has gradually increased except for the year of 1980 and 1998. The year 1980 represented negative economic growth, owing to political instability caused by the assassination of President Park Jung-Hee, as well as the second oil crisis, as did the year 1998, during the aftermath of the financial crisis in 1997. However, illustrates that Korea has recovered rapidly with a V shaped curve despite the two periods of negative growth. The size of Algeria’s economy increased slightly after the 1960s, however, the size of Algeria’s GDP has shrunk by 1/8 from a similar level to that of Korea in the 1960s. On the other hand, in terms of North Korea, the size of GDP showed a similar trend as in Algeria until the early 1990s. It has not yet reached a quarter of Algeria’s GDP, as the size itself has declined.
South Korea, North Korea and Algeria’s of GDP (1960-2008)
Source: Angus Maddison(2010), Historical Statistics of the World Economy
Chapter 3 _ Algeria and Role of Korea·067 Moreover, in the early 1960s, for the given GDP per capita among Algeria, North Korea and South Korea, Algeria’s GDP per capita, about US$ 2,000, was much higher than that of North Korea and South Korea, about US$ 1,200 respectively. Thus, in the early 1970s, the GDP per capita of the three countries were on a similar level in terms of amount, around US$ 2,000. Then, after the early 1970s, North Korea showed negative growth while Algeria posted steady growth and the GDP per capita of South Korea rapidly increased. As a result, the GDP per capita of Algeria has only reached US$ 3,520, 18% of South Korea’s.
South Korea, North Korea and Algeria’s GDP per capita (1960-2008)
Source: Angus Maddison(2010), Historical Statistics of the World Economy
In 2008, the GDP per capita of South Korea was estimated around US$ 20,000, which had increased by 15 times compared to that of the 1960s. In the meantime, the income level of Algeria increased by 1.7 times, but the increase was insignificant when considering the performance for the previous 50 years. North Korea has struggled with economic problems at a similar level in the past 50 years, experiencing a decline of growth from the beginning of the 1990s.
shows the changes in growth rates of GDP per capita among Algeria, North Korea and South Korea from 1960 to 2008. Korea bounced back, as illustrated with a V shaped curve in the figure, while the GDP per capita posted negative
068·Algeria: Establishment of National Vision 2030 growth when experiencing a recession with political instability in 1980 and the economic crisis in 1997. However, since the 2000s, when the economy reached maturity, the upward trend has somewhat slowed down. During the past half- century, Algeria has shown modest growth with acompound annual growth rate of 1.16% in GDP per capita, which falls short of the global average growth rate. However, since the 2000s, Algeria’s economic growth rate has improved, so better performance is projected in the future. Meanwhile, North Korea’s economy rapidly deteriorated at its lowest point when Kim Il-Sung died in 1994, which suggests that the economy has been stagnant since the late 1990s.
Growth Rates of GDP per capita (1960-2008)
Source: Angus Maddison(2010), Historical Statistics of the World Economy
1.2. Population
In terms of population trends in Algeria and Korea, the population of Algeria increased slightly faster than that of North and South Korea. In the early 1960s, the population of Algeria was approximately ten million, which was similar to that of North Korea, but recently it has increased by approximately 35 million. In addition, in comparison to the annual population growth rates of North Korea and South Korea from 1990 to 2008, which was respectively 0.67%, and that of Algeria was 1.65%, confirmed a rising trend. Thus, the rapid population growth of Algeria positively contributes to the increase in GDP; on the other hand, it has a negative effect on the growth of GDP per capita.
Chapter 3 _ Algeria and Role of Korea·069 Population Trends in South Korea, North Korea and Algeria (1960-2009)
Source: Angus Maddison(2010), Historical Statistics of the World Economy
1.3. Performance Evaluation of Algeria and Korea: Growth Accounting
shows Korea’s growth accounting in comparison to that of the world, the Middle East and North Africa, including Algeria. In this figure, the regional average is regarded as a weighted average of GDP over purchasing power parity in the same period. First, Korea is separate from the Middle East and North Africa from a point of view that the high growth rate has lasted for a long time, having a very high rate in terms of GDP growth rate per worker. The accumulation of capital has primarily led Korea’s high earnings growth. Korea’s total factor of productivity was a low level, about 1% in the 1960s and 1970s, the period of rapid economic growth. Specifically, considering the at the time economic growth, the level of contribution to the total factor of productivity was much lower. However, after the 2000s, the total factor of productivity rose by 1.5%, which appeared at a significantly higher level compared to the growth rate, so Korea’s economy attained economic advancement.
19) In this report, the growth accounting analysis for Algeria has not been conducted yet because of a lack of basic data for the growth accounting analysis. The results of the growth accounting analysis for Algeria will be included in the 2012 report. Therefore, the comparative analysis is conducted by using the results of the growth accounting analysis for the Middle East and North Africa, instead of Algeria’s.
070·Algeria: Establishment of National Vision 2030
Growth Accounting (unit:%) Growth rate Capital Growth rate Region Year of GDP per stock per TFP of GDP capita capita 1961-70 5.3 3.5 1.5 2.1 1971-80 4 2.2 1.3 0.9 1981-90 3.7 2 0.8 1.1 World 1991-2000 3.6 2.2 1 1.2 Apr-01 2.6 1.5 1 0.4 1961-2004 4 2.4 1.2 1.3 1961-70 7.7 4.7 3 1.6 1971-80 7.3 4.6 3.8 0.8 1981-90 8.6 6.1 2.8 3.4 Korea 1991-2000 5.8 4.1 2.7 1.5 Apr-01 4.5 2.9 1.3 1.5 1961-2004 7.1 4.7 2.9 1.8 1961-70 6.3 4.5 1.8 2.7 1971-80 4.2 2.7 2.7 0.1 The Middle 1981-90 3.8 0.8 0.5 0.3 East and North Africa 1991-2000 4 1.3 0.2 1.1 Apr-01 3 -0.4 -0.1 -0.1 1961-2004 4.4 2 1.2 0.9
Source: Hahn(2008)
As illustrated in the growth rates of GDP per capita in the Middle East and North Africa, the growth rates have constantly decreased, resulting in negative growth in recent years. The growth in the Middle East and North Africa in the 1960s was notable in accordance with the increase of total factor productivity, but there has been almost no contribution since the 1970s, without reaching the level of the 1960s. Moreover, the growth rate increased in the 1970s was due to the accumulation of capital stock, but since then it has declined dramatically and has decreased in recent years.
Chapter 3 _ Algeria and Role of Korea·071 2. Korea’s Economic Development and Role of Government
Korea has achieved remarkable economic growth and social development in the past five decades. Per capita income grew from US$1,342 in 1960 to US$19,227 in 2008. In the same period, life expectancy rose from 52.4 years to 79.6 years and infant mortality declined from 70 deaths per 1,000 births to 3.4 deaths. The political structure also switched from an authoritarian one to a fully functioning democracy. In the 20th century, such socio-economic achievements over decades can be found in only a handful of developing economies, including Korea and other East Asian countries.
The Korean economic success story has been told many times and yet controversy continues to surround some fundamental questions about how Korea has moved so rapidly from a poor nation dominated by a traditional agricultural sector to a modern urban industrial state.
According to the market-friendly view, the rapid growth was made possible by the government maintaining macroeconomic stability and heavy investments in human capital. For all of the apparent government intervention, Korea’s economic policies were market conforming. Industrial targeting and foreign trade interventions cancelled each other out in ways that made Korea behave much like a liberalized market economy.
At the opposite end of the spectrum is the development state view, which claims that it is effective government intervention in support of particular sectors and even individual firms that explain Korea’s economic success. The Korean government purposefully distorted relative prices and boosted investment in particular sectors, attaining rapid industrialization that would have been otherwise impossible.
We already know from the growth accounting literature why Korea grew rapidly. Rapid growth was accompanied by structural change in the Korean economy and the question here is whether there was anything unusual about the way in which this structure changed when compared to the experience of other industrialized nations. Next, we will review the government economic policies that accompanied this growth and structural transformation.
The main theme of this report is that Korea started from a position of fundamental economic disequilibrium and that government interventions in the 1960s and 1970s were designed to correct that disequilibrium. As Korea moved toward a more typical economic structure and as per capita GDP and the complexity of the economy increased, the government responded by withdrawing from many of
072·Algeria: Establishment of National Vision 2030 its specific targeted interventions in favor of more general macro controls over the economy.
Thus, in a sense, all sides of the major controversies surrounding Korea’s economic performance have been partly correct. But no single view is correct for all periods in Korea’s development experience of the past 5 decades. Government intervention has been more extensive than is apparent. The promotion of exports in the 1960s and heavy and chemical industries (HCIs) in the 1970s were based on severe financial repression. The period up to the 1980s was characterized by high import barriers, restrictions on capital flows, widespread price controls, and repressive labor practices. On the other hand, a relatively stable macroeconomic environment, well-established private property rights, and large public spending on education (particularly primary education) and infrastructure investment were market-friendly aspects of government policy, often ignored by proponents of the development state view. 2.1. 1960s ~ 1970s
President Park Chung-Hee, who came into power in 1961 through a military coup, began to shift the previous policy, emphasizing inward-looking industrialization toward the direction of export-oriented industrialization (EOI). As the new president, Park and his aides understood the importance of economic success in legitimizing their forceful seizure of power. The military government could not complete the policy transition of adopting EOI strategy since it failed to undertake necessary policy reforms. Initially, export promotion was pursued in response to the rapid depletion of foreign exchange reserves. The reserves began to decline in March 1962 due to the large repayment of short-term commercial loans raised in 1961 and 1962 to finance the first Five-Year Economic Development Plan (1962-1966). Faced with the specter of a foreign exchange crisis, the government introduced various measures. In January 1963, the export-import link system was introduced to give exporters the right to import foreign goods equal to the full amount of exports.
The system of incentive compatible with the EOI strategy could be institutionalized, following the exchange reform of 1964-65. Multiple fixed rates were consolidated into a single variable rate, and the won was devalued by almost half from 130 to 255 won per dollar. The real exchange rate has maintained a competitive and stable level since then. Exports as a proportion of GDP rose from 5 percent in 1963 to 28 percent in 1973.
Industrialization was the main theme of the Five-Year Economic Plans that started in 1962. The initial version of the first Five-Year Economic Plan (1962-1966) assigned 34 percent of gross investment to mining and manufacturing. The second Plan (1967- 1971) placed emphasis on HCIs, but a full-scale drive toward HCIs began in 1973. The
Chapter 3 _ Algeria and Role of Korea·073 Export and Import
Source: Bank of Korea
government announced the HCI project that envisioned a total investment of approximately US$ 9.6 billion for the construction of six HCIs - iron and steel, non- ferrous metal, machinery, shipbuilding, electronics, and chemicals - during the period of 1973-1981. Through industrial deepening and export mix upgrading, the share of HCIs in total industrial production was to be raised from 35 to 51 percent between 1972 and 1981, and their share in total exports from 27 to 65 percent.
In order to facilitate the implementation of the HCI Plan, the government consistently followed an expansionary fiscal and monetary policy despite the accumulation of inflationary pressures. In particular, the government increased intervention in domestic financial markets to support the HCIs Project, reversing the course from the 1950s.
The primary role of the monetary authorities during the government-led growth period lay in supplying “growth money,”and price stabilization received a far lower priority. Banks never had enough money to satisfy the voracious demand for credit from businesses, and had to rely on the central bank lendings. In the 1960s and 1970s, the government tried to contract the money supply from time to time to contain inflation. However, with the exception of a few years, money supply continued to grow rapidly and the budget deficit remained large due to the “growth-first” policy at the time.
074·Algeria: Establishment of National Vision 2030 2.2. From 1980 to the Economic Crisis of 1997
In the 1970s, the Korean economy grew at an average annual rate of 9.6% in real terms. However, this rapid growth was accompanied by serious macroeconomic imbalances. In particular, the first and second oil shocks dealt a fatal blow to the oil import economy, accelerating inflation and considerably deteriorating the balance of payments. In addition, massive investment in HCIs, the Middle East construction boom and increased budgetary deficits arising from the subsidization of grain prices all led to increasing excess demand pressure in the second half of the 1970s. The rapid growth and high inflation resulted in soaring wages. During the second half of the 1970s, real wages escalated 18% annually, 2.2 times higher than the increase in labor productivity. Together with the rapid rise in wages, the overvalued won eroded the competitiveness of Korean exports. Consequently, exports in real terms recorded negative growth in 1979, the first decline since the nation adopted the EOI strategy in the early 1960s. Thus faced with both high inflation and a widening deficit in the balance of payments, attention was called to the need for conservative fiscal and monetary management.
Stabilization was pursued with monetary and fiscal contractions. Salaries of civil servants and public enterprise employees were restrained by government direction and interest rates were lowered to reduce the burden of business. The annual M2 growth declined from 35 percent in 1975-1982 to 20 percent in 1983-1985. By 1984 inflation was brought down to the low single digits for the first time since the beginning of rapid GDP growth. What contributed most to price stabilization was moderation in rice price increases and active fiscal consolidation.
The government also began a systematic effort to liberalize critical sectors of the domestic economy and also to free up its international economic relations. Direct government ownership and control of the banking system had been a central element in the industrial policies of the 1970s. Because the government of that epoch wanted to move away from this approach, it decided to privatize the states bank and more broadly liberalize government control over the financial sector.
Financial liberalization proceeded very slowly in the 1980s and early 1990s. In the early 1980s, the real interest rate turned positive as inflation stabilized, providing a favorable environment for interest rate reform. The large amount of corporate debt, however, precluded active liberalization because even a slight rise in interest rates would increase interest payments substantially.
The financial market became increasingly liberalized in the 1980s and early 1990s, especially as many chaebols, Korean large conglomerates demanded deregulation. The liberalization, however, lacked a clear orientation and was not accompanied by a
Chapter 3 _ Algeria and Role of Korea·075 concurrent strengthening of prudential regulation. A fundamental reform was delayed because politicians and bureaucrats were not ready to bear the short-term costs. Enforcing prudential regulation would have required the restructuring of many businesses and financial institutions. This would have helped clarify the respective responsibilities of the state, businesses and financial institutions and dismantle the risk partnerships among them, but no effort was made in this direction.
An important contribution to the enhanced market competition was made by the Monopoly Regulation and Fair Trade Act (MRFTA), which was legislated in 1980 and became effective in 1981. MRFTA banned or restricted the abuse of market-dominant positions, anti-competitive M&As, undue collaborative activities, unfair business practices, restraints on competition by trade associations, resale price maintenances, and anti-competitive international contracts. The Fair Trade Commission (FTC) was instituted in 1981 within the EPB, and was then separated from the EPB and became an independent agency in 1994.
While competition policy was struggling to take root, regulations on the chaebols multiplied. Attempts to halt economic concentration in the chaebols began in 1974 with the introduction of a credit control system, which was not vigorously enforced and soon neglected. The government provided an implicit state guarantee to the chaebol’s expansion based on the “too-big-to-fail” principle. In fact, the larger a chaebol was, the more likely it was to be saved by the government from bankruptcy. Low interest rates also encouraged borrowing by the chaebol to finance their expansion. The domestic market was too small for the chaebols to realize economies of scale through specialization, and diversification into various business lines was a natural choice for them. Insufficient foreign competition due to import restrictions assured the success of such diversification.
The debt-to-equity ratio in the manufacturing sector rose from 100 percent in the mid-1960s to 300~400 percent since the 1970s until 1997 . Interest payments turned more onerous, as reflected in the interest coverage ratio of 100-200 percent in the 1970s through 1990s. This implies that operating profits could barely cover interest expenses in those years.
076·Algeria: Establishment of National Vision 2030 Debt-to-equity Ratio and Interest Coverage Ratio20
Source: Bank of Korea
2.3. From the Economic Crisis to the Present (1997~2009)
In November 1997, Korea was hit by a currency-cum-banking crisis that left it no option but to seek official assistance from the IMF. The BOK provided emergency lending to banks, but could not meet the demand for foreign currency. The foreign exchange reserve was quickly depleted and an explosive devaluation followed.
Major Indicators of the Korean Economy in the 1990s 1991 1992 1993 1994 1995 1996 1997 GDP 9.1 5.1 5.8 8.6 7.1 7.1 6.1 Savings / GDP 35.9 34.7 35.1 35.2 35.9 34.3 34.2 Investment / GDP 38.9 36.6 35.1 36.1 37.0 38.2 36.1 Current account -2.8 -1.3 -1.3 -1.0 -1.8 -4.8 -1.9 / GDP CPI 9..3 6.3 4.8 6.2 4.5 4.9 4.4 Source: Bank of Korea, National Statistical Office
20) The interest coverage ratio is used to determine how easily a company can pay interest expenses on outstanding debt. The ratio is calculated by dividing a company’s earnings before interest and taxes(EBIT) by the company’s interest expenses for the same period. The lower the ratio, the more the company is burdened by debt expense. When a company’s interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable.
Chapter 3 _ Algeria and Role of Korea·077
illustrates the trends of economic activities in the 1990s. Overall, the economy had maintained high growth rates. Real GDP and real private consumption on average rose by 7.5 percent and 7.3 percent a year respectively, while investment and government consumption grew by 8.8 percent and 5.6 percent a year. Mexico and Thailand just before their crises, Korea was not running a big deficit in the 1990s.
Before the outbreak of the crisis, it was difficult to spot abnormalities in major macroeconomic indicators. The underlying origins of the Korean crisis are multifaceted, and external and internal factors are intermingled. The vast international capital movement generated a huge boom-bust cycle, internal problems such as moral hazard and the resultant financial fragility aggravated the bust of the cycle, and adverse shocks such as the South East Asian crisis and Japanese and other banks’ refusal to roll-over short-term debts on Korea developed the bust into a crisis.
An important external factor of the Korean crisis was the sudden change of international capital flows. The net outflow of portfolio investment was US$ 11.6 billion in 1997 while the net inflow had amounted to US$ 12.1 billion in 1996. The sharpest decline in net private flows was in flows from commercial banks.
In contrast to its fairly stable macroeconomic performance, Korea, on the business side, had very fragile financial structures. The experiences of the past thirty years of the government’s bailout policies had formed expectations that chaebols would never fail. With little chance of bankruptcy, therefore, the Korean chaebols were given strong incentives to keep expanding without careful consideration of the associated returns and risks. The chaebols made aggressive investments through profligate loans from financial institutions, and quite often, they financed long-term investments from short-term capital markets without due regard for the possibility of failure.
An abnormally high level of corporate debts mainly used to finance risky investments had not been possible without imprudent and inefficient credit allocation of the financial sector and the large scale moral hazard based on “too-big- to-fail” argument.
The largest 30 chaebols recorded an average return on assets (ROA) of 0.2 and -2.1 percent in 1996 and 1997, respectively. In early 1997, some chaebols went bankruptand the general shortage in liquidity began to afflict businesses.
Through the restructuring process, corporations and financial institutions improved their financial health significantly. In the corporate sector, latent non- performing assets were estimated at 18.6 trillion won, or 3.4 percent of the GDP, at
078·Algeria: Establishment of National Vision 2030 the end of 2001. This ratio was much lower than the level observed before the crisis (over 20 percent), and government intervention was deemed no longer necessary. Debt-to-equity ratios and other financial indicators also improved dramatically. Of particular importance was the disappearance of implicit state guarantees to businesses. Witnessing the demise of Daewoo and other chaebols, businesses hurried to dispose of unprofitable business lines and reduce debts, and became more prudent in their investment decisions. The root of the chaebol problem vanished.
3. Industrialization through Globalization
Over the past five decades, Korea experienced rapid growth and industrialization. Growth everywhere has been accompanied by fundamental changes in the structure of the economy. Initially, the Korean economy was dominated by agriculture and other primary industries. As the industrialization gained full momentum in the 1960s, labor-intensive manufacturing came to lead output growth by utilizing Korea’s comparative advantage in its abundant supply of a relatively well-educated and diligent labor force. But as wage levels rose and competition from low-wage economies intensified in the 1970s, capital-intensive, high-productivity manufacturing assumed importance over labor-intensive, low-productivity manufacturing. Entering the 1980s, private enterprises stepped up investment in R&D to further improve productivity. These efforts gradually were successful in narrowing the productivity gap with advanced countries. In a few industries such as information and communication technology (ICT), Korea became a global leader. The trend continued into the 2000s, with many Korean firms in important industries (electronics, steel, automobile, shipbuilding and others) emerging as global players. 3.1. Early Stage of Industrialization and International Policy Making (1960s and 1970s)
The Korean economy began to grow rapidly in the 1960s. The growth spurt was led by manufacturing, whose output grew annually by 17 percent in the 1960s and 16 percent in the 1970s. The share of manufacturing in gross value-added rose from 12 percent in 1953~1960 to 23 percent in 1971~1980, and since then stabilized at that level. Its share in total employment also rose rapidly. In the meantime, the share of services increased continuously in terms of both value-added and employment, whereas that of agriculture declined. Within manufacturing, heavy and chemical industries (HCIs) have increased their share at the expense of light industries (see ).
Chapter 3 _ Algeria and Role of Korea·079 Share in Value-added by Sector
Source: Bank of Korea
Since the early 1960s, exports began to expand rapidly, with exports growing by 40 percent per year on average in current dollars. As a result, the export/GNP ratio rose from less than 1 percent in 1959 to more than 10 percent in 1970. The rapid expansion of exports continued over the next decades. The successful rise in exports greatly affected export policies. In 1964~1965, the Korean government adopted the Comprehensive Export Promotion Program. The program extended policy support to export production as well as exports themselves. It may be regarded as much ofan industrial policy as a trade policy since it attempted to pick and promote export industries. Credit incentives were greatly expanded by increasing the number of types and volume of loans for exports that offered preferential interest rates.
The experience with export expansion in the 1960s and 1970s indicates that Korea had a comparative advantage in labor-intensive light manufactures, as the country was resource-poor and labor-abundant. But this export potential had been suppressed by two impediments to trade; namely, an overvalued currency and a protectionist import regime. As soon as the first impediment was removed by devaluations, exports of labor-intensive light manufactures began to expand explosively in the early 1960s. In the following years, the government’s all-out efforts for export promotion neutralized the second impediment of the protectionist import regime by offsetting the negative effects on exports.
080·Algeria: Establishment of National Vision 2030 3.2. Economic Liberalization and Globalization (from 1980 to present)
After the government decided to correct the macroeconomic imbalances of the 1970s, policy priority was given to moving towards a market-driven and more open economy. The government reduced intervention in the economy and emphasized greater reliance on the market. It also decided on market opening measures to stimulate a competitive business environment. The rapid increase in export volume also encouraged the government to undertake import liberalization. In addition, three lows - stable energy prices, low international interest rates and a favorable exchange rate, especially with that of Japan - in the mid-1980s contributed to trade liberalization.
Beginning in the 1990s, Korea started opening markets in services and FDI. Competitiveness based on low wages was no longer effective starting in the 1990s. Wages have risen rapidly since the mid-1980s due to the democratization of the Korean society and the end of labor surpluses, while Japanese firms increased outsourcing to Southeast Asian countries in order to take advantage of lower wages there. These circumstances forced Korea to develop technology-intensive industries. In addition, Korea was pressed to open its markets due to worldwide economic integration, resulting from the UR, the World Trade Organization and globalization trends.
The IMF bailout agreement also helped to accelerate the liberalization of the Korean economy. Korea agreed to eliminate trade-related subsidies, restrictive import licensing, and the import diversification program, in addition to streamlining and improving the transparency of import certification procedures.
Technological progress is made possible by domestic R&D activities, imports of capital goods that embody advanced technologies, acquisition of foreign technologies, and knowledge transfer through foreign direct investments. Domestic R&D activities surged in the 1980s as the R&D spending increased rapidly in response to the intensifying competition at home and abroad. The current level of total R&D spending (3.4 percent of GDP in 2008) is among the highest in the world.
Another important source of efficiency improvement is the reallocation of resources from less productive toward more productive sectors. A notable example is the migration of labor and capital from agriculture to manufacturing, from light industries to HCIs, and from rural to urban areas. The economy-wide productivity improves when such migration proceeds without much difficulty. On the other hand, productivity improvement is constrained when such migration is hindered by an inflexible labor market, geographic immobility of factor inputs, government
Chapter 3 _ Algeria and Role of Korea·081 protection of declining industries and unprofitable businesses, inefficient financial intermediation, or inadequate supply of infrastructure to support the growth of cities.
The structural transformation of the Korean economy is an ongoing process. The government should continue to promote productivity growth by facilitating technological progress and resource reallocation. Potential impediments to continued productivity growth should be removed immediately. 3.3. FTA and FDI
Korea joined regional trade agreements (RTAs) at a relatively later period among countries pursuing EOI strategy. This is because Korea was the country that benefited most from the multilateral system of world trade rather than bilateral or regional systems. In particular, America’s participation in NAFTA was the momentum to first consider FTAs for Korea. It was inevitable for Korea, highly dependent on trade, to push for FTAs because no FTA puts any country in an unfavorable situation compared to other competing countries. Beginning in the early 2000s, Korea has pursued simultaneous FTAs with major economies to conclude high-quality and comprehensive FTAs. As of January 2010, the country has signed seven FTAs, with five having gone into effect, and more than 10 FTA negotiations are underway. In particular, the economic impact of the Korea-US FTA (concluded in 2007) and Korea- EU FTA (signed in 2010) on the Korean economy is expected to be comprehensive and substantial because Korea’s commitments agreed in these FTAs are more far- reaching than any other FTAs Korea concluded before. As a result of such FTAs, Korea is expected to strengthen and advance its economic system and to see quantitative and qualitative improvement in growth potential through increased access to foreign markets.21
Foreign direct investment in Korea was allowed in 1962. However, the Korean government depended on foreign loans rather than FDI in its development strategies, with FDI being restricted until the early 1980s. The Korean government worried that foreign firms might dominate the domestic industry, while funding through foreign loans was easier to control than capital inflows. During the early 1980s, when foreign debt became a serious problem among developing countries, the Korean government changed its policy by reducing its dependency on foreign loans and encouraging FDI, with systems to achieve this goal being put in place. In 1984, the Korean government changed its FDI policy from a positive list system to negative list one in order to expand the number of business categories that would be liberalized for FDI. It lifted the horizontal restriction in foreign equity ceiling of 50
21) Korea is the second largest country in the world, after Chile, in terms of economy size, including FTA partner countries.
082·Algeria: Establishment of National Vision 2030 percent. In 1992, it introduced a notification system in principle. In 1996, with Korea joining the OECD, the government took further liberalization steps in FDI. It started to open up the service sector, including financial, telecommunications and distribution services. In February 1997, the government eased rules on mergers and acquisitions (M&As) of domestic companies by foreign firms, allowing friendly M&As, where the board of directors of targeted firms approved the deal.
In 1998, with the Korean economy trying to recover from the Asian financial crisis, the government promoted FDI by enacting the Foreign Investment Promotion Act. The government allowed hostile M&As as well and liberalized the acquisition of real estate by foreigners. Investment incentives involving tax exemptions were extended to ten years and their coverage was expanded to include high technology industries, industrial support services and businesses located in foreign investment zones. 3.4. Economic Cooperation
Korea’s economic reconstruction in the 1950s greatly benefitted from U.S. aid, which accounted for up to 10 percent of the GDP. Although the share of trade with the U.S. has fallen in recent years due to the rise of the Chinese economy and Korea’s diversification strategy towards overseas markets, the U.S. remains one of Korea’s three biggest trading partners. Korea and the U.S. also have entered into a new stage of economic cooperation, with the establishment of an FTA, which represents a more advanced stage of economic cooperation.
In contrast with the U.S., cooperation between Korea and Japan did not begin until 1965 when diplomatic ties between the two countries were normalized. The development grant from Japan made a huge contribution to financing infrastructure investment projects and fostering industrial development in Korea. This set the stage for increased trade and investment between Korea and Japan. As Korea’s exports became more capital-intensive and technology-intensive, Korean firms’ competition with Japanese counterparts intensified in the world market. The relative importance of Japan in Korea’s trade has declined, as trade and investment expanded with a growing number of nations. Nonetheless, Japan still remains one of Korea’s major partners in trade and investment, with great potential for further cooperation.
Bilateral economic cooperation with China has accelerated since the establishment of diplomatic relations in 1992. China is of paramount importance in terms of trade and investment flows. Korea-China economic relations have mirrored the dynamic development of China. But the model of using Chinese low-wage labor as part of a wider East Asian production network has reached a critical junction. Companies engaged in simple manufacturing processing are being forced to relocate or shut down. Large investments tend to be made in “high value-added” industries in China,
Chapter 3 _ Algeria and Role of Korea·083 from manufacturing to services in finance, logistics and real estate.
The European Union (EU) has become the largest investor in Korea, and also it has become the second largest market for Korea’s exports, after China. The importance of the EU as a market and a source of FDI can hardly be overstated for Korea, especially now when Korea needs to develop the service sector and upgrade its industrial structure. With the Korea-EU FTA signed in 2010, it is vital to strengthen cooperation in science and technology to bolster Korea’s industrial bases and participate in the joint development of new technologies for the environment and energy sectors.
The history of Korea’s regional economic cooperation is short in contrast to that of its bilateral cooperation. A regional cooperation policy came into being with the market opening measures of the early 1980s. In the late 1980s, liberalization in trade, investment and the foreign exchange market started to make a positive impact in terms of promoting the globalization of the Korean economy and its structural improvement. It created the conditions and an environment for Korea to play a leading role in the arena of international cooperation. Since the Asian financial crisis in 1997, Korea has taken an active part in broader regional cooperation efforts through ASEAN (Association of Southeast Asian Nations), ASEAN+3 (China, Japan, Korea), and ASEM (Asia-Europe Meeting) in order to attain sustainable growth in association with regional economic development.
With regard to East Asian cooperation, the Korean government has stepped up efforts to create the ASEAN+3 cooperative frameworks. There are a number of impediments to genuine economic integration. In particular, the historical conflict between China and Japan hinders economic integration. Clarifying the division of roles with the EAS (East Asia Summit) and other Asian cooperation forums, and solidifying the role of ASEAN+3 are regarded as the key to all future activities.
4. Lessons from Korean Experiences 4.1. Both Industrialization and Globalization
In the last five decades, Korea has achieved unparalleled economic growth. The transformation of the Korean economy can be summarized in two words: industrialization and globalization. The industrialization of the Korean economy has been greatly affected by the globalization trend. International trade offered a vast global market for Korean producers. It also enabled them to import intermediate goods and advanced technologies needed for the production of export goods. At the beginning, the international division of labor prompted the growth of labor-
084·Algeria: Establishment of National Vision 2030 intensive industries in which Korea had a comparative advantage. These industries absorbed surplus labor from rural areas and contributed to an increase in per capita income and savings rates. Later, as capital accumulation progressed, the comparative advantage shifted from labor-intensive to capital-intensive industries, and the latter began to dominate industrial production and exports. Per capita income continued to grow rapidly as productivity improved.
In the process of industrialization and globalization, the policy stance of the government underwent a few significant changes. In the 1960s, a systematic effort to jump-start the economy was initiated. The government actively promoted exports with pecuniary and other incentives given to exporters. In the 1970s, as the government came to concentrate its efforts on promoting heavy and chemical industries (HCIs), government intervention in the market became more selective and discriminatory. The government also strengthened its control of the financial market to direct resource allocation in favor of the HCIs. The government-led growth strategy produced many problems, including a serious mis-allocation of resources, chronic inflation, and greater income inequality. In the early 1980s, the government made a radical departure from the past by emphasizing price stability over economic growth. It also encouraged private initiatives and began to liberalize the market. More attention was given to social policies, with a corresponding increase in public spending on health, welfare and education. 4.2. Elimination of Trade Barriers
The rapid growth of Korea was made possible by eliminating impediments to international trade. Korea had two major impediments. The first impediment was the overvaluation of won and it disappeared following devaluations in the early 1960s. This enabled the Korean economy to realize its export potential in labor-intensive manufacturing, in which it had a natural comparative advantage. The unexpected sharp rise in exports, especially that of labor-intensive manufacturing products, brought about a switch in development policy from import-substitution industrialization to export promotion in the mid-1960s.
The second impediment to trade and growth was the protectionist import policy, which was the legacy of industrialization based on import substitution. The depressing effects of the protectionist policy on exports were neutralized by the export promotion policy that began in the mid-1960s. This policy, in effect, cleared the roadblocks for Korean exports to the global market. Import policy began to be liberalized at about the same time as the balance of payments improved. Korea joined the GATT in 1967 and began to scale down export promotion measures in the early 1970s. After a temporarily setback under the HCI policy in the 1970s, import liberalization continued in the 1980s. Between 1980 and 1997, Korea pursued a
Chapter 3 _ Algeria and Role of Korea·085 comprehensive market liberalization policy in response to changes in both the domestic economy and the increased influence of globalization. The 1997 financial crisis was a significant turning point that led to extensive changes in the Korean economy and society, which still continue today. Korea pushed ahead with further trade liberalization and economic reforms. It eliminated trade measures that were not compatible with WTO rules and phased out the import diversification program among others. 4.3. Concluding Remarks
Since the early 1960s, the Korean economy has recorded sustained high growth, interrupted only in 1980 and 1998 when output temporarily declined. The rapid rise in per capita real output over five decades is considered to be primarily the result of the adoption of an EOI strategy in the first half of the 1960s, although it was certainly helped by other factors. The high performance of the Korean economy actually began with rapid growth of exports following the shift in the industrialization strategy. The miraculous speed of exports was accompanied by a significant progress in the diversification of export products. The expansion of exports contributed to the acceleration of GDP beginning in the first half of the 1960s. In particular, the manufacturing sector played a large role in leading the growth of the overall economy.
The structural change was made possible in a great extent by a rapid rise in capital formation. In order to mobilize the fundsfor capital formation, domestic savingshad to increase. Koreans did not save and invest because such habits were built into their culture, they did so because rapid growth made savings and investment highly rewarding since the early 1960s.
The progress was also made possible not only by the massive mobilization of labor and capital but also by the flexible reallocation of resources from less to more productive sectors. Foreign trade played a pivotal role in this aspect by encouraging innovation and accelerating resource reallocation. It also enabled Korea to learn from advanced countries and take advantage of the vastly expanded global market. Entrepreneurs responded to changing circumstances by committing themselves to pioneering new markets and new products. The government provided institutional and physical infrastructure essential for their activities.
One distinguishing feature of the Korea’s industrialization process is that it depended critically on the dynamism of the private sector. The government intervened in the market heavily but relied mostly on private enterprises for the actual implementation of the projects, taking full advantage of their creativity and minimizing deadweight costs associated with bureaucratic control. This was true even
086·Algeria: Establishment of National Vision 2030 at the height of the HCI drive. Since the 1980s, as the government intervention receded, the private sector has been playing an even greater role in innovation and market expansion.
Now that Korea has significantly narrowed the technological gap with advanced countries and in some cases is leading the industry, the uncertainty surrounding investment outcomes is much larger and the government is nearly incapable of picking winners. Its role now lies in finding and eliminating obstacles to entrepreneurship, correcting market failures, and supplying high-quality manpower, all in close consultation with market participants. All government interventions should be based on sound economic analyses, have clear criteria for success and failure, and target activities but not sectors.
Indeed, this is exactly what the Korean government did in the 1960s with its export promotion program. It eliminated rent-seeking opportunities and encouraged positive-sum activities by entrepreneurs with the exchange rate reform. It provided export subsidies, which can be considered as a compensation for the knowledge spillover exporters generated for other domestic producers by finding new markets or products. The subsidies were given in proportion to the export performance, which acted as a clear and objective criterion for success. They were also given to all export activities regardless of the sectors or industries. The government held a monthly cabinet-level meeting with representatives from the private sector to discuss and solve export-related problems. The government also focused on education and training to support export industries.
When industrial policy is taken simply as handing out subsidies to the targeted sector without due regard to their potentially adverse impact on entrepreneurial spirits, it often degenerates into grounds for rent-seeking and results in expensive failure. The problem turns even more serious when the government lacks clear ideas about the nature of the market failure to be addressed, objective criteria for success and failure, or a tightly structured coordination mechanism between the government and the private sector. In fact, industrial policy is gaining popularity after the recent global financial crisis, but not all countries are keenly aware of its dangers as well as potentials.
In this respect, the Korean government should resist the temptation to designate certain industries as “strategic” and provide them with subsidies in the name of industrial policy. Rather, future efforts must be directed at encouraging innovation through regulatory reform and external liberalization, correcting market failures where they exist, strengthening the analytic capability within the government, securing a well-functioning communication channel with the private sector, and upgrading the education system.
Chapter 3 _ Algeria and Role of Korea·087
Algeria: Establishment of National Vision 2030 Chapter 4
Vision Analysis: Case Study
1. Korea Vision 2030 2. Foreign Cases ■ Chapter 04
Vision Analysis: Case Study
Hong Tack Chun (Korea Development Institute) Myungho Park (Hankuk Univ. of Foreign Studies) Wankeun Oh (Hankuk Univ. of Foreign Studies)
1. Korea Vision 2030 1.1. Korean Economy facing Challenges Ahead
Currently the 11th largest economy in the world, Korea has seen decades of unprecedented economic growth starting in the 1960s. However, Korea is now faced with a number of overarching challenges that impede economic growth and social cohesion, and thus far, calls for more innovative and proactive policy measures. Potential growth rate is on declining trend, from 7.8% in the 1980s to 6.3% in the 1990s, to 4.8% in the 2000s, and the income and employment gaps have widened especially over the past decade or so. The situation could be aggravated over time because of a low fertility rate and rapid aging in the population. Korea may be able to find new opportunities in the stepped-up integration of world economy resulting from globalization, emerging markets of BRICs, and proliferation of IT and other new technologies. However, without a transition into a more flexible economic system that efficiently works with the global economic order, Korea may not be able to capitalize on these foreseeable benefits.
Now is the time for Korea to act against all these structural challenges and to start establishing a new development model that could reinforce stable socio-economic progress for the 21st century. Korea is not alone in facing these challenges. Almost all countries around the world are struggling to cope with the profound and complicated changes in the economic and social environment. A notable trend here is that not only advanced countries such as Finland, Australia, Japan, but also
090·Algeria: Establishment of National Vision 2030 developing countries, including China and India, are bracing for the future by mapping out long-term, 10 to 30-year national plans.
Indeed, Korea herself has continued enormous efforts to seek and establish a new development model that could satisfy the knowledge-information society of the 21st century. The efforts have been stepped up especially after the financial crisis of 1998, a monumental event for Korea, which testified to the very limits of Korea’s old development model. However, the efforts have not brought satisfactory results so far. National consensus has not been formed yet on the concrete concept and roles of a new development model, and a number of institutional reforms and policy experiments undertaken are far from being rooted down yet.
In a word, Korea is in the midst of another very critical transition or developmental phase-shift. While paying substantial and increasing costs of transition in the wake of the 1998 financial crisis, these days, the burdens from several long- standing, structural difficulties are amplifying fast, including a low fertility rate, aging population, low economic growth and socio-economic divide. Before itis too late, it is imperative to craft comprehensive, long-term measures to systematically meet the challenges with the well-being of the next generation in mind. Not least because Korea’s economically productive population is expected to drop beginning in 2016, a course of action taken in the next 10 to 15 years will determine Korea’s economic dynamism and social stability thereafter. With a delayed response, low economic growth and deteriorating welfare are feared to be aggravated, threatening economic dynamism and social stability.
In this regard, Korea has recently worked on its “Vision 2030” project, with an aim to establish a new long-term and comprehensive strategy, and then to help forge national consensus on it. Korea has consolidated the outreach works co-prepared by the Government and private sector experts and finally released the outcome, “Vision 2030,” in August 2006.
Vision 2030 is Korea’s first long-term comprehensive national strategy aimed at the next generation from a far-sighted perspective. Complementing the yearly- updated mid-term fiscal plans in effect in Korea, Vision 2030 suggests directions and challenges of major institutional innovation and fiscal investment, which needs to be undertaken successfully to open a new era of shared prosperity by the year 2030. Vision 2030 purports to provide a long-term blueprint of the Korean economy that can be long cherished by all Korean people, including the youngest and yet-to-come future generations.
Chapter 4 _ Vision Analysis: Case Study·091 1.2 The Broad-based Growth as a New Development Paradigm
Although Korea has grown into the 11th largest economy in the world and reached per capita income over US$ 20,000 by 2008, Korea’s quality of life is at the lowest level among the OECD member countries, ranked as 41st among 60 countries by 2005 IMD survey. For instance, many Koreans are distressed by the burden of high housing and private education costs. They are also deeply concerned about their jobs and lives after retirement. Especially nowadays, a substantial number of people decry that it is difficult to find a second chance in life and to unshackle them from poverty. It is likely that such destitution will be passed on to the next generation. Though arguable, much of these problems can be attributed to Korea’s adherence to its old growth-first paradigm for too long. Indeed, Korea’s total welfare spending remains a mere one third of that spent by industrialized countries. Both the domestic and international conditions demand that the traditional growth-first view be replaced by a more balanced and nuanced framework that equally values growth and all factors affecting quality of life.
To this end, Vision 2030, as the core of the new development strategy, sets forth the paradigm of “broad-based growth,”which focuses on the synergic relation between growth and welfare. With broad-based growth, Vision 2030 aims (1) to increase employment opportunities, income, and social mobility, and (2) to promote welfare. Put simply, the new paradigm reflects a belief that not only quality of life but the very competitive edge or growth base of Korea in the future will lie in human capital. Korea needs to drastically upgrade or harness all institutions and social programs pertaining to human wellbeing and human capital acquisition. Public investment in various social programs, including the education and safety net, is an investment for the future, not mere spending: investment in welfare is intended to nurture talented people. 1.3. Overall Scheme, Strategies and Policy Agendas
Vision 2030 aims toward a country where economic growth and welfare standards surge ahead in synergy by the year 2030. It also envisions a nation where every citizen is given equal opportunity and a reason for hope. The overall scheme and contents of Vision 2030 can be illustrated as follows.
The ultimate goals of Vision 2030 are to realize the following in Korea: (1) an innovative and vibrant economy, (2) a safe and equitable society, (3) a stable and poised nation. To achieve an innovative and vibrant economy, Vision 2030 proposes investment in education and enhancement of national competitiveness through market mechanisms. Such apolicy goal implies revision of the old growth strategy of
092·Algeria: Establishment of National Vision 2030 input maximization to growth with innovation strategy with investment in human capital. A safe and equitable society means a society in which the members of society enjoy security from social risks throughout thelife cycle, and equitable opportunities for social mobility. The policy objective requires a well-devised social safety net, a sustainable social security system, and a social investment scheme that can provide opportunities for upward social mobility to all members. A stable and poised nation means a country where conflicts and confrontations are resolved rationally via social dialogue, negotiation, and mutual trust, and respected internationally by its contribution to international society and by becoming a model for other less developed countries.
Overall Scheme and Contents of Vision 2030
Source: Korean government (2006)
The strategic policy areas that Vision 2030 has its eyes on in order to attain its goals are five-fold: 1) growth momentum, 2) human resources, 3) social welfare system, 4) social capital, and 5) globalization. As far as the growth strategy is concerned, Vision 2030 does not deviate much from the old strategy, in that Korea will aim at building an open, flexible, and globalized economy, although Vision 2030 putsgreater emphasis on human capital and social capital over physical capital than before.
The area that majorly deviates from the old strategy is the social policy area, which encompasses social protection and welfare policies. Vision 2030 extends the concept of “social responsibility” more broadly than before. It proposes social protection for childcare and female labor participation and old-age income security.
Chapter 4 _ Vision Analysis: Case Study·093 For example, it proposes lowering the parent’s share of child-care cost from 62% in 2005 to 37% in 2030, and increasing the rate of female labor participation from 50.1% to 65% in 2030. It also proposes introducing a long-term care system for the elderly and extends the pension coverage from 16.6% in 2005 to 65.5% by 2030.
An increase in public expenditure to satisfy the basic needs of the disadvantaged is another area that the Vision 2030 emphasizes. It proposes to aim at zero percent of households living in sub-minimum dwelling standards by 2030 and extend social protection coverage by introducing public assistance by need such as medical aid, housing aid, child benefit, and income subsidies such as EITC. It also proposes introducing after school programs, increasing investment in education and improving the quality of higher education. In the labor market, Vision 2030’s strategy for job creation is investment in workers and labor market flexibility. Along with a flexible labor market, it proposes increasing job training opportunities, especially for those who lost their job in the labor market.
Vision 2030 is to realize steady progress towards its goals in three stages: • Stage I (~2010): complete reform of the major economic and social systems as they constitute the foundation for continuing national progress • Stage II (2010~20): join the top echelon nations in the course of the 2010s, by harnessing the base for sustained growth as well as laying down a viable, quality social safety net • Stage III (2020~30): maintain the momentum of change and emerge as one of the leading countries of the world, leading politically, economically, socially and culturally.
Staged Approach of Vision 2030
Source: Korean government (2006)
Institutional innovation, proactive investment, and the Vision Action Plan are essential instruments that will drive Vision 2030, underpinning all policy actions in the five strategic areas mentioned above. Proactive investment is a key factor shaping the nation’s prosperous road ahead, and Vision 2030 proposes an increased and
094·Algeria: Establishment of National Vision 2030 aggressive investment in a number of strategic areas. Basically, the government needs to focus on areas that will improve the quality of life, expand the growth potential and requirean adequate degree of preparation to meet the increasing demands down the road. For all five strategic areas, including welfare, human resources, and growth momentum, institutional reform is a must to ensure the effectiveness of all individual policy actions and overall fiscal sustainability. This is why Vision 2030 proposes a two-stage approach toward transformation: first focus on institutional reforms until 2010 and then set out on full-scaled proactive investment to stimulate broad-based economic growth. The Vision Action Plan (VAP) suggests specific policy actions or programs together with concrete policy goals and targets for each individual policy action. The most important and urgent action agendas Korea needs to undertake in the near future are summarized as the top 50 core agendas.
50 Core Action Agendas of Vision 2030 Institudional Reforms (26) Fiscal Investment (24) ˙Service sectors ˙Social Services Growth ˙SME support system ˙R&D Monentum ˙Cultural Industries promotion ˙energy (9) ˙New Adm. Capital, ˙Next-generation Industries ˙Balanced Territorial Dev. ˙Parts & Intermedlate products ˙ALMPs Human ˙University enaluation ˙Industry-academia linkage ˙National univ. restructuring Resources ˙Yorth labor ˙Mandatory retirement & Peak wage (9) ˙Devolved welfare & edcation system ˙Academic advancement system ˙Dverseas brain network Glovali- ˙FTA zation ˙Free Economic Zone promotion ˙ODA Foreign labor policy Re-unification infra (6) ˙ ˙ ˙Logistics & Financial Hub ˙Pension system ˙After-school activities ˙Heath insurance ˙Nurery and Child-care ˙Upfront public adm. services ˙Food & Drug security Social ˙Medical payment system ˙EITC Welfare ˙Non-regular workers ˙Comprehensive welfare for the Disabled (18) ˙Social insurance adm. integration ˙Public housing ˙Minimum insurance ˙Old-aged healthcare insurance ˙Real estate staviliaztion ˙Infra for better Living environment ˙Small tradidional business ˙Rural areas support ˙Cinflict Resolution system Social ˙Juridical system National defense sysem Capital ˙Public institutes governance E-government (8) ˙Sub-national Adm system Re-functioning of public servants ˙Community-based informal welfare
Source: Korean government (2006)
Chapter 4 _ Vision Analysis: Case Study·095 1.4. Fiscal Outlook and Future of Korea
Assuming no changes in the baseline welfare spending level, the nation is unlikely to grapple with intergenerational poverty, uneasiness among the elderly, a low fertility rate, and a shrinking job market that will undermine social integration and exasperate individual anxieties in the future. More besetting, the present system may not be fiscally sustainable in the longest-term, given serious institutional inefficient factors within it. Vision 2030 proposes to address these problems through institutional reforms and proactive investments.
According to a tentative analysis, the size of additional fiscal spending needed to finance Vision 2030 is projected to a total annual average of 0.1% of GDP for the period FY 2006-2010 and 2.1% for FY 2011-2030. Because the period until FY 2010 is the period of institutional reform, the extra spending requirements for the period FY 2006-2010 will be minimal and be met by administrative measures such as scaling back tax-exempt/reduction items and improving transparency in taxation. However, once entering the phase of proactive-investment, starting in FY 2010 or so, the extra fiscal resources requirement will mount up huge and the government must consider implementing additional increases on the revenue side. Serious public discussions will be unavoidable to reach a decision on to what extent social welfare should improve and how much burden the public will have to bear in the process, either in taxes or debts.
Projection of GDP and Other Important Figures Index 2005 2010 2020 2030 Remarks (Base year: 2005)
Switzerland: Per capital GDP 16 23 37 49 US: 42 50 (US$thousand) (16) (26) (51) (84) France:34 UK: 36 US: 1 Global Competitiveness Singapore: 3 29 20 15 10 Switzerland: (IMF Ranking) Japan: 21 8 Switzerland: Puality of Life(IMF Australia: 1 41 30 20 10 4 Ranking) US: 14 Japan: 35 Source: Korean government (2006)
096·Algeria: Establishment of National Vision 2030 If Korea makes a successful long-term transformation as envisaged by Vision 2030, Korea is expected to attain average 3.8% of annual growth for the period of 2006- 2030 (4.8% until 2010, 4.3% during the 2010s, and 2.8% during the 2020s). Under such scenario, Korea’s GDP per capita is projected to jump to US$ 37,000 in FY 2020 and US$ 49,000 in FY 2030, both at 2005 constant price. As Korea strengthens its social safety net in the future, the size of welfare spending is estimated to inch up an average of 9.8 percent annually during the period FY 2006-2030, rising to, as a percentage of GDP, the 2001 US level of 15 percent in FY 2019, the 2001 Japanese level of 17 percent in FY 2024, and ultimately climbing to 21 percent, close to the 2001 OECD average of 21.2 percent. 1.5. Conclusion
As this section briefly reviews, Vision 2030 proposes a meaningful revision of the old growth strategy in view of the changed internal and external environment. Specifically, it emphasizes investment in human resources and setting up an advanced social welfare system for “equitable growth.” The major significance of the long- term plan can be found in that it is a long-term plan backed up by the government’s budget plan. There are many famous welfare plans all over the world, but ones with detailed budget plans are rare. In such respect it has higher feasibility and more changes to be put to action. Hence, the plan is not only an ambitious rosy plan, but also a government document that warns against the dangers that might be incurred if welfare programs are introduced without the needed reforms.
Vision 2030 is also incomplete in some aspects. Some of the specific resource plans are not fixed yet, and details of some of the welfare programs are not worked out yet. It inherits the old legacy of an integrated governance of social security system and how the equitable growth strategy will be harmonized by macro-economic policies is not yet clear. In the past, in all countries, many welfare programs did not realize the intended effect, not because the inadequacy of the program but because of the ineffectiveness of the implementation system, and macro policies are often acted in opposite directions. Such respects need to be supplemented not only at the planning stage but also at the implementation stages.
Common criticisms towards Vision 2030 in Korea include that it is trying to resolve social problems with an increase ingovernment spending, it is too rosy ofa plan, etc. But as described in the plan, it is accompanied by a long-term budget plan, and it does not in fact plan to introduce many new and expensive programs. Most of the programs are already planned for, and Vision 2030 is more focused on the budgetary and optimal allocation aspect rather than introducing new plans. Without such a long-term plan, even costly programs may be introduced in the future without due considerations on budget, which may even deteriorate the fiscal positions. Vision
Chapter 4 _ Vision Analysis: Case Study·097 2030 draws an optimistic future of Korea, while the international environment is not as favorable as before. But many of the programs are dependent upon economic conditions, and the plan does not presuppose that the plans will be enacted if economic growth is not accompanied. Furthermore, the growth strategy of innovation driven and market-led growth are not in fact options for the Korean economy but the only alternatives left with Korea under the current and future environment. At this stage, Korea also has to take into account the political and its resultant economic costs incurred by the lack of social cohesion in its growth strategy, as advanced economies have in the past.
Many of the important issues are still open. How to enhance effectiveness and efficiency of the government in general and of social programs in particular, how to reform labor market for more flexibility, and how to design an efficient social security and public assistance systems are among them. Addressing these issues seems to be more urgent than the general directions that Vision 2030 proposes.
2. Foreign Cases 2.1 Finland 2015
The Government report on the longer-term future of Finland, concentrates on regional development. Particular areas of consideration are the prospects of population, production and employment over the next fifteen years. The Government has included in its report a population prognosis as proposed by Parliament.
The Finnish economy has developed well since the recession. Despite a long period of economic growth, unemployment nevertheless remains high. Overall ageing of the population will have a significant impact on Finnish society in the next few decades. The next few years,will already see the number of those leaving work life surpassing that of those entering it, and the number of pensioners will rise sharply.
These social trends have diverse effects, depending on the region. In recent years, regional developmentin Finland has been characterized by internal migration. The ensuing concentration of population and production, combined with ageing, is likely to give rise to increasingly acute problems not only in areas with a net migration outflow, but throughout the nation.
Upon examination of this changing environment, the Government addresses globalization, Finnish competitiveness, the Finnish information society, closer cooperation within the EU and EU enlargement, population growth and the
098·Algeria: Establishment of National Vision 2030 workforce, diversifying regional development, and the environment as a competitive factor. The Government reviews development in growth centers, other urban sub- regional centers and rural areas and assesses changes in the nation’s regional and community structure.
The Government presents its strategies concerning labor supply, readiness for an ageing population, immigration and promoting employment among foreigners living in Finland, education, cultural and sports services as regional attractions, support for enterprise, research and development, municipal economies, regional development programs, the coherence of community structure, housing production, the transport and communications network, and the regional accessibility of welfare services.
Studies were conducted on trends in population, employment and production as well as trends in regional population and workforce figures. These have been published by the Prime Minister’s Office in Finnish under the title “Future Population and Employment Prospects.” 2.2. Japan’s 21st Century Vision
The Council on Economic and Fiscal Policy established the special board of inquiry for examining “Japan’s 21st Century Vision” in September 2004. Four working groups in the areas of Economic and Fiscal Prospects, Competitiveness, Living and Regional Affairs, and Globalization were further established under the special board, and these conducted vigorous deliberations across a wide range of issues. The free and energetic discussions held by the working groups, which delved deeply into their respective fields, provided a basis for the deliberations by the special board, which has systematically condensed its findings into as clear a vision as it can form of what Japan will look like in the year 2030.
Structural reform originally aimed to construct a foundation for the era, taking advantage of the era’strends as opportunities. Now that the period of intensive adjustment (fiscal year 2001~2004) is over, the prospects for the coming quarter century (up to 2030) were reviewed, also taking a longer term perspective, to further clarify the shape of the nation that structural reform is intended to realize. It is to be hoped that the results will be taken as useful food for thought when considering the future shape of Japan.
Japanese government envisaged three strategies to realize the images of the future.
• Create a virtuous cycle of rising productivity and growing income; aim for a
Chapter 4 _ Vision Analysis: Case Study·099 high-quality market society with reliable markets that are considered; to create high intellectual and cultural value, foster and utilize “human resources” and elicit individual motivation. • Take maximum advantage of globalization; the economic development of China and other neighboring countries should be considered a favorable opportunity. • Create systems to provide public values as selected by the citizenry; reform government-dominated markets, eliminating the provision of unnecessary goods and services by the government, and create systems enabling the private sector to act as prime provider of public services. The period up to the early 2010s shall be defined as the period of innovation, and implement thorough going system reforms to enable the expansion of productivity, carry out concentrated reforms during the period of intensive adjustment in particular, aim for a virtuous cycle of structural evolution in which structures undergo change autonomously in response to environmental changes, costs should not be passed on to the next generation, collaborate across generational boundaries in order to mitigate distortions resulting from rapid changes in age composition. 2.3. Backing Australia’s Ability
Backing Australia’s Ability has been developed with a full understanding of current strengths and weaknesses, recognition of relevant national and international factors and a comprehensive assessment of likely conditions in the future. This strategy supports the essential ingredients for a dynamic and productive innovation system. It focuses on the Government’s commitment to three key elements in the innovation process: strengthening Australia’s ability to generate ideas and undertake research, accelerating the commercial application of these ideas, and developing and retaining Australian skills.
The Government’s strategy builds on existing substantial Commonwealth support for innovation by boosting funding to key areas and introducing significant new initiatives. Backing Australia’s Ability provides US$ 2.9 billion of additional funding over 5 years, with US$ 159 million in the first year growing to US$ 947 million in 2005~06. It also identifies areas for ongoing review and future action.
A key aim of the strategy is to strengthen Australia’s research capability, to ensure the flow of new ideas that underpin innovation, to create critical mass in leading research fields, and to build competitive advantage in ICT and biotechnology. The strategy provides significant new investment in these areas including additional funding and incentives to ensure Australia’s research base - the backbone of the innovation system remains strong and internationally competitive.
Backing Australia’s Ability supports greater commercial application of research
100·Algeria: Establishment of National Vision 2030 results. In addition to direct support for R&D, the Government aims to improve the flow of finance into business innovation and to stimulate growth of innovative firms by improving Australia’s capacity to commercialize research and new technologies. This will also be achieved through initiatives to enhance Australia’s capacity to build and manage innovative enterprises, encourage the spin-off opportunities from industry research collaboration, strengthen Australia’s intellectual property (IP) management processes and increase access to global research and technologies.
Backing Australia’s Ability assists the greater commercial application of research from universities and public sector research agencies, like the CSIRO, by strengthening the commercial linkages with industry and making it easier to take promising research to the stage of commercial viability.
To be competitive in today’s world, Australia must develop its strong research base and encourage further collaboration with the world’s best. Australia needs to continue to enhance their own local expertise and skills, and to attract further overseas interest, talent and investment.
The well-educated and culturally diverse Australian society provides a rich environment for generating original and groundbreaking ideas.
The Government’s broad strategy in this area increases university places in critical fields, supports ongoing skills development and enhanced science and technology literacy, provides for increased access to online learning opportunities, and further boost Australia’s skills base through immigration. New Federation Fellowships will create new rewards and incentives for leading researchers to apply their talents in Australia.
The strategy addresses the challenge to build Australia’s capacity in key enabling technologies (such as ICT and biotechnology), not only for the growth and employment opportunities, but also so that Australia continues to be competitive in rapidly changing global markets. The expanding global market for these technologies is an engine for growth, providing jobs, rejuvenating traditional industries and creating new ones.
A high-level committee comprising the Prime Minister, the Minister for Industry, Science and Resources, the Minister for Communications, Information Technology and the Arts, the Minister for Education, Training and Youth Affairs and the Minister for Finance and Administration will be established to oversee the implementation of Backing Australia’s Ability, with an annual progress report provided in the Science & Technology Budget Statement. The Chief Scientist and relevant Government departments will provide advice to the committee.
Chapter 4 _ Vision Analysis: Case Study·0101 The achievement of outcomes will be monitored through ongoing assessment of individual initiatives and their use of funds through regular program reviews for example, regular review mechanisms exist for the Australian Research Council, the Cooperative Research Centres program, the R&D Tax Concession and other innovation outlay programs.
102·Algeria: Establishment of National Vision 2030 Algeria: Establishment of National Vision 2030 Chapter 5
Strategies for Major Policy Issues
1. Industrial Transformation 2. Education Reform 3. Openness and Globalization 4. Territorial Development 5. Health Reform ■ Chapter 05
Strategies for Major Policy Issues
Hong Tack Chun (Korea Development Institute) Myungho Park (Hankuk Univ. of Foreign Studies) Wankeun Oh (Hankuk Univ. of Foreign Studies)
The Algerian government has asked us to help establish policy developments and suggestions in the following fields: industrial transformation, education reform, openness and globalization, territorial development, and health reform. Suggesting the specific strategies for these fields will be the main component of the 2012 Algeria Report. This chapter includes only a part of the basic facts about these fields.
This chapter will examinethe current status of related variables in these areas in Algeria and compare them to the same variables in Korea and the Big 4 advanced countries (the United States, Japan, Germany, and Sweden). The chapter will also compare Algeria to two natural resource-rich countries, Norway and Chile.
1. Industrial Transformation
To investigate the field of industrial transformation, both export diversification and information and communication technology (ICT) industry will be looked at. The share of hydrocarbon exports in total exports has increased from 95.2% in 1995 to 98.3% in 2010. This number shows that Algeria needs to diversity more in its exports by industry. In 2010, while the amount of oil exports was US$ 33.6 billion and its share in total industry was 58.9%, those of gas were US$ 22.4 billion and 39.4%, respectively.
104·Algeria: Establishment of National Vision 2030
Share of Exports by Industry (1995, 2010) (million $, %) Industry Exports (SITC Rev.3) 1995 2010 99.8 281.4 0. Food and live animals (1.1) (0.5) 10.5 29.0 1. Beverages and tobacco (0.1) (0.1) 40.3 94.4 2. Crude materials, inedible, except fuels (0.4) (0.2) 8,909.0 56,087.3 3. Mineral fuels, lubricants and related materials (95.2) (98.3) 0.0 0.0 32. Coal, coke, briquettes (0.0) (0.0) 6,056.0 33,620.0 33. Petroleum, petrol. product (64.7) (58.9) 2,840.6 22,461.9 34. Gas, natural, manufactured (30.4) (39.4) 12.4 5.4 35. Electric current (0.1) (0.0) 0.0 9.5 4. Animal and vegetable oils, fats and waxes (0.0) (0.0) 114.0 311.8 5. Chemicals and related products, n.e.s. (1.2) (0.5) 135.8 205.7 6. Manufactured goods classified chiefly by material (1.5) (0.4) 35.4 14.1 7. Machinery and transport equipment (0.4) (0.0) 11.7 9.6 8. Miscellaneous manufactured articles (0.1) (0.0) 0.0 8.2 9. Not classified elsewhere in the SITC (0.0) (0.0) All Industries 9,356.7 57,051.0
Source: UN, COMTRADE DB Note: Values in parenthesis indicate the shares in the total industry
illustrates the E-government development index (EGDI)22 of the UN in 2003 and 2010 for the comparable countries. The EGDI is composed of three indices: the online service index, telecommunication index, and human capital index. The EGDI of Algeria was 0.318 in 2010, ranked 131st, the lowest. The rank is lower than those of other Maghreb countries such as Tunisia, at 66th, Morocco, 126th and Libya, 114th. The average global EGDI was 0.441 in 2010.
Chapter 5 _ Strategies for Major Policy lssues·105
E-government Development Index E-government development index Country Rank Group 2003 2010 Name Change Index Rank Index Rank - Algeria 0.370 91 0.318 131 -40 - Korea 0.744 13 0.879 1 12 United States 0.927 1 0.851 2 -1 Japan 0.693 18 0.715 17 1 BIG 4 Germany 0.762 9 0.731 15 -6 Sweden 0.840 2 0.747 12 -10 Natural Norway 0.778 7 0.802 6 1 resource rich Chile 0.671 22 0.601 34 -12
Source: UN Global E-government Survey 2003, 2010
shows the numbers of Internet users for Algeria and other comparable countries. The number of Internet users per 100 people in Algeria is 11.2 at the lowest among the comparable countries and the increase of change from 1995 is the lowest. Among the comparable countries, Norway is the highest, with 92.2%.
Internet Users Internet users Country Change Group (per 100 people) Name (%p) 1995 2009 - Algeria 0.0 11.2 11.2 - Korea 0.8 80.3 79.5 United States 9.2 78.2 68.9 Japan 1.6 77.4 75.8 BIG 4 Germany 1.8 79.7 77.9 Sweden 5.1 91.1 86.0 Natural Norway 6.4 92.2 85.8 resource rich Chile 0.3 38.8 38.5
Source: World Bank, World Development Indicators
Mobile cellular subscriptions in Algeria in 2009 were 93.6 per 100 people. They are relatively higher compared to those of other countries. In contrast to no mobile cellular subscriptions in 1995, the amount has rapidly increased.
106·Algeria: Establishment of National Vision 2030
Mobile Cellular Subscriptions Mobile cellular subscriptions Country Change Group (per 100 people) Name (%p) 1995 2009 - Algeria 0.0 93.6 93.6 - Korea 3.6 98.4 94.7 United States 12.7 89.3 76.7 Japan 9.3 90.1 80.8 BIG 4 Germany 4.6 128.2 123.6 Sweden 22.7 112.3 89.5 Natural Norway 22.5 111.0 88.5 resource rich Chile 1.4 97.0 95.6
Source: World Bank, World Development Indicators
Unlike the case of mobile cellular subscriptions, the number of computers per capita in Algeria in 2009 has been very low and its changing rate from 1995 to 2009 is also the lowest among the compared countries.
Computers per capita Computers per capita Country Change Group (Computers per 100 people) Name (%p) 1995 2009 - Algeria 0.3 18.1 17.8 - Korea 7.7 76.1 68.4 United States 36.0 89.9 53.9 Japan 14.6 71.0 56.4 BIG 4 Germany 17.4 79.4 62.0 Sweden 25.5 90.9 65.4
Source: IMD, World Competitiveness On-Line (Original source: Computer Industry Almanac), Data about Algeria: World Bank, World Development Indicators (Original source: ITU)
As illustrated above, the Algerian industrial structure is hydrocarbon dependent and lags behind in the fields of information and communication technology compared to the values of the compared countries. Therefore, Algeria needs to develop its manufacturing industry and diversify export items. We also suggest that
Chapter 5 _ Strategies for Major Policy lssues·107 Algerian authorities need to enhance the linkage between the export oriented hydrocarbon industry and the inward-oriented non-hydrocarbon industry23. This is a necessary step to avoid the Dutch Disease, because the forward and backward linkage among industries makes contributions to the development of natural resources as well as economic growth.
2. Education Reform
In the field of education reform, we compare Algeria to the countries in terms of HDI, quantity and quality of labor, and level of education. First, the HDI of Algeria in 2009 was 0.691, which is the lowest among the countries that are being compared, but its increasing rate was the highest from 1995 to 2009.
HDI
Country Human Development Index (HDI) Group Change Name 1995 2009 - Algeria 0.579 0.691 0.112 - Korea 0.793 0.889 0.096 United States 0.883 0.906 0.023 Japan 0.850 0.895 0.045 BIG 4 Germany 0.835 0.900 0.065 Sweden 0.855 0.898 0.043 Natural Norway 0.876 0.941 0.065 resource rich Chile 0.722 0.798 0.076
Source: UNDP, International Human Development Indicators
The employment rate of Algeria in 2009 is 52.0%, which indicates the second lowest. However, its rate of change from 1995 to 2009 is 14.1%p. This rate is the highest in contrast to the comparable countries that have suffered from some negative changes.
23) IMF(2011a, p. 3).
108·Algeria: Establishment of National Vision 2030
Employment Rate Employment to population ratio, Country Change Group 15+, total (%) Name (%p) 1995 2009 - Algeria 37.9 52.0 14.1 - Korea 60.4 58.7 -1.7 United States 62.4 58.8 -3.6 Japan 61.5 56.5 -5.0 BIG 4 Germany 53.5 55.2 1.7 Sweden 58.1 59.4 1.3
In 2009, Algeria’s GDP per person employed, which is used as a measure of productivity, was US$ 8,051. The most disappointing aspect of productivity in Algeria is that it has decreased from US$ 8,327 in 1995 to US$ 8,051 in 2008. This decrease occurred only in Algeria among the compared countries.
GDP per person employed (productivity)
GDP per person employed Annual Country Change Group (constant 1990 PPP $) Growth Name ($) 1995 2008 Rate (%) - Algeria 8,327 8,051 -276 -0.24 - Korea 26,624 40,261 13,637 3.00 United States 51,455 65,480 14,025 1.74 Japan 38,765 45,587 6,822 1.16 BIG 4 Germany 37,566 42,588 5,022 0.90 Sweden 37,929 48,987 11,058 1.84
Chapter 5 _ Strategies for Major Policy lssues·109 The years of schooling in Algeria recorded 13.6 in 2009, a number that is the lowest among the compared countries. However, the level of improvement, 3.5 years from 1995 to 2009, is the highest among the countries. This improvement is consistent with the positive relationship between the levels of education and income.
Level of Education
School life expectancy Annual Country Change Group (Primary to tertiary, years) Growth Name (years) 1995 2009 Rate (%) - Algeria 10.1 13.6 3.5 2.14 - Korea 14.7 17.0 2.3 1.03 United States 15.8 16.6 0.8 0.35 Japan 14.1 15.2 1.1 0.53 BIG 4 Germany 15.6 - - - Sweden 15.9 15.8 -0.1 -0.05
Source: World Bank, World Development Indicators. Data in 2009 from UNESCO. Note: Germany does not have recent data.
School Life Expectancy vs. GDP per capita
Source: GDP per capita is from World Bank WDI database, School Life Expectancy from UNESCO Note: The solid line is linear fitted values and the dashed line is quadratic fitted values.
110·Algeria: Establishment of National Vision 2030 As discussed, Algeria has low HDI and employment rate in the field of education reform. However, the quality of labor has increased, as the employment rate has risen by 14.1% compared to 1995. Also, the quality of labor, estimated through productivity, declined in 2008 compared to that of 1995. As a leading international comparison means, school life expectancy was 13.6 years in Algeria, which is relatively low. As is generally known, there is a positive correlation between school life expectancy and GDP per capita; therefore, the enhancement in education level is a shortcut for the accumulation of human capital.
3. Openness and Globalization
We look at the trade ratio and FDI ratio as a measure of openness and globalization.
shows the trade ratios to GDP in Algeria and other comparable countries in 1995 and 2009. The trade ratio of Algeria was 76.5% in 2009, which is higher than those of other natural resource-rich countries such as Norway and Chile. The percentage change from 1995 to 2009 is 21.3%p.
Share of Trade
Trade / GDP Country Change Group (%) Name (%p) 1995 2009 - Algeria 55.2 76.5 21.3 - Korea 58.7 95.8 37.0 United States 23.4 25.3 2.0 Japan 16.9 25.0 8.1 BIG 4 Germany 46.9 78.9 32.0 Sweden 72.6 90.1 17.5
Source: World Bank, World Development Indicators Note: Trade= export plus import
illustrates that the share of net FDI inflow to GDP of Algeria is 2.0% in 2009. This number is higher than those of Korea and Japan, which recorded a much lower percentage than 1% and those of the United States and Germany, which are approximately 1%. However, the number is lower than those of the resource-rich countries such as Norway (4.0%) and Chile (8.0%). While the share of net FDI to GDP
Chapter 5 _ Strategies for Major Policy lssues·111 in comparison with 1995 has also increased relatively, it is lower than those of the resource-rich countries. In the case of Chile that achieved an export diversification strategy successfully, it is necessary to take note that the country largely depend on FDI.
FDI Foreign direct investment, net Country Change Group inflows (% of GDP) Name (%p) 1995 2009 - Algeria 0.6 2.0 1.4 - Korea 0.3 0.3 -0.1 United States 0.8 1.1 0.3 Japan 0.0 0.2 0.2 BIG 4 Germany 0.5 1.2 0.7 Sweden 5.9 2.6 -3.3 Natural Norway 1.6 4.0 2.4 resource rich Chile 4.1 8.0 3.9
Source: World Bank, World Development Indicators
Except petroleum and gas, net FDI inflow by sector shows two things in . First, FDI in the information and communication technology sector has decreased continuously since 2003. Second, net FDI inflow has decreased sharply after 2009 because Algeria set up a ceiling of 49% for foreigners, regarding no FDI decrease in the near areas. (IMF, 2011b, p.21)
FDI Inflows by Sector
Source: IMF (December 23, 2010), ALGERIA Staff Report for the 2010 Article IV Consultation
112·Algeria: Establishment of National Vision 2030 As previously stated, Algeria’s trade ratio is higher than those of other resource- rich countries; therefore, Algeria has accomplished openness from the point of view of trade ratio. However, it is true that the expansion of FDI is the strategy that resource-rich countries have mainly implemented in order to achieve export diversification and all the countries succeeding in diversification such as Chile, Colombia, Indonesia, Malaysia, and others, largely depend on FDI (IMF, 2011b). An open FDI system is very important for the development of private-oriented exports. Meanwhile, Algeria’s net FDI inflow has been low, concentrating on the hydrocarbon sector. In order to promote FDI inflow in the non-hydrocarbon sector, the regulation of the ceiling 49% for a foreigner’s share introduced in 2009 should be reconsidered.
Additionally, it is essential to create a new market for export products in open trade. It is therefore necessary to positively review the possibility of joining the WTO, promoting FTA, and participating in the EU and integrating with other regions.
4. Territorial Development
We look at three variables for regional disparity: urban population (% of total), population in urban agglomerations of more than 1 million (% of total), population in the largest city (% of urban). The share of urban population in the total population of Algeria was relatively very low, recording 66.5% in 2010. The rate of change is the fastest among the compared countries. The share of population in urban agglomerations was also very low, 7.9% in 2010, which increased slightly from 1995. It is exceptional that the share of population in the largest city declined from 1995 because of the rapid increase of population in cities.
Regional Disparity Urban Population in urban Population in Country population agglomerations of more the largest city Group Name (% of total) than 1 million (% of total) (% of urban) 1995 2010 1995 2010 1995 2010 - Algeria 56.0 66.5 7.1 7.9 12.8 11.9 - Korea 78.2 81.9 50.9 48.0 29.1 24.4 United States 77.3 82.3 42.1 44.7 8.2 7.6 Japan 64.6 66.8 46.8 49.5 41.4 43.1 BIG 4 Germany 73.3 73.8 7.9 8.1 5.8 5.7 Sweden 83.8 84.7 12.9 13.7 15.4 16.2 Natural Norway 73.8 77.6 22.7 23.4 resource rich Chile 84.4 89.0 34.5 34.8 40.8 39.1 Source: World Bank, World Development Indicators
Chapter 5 _ Strategies for Major Policy lssues·113 5. Health Reform
Life expectancy at birth in Algeria was 72.6 in 2009, which is the lowest from the compared countries. However, the rate of change from 1995 to 2009 is the second fastest among the countries being compared. The rate of change in Algeria is consistent with the positive relationship between life expectancy and income.
Life Expectancy at Birth Life expectancy at birth, total Annual Country Change Group (years) Growth Name (years) 1995 2009 rate (%) - Algeria 68.5 72.6 4.2 0.42 - Korea 73.4 80.3 6.9 0.64 United States 75.6 78.1 2.5 0.23 Japan 79.5 82.9 3.4 0.30 BIG 4 Germany 76.4 79.8 3.4 0.31 Sweden 78.7 81.4 2.6 0.23 Natural Norway 77.7 80.8 3.1 0.28 resource rich Chile 75.0 78.8 3.7 0.35
Source: World Bank, World Development Indicators
Life Expectancy at Birth vs. GDP per capita
Source: World Bank WDI database. Note: The solid line is linear fitted values and the dashed line is quadratic fitted values.
114·Algeria: Establishment of National Vision 2030
shows the mortality rate of Algeria and other compared countries. In Algeria, the mortality rate was 32% in 2009, which is relatively quite high compared to less than 1% in the other compared countries. However, it has improved greatly since 1995.
Mortality Rate, infant Mortality rate, infant Country Group (per 1,000 live births) Change Name 1995 2009 - Algeria 47.3 32.0 -15.3 - Korea 5.2 4.3 -0.9 United States 7.9 6.6 -1.3 Japan 4.1 2.4 -1.7 BIG 4 Germany 5.3 3.5 -1.8 Sweden 4.1 2.4 -1.7
Chapter 5 _ Strategies for Major Policy lssues·115
Algeria: Establishment of National Vision 2030 Chapter 6
Conclusion
1. Implications 2. Lessons ■ Chapter 06
Conclusion
Hong Tack Chun (Korea Development Institute) Myungho Park (Hankuk Univ. of Foreign Studies) Wankeun Oh (Hankuk Univ. of Foreign Studies)
1. Implications
Algeria’s Vision 2030 project begins with an understanding of Algeria’s current position in the world. Then, the examination of pending issues regarding Algeria’s economy is followed by the identification of challenging factors proposed from a long-term perspective and the examination of whether they can be overcome under the current paradigm.24 If it is not easy to overcome the difficulty with the current baseline scenario, a new paradigm will be needed with participation from thepublic and experts. At this stage, according to the Algerian government and the evaluation of experts, it is not enough to have the baseline scenario in order to overcome the challenge. Thus, it is necessary to create a new vision and find a concrete strategy after identifying the challenges. The 2011 report identifies Algeria’s relative status, proposing the basic direction that Algeria should take in the near future and the necessity of working on a vision based on Korea’s experience. The 2012 KSP will be dealing with a rigorous analysis of future challenges and presenting the alternatives.25
24) In working on Algeria’s Vision 2030 in 2012, a future vision that the Algerian people and experts want is expected to complement the information. 25) In order to break down the current situation, the Algerian government understands that it should push forward an aggressive reform that will become the focal point. Although the Algerian government emphasizes the direction and needs for the reform, it eagerly looks forward to Korea’s experience with regard to specific strategies. What the Algerian government would like to hear from Korea is as follows: 1) What should Algeria do in order to achieve a switch inits industrial structure while reducing dependence on petroleum? 2) How does the government execute government expenditure efficiently? 3) Is there a way to lower volatility of oil prices and to improve macroeconomic stability at the same time? 4) How can the government achieve reforms in human capital as well as in the health sector? 5) How can the government achieve a balanced development of the country and efficiency of the land at the same time? 6) What level of a long-term forecast per industry is available?
118·Algeria: Establishment of National Vision 2030 Currently, Algeria promotes is promoting a five-year plan. However, unlike Korea’s economic development plan, Algeria’s five-year plan is composed by aggregating the different 5-year goals being promoted by each ministry. Therefore, Algeria’s five-year plan might be an investment plan at the government level rather than a comprehensive development plan of the country. For this reason, the Algerian government has also recognized the need for a development plan and requested the establishment of a development plan. However, the establishment of a development plan itself is a unique boundary of the government so that it is beyond the scope of KSP. Hence, it is within the range of KSP that Algeria’s long-term vision should be established as a priority and specific policy alternatives will be covered with Korea’s experience in order to achieve the vision.
Korea’s experience has provided some important implications for Algeria. First of all, Korea’s economic success is probably a combination of the public’s intention to be better off, the government’s provision of a strong institutional framework supporting the intention and the dynamism of entrepreneurs from the private sector. In this sense, the first lesson from Korea’s experience is that socioeconomic development is a joint combination of the public, corporations and government. Thus, what Algeria needs now is that all the economic units should dedicate themselves to playing their role. Unfortunately, Algeria has not been equipped with basic conditions in order to embrace Korea’s economic success. The majority of the population does not seem to be complaining about the fact that the government supports their lives with money from the export of oil and gas. In particular, the Algerian private sector comprises a small proportion of the total economy of Algeria and there is no cooperation that inspires the public with dreams and hope. At this stage, it is not much to say that the government is the only economic unit leading Algeria’s economy, which means that the government should lead the public and foster corporations. Based on Korea’s experience, the Algerian government should allow the public to participate in the market and expand the opportunity to experience the market. Furthermore, government-led projects should also gradually be switched into privately led ones.
2. Lessons
The KSP project supporting Algeria’s development plan is a project that the Algerian government has conducted with a special purpose. The year 2012 is the 50th anniversary of Algerian independence. Countries plan momentous events at a 50th anniversary of independence. The Algerian government will also declare a long-term vision with the Ministry of Prospective and Statistics as the focal point, and KDI from Korea is expected to be in charge of a significant portion of the work. Therefore, unlike other projects, Algeria’s KSP project must be a significant project that is of
Chapter 6 _ Conclusion·119 great importance in terms of promoting the country’s vision as well as a part of the event. As the Algerian government is also active, close cooperation is fully expected in the near future.
It is clear that Korea’s experience will be able to provide Algeria with significant strategic implications, so both countries that share long colonial experiences can stand up to the competitiveness of the 21st century. This project will be able to trigger good results in the field of strategy as well as in the fields of exchange and cooperation.
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Chapter 6 _ Conclusion·123
Algeria: Establishment of National Vision 2030
Algeria: Establishment of National Vision 2030
.go.kr 2012 ksp www.
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