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Democratic and Popular Republic of Algeria Growth, Employment and Poverty Reduction

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Democratic and Popular Republic of Algeria Growth, Employment and Poverty Reduction ReportNo. 18564-AL Democraticand PopularRepublic of Algeria Growth, Employmentand PovertyReduction Public Disclosure Authorized (In Two Volumes)Volume 1:Main Report January20, 1999 Human Development Group Middle Eastand North Africa Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Documentof theWorld Bank This documenthas a restricteddistribution and may be usedby recipients only in the performanceof their official duties.Its contentsmay not otherwise be disclosedwithout World Bankauthorization. CURRENCY EQUIVALENTS Currency Unit = Algerian Dinar (DZD) US$1 = DZD 54.68 FISCAL YEAR January 1-December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS ADS Agence de DeveloppementSocial AFS Solidarity Transfer -Allocation Forfaitaire de Solidarite AGEP Agence Nationale de l 'Eau Potable et Industrielle et de l 'Assainissement CNEP Caisse Nationale d'Epargne et de Prevoyance CNP Conseil National de la Planification EDCM Enquete sur les Dipenses de Consommation des Menages 1988 ENMNV Enquete Nationale sur la Mesure des Niveaux de Vie des Menages Algeriens 1995 EAI Individual Farms EAC Collective Farms HSAL Housing Structural Adjustment Loan IAIG Public Work Program - Indemnitepour Activite d'Interet General ONAPSA Office National d'Approvisionnement et de Services Agricoles SAL Structural Adjustment Loan SONELGAZ Societe Nationale de l 'Electricite et du Gaz Vice President: Mr. KemalDervi~ CountryDirector: Mr. ChristianDelvoie SectorDirector: Mr. JacquesBaudouy TaskManager: Ms. SetarehRazmara This report was preparedby a team led by Setareh Razmaraand is based on backgroundpapers preparedby Ragui Assaad,Vincenzo Atella, Paul Glewwe,Kathy Lindert, Nicola Rossi, Lynn Salinger,and Dan Levy. Dominiquevan de Walle was the peer reviewerand the PrincipalAdvisor. Additionaladvice and valuablesuggestions were provided by HabibFetini, ElizabethRuppert, Daniela Gressani, John Underwood,Sarosh Sattar, Kutlu Somel,Fritz Rodriguez, George Schieber and Miria Pigato. MichelineFaucompre, Iqbal Kaur, Alia Achsien, and Marisa Stubbs provided productionsupport. The report could not have been writtenwithout the active collaborationof the Governmentof Algeria. In particular,extensive assistance was receivedfrom the NationalOffice of Statisticsfor preparingthe results of the 1995Living StandardsSurvey. DEMOCRATICAND POPULARREPUBLIC OF ALGERIA GROWTH,EMPLOYMENT AND POVERTYREDUCTION Table of Contents Preface Executive Summary I. POVERTYAND SOCIALCONDITIONS ............................... 1 A. Measuring Poverty in Algeria............................................. 1 B. Poverty Lines for Algeria ............................................ 1-2 C. Dimensionsand Probable Changesin Poverty during 1988-95............. .............. 2-4 D. Characteristicsof the Poor ............................................ 4-6 E. Social Indicatorsand Living Conditions....................... ..................... 6-7 F. Improvingthe StatisticalBase and Future Poverty Monitoring.............................. 7 II. MACROECONOMICENVIRONMENT AND SECTORAL POLICIESTO PROMOTEGROWTH .. 8 A. Background................................... 8-9 B. The TransitionProcess and StructuralAdjustment ................................... 9-10 C. Consequencesof the Lack of Growth................................... 10-12 D. Effects of AgriculturalPolicy Reforms........... ........................ 12-13 E. Public Finance and the Social Sectors................................... 13-14 F. ReducingPoverty: What Matters Most?.................................... 14-16 mR. PUBLICSPENDING AND BENEFICIARIESIN THE SOCIALSECTORS ................ 17 A. Educationand Training ........................ 17-19 B. Health Care System........................ 19-20 C. Basic Physical Infrastructure........................ 20-21 D. Consumer Food Subsidies........................ 21-22 E. Social AssistancePrograms ........................ 22-23 F. Conclusionsand Recommendations........................ 23-25 ANNEXES Annex A. 1. MethodologyUsed in ConstructionPoverty Lines for Algeria Annex A.2. Measures of Poverty and Inequality Annex A.3. Poverty Profiles in 1988 and 1995 Annex A.4. RecommendationsTo ImproveSocial Data Annex B.1. Labor Marketsin Algeria Annex C. 1. Education and Training Annex C.2. Health Care System Annex C.3. Housing Sector Annex C.4. Overview of the Food Subsidy Program Annex C.5. Social Assistance Programs STATISTICAL ANNEX Preface Algeria, a lower middle-incomecountry with a per capita GNP of US$1,580and a 1995 populationof about 28 million,is the largestcountry in the Maghreb. Populationgrowth of about 3.5% in the mid 1980s was one of the highest in the world. It has since slowed to around 2%. Fertility rates are high and as a result nearly 40% of the populationis under 15 years of age. The population is relativelyurbanized: more than half live in urban areas, up from 40% in the early 1970s. Like many other centrally plannedeconomies, Algeria tried, from independencein 1962, to guaranteethe living standard of its populationthrough employmentgeneration in the public sector and extensivesocial protectionschemes. It had considerablesuccess when oil prices were high, from 1973 to the early 1980s, and during this time progress in social indicators was impressive. But the decline in world oil prices in the 1980s led to stagnation of the economy, resulting in a deterioration in living standards, high unemployment,and an increase in the incidence of poverty. The cumulative impact of these effects has aggravated the country's present social crisis considerably. The purpose of this study is to review the nature and extent of poverty, and to assess the impact of the Government's past and present policies to alleviate poverty. This study, complementingother ongoingstudies in the social sectors,is intendedto help the Governmentin better focusing its interventions aimed at poverty reduction and to help the World Bank in designingprojects, strategiesand policiesto supportthe Government's interventions. The study, which is the first comprehensivepoverty assessment carried out in Algeria, is also an integralpart of the recently approvedStructural Adjustment Loan (P-6855-AL,April 1996). EXECUTIVE SUIMMARY A. Overview The Governmentof Algeria is revising its strategy for poverty alleviationand social promotion. This report is a contributionto such a strategy. The report analyzes and assesses the nature and dimension of poverty in Algeria, discusses the role of past and current public policies on poverty, and provides recommendationsfor policy interventionsto further improvethe livingstandards of the poor. Like many centrally planned economies,Algeria tried, from independencein 1962, to guarantee the living standard of the population through employmentgeneration in the public sector and extensive social sector investment and social protection schemes. This was possible when oil prices were high, from 1973 to the early 1980s,and during this time progressin social indicatorswas impressive. But the decline in world oil prices in the 1980s made manifest the economy's fragility. The inefficient publicly dominated industrial structure and the drop in oil revenuesled to economicstagnation and to deteriorationin living standards,high unemployment, and an increase in the incidence of poverty. The cumulative impact of these effects has aggravatedthe country's present social crisis considerably. The Governmentimplemented initial reforms, in the late 1980s,to liberalize the systemon both the political and economicfronts. However, mainly because of structural rigidities,uncompetitive business practices ingrainedduring 25 years of centralized planning, and lack of sufficient changes, the institutionalreforms failed to reverse the economic decline during 1989-94. Efforts at structuraladjustment were resumedand intensifiedsince 1994. The incidence of poverty increased significantlybetween 1988 and 1995. The main causesof this increase were the lack of economic growth and the resulting decline in employmentopportunities. Broad- based economic growth is crucial for reducing poverty in Algeria. It can both directlyraise the income of the poor by creating income-earningactivities in which they can participate, and it will help them indirectly by freeing financial resourceswhich can be directedto productiveinvestments and to priority social sectors. The latter are also important determinantsof growth. Further delays in structuralchanges, needed to restore the level of sustainablegrowth, are likely to increase the social costs. Internationalexperience indicates that the most sustainableengine of growth and of new jobs during a transition from a centrally planned to a market economy is the private sector. Therefore,while deepeningthe process of structural reform, achieving and maintainingmacroeconomic stability, and promotingprivate sector development,Algeria needs to redefine its strategic objectives in such fields as education,health, and economicinfrastructure so as not to undermine a broad-basedeconomic recovery and to be able to fully meet the challengesof the future. To assist those who will be hurt by structural reform and facilitate the adjustment of vulnerable groups to the new economic environment,the Government should continue enhancingsafety net programswhich will rely on more self- targeting. B. Poverty Incidenceand Profile Trendsin Poverty IncidenceBetween 1988 and 1995 A comparison between the 1988 HouseholdConsumption Survey and the 1995 Living Standards Survey indicatesthat
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