Algeria: Growth, Employment and Poverty Reduction

The Government of Algeria is revising its strategy for poverty alleviation and social promotion. This report is a contribution to 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 recommendations for policy interventions to further improve the living standards of the poor.

Like many centrally planned economies, Algeria tried, from independence in 1962, to guarantee the living standard of the population through employment generation 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 progress in social indicators was 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 revenues led to economic stagnation and to 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 government implemented initial reforms, in the late 1980s, to liberalize the system on both the political and economic fronts. However, mainly because of structural rigidities, uncompetitive business practices ingrained during 25 years of centralized planning, and lack of sufficient changes, the institutional reforms failed to reverse the economic decline during 1989-94. Efforts at structural adjustment were resumed and intensified since 1994.

The incidence of poverty increased significantly between 1988 and 1995. The main causes of this increase were the lack of economic growth and the resulting decline in employment opportunities. Broad-based economic growth is crucial for reducing poverty in Algeria. It can both directly raise the income of the poor by creating income-earning activities in which they can participate, and it will help them indirectly by freeing financial resources, which can be directed to productive investments and to priority social sectors. The latter are also important determinants of growth. Further delays in structural changes, which are needed to restore the level of sustainable growth, are likely to increase the social costs. International experience indicates that, during a transition from a centrally planned to a market economy, the private sector is the most sustainable engine of growth and of new jobs. Therefore, while deepening the process of structural reform, achieving and maintaining macroeconomic stability, and promoting private sector development, Algeria needs to redefine its strategic objectives in such fields as education, health, and economic infrastructure so as not to undermine a broad-based economic recovery and to be able to fully meet the challenges of 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 enhancing safety net programs that will rely on more self-targeting.

B. Poverty Incidence and Profile Trends in Poverty Incidence Between 1988 and 1995

A comparison between the 1988 Household Consumption Survey and the 1995 Living Standards Survey indicates that the percentage of the population with average consumption below the poverty line increased from around 8 percent to around 14 percent during that period. Changes in poverty over time and the structure of the poverty profile in Algeria should be treated with caution due to comparability problems between the surveys and to problems underlying the measurement of living standards. Moreover, the choice of a poverty line inevitably involves some element of arbitrariness. However, the conclusion that poverty increased from 1988 to 1995 appears to be robust to various choices of poverty lines and measures.

Trends in Social Indicators

Some aggregate social indicators and non-income measures of welfare, generally in education and basic social infrastructure, compare favorably with the average for lower-middle income countries. In other areas however, such as health, indicators compare less favorably. Moreover, there appear to be important disparities between urban and rural areas and among regions in access to social services.

The illiteracy rate is about 35 percent (50 percent decline since 1970s). The primary gross enrollment rate is about 99 percent, and important improvements were made in female primary and secondary enrollment rates over the last two decades. Beyond the primary level, however, there are considerable differences in enrollments among regions and income groups: total urban secondary enrollment is about 82 percent, compared with about 77 percent for the urban poor, and total rural secondary is about 64 percent, compared with about 59 percent for the rural poor. Repetition and dropout rates are high and increase substantially at the secondary level.

Past progress in health has been significant. Data from 1995 indicate virtually no difference in vaccination coverage among poor and non-poor households. However, some reversals in health status have appeared in recent years. For example, the infant mortality rate, which had dropped substantially during the 1980s, is now stagnating. Progress in reducing infectious diseases has also been reversed, and the incidence of these diseases is increasing. While the deterioration in health conditions can be presumed to affect lower income groups more than others, the data available do not provide the detailed information needed to test this presumption.

Progress in access to basic physical services has also been impressive. About 80 percent of the total population — and about 60 percent of the poor — have access to safe piped water. As with access to health and education, however, disparities continue to be important between urban and rural areas, as well as across regions. Access to electricity, almost as widespread in rural as in urban areas, is equitably distributed: about 96 percent of both the rural population and the rural poor have access to electricity.

Who Are The Poor?

According to 1995 data, about 4 million people, or 14 percent of the population, live below the poverty line; Raising the poverty line by 25 percent increases the number of poor by 2.5 million. Thus, about 22 percent of Algerians are vulnerable to even a small deterioration in economic conditions. In both 1988 and 1995, almost 70 percent of the poor lived in rural areas, but the share of the urban poor has increased. In 1988, the incidence of poverty in rural areas was about twice that in urban areas. This disparity did not change much by 1995: the headcount index indicates that rural poverty, at about 19 percent of the population, is more than twice as prevalent as in urban areas, where it affected 9 percent of the population.

The poor in urban and rural areas have some common characteristics. Both tend to have larger than average household sizes, a large proportion of children and a high dependency ratio. Most own their dwellings, with 80 percent living in houses. Poverty is strongly associated with low education and schooling. Enrollment rates are lower for the poor, particularly in secondary education, in rural areas and among women.

Most of the working-age poor (16 - 59 years of age) are employed, but poor households have a higher ratio of non-working members to working members. In both rural and urban areas, most of the poor live in households where the head is a wage earner. However, compared with the non-poor, the poor are also more likely to live in households where the head is unemployed. In rural areas, people living in households where the head is working in agriculture, either as farmers or as agricultural workers, have higher than average rates of poverty. Furthermore, most of the poor in rural areas are landless and they are involved in field crops (cereals). While diversification of income sources is more common in urban areas for both the poor and non-poor, most secondary activities of the urban poor are concentrated in the commercial and services sectors.

Among those not working, the incidence of poverty is higher among the unemployed than among the inactive. While unemployment is more of an urban phenomenon in Algeria, the incidence of unemployment among the poor is higher than among the non-poor: in 1995, the unemployment rate among the poor was 44 percent in urban areas and 35 percent in rural areas, compared with 29 percent and 24 percent for the non-poor in the two areas, respectively. Finally, among the economically inactive population, the highest incidence of poverty is found among the elderly men in rural areas.

C. How Economic Development From 1987 to 1995 Affected the Living Standards of the Poor

The macroeconomic stabilization and structural reforms undertaken since 1987 failed to reverse the
economic decline that began in the mid-1980s: all basic macroeconomic indicators continued to deteriorate from 1987 to 1995. Important reversals in economic policy during the first phase of transition to a market economy (1989-94) resulted in prolonged economic recession, accompanied by increasing inflationary pressure, high external debt, growing unemployment, and mounting social discontent. During the second phase of the transition, beginning in 1994, Algeria introduced radical structural reforms, relaunched the stabilization and adjustment programs, and restored macroeconomic balances. The full effects of these changes and the implementation of further structural changes to the economy will take some time. The stop-and-go implementation of the reform programs since 1989 and the lack of economic growth until 1995 resulted in a substantial deterioration of living standards for all and increased the incidence of poverty.

Per capita GNP declined by 45 percent, from US$2,880 in 1987 to US$1,580 in 1995, and per capita private consumption fell by an average of 2.5 percent per year over the same period. Inequality seems unchanged according to the available data surveys, but this finding requires further investigation. Several features of the economy from 1987 to 1995 are particularly relevant to increasing poverty during that period.

• Without economic growth, disposable income declined. Despite high investment rates, average annual GDP growth from 1987 to 1995 was about 0.3 percent per year, while non-oil and non-agriculture real GDP fell on average by about 2 percent per year. Declining productive sector growth was due mainly to inefficient performance in the industrial and manufacturing sectors, which continue to be dominated by large public enterprises, and lack of private investment. Returns to investment outside the oil sector were thus very low (five-year ICOR ranging from 10 to 40). Disposable household income was also severely affected by the recession and followed a pattern similar to that of consumption, falling by about 36 percent in real terms over the period. This sharp decrease was mainly caused by the decline in wage income.

• Without economic growth, creation of productive employment has been absent. The unemployment rate increased from 17 percent in 1985 to 27 percent in 1994. In the past, the government had responded to exploding growth in job seekers by expanding public sector employment. After the oil price collapse, however, total public sector employment slowed, and employment in the public industrial sector declined. The non-agricultural private sector was unable to offset this decline, and average agricultural employment stagnated over the period. Because the incidence of unemployment is higher among the poor than among the non poor, rising unemployment in both urban and rural areas has been an important cause of increasing poverty, particularly in urban areas.

• Changes in the characteristics of unemployment are of great concern from a poverty perspective. Unemployment is spreading to older adults while the proportion of unemployed youth is declining, and unemployment among those with lower levels of education is increasing. Since illiterates have relatively low employment expectations, increasing unemployment among poorly educated household heads indicates that job opportunities are lacking.

• Agricultural policies have had mixed effects. Because most of the poor are concentrated in rural areas, the government's agricultural policies have a substantial impact on poverty. Since the late 1980s, the government has introduced reforms in agricultural input and output prices, in trade in products other than cereals, and has eliminated the input distribution parastatal. As a result of liberalized input and output prices, rural farm households have been, in the short term, receiving less for certain products as protection is decreased while paying more for inputs they consume, with obvious negative implications for financial profitability, changes in products, and product mix. While the maintenance of cereal price supports acts as an income safety net for households that are net sellers of grain, poor rural households are often net consumers of basic foodstuffs. Protection of grain prices may not compensate adequately for the higher cost of food staples in their consumption basket. Reduced agricultural protection, which leads to loss of employment and income for some vulnerable rural groups, requires government assistance in the short term.

• The government's land privatization reform is not yet completed. In 1987, farmlands formerly operated by the state (about 40 percent of Algeria's arable land), were distributed to individual (EAI) and collective farms (EAC) with usufruct rights. The remaining 60 percent of arable land were already in private hands. As a result, a new farm community of individual farms and farmers has arisen. This community requires a strong, competitive market sector to address its agricultural services needs. However, because EAI/EAC farmlands are still owned by the State, and because a program to give official deeds to private farm owners has not yet been implemented, lack of secure title to land and, hence, fixed assets for collateral limits farmers' access to credit. This in turn constrains efforts to increase agricultural productivity. The rural poor have limited access to EAI/EAC land, providing only the labor needed for cultivation. Most cultivation, however, is still heavily mechanized, a legacy of machinery and fuel subsidies from the formerly public sector farms.

• Fiscal adjustment has resulted in cuts in social sector spending. Despite the consistent national focus on improving social conditions and high public investments in the social sectors, the returns are low and there appears to have been deterioration of some social indicators in recent years (particularly in health and education). Central government social sector spending as a share of GDP declined from 12 percent in 1987 to about 9 percent in 1995; as a share of government expenditures, social sector spending declined from 38 percent in 1987 to 29 percent in 1995. The aggregate impact on the poor is not clear. While some spending cuts appear to have been made through increases in efficiency, the evidence is unclear. But fiscal policy pursued cuts in both capital and current health and education expenditures. This policy undermines the country's prospects for future growth, because of its medium- and long-term negative effects on living standards and on the productivity of the poor. Declining quality and availability of social services may result in further erosion of past achievements in the social sectors and may pave the way for higher poverty levels in the future. In addition, the elimination of food subsidies has been estimated to cost the poor about one-fifth of their purchasing power. While average outlays under the safety net programs appear to compensate for the loss of food subsidies, it is unclear whether pro-poor targeting by these programs was adequate enough to prevent an increase in poverty.

D. A Strategy For Reducing Poverty

Key elements for a strategy to reduce poverty include: restoring and maintaining macroeconomic balances; enhancing labor-intensive growth; speeding up privatization and public enterprise reform; continuing agriculture reforms; investigating reforms needed in the labor market to promote growth; emphasizing human capital development and improving the efficiency and the quality of the social sectors benefiting the poor; and continuing cost-effective safety net measures for those segments of the population unable to take advantage of income-earning opportunities. None of these elements, without the others, can provide sustainable reductions in poverty.

Sustainable Labor-Intensive Growth is Prerequisite: Lack of economic growth from 1987 to 1995 is the most important factor contributing to increasing poverty in Algeria. A primary imperative for any poverty alleviation strategy should be employment creation through broad-based economic growth, ensuring that the benefits of growth are distributed across all income groups. Over the medium- and long-run, this can be achieved by promoting labor-intensive activities in agriculture, manufacturing, and services, especially in export-oriented sectors and, to some extent, in the informal sector. In the medium term, the impact of growth on poverty reduction is expected to be high. The elasticities of poverty measures to growth in mean per capita consumption expenditures suggest that, with a distributionally neutral growth path, 10 percent per capita growth would reduce poverty by 26 percent nationally, 32 percent in urban areas, and 23 percent in rural areas.

Disengaging the State and Promoting the Private Sector. Encouraging competition, promoting the private sector, and disengaging the State from involvement in production and trade are the three main measures needed to increase economic growth. Promoting private sector growth should help reduce unemployment and help alleviate poverty. Development of the private sector, and of small and medium industrial and agricultural enterprises in particular, will require State disengagement and improvement of the investment climate. This would lead to an increase in budgetary savings, which in turn should finance the required growth in private sector investment. Furthermore, progressive withdrawal of the State from productive and commercial sectors would free up public funds to finance activities beneficial to the poor, as well as safety nets necessary to assist those who will be hurt in the short term by enterprise restructuring. Consequently disengagement of the State should be accelerated. Reforms designed to make the economy more responsive to market signals can be expected, in the medium term, to improve employment and income opportunities for the entire population.

Pro-Agricultural Growth Strategy. Since most of the poor live in rural areas, creating rural income earning opportunities (farm and non-farm activities) should be a main priority. Policy interventions to increase agricultural productivity could encourage farmers to grow whatever crop is best suited to the land they work. The government's abandonment in 1994 of the "self-sufficiency" policy for food production is an important positive step in this direction. The government priorities should focus on:

• Building an efficient and high productivity agriculture and rural sector that will be more competitive: The agricultural adjustment process should continue in order to establish an incentive structure that allows markets rather than public authorities to determine resource allocation across competing activities. The program should focus on: (i) natural resource management, especially in erosion and water management; (ii) delivering agricultural and rural credit, as well as irrigation services; (iii) full privatization of public lands and enterprises; (iv) reducing public expenditures and making remaining investments and expenditures more efficient; and (v) further reducing or eliminating public interventions in agricultural trade and marketing, and promoting the development of small and medium enterprises.

• Creating the policy environment to be conducive to new investment: To create an environment conducive to private investment, policies need to be consistent, transparent, and non-arbitrary in their implementation. Moreover, current legal, regulatory, and judicial frameworks need to be reviewed for the impact they have on the private sector.

• Using public expenditures and targeted programs to facilitate the adjustment of vulnerable groups in rural areas: Reduced agricultural protection and more liberal trade import policies will lead to greater efficiency and competitiveness in the long term, but in the short term it will decrease employment among many of the poor rural households who will have difficulties adjusting to the new environment. To help these groups, government assistance programs should focus on (i) labor-intensive civil works programs, and (ii) economically viable alternative cropping patterns to absorb labor (i.e., labor-intensive horticulture production, processing, and export).

• Continuing progress in macroeconomic reform: Progress in macroeconomic reform should continue in order to eliminate foreign exchange market distortions as a source of anti-export, pro-import bias.

Structural Changes Needed to Promote Growth and Generate Employment. The expansion of employment may require changes in labor market policies and regulations. Greater labor market flexibility (regulations and wages) can promote privatization and facilitate public enterprise reform by enabling the industrial, agricultural and service sectors to absorb more labor, and by allowing greater labor mobility. Experience shows that increases in the minimum wage should be kept below the rate of labor productivity growth. However, further research is needed to understand: (i) the link between labor market policies and expansion of employment; (ii) the effects of relaxation of labor regulations on the poor; (iii) the importance of the informal sector as source of income for the poor; (iii) the costs of labor (wage and non-wage); (iv) the cost of retrenchments during the enterprise restructuring; and (iv) the obstacles to obtaining productive employment for women, and alternatives to increasing women's access to the labor market.

Improving the Efficiency and Quality of Priority Social Sectors. Public spending is a powerful tool for reducing poverty and inequity, in both the short and long terms. In the short term, poverty reduction measures will only bear fruit if resources are managed more efficiently and redirected to priority social sectors. In the longer term, primary health and basic education are the priority sectors for Algeria in its attempts to reduce poverty and improve human capital, because they are essential to achieving sustainable growth. Faced with growing demographic pressures, besides improving quality and increasing returns in the priority social sectors, the government needs to prevent actual spending per capita from falling. While necessary, the introduction of various safety net measures for those segments of the population that are temporarily or permanently unable to take advantage of income-earning opportunities is not a sustainable or sufficient strategy for reducing poverty.

Education and Training. Investing in the human capital of the poor is necessary for sustainable growth and ensures that the poor have the skills necessary to benefit from the jobs created as a result of structural reforms. The government, therefore, needs to emphasize the following priorities:

• Ensure universal access to basic education, for both females and males. Particular attention should be given to reducing the large urban-rural and gender disparities in enrollment rates at the secondary level, with rural girls the ultimate target. This would require: (i) abolishing the quota system at the secondary level; (ii) using cost-recovery and alternative financing sources in higher education, in order to increase availability of public resources for financing basic education; and (iii) further analyzing constraints to female school attendance in order to better understand how to design appropriate policy to increase female enrollments.

• Increase access to education for the rural poor. While it is necessary to further investigate the causes of dropouts in primary and junior secondary school, early dropout among the poor may be determined to a large extent by indirect out-of-pocket schooling costs (e.g., clothing, transportation, etc.) and by the opportunity cost of lost labor. Strategies to improve the educational profile of the poor will need to account for their financial constraints so that they can take advantage of increasing opportunities for schooling.

• Improve the quality of education and vocational training to better prepare graduates for labor market opportunities. Improving the quality of education would require the introduction of a detailed system of quality assessment. The publicly operated vocational training system, which is presently designed to address social considerations, needs far reaching reforms in order to improve the skills of youth for the emerging market economy.

Health Care. The Algerian public health care system, which suffers from inefficient resource use, faces the difficult challenge of expanding and more equitably providing services while simultaneously improving quality with limited funding increases. The government needs to focus on the following priorities:

• Providing good-quality basic public health services to low-income groups and in rural areas. The recent deterioration in health status suggests that greater emphasis should be given to primary and preventive care, in particular for low income groups (e.g., immunization, sewage, sanitation, maternal education and family planning).

• Improve equity and expand health coverage. The present bias against poorer regions and between rural and urban areas needs to be reversed. Increasing the level of resources targeted towards poorer groups or regions would likewise increase the marginal benefit of health spending. Extending services and coverage to poor and marginal groups may require the government to enter into operational partnerships with non-governmental organizations and local communities.

• Revise the Pricing Structure. By improving the managerial environment and by designing and implementing a detailed monitoring system, price discrimination can be used to target subsidies to the poor. Geographical price discrimination, disease targeting, and appropriate use of lower levels of the system will need to be closely examined.

• Involve the private sector. To make the best use of combined public and private resources, the government may choose to reduce its role as a direct provider while expanding its capacity to purchase private health services, as well as regulate the sector (i.e., policy setting, planning, pricing determination, and quality control).

Basic Physical Infrastructure

Safe Water Supply. Government policies should focus on maximizing efficiency of water use and providing safe, adequate and easily accessible water supplies and sanitation services, with particular attention to low-income households. A higher level of cost recovery will help increase both financial sustainability and sector efficiency. In particular, experience suggests that water investments in both urban and rural areas without cost recovery may involve considerable waste, under-funding of recurrent costs, and poor service delivery.

Electricity. Worldwide experience shows that subsidies to electricity consumption are not cost effective in reaching and helping the poor. In Algeria as elsewhere, the non-poor, who consume much greater quantities of electricity, are probably the main beneficiaries of high subsidies. Policy reform should work towards reaching economic cost as the basis of electricity pricing.

Housing. The upcoming Housing operation (HSAL) will help authorities to shift from a supply-driven and publicly dominated housing sector to a demand-driven market-oriented sector. It is strongly advisable to gradually eliminate housing subsidy schemes given the evidence that the non-poor are the primary beneficiaries of the current scheme and because of the difficulties in targeting housing subsidies to the poor. Moreover, the private sector should take increased responsibility for providing housing since there is no economic or social rationale for the public sector to do so. Promoting private sector development and ensuring an adequate regulatory framework and enforcement should eventually be the only areas of public sector involvement.

Enhancing Social Assistance and Safety Net Programs. Social assistance (e.g., cash and in-kind transfers, family allowances) and safety net programs in Algeria are targeted to various groups. Unfortunately, little is known about the impact of these programs on poverty, although it is clear that some schemes (i.e., scholarships, family allowances) don't reach the poorest. Given political economy constraints and administrative and other costs of targeting, the overall transfer programs may be having a reasonable impact on living standards. However, additional schemes may be needed to help those not currently reached. The new safety net programs (AFS and IAIG) are expected to favor the poor, and these may have played an important role in recent poverty alleviation efforts. Analysis of the elimination of consumer food subsidies and the compensation schemes instituted to replace them shows that the average transfer level under these programs adequately compensates for the value of food subsidies lost. However, it is unclear whether the coverage provided is broad enough to prevent an increase in poverty arising from the removal of food subsidies. In the short term, strategies to enhance the employment prospects of the poor should continue to be complemented by present safety net measures to reach those who are unable to work (due to disability or age) and the unemployed. The targeting of these programs could, however, be improved, and this would require identifying a well-focused set of objectives. Better socioeconomic indicators at the household level are needed to identify the characteristics of poverty groups and refine a set of indicators for monitoring living conditions. These indicators could form the basis for self-targeting and improving the targeting of the poverty alleviation strategy.

Improving the Statistical Base and Future Poverty Monitoring. Targeting the poor requires that the government continuously identify the poor and understand how they would respond to changing public policies. Algeria's National Household Surveys provide a good start for describing income poverty. However, better data are needed to measure poverty accurately, develop a detailed and policy-relevant poverty profile, and assess changes over time. Two key steps are needed to improve the statistical base: (i) institutionalization of a single standardized, integrated and improved household information base at the national level, and (ii) establishment of a monitoring system of key socioeconomic indicators by region and other relevant disaggregations such as gender. The first of these steps would allow collection of a comprehensive welfare indicator based on consumption expenditures. This would represent the single most important and feasible means of identifying the poor and tracking poverty trends. In addition, social indicators provide supplementary information important in determining access levels and effectiveness of social services, and would indicate changes in living standards not always captured by the income measure. Second, given the rapid pace of economic and social change in Algeria, the government needs to establish a regular monitoring system to have a timely and clear picture of how its policies are performing and how they affect the level and depth of income and non-income poverty in the country.

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