A common pitfall in Algerian politics is the belief that the country has progressed because of vast oil reserves. Economic theory, however, as I have shown elsewhere, tells the opposite: Algeria has stagnated for many years because it has long depended on oil proceeds for its economic development. To shed more light on the pitfalls of Algeria's 'oil-only' strategy, this article does what most Algerians would not wish to do: imagine their country with absolutely no oil. By doing this, it is hoped that Algerian politicians would one day, hopefully in the near future, realize the urgent need for adopting a new and fresh development approach that is inherently different from what is currently in place.

Background

What I want to do here is imagine Algeria with no oil reserves. To partly achieve this, I have followed a straightforward academic approach: estimate Algerians' living standards on the assumption of zero oil and then compare them with the actual numbers. The discrepancy or residual would then be attributed to dependency on oil proceeds.

This is a simple, but, as the economic literature has shown, powerful approach. More precisely, the estimates (Table 1 below) were obtained by first estimating a conventional production function with capital and labor, in addition to oil proceed, as explanatory variables, then setting the oil coefficient to zero. Data for estimation, in 1987 prices, come from the World Bank, World Tables, 1994.

The most striking result to be noted from the table is the serious deterioration in Algerians' living standards in the zero-oil case. Thus, in the period 1974-79, average income, as measured by real GDP per capita, would have been only US$840 as opposed to the actual US$3,095. This is a significant reduction that represents a drop of more than 70 percent. Similarly, in 1980-85, Algerians would have witnessed a sharp decline in their average income, from US$3,082 to only US$830; a drop of more than US$2,250 in absolute value. In 1986-91, the gap between the actual GDP per capita and the estimated one is lower (roughly US$1000), confirming the hypothesis that the oil-only strategy is to blame for the post-1986 disaster. On the whole, Algerians' living standards would have been more than three times lower had Algeria not have any oil reserves for the period 1974-91.

The Neighborhood

A more attractive exercise would be to compare Algerians' living standards without oil with their counterparts in Morocco and Tunisia. This is interesting because many Algerians feel proud to have always enjoyed higher living standards than the bulk majority of people in their neighborhood. In the 1970s, in particular, Algerians attributed their success to Boumedienne's special economic policies (namely the Agrarian-Cultural-Industrial revolutions); in the 1980s, they simply felt that the blessing was a gift from God.

The data in Table 2 is self-explanatory. For example, during the period 1974-79, Algerians' average income would have been almost 40 percent lower than that of their Moroccan counterparts and more than 60 percent lower than that of Tunisians. While for the period 1980-85, these percentages drop to about 20 percent and 50 percent, respectively, the gap, evidently, remains significant. This, however, is not strictly the case with the post-1986 period where the average income of Algerians is estimated to have been almost 20 percent higher than that of Moroccans and only about 20 percent lower than that of Tunisians.

On the whole, Algerians' living standards without oil would have been about 20 percent lower than those of Moroccans and about 45 percent lower than those of Tunisians.

On the other hand, there is a warning. The estimates here compare Algerians' living standards with those of their Moroccan and Tunisian counterparts on the assumption of no oil and no manufacturing sector. If one assumes the existence of a leading manufacturing sector in Algeria, as it is the case with Tunisia, for example, then a different conclusion emerges. Algeria has a better qualified labor force and a larger stock of human capital, thanks to Boumedienne's free education policy. This, combined with a smart technology and industrial policy, would have undoubtedly produced an Algerian miracle. Algeria would have become the small Japan of Africa, as many Algerians were poised to believe in the late 1970s. Furthermore, Tunisia appears to take the lead in terms of GDP per capita because the country itself used to depend on oil proceeds for economic development. Similarly, for Morocco, one should not forget the crucial role of the phosphate sector in improving Moroccans' living standards. Hence, a more meaningful comparison would have been between Algeria without oil, on the one hand, and Tunisia without oil and manufacturing, and Morocco without manufacturing and phosphate, on the other.

Nevertheless the current exercise does give a rough idea on Algerians' average income without oil, stressing, at the same time, the role of manufacturing in improving the livelihood of many people in such countries as Tunisia and Morocco.

Conclusion

Not so many Algerians seem to appreciate the fact that oil for its own sake is not a virtue. Those who do, namely economists, can never make it to the presidential palace in Algiers to get actively involved in designing a meaningful development strategy that will eventually save the country. The reasons are many, but the most important of these is the existence of 'barriers to entry.' In other words, political monopoly exists. But those lucky ones who manage to get their way into Algeria's White House, they, as expected, become "so charitable" to their politicians. They twist their views to tell them what they really want to hear: pump oil for its own sake, and the IMF, like oil, is a virtue.

It is really a puzzle that with such well-documented shortcomings of the oil-only strategy, Algerians do not seem to have made any real progress in minimizing dependency on oil proceeds for economic development. The reasons, as I argued here and elsewhere, are many; the most important, undoubtedly, being that Algerian politicians tend to stick to what they really know best: pumping oil.