Export growth and diversification in Algeria: lessons from China’s foreign trade experience

Celia Bouzekri

【Abstract】Algeria like many of its Middle Eastern and North African (MENA) counterparts, rely heavily on the industry of fossil fuels, such as gas and petroleum. This big reliance of Algerian economy on hydrocarbon exports revenue makes it very vulnerable to external shocks. So since the late 1990s different measures had been adopted to help promote the diversification of exports, but so far the adoption of these measures, has mixed results and has failed to boost foreign trade out of Hydrocarbons exports in a significant way. But unlike Algeria, China has been the most successful developing country in this modern era of globalization. It was one of the poorest countries in the world in 1980s, and since initiating economic reform after 1978 its GDP has expanded at a steady rate over 10% and it`s foreign trade is considered as one of the most important in the world.Given these facts the purpose of this paper is to analyze, why Algeria struggles to develop and diversify its exports out of Hydrocarbons. And what are the engines of the impressive growth of china's foreign trade, if any; lessons can Algeria take from china's foreign trade experience.

【Key words】Algeria;Exports growth;Diversification;China;Trade policy

1.Introduction

Over the past twenty-five years, Chinas foreign trade has undergone unprecedented development. The total trade value increased from US$36 billion in 1978 to US$ 3642.06 billion in 2011①. The proportion of manufactured goods in total exports rose from less than one half in the early period to 90 percent in 2011. Manufactured exports saw also a significant structural change, apart from traditional major export items such as textiles and light industrial goods, machinery and transport equipment exports also achieved rapid growth, increasing from 10 percent of total exports in the early 1990s to nearly 40 percent in recent years. During this time, state sector dominance of foreign trade was gradually replaced by joint participation of state-owned enterprises (SOEs) and foreign-invested enterprises (FIEs). By 2003, exports by FIEs reached 50 percent of total exports, up from a mere 1 percent in 1985. Opposite to the great success of Chins foreign trade, Algerian foreign trade is poorly developed exports are very low and are mainly composed of hydrocarbons. In fact hydrocarbons in Algeria account for 95 percent of exports, 60 percent of government revenue, and 30 percent of GDP②, making Algerian economy vulnerable to changes in world oil markets. Therefore the reduction in the dependence on oil and other hydrocarbons, through the development and the diversification of non hydrocarbon exports has been the main long term objectives of the government's adjustment effort since 1994. But despite successful stabilization in the past few years, progress in the structural areas has been slower. The pickup of growth in the no hydrocarbon sector exports has not yet materialized. For example, non-oil exports in 2011 still only 5 percent of total.

Given this introduction, the main objective of this report is to determine the most important engines behind the huge success of Chinese foreign trade in order to study the possibility of applying these policies to Algerian foreign trade in order to diversify and increase exports out of hydrocarbons.

Many Elements were behind the huge success of chinas foreign trade, such as: 1.Market-oriented economic reform, direct investment corporations, export processing trade, and appropriate exchange rate policies.

So after a comparative analysis, between Chinas and Algerias foreign trade policies, the bellowing lessons can be addressed to Algerian policy makers in order to increase and diversify Algerians exports out of hydrocarbons:

Ⅰ.Policies to encourage FDI-led exports in Algeria.

Chinas policies aiming at promoting export-oriented FDI has met with remarkable success. FDI has been at the core of Chinas foreign trade expansion. Conversely to China, FDI inflow to Algeria has been traditionally scarce and has been mostly flowing to the hydrocarbon sector, open FDI regimes are essential for the development of a private sector-led export. The new FDI regulations adopted under the 2009 Supplementary budget law③ in Algeria, which oblige foreign companies whose only business is the importation of goods for resale will be bound to transfer 30% of their stock to an Algerian partner, while companies which invest directly in Algeria will have to transfer 51% of their stock to local partners. Are likely to deter not attract more FDI by putting a ceiling on foreign investors stake in new FDI projects.Thus Algeria should review its FDI policies to attract more foreign capital by creating a more FDI friendly regime.

II.Promotion of exports through Special Economic Zones (SEZs) and Exports processing zones(EPZ)

From Chinese experience in Special Economic Zones (SEZs), Algeria who failed to create its own SEZs can draw the following lessons:

A successful SEZ operation depends critically on a set of economic and institutional factors. Compared with elsewhere in China, incentive packages offered in the SEZs have not only been attractive to foreign and domestic export investors, but have a high degree of flexibility as well. Also for these incentives to work effectively, a favorable overall investment environment has to be in place.This requires a comprehensive strategy, dealing with various issues from infrastructure upgrading and legal framework development, to changing government behavior. The location of a SEZ also matters, establishing a zone in an isolated area can increase start-up costs, and curb its subsequent expansion.④

Previous SEZs in Algeria failed to attract FDI and was not considered as focal points of investment activity. Creating a liberal and flexible economic environment along the lines of SEZs in Algeria would stimulate greater foreign investment. To do so Algeria can begin with a small number of cities—e.g, Anaba, Skikda, Boumerdes, and Tlemcen, as it was the case during the first economic reforms in China. Local governments may be given full authority to approve foreign investment up to a certain limit. Most important, rules of entry and exit in the zones can be made more flexible.

Encouraging assembly type operations was also important in chinas foreign trade, duty exemptions for assembly type operations combined with rapid processing of imported inputs and materials, by customs authorities made a significant contribution to China's export growth. Algeria could introduce duty exemptions for exporters and provide improvement in their administration and simplification of procedures.

III.Openness to international trade

Together with WTO accession, China has implemented economic reforms and open door policies and made efforts to promote trade by concluding several bilateral trade arrangements and adopted unilateral actions, there has been substantial progress in reducing tariff barriers. Duty exemptions for intermediate products used in the production of exports have also been particularly important in boosting Chinas exports. Similar to china, Algeria is a signatory to different multilateral, bilateral and unilateral agreements; however Algeria has failed to take advantage, and to make full benefits of such agreements, for examples in the Middle Eastern and North Africa (MENA) region, regional trade is very low. According to the U.N. statistics, “Regional trade was particularly low, and in 2001, it accounted for only 8% of the regions total trade.” Regional exports were dominated by oil, and only a few countries had established growing non-oil export sectors.⑤Algerian government should review its strategy in such agreements, in a way that he can take full benefit of it, especially in the MENA region, and with the European Union which is Algeria main trading partner, he should also accelerate its procedures to join WTO.

IV.Physical and technological infrastructure

The availability of physical infrastructure in china has affected the decision of FDI-led exports to choose China as a plat form for investment. The more highways, railways and interior transport waterways are adjusted according to the size of host province, the more FDI inflows. Another important variable is the level of telecommunication services. Higher levels of telecommunications services will save time and reduce the costs of communication and information gathering and facilitating business activities. Thus Algeria should upgrade her infrastructure and ameliorate the overall doing business climate, the World Banks 2011 Doing Business overall index shows that Algeria ranks poorly in doing business, its ranking is estimated at 136th out of 183 countries.

V.Encourage capital-intensive exports policy and privatization

Algeria has to rely mainly on capital-intensive and technology-intensive sectors to Increase and diversify exports. There are many difficulties creating serious obstacles to exporting in these industries, it includes: backward technology, low degree of specialization, lack of skilled workers, low degree of production concentration, and the domination of inefficient large state owned enterprises (SOEs). One obvious consequence is that the export share of domestic private enterprises in these industries is quite low. To realize the export growth potential in these industries, the Algerian government must speed up the process of SOEs reform, and structural adjustment in the industry, which, in turn, will eventually make domestic private enterprise become the most important driving force for exports in the future, as is the case in China, where the reform of SOEs begun in 1980s with a large scale of privatization in different sectors.

VI.Modernize financial sector

As China, Algeria needs to upgrade its financial sector. Public banks need to improve their governance and further modernize their operational framework to enhance financial intermediation. All possible ways should be explored to bring them to the highest international standards, including through partnerships with foreign institutions and opening up of their capital to the private sector. The financial opening and liberalization of Algerias external sector could reduce significantly the currently high and hidden transaction costs of doing business in Algeria.

VII.Exchange rate policy

Concerning the exchange rate policy, China has largely benefited from the devaluated exchange rate, its exports were relatively cheap compared to other countries. However this situation was a source of conflict, with many of its trading partners, especially with USA. Thus this strategy is not advisable for Algeria, especially in currents time, where Algeria try to join the WTO, and to increase its cooperation with many of its trading partners, such as European Union.

2.Conclusion

As a conclusion we can say that countries can learn from each other and adapt lessons taken from other experiences. Chinas success in foreign trade over a quarter century provides many interesting lessons for Algeria and other developing countries.

Chinese reforms have been pragmatic and experience-based, in many sectors, there has been a process of pilot testing reform, evaluating results, and scaling up good ideas. If there is a lesson here for Algeria, it is to be pragmatic about reform. Try out new ideas, evaluate results, and then expand ones that work.

Countries should not blindly copy China or any other model, the measures adopted in China would not have exactly the same effect if adopted somewhere else. But I think that countries can learn from each other and bring these lessons to bear on solving their own unique development challenges.