2009 Index of Economic Freedom

Quick Facts

Population:

• 33.4 million

GDP (PPP):

• $211.7 billion
• 2.0% growth
• 4.8% 5-year compound annual growth
• $6347 per capita

Unemployment:

• 13.0%

Inflation (CPI):

• 3.7%

FDI Inflow:

• $1.8 billion

Algeria's economic freedom score is 56.6, making its economy the 107th freest in the 2009 Index. Its overall score is 0.4 point higher than last year, reflecting improvement primarily in investment freedom. Algeria is ranked 14th among the 17 countries in the Middle East and North Africa region, and its score remains below both the regional and world averages.

Algeria scores moderately high in just a few of the 10 components of economic freedom, notably business freedom and government size. In most areas, it is below the world average. Algeria has significant problems with its underdeveloped financial sector, banking restrictions, corruption, and political interference in the judiciary. The government and state-owned companies still dominate several critical industries.

Strengthening tax administration and simplifying the tax system have been part of the government's major reform agenda in recent years. The quality and transparency of government expenditure need to improve, and the government needs to continue to strengthen fiscal governance and modernize budget management. In an effort to diversify and inject new dynamism, the government plans to support partial privatization of state-owned companies through the stock exchange. More flexibility in the labor market is also needed to create more vibrant employment and productivity growth.

Background Back to the top

After Algeria gained its independence from France in 1962 following eight years of civil war, the new revolutionary government adopted a socialist economic model that held back economic development despite huge oil and gas wealth: Algeria is the world's fourth-largest exporter of natural gas and has the world's eighth-largest natural gas reserves and 14th-largest oil reserves. Violent conflict in the 1990s between Islamists and the government claimed more than 100,000 lives. President Abdelaziz Bouteflika negotiated a fragile peace accord in 1999 and has delivered greater political stability. Though Algeria is Africa's second-largest country, its population is heavily concentrated along the Mediterranean coast.

Business Freedom 72.5 Back to the top

The overall freedom to start, operate, and close a business is relatively well protected by Algeria's national regulatory environment. Starting a business takes an average of 24 days, compared to the world average of 38 days. However, obtaining a business license requires slightly more than the global average of 18 procedures and 225 days.

Trade Freedom 68.6 Back to the top

Algeria's weighted average tariff rate in 2005 was 10.7 percent. The government has made some progress in eliminating non-tariff barriers, but customs clearance procedures, some import and export controls, and restrictive labeling, sanitary, and phytosanitary regulations continue to delay trade and increase costs. Ten points were deducted from Algeria's trade freedom score to adjust for non-tariff barriers.

Fiscal Freedom 77.2 Back to the top

The top income tax rate is 40 percent, but the government has said that it plans to cut the rate to 35 percent. The top corporate tax rate was lowered to 25 percent from 30 percent in 2006. Other major taxes include a value-added tax (VAT) and a capital gains tax. In the most recent year, overall tax revenue as a percentage of GDP was 7.7 percent.

Government Size 74.1 Back to the top

Algeria's economy is not fully diversified and is dominated by the public sector, which is still the largest employer. In the most recent year, government spending equaled 29.4 percent of GDP.

Monetary Freedom78.6 Back to the top

Despite rising food prices, inflation has remained relatively low, averaging 3.2 percent between 2005 and 2007, although this was achieved in part due to distortionary subsidies and direct price controls on some essential commodities including water, energy, and agricultural products. Ten points were deducted from Algeria's monetary freedom score to adjust for price-control measures.

Investment Freedom50.0 Back to the top

Foreign and domestic firms are treated equally under the law, and most sectors of the economy are open to foreign investment. There has been some progress in privatizing state-owned firms, but foreign ownership is still limited to joint-venture relationships in hydrocarbons and some other sectors. The investment code is transparent, but administration and bureaucracy can be burdensome. Both residents and non-residents may hold foreign exchange, subject to some restrictions. Foreign investors are allowed to repatriate profits. The modernization of Algeria's underdeveloped banking system is progressing slowly.

Financial Freedom30.0 Back to the top

The government exerts heavy influence on the financial sector, and banking reform is critical if resource allocation and private-sector development are to improve. Currently, the banking sector is dominated by state-owned banks, which account for more than 95 percent of total assets. Banking reform, ostensibly a goal since 1999, has been uneven and slow overall. In November 2007, citing the slowdown of global financial markets, the government decided to delay the privatization of one of the state-owned banks, Credit Populaire d'Algerie (CPA). The insurance sector is small and dominated by six state-owned firms. The stock exchange, established in 1999, remains undeveloped with only two companies listed.

Property Rights30.0 Back to the top

The constitution provides for an independent judiciary, but the legal system functions inefficiently. The judiciary is influenced by the executive branch and the Ministry of the Interior. Protection of intellectual property rights suffers from a lack of trained magistrates, although the government is taking some steps to improve enforcement. The government is attempting to address some of these issues, but progress remains slow, hampered by the fact that ultimate decision-making rests with the president.

Freedom From Corruption30.0 Back to the top

Corruption is perceived as widespread. Political killings, torture, and abductions by armed groups and state security forces prompted violent protests over social and economic conditions in 2007. Algeria ranks 99th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007, a significant deterioration from 2006 that correlates with a dramatic increase in revenues from sales of abundant natural gas resources by the state-owned Sonartrach energy company.

Labor Freedom55.5 Back to the top

Algeria's labor market is burdened by restrictive employment regulations that hinder employment opportunity and productivity growth. The non-salary cost of employing a worker is high, although dismissing a redundant employee is relatively inexpensive.