Alan Richards is professor of economics, University of California, Santa Cruz. In 1992-94, he was senior analyst at Cheronics International, a Washington, D.C. consulting firm. His publications include (with John Waterbury) A Political Economy of the Middle East (Westview, 1990).

If Algeria’s government falls to Islamist Muslims, will its Moroccan and Tunisian counterparts be the next to go? Western policy makers fear just such a scenario, with its many implications. They worry that an Islamist victory, or even a prolongation of internal war, will accelerate already high levels of migration into the European Union (EU). They also worry that this will create a domino effect, first undermining moderate regimes in Morocco and Tunisia, then those in Egypt and Jordan, as well as strengthening Palestinian support for Hamas.

But there is no reason to panic. Algeria’s woes stem from its own special circumstances, and particularly from the regime’s many economic mistakes. In the 1980s, instead of instituting real market reforms, the government tinkered with the existing system. By the time it embraced genuine reform, a civil war had already begun. While Morocco and Tunisia face aggression from Algeria¹ and have similar problems of their own (especially a paucity of jobs for young men), their governments have handled economic issues with much greater competence. Accordingly, these dominoes are far less wobbly than is often thought.

And if the West takes far-sighted steps to help Morocco and Tunisia, including the establishment of a free-trade zone with the EU, these countries will be stronger yet.

YOUNG JOB-SEEKERS

Ever larger numbers of young North Africans cannot get a job, cannot get an apartment, and cannot get married. They are deeply, explosively frustrated. Such young people are the principal recruiting ground for political Islamists, particularly if (as is often the case) they come from families that moved to the cities from the countryside.

The three Maghrib countries have a combined population of 63 million (more than that of France); all of them face the problem of a rapidly expanding supply of young job-seekers, as table 1 shows. Labor forces are growing more than 3 percent a year so that, by a conservative estimate, Algeria and Morocco both must create over 2 million new jobs by the end of the decade just to reduce unemployment to 10 percent of the labor force; Tunisia must generate over 800,000 jobs to achieve the same result. This amounts to adding 35, 24, and 28 percent, respectively, to the three countries’ current labor forces. Creating jobs is the premier challenge facing Maghrib political economies.

Three factors propel labor force growth: past population growth, educational expansion, and increased female labor force participation. Population growth remains high throughout the region (table 2 provides some illustrative data), although Tunisia’s problems are abating thanks to decades of investment in health, education, and contraception. Education has expanded (with Morocco’s performance lagging seriously behind Tunisia’s) but the quality of much education renders many graduates poorly equipped with modern skills. Enrollment explosions, Arabization disputes, poorly trained teachers, and the lack of educational materials seriously weaken educational systems. Unemployment appears to be worst for the semi-educated (i.e., those individuals with a secondary education). Increased labor-force participation by women is probably partly a statistical artifact, since women’s work in agriculture has been grossly underestimated; still, expanding education for women has much increased their role in the formal urban labor market.

The demand for labor has not kept up with labor supply. The result has been rising unemployment and (often) stagnant or falling real wages. There are now probably nearly 3 million unemployed Maghribis, most of them young. Data on unemployment suffer from serious deficiencies, but a 1990 estimate for Algeria places unemployment for fifteen-to-nineteen-year-olds at 63 percent, and for twenty-to-twenty-four-year-olds at 31 percent.² Similar data for Morocco and Tunisia confirm that unemployment is overwhelmingly a problem of the young. Moreover, the future entrants to the labor force in the next fifteen years have already been born and constitute roughly two-fifths of the entire population of the region (table 2).

Job creation must be a centerpiece of any viable strategy to promote stability in the Maghrib (North Africa). How is this to be accomplished? By clearing away the dense underbrush of failed policies of the past. The deficiencies of state-centered, rentier growth have become very apparent. A neglect of agriculture contributed to rising food dependency on imports and accelerating urbanization. Inefficient industries produced few goods that could compete internationally. Weak fiscal mechanisms spawned large government deficits, stimulating inflation, overvalued currencies, and negative real interest rates. Industry became more capital intensive even as the labor force grew in size. Governments borrowed abroad (table 3) and shunted young people into useless civil service jobs (table 4) to delay fundamental change, thereby only making the adjustment more difficult in the end, when the collapse of the commodities boom and the increasing pressures of debt forced governments to embark on economic reforms.

The governments in all three countries began stabilization and structural adjustment programs during the 1980s. They did so with an intent to increase exports and foreign-exchange earnings, maintain the ability to service debt, reform public-sector decision making, and stimulate the role of the private sector in the economy. Yet, while the Moroccan and Tunisian authorities pursued stabilization and structural adjustment in almost textbook fashion, Algeria’s “nationalist adjustment” policies of the years 1980 to 1989 were fundamentally misconceived and poorly implemented. This contrast provides a key to understanding the three countries’ very different situations today.

TUNISIA AND MOROCCO

Tunisian and Moroccan reform after 1986 was highly orthodox.

Tunisia. Devaluation of the currency, export promotion, reduction in import protection, liberalization of banking and prices, budgetary austerity, and privatization were the key elements of the Structural Adjustment Program in Tunisia. Most targets were met, and the economy’s performance improved significantly. Economic growth in 1987-92 grew to 5 percent from 2.8 percent during the previous five years. Exports grew strongly and became more diversified. Private savings rose, as did direct foreign investment, which increased from $75 million in 1989-90 to $215 million in 1992-93. Inflationary pressures were reduced and the balance of payments improved, despite the adverse shock of the Kuwait war. Debt accumulation decelerated markedly in the second half of the decade, and the debt-service ratio improved. In 1991-92, Tunisia achieved a positive food-trade balance for the first time in twenty years. These are significant achievements.

There are some weaknesses to the program. Government savings performed relatively poorly. Financial reform has fallen behind schedule; the Central Bank is often accused of excessive regulatory interventions, with the result that a truly modern, competitive banking sector has yet to emerge. There are persistent reports of collusive behavior among bankers, especially through the Association Professionnelle des Banques. Although most agricultural commodities have been deregulated, price controls are maintained on cereal grains, milk, sugar, and oil. Privatization has been the weakest aspect of the reform program, with less than 1 percent of the book value of the over two hundred state-owned enterprises privatized by September 1991. From a labor market perspective, the changes essentially have been a process of running faster to stand still.

These problems notwithstanding, Tunisia is rightly praised by the International Monetary Fund (IMF) and the World Bank as one of the most successful reformers in the Arab world. Achievements in Tunisia show that sound policies can go very far toward ameliorating the socio-economic problems that underlie the current Algerian crisis.

Morocco. Morocco is held up, with some justification, as a textbook case of successful economic reform. From 1983, the government in Rabat implemented a series of stabilization and structural-adjustment packages that reduced external and internal imbalances and enhanced the efficiency of resource allocation. The policy package included the familiar ingredients of nominal exchange-rate devaluation, budgetary discipline, tariff reduction, real interest-rate increases, and privatization. Tariffs were slashed; Morocco has also joined the General Agreement on Tariffs and Trade (GATT), and has entered into negotiations with the EU for a free-trade agreement along the lines of the 1993 North American Free Trade Agreement (NAFTA). The country has maintained a high rate of domestic savings and of investment, but the resource gap has become increasingly easy to fill thanks to accelerating inflows of direct foreign investment, which rose from levels of $1 million in 1986, $85 million in 1988, and $165 million in 1990, to $320 million in 1991.

The results have been encouraging: Morocco’s GDP expanded at an annual average rate of 4 percent during the 1980s, with manufacturing growing slightly at 4.1 percent. Exports rose from 18 percent of GDP in 1965 to 25 percent in 1990. The composition of exports also shifted markedly, with large increases in farm and factory goods. Both the balance of trade and the balance of payments improved. At the same time, import growth decelerated.

Problems past and future. Even these good performers had false starts. The Tunisian government backed away from reforms to cut the budget deficit after a reduction in consumer subsidies led to riots in January 1984. The Moroccan government retreated from its efforts to reduce public spending in 1979, buckling to pressure from urban bureaucrats, then capitulated a second time in the 1981-83 period. But such retreats only exacerbated underlying disequilibria: by the middle of 1983, the Moroccan government had only a few months of funds left, forcing the government to take emergency measures to restrict imports. Tunisia reached the same point two years later.

Without minimizing Tunisian achievements in economic reform so far, it is fair to say that the next phase of reform will be more difficult than that of the past eight years. Most of the needed changes will pose significant political challenges. Powerful domestic political interest groups oppose further privatization and liberalization of the labor market. Reduced budgetary deficits will be difficult since public investment needs to increase to provide the kind of improved infrastructure that private investors seek. Local and foreign investors are not particularly keen to see domestic tariff walls further reduced.

In Morocco, too, despite important successes, three serious problems face the king’s government in the years ahead. The first is debt overhang; table 5 shows that the ratio of the debt to exports remains high. Historically, countries with ratios above 150 percent have difficulty attracting long-term capital investment. Secondly, Morocco’s archaic political system could also block continued development. A more institutionalized, participatory, modern political system is a necessary component of continued economic growth, job creation, and stability in Morocco. Thirdly, weak social indicators and deficient human capital investments constitute a threat to development. The population is not literate enough, the quality of life lags, and the educated need jobs.

ALGERIA

Ironically, because the Algerians could export oil and gas, they were spared being driven to the wall by dwindling foreign-exchange reserves until late in the 1980s. This meant they did not have to engage in the full-scale economic reforms of their neighbors. But by the time they put together their own economic reform program, it was too little, too late. The Algerian efforts represented an attempt by reform-minded technocrats grouped around Algerian president Chadli Bendjedid to square the circle: they sought to overcome Houari Boumedienne’s legacy of excess capacity, low productivity, overcentralization, excessive capital intensive, galloping urbanization, and one of the most seriously neglected agricultural sectors in the region--all this while still maintaining state control of the economy. This program of “Arab perestroika” met much the same fate, for many of the same reasons, as its Soviet namesake.

The mounting pressure of servicing an international debt (table 5) inspired much of the impetus for Algerian reform, as in Morocco and Tunisia. But, in marked contrast to its neighbors, Algiers avoided entering into an agreement with the IMF. The reforms were “structural adjustment with a nationalist face,” designed in part to avoid the humiliating (to Arab nationalists, at any rate) loss of sovereignty to the IMF.

The Algerian government began the reform by regrouping and restructuring state-owned enterprises, reallocating public investment away from heavy industry, providing incentives to attract foreign investors, and trying to revive the agricultural sector. But such reform efforts were fundamentally flawed. The government refused to devalue the real exchange rate, the centerpiece of all structural adjustment programs. Devaluation makes farm and factory products relatively more expensive, which encourages investment in these sectors. It also makes imports more expensive and exports cheaper. Therefore, imports fall, exports rise, and the trade balance improves. Yet, it is difficult to promote agriculture, create jobs, or foster the private sector without such a change in relative prices.

Also, the government refused to cut the link between public companies and state-owned enterprises: the “soft budget constraint” stayed soft. Not surprisingly, the government had difficulty restraining public spending and, therefore, inflation. By maintaining fixed nominal interest rates, it produced negative real interest rates, underpricing capital. The reform effort in Algeria was before 1989 an attempt to redress fundamental resource misallocations without changing key price signals: a case of Hamlet without the Prince.

Large sections of the ruling party, the National Liberation Front (Front de Libération Nationale--FLN), never accepted the need for reform. Middle- and lower-level functionaries impeded the shift to the market at every opportunity. Their suspicion of market activities remained high; even as legal changes dictated from the top removed obstacles to private-sector activity, bureaucratic resistance blocked their realization. In effect, political dynamics doomed the economic reform from the start.

The reformers were initially a group around President Bendjedid. He found few supporters for his reformist intentions in the dominant FLN or in the army. Some have argued that he used the Islamic Salvation Front (Front Islamique du Salut--FIS) as a counterweight to the FLN and some army elements as a way to “open a space” for his reforms.³

This political strategy had serious flaws. The government’s legitimacy eroded significantly both before and during the reform decade of the 1980s. As Dirk Vandewalle puts it, the FLN “had become valued by most Algerians by what it could deliver, not for what it stood for politically or ideologically.”⁴ The regime could not deliver, causing its legitimacy to evaporate.

In all, Algerian economic reform until 1989 differed in three main ways from that of Morocco and Tunisia: it was homemade, developed by the government of Algeria without significant participation from the IMF and the World Bank; it was not as market friendly nor as far-reaching; and the Algerian government as late as 1993 retreated from economic orthodoxy by trying to reinstate government trade monopolies, reinstitute state monopolies, and slow down the privatization of agricultural land.

When sensible macroeconomic policies were finally put in place after the 1988 riots, it was too little, too late: urban youth were far too alienated, and even at this late date, the dinosaurs of the FLN and the bureaucracy continued to block the kind of market-oriented reforms that alone have a chance of creating jobs. The politics of encouraging the Islamists as a counterweight to anti-reform elements was a strategy of sowing the dragons’ teeth. The FIS soon became stronger than the reforming technocrats around the president.

Only after it signed a letter of intent with the IMF in April 1994 did Algiers finally embrace an economically sound package of reforms. But by then the country had long been in the midst of civil war. Even today, it remains an open question whether the leopard can change his spots: can the statist interests at the core of the FLN and the bureaucracy (both of which stand to lose heavily from reform) actually agree to implement the full IMF package? We cannot know yet whether the current government of Liamine Zeroual will be able, against the odds, to implement economic reform while negotiating a political settlement with the Islamists. Some positive signs exist: it replaced the entire upper echelon of the army, signed an agreement with the IMF, and sought a sort of dialogue with some Islamist elements.

This strategy may work, but it’s not likely. The deepest problem remains the credibility of the current commitment to reform. Disregarding even the physical insecurity and violence, why should private investors believe that the FLN’s old guard, which retains significant power, will not continue to sabotage the implementation of reform? As in the Soviet Union, fundamental change probably requires a profound change in leadership. Although this process is proceeding, it has yet to reach the upper levels of the leadership. As convinced statists, that leadership is highly unlikely to implement the kinds of reform that are needed to foster growth and create jobs. The leopard is even less likely to change his spots when in the middle of a fight with a very nasty pack of hyenas.

WHAT IS THE WEST TO DO?

The West has problems with both main parties to the conflict in Algeria. The installation of a fundamentalist Muslim regime in Algeria would stimulate large-scale emigration and would place an ally of Iran and the Sudan in the Western Mediterranean, in a country whose army has Scud missiles and that has nuclear reactors and engineers to run them.

This said, the Algerian military, currently in charge, is hardly a friend: it seeks weapons of mass destruction and has a history of being deeply anti-Western (as showed by its pronouncements during the Kuwait war). Other elements in Algerian public life, such as moderate and modern business people, are currently weak and have little chance of becoming stronger. Only if President Zeroual turns out to be a combination of Deng Xiao Ping and Charles de Gaulle--a ruler who can reform a statist economy from within and who can also make peace with the other side in a bitter civil war--can one hope that any outcome in Algeria will suit Western interests. Unfortunately, it appears that Zeroual may be turning into a figurehead, a creature of the unreconstructed hardliners who surround him, including such figures as Mohammed Lamari and Khaled Nezzar. In other words, whatever transpires in Algeria will probably be detrimental to Western interests.

It is difficult to see what role outside forces can play in the Algerian drama. The FLN is made up of “dinosaurs,” men whose blunders and corruption have created the vast socio-economic morass described here. They enjoy virtually no legitimacy among the general population. The West, and particularly the United States, has relatively few levers to utilize; Algeria has never been, after all, an ally with whom Washington has enjoyed good relations or forged close ties. Further, the situation in Algeria has deteriorated to such an extent that it is extremely difficult to formulate a coherent plan of action. The West is caught between the Scylla of the dinosaurs and the Charybdis of the fanatics.

This may be unpleasant news for policy makers, but since “doing something” has a high probability of exacerbating problems, a minimalist policy may be the best available.

This makes it all the more important to strengthen Morocco and Tunisia, so that, should the FIS win in Algeria, these countries can both resist fanaticism and offer an alternative example of governance. It may be that the best the outside world can do to contain the consequences of a second revolution in Algeria is to strengthen Morocco and Tunisia. The strategy of strengthening the flanks means taking a few, admittedly modest, steps to support Moroccan and Tunisian efforts to accelerate their transitions to modern market economies. The United States can help, but Europeans hold the key here.

In both Tunisia and Morocco, the government and much of the opposition agree on the need for closer ties to Europe. The linchpin of this vision is ever closer integration with the European Union in what may be called “NAFTA-East": a free-trade zone that includes the EU and North Africa in the hope of ever closer economic integration between the two regions (much as the Mexican government under Carlos Salinas de Gortari sought closer integration with the United States).

Sustaining job-creating growth in Morocco and Tunisia requires continued changes in the domestic political economies of these two countries and sensible policies by the major Western states. No other strategy has a chance of meeting the challenge of job creation in the years ahead; none other is as consistent with European and American interests.

The economic conception is sound; the political difficulties are numerous. The EU’s priorities, particularly those of Germany, are the consolidation of the existing union; the accession of Austria, Sweden, and Finland; and the development of agreements with Poland, the Czech Republic, Hungary, and Slovenia. Something of a Germanic-Latin split exists within the EU, with the former looking east and the latter south. Further, strong vested interests in the Mediterranean countries, particularly in agriculture and textiles, oppose further openings to Maghrib countries.

Rabat formally applied to join the EU in July 1987, and was rejected two months later. In December 1992, the EU declared itself ready to negotiate a NAFTA-style free-trade agreement with Morocco. Negotiations have been delayed owing to GATT, but some form of agreement appears very likely. Tunisians seek a similar arrangement with the EU. Four rounds of negotiations have been completed, and a text for formal presentation to the EU may be finished next year. The hope, as with Morocco, is that the treaty would be in place by 1996, although Tunisian officials say that they would not expect fully free trade to occur until 2010.

Several difficulties confront these agreements. First, as usual, farm trade gets in the way. Olive oil is Tunisia’s most important agricultural export, and the government seeks to sell 80,000 tons to the EU, far more than the 46,000 tons the latter is prepared to take. Secondly, educational levels differ greatly. Tunisian literacy levels are higher than anywhere else in Arab Africa but they cannot compare with those of Europe, while Morocco’s human development indicators are severely lacking (table 6). Integration with Europe cannot proceed far without raising the level of Moroccan education closer to those of the hoped-for partners on the northern shores of the Mediterranean. (But an increasingly educated population is also a more politically demanding one, and this may give the leaders pause.) Thirdly, closer integration with the EU requires more accountable governance. European joint-venture partners are unlikely to tolerate kickbacks, baksheesh, and the other payments too often necessary to do business in Morocco. Tunisian public administration also needs strengthening.

A free-trade zone does not just offer the only economic exit from the current difficulties but it provides a rival vision to that offered by the religious fanatics. It is particularly important to strengthen Morocco since, because of its size and traditional wariness of its Algerian neighbor, it provides the most significant regional counterweight (if Algeria’s crisis ends in a government run by fanatics) or example (should more reasonable political forces win in Algeria).

POLICY RECOMMENDATIONS

Several policy recommendations for the West follow from this analysis:

* Foster the NAFTA-East vision wherever possible. The EU can support NAFTA-East in several ways. First, as Paul Krugman has reminded us about NAFTA itself, the issue is “foreign policy, stupid!”⁵ Freer trade with Morocco is fundamentally a foreign policy, not a domestic economic policy, question. Act accordingly. Anything that can be done to weaken farmer-led protectionism in the EU will help to strengthen Morocco and Tunisia.

* Encourage European business interests to add their voices to those of their North African partners for more transparent, accountable governance. Integration with Europe means increasing European pressure on the Moroccan government, especially to conform to European standards of governance.

* Offer Morocco the same debt relief that Poland and Egypt have won. Both the Poles and the Egyptians were offered debt relief because it was in the national interests of the advanced industrial countries. Exactly the same argument applies to Moroccan debt, for continued growth and job creation encourage stability in Morocco--and that is as important as stability in Poland or Egypt. Further, the Moroccan policy record fully merits it, certainly at least as much as the Egyptian.

* Adhere to an economic Hippocratic Oath: “Do No Harm.” Avoid self-defeating (and domestically harmful) protectionist policies. Anything that strengthens the hands of free-traders in Europe helps the Maghrib; the recently signed GATT agreement is of great utility here. After all, free trade helps Europeans as well. The economy of the EU is vastly larger than that of the Maghrib; for Europe, as for America, there will be no “giant sucking sound” taking jobs south if there is closer integration between the EU and the Maghrib. Of course, some European special interests (in labor-intensive manufacturing and especially in agriculture) will be adversely affected; these will, as always, dress up their special pleas in the rhetoric of national interest. Responsible politicians must point out that free trade helps Europeans, but far more, it helps the Maghrib.

* Avoid precipitous changes in immigration laws. Process is at least as important as outcome here. Arbitrary and sudden decisions in immigration policy rankle the North Africans. Fortunately, the flow of workers from North Africa to Europe will likely slow down when economic growth efforts prove successful.

* Promote moderate, forward-looking elements who seek to promote the rule of law and a transition to a modern polity. The present, archaic political systems of all three countries are ill-suited to coping with a possible death of the leader (e.g., Morocco), the requirements of an increasingly market-oriented economy (Morocco, Tunisia), and the need to incorporate the increasingly disaffected youth (Algeria, Morocco, and Tunisia).

* Reorient existing foreign aid programs in Morocco toward investment in basic education and other areas of human capital formation.

Outsiders can do little about the second Algerian civil war. The violence seems unlikely to end soon, and the flow of emigration is already accelerating. It is hard to imagine how FLN hardliners, who have created the current slough of despondency, can successfully lead the transition of Algeria to a modern market economy. The fundamentalists would probably pose a regional security threat if they were to win. The West’s best strategy in this difficult situation is to strengthen Morocco and Tunisia, two countries that have gone far toward creating modern economies.

¹ In early February 1995, an Algerian force attacked a station of the Tunisian gendarmerie in Tamerza, in southern Tunisia close to the border with Algeria, killed six officers, and took their weapons. In response, Tunisian border guards reportedly began patrolling areas in eastern Algeria, apparently with the blessing of the government in Algiers (Al-Hayat, Mar. 24, 1995). Tunisia later denied this report, and said it “is not linked in any way, shape, or form to what is happening on Algerian territory.” (Al Hayat, Mar. 27, 1995, in Foreign Broadcast Information Service, Daily Report: Near East and South Asia, Mar. 29, 1995.)
² Gail Stephenson and Arvil Van Adams, “Youth Unemployment in the Middle East and North Africa: Issues and Policies,” World Bank, mimeograph, 1992.
³ Remy Leveau, Le sabre et le turban: l’avenir du Maghrib (Paris: Editions Francois Bourin, 1993). See also Hugh Roberts, “From Radical Mission to Equivocal Ambition: The Expansion and Manipulation of the Algerian Islamism, 1979-1992,” in Martin E. Marty and R. Scott Appleby, eds., Accounting for Fundamentalisms: The Dynamic Character of Movements, vol. 4 of The Fundamentalism Project (Chicago, Ill.: University of Chicago Press, 1994).
⁴ Dirk Vandewalle, “Breaking with Socialism in Algeria,” in Ilya Harik and Denis J. Sullivan, eds., Privatization and Liberalization in the Middle East (Bloomington, Ind.: Indiana University Press, 1992), p. 190.
⁵ Paul Krugman, “The Uncomfortable Truth about NAFTA,” Foreign Affairs, Nov./Dec. 1993, pp. 13-19.