William Bauer
Last updated: 28 March, 2012

Algeria’s Necessary Black Market Economy

Recently at an International Business conference in Algiers, the Algerian minister for Trade – Mustapha Benbada – made a startling statement. He said that “Most of the above-board economic agents, who are registered with the trade ministry, are involved in black economy practises.” Further adding “…half their revenue is generated by the black market”.

Indeed, the black market in Algeria has cost the state about €10bn since 2009 in incomes. The sum is an important loss of revenue for a country whose government revenues were €62bn in 2011. Even when considering Algeria’s impressive €129.5bn foreign currency reserve, the loss to revenue is quite important. However, this loss of income is one that is evidently tolerable for a government whose budget is largely derived from hydrocarbon exports, buoyed by recent increases in the price of oil.

The question does remain as to whether this pseudo-institutionalized illegal market is one that is the bane of the Algerian economy or – indeed – the saviour.

With the primary focus of the economy on the oil and gas industry, there is a minimally developed industrial or private sector.  Most of the major companies are state owned and operated – leading to highly inflated prices and a stifling lack of competition or choice. In addition to the monolithic state-owned companies is a pervasive and systemic corruption, coupled with nepotism and patronage networks. 

Major economic reforms have been enacted – specifically with the aim of attracting foreign investors to the country, but these has done comparatively little to revive a flagging, state-monopolized economy. As Algeria is the world’s sixth-largest exporter of hydrocarbons, the non-fossil fuel sectors of the economy have by and large been ignored. This is problematic. Today, with chronic youth unemployment – hovering at 21% – the black market is seen as a way of cushioning issues arising from poor, disenfranchised and unemployed young Algerians.

Effectively, the black market allows for a parallel underground economy to exist – unregulated by the state and its inefficient, overly bureaucratic institutions –thereby giving employment and income to young Algerians who would otherwise be struggling to make ends meet.

The black market takes many forms. It ranges from illegal street stalls full of cheap, low-cost goods – sunglasses, perfume, fruit, belts, etc. – through to the selling of raw materials to official businesses. The latter example highlights the fundamental co-operative element between the informal and formal economy. In essence, the formal economy is driven by the state and as such experiences problems in terms of supply of raw materials needed. To address and rectify this issue, many businesses have turned to the black market. The state’s problem therefore becomes the market’s solution.

Consequently, the formal economy is facing a paradox. It loses income and profit to the black market, but without the services of black marketers it would grind to a halt. In fact, in economies such as Algeria’s it is sometimes necessary to suspend one’s economic disbelief and acknowledge that such paradoxes can actually work.

Furthermore, the impact on society from the black market – far from being negative – is positive. It brings down the youth unemployment, allows for greater flexibility within state-run businesses and enables many low-income families to make ends meet. The importance for community of this economic input is invaluable.  Algeria has long struggled with industrialization and, importantly, diversification away from the hydrocarbon industry. Whilst providing the majority of the revenue for the country, the oil and gas industry certainly does not provide the majority of the employment opportunities. The formal economy has struggled with ways to lower the chronic unemployment rate of Algeria’s youth population, so the secondary economy provided by the black market is ideally suited to take the pressure off the system.

This – however – needs to be a short-term solution, only.  Algeria’s public spending is set to grow at 27% annually, entailing a squeeze on revenue which will inevitably lead to a crackdown on the black market. Therefore, far from seeking to stamp out the black market, the Algerian government should seek to integrate it into the mainstream economy – by cutting regulation, bureaucracy, corruption and costs. This is a big task, but it could reap dividends for the Algerian economy and people.

Throughout history, the term ‘black market’ is usually associated with negative connotations, but it is clear that in Algerian terms it is a very positive entity.  This even acknowledged by Mustapha Benbada who added: “It is socially useful as it allows tens of thousands of families to make a living.” This, in the end, might be the most enduring legacy of the Algerian black market. Effectively, it provided the learning ground for many Algerians to undertake entrepreneurial skills that were neither tolerated nor possible in its formal, state monopolized economy.  In the process it created employment, income and helped many of Algeria’s poorest to have a means to weather tough economic climates.