 Egypt and Algeria, two of Africa’s leading economies, find themselves at a crossroads as the international community seeks to shift away from one of their primary exports: oil. Algeria and Egypt remain deeply dependent on oil exports. Both of these oil-dependent countries are seeking to alleviate this dependence through green transition strategies in their energy sector that expand the use of renewable energy. Whether or not these two nations will make meaningful progress in their green energy transition will depend on their ability to diversify their economies by shifting their economies away from narrow income sources toward multiple sectors and markets.
Egypt: Egypt is Africa’s second-largest economy and has the continent's third-largest population. The country is home to various natural resources, a rich history that attracts tourism, and a strategic location with a coastline bordering the Mediterranean and Red Sea, including control of the Suez Canal. Egypt has a very diversified economy. According to the Growth Lab, fossil fuels, including petroleum, gases, and oils (both crude and refined), contributed less than 25% to Egypt's GDP in 2022, with tourism accounting for 14%, and transportation for 13.6%. The Global Economic Diversification Index ranks Egypt 64th globally for its diversified economy. When filtering the index for only developing countries, Egypt ranks 9th, with South Africa being the only African country to rank higher. According to the International Energy Agency, Egypt relies on oil and natural gas for about 88% of its energy consumption, with the remaining 12% coming from renewables. Despite this heavy reliance on fossil fuels, the Egyptian government has vowed to diversify its energy sector by introducing more renewable sources. The Egypt Vision 2030 document states that the goal is for renewable energy sources to make up 42% of the total energy mix by 2035. An ambitious goal, they claim, is feasible due to the existing strategic plans and ongoing technological advancements in the field, which will render the construction of renewable energy plants less costly. With less than a decade remaining to achieve this goal, it appears increasingly unrealistic. However, Egypt is not alone, as many countries have set similarly lofty targets without being close to achieving them. Despite various efforts to move Egypt’s energy consumption in a more sustainable direction, challenges remain. Firstly, there is an ever-increasing demand for energy. An abrupt shift to sustainable energy sources may result in power shortages during the initial stages of implementation. From past instances of power shortages in Egypt, it’s evident that they can lead to civil discontent disproportionately in rural and poverty-stricken areas where people lack access to mobile generators. Secondly, transitioning to an energy mix consisting of more than 40% renewables implies a complete transformation of Egypt’s energy consumption, which is likely to prove very costly, as seen with the implementation of the Benban solar park, costing the country an estimated 2 billion USD. Even many countries in the developed world have yet to undertake such drastic shifts away from the fossil fuel industry. With all this considered, Egypt has the vast potential to transform its economy and achieve economic development with its large young workforce and extensive natural resources. In the wake of a global green transition effort, Egypt has the potential to become a regional leader by continuing its investments in green energy technology, which would not only address local challenges like unemployment but also position the country as a pioneer in sustainable growth for developing nations. Algeria: At the other end of the Mediterranean Sea, Algeria holds the third-largest oil reserves on the continent. Algeria’s economy is highly monolithic--oil accounts for over 90% of the nation’s exports. According to the Global Diversification Index, Algeria has consistently been one of the ten least diverse economies since 2004. Due to Algeria’s severe dependence on oil exports and oil’s lack of linkages (relationships between different sectors of an economy), Algeria is classified as a rentier state. A rentier state is a country that derives a substantial portion of its revenue from external sources—primarily natural resources—through rent-based income, while exercising control over their management and distribution. Several issues arise with the rentier state model, including a poor tax base and the lack of incentive to break the status quo, exacerbating a vicious cycle of dependence on specific sectors of the economy. Most rentier states don’t have a strong tax base because the governments instead generate revenue from “rent,” or the sectors that generate large profits without engaging in any productive activity. Currently, only 4.8% of Algeria’s GDP comes from tax revenue. In comparison, Tunisia, Algeria’s neighbor, generates around 25.4% of its GDP from tax revenues. This limits government spending, leaving the country vulnerable to deficits if oil prices crash or if there is a sudden increase in demand for public services. Algeria’s rentier state hurts efforts to diversify its economy and energy sources. Hossein Mahdavy, one of the pioneers of the rentier state theory, argues that the rentier state hinders economic growth and diversification because there is no government incentive to diversify the economy. For instance, in 2019, the Algerian Parliament adopted amendments to the Hydrocarbon Law, expanding multinational corporations’ (MNCs) rights to exploit unconventional hydrocarbons like shale gas. Many citizens were worried the amendments would lead to more dependence on selling oil to the Global North and undo the years of effort to gain national sovereignty from France, their previous colonial ruler. Algerians view fracking as the primary cause of the political and social marginalization of those who live in the south of the country, who view the increasing fracking initiatives in their region, without the consent of the residents, as a symbol of continued government exploitation of marginalized communities. Additionally, the jobs with the highest wages and growth are within the oil sector, as 90% of Algeria’s economy is dependent on oil. This creates major inequality between people working in the oil sector and the rest of the population. However, in an era of green energy transition, many importers of Algerian oil have begun to shift away from fossil fuels. In the European Green Deal, the European Union, one of Algeria’s most significant oil importers, vowed to decrease greenhouse gas emissions and aims to be carbon-neutral by 2050. To combat this loss of revenue, Algeria has begun to look for alternative energy sources, particularly solar energy. In the Saharan Desert, which covers over 80% of Algeria’s territory, there are around 2000 to 3900 hours of daylight per year. With this remarkable potential for solar power, Algeria has the prospects to be one of the regional pioneers in the green energy sector. It has taken essential first steps, such as investing in green energy research at its national universities. However, the historical dependence on oil and the recent influx of oil demand due to the Russia-Ukraine War have created perverse incentives, hindering their pivot towards green energy. Policy Recommendations For Egypt, the state of economic diversification is promising when it comes to the country's export basket. This should be maintained to continue the move towards an economy that is primarily focused on producing value-added products and investments in infrastructure. By having more advanced roads and ports, Egypt can reduce the production costs of various products and retain a higher profit margin. These profits can then be reinvested in further developing its sustainable energy sector to achieve its ambitious goal of 42% renewable energy sources by the end of the decade. Many of Egypt’s objectives are commendable, but the country has struggled with implementation, and government accountability channels need to be created to ensure they remain on track to achieve their targets. For Algeria, economic diversification is necessary not only for the green energy transition but also for sustainable economic growth. However, this isn’t possible with the current regime in power, which has failed to uphold its commitments towards diversifying its energy sources. There’s a need to create channels to hold the government accountable for the promises it makes. For example, in 2011, Algeria established the National Program for Developing Renewable Energies and Energy Efficiency, aiming to use 40% renewable energy by 2030. It even had a step-by-step plan on how to collect the data, implement various projects, and increase productivity. Nonetheless, as of 2018, only 8.6% of its goals have been achieved. This is in large part due to the dependence on the hydrocarbon sector. Due to the nature of Algeria’s economy, it is very volatile to oil price fluctuations, leaving the government constantly reinforcing the oil sector to maintain the government budget. For both Algeria and Egypt, foreign investors should increase the conditionality within their loans and investments to improve accountability. These conditionalities will incentivize more checks and balances, ensuring that energy consumption becomes more diversified and sustainable. There should also be an independent office or committee, unencumbered by special interests, whose sole purpose is to hold the government accountable for its promises. This would include holding audits and ensuring that a fixed percentage of the GDP goes to green technology development and implementation annually. Both Egypt and Algeria have vast untapped potential. If plans are implemented well, these countries can become regional and international leaders in terms of sustainable economic development. However, to do this, it is essential for these countries to create or maintain a diverse economy and decrease dependence on oil. Only then will these countries be able to better the lives of ordinary people while preserving the planet for generations to come Zaara Mohammed is the Director of Economics & Business at the Rainier Institute for Foreign Affairs Waad Abdalla is a undergraduate senior majoring Politics, Philosophy, and Economics at the University of Oslo
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