Page 55 - Azerbaijan State University of Economics

Fatih Chellai: Regime-Dependent Effects of Public Spending in Algeria: A Structural VAR and
Markov-Switching Approach

suggests that public investment can be particularly effective in times of crisis.
Furthermore, regional analyses, such as those conducted on Italian regions, confirm that
fiscal policy and public investment are potent tools for fostering structural change and
employment at a sub-national level, highlighting the importance of targeted regional
development strategies (Zezza & Guarascio, 2024).

For Algeria, this could mean redirecting spending towards intensive employment
programs and initiatives to develop non-oil industries, creating sustainable and
diversified employment opportunities. This approach echoes findings from Azerbaijan,
where modular profiling and retraining programs have been shown to reduce long-term
unemployment risks effectively (Ismayilov, Almasov, & Mirzayev, 2021).

The relevance of these findings becomes even more pronounced when situated within
the broader geopolitical and macroeconomic shifts of the post-COVID-19 era. The
global pandemic prompted massive fiscal interventions globally, but it also laid bare
the structural limitations of fiscal policy in resource-dependent economies like
Algeria, where countercyclical spending is constrained by oil revenue volatility
(Fernandes, 2020; Hansen, 2020). The SVAR analysis confirms that Algeria's public
expenditure has significant, though short-lived, effects on output and employment —
a dynamic that became increasingly evident during the emergency response to
COVID-19, when the Algerian government faced a dual shock of collapsing oil prices
and growing social demands.

Subsequently, the geopolitical upheaval resulting from the Russia–Ukraine war in early
2022 led to a dramatic realignment of global energy markets. With Europe's energy
diversification strategy accelerating, Algeria - the third-largest natural gas supplier to the
European Union - witnessed a renewed geopolitical significance. This shift translated into
higher hydrocarbon revenues and renewed fiscal breathing room for the government
(Abdelkawy & Al Shammre, 2024). However, the SVAR findings caution against
overreliance on transient windfalls, emphasizing instead the need for structural
investments that can yield more persistent growth effects and shield the economy from
future commodity shocks.

At the same time, the war in Ukraine and ensuing energy crisis reignited debates on
energy sovereignty, supply security, and the role of national champions such as
Sonatrach. Algeria leveraged this context to renegotiate long-term gas contracts and
assert itself diplomatically in Mediterranean energy diplomacy, positioning itself as
an indispensable actor in Europe’s quest for non-Russian energy (IEA, 2022). These
developments lend credence to the argument that fiscal policy in Algeria is inseparable
from hydrocarbon geopolitics — a dimension that traditional macroeconomic models
often fail to capture but which structural models like SVAR help reveal.

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