72
Hausmann, Klinger, and López-Cálix
Figure 4.5 Top Business Constraints Identified in the 2007 Investment Climate Assessment of Algeria corruption informal sector competition land access financing access electricity high taxes corruption financing access high taxes electricity informal sector competition political instability 0
20
40 manufacturing
60
80
services
Source: World Bank 2008a.
relationship between ease of doing business and the number of products exported (a crude and simple measure of diversification): countries with better business environments (and higher incomes) tend to be more diversified (figure 4.6). Algeria has the lowest level of export diversification given its business climate. So while the business climate could be improved, problems with the business climate do not seem to explain Algeria’s lack of export diversification. A fourth potential explanation is that a highly protected domestic market is dampening the incentives to search for new opportunities in external markets. Despite recent tariff reductions with respect to the European Union, Algeria’s economy continues to be highly protected. The average nominal tariff was 18.7 percent in 2004, well below the more than 30 percent averages in Morocco and Tunisia. However, if one takes into account nontariff and behind-the-border barriers (as measured by the Trade Restrictiveness Index), Algeria’s level of protection is the fifth highest in the world (Kee, Nicita, and Olarreaga 2006). According to Ecotechnics (2004), protectionism offers high returns to selected Algerian firms in the domestic market, discouraging firms that would introduce