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International Monetary Fund
This Selected Issues paper for Algeria analyzes the potential economic impact of Algeria’s Association Agreement with the European Union (AAEU). The paper lays out the major elements of Algeria’s AAEU and makes a comparison with other AAEUs. It discusses the potential economic implications (costs and benefits) of the agreement, and elaborates economic policy issues and challenges. The paper also takes stock of Algeria’s business climate as the authorities consider the use of the fiscal space created by higher hydrocarbon revenues to tackle Algeria’s jobs challenge.
International Monetary Fund

insider-privatized firms. Smith, Cin, and Vodopivec (1997 ) find that foreign-dominated enterprises have a 3.9 percent higher growth in value added than other types of firms, while employee-owned firms have a 1.4 percent higher than average growth. The explanation of such differences lies in application of hard budget constraints. Continued direct subsidies, imprudent bank lending, write-offs of bad debt by the government, continued use of interenterprise arrears, and reliance on barter all retard enterprise restructuring; further, it may be rational for managers to

International Monetary Fund

required structural adjustment is gradual. The EU can play an important role in providing financial and technical assistance in this transformation and the development of Algeria’s private industry. However, the restructuring would be delayed if the government decides to support the losses of the public enterprise sector facing foreign competition. Thus, soft budget constraints—imprudent or politically motivated bank lending, and write-offs of bad debt by the government—could retard enterprise restructuring, because loss-making public enterprises would continue to absorb

Mr. Oleh Havrylyshyn and Mr. Donal McGettigan
This paper reviews a selection of studies on privatization experiences in transition countries. Empirical studies almost invariably show privatized enterprises outperform state enterprises. Moreover, the literature identifies de novo firms as being clearly the best performers, followed by outsider-dominated firms, while insider-dominated firms are the least efficient among those newly privatized. The importance of de novo firms in enlarging the private sector in transition economies is reviewed, along with the question of whether privatization efforts support or hinder de novo private sector development. Finally, the paper discusses the importance of providing a suitable market environment for successful private-sector development.
Mr. Oleh Havrylyshyn and Mr. Donal McGettigan

as well as de novo firms lies in the role of hard budget constraints . Continued direct subsidies, imprudent bank lending, and write-offs of bad debt by the government retards enterprise restructuring. Further, it may be rational for managers to spend more time lobbying the government for support rather than undertake painful restructuring measures. But soft budget constraints are not necessarily restricted to state-owned units and can be provided in ways other than direct government subsidies, including tax arrears. There is no evidence yet on whether such