Depending on what “algebra” as an entire class actually is (I don’t know of it in that form from my Australian upbringing or from elsewhere) I can see it possibly having real benefit: abstract reasoning is one of the major things that needs to be taught to kids and has huge benefits but too often isn’t particularly taught; and algebra with all its symbolic representations and logical reasoning is excellent for that.
From your single-paragraph anecdote I don’t know the full story, of course, but it’s plausible to me that it might be not solely a case of confusing correlation and causation, but at least partly because the described effect made sense to people making the decisions, based on their broad experience in education.
The point is that they're teaching algebra without ensuring that the students are proficient in the prerequisites, so those students who are behind are not actually learning anything. You might as well teach it in first grade for all the good it's doing.
honestly, teaching the concept of a variable in first grade might not be the worst idea in the world