Tag Archives: méditerranée

Income Convergence and the Impact of the Euro-MED Trade and Financial Integration on Macroeconomic Volatility

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Economic and financial integration efforts between the Mediterranean Partner (MPs) countries and the European Union (EU) were initially introduced by the Cooperation Agreements, which granted total exemption from tariffs on industrial products. These efforts were subsequently enhanced by the Association Agreements that were launched under the Barcelona declaration of 1995, which resulted in MPs reducing or even eliminating tariffs on European industrial imports. At the same time, MPs have opened up considerably to other countries, either under the framework of the EU-Mediterranean (MED) trade agreements, or in the context of widespread reduction in tariffs through the signing of the World Trade Organization (WTO) agreements. In early 2000, the Barcelona Process was replaced by the European Neighborhood Policy (ENP), which then was revised in 2015 and became the New European Neighborhood Policy. It is under this framework that the economic relations between the EU and their MPs are now being reshaped.

The New European Neighborhood Policy provides a robust platform towards financial assistance through deeper financial integration, greater access to the common market, and better institutionalization of trade and financial relationships. The EU is also proposing a Deep and Comprehensive Free Trade Area (DCFTA) that will address agriculture, services, and non-tariff measures. Negotiations for the DCFTA are underway with Morocco and Tunisia. Within the context of this New European Neighborhood Policy and the role of the EU in facilitating the modernization, the transition, and international openness of the Mediterranean countries, this research study assesses the degree of income convergence between the two groups (EU and MED) resulting from those trade agreements, as well as macroeconomic volatility effects of those policies on a selected sample of MPs, in order to identify the winners/losers form these trade agreements.

This said, in this study, we use in a first stage the concepts of s-convergence and b-convergence to evaluate empirically income convergence among a group of EU-MED countries over the period 1980-2015. We then present a thorough empirical analysis of the implications of the Euro-MED partnership agreements on economic growth and on macroeconomic volatility in a sample of MPs. Because of the initiation of the Barcelona Process and the Neighborhood Policy in 2000, the empirical analysis is carried out sequentially, over 5 and 10-year periods, and then for the period as a whole 1980-2015. The empirical findings show that there is weak evidence of income convergence for a group of EU-MED countries when analyzed in 5- or 10-year subintervals from 1980-2000 in single equation cross section regressions. However, we find statistically significant evidence of real per capita GDP convergence either when the whole sample period 1980-2015 is analyzed or when the 10-year sub-periods are pooled and estimated in panel growth regressions. These are more plausible results both because economic growth and convergence are long run phenomena and because panel methods deliver more efficient parameter estimates. For the period 1980-2000, there is evidence of weak conditional income convergence in the group of EU-MED (16) countries, and this evidence becomes much weaker for the MED group of countries in between 2000-2015. The reason for these results is the negative effects of the European financial and debt crises on the Euro-MED region in general, and on the MED region in particular.

Macroeconomic stability and economic openness turned out to be statistically important factors and have the expected positive effect on economic growth in the MED countries. Indeed, in most of the estimated models, the variable that is consistently the most significant is economic openness. Of the other explanatory variables, population growth has the theoretically expected negative effect on economic growth as it is found in other studies on empirical growth. Government spending also had a negative effect on economic growth and is statistically significant as is population growth.

The main policy implications that emerge from the empirical results of this paper is that if the MED countries wish to achieve high economic growth they should pursue policies that further promote free trade and economic openness with the EU, as well provide an anchor of macroeconomic stability by means of policies that keep fiscal and monetary policies under control. Political and social unrest, as well as, financial and debt crises have a negative effect on economic growth and convergence in the region and, if possible, should be dealt with as soon as possible by appropriate political and macroeconomic policy action.

Other empirical results point to the fact that MED countries may be less susceptible to EU’s financial shocks if the domestic MED market is larger and/or more regulated. This is consistent with what economic theory would suggest and it has policy implications. In reality, some MED countries have chosen to impose capital controls to deal with financial market crises since it appears that the “culprit” is international capital flows although this policy practice may have undesirable long-term economic consequences. We have shown that MED countries should improve their macroeconomic and financial policy coordination to cope effectively with the impact of greater trade and financial integration with the EU. This may be achieved for example through enhancing regional economic and financial integration. The establishment of a MED free trade zone will not only stimulate and enhance growth, but will also enhance intra-MED trade, thereby, reducing considerably the exposure to the EU’s business cycle, and controlling for the excessive exposure of these MED small open economies to macroeconomic developments in the EU.

The literature shows that large economies can better absorb and neutralize the effects of external shocks. Controlling for the effects of shocks, however, is particularly more difficult in the case of the developing MED economies, which are smaller in size and nearly dependent on exports to the EU of very few commodities and on the import of a huge number of commodities. A direct consequence of an integrated capital market within the MED region will be to reduce the risks associated with greater EU-MED integration, and to dampen the vulnerability of MPs, especially those with high levels of debt, such as Lebanon, Jordan and Egypt, to the effects of fluctuations in EU’s interest rates. A larger MED financial market would lower the cost of raising capital, and would allow MED governments to service their huge debt at lower costs on one hand, and MED firms to rely more on the local market rather than tapping EU’s markets to raise capital, on the other. Lower costs of raising capital will subsequently translate into more investment, consumption, and GDP growth rates in the region. The MED region should accelerate the process of trade, financial, and economic integration with the EU in order to better absorb the negative effects of external political, financial and/or economic shocks. Efforts should also be exerted to speed up the implementation of the fiscal and monetary reforms so as to improve the inflow of portfolio and FDI into the region.

In short, for further trade and financial integration with the EU, MPs need to individually devote more efforts to pursue sound macroeconomic policies. This should be coupled with institutional reforms aimed at developing the financial sector in the respective MED economies. Subsequently, MPs should try to integrate horizontally while at the same time opening up further vertically (to the EU). It was shown that financial openness- as measured by gross capital flows as a ratio to GDP- is associated with an increase in consumption volatility, contrary to the notions of improved international risk-sharing opportunities through financial integration. The inherently unstable macroeconomic environment, political and military turmoil, as well as unsound monetary and fiscal policies in the MED region may explain this empirical irregularity.

One policy recommendation of the study is that MPs need to be more, not less, integrated with EU’s financial markets to be able to reap the benefits of financial integration in terms of improved risk sharing, and consumption smoothing opportunities. This conclusion will however require further analysis, as regional financial integration is associated with a variety of risks in the EU-MED region. To minimize these risks, MPs would need to implement sound macroeconomic and structural frameworks in tandem with further integration. For example, our findings have emphasized the role of sound fiscal and monetary policies in driving macroeconomic volatility. In regard to structural reforms, the development of the domestic financial sector is critical, as a high degree of financial sector development is associated with lower macroeconomic volatility.

Finally, the New European Neighborhood Policy provides a robust framework towards trade and financial assistance through deeper financial integration, greater access to the common market and better institutionalization of trade and financial relationships between the MED and EU countries. This research project will assist policy makers and academics in the EU and MED regions in redefining their trade, financial and macroeconomic priorities while designing new European Neighborhood Policies that will respond to the recent economic challenges. The new European Neighborhood Policy will spawn a large amount of literature on its consequences. This study constitutes an integral part of that literature by identifying the common and differing strands of analysis with particular emphasis on the changes made in the macroeconomic policy paradigm in both the MED and EU region.

FEMISE had the pleasure of co-hosting a workshop on “Sustainable Finance” at SDSN-France with Prof. Jeffrey Sachs (13 November, Paris)

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FEMISE was pleased to be part of SDSN-France launch in Paris on the 13th of November 2018.

Pr. Jeffrey Sachs (SDSN, Columbia University)

The UN Sustainable Development Solutions Network (SDSN) aims to gather a large number of leaders from all regions and diverse backgrounds in order to promote practical solutions for sustainable development, including the implementation of the Sustainable Development Goals (SDGs) and the Paris Climate Agreement. This network has been operating since 2012 under the auspices of the UN Secretary-General and bases its action on values of joint learning and integrated approaches towards interconnected economic, social, and environmental challenges.

The launch of SDSN-France is a key event for the network in general because it allows it to have valuable partners form the academic and research field in France articulating the collaboration between multilateral actors and local financing institutions, the private sector, and civil society. The office of SDSN-France will be driven by KEDGE Business School, member of FEMISE network, the University of PSL, the Pierre et Marie Curie University and Cergy-Pontoise University.

The event was extremely rich in presentations, forward-thinking discussions and proficient workshops. These workshops took the form of collective intelligence sessions where the diversity of the backgrounds of the participants allowed a broad understanding and holistic approaches to the issues discussed. Constantin Tsakas, Secretary General of FEMISE and General Manager of Institut de la Méditerranée, was a host in the workshop “Sustainable Finance”, organized by KEDGE Business School. Alternative and green financial tools were discussed during this workshop, along with determining the key objectives and responsibilities of the French branch of SDSN, as an unavoidable stakeholder in the debate of concretization of the SDGs. Questions brought up by Professor Jeffrey Sachs (Professor at Columbia University, special consultant UN Secretary General) such as the means by which the evaluation of projects in the context of systemic transformation can be possible or the standards to apply for ESGs (Environmental, Social and corporate Governance), pointed out the richness of this matter from a conceptual point of view but also the important practicality of this issue.

In his recap of the workshop, Professor Thomas Lagoarde-Segot (Associate Professor of Economics and International Finance at KEDGE Business School and FEMISE researcher), stressed on the role of SDSN as a mediator between the different actors of Green Finance and more particularly as a gateway between the academic world and research, on the one hand, and the practitioners, on the other. An approach in 3 steps, that included FEMISE proposals, was retained by the participants: To achieve SDSN-France’s full potential, the network could act on 3 levels; the macro-level by raising awareness towards policy-makers, the meso-level by allowing the emergence and mapping of structures (financial, technical) that support social impact and on the micro-level by helping social entrepreneurs improve their perception of Green Finance and their access to it.

These findings were then exposed during a plenary session with the presence of the SDSN-France board and will be included in the roadmap of this French branch of the network, under the section “Sustainable Finance”, alongside the other key findings of the different workshops tackling subjects as diverse and essential as “Education for Sustainable Development”, “Sustainable Cities”, “Sustainable Value Chains”, “Energetic transitions” and leads toward enhancing the “Solutions’ agenda” for SDGs in France. All of these workshops stressed the crucial role of SDSN-France as a facilitator of collaboration between stakeholders and of an accelerator of academic and intellectual effervescence towards finding practical and adequate solutions to concretize SDG goals.

“Precipitating the change of the system as a whole” was one of the focal points of Professor Jeffrey Sachs during his keynote speech at the Chimie ParisTech. It is not about addressing each issue as an independent issue but about “kedging” the world towards change and towards cooperation and alternative ways of governing.

FEMISE MED BRIEF no14 : “How does spatial proximity of firms contribute to EU-Med transition ?”

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Dr. Anna M. Ferragina, CELPE, University of Salerno, FEMISE

The FEMISE Policy Brief series MED BRIEF aspires to provide Forward Thinking for the EuroMediterranean region. The briefs contain succinct, policy-oriented analysis of relevant EuroMed issues, presenting the views of FEMISE researchers and collaborators to policy-makers.

The latest MED BRIEF on “How does spatial proximity of firms contribute to the transition of the EU-Med region? Empirical evidence from Turkey, Italy and Tunisia” is available here. 

It is also available here in Arabic as well.

 

Abstract: In this policy brief we provide policy implications and recommendations on how firms’ productivity react to spatial economic drivers of growth related to agglomeration economies, clustering of innovation, and localisation of FDI. We observe how these features interact with firm characteristics (specifically size, ownership, and innovation) focusing on three case studies: Turkey, Italy, and Tunisia. Overall, the estimation results suggest significant productivity enhancing agglomeration and innovation effects, in particular spillovers are higher between firms operating in the same sector and region and having small technology divides. In addition, evidence on productivity spillovers from neighbouring foreign firms is less robust. The results of the study confirm the efficiency of clusters of SMEs in  South Mediterranean countries and helps identifying key drivers and patterns of localised production providing a benchmark of analysis. The evidence support policies which pay specific effort to enhance the absorptive capacity of less technologically sophisticated firms by supporting R&D investment and human capital qualification allowing firms to compete and benefit of surrounding spillovers in agglomerated areas. Another policy target for the government should be investing in transportation infrastructure, easing access to housing and developing regional complementarities. This would lead to a more sustainable convergence of standards of living among regions in the long-term, and would reduce the exploitation of resources along the coast and the pressure on natural resources.

The list of FEMISE MED BRIEFS is available here.

The policy brief has been produced with the financial assistance of the European Union within the context of the FEMISE program. The contents of this document are the sole responsibility of the authors and can under no circumstances be regarded as reflecting the position of the European Union.

Med Change Makers e05 : Katarzyna SIDLO, Women Empowerment and Collaborative Economy

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FEMISE recently launched its series of interviews called « Med Change Makers ».

« Med Change Makers » are text and video-based interviews that allow dynamic researchers of the FEMISE network to illustrate how their research addresses a policy-relevant question and how it contributes to the policy-making process in the Euro-Mediterranean region.

 

Boosting female labour market participation rates in the MENA region : Can collaborative economy be of help? ”

Interview with Katarzyna Sidlo, Political Analyst at CASE, researcher at FEMISE

FEMISE recently published its Policy Brief “Boosting female labour market participation rates in the MENA region : Can collaborative economy be of help?”.

Autthor of the MED BRIEF, Dr. Katarzyna Sidlo is a FEMISE researcher who actively participates in the activities of the network. Her work assesses the potential of the collaborative economy to increase women’s labor force participation in the MENA region (Middle East and North Africa). More specifically, it examines ways in which the collaborative economy can enable women who are interested to join the labor market.

  1. How do you define collaborative economy? Can you give us examples from different sectors of such initiatives?

The collaborative (or sharing) economy refers to business models that create an open marketplace for access to goods and services thanks to the use of modern technology. It covers a variety of sectors, is rapidly emerging throughout the world and provides new opportunities for citizens who are able to get what they need from each other instead of going to large organizations (at least that is the theory). Some of the best-known examples of collaborative economy businesses are car-hailing applications such as Uber or Careem, peer-to-peer accommodation website Airbnb, crowdsourcing platforms Kickstarter or Indiegogo, or online marketplace Etsy. Many of them are already household names.

  1. Do you think that collaborative economy is a feasible solution in MENA countries given internet access obstacles and public perceptions?

Well, firstly according to the World Bank, 59% of individuals in the MENA region are internet users. Access to internet as such is therefore not a problem everywhere in the region, although of course in many places broadband is expensive, slow and generally unreliable and in many other, especially urban areas, simply not yet readily available. More importantly, however, I would look at the problem stated in the question in a different way: the potential to make use of what collaborative economy has to offer can be one more argument in favour of extending efforts to provide access to internet to as many people as possible. If internet is not available in a village in the south of Egypt, chances are that neither are many job offers. By providing inhabitants of such a village with access to internet, you give them an opportunity to enter the labour market as well. For instance, they could study for free on one of the many Massive Open Online Courses (MOOCs) platforms available – increasingly also in Arabic – and gain skills that will allow them to find employment. Or they could give Arabic classes online (one platform, NaTakallam, offers such classes taught by refugees). All without having to emigrate and leave their villages or, indeed, houses.

I strongly believe that even if just a small percentage of people in a given society use this chance, it will be worth it. So while the sharing economy will by no means solve all or even most of the problems related to the low female (and male) labour force participation – it would not even if virtually every single person in the region had access to a fast, affordable, and reliable internet – it has a huge potential to contribute to the alleviation of this problem.

  1. What are the main obstacles for female labour force participation in the MENA region and how does collaborative economy bring innovative solutions to each?

Women in the MENA region wishing to join the labour market face numerous obstacles, from practical ones (lack of jobs, difficult commutes) to those of socio-cultural nature (restrictions on outside-of-the-house activities, caring responsibilities) nature. Sharing economy can help to overcome a number of those. Most importantly, it allows women to perform work – and indeed create their own businesses – from the comfort of their own homes. Thanks to this even those women, who due to various family- or culture-related reasons would not undertake paid work outside of the house, can earn their own income (and economic empowerment is a great step towards social and political empowerment). Another good example are ride-hailing services, providing a safer, more reliable and cheaper (compared to traditional taxis) alternative to faulty or point-blank non-existent public transport, oftentimes believed to be not appropriate for use by non-accompanied women. An extreme case in point was Saudi Arabia, where prior to lifting the ban on women driving 80% of Uber’s and 70% of Careem’s clients were female.

  1. One of the article’s recommendations was to improve the legal frameworks in each MENA country to enable the optimal functioning of sharing-economy businesses. What concrete measures can be successfully implemented in the region as a whole and in case-specific contexts?

One of the main advantages of the sharing economy is its flexibility. However, this flexibility can also oftentimes mean lack of clarity for instance in terms of liability, taxation, consumer protection, licensing or insurance. Think about ride hailing services such as Uber, Careem or Lyft: in case of an accident, whose insurance should cover the damages? As drivers are using their private vehicles they may not possess commercial, but rather personal insurance, which can lead to insurers denying the claim. Should the company owning the platform through which drivers are matched with clients be liable at all? Are the drivers even their employees or clients making use of the platforms features? The answer to that question determines answers to many subsequent ones related to social protection (maternity leaves, pensions, health insurance etc.) of the collaborative service providers. Another issue is of course taxation.

Unfortunately, there are no easy answers. The European Union is for instance pondering issuing EU level guidelines but currently whether and to what extent the sharing economy should be regulated is still a matter of a lively debate. The big question is of course how to regulate so that you don’t overregulate and therefore kill the flexibility that makes participating in sharing economy so convenient.

In the MENA region, countries should think about solutions that work best under their specific circumstances. For instance, a voluntary health insurance scheme could be introduced to help those earning their income within the sharing economy to gain social protection (an interesting study on this topic for Tunisia by Khaled Makhloufi, Mohammad Abu-Zaineh, and Bruno Ventelou has been published recently by FEMISE). In Jordan, where the government is working on a tax reform, the question of imposing corporate law tax on collaborative platforms could be investigated.

  1. What is the role you see for the civil society and NGOs in the proliferation of collaborative economy? Would cooperation and synergies between different actors/ stakeholders possible in your opinion?

Collaborative economy has it for-profit and non-profit dimension. Speaking of increasing female labour market participation in the MENA region and the role of CSOs and NGOs, we should probably focus on the latter. The spectrum of possibilities is really broad. Both types of organizations could for instance facilitate women organizing their own car pooling schemes, helping each other to safely and conveniently get to and from work on daily basis. They could set up collaborative working spaces, where female entrepreneurs could set up and run their businesses in a friendly, safe and inspiring environment. They could create online courses in local dialects of Arabic, providing free training to women thinking about starting their own business or work on translations into Arabic of courses which are already available on various MOOC platforms and which provide knowledge and skills that make finding a job easier. All that – and much more – can of course be done in collaboration between different stakeholders. After all that is what collaborative economy is all about.

The MED BRIEF is available for download by clicking here.

Interview by Constantin Tsakas

This activity received financial support from the European Union through the FEMISE project on “Support to Economic Research, studies and dialogues of the Euro-Mediterranean Partnership”. Any views expressed are the sole responsibility of the speakers.

The private sector, its role as an engine of growth and job creation, at the heart of FEMISE research

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FEMISE Brochure

Mediterranean countries suffer from a lack of dynamism of their private sector, which is not sufficiently competitive nor job-creating.

Therefore, FEMISE has placed the theme of the private sector, and in particular its role as an engine of growth, job creation and inclusivity, at the center of its research activities. A special attention is paid to the causes that prevent the sector from reaching its potential, in particular the constraints faced by firms in the Southern Mediterranean Region, and to the importance of innovation in the development of the Mediterranean private sector.

One of the specificities of the FEMISE network, coordinated by the Economic Research Forum (ERF) and Institut de la Méditerranée (IM), is to always strive to integrate the points of view of politicians, of private operators and, more broadly, of all local actors, in the discussions carried out under this theme. This approach provides better feedback on the research, and ensures its policy relevance.

The private sector at the center of the FEMISE academic research

Patricia AUGIER (Scientific Pres. of Institut de la Méditerranée, Coordinator and Scientific Pres. of FEMISE), coordinates the 2018 EuroMed report

Firstly, the 2018 FEMISE EuroMed report, the flagship publication of the network, will focus on the private sector in the Mediterranean countries. The objective of the report will be to take stock of the economic dynamics of the Mediterranean countries over the last 20 years (ie since the Barcelona Process), and to understand the blocking points. The general idea is that growth in Mediterranean countries must accelerate to absorb a growing number of incoming individuals in the labor market, and that this growth must be based on productivity gains rather than on factors accumulation : the development of the private sector is therefore at the heart of the definition of a new development model. One of the chapters will focus more specifically on the role of central banks in private sector development. Finally, the major concern of a more inclusive growth will lead us to consider social entrepreneurship as a potential opportunity for the Mediterranean countries.

A “Science for Business” partnership dynamic with technical and operational support actors

Secondly, FEMISE participates, in partnership with ANIMA, in THE NEXT SOCIETY project, which brings together public and private actors from 7 Mediterranean countries with the aim of supporting innovation ecosystems. This collaboration gives the opportunity to FEMISE and ANIMA to pool their complementary skills, which are analysis and production of academic knowledge on the one hand, and technical and operational support on the other hand.

FEMISE’s contribution is firstly to draw-up a scoreboard and analyze the position of each country in terms of innovation and competitiveness indicators, such as the Global Innovation Index, at different stages of innovation (inputs, process and outputs). FEMISE also carries out an analysis of the national innovation strategies and of the ecosystem of involved actors (government, associations, private operators…).

Next, FEMISE identifies high-performing sectors and products to highlight new national comparative advantages and investment opportunities.

Dr. Maryse LOUIS (General Manager FEMISE, Programs Manager ERF) and Dr. Constantin TSAKAS (General Manager Institut de la Méditerranée, General Secretary FEMISE) presenting FEMISE research at THE NEXT SOCIETY panels in Tunisia and Jordan.

FEMISE presents its findings on the occasion of advocacy panels bringing together academics, entrepreneurs, investors, managers of incubators and innovation structures and public actors. This allows to benefit from their feedback and, above all, from their point of view regarding the factors that led to the emergence of these new comparative advantages. This approach ensures that the findings and recommendations from FEMISE work can contribute to elaborate public policies. The challenge of these panels is to establish, for each country, a roadmap for innovation, from implementation to evaluation, with the objectives of strengthening national innovation systems, fostering coordination between stakeholders, and improving the instruments of innovation policies and strategies.

An opening towards South-Mediterranean institutions in a “Science for Policy” approach

Les jeunes chercheurs du FEMISE participent activement aux recherches, Karine MOUKADDEM et Jocelyn VENTURA (Institut de la Méditerranée, FEMISE) et Dalia RAFIK (ERF, FEMISE)

Thirdly, FEMISE is opening-up by cooperating with South Mediterranean actors and institutions directly concerned by these issues. Therefore, FEMISE co-authored and will publish in 2019 the2019 EuroMed report which will identify the constraints to growth and integration in the global value chains of Moroccan SMEs. This document results from the cooperation of the network with the African Development Bank, a main regional funder for development aid, and with the Institut supérieur de commerce et de gestion d’administration des entreprises (ISCAE) established in Morocco.

It is essential for the Mediterranean countries to better integrate SMEs into the global value chains in which most international trade takes place. In this report, we have chosen to focus on the case of Moroccan firms. It will be based on surveys and field interviews of SME managers and representatives of professional associations as well as on the Enterprise Surveys and Doing Business indicators of the World Bank. It is in this approach of discussions between researchers and public and private operators that the preliminary results of the report were presented before publication, in order to gather comments, suggestions and recommendations to enrich the research.

A triple anchoring to obtain research that is relevant from a political and operational dimension

To conclude, in addition to the ongoing academic research conducted by network members and supported financially by FEMISE funds (research available on the website), 3 other types of work devoted to the private sector are currently mobilizing the FEMISE team: (1) an analysis of the situation and a general discussion covering the entire region (EuroMed2018 Report), (2) a targeted and co-authored thematic analysis with a national focus (EuroMed2019 Report) and (3) a project on innovation in partnership with ANIMA.

Our analysis feeds on both (i) the knowledge and contributions of academic research, (ii) the consideration of concrete situations within the countries, as well as (iii) the points of view and insights from politicians and business actors. This triple anchoring allows us to develop products that are relevant from a political and operational dimension.

To get the FEMISE Brochure, with a presentation of the activities of the network and its new thematic approaches please click here.

To find out more about the preliminary findings of the report co-led with the AfDB, some answers are available in the interview below:

Article written by Jocelyn Ventura (Economist Institut de la Méditerranée)

External and internal imbalances in South Mediterranean countries

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South – MED countries are characterising by non-diversified economic structures. Some are heavily dependent on oil resources to support their economic growth and development; while others are relying disproportionately on real estate, tourism and low-value added export products. This makes them vulnerable to external economic conditions. Together with the wider geo-political situation of the region, which fuels economic uncertainty, this creates significant threats and problems, including with regard to trade deficits and the current account (external imbalances). The domestic political situation is also not conducive to economic stability. Governments in South – MED countries are rather centralised and often lack –transparent and good-quality institutions. In the economic sphere, this contributes to exacerbating budget deficits and escalating government debts (internal imbalances). In conjunction, internal and external imbalances both reflect and reinforce the inability of these economies to climb up the value-added ladder, developing more competitive products and specialisations that will help them achieve more sustainable economic growth, balanced fiscal stances and trade account surpluses.

Within this context, and largely in response to the new risks that emerged in the financial sphere, with regard to both internal and external imbalances, after the global financial crisis, government policies in the South – MED adopted – sometimes harsh – economic reform programmes as a way to stabilise their economies and manage the associated risks. Adjustment programmes, however, are socially painful and may also have adverse effects on the economy, thus increasing further the fragility of these economies and threatening a further deterioration of their external position. This raises two analytically interesting and, in policy terms, very pressing questions about, on the one hand, the extent and nature of internal and external imbalances in these countries and, on the other hand, the appropriateness of the adjustment policies that were pursued.

This study provides an extensive analysis of these issues, focusing on the case of six South – MED countries, namely Algeria, Egypt, Jordan, Lebanon, Morocco and Tunisia. It examines in detail the internal and external imbalances of these countries, over the last three decades, both descriptively (through the use of graphs) and econometrically (through time-series econometric techniques). It subsequently reviews the range of adjustment programmes, austerity policies and other macro-economic adjustment mechanisms (e.g., exchange rate policies) that were deployed in these countries to deal with the internal and external threats to stability and, by reflecting on these two lines of research, it provides useful insights about the effectiveness and appropriateness of these policy responses in addressing the problem at hand.

Stabilising economies with significant economic disadvantages and political-institutional weaknesses – let alone upgrading their comparative and competitive advantages – is not an easy task. Fiscal, financial and economic threats often combine with and reinforce each other, while on the other hand attempted policy solutions tend to be much less synergetic. For example, implementing fiscal consolidation (e.g., in order to fix a borrowing-costs or liquidity problem holding investment back) may actually reduce investment by depressing domestic demand and/or by lowering the provision of public goods that stimulate investment (e.g., infrastructure). Similarly, market and trade liberalisation policies, which are meant to increase competition and productivity and generate positive market-size effects, can often lead to a disproportionate increase in imports, thus destabilising the current account balance and, through this, perhaps also the government’s own fiscal stance. The same adverse effect may result from policies aiming at reducing currency uncertainty (e.g., to stimulate foreign direct investment) via maintaining a fixed (or pegged) exchange rate.

In recognition of this, it has come to be established in the international literature that an important pre-condition for successful policies, for both stabilisation and development, is the existence of good-governance institutions. This is of course a big challenge for countries such as those in the South – MED, which are still undergoing a transition process from economic and political centralisation to economic and political liberalisation and have relatively young democratic-capitalist institutions and relatively weak policy-making capacities. In this context, understanding the full nature of the challenges imposed by the external and domestic environment (e.g., as reflected in the values and trajectories of aggregates related to internal and external imbalances) becomes even more important as a precondition for successful and effective policy-making. The guidance that can follow from such an analysis can allow the development of a relevant and realistic policy vision and, consequently, the design and implementation of an appropriate strategy that will try to address the identified problems and achieve the targets set by policy.

As our review of the adjustment programmes and other policy measures show, the six South – MED countries studied here did not have the ability, or perhaps the time, to take such a policy approach. Threatened by fast deteriorating external and internal imbalances, in an international environment of heightened risks and uncertainty, the countries implemented rather hastily austerity programmes which combined tax increases with significant cuts in expenditures, including in price-subsidies which – in comparative terms – seem to play a large part of government policy in these economies. Under the direct or indirect advice of international financing institutions such as the IMF, the removal of price (and other) subsidies was considered as a positive measure seeking to remove distortions form the economy which block the economy’s modernisation by lowering the returns to productive investments. However, it also had negative consequences, both distributive-social (as it hurt most those who most needed the subsidies) and economic (as it depressed domestic demand). Thus, although in most of the cases stabilisation policies (i.e., policies aiming at reducing budget and current account deficits and stabilising the exchange rate) were relatively successful, the economic structures and main fundamentals of these countries remain largely the same – and, importantly, so do the overall external vulnerability of these economies and the domestic socio-economic problems of inequality and unemployment. Notably, also the general trajectories of the aggregates underpinning the internal and external positions of these countries do not seem to have changed drastically with the implementation of the adjustment programmes.

Overall, our empirical analysis presents a picture of large and persistent external imbalances, concerning the foreign debts of all countries and the net foreign asset positions of all but one (Egypt). However, and although they are broadly rather large, current account imbalances do not appear to be uniformly unsustainable across the six countries. Non-sustainability appears to characterise the cases of Algeria and Tunisia; but for countries such as Egypt and Morocco the evidence of current-account unsustainability is mixed, while for Jordan and Lebanon current account unsustainability is econometrically rejected. More importantly, internal imbalances, in the form of budget deficits and public debt, also do not seem to be an issue of major concern for the six South – MED countries. Non-sustainability in these aggregates seems to concern only Morocco and Egypt (for the fiscal balance only), while for Algeria, Lebanon and Tunisia there is only some very limited evidence of non-sustainability. Further, the causality analysis indicates that the fiscal positions are, not only broadly sustainable, but also not a cause (in a temporal sense) of external imbalances. Rather, the causality runs in the opposite direction, specifically from current account imbalances to fiscal derailments and from net foreign assets imbalances vulnerabilities destabilising government debt in the majority of cases.

Thus, although some cases do emerge, where fiscal risks became particularly heightened immediately after the global financial crisis and fiscal policy responses were relatively successful in controlling the rising deficits and debts, on the whole the analysis of internal and external sustainability presented here does not seem to justify the attention paid by many countries in the region to fiscal consolidation. Instead, emphasis on correcting currency misalignments and addressing issues of international competitiveness, exports and foreign investment appear much more relevant in relation to the identified threats to these economies. But in the longer term the critical set of policies concerns not so much the monetary or fiscal domain but rather the set of interventions that can be applied in the real economy, to strengthen the skills-base there and to push towards economic diversification towards higher added-value activities; as well as with regard to the legal and institutional system (addressing problems of corruption, public management inefficiencies, economic informality, etc).

When the location of a firm affects its productivity

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Should firms give in to the sirens of globalization? Stimulating R & D, sharing knowledge, skills, subcontracting … Productivity rises when firms in the same sector are in geographical proximity analyzes the latest Femise report.

 

« La proximité spatiale et les performances des entreprises: comment les économies basées sur la localisation peuvent-elles contribuer au processus de transition dans la région méditerranéenne ? ». Le Femise répond à cette question dans son dernier rapport. Photo F.D

“Spatial proximity and business performance: how can location-based economies contribute to the transition process in the Mediterranean region? “. Femise answers this question in its latest report. ©F.D

Agglomerations of economic activity contain all the links in the value chain, know-how and qualified workforce in a specific area. These are valuable assets for a firm, as well as for a country as a whole. It is enough to take the cases of agglomeration zones in Turkey and in Tunisia. As the world’s 15th largest producer of vehicles, Turkey has 12 active car manufacturers and nearly 5,000 OEMs (including around 250 foreign investors). Fiat, Oyak-Renault and their equipment manufacturers are focusing on Bursa, the European capital of vehicle production.

In Tunisia, SMEs are in contact with aeronautical multinationals (Stelia, a subsidiary of Eads / Airbus) on the El-Mghira aeropole, an industrial platform of 200 ha south of Tunis. ” How can location-based economies help the transition process in the Mediterranean region?“, questions Femise in its latest report FEM 41-09. The project, edited by Anna Ferragina of the University of Salerno in Italy, analyzes the link between spatial proximity and business performance. It issues recommendations on public policies and observes the impact of innovation spillovers in a context of geographic and sectoral concentration.

 

Productivity, innovation and foreign direct investment

“Despite the challenges of globalization, location is what makes a difference,” says the document. Femise notes an improvement in the productivity of firms located in the automotive or aeronautical clusters of Turkey, Italy and Tunisia. Technologically and geographically close, they benefit from the circulation of knowledge, especially when it comes to innovation actors.

The Femise report notes some interesting variables accross countries. While foreign firms play a decisive role in Turkey, clusters of domestic SMEs create negative externalities, with Femise citing the example of congestion. The emergence of clusters, generates spatial inequalities and large disparities across regions. In Tunisia the majority of firms are located in coastal areas. Wealth and jobs are therefore concentrated on the coastal strip. For the authors of the report, the country must invest in transport infrastructure in order to develop regional complementarities.
If Italy remains far removed from the extreme fractures observed in Turkey and Tunisia, the Femise report notes significant agglomeration effects stimulating the productivity of firms.

Access the FEMISE report by clicking here

Article by in partnership with Econostrum 

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Med Change Makers e03 : Jocelyn VENTURA, Integration into the global value chains of Moroccan SMEs

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FEMISE recently launched its new series of interviews called « Med Change Makers ».

« Med Change Makers » are text and video-based interviews that allow dynamic FEMISE researchers to illustrate how their research addresses a policy-relevant question and contributes to the policy-making process in the Euro-Mediterranean region.

 

 

Integration into the global value chains of Moroccan SMEs

Interview with Jocelyn Ventura, Aix-Marseille University (France), Institut de la Méditerranée and FEMISE

Jocelyn Ventura, Aix-Marseille Université (France), Institut de la Méditerranée and FEMISE

Economists from FEMISE and Institut de la Méditerranée recently presented the preliminary findings of a study produced for the African Development Bank entitled “Identifying Barriers to Improving the Business Environment and Integrating the global value chains for Moroccan exporting SMEs “.

Jocelyn Ventura (Aix-Marseille University (France), Economist at Institut de la Méditerranée and FEMISE) contributed to the report. In this interview, he offers avenues for reflection on opportunities as well as measures that the state could put in place to improve the insertion of SMEs into global value chains.

 

1) What are the dynamics of Moroccan exports? What are the main export sectors?

There is a notable dynamic. Since 2014, Morocco has implemented an Industrial Acceleration Plan (PAI), one of whose objectives is to promote exports from the industrial sector. One of the goals of this plan is to strengthen Morocco’s international positioning by improving its attractiveness. Since then, Morocco has diversified the destinations of its exports especially to the rest of the world. Although Europe remains the leading destination for Moroccan exports, its relative importance has declined.

In addition to the traditional exporting sectors, there are more technology-intensive sectors that have emerged recently and have experienced a high growth rate: machinery and electrical appliances, vehicles, etc.

Moroccan exports are upgrading to a higher range with the emergence of new export sectors that are more intensive in technology. However, the growth rate of Moroccan exports remains lower than the one found in countries with comparable income levels. A possible explanation being that the competitiveness of exports has been reduced by the rigid exchange rate regime (recently relaxed). In addition, macroeconomic imbalances and the general business environment have been barriers to export growth.

2) What is the situation of Morocco regarding the integration of global value chains? What is its position relative to comparable or neighbouring countries?

Generally speaking, the Mediterranean countries, and Morocco in particular, are fairly well integrated in the GVC. The GVC participation index shows that Morocco’s integration into the GVC is equivalent to that of Turkey and close to that of Israel, but remains lower than that of Tunisia (51.1% in 2011) or other comparative countries (Chile, Romania, Malaysia …).

We observe that the participation of Morocco in the GVC is mainly backward or, in other words, it is the share of foreign VA in Moroccan exports that contributes the most to integration into the GVC. Backward participation is particularly important in Morocco’s main export sectors, such as vehicles, electrical machinery and textiles, which shows that Moroccan exports are part of internationalized production processes.

3) What are the main barriers to SMEs’ ability to sell their product in foreign markets?

Among the obstacles to the launch of an export activity cited by Moroccan SMEs, we can note the difficulty to enter foreign markets and to adapt the products to the standards imposed there, the difficulty to obtain financing, transport costs and cumbersome customs procedures. Also playing a role are the cost of currency hedging, the weakness of R&D and the lack of national export support agencies.

Among the policies demanded to reduce these obstacles is the establishment of relays in the target markets, an increase in the means available to economic advisers of diplomatic missions abroad, and also the creation of a special bank supporting export activities…

4) What opportunities would be offered by a better integration in GVCs of SMEs?

Opportunities are numerous. Between 60% and 80% of trade flows take place within the GVC. For a company in a developing country, integrating these GVCs would be a great way to export its production. The integration of GVC can also improve the productivity and competitiveness of the company. For example, better integration into these GVCs could facilitate the upgrading of both product quality and production processes standards, help improve employee skills, give access to new technologies, etc.

The fragmentation of production processes allows firms in developing countries, especially SMEs, to use comparative advantages to produce and export part of their value chain in which they are more competitive.

This would be one of the best ways to accelerate the growth of Moroccan exports, as well as the shortest way for SMEs to benefit from both productivity and competitiveness improvement and better positioning in the international market.

5) What policy could be implemented to improve the integration of SMEs into GVCs?

First of all, we can notice that SMEs will be at a disadvantage in the face of large companies, which benefit from better productivity and a better capacity to acquire and absorb new technologies, and therefore to integrate GVC.

Among the obstacles to be overcome are the lack of an efficient logistic services, the lack of product competitiveness, the difficulties to satisfy the requirements of ordering customers and to put the products and production processes to the required quality standards etc.

The State could therefore improve the integration of SMEs by offering them a support to bring products and production processes into conformity, a support for employee training, a support for networking with foreign companies, and finally and most importantly, an increase in available bank credits.

Interviewed by Constantin Tsakas

[1] This activity received financial support from the European Union through the FEMISE project on “Support to Economic Research, studies and dialogues of the Euro-Mediterranean Partnership”. Any views expressed are the sole responsibility of the speakers.

FEMISE MED BRIEF no9 : “The determinants of export performance of firms in MENA countries”

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The FEMISE Policy Brief series MED BRIEF aspires to provide Forward Thinking for the EuroMediterranean region. The briefs contain succinct, policy-oriented analysis of relevant EuroMed issues, presenting the views of FEMISE researchers and collaborators to policy-makers.

The ninth issue of MED BRIEF “The determinants of export performance of firms in selected MENA countries. Comparison to CEE countries, Israel and Turkey” is available by clicking here.

Pr. Alfred Tovias (Leonard Davis Institute of International Relations, The Hebrew University and FEMISE)

While focussing mainly on the export performance determinants of firms in selected MENA countries, this brief draws some useful policy recommendations after comparing the MENA firms performance with that of firms from countries in Central and Eastern Europe (CEE). Empirical results obtained for Middle East and North Africa (MENA) and CEE countries indicate that productivity, firm size, spending on research and development (R&D), the share of university graduates in productive employment and the internationalization of firms all have a positive relation vis-a-vis the probability of exporting.

The list of FEMISE MED BRIEFS is available here.

The policy brief has been produced with the financial assistance of the European Union within the context of the FEMISE program. The contents of this document are the sole responsibility of the authors and can under no circumstances be regarded as reflecting the position of the European Union.

Med Change Makers e02 : Simona RAMOS, Climate-Induced Migration: Issues and Solutions

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FEMISE recently launched its new series of interviews called « Med Change Makers ».

« Med Change Makers » are text and video-based interviews that allow dynamic FEMISE researchers to illustrate how their research addresses a policy-relevant question and contributes to the policy-making process in the Euro-Mediterranean region.

Med Change Makers e02 : Simona RAMOS, Climate-Induced Migration: Issues and Solutions

Interview with Simona RAMOS, Aix-Marseille Université (France), Institut de la Méditerranée and FEMISE

Simona RAMOS, Aix-Marseille Université (France), Institut de la Méditerranée and FEMISE

The latest edition of the ENERGIES2050 / Institut de la Méditerranée / FEMISE report “The challenges of climate change in the Mediterranean” provides insight into the specific place of the Mediterranean basin in the new International Climate Agenda.

Simona Ramos (Aix-Marseille University (France), Policy Researcher at Institut de la Méditerranée / FEMISE) contributed to the report by studying the link between “Migration and climate-change in the countries of the southern Mediterranean”.

In this interview, Simona Ramos offers avenues for political reflection to deal with the continuing effects of climate-induced migration.

  1. Regarding implementation efforts of the Paris Agreement which country/countries in the South Med region are examples to follow and why?

Countries in the South Med region do differ in their progress towards the implementation of the Paris Agreement. Morocco and Israel are considerably ahead in terms of policies and actions. At the core of Morocco’s current emissions reduction efforts stands the National Energy Strategy, which aims to extend the share of renewable electricity capacity to 42% by 2020 and to 52% by 2030. Morocco has demonstrated policy-in-action, with massive investment on solar energy debuting with the construction of the giant Noor solar complex (using concentrated solar power) near Ouarzazate. On the other hand, Algeria, Tunisia and Palestine, seem to be willing to take more valiant measures for mitigation and adaptation to climate change although they also face serious constraints. For example, in terms of legislation, Tunisia became one of the few countries to recognize climate change in its Constitution, even though climate related policies in the country have still a long way to improve.

  1. You suggest that there has not been enough cooperation among South-South countries. Why is this so important and what are your suggestions in this regard?

Indeed, one of the key problems that South Med countries are facing is the lack of mutual collaboration in the implementation of their climate-based policies. A solid South‐South collaboration could foster significant improvement in the implementation of South Med policy implementation in terms of climate change. Cooperation can assist in mutual capacity building in the realm of research and development. Also, technological and know-how transfer can be fostered through Legislative and Institutional frameworks (ex. by developing technology transfer frameworks and enabling environments to integrate technology transfer policies at the national levels). The potential of South-South cooperation is vast and as such should be seriously taken into consideration.

  1. How do climate processes affect human migration? Has anything been done at the national policy level in this regard within SMCs?

Climate processes seriously affect human migration. Nevertheless, it can be argued that this topic doesn’t receive proper attention as contrary to climatic events, climatic processes occur in a gradual and cumulative way, and as such establishing a strict causal relation is difficult. Nevertheless, the effect of climate change on populations can operate in multiple ways. Water, food and land availability can be seriously affected and populations can be forced to migrate from affected areas. The South Med region has been among the most climatically affected regions worldwide, with sea level rise and desertification occurring on an ongoing basis. With regards to policy, what has been done so far has to do more with adaptation and mitigation measures (often as part of countries’ NDCs or NCs). Nevertheless, it can be argued that these measures do not necessarily tackle and/or fully address climate induced (forced) human migration.

  1. You state that current policy measures fail to fully address the ongoing effects of climate induced migration. Why and what are your policy suggestions to address the ongoing effects of climate induced migration in the South Mediterranean countries?

Although it can be strongly argued that current policy measures and climate based strategies are crucial with regards to climate change improvement, they are not expected to fully address the spectrum of climate change consequences, such as the one of “climatic processes-induced migration”. This is due to several reasons. Mitigation, adaptation as well as capacity building and technology transfer strategies take time to be implemented, which means that the millions of presently affected people are not likely to immediately benefit from these measures. Also, in order for these strategies to be effective, a global consensus is needed. Unfortunately, this is not always the case as recent history has shown.

One of the policy recommendations in this regard would be to incorporate climate-induced migration under the international legal framework, as an adaptation strategy rather than as a failure to adapt. In this case, having a legal status for ‘climatic migrants” would properly address and protect people crossing bothers. Other suggestions include using “planned re-alocation”, an approach that has often been incorporated in cases of natural disasters. Many have favored this approach because it usually takes place within the borders of the country, allowing for higher flexibility and avoiding the complexity of requiring international agreements.

  1. How can re-allocation measures be used to address people affected by climate induced migration?

Planned re-allocation strategies can be complex and difficult to implement especially if a country lacks institutional, technological and financial capacity.

  • At first, there should be an early identification of populations exposed to disasters and other impacts of climate change or affected by mitigation and adaptation projects associated with climate change. A National Mapping of such populations needs to be systematized and publicly shared to maximize awareness-raising.
  • Planning for relocation should be integrated within the national strategies and requires the creation of an enabling environment, including a legal basis for undertaking planned relocation, capacity-building, institutionalization, and a whole-of-government approach.
  • The sustainability of planned relocation should be assured through adequate attention to site selection, livelihoods, integration (identity and culture), and host communities, among other factors.
  • Independent, short and long-term, quantitative and qualitative monitoring and evaluation systems should be created to assess the impacts and outcomes of planned relocation.
  1. What is the Green Wall Project and what are its implications and potential for South Mediterranean countries?

Planned relocation should be an option of last resort as it is a complex and expensive process. It is necessary to enable improvement in the living conditions of areas affected by climate change. One of the most prominent projects in this regard is the Great Green Wall, an African led initiative to green the desert (by growing more plants and trees) with a goal of providing food, jobs and a future for millions of people who live in regions that are affected by climate change.

The inability to make a living from the land can be an important push factor for migration. Greening areas that are currently scarcely populated and not able to fully sustain human necessities could bring multiple benefits as i. people already living in those areas wouldn’t be forced to move and ii. these areas could also serve as potential place for reallocation for people in neighboring affected zones. Algeria, Egypt and Tunisia are already partners within this project and could serve as an example to other SMCs.

Interviewed by Constantin Tsakas