Page 1

FEMISE REPORT ON THE EURO-MEDITERRANEAN PARTNERSHIP

2 12

THE SEASON OF CHOICES

Illustration by Alain Soucasse

Coordinators Ahmed Galal, Economic Research Forum, Egypt Jean-Louis Reiffers, Institut de la Méditerranée, France November 2012 This document has been produced with the financial assistance of the European Union. 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.

0


FEMISE REPORT ON THE EURO-MEDITERRANEaN PARTNERSHIP

THE SEASON OF CHOICES

Ahmed Galal, Economic Research Forum, Egypt Jean-Louis Reiffers, Institut de la Méditerranée, France Coordinators

November 2012

This document has been produced with the financial assistance of the European Union. 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. -i-


-ii-


FEMISE REPORT ON THE EURO-MEDITERRANEAN PARTNERSHIP THE SEASON OF CHOICES

November 2012

This report was directed by Professor Jean-Louis Reiffers (President of the FEMISE Scientific Committee, Euromed Management/ Kedge Business School, Professor Emeritus USTV). Contributions, alphabetically: Pr. Lahcen Achy (INSEA, Morocco). Dr. Patricia Augier (Aix-Marseille University, Aix-Marseille School of Economics, CNRS & EHESS, Deputy director of FEMISE Scientific Committee). Dr. Frédéric Blanc (General Manager of FEMISE, Institut de la Méditerranée) Dr. Hoda Selim (Economist FEMISE, ERF). Dr. Constantin Tsakas (Economist FEMISE, Institut de la Méditerranée). Formatting by Dr. Constantin Tsakas. Cover : Illustration by Alain Soucasse “Vitrail pour le Caribou Corse”.

-iii-


November 2012 Members of the Steering Committee :

Ahmed GALAL

Economic Research Forum

Egypt

Jean-Louis REIFFERS

Institut de la Méditerranée

France

Nuhad ABDALLAH

Academic Unit for Scientific Research ( AUSR)

Syria

Lahcen ACHY

INSEA

Morocco

Bruno AMOROSO

Federico Caffe Center Roskilde University

Denmark

Slimane BEDRANI

CREAD

Algeria

Mongi BOUGHZALA

Université de Tunis El Manar

Tunisia

Mahmoud EL JAFARI

Al Quds University of Jerusalem

Palestine

Anna Maria FERRAGINA

CELPE, University of Salermo

Italy

Michael GASIOREK

Sussex University

United Kingdom

Ahmed GHONEIM

Faculty of Economics and Political Sciences - Cairo University

Egypt

John GRECH

Competitive Malta

Malta

Omar HAMARNEH

Royal Scientific Society

Jordan

Alejandro LORCA CORRONS

Universidad Autonoma de Madrid

Spain

Samir MAKDISI

Institute of Financial Economics Am. Univ. in Beirut

Lebanon

Tuomo MELASUO

University of Tampere TAPRI

Finland

Jan MICHALEK

Department of Economics Université de Varsovie

Poland

Bernard PARANQUE

Euromed Management / Kedge - CEMM

France

Khalid SEKKAT

Université Libre de Bruxelles

Belgium

Alfred STEINHERR

DIW

Germany

Subidey TOGAN

Bilkent University

Turkey

Alfred TOVIAS

Leonard Davis Institute of International Relations

Israel

-iv-


TABLE OF CONTENTS Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.1 Part one THE SEASON OF CHOICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.1 Chapter 1. Short-term Challenges and Long-term Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.11 I. The Economies of the Arab Spring: Two Years Later . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.12 II. Lack of inclusive growth that penalizes long- term development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.24 III. Recommendations: Rising to the challenge through Innovation, Inclusiveness and with an active role of the International Community . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.28 Chapter 2. The Long Journey out from the Authoritarian Bargain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.35 I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.35 II. The authoritarian bargain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.35 III. The dismantling of the authoritarian bargain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.36 IV. Emergence of new social forces. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.39 V. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.46 Chapter 3. Opening up intelligently. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.53 I. Trade openness beyond the global trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.53 II. Did the opening up efforts pay off?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.63 III. Evolution of EU-MPs trade: lesser deterioration of the trade balance with the EU than with all other partners. . . p.67 IV. Why to continue the opening up process and how? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.73 V. Recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.81 Annexes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.86 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.89

Part two - Detailed situation in MPs : country sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p.95

-v-


-vi-


THE SEASON OF CHOICES

ced the authoritarian bargain in various forms but always with a constant: a low participation of young people and women in the process and the development of inequalities. It is clear that these are the forms that Arab populations now refuse at the risk of a significant deterioration in their economic well-being.

INTRODUCTION The economic and social reasons which were behind those events, qualified as the Arab Spring, have since been clearly identified [1]. There is a need to make a profound transformation of the social contract that bound the leaders of civil society in these countries. The authoritarian bargain model was at the heart of this contract, it was based on an implicit agreement between the regimes in power and the people who renounced their political freedom and participation in decisions in exchange for public goods and economic benefits. It had been in place since independence, its purpose was to strengthen corporate identity through a self-centered growth model based on the control of natural resources, structural policies supported by heavy planning mechanisms, centralized actions focused on education, land reform and health.

When it came to consolidating a national identity after the independence, the heavy intervention of states was accepted by the population, on the one hand because it was based on a surge of nationalism, on the other hand because it offered necessary public goods. However, it quickly generated a system of rents for the benefit of public companies located in monopoly positions, thus inefficient ones (their operating deficits were directly supported by the Treasury) and an administrative elite who rose to power. Through that time was wrought, especially for the youth, an ideal of participation in the public sector which was at the expense of the “adventure� in the private sector.

During the 80s with the beginning of international openness, falling oil prices and the inclusion of large macroeconomic imbalances, the time came for structural adjustment plans and the beginning of operations of institutional transformation aimed at relieving States and developing the private sector. This trend continued in the 90s with the proliferation of free trade agreements, it was accompanied by widespread privatization, development grants and private funding. In front of the widening trade deficits, financial equilibrium was achieved through the extension of compensatory flows from outside, through tourism, foreign direct investment and income transfers from migrants. It led to significant growth rates in the 2000s that produced a convergence with neighboring countries, especially in Europe.

When economies opened-up, it was the same elite that led the privatization negotiations with major international organizations, with foreign investors, providing collateral to international expertise who claimed market penetration, changing institutional frameworks and the release of initiatives. Much was made in the development of legal frameworks but not the essential, that is to say, the practical application. The authoritarian bargain model was maintained in different forms. Freedom of the press and partnership was confiscated to ensure that the adjustments inherent in any policy of openness does not lead to unrest. Development was only concentrated in the cities and coastal areas. The State was not able to provide to the youth the public jobs that it used to aim. More serious and hidden was the fact that collusion between business and political leaders was implemented. Due to the lack of means for evaluating independent projects, and of other operations involving public decisions, countries were led to widespread corruption that affected all levels of the population. The result was

However, this period, which should have led to the suppression of rents of all kinds, to the development of private initiative and to innovation for transforming state practices, reprodu-1-


a growth model that was unproductive and with a low level of job creation, a reality that was hidden as said in a recent Brookings publication “ the ability of the governments to collect and distribute the proceeds of sizable natural resources rents, largely from oil and gaz. Arab countries without natural resources have still benefited from the regions’s wealth, receiving large worker remittances driven by the high demand for employement in neighboring oil-rich countries ”[2].

political context of the Mediterranean countries in order to participate in the development of a new social contract, in accordance with the expression of the popular will. It is this latter perspective that will guide this report, insofar as it simultaneously considers that the wait-and-see attitude is dangerous while it also considers the transition through a gradual turning of the growth model as a possibility.

This clearly poses a political problem. Will the new powers be able to continue to open-up their economies, follow the path that can integrate them into new forms of globalization or will they operate in a nationalist way? Will it be possible to conduct a policy of participation in a broader and more transparent way for the population in general? Will it maintain the level of growth needed to help provide the necessary jobs? Will it succeed in obtaining a balanced regional development and ensure greater food independence through rural development?

The reason for advocating a rethink for this model is that average growth in the years, prior to the breakdown in the Mediterranean (5% p.a.), which had been lauded as marking the beginning of a process of convergence, notably with the E.U., had not been effective from the point of view of the four questions mentioned above. At FEMISE, we had even talked about an enigma as regards countries such as Tunisia and Egypt which presented most of the ingredients of universal economic progress with the exception of unemployment among graduates where the performance was particularly mediocre.

Today nobody is able to answer these questions unequivocally. There are, however, several possible directions. The first is to consider that the economic expertise has enough experience and points of comparison to firmly maintain its principles and wait for political tensions to subside in order to return to business as usual. Economics being based primarily on the expectations of consumers, investors, foreign and domestic, the conditions of market transparency and efficiency of institutional frameworks, they will regain their levers when these conditions are met. The second direction is to consider that the current movements in the Arab world also affect how this business model is implemented and distributed in society. It is more than just a political issue but a deeper question of the growth model itself. This involves adapting our universal doxa to local realities which significantly different from one Mediterranean country to another, even to the entire Arab world. This requires above all retaining an approach that is more relative to the social and

Some indications could be useful:

The limits of the current growth model

The growth model was an “open” growth one, based in the beginning upon free trade areas (at times asymmetrical: the Mediterranean countries (MEDs) allowing access to developed markets (in particular European) which opened up to industrial products without any real equivalent for agricultural products). Of course, this evolution was without doubt favourable for GDP growth (despite the fact that this may not have been proven by any scientific work), thanks to the contribution of imported equipment and intermediate consumables, to the efforts devoted to structural reforms, to the general climate showing a willingness for an opening onto the international scene. This model was, however, little sensitive to any upgrading, the production of new comparative advantages and agro-food independence. It was also very clearly unfavourable to the trade balances -2-


which were generally in deficit, a deficit which was shored up by the remittances of migrants, tourism and capital inputs. All were highly volatile for balancing transfers since they were dependent on anticipations. They therefore collapsed brutally during the crisis. As for the intra-Mediterranean market, it developed very little, whereas it could have played a role in the creation of new, real Mediterranean comparative advantages thanks to scale economies which it might have been able to allow.

return), national savings and the capital that it engenders in all its forms, human resources, the territories, are, as has been said previously, mobilised in a very specific and not too transparent a way, without any search for equality of opportunity and often to the advantage of particular interests which do not represent the majority of the population.

The result is that in the current situation this strategy of liberalisation may no longer provide the central lynchpin of the strategy for the future growth of Mediterranean countries. The latter may, in the future, no longer count on reducing customs duties on manufactured products as a tool of economic policy to initiate changes in their economy. The reductions in customs duties which remain to be put into effect concern the services sector and agriculture, which are particularly sensitive fields and much more complex to dismantle.

√ It is a model for growth which creates an insufficient number of jobs, which can be seen by the fact that an increase of one point of the GDP brings about a considerably lower growth in employment, √ The rates of participation of the working population are remarkably low (46% at the end of the period v. 66% in Latin America, 74% in the Far East, 58% in Eastern Europe) with a rate of participation of women which is extremely low (20%), √ We observe a particularly worrying situation for young people since the rate of the 20-29 year olds in activity is 51% v. 78% in the Far East and in the Mercosur, the rate of unemployment among 15-24 year olds is the highest in the world (25%) and where it is at its highest is among graduates, √ There are also strong territorial imbalances, pockets of poverty in rural areas, a significant increase of food dependency that involves policies of price subsidies that are increasingly difficult to sustain.

More specifically, the main features of the current growth model in the Mediterranean countries are the following:

Meanwhile, this growth was largely fired by inputs of foreign direct investment and developed according to a model of capital accumulation (and not of overall productivity of the factors which enable employment to be maintained, whereas the accumulation model often substitutes capital for work) where each Mediterranean country sought to win the beauty contest of attractiveness. This engendered both ripple effects on the local fabric of weak SMI-SMEs and created few job offers. We should point out that considerable progress in the movement of persons did not go hand in hand with this opening to trade in goods and capital, which represents, as all studies show, a limit to the effectiveness of the process of the region’s integration.

The point that is most central and most binding for the current holders of power, is probably that this growth model is still a model of capital accumulation. Labour productivity has progressed but at the price of the substitution of capital for labor. Foreign Direct Investment has played a driving role in the process of accumulation for those countries without large natural resources, but it has not had the expected ripple effects. For others, the likes of

Finally, this growth model, has not shown itself to be very inclusive, which means that the elements which play on growth (and which profit from it in -3-


Algeria, the rates of investment growth have been largely greater than GDP growth which means that investment is not sufficiently productive.

in anticipations which weigh upon growth, employment, prices and budgetary equilibrium. These phenomena are inevitable, we shall see below that they can be observed today in the Arab Spring countries and they certainly require a significant intervention from the international community.

It should be noted that the evolution of total factor productivity is the sign of an improvement in the mobilisation and organisation of the factors of production, of their quality and their capacity to produce innovations. All the scientific studies show that this form of “endogenous growth� creates more jobs than growth by simple accumulation of physical capital or human capital. Its implementation involves a sufficiently open economy to benefit from the transfers of technologies incorporated in the imports of intermediate goods, a continuous improvement in the quality of the factors of production, a wide dissemination of the whole of the productive system and the penetration of what is commonly referred to as the knowledge economy. Finally, a total factor productivity growth regime helps generate revenues (by indexing salaries to productivity and not to prices), hence a domestic demand with no appreciation of the real exchange rate and the risk of trade imbalances.

Maintain the involvement of the international community to avoid that the needs of the shortterm contradict sustainable growth The Arab Spring countries have responded to social demands by general, indiscriminate measures, the easiest of which to take are the massive creation of public jobs, the increase in salaries and subsidies. This response is natural and is the one which has been used in past processes of transition towards the market economy. We will recall that German reunification cost more than $300 billion for a population of 18 million inhabitants and that the transition in Poland, which concerned a population of 38 million, was supported by the international community with transfers and loans coming close to $US 70 billion. An important commitment from the international community is therefore indispensable given the levels reached by the public deficits, close to 10% of GDP. It would be a great mistake to consider that the levels of the external debt reached today should permit a relative passiveness. Firstly, because this debt is increasing rapidly (+ 8% of GDP forecast for 2013 in Egypt, + 5% in Tunisia + 10% in Morocco). Secondly, because the conditions for refinancing on the international capital markets are much more complex than those of developed countries which have larger rates of indebtedness. Thirdly, because domestic debt is much higher than external debt and equally dangerous.

Finally, the liberalisation strategy followed has translated into a large concentration of trade whether in terms of products, (the 10 most exported products represent 57% of the total of exports) or partners (the ten leading partners account for 70% of exports). Strategy elements As everywhere else in the world, wherever it has taken place, the period of transition has generated costs which have given rise to large macro-economic imbalances. The short term emergency is to counter the J curve effect observed everywhere during the transition process. In fact, the uncertainties linked to the installation of the new powers, the time necessary to allow new elites to emerge, the obligation to maintain and where possible improve social conditions of existence, to dispose of new political credibility, bring along modifications

A second mistake would be that the international community grants its support on the basis of conditionalities which have been at the core of its intervention in the past. Reaffirming, in an identical manner, the principles which have led to recommendations given prior to the crisis would -4-


Table 1. Evolution of external debt of Arab Spring countries Total external debt $billion

2008

2009

2010

2011

2012*

2013*

Algeria

5.9

5.4

5.3

4.6

4.3

4.0

Egypt

33.4

33.3

34.8

33.8

35.6

42.5

Morocco

20.8

23.8

25.4

27.8

29.6

30.9

Tunisia

20.8

21.7

21.6

23.2

24.5

26.4

Total external debt in % of GDP

2008

2009

2010

2011

2012*

2013*

Algeria

3.5

3.9

3.3

2.3

2.1

1.7

Egypt

18.9

16.6

15.6

13.9

14.0

15.4

Morocco

23.4

26.1

28.1

28.0

31.0

30.9

Tunisia

46.4

50.0

48.8

50.5

57.3

60.9

Source: Economist Intelligence Unit, October and November 2012 forecasts. * EIU estimates.

probably create a sort of provocation vis-à-vis populations which having clearly rejected the former model (however effective in terms of GDP growth), would end up reinforcing current political uncertainties and would risk a return towards the selfcentred protectionist model. We should take good note that this is not the case today for the powers in place, in conformity with the thousand year old Arab-Muslim tradition, which are favourable to international liberalisation and to private business.

new social contract. We would not have the pretention here to present this vision especially since it must emanate from different currents of ideas. But, some reference points on which it could be based are the following: √ Offer, first, a future for young people whose weight in the region is unprecedented (twothirds of the population is under 30 years). To do this, it is necessary to propose a clear vision instead of partitioning the youth in ideological debates on morality and the nature of the political system. Youth has shown an extraordinary ability to capture new technologies to build informal networks that will drive human relations in the next 20 years. We will venture to say that it is time for the powers that be to have a great ambition of knowledge, culture and innovation. This vision could perhaps be expressed as follows: “After the Arab Spring we want to build a society of open knowledge, develop our creativity in science and culture in order to participate in the construction of human knowledge as in ancient times and produce innovations that offer new market values. We shall listen to the needs of our youth and involve it in our strategic choices, we will represent them more in the decision-making process. We will try to ensure that they are open to all means of thought and have access, as was the case in the times of Al Ma’mun who

In the short term, the solution is therefore to clearly support the demands of the Arab Spring countries by helping to both respond to the social aspirations and build the bases of a new growth model. The point of view that we would like to defend is that the strategy must be based on the idea of extending the option of openess and integration into the global economy, search for a strong growth, but found it, as was said, on a social contract which meets the shortcomings of past growth models and most particularly the causes of the crisis. Presenting a pro-active vision and having it shared While political uncertainties may handicap the elites and the functioning of the institutions in place, they have one advantage, offering a relatively clean sheet which may serve as a basis for a -5-


founded the House of Wisdom in Baghdad, to all scientific discoveries, that they can discuss all philosophies and embark on all industrial and commercial adventures”[3]. √ Continuing with the elimination of useless administrative benefits and obstacles. √ Introducing a profound (and not nominal) modification of institutions which should be assessed continually by independent agencies on the basis of new criteria in relation to the general orientation. The Mediterranean countries are societies of connivance which have the greatest difficulty in adapting to the rules of governance recommended by international expertise. Connivance may be acceptable if it does not mean corruption and if the assessment of the results is transparent, continuous and leads to the questioning of the perennial nature of the projects when results are disappointing. √ Initiating a social dialogue by allowing the development of the intermediate groups and generally, enabling a wider participation of the citizens through real decentralisation operations (doubtless mainly at the local level) necessary for the backward territories to catch up and for rural development.

the past was non-egalitarian, it did on the other hand enable a sizeable reduction in absolute poverty: the percentage of people below the threshold of 2$ PPP in Algeria, Tunisia, Morocco, Egypt, Jordan, Syria, Palestine, went from an average of 18% of the population in 2000 to 9.6% in 2008. But, in these countries, there still remain 3.1 million people who have to live with less than $1.25per day and 24.5 million with less than $2 per day. Further opening with a delicate management and concentrating on South-South integration As has been said, with the exception of Algeria, the tariff liberalisation operations on industrial products have reached their limits. It now remains to deal with the question of agricultural products and services. Here considerable progress is still possible from the side of the European countries for agricultural products and from the Mediterranean countries for the service factors (insurance, banks, transportation, logistics etc.). However, as a number of studies comment, the effects of liberalisation on growth have been limited as a result of specialisation in strongly under-enhanced segments, which comprise poorly diversified ranges of products made by businesses which do not profit from scale economies. Elsewhere, while liberalisation is indispensable to benefit from technology transfer; scale economies linked to a widened market naturally make social inequalities greater since the sectors and territories with comparative advantages take a growing share of the net income created; at the same time, the share of the sectors with comparative disadvantages decreases. To correct this Paretian way of thinking, it is necessary to introduce a finer and more technical control of the dismantling of customs and non-tariff agreements, develop effective policies of compensation for the losers and introduce structural policies likely to engender new comparative advantages on the sectors of the future, notably the environment; similar to what Morocco is doing today.

Search for a strong growth Firstly, it is indispensable that the Arab Spring countries revert to strong growth as quickly as possible (around 7% p.a.). The need in jobs to be created in the Mediterranean partner countries of the EU over the next twenty years, simply to maintain the unemployment rate at today’s level, is estimated at 34 million. And this is without modifying the rates of participation (if we want the participation in working life to move closer to the rate of other large regions in the world and reduce the unemployment rate by half, the need in job creation is in the order of 62 million). Without a policy for growth, we should find ourselves in a pure distributive model, almost impossible to manage in time, given the resources available and the level of integration in the global economy already reached. Moreover, if growth in

The pursuit of an integration path between Mediterranean countries and the EU should also be -6-


continued. All past experiences, the Eastern European countries with membership, Turkey with the Customs Union, Morocco with its advanced status, plead in favour of greater integration. Greater integration between the Mediterranean countries themselves is central to the extent that the current process of integration of the region with the EU, follows a hub-and-spoke approach which weakens the bargaining power of the South, slows-down its own integration process and limits the possibilities to undertake major regional infrastructure projects.

which was started by Egypt and Tunisia and which gave the observed gains in productivity. Its risk is obviously heavy social adjustments if they are not compensated appropriately. We should note a particularity specific point to the Arab-Muslim world which has great difficulty bearing the consequences of these adjustments. Indeed, the ArabMuslim world is probably, for cultural reasons, the region of the world where there is the least extreme poverty in absolute value and where the mechanisms deprived of social redundancy associated to the religious fact are among the strongest. Even, outside the two Arab Spring leader countries, the case of Algeria should be kept in mind: Algeria committed to this road in the middle of the 1980s with the well-known success (cf. the rise of the FIS in 1990) and the backtracking that took place.

Going for an endogenous growth model In order for growth to be sustainable, it is necessary that there be “something else”, other than the accumulation of physical capital and work supply consecutive to demographic growth. This other thing is total factor productivity (TFP). But, what produces TFP?

Thirdly, this growth, without a quantitative increase of production factors, sets in when the quality of factors improves continuously as does their organisation. It is the first element for the constitution of an endogenous growth model. Here it is competition which eliminates income and encourages dynamism, progress in the education system in the direction of competence and autonomy, lifelong training, an improvement in capital and processes. According to scientific studies, the “between” plays the role of the relational system which links the businesses one to another, which allows the development of externalities and ripple or knock-on effects between large corporations and SME-SMIs.

In the first instance, TFP requires a sufficiently high level of end-user demand, in particular domestic, without which production capacity is under-used and there is no point in seeking productivity elsewhere. The good side of the measures that have been taken as an emergency by the Arab Spring countries is that domestic demand has remained relatively strong which explains the positive growth rates in 2012. Secondly, the re-allocation of the resources of the non-competitive businesses and sectors towards the others, provides a mechanical increase in growth through productivity (economists call this mechanism the search for allocative efficiency). This was the policy generally chosen by international expertise which oriented all its action on an opening to foreign competition, the development of markets within countries, privatisation, the facilitation of the business installation and closure process, generalised competition (including the public sector). To obtain this result, it is necessary to have a flexible labour market. It is this policy

Fourthly, this growth develops thanks to the penetration of the knowledge-based economy which enables the production of economic, social and cultural innovations which push back the technological boundaries. This is a general orientation which involves institutional reforms, the development of the ICT sector, improvement in education and training. From these points of view, the Mediterranean countries are lagging tangibly behind. It is around the penetration of the knowledge eco-7-


nomy in all sectors and not only in confined poles that we can best mobilise young people.

This may explain the existence of a large stock of obsolete regulations, in particular in Egypt and Tunisia. Rethinking regulation is therefore a crucial question. The orientation of this approach concerns: (i) the development of the dialogue between the public sector and the private sector, with the latter installing its own standards of self-regulation, (ii) differentiated regulations according to sector (iii) research into performance of regulations as done in Tunisia, eliminating ineffective regulations by creating specialized councils. It is necessary to create a favourable environment for new entrepreneurs. This “entrepreneur ecosystem” will enable young people to create and develop new “start-ups”.

Among the most important challenges with which the Mediterranean countries are confronted from this point of view, should be quoted: √ The weakness of investments in science and technology and the insufficiency of the infrastructure in information and telecommunication technologies, even when assessed against the standards of developing countries, √ The low return from these investments in terms of patents and scientific productions, √ The disconnection of locally trained graduates from the local labour market demand which leads to considerable unemployment among them, √ A poor relationship between expenses on education and growth. Despite large expenses in education and training, the quality of education is lacking, √ Insufficient capacity to absorb globally available technology which leads to the insufficient orientation of students towards scientific and technical disciplines.

Meanwhile, we should take note that numerous young people are focused on activities which have a social impact (training, environment, health, notably). In this way they offer a service to the poor or a service of a social nature. These are the initiatives that we must support and which today unfortunately face considerable obstacles, notably due to the fact that no legal status exists for hybrid social businesses.

These are just a few points highlighted in all studies of the region which are part of a wider issue, that of the overall dynamism of the societies concerned. It is preferable to consider this question in its entirety as everyone seems to agree on the need to work towards the knowledge economy. Guidance still seems fragmented and centered on some administrative departments. Moreover, an inter-ministerial system could be necessary, given the number of sectors that are concerned.

Finally, the concept of the socially responsible enterprise has to develop and large corporations have to be obliged to invest in initial, professional and lifelong training, in structures founded on a public/ private partnership. Given the lack of public resources, it will be decisive for the social image of these large public, privatised or private corporations to show their interest in the consolidation of the national project.

Modifying the regulation and developing social entrepreneurship

The first chapter presents the overall macroeconomic situation in autumn 2012, highlighting growth conditions, macroeconomic equilibria and the evolution of the inclusive nature of growth. It concludes with recommendations on the efforts to be undertaken, building a vision for the youth and on the necessary involvement of the EU.

Outline of the report

Several authors have underlined the fact that the administrative services of the Mediterranean countries have out-of-date practices which prevent them from grasping new opportunities. -8-


The second chapter presents the evolution of the authoritarian bargain model since the accession to power of the new governments. The third chapter details the results of the policy of openness and external questions about the margins of progress that could still be made, particularly with regard to the evolution of non-tariff impediments, especially non-tariff barriers. It offers recommendations concerning the future of the policy of openness, in particular the need to make progress on non-tariff barriers and the need for greater cooperation in this matter for further regional integration. The last part details the situation of each Mediterranean country in terms of growth, its inclusiveness (or lack of) and macroeconomic balances. Endnotes: 1. Brookings (2012), “After the spring. Economic transition in the arab world”, collective work initiated by the Brookings Institution, Oxford University Press 2012. 2. Brookings (2012), “After the spring. Economic transition in the arab world”, collective work initiated by the Brookings Institution, Oxford University Press 2012, page 6. 3. Jean-Louis Reiffers and Constantin Tsakas (2012), “What responses can we give as to the economic and social reasons which led to the Arab Spring?”, Contribution to the seminar on the “Arab Spring” JICA/AFD, Tokyo, Japan, 15 October 2012.

-9-


-10-


CHAPTER 1. Short-term Challenges and Long-term Stability

Stemming from similar grievances, the political upheaval in the “Arab Spring” countries of the Mediterranean could be seen as a new paradigm of a transition process towards democracy. Almost two years later, many countries have embraced some political reforms but not all of them embarked on the same political trajectory and progress has been uneven across countries (see following chapter “The Long Journey out of the Authoritarian Bargain”). In Egypt and Tunisia, long-standing political regimes have fallen and political transitions are underway with elections taking place and the constitution-writing process launched. Other monarchies like Jordan and Morocco were compelled to undertake political reforms to increase political representation. Even Algeria has lifted the state of emergency in place since 1992. In Syria, however, the ongoing story takes a different and dramatic turn.

dity prices) is magnifying the negative effects of social instability. Nevertheless, despite the global downturn, large donors including the EU are broadly supportive of the political transformations of the Arab Spring economies. They have and continue to pledge financial assistance to support the democratic transition in the South. As a result of these factors, short-term costs of the transition continue to be incurred in most countries. The region’s growth fell from 4.8% in 2010 to 3% in 2011 but this masks wide country variations. On the one hand, Egypt and Tunisia seem so far to have escaped a recession but have experienced slight contractions in their GDPs. On the other hand, Turkey was the region’s best performer, posting growth of 8.5% in 2011. External and domestic finances, while so far contained in 2011, are falling under increased pressure. Many countries, like Egypt, Jordan, Tunisia and Morocco, are faced with diminished policy space, having depleted their foreign exchange and fiscal buffers during 2011. This situation has led some of these countries, namely Jordan and Morocco to seek internationl assistance from international financial institutions.

Accompanying these significative democratic reforms are plans for economic reforms that should eventually propel the region’s medium-term growth to higher levels. However, the region is facing several immediate challenges. First, as expected, the political transition is long and painful and the newly acquired freedom has not yet translated into tangible benefits for the citizens. Pressing social demands are forcing many governments to succumb to increase public spending that includes higher salaries, subsidies and job provision in the public sector. Political uncertainty and some clashes in some countries also weigh on investment and tourism. Second, tighter financing constraints, originating from continued domestic fiscal and external pressures, are increasing short-term risks to macroeconomic stability. To some extent, the impact of a deteriorating external economic environment (faltering global growth, negative spillovers from the euro area and higher commo-

While the near-term outlook is clouded by these factors, the Arab spring provides the region with a unique window of opportunity to shift towards a model of more inclusive and equal growth (FEMISE, 2011). In this context, current policy actions aiming to tackle the short-term challenges should not jeopardize long-term growth and stability. This means that newly elected governments should offer a credible response to social, political and economic demands without compromising future sustainable growth. In fact, despite registering high growth rates in recent years growth could not be considered inclusive in Mediterranean countries. For instance, more than half of the working age population does not participate in the formal labor market, one reason why the middle classes and the youth did not fully benefit from this growth through job-creation. Authorities will thus need to provide new solutions to the failure of the old growth-model in fostering a more participatory approach to development.

Introduction

-11-


This chapter first examines how political transitions are affecting short-term macroeconomic outcomes and the short run outlook for the region. The remainder of the chapter takes a longer-term perspective, showing that the region’s development model was not based on inclusive growth. Finally, a concluding section summarizes some recommendations for policy actions both in the short and long-terms. I. The Economies of the Arab Spring: Two Years Later I.1. Decelerating growth in most Mediterranean Partners (MPs) The Mediterranean region had rebounded from the aftermath of the financial crisis of 2008-2009 but faced the impact of the “Arab Spring” starting late 2010 with economic consequences that varied from mixed to successful depending on the country. Despite the short-term challenges and uncertainty about political transitions, the region managed to maintain positive though significantly lower growth, falling from 4.8% in 2010 to 3% in 2011. Yet, this figure masks wide country variations. Naturally, the countries of the revolutions, Egypt and Tunisia, were the ones to suffer the most from industrial output disruptions. Even so, they seem so far to have escaped a recession but have experienced zero growth. Meanwhile, Turkey was the region’s best performer, posting growth of 8.5% in 2011. To a lesser extent, Morocco and Israel fared well, with growth rates around 4-5%. Recent trends suggest that growth has improved in some countries and slowed down in others. In fact, countries of the Arab Spring have already shown signs of an economic revival. Egypt’s economy already showed signs of recovery in 2012, but growth is hampered by weaknesses in sectors such as manufacturing, tourism and to a lesser extent transport, and construction (see country sheet). As for Tunisia, growth seems to be more broad-based, though industrial activity declined and exports

slowed because of weak external demand from Europe. In Jordan, output growth (3% year on year, — y-o-y) was stimulated by construction (up by 9% compared to -1% last year), tourism (up by 3% vs. -24%) and to a lesser extent mining and quarrying (up by 3.5% vs. 2.3%). On the other hand, growth in Turkey, Israel and Morocco is expected to slow down. In particular, Turkey’s impressive recovery has significantly moderated in Q1-2012, with year on year growth of 3.2% compared to 12% last year. This decline reflects worsening base effects, weaker Eurozone conditions, as well as monetary policy tightening (which took place in end of 2011) to reverse the sharp currency depreciation. In Israel slower growth was due to limited export market performance. The slowdown in Morocco follows a rather weak harvest and, among others, a decline in external demand for tourism. However, sectors such as construction appear to have fared considerably better (EBRD, 2012). Taking into account these recent developments, growth is expected to slightly recover in 2012 in both Egypt and Tunisia leading to an average rate of growth of 2.3%. This recovery could be attributable to a rise in private consumption and/ or investment. For the rest of the MPs, private consumption is expected to play a smaller role in domestic demand and thus lead to slower growth. In countries such as Turkey and Israel the contribution of private consumption to real GDP growth could respectively decline from 5.3% and 2.2% in 2011 to 1.1% and 1.3% in 2012. As a result of the region’s diverging trends,overall growth is expected to further decline to 2.6% in 2012, well below what is observed in emerging and developing economies, before rebounding uniformly in 2013 to a still relatively low rate of 3.5%. It is important to note that this pattern of slow recovery is not surprising, especially concerning rebounds in investment. Indeed, experiences from successful transitions to democracy for more than 40 countries shows that investment takes longer to recover than economic growth. On average, growth -12-


Table 1. Growth, Unemployment and Inflation in MPs Gross domestic product. constant prices (% change) 2011

2012*

2013*

Gross domestic product based on purchasing-power-parity (PPP) per capita GDP (units) 2011

2012*

2013*

Algeria

2.4

2.6

3.4

7325

7522

7763

Egypt

1.8

2

3

6455

6557

6712

Israel

4.6

2.9

3.2

31467

32212

32964

Jordan

2.6

3

3.5

5907

6044

6197

Lebanon

1.5

2

2.5

15523

15884

16287

Morocco

4.9

2.9

5.5

508

5257

5565

Syrian Arab Republic

n/a

n/a

n/a

n/a

n/a

n/a

Tunisia

-1.8

2.7

3.3

9389

9698

10048

Turkey

8.5

3

3.5

14393

15029

15574

Total MPs (simple av.)

3

2.6

3.5

11942

12275

12639

Egypt and Tunisia (simple av.)

0

2.3

3.2

7922

8128

838

4.1

2.7

3.6

13282

13658

14058

Rest of MPs (simple av.)

Unemployment rate (% of total labor force) Algeria Egypt

Inflation. average consumer prices (% change)

2011

2012*

2013*

2011

2012*

2013*

10

9.7

9.3

4.5

8.4

5

12.1

12.7

13.5

11.1

8.7

10.7

Israel

7.1

7

7

3.5

1.7

2.1

Jordan

12.9

12.9

12.9

4.4

4.5

3.9

5

6.5

5.7

8.9

8.8

8.7

0.9

2.2

2.5

Lebanon Morocco Syrian Arab Republic

n/a

n/a

n/a

n/a

n/a

Tunisia

18.9

17

16

3.5

5

4

Turkey

9.8

9.4

9.9

6.5

8.7

6.5

Total MPs (simple av.)

11.4

11.1

11

4.9

5.7

5

Egypt and Tunisia (simple av.)

15.5

14.9

14.8

7.3

6.8

7.3

Rest of MPs (simple av.)

8.1

8

8

4.1

5.3

4.3

Source: Data from IMF World Economic Outlook October 2012. * estimations for 2012 and 2013.

declines by around 3 percentage points during transition, but rebounds to or above its pre-transition rate within one to two years. In contrast, the average investment rate declines with a delay, by less than 2 percentage points, but it takes at least 5 years to recover. Private investment bottoms out more quickly than public investment and leads the recover (World Bank, 2011). This expected modest performance in 2012 is largely the result of domestic factors related to the

long and painful transition and associated costs. To a certain extent, the current European crisis will surely affect the EU’s external demand for MPs exports of goods and services and the outflow of remittances from resident migrants. The impact of a deteriorating external economic environment is magnifying the negative effects of social instability. Nevertheless, despite the global downturn, large donors including the EU, have been and remain broadly supportive of the political transformations in the Arab Spring economies. -13-


Figure 1. Real contribution to GDP growth (%) Algeria 5

7 6

4,3

1,9

5

3,4

4

2,4

3

1,6

0,9 1,1

2,4

2 1

-1

-1

-1

4

3

1,7 2

2,5

1,9

0

1,4

2,6 2,1

Real contribution to GDP growth (%)

Real contribution to GDP growth (%)

1,3

1,4

-1,2

-0,6

1

0

-2

2010

2011

2012e

2013e

6 5 3 2

3,6

3

1 0

0,1 0,3

1,1 0,3

4,3

4,6

-1,4

-1

-1,11,8

-2

2,2

1

-4 0

-5

2010

2011

2012e

2013e

Public consumption

Trade balance (goods & services)

Private consumption

Economic growth

Israel

7

6

2,1 5 0,7

3

0,7

3 2

3

1

5

4,6

4

0,7 2,2

0

1,4

1,2 0,7 1 -0,7

2,4

0,6

3

1,1 -0,1

-2,1

-1

3 2 1

-2 0

-3

2010

2011

2012e

2013e

Jordan 6

4

3

1

0,4

0,5 0,4

0,7

0,7

0,4

2

3,8

0,3

3,1 1

2,3 2,6

1,9

0

1,9 2,5

2,4

-0,1

2012e

2013e

-0,9

2010

2011

Public consumption

GFCF

Public consumption

Private consumption

Trade balance (goods & services)

Private consumption

Morocco Real contribution to GDP growth (%)

6

0,8 0,75

5

4

1,5 4

3,4

3,6 4,2

2 1

1,3

0

1,1 0,6 1,3

-0,2

-1

-1,2

0,7

2,4

2

4 3 2

-0,2

-1,4

1 0

-2

2010

2011

2012e

2013e

Tunisia 6

4 3

0,2 0,9

2

0,4

1

1,6 3

1 2,1

0,6

0,8

1,1

1 0 3,5 1,3

1,2 2,8 -0,2

0

4 3

1

-2

0

-4,1

-1

-3

-1,8

-4

-2

-0,8

-5

2010

-3

2011

2012e

2013e

Public consumption

GFCF

Public consumption

Trade balance (goods & services)

Private consumption

Trade balance (goods & services)

Private consumption

Economic growth

5

2

-1

GFCF

1

Economic growth

6

3

3

0

-1

Economic growth

4

2

-0,4

Trade balance (goods & services)

5

5

0,5

GFCF

3 2

-4,5

GFCF

4

4

-3

Private consumption

5

5

-0,6

Public consumption

6

6

3,3

Trade balance (goods & services)

Real contribution to GDP growth (%)

Real contribution to GDP growth (%)

0,4

GFCF

Real contribution to GDP growth (%)

1,5 5,1 0,5 0,1

4

Economic growth

Real contribution to GDP growth (%)

Egypt

Economic growth

Turkey

Real growth in MP’s vs rest of the world (%) 10

11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5

9,3 6 0,2 4,7

9

4,5 8,6

8 7

0,6

6

5,4

-1,6

1 0,5 0,8 1

3,2

1,4 0,3 0,4 1,6 3,8

5 4 3

10 8   6   4   2   0   -­‐2   -­‐4   -­‐6  

1 0

2010

2011

2012e

Public consumption

Trade balance (goods & services)

Private consumption

2008

2009

2010

Economic growth

Source: EIU -14-

2011

2012

Total MPs  (simple  av.)  

Egypt and  Tunisia  (simple  av.)  

Rest of  MPs  (simple  av.)  

European Union  

Emerging market  and  developing  economies  

2013e

GFCF

5,6

3,5

3,2

2007

2

-4,4

8,7

5,6

2013


Many donors have and continue to pledge financial assistance to support the democratic transition in the South, which could offset the negative effects resulting from slower trade and finance. For instance, in the aftermath of the uprisings, the EU made available up to €1.2 billion on top of the €5.7 billion already budgeted for grant support to the Neighbourhood for the period 2011-2013. In addition, the European Investment Bank (EIB) can now provide additional loans for up to €1 billion to the region, as well as the €4 billion available before the Arab Spring. The European Bank for Reconstruction and Development (EBRD) is set to extend its geographical coverage to include the Southern Neighbourhood and to provide annually up to €2.5 billion of public and private sector investment to support the establishment and expansion of businesses and the financing of infrastructure. I.2. High unemployment and the need of ensuring stable rates of employment creation Following the political upheaval, unemployment in the Arab Spring countries increased following layoffs and limited job creation, which was well below the rise in the workforce. In 2011, Egypt and Tunisia had respective unemployment rates of 12.1% and 18.9% according to IMF with considerably higher rates among the youth. A notable exception to this trend was Turkey, where, in tandem with the economic recovery, unemployment fell from 12% in 2010 to below the 10% a floor not breached before the crisis. The comparatively lower rates in the rest of the region brought the regional unemployment average close to 11.4%. In 2012, current projections suggest unemployment for the countries of the Arab Spring to stay at very high levels. Perspectives are stable for the rest of the region (8% average rate), leading to a rate still above 10% for MPs as a whole (estimated at approximately 11.1%). What are the actual needs for employment creation in the Mediterranean for unemployment rates to decrease substantially? Taking into account

Box 1. The nature and properties of business cycles in the Mediterranean Are business cycles in the Mediterranean becoming more similar following increased interdependencies? And how will Mediterranean cycles evolve in the near future considering recent EU policies? A recent paper by Canova and Ciccarelli (2012) tries to provide an answer by investigating macroeconomic fluctuations in the Mediterranean, their similarities and convergence. The analysis uncovers three key facts: √ First, Mediterranean business cycles are heterogenous and are not directly linked to difference in production structures or monetary institutions. √ Second, changes in EU cyclical fluctuations are transmitted to the Mediterranean but business cycles of the latter are neither too aligned nor are completely decoupled from the EU’s. √ Third, given the current context, “global cyclical convergence is unlikely to occur and even regional convergence will be difficult to obtain”. Despite readjustments (above average growth rates in the East Med), similarities between GDP cycles are not expected to grow in the near future. In conclusion, the authors underline that despite integration efforts, the persistence of important heterogeneities casts doubts on the effectiveness of the UfM partnership. Since many countries in the region depend on tourism and remittances, encouraging mobility more than trade or financial ties could help make business cycles more synchronized. labor supply and prior rates of economic activity, we provide estimates based on two different scenarios presented in Table 2. The first scenario presents the number of jobs that will be needed to maintain recent (of benchmark year 2007) rates of unemployment and inactivity. Under this scenario, it appears that job-creation in the Mediterranean will need to rise by roughly 1.65% per year until 2030. Based on both our estimates and actual rates of employment creation how many MPs create “sufficient” jobs? To answer this -15-


question we need to separate MPs into two groups. The first would comprise Israel and Turkey, which seem to have actual employment growth in 2011 that is higher than that required for maintaining current ratios of inactivity and unemployment. The second group would include all other MPs with rates of employment creation that were not sufficient to cover rising demographics and employment needs. In particular the actual rate of employment change in Egypt and Tunisia, -2.2% and -2.4% respectively, was actually negative.

2.74% on average, unattainable by current performances for all MP’s, except for Israel and Turkey. It is important to stress that there is an issue of employability and skills. As indicated by the European Training Foundation (ETF, 2011), about 41.5% of private companies indicated that the main obstacle to hiring young people is that the education system does not give them the necessary skills. Skills mismatches are identified as a major impediment to business development in more than half of firms in Egypt, Lebanon and Syria. More precisely, graduates do not generally have the combination of hard and soft skills that employers are seeking. A recent survey (E4E, 2012) reveals substantial gaps in the following:

Under the second scenario, we present the necessary job creation rates to reduce the increase in the number of inactives and unemployed by 50% compared to the first scenario. This would require an even higher annual rate of job creation of roughly

√ hard skills, meaning that the graduate youth often lack an adequate understanding 14,8 of both the theory and application of their discipline, with a lack of a practical technical 11,0   knowledge. 8,0   √ soft skills, meaning that education in MPs is lacking in terms of cultivating among the 2007   2008   2009   2010   2011   2012   2013   youth the ability to communicate clearly, deTotal  MPs  (simple  av.)   velop critical thinking, leadership and interEgypt  and  Tunisia  (simple  av.)   Rest  of  MPs  (simple  av.)   personal skills. Source: EIU, estimations for 2012 and 2013 √ language skills, the latter are very much Table 2. Employment creation needs by 2030 in the Mediterranean appreciated by employers but, in the case of Annual rate of needed job-creation to English, many graduates are far from profipreserve by 2032 cient because of inadequate teaching. Figure 2. Unemployment rate in MP’s (%) 16   15   14   13   12   11   10   9   8   7   6  

Scenario A : Scenario B : Limiting maintaining the increase of the Observed rate current ratios number of inactives of employof inactivity and and unemployed of ment change unemployment Scenario A by 50% 2011

Algeria

1.57%

2.81%

1.50%

Egypt

1.88%

3.03%

-2.20%

Israel

1.43%

2.16%

4.20%

Jordan

2.58%

4.27%

0.50%

Lebanon

1.08%

1.92%

n.a

Morocco

1.44%

2.19%

1.10%

Tunisia

1.00%

1.83%

-2.40%

Turkey

1.34%

2.30%

6.70%

Total MPs

1.65%

2.74%

Source : Fréderic Blanc, FEMISE for scenario projections, EIU for observed rates of employment change. -16-

These gaps can be explained, in part, by the fact that “while the job market is creating new needs... the university offer has not shifted its offer to these new needs” (E4E, 2012). Policies for employment creation should thus take into account this often neglected fact. Finally, it should be noted that there is a need for additional efforts to guide the Mediterranean youth “with information on labour markets at all stages of the education system” (AfDB, 2012). Indeed, there


Figure 3. Firms that identify labour skill level as a major constraint (%) 70 60   50   40   30   20   10   0  

Algeria Egypt  (08)   Jordan   Lebanon   Morocco   PalesCne   Syria  (09)   Turkey   (07)   (06)   (09)   (07)   (06)   (08)  

Sources: World Bank and EBRD Figure 4. Answering the question “Where do you want to work, assuming equal pay and benefits?” Egypt Youth

Government

Tunisia Youth

Private business Self-employment

Algeria Youth

Non-profit organization

Morocco Youth

To the mismatch between youth expectations and employment offers one can add the overall climate of pessimism regarding job-seeking in the Arab world. Very few people people believe that it is a good time to search for a job right now in Egypt (9%), Jordan (19%), Lebanon (18%) and Palestine (13%), suggesting populations are globally discouraged.

I.3. Inflation was moderate despite rising international food inflation in 2011 Despite rising food commodity prices , as measured by the change in the index of the Food and Agriculture Organisation (FAO), was up by close to 23% in the region, highlighting that the region experienced a moderate rate of inflation in 2011, of close to 5%, the same level as in 2010.

Source: AfDB (2012) Table 3. “Thinking about the job situation in the city or area where you live today, would you say that it is now a good time or a bad time to find a job?” Good time

Bad time

Don’t know / refused

50%

49%

2%

Egypt

9%

87%

4%

Israel

33%

53%

13%

Jordan

19%

64%

17%

Lebanon

18%

77%

5%

Morocco

36%

50%

15%

Palestine

13%

80%

7%

Syria

34%

56%

10%

Tunisia

26%

65%

9%

Turkey

33%

63%

4%

World

33%

57%

11%

Algeria

Source: Gallup (2012)

are mismatches between youth expectations and employment offers, most youth seek public-sector jobs (for example 53% of Egypts youth seem to favor a government job and 18% self-employment versus only 10% that favor a private sector job), even though only a few are available, so most ultimately end up working in the informal sector.

Two aspects are worthwhile to note with respect to the transmission of international food prices to domestic food prices. First, domestic food price inflation has generally been lower and less volatile than international food price inflation. The exception is Egypt where food inflation has been at the double-digit level since 2007 and was higher than international food inflation in 2009 and 2010. Second, domestic food price inflation decouple from international food prices when the latter decrease. In fact, no country witnessed any deflation in 2009, whereas international food price inflation decreased by close to 20%. In fact, focusing on some Mediterranean countries, Albers and Peeters (2011) show that a 10% positive shock in world food prices leads almost immediately to an almost 1% increase in CPI inflation. On the contrary, a 10% negative shock in world food prices does not depress CPI inflation. This asymmetry in the price transmission mechanism is also apparent in Q1-2012 when international prices went down by 8% while the region continued to post positive inflation rates of 5%. Moreover, from a macroeconomic point of view, food-price rises increase GDP per capita through -17-


Figure 5. Percentage change (year-on-year) in international food and domestic CPI inflation, 2008-2011

ensuing inflation. Most countries posted low single-digit inflation except for Egypt which 25,9 30   22,8   continues to suffer from high inflation and was 18,1   20   double the regional average. To a lesser extent, 9,0   5,4   5,1   10   4,8   4,0   Turkey also experienced inflationary pressures, 0   with CPI inflation overshooting the target, rea-­‐10   -­‐8,1   -­‐20   ching 6.5% in 2011. This was due to the depre-­‐21,5   -­‐30   ciation of the Turkish Lira during the second half 2008   2009   2010   2011   Q1-­‐2012   of 2011 as well as price adjustments in electriInterna3onal  food  infla3on   Domes3c  infla3on   city, energy tariffs and tobacco prices which Source: FAO, WEO database, EIU and national sources contributed to rising domestic fuel prices. For Figure 6. Inflation level and volatility, FAO and selected Euro- the time being data for early 2012 suggests that Med countries the rate of inflation will on average increase 40%   slightly for the Mediterranean as a whole, to 30%   20%   10%   5.7% in 2012 up from 4.9% in 2011 (IMF). Those 0%   -­‐10%   most affected will probably be Egypt and Tuni-­‐20%   -­‐30%   sia with rates in 2012 respectively expected at average   vola0lity   average   vola0lity   average   vola0lity   average   vola0lity   average   vola0lity   average   vola0lity   2007   2008   2009   2010   2011   Jan-­‐Jun2012   8.7% and 5% respectively; meanwhile countries Egypt   Jordan   Turkey   Interna0onal  food  infla0on   such as Morocco and Israel are expected to Source: FAO and national sources showcase a rate close to 2%. a terms of trade effect that increases the return to capital in net food exporters while per capita government expenditures also increase. However, private consumption decreases, thus higher food prices may widen income inequalities between rich and poor households and lead to a rise in relative deprivation. In the case of Egypt, Marotta et al. (2011) shows that between 2005 and 2009, inflation harmed the poor: the increase in the cost of the subsistence food basket (by 47%) cut the real incomes of the poor and near poor by 20%. Out of the total change in poverty (+2.46 percentage points) between 2005 and 2009, food inflation accounted for a 4% increase, overpowering the poverty reduction effects of growth (-0.39%) and distribution (-0.92 %). Moreover, international food price fluctuations have an indirect effect on the economy through subsidies. In most Euro-med countries, food subsidies are substantial and often poorly target the poor (FEMISE report FEM 33-14, 2010) in addition to being a burden on public finances. In many countries, the slowdown in economic activity seems to have eased demand pressures and

I.4. External Balances a. Rising financing needs in the Arab spring economies In 2011, external balances deteriorated on the back of weaker external demand from Europe and higher commodity prices, which has compounded the effects of the domestic turmoil on trade flows. Overall, the region has reduced its exposure to the EU and US markets over the past decade and increased exports to Asia, but exposure to the EU remains significant (World Bank, 2011). In general, countries with closer ties to the Eurozone, like Tunisia and Morocco, are clearly more affected by growth shocks in European partner countries which are transmitted through exports and tourism (De Bock et al., 2010). This is why they are slightly varied for each country. On the export side, the European downturn led to a contraction in exports (in volume) in Turkey and slowed down their growth in Israel (figure 7). In countries, like Egypt and Tunisia, the slowdown -18-


in the Eurozone was magnified by disruptions to industrial production. Jordan’s peformance is a notable exception, posting export growth of 12.2% and higher than last year’s growth of 9.5%. Meanwhile, slower economic activity reduced import growth in all Southern Med countries, except in Jordan, on the back of increased energy imports. This partly reflects higher global prices, but is mostly the result of the interruption of cheaper natural gas supplies from Egypt following ten explosions on the pipeline in 2011, thus forcing Jordan to buy more expensive natural gas.

In contrast to Egypt and Tunisia the tourism sector in Morocco and Turkey underperformed in the first half of 2012 after posting growth in 2011. In Morocco the number of visitors dropped year on year by 4.4% in the first half of 2012, compared to positive growth of 6.4% last year, and earnings by close to 10%, compared to an increase of close to 12% last year. In Turkey, tourist arrivals dropped year on year by 2% in the first half of 2012, compared to positive growth of 13% last year, and earnings by close to 1%, compared to an increase of close to 21.5% last year.

Tourism is an important sector in MPs, accounting for around 10% of GDP in most countries, and post annual rates of growth of 5%-15% since 1990. Tourism also promotes infrastructure and generates important amounts of employment because it is a labour intensive activity, both for skilled and nonskilled workers. Sharp falls in tourism earnings has been a serious side effect of the political unrest and has contributed to the deterioration of the current account in many of the Southern Mediterranean economies but a partial recovery seems to have commenced in some countries. Both Egypt and Tunisia suffered significant declines in tourism revenues by around 30% in 2011. Output of the tourism sectors also contracted respectively by 18% and 34%. However, both countries experienced rebounds in the first half of 2012 but with varying degrees. In Egypt tourism earnings increased by close to 20% and arrivals by 27%, though levels remain lower than in previous periods. Similarly in Tunisia, tourism receipts also increased by 36%.

Lanquar (2011) explains that in general, the tourism sector in the South Med countries has shown resilience over the years despite security incidents and other push factors. The author provides four different possible scenarios for the development of the tourism sector in the MED 11 up to 2030 and shows that in all of them tourism will resume but that this depends on security and adjustment to climate change. In particular, climate change prospects and adjustments still require research and well-targeted policy responses, as it could have serious impacts on travel and tourism with respect to sea level and water availability for tourism.

Despite the slowdown in Europe and the US, workers’ remittances to the region held-up fairly well during 2011, which in many cases helped buffer the deterioration in current accounts. In particular, remittances to Egypt were slightly increased in 2011 compared to 2010 and accounted for 6% of GDP. For Morocco, Tunisia and Jordan remittances remained at the same ratio to GDP. It is worFigure 7. Volume of exports of goods (percentage change) thwhile to note that remittances from the Eu30 rozone are likely to decline with a deepening 25   20   of the Euro sovereign debt crisis but that Eu15   10   ro-med countries which rely on remittances 5   from the GCC, such as like Jordan and Morocco 0   -­‐5   might be somewhat shielded. But, they too mi-­‐10   -­‐15   ght feel the second-round impact as a negative Algeria   Egypt   Jordan   Lebanon  Morocco   Tunisia   Israel   Turkey   terms–of-trade effect in the GCC would imply 2010   2011   2012  (f)   fiscal contraction and therefore a decline in deSource: World Economic Outlook (WEO) database mand for foreign workers. -19-


Figure 8. Tourism in selected Euro-Med countries, (year-on-year percentage change) 2011 15% 10%   5%   0%   -­‐5%   -­‐10%   -­‐15%   -­‐20%   -­‐25%   -­‐30%   -­‐35%   -­‐40%  

Figure 9. Current accounts in Euro-med countries, (% of GDP) 15

10 5   0  

-­‐5

-­‐10 -­‐15  

Egypt

Tunisia

Turkey

Tourism revenues  

Jordan

-­‐20

Morocco

Algeria

Egypt

Jordan Lebanon   Morocco   Tunisia  

2010

Israel

Turkey

2011

Tourist arrivals  

Source: National sources

Source: World Economic Outlook (WEO) database and national sources

While the shock of the 2008-09 financial crisis did not aggravate external finances for most countries and in some cases, even improved them (like in Jordan, Israel and Turkey), the political unrest did. Benefiting from rising oil prices, Algeria, a major oil exporter, is an exception to the strain on external finances, posting a surplus of close to 10% of GDP. In contrast, oil-importing countries were subject to rising energy imports, declining demand for their exports to Europe and US and sharp falls in tourism income. Consequently, current accounts have deteriorated significantly in almost all countries. In particular, Jordan witnessed the worst deterioration in the current account to 12% of GDP in 2011 from 7.1% of GDP in 2010. Lebanon posted the highest current account in the region of 14% of GDP.

the current account deficit deteriorated, more than doubling in Egypt to 1.5% of GDP from 0.6% and increasing to 4.8% from 3.6% of GDP in Tunisia in the first half of 2012 compared to the same period last year, following a deterioration in the trade deficit. Similarly, in Jordan the current account soared to 6% of GDP in Q1-2012 from 2.3% of GDP a year earlier. On the other hand, as a result of a weaker Turkish Lira and slower growth which reduced domestic demand for foreign goods, Turkey’s current account narrowed from 6% of GDP in the first half of 2012 to 4% of GDP a year ago. For 2012, the outlook is dim for Egypt where the current account is expected to widen further as foreign exchange earnings remain under pressure. For all other countries, current account deficits will not deteriorate significantly.

High dependency on fuel imports was particularly harmful to Israel and Jordan causing a significant deterioration of their trade deficits.

b. Capital inflows remain scarce

Most countries in the region continued to experience sizable declines in foreign direct investment, In 2012, current account trends diverge across a trend that began in 2007-08 in the aftermath countries. On the one hand, in Egypt and Tunisia of the global financial crisis, and was particularly strong since 2009. In 2011, Figure 10. FDI inflows, % of GDP owing to regional instability and 2011 the global economic downturn, 2010   2009   the region’s performance in 2008   terms of FDI attraction has been 2007   weak. Egypt which was among 2006   2005   the largest recipient of FDI, saw 2004   a -0.2 point of GDP fall in FDI in -­‐10%   0%   10%   20%   30%   40%   50%   60%   70%   80%   2011 (from a pre-crisis level of Jordan   Tunisia       Lebanon   Morocco       Israel   Turkey   Egypt   close to 8% of GDP). Countries Source: National sources which are able to increase FDI -20-


inflows include Turkey, Israel and Morocco. On a brighter note, several GCC countries have announced their interest in investing in some South Med countries. For example, the United Arab Emirates would invest up to US$ 3 billion in four Egyptian agricultural projects. Qatar also showed interest in collaborating with Tunisia to build the first private oil refinery in the country. c. The IMF loan: Jordan and Morocco make progess

Two countries, namely Jordan and Morocco have already finalized agreements with IMF, entitling them to exceptional access to resources. On one hand, Jordan has sealed a 36-month Stand-By Arrangement (SBA), amounting to SDR 1.364 billion (about US$ 2.06 billion and 800% of Jordan’s quota), of which SDR 255.75 million (about US$ 385.35 million) will be immediately available, and the remaining amount will be phased in over the duration of the program, subject to quarterly reviews. The SBA would support the country’s economic program during 2012-15 to address fiscal and external challenges and foster high and inclusive growth (please see country sheets for further details).

Consequently, many countries in the region have experienced a considerable rise in their external financing needs. For instance, Tunisia’s financing gap is the largest, estimated at US$ 15.7 billion (33.8% of GDP) in 2011. Egypt’s external financing needs On the other hand, Morocco has agreed on a twowas estimated at around US$11 billion for the next year arrangement of US$ 6.2 billion, 700% of quo18 months and Morocco’s at US$ 6.8 billion (6.7% ta, under the Precautionary Liquidity Line (PLL), of GDP). Finally, Jordan’s needs (after FDI, new bor- enabling Morocco to access in the first year about rowing and other capital flows, and including offi- US$ 3.55 billion (400% of quota), rising to cumulacial transfers) were estimated at US$ 1 billion (3.3% tively US$ 6.2 billion in the second year. The PLL is a of GDP). Even Turkey, though it is not one of the new instrument introduced in 2011, and Morocco Arab Spring economies, has needs that were esti- is the first country to make use of it. It is designed mated at about US$ 150 billion for 2012 or 18.2% to support countries with sound economic fundaof GDP (OECD, 2012). This situation has led some mentals, but with some vulnerabilties, by proviof these countries, namely Jordan, Egypt, Morocco ding them with access to resources in the event of and Tunisia to consider seeking assistance from in- external shocks. ternational financial institutions. All four countries have already implemented past World Bank-IMF The loan negotiations in the two other countries, reform programs since the late 1980’s and their Egypt and Tunisia, have still not gone very far, despite past experiences were seen as a success in terms the IMF’s renewed intention for financial support. In of some outcomes (Pfiefer, 1999). In Egypt, Moroc- Tunisia, no agreement was concluded with the IMF to co and Tunisia, these reforms provoked some so- date. Instead, two loan agreements were signed with cial unrest, particularly attempts to eliminate food the African Development bank in September 2011 subsidies, and this helps explain why these coun- with a total of 340 million dinars. The loans seek to tries were so reluctant under subsequent Figure 11. External debt stocks, 2010 IMF and World Bank programs to tackle the 184,0 200   180   issue of subsidy removal (Harrigan and Said, 160   140   2010). Nevertheless, external pressures 109,3   120   95,2   82,0   82,0   100   70,6   have led some countries to resort once 60,7   80   51,1   40,4   60   28,1   27,9   40   again to international financial assistance. It 16,2   3,4  8,1   20   0   is hoped that the IMF loan will act as a posiAlgeria   Egypt   Jordan   Lebanon   Morocco   Tunisia   Turkey   tive signal to boost the confidence of inves%  of  GNI   %  of  exports  of  goods,  services  and  income   tors and other potential lenders, provided Source: WDI that necessary reforms are undertaken. -21-


stimulate the economy through job creation either through infrastructure projects or SME support. In addition to this, Tunisia benefited from support for governance and the inclusive development programme. In Egypt, despite rising financing needs, the country has so far been able to get by relying on piecemeal support for foreign exchange reserves from neighbouring Arab countries and more recently Turkey. Clearly, this is not a sustainable solution, especially if foreign exchange earnings do not rebound. Loan negotiations with the IMF have stalled over the past year and a half, but it is said that the government formally requested a loan for a US$ 4.8 billion under the SBA facility in August 2012. A critical challenge for Egypt and also for the rest of the region is to make socially acceptable the necessary reforms. This is not an easy task given both the growing feeling of national identity/sovereignty that accompanied the uprising and the associated skeptic perception of economic reform advocated by international institutions and implemented by the former regimes - fingerpointed by many to be the reason for rising inequality. An important aspect to consider is whether external borrowing will comprise external debt sustainability. Figure 11 shows that external debt is not excessively high in Egypt, Jordan Morocco and Tunisia, the four countries where external financing is necessary.

(see country sheet). In June 2012, Egypt was given a rating of B by Standard and Poor’s (S&P), five notches below the investment grade. It was also downgraded 4 times by Moody’s in 2011, the latest ranking being a B2. Meanwhile, Tunisia sovereign credit rating suffered two consecutive downgrades in 2012, first by S&P (in May 2012) to junk (by two notches from BBB- to BB), followed by Moody’s (in July 2012) to Baa3 negative, in reason of “uncertainty in the business and investment sector”. Jordan was also downgraded by S&P to BB on the grounds of a negative economic and political outlook. I.5. Monetary policy The monetary policy in most Euromed countries is focused on the exchange rate with most countries relying on tightly managed exchange rate regimes, two countries having hard pegs (Jordan and Lebanon) and only two countries adopting independent floating exchange rates (Israel and Turkey). With the exception of Turkey, which saw a strong depreciation of its currency in 2011, all other exchange rates witnessed marginal fluctuations, despite the significant deterioration in their current accounts and limited access to external finance so far (figure 12). Central banks of the region (excluding those of Algeria, Lebanon and Israel) reacted by depleting their reserves in order to mitigate the depreciation of their currencies. By the end of 2011, Egypt had lost 50% of its stock of official reserves, which have fallen to around three months of imports. Tunisia also depleted more than one fifth of reserves. The critical challenge for these two countries will be to build reserves back up to a more secure level. This

Finally, it is worthwhile to note that the loan could boost the confidence of investors and other potential lenders in the government’s creditworthiness. This would be needed Figure 12. Change in reserves and exchange rate (domestic cur./US$) by June 2012 given that many economies have 40% 23,0%   12,4%   5,6%   7,1%   20%   4,7%   3,9%   2,1%   been downgraded since the upri0,6%   0,4%   0%   sings in early 2011. In particular, -­‐20%   -­‐3,0%   -­‐12,2%   -­‐13,7%   -­‐20,7%   -­‐40%   Egypt’s sovereign ratings have -­‐60%   -­‐49,7%   been cut several times since JaAlgeria   Egypt   Jordan   Lebanon   Morocco   Tunisia   Israel   Turkey   nuary 2011 on the back of polichange  in  interna;onal  reserves   exchange  rate  deprecia;on   tical uncertainty, deteriorating Source: Authors’ calculations based on EIU data. The change is calculated republic and external finances lative to June 2011 -22-


market. Even in Egypt, despite interest rate hikes in November 2011, the Central Bank reduced the statutory reserve requirement for commercial banks in two steps from 14% of total deposits to 10% in 2012. These cuts should ease credit conditions but also increase liquidity in local currency in order to help reduce the pressure of the exchange rate.

Figure 13. Reserves in months of imports, 2011 Turkey Israel   Tunisia   Morocco   Lebanon   Jordan   Egypt   Algeria   0  

5

10

15

20

25

30

35

40

Source: IMF article IV appendix tables for all countries

also implies that reserve depletion to restrain the depreciation may have reached its limit and increasing exchange rate flexibility is an option to consider. However, this policy option is likely to induce some pass-through effects on domestic inflation especially since some of the benefits of devaluation on national exports could be offset by the increase in the price of imported inputs that enter into the production of exports.

I.6. Public finances In an attempt to calm popular riots in 2011 and also to counter rising commodity prices many Euromed governments resorted to public spending increases. This primarily took the form of increasing civil servants wages, provision of jobs in the civil service, expanding subsidies and transfers (figure 14). In 2011, current spending account for most of public spending (more or close to a fifth of GDP), leaving limited resources for investment. For instance, subsidies and transfers in many Euromed countries constituting close to 10% of GDP, wages and salaries of civil servants are also high. In some countries, like Lebanon and Egypt, interest expense is an increasing burden on the budget. Resorting to escalated current public spending led to a significant cut in public investment spending in Morocco.

With the exception of Egypt, Jordan and Turkey where there was concern for rising inflation, central banks loosened monetary policy across the Euromed region in late 2011. Monetary policy easing intended to revive economic growth and support liquitidy on the back of a dimmer global outlook, which in some countries was com- Figure 14. Current spending, 2011 pounded by a slowing down of the domestic 30% 30% 25% economy following the political and social 25%   20% 20%   unrest. Consequently, central banks reduced 15%   15% 10% main rates: in Israel by a cumulative 100 10%   5% 5%   0% basis points since September 2011 and in 0%   Algeria   Egypt   Israel   Jordan   Lebanon  Morocco   Tunisia   Turkey   Tunisia by the same magnitude. Meanwhile wages and salaries interest expenses subsidies, transfers andagrants interest   expenses   Subsidies,   transfers   nd  grants   wages   and   salaries   Turkey followed suit in early 2012. Source: Authors calculations

In many other Euromed countries, main rate cuts have typically been accompanied by Figure 15. Fiscal deficits changes in reserve requirements to provide 14 12   additional market liquidity and also offset 10   the decline in foreign reserves. For instance, 8   6   the Central Bank of Tunisia reduced the re4   serve requirement ratio from 12.5% to 2% in 2   2011. Similarly, the Central Bank of Morocco 0   Egypt   Israel   Jordan   Lebanon  Morocco   Tunisia   Turkey   lowered the reserve requirement from 16.5% to 6% to ease the pressures on the interbank Source: World Economic Outlook (WEO) database -23-

2010 2011   2012(f)  


Consequently, fiscal deficits deteriorated in almost all countries with the exception of Lebanon and Turkey. The situation is most alarming in Egypt where the deficit was close to 10% of GDP in FY11 and is expected to exceed this rate in 2012. Meanwhile, some countries reported strong fiscal results in 2011 like Turkey, Israel and Lebanon. In particular, Turkey’s deficit narrowed to 1.3% of GDP in 2011 from 3.7% in 2010 following a significant cut in spending to 23.7% of GDP from 26% of GDP.

seeks to eliminate «bad inequalities» (related to circumstances such as social exclusion), while accepting «good inequalities» (related to the effort provided by individuals to take advantage of opportunities and incentives offered by the market). The lack of inclusiveness was determinant for the manifestation of the revolutions in the Arab world. Human development and inequality reduction were never truly at the forefront of economic policy despite remarkable economic growth.

Unlike in 2008, when some Euro-med countries had ample fiscal space to respond to the challenges brought by the global economic and financial crisis, current political and economic developments have weakened many countries’ fiscal position and their ability to respond with additional spending in the event of another global crisis. In countries with limited fiscal space such as Morocco and Jordan, expansions of social programs in response to popular demand have occurred at the expense of public investment programs. As a result, Jordan announced austerity measures that include a three-year fiscal reform agenda that targets a fiscal deficit of 3.5% of GDP by 2014. They include raising domestic revenue, containment of current spending through freezing public sector hiring (except in education and healthcare), reducing the operational costs of Ministries, raising electricity prices for selected industries and modifying the system of universal subsidies for gasoline and diesel.

The definition of the concept of inclusive growth is much broader than the one of pro-poor growth. It does so by giving greater emphasis to the struc-

II. Lack of inclusive growth that penalizes longterm development While addressing these short-term challenges authorities need not to lose focus on the big picture which is the path towards long-term inclusive growth. As known, inclusive growth favours an approach based on opportunities. One of its objectives is to reduce inequalities of access to opportunities, for the poor but more broadly, for all population that is excluded. Inclusive growth

Box 2. The concept of inclusive growth The definition of inclusive growth (IG) to which all literature refers is the one of Ianchovichina & Lundstrom (2009) : “Rapid and sustained poverty reduction requires inclusive growth that allows people to contribute to and benefit from economic growth. Rapid pace of growth is unquestionably necessary for substantial poverty reduction, but for this growth to be sustainable in the long term, it should be broad-based across sectors, and inclusive of the large part of the country’s labor force. (...) Inclusive growth refers both to the pace and pattern of growth, which are considered as interlinked, and therefore need to be addressed together. (...) The inclusive growth approach takes a long term perspective as the focus is on productive employment rather than on direct income redistribution as a means of increasing incomes for excluded groups. (...) Inclusive growth focuses on ex-ante analysis of sources of, and constraints to sustained, high growth, and not only on one group – the poor. The analysis focuses on ways to raise the pace of growth by utilizing more fully parts of the labor force trapped in low-productivity activities or completely excluded from the growth process.” See also: FEMISE (2012), “What is inclusive growth and how to implement it in the Mediterranean Countries?”, Background note for the Workshop on inclusive growth in Brussels on the 13th July 2012. -24-


tural transformation of economies. It differs from «pro-poor growth» by addressing the welfare of a broader segment of the population (not just the poor), both in terms of income and in terms of opportunities. As a result, it leaves room for a broad interpretation of the concept. To measure inclusive growth both social and economic issues are considered. The former concerns equality of opportunities and the latter concerns the enlargement of the scope of the economy (FEMISE 2012, background note). All in all, without any major long-term inclusive actions, support for immediate needs will produce rigidities that will prevent the implementation of a successful economic and social strategy. In the following, a first section will focus on inequality of opportunities and a second section on the limited scope of the economy. II.1. Inequality of opportunities in MPs Growth would be inclusive if shared by the majority of the labour force and working age population. To measure this aspect of inclusive growth, we use the three following indicators in comparison with major emergent regions: (i) the evolution of disparities of consumption and the share of consumption of the middle class (Table 4); (ii) the participation rate for the entire active population by gender (Table 5) and finally (iii) the rate of youth participation (Table 6).

(i) First, if the question of inequality is not a first rank priority for growth to be inclusive, it matters anyway as the participation of the middle-class is fundamental in the “inclusive growth” view. From this point of view, the data in MPs shows evidence of non-reduction in inequality in a substantive way throughout the past decade (see Table 4). Indices of inequality (Gini coefficient and distributional shares in consumption of extreme deciles) tend to indicate that MPs are not in the worst position, relative to other emerging regions. However, we realize that the middle-income class did not benefit from the two decades of growth, as almost all gains were cancelled during the last period. (ii) Second, the labour market participation rates remain very low in the region, either relative to other emerging regions, or in absolute terms (see Table 5). In 2011, a majority of the working age population was not participating in the labour market as the median Arab MPs stood at 45.6%. The situation nowadays is worse than it was at the beginning of the 2000’s and such performance is much worse than in other regions. The very low female participation rate partly explains the gap but male participation rates are also significantly lower than in Latin America or East Asia.

Table 4. Inequality trend in MPs & selected regions 1999-2008 Share in Consumption of the 2 lowest Share in Consumption Share in Consumption Deciles of the 2 Highest Deciles of Middle Class** Gini early Gini 90’s 00’s

Gini end 00’s

90’s

early 00’s

End 00’s

90’s

early 00’s

End 00’s

90’s

early 00’s

End 00’s

5 MPs*

39.2

36.8

38.2

6.6

7.1

7.1

46.3

44.7

45.7

25.6

26.6

26.1

Mercosur

48.9

54.7

45.3

3.9

2.8

4.3

53.7

57.5

50.9

21.6

18.6

22.7

ASEAN

38.3

41.9

37.9

7.8

6.9

7.4

46.8

49.0

45.9

25.4

23.9

25.9

Non EU East C.

34.0

29.4

26.8

7.3

8.6

9.4

41.5

38.2

36.3

26.5

28.5

29.6

Selected Emer. (med.).

42.4

42.0

42.5

6.1

6.3

6.0

48.1

49.4

47.9

24.9

23.9

24.8

*: Alg, Egy, Jord., Mor. Tun.; **: **: 3rd to 7th Decile Source : Own calculation using PovcalNet, World Bank

-25-


Table 5. Labour Market Participation Rates in MPs & selected regions 1999-2011 1999

2005

2008

2011

Male Female

TTL

Male Female TTL

Male Female TTL

Male Female TTL

MPs*

74.9

20.4

47.3

74.5

18.3

46.3

72.7

18.8

45.6

71.8

19.7

45.6

Latin America

82.7

49.6

65.8

81.5

52.8

66.4

80.1

54.7

65.3

80.2

55.6

66.1

East Asia

83.6

69.3

75.3

83.5

69.6

75.3

82.5

69.1

74.9

82.7

68.5

74.4

Est. Europe

65.5

52.6

58.5

63.9

51.4

57.1

63.8

51.2

56.9

64.6

51.8

57.6

Source : Own calculations based on ILO, LaborSta EAPEP database Table 6. Labour Market Participation Rates of the Youth in MPs & selected regions 1999-2011 1999

2005

2008

2011

20-24

25-29

20-29

20-24

25-29 20-29 20-24

25-29

20-29

20-24

25-29 20-29

MPs*

48.8

60.1

53.8

45.6

59.9

52.7

44.3

60.5

51.6

42.7

61.7

51.4

Latin America

64.5

78.4

70.6

70.2

80.2

74.7

73.8

81.1

76.8

74.6

81.5

78.4

East Asia

72.9

86.9

79.9

71.5

87.8

80.2

71.2

87.8

79.6

69.3

86.7

78.1

Est. Europe

71.5

85.5

60.0

64.5

80.4

56.3

57.0

78.1

54.3

53.5

77.6

54.4

Source : Own calculations based on ILO, LaborSta EAPEP database

(iii) Third, youth participation shows the same negative aspects (Table 6). For young people aged 20-24 years, less than 50% is active in MP’s. Moreover, since 1999, the proportion has been continuously declining and the median rate decreased by more than 6 percentage points. Inactivity among those young people is more severe than in the other emerging regions (by more than 25-30 percentage points nowadays) and this gap increased sharply in the last decade.

In addressing the economic aspect of “inclusive Growth” by increasing opportunities through increasing the scope of the economy, we illustrate MPs characteristics through three different kinds of indicators: (i) economic diversification measured by the trends in exports concentration; (ii) opportunities for firms to develop through banks funding availability; (iii) global labour and factor productivity trends.

lities as the economy would rely on more growth engines and therefore would be less dependant on external conditions. This can also be illustrated by the concentration of exports (as an indicator of the economy’s capacity to bear fruits from its openness and from globalisation). As shown in Table 7, most MP’s made some progress, in all MPs but Algeria, Jordan and Lebanon, the trade structure appears to have “broadened its horizons”. However, MP’s on average are still more concentrated than most Emerging Countries. Meanwhile, regarding the diversification in terms of partners, MPs also seem to have made significant progress, while staying at a level of high vulnerabilities. However, looking at country level values, MPs should be divided into two groups. The first is composed of Algeria, Tunisia and Syria in which, despite a slightly lowering share, the top 10 export partners represented more than 75% of total exports in 2010. The second includes Egypt, Morocco and Turkey in which the share of the top 10 export partners drastically decreased over time.

(i) First, “inclusive growth” would imply that the number of sectors participating in the economy increased over time. This would not only increase economic opportunities but also reduce vulnerabi-

(ii) Second, being inclusive, the growth pattern should allow firms to benefit from possibilities to “catch opportunities”, which would in fact increase the potential of productive job creation. Financing

II.2. Limited scope of the economy

-26-


Table 7. Concentration of Exports in terms of products and markets (based on SITC rev3 3-digit data)

2000. Trade Concentration Index

2010 . Trade Concentration Index

2000 share of top 10 products in total export value

2008 share 2010 share of top 10 of top 10 products in products in total export total export value value

2000 share of top 10 Partners in total export value

2010 share of top 10 Partners in total export value

MPs (Median)

0.067

0.057

62.6%

60.3%

57.0%

73.33

69.10

MERCOSUR* (av.)

0.030

0.043

41.9%

46.9%

51.5%

66.60

57.46

ASEAN (Median)

0.094

0.043

67.0%

53.7%

52.7%

71.79

72.89

Ukraine

0.036

0.034

45.4%

52.7%

57.0%

56.74

56.44

Belarus

0.052

0.094

41.3%

62.7%

52.1%

83.28

80.56

China

0.018

0.026

31.4%

35.7%

52.7%

73.56

60.36

India

0.041

0.048

34.6%

42.0%

57.0%

56.80

52.96

Note: The Trade Concentration Index is aimed at assessing the degree of concentration/diversification of a given country’s exports. Based here on the Hirschmann-Herfindahl Index, it ranges from 1 to 0: the lower the indicators, the more diversified the economy. Similarly, the lower the share of the top 10 products, the more diversified the economy trade. *: Only Argentina & Brazil Source: Own calculations using TradeSift and Comtrade

MPs’ firms has always been highlighted as one major constraint and from this perspective things turned for the worse during the last decade. The percentage of firms using banks to finance investment has decreased over time in all MPs, except Syria and Turkey. Furthermore, the level of MPs firms using banks to finance investment is on average far worse than in all other regions. The only exception to the rule is Turkey in which firms drastically increased their access to banks.

Table 8. Firms using banks to finance investment (% of firms) Average 2002- Average 20062006 2010 MPs (median)

20.09

12.29

MERCOSUR (median)

8.24

19.145

ASEAN (median)

29.38

21.48

Ukraine

16.71

32.08

Belarus

14.95

35.82

China

28.76

India

46.58

46.58

Source : WDI

(iii) The productivity trend matters, especially as increases in productivity may allow the increase of real wages significantly without negative feedback effects on the macro equilibrium. However, productivity gains may have negative effects on employment, especially when a high level of labour-capital-substitution takes place. Therefore, the channel of productivity gains to favour is the one of total factor productivity growth. Before looking at MPs trends, we should underline that productivity data at the aggregate level should be viewed with caution, and relative to other indicators and regions. Starting from low levels of labour productivity gains (and a negative factor productivity trend), MPs gradually increased labour productivity. But, with the exception of the beginning of the 2000’s, they did not fill the gap in terms of Factor Productivity relative to the other emerging economies. Moreover, while in

Table 9. Trends in Labour Productivity and Factor Productivity in MPs and selected emerging economies 1990-2010 Labor Poductivity (Av. An. Rate in %. based on Values in 90$) 90-95

95-00

00-05 05-10

8 MPs Median

0.60% 1.40% 1.80% 2.20%

Mercosur

2.40% 1.60% 0.00% 1.60%

Asean

5.70% 2.30% 2.60% 2.80%

Non Eu East

-9.00% 3.20% 7.50% 3.70%

All emerging Ref

2.70% 2.50% 2.60% 2.80%

Factor Productivity (Average An. Rate in %) 90-95

95-00

00-05 05-09

8 MPs Median

-0.30% 0.20% -0.10% -0.40%

Mercosur

-0.50% 0.10% 0.80% -2.20%

Asean

0.20% 0.20% -0.20% -0.90%

Non Eu East

0.00% 1.10% -0.80% -3.70%

All emerging Ref

0.20% 0.20% 0.00% -1.40%

Source: Own calculations based on the Conference Board-Groenigen University dataset -27-


the other regions trends of labour productivity were stable or even declining, perhaps indicating that they chose to favour the Total Factor Productivity channel to avoid high labour-capital substitution, MPs on the contrary followed an increasing trend of Labour Productivity with Low Factor productivity. This could indicate a high level of labour substitution and hence would not favour job creation. In conclusion to this second section that aimed to analyse where MPs stand from an “inclusive growth” point of view, we should highlight that despite registering satisfactory growth rates in recent years and partial decline in poverty (see previous FEMISE reports on that subject) the degree of inclusiveness of growth in Mediterranean countries remains low because of the following: √ The situation remains worrying for employment in particular. Even today, more than half of the working age population does not participate in the formal labor market. Probably this is a major reason that has not allowed the middle classes but also the youth to significantly benefit from opening and satisfactory growth rates. √ Some indicators also point to a failure in creating more opportunities that would have improved participation (productive diversification, support for small businesses, productivity gains to a generalized increase in income). All in all, the past two decades were definitely insufficiently «inclusive», penalizing long-term development in the Mediterranean countries. III. Recommendations: Rising to the challenge through Innovation, Inclusiveness and with an active role of the International Community In conclusion, a series of recommendations can be given which could help MPs in their transition towards a stable regime of growth, one that is both endogeneous and productive, that addresses crucial issues such as inclusiveness and employment without sacrificing them to short-term prospects (see also Reiffers and Tsakas, 2012).

III.1. The need to go towards a growth model based on innovation Undeniably there is a need to quickly reinvigorate growth. The rate of the latter must pick-up as soon as possible since without a strong rate of growth (revolving around 7%) job creation will be insufficient to match the labor supply of the next 20 years. Projections show that if MPs are ambitious then 62 million jobs will be needed by 2030 for the participation rate to increase as it did in the 2005-2007 period. In a less ambitious scenario, MPs will still need to come up with 34 million jobs by 2030 for participation rates and unemployment to remain at 44.4% and 10.4% respectively (Blanc, 2012). To meet the needs of domestic labour, growth should become self-sustaining and a model of endogeneous growth should be obtained to ensure that innovation grows continuously in all its aspects. The theory of endogenous growth implies that policies that favour knowledge accumulation can have a permanent effect on economic growth. Knowledge, contrary to regular inputs, has the characteristics of a public good (which diffuses at zero cost and is available to all) but also embodies new “knowledge complements” so that as noted by Schiff and Wang (2006) “the marginal product of additional units of knowledge increases”. By focusing on the process of international technology diffusion the authors suggest that for North-South trade, openness has a greater impact on TFP than the R&D content of trade. Their results are encouraging for Mediterranean economies since they suggest that the gains from trade liberalization can be larger than earlier literature suggested while liberalization of trade could have a greater impact on growth . All in all, through greater openness, new ideas that “circulate” will increase productivity and market size, which in turn will raise the return to more ideas and contribute to sustainable growth. One should note that, in the recent literature on firm-level innovation one finds the idea that firms which innovate once have a higher likelihood of -28-


innovating again in the future, a process called “innovation persistence”. A study by Clausen et al. (2011) shows that innovation strategies across firms appear to constitute a key driving force of a firm’s probability to innovate over time, more than the stock of innovation. Meanwhile, a persistence of product and process innovation show a kind of persistence, process innovation seeming to be more persistent in the low-tech sector. To sum up, the new model of growth followed by MPs should keep in mind that differences in firms’ innovation strategies affect innovation persistence in a major way, while different sectors require a different type of innovation. A pre-requisite for growth to be durable is that growth must be based more on openness and total factor productivity (TFP) and less on capital accumulation. Indeed, capital accumulation cannot produce the expected results in terms of employment creation because it decreases productivity (see the case of oil producing countries such as Algeria) and often substitutes labor with capital. Meanwhile, as shown by various studies, external opening is essential to facilitate technology transfer through intermediate inputs, to diversify production and allow MPs to benefit from scale economies in larger markets. Granted, external opening should always be well negotiated, gradual and accompanied by supporting structural policies. The case of Thailand which is progressively going from an investment-led type of growth to an innovation-led model of growth could serve as an example to several MPs. Needless to say, trade keeps having an important role to play, as imports from more advanced economies constitute “a channel of knowledge flows” (Goldberg et al., 2008). Importing inputs and capital goods allows firms in developing economies to acquire the use of the technology embodied in these goods and derive gains. But, only focusing on the “quantity of openness” could be error-inducing. In their article, Navaretti et al (2006) suggest that, in the case of CEE and South-Med countries, pro-

Box 3. The case of Thailand: From Investment-led Growth to Innovation-led Growth The case of Thailand is an interesting one since some parallels can be drawn with the experiences of MPs. The sailent fact is that Thailand has been making efforts to move from a capital-intensive system to an innovation intensive one. When focusing in the case of Thailand one observes that it had a long history of liberal trade and investment liberal policies. Early on, the liberal development strategy focused on private investment and in later years it also extended to foreign capital. This was of crucial importance in bringing higher output growth along with structural transformation, especially in manufacturing, a sector that emerged as a driving force for the Thai economy. The development strategy allowed the Thai economy to showcase impressive rates of growth compared to neighbouring economies. For instance, in the 1960–73 period the annual average growth rate was above 8%, followed by a 6.3% rate in 1974–85 and a 9% growth rate in 1986–96 just before the 1997 financial crisis. This openess regime greatly contributed to considerable investment inflow in electronics that in turn became a great source of both employment creation and exports revenue (Joseph, 2006). Similar to MPs nowadays, Thailand needed to find emerging sectors that can carry future growth and become major sources of employment and export earning. Looking back to the case of Thailand, one notes the following success: the most important leaders in electronics are now present in the domestic electronic industry. On the flipside, the later has been overly specialized in a handful of low technology products (a common trait with some MPs) that translates in low value added, poor forward and backward linkages and a relatively high intensity for imports. In the end the country has been stigmatized as the « low end of the value chain » (Joseph, 2006), a development that MPs are also familiar with. In that respect, the role of innovation and human capital is central and MPs can learn from both the suc-29-


cesses and mistakes of other developing economies. In Thailand, companies were not initially encouraged to invest in skill upgrading and knowledge, which in the long-term has proven penalizing at the value chain level. On the contrary, in countries like India efforts for a national system of innovation had been made earlier on allowing for better knowledge generation, innovation and diffusion, which thus increased skills and high value added activities.

ductivity in manufacturing depends on the type of machines that are being imported. While importing cheaper equipment may often seem optimal from a cost-related perspecive, the authors suggest that the cheaper and less sophisticated machines that these countries import translate into lower TFP and thus importers’ competitiveness is not increased. In the end, once the authors control for the quality of imports their quantity ceases to matter.

In recent years, Thai authorities initiated structural reforms to not only develop an ICT sector but also to allow positive spill-overs of technology to all sectors of the economy. To summarize, the first IT policy (IT2000) aimed at laying foundations for development and use of new technology while the second (IT-2010) provided a long-term vision to ensure the transition to a knowledge-based economy and society. As such it is a two-step approach that could be useful to MPs. This strategy would be compatible with what was suggested by a FEMISE-EIB study (2010). Namely the areas to which priority should be given involve :

Perhaps most importantly, growth should be inclusive meaning that it shall mobilize human resources in a fair manner, taking into account of social and territorial characteristics and their needs.This brings us to our second point.

√ Firstly, correcting “the initial conditions (infrastructure, education, particularly training), which play a key role in terms of the level of transaction costs and in sustainable productivity growth” and then, √ to proceed to “promoting skills and the employability of human capital at the regional level through networks of training institutes for specific trades and professions, with mutual recognition of qualifications” as well as “developing research and innovation and, more generally, putting in place measures that will enable a knowledge economy to be established”. In the end, pro-trade and FDI reforms are preconditions to attract investment. But, openess itself is not a panacea for Mediterranean economies. As in the case of Asian countries there is an underlying issue that should always be kept in mind: despite liberal policy regimes, weak innovation systems will always act as a “debilitating factor” in attracting investment, as noted by Joseph (2006).

III.2. Implementing the concept of inclusive growth within the framework of the Euromed partnership As strong growth is required in MPs, the principle growth factors must be stimulated. Desirably, human capital should become the production factor that will play the biggest role in the future growth process. The key points that need to be fulfilled are numerous. To quote but a few MPs need: √ Achievement of basic conditions by tackling illiteracy; √ Equal access to education and training, i.e. making sure that they are generalised and accessible to all and that the right information is diffused among people; √ Improvement in the quality of education and training (widespread use and recognition of Pisa tests) through the necessary pedagogical changes to minimise failure and to develop creativity; √ Improvement of participation at all society levels (development of representative unions and their participation in decisions); √ Actions focussing on the employment of young drop-outs and unemployed graduates via vocational training, the creation of dedicated structures forming linkages with companies’ needs, the development of a skill-based approach and rethinking of teaching methods; -30-


√ Significant improvements in vocational training in collaboration with professions and companies.This could be achieved by public means or donations by foundations. The direct involvement of firms is desirable as is the development of partnerships with schools, training centres around these issues. Moreover, although the decomposition of the role and effects of each factor in growth is important, the decisive point when considering a policy that targets growth is the way in which factors combine their action. Indeed, when growth is stronger than expected from the available factors, it is because their organisation and environment bring value added. The question that arises is thus the following: can such growth driven by TFP be inclusive and under which conditions? Let us suggest a few key points: √ Generally speaking, growth driven by TFP preserves more jobs, or even creates more direct employment than labour productivity which is frequently obtained by the substitution of capital to labour. √ The true contributions of international opening and free-trade areas come through the channel of economies of scale, extended market and technology transfer via imported intermediary inputs and direct investment. All of this can increase inclusiveness of growth if the necessary qualified labour is trained to develop the use of these transferred technologies. √ Growth will follow the model of endogenous growth if the economy is able to continuously innovate. Here a question rises as to the development of research laboratories, the status of the researchers of Mediterranean countries and their relationship with firms. √ At the level of the growth process as a whole, policies on education, training and employment are key, notably to foster the participation of young people. √ Foreign direct investment should be channelled to produce spill-over effects on the local SMEs fabric.

√ The development of infrastructures for transport, electricity, communication, water and health must be designed as a key element of inclusivity. Meanwhile, bear in mind that inclusiveness can be applied to governance as well and be compatible with the industrial strategy that is followed. As noted by Cowling and Tomlinson (2011), the long run effectiveness of the latter “depends upon designing appropriate economic governance structures that facilitate wider stakeholder engagement and better serve the public interest”. Moreover, “wider public interests are likely to be better served through an inclusive approach where governance structures are relatively diffuse and allow opportunities for all stakeholders to participate in the development process”. For more participation in the labour market, specific focus should also be given to the negotiations with foreign investors in exchange of benefits, in a way that labour demand also goes to higher qualifications for a real and inclusive transfer of technology. From this point of view, it is important that the “beauty contest” for the attractiveness of foreign investment comes to an end among MPs. A regional investment code could be considered, with potential investors having to choose more in terms of the quality of technicians, engineers and managers found locally and less in terms of tax benefits to be granted. III.3. The need to rethink markets’ regulation towards “social entrepreneurship” Empowering markets in countries of the Mediterranean, especially those of the revolutions, could provide a necessary stimulus to the economy, improve productivity and employment. Currently, one could say that the administration in MP’s is relatively outdated and cannot follow the development of markets and opportunities. This could be one of the causes for having “a large stock of obsolete regulation” in Egypt and Tunisia and a -31-


mismatch between the “stock of educated graduates in Tunisia and the market for their skills” (Amin, 2012). It had already been noted that the effectiveness of the productive system faces several impediments, among which are labour market problems linked to restrictive regulations that affect factor utilisation in terms of recruitment, overtime and dismissal/redundancy procedures (FEMISE-EIB, 2010). Rethinking regulation is a crucial issue; MPs would probably have a lot to gain by adopting a new framework that allows regulation to be (Amin, 2012): √ Participatory, with a well-structured dialogue with the private sector and with the latter embracing a role in enforcement through voluntary standards or self-regulation. √ Differentiated, such as in border control where information technology can be used to increase the rate of detection of bad shipments, protecting public interest and allowing for trade to be ‘faster’. √ Efficient, thus removing old and ineffective regulations. Currently, steps are being taken by Tunisia which created a technical committee to eliminate unnecessary and redundant regulations. √ Predictable, something needed by firms who “earn a profit commensurate with the risk of investment undertaken”. √ Accountable, increasing the legitimacy of legal decisions. The need to remove off-putting regulations is an opinion shared by many in the economic literature. In the case of the Indian economy, it has been suggested that removing unnecessary regulations and allowing essential ones to be efficiently applied in “product, land, labor, capital, and infrastructure services markets” would also be critical in “spurring innovation efforts” (Dutz, 2007). To allow MPs to rely more on total factor productivity and less on capital accumulation it can only be achieved with regulatory reforms that allow for genuine competition. As in the case of India, the new framework could be accompanied by some sort of financial support, es-

pecially oriented towards “pro-poor innovation”. In that respect, the private sector could manage such a program, while public support initiatives would be reviewed and become more effective. There is a need to foster an environment for high potential entrepreneurs to surface. More specifically, the “entrepreneurship ecosystem” needs to be developed for new startups, led by the youth, to blossom (Reiffers and Tsakas, 2012). Let as note that many young entrepreneurs start businesses that have a social impact, that is, offering services to poor consumers or addressing issues of a social nature. It is those initiatives that one must support. But unfortunately they currently face considerable impediments since their status is a blurry one (no legal options for hybrid social enterprises, Amin 2012). A clear plan would not only allow new young entrepreneurs to thrive but also to set up a sort-of «social license», marrying the principles of the private sector with an approach that appears more honorable and social. III.4. The need for the international community to be more active Finally, some may note that the authoritarian economy model of several MPs was not solely due to domestic developments. Indeed, one could argue that the international community, more specifically the EU, tolerated such regimes justifying their existence for the cause of “stability” (IAI, 2012). After the revolutions, the EU was hesitant, notably with its consensus deficit among EU members. At first, official sources from the EU stated that what was occurring in the Arab Spring countries was “their” revolutions. Then, some EU members made several diplomatic misteps, with members going as far as suggesting some assistance be given to authorities to handle the riots (Deliberacion, 2011). Fortunately, the EU and the rest of the international community finally declared clear support for the democratic transition. Truth be told, there is -32-


always a need for assistance from the international community and especially from the EU. During a transition process one observes “a J-curve effect� that can last for roughly 4 to 5 years. Simply put, this means that uncertainties in the expectations, the renewal of elites, changes in the institutional framework, involve a short-term decrease or stagnation in production, increasing unemployment, prices and debt (Reiffers, 2012). It is thus crucial that the international community helps maintain macroeconomic stability in the Mediterranean countries concerned by the transition process.

for granted that foreign support will always be beneficial or welcomed by recipients in the Arab world (Amin et al., 2012). Thus, the international community should act quickly, embrace its role and responsibilities and not postpone any potential initiatives. In particular, it should support the MPs that make efforts towards new regimes out of the authoritarian bargain, the evolution of which is presented in the second chapter.

But in practice there are still flaws in the overall response. While the EU and all other donors also support sectors such as education and health and offer incentives for job creation in SMEs, their overall policy has not changed much. There are not many instruments that have been put in place to facilitate transition. For instance, the Union for the Mediterranean (UpM) initiative seems to be more preoccupied in launching symbolic projects (ex. desalination facility in Gaza strip) than providing a pragmatic approach that does not neglect the political dimension (IAI, 2012). Thus, support could take the form of concrete transfers and loans and should be compatible with a long-term growth strategy that focuses on active structural policies and not only on short-term compensatory policies. Let us note that European countries and most of OECD members are currently in deep crisis but they should see beyond the short-term. The international community has the opportunity to set the example and become less technocratic vis-a-vis its external action, prioritizing its relations with the Arab world and offering tangible concessions not only through transfers but also on issues such as market access and migration, especially in Europe (D’Alema, 2011). It should finally be stressed that many international actors are viewed with distrust in the region since they ignored the underlying problems that led to the Arab Spring. Thus, it cannot be taken -33-


-34-


CHAPTER 2. The Long Journey out from the Authoritarian Bargain I. Introduction For a long time, the authoritarian bargain model explained the dynamics in the region and its resilience to change. Authoritarian regimes split state resources between repressing opponents and rewarding supporters. Their economic and social policies were designed to channel rents to their constituencies. The inability of these regimes to continue to buy loyalty and obedience of large segments of the population or to offer them a viable alternative eroded their legitimacy and led to the uprising that erupted in Tunisia and swept across the region. In all the countries in the region, the regimes’ first reaction after the uprising began was to increase wages in the public sector and expand subsidies and social transfers to mend the authoritarian bargain and put an end to people’s political demands. One year and half later, the outcome of the so-called “Arab spring” differs substantially among countries. Egypt and Tunisia achieved a relatively peaceful “revolution”. Both countries have overthrown their former leaders, held free and fair elections, and handed power over to a new civilian authority. In other countries such as Morocco, Jordan and Algeria; the incumbent regimes have managed through limited adjustments to their ruling strategies to remain in power and face down the protestors. A third group of countries (Libya and Syria) experienced a violent transition that turned into a civil war. The Libyan struggle ended with NATO intervention and the post-regime change situation is still ongoing. The stalemate of violence and civil strife continue to prevail in Syria. The purpose of the present chapter is to assess the extent to which the ruling bargain has been changing and whether there is any progress made in shifting away from the authoritarian bargain to a negotiated and more balanced social contract. Theoretically, the transition away from autho-

ritarianism—either through mass protests and toppling of the incumbent rulers or through topdown reforms— is expected to lead gradually to more inclusive political systems with more diversity and broader civil society impact and participation in the decisionmaking process. The chapter puts more emphasis on most advanced cases in terms of the change that occurred, namely Egypt and Tunisia. The chapter investigates efforts made in dismantling the foundations of the authoritarian bargain and the progress achieved towards broader participation and inclusiveness in the policy-process of the key social forces such as business associations, labor movements, youth and women. The rest of the chapter is organized into four sections. The second section provides an overview of the authoritarian bargain model (ABM) that has been prevailing in the Mediterranean countries over the last five decades. The third section investigates the progress made in dismantling the foundations of the ABM since the “Arab spring” began. The fourth section focuses on the dynamics within the civil society and the extent to which emerging social forces are taking part in the decision making process. Finally, the fifth section concludes. II. The authoritarian bargain The authoritarian regimes in the Mediterranean countries survived over decades in which democratic waves rolled across different regions. For a long time, the authoritarian bargain model explained the dynamics in the region and its resilience to change [1]. Authoritarian regimes shared state resources between rewarding supporters and repressing opponents. This section briefly presents the pillars of the authoritarian bargain and then moves to the struggles facing the new governments in the region in dismantling the foundations of the authoritarian bargain. The section argues that the deep-seated structures of authoritarian rule in the Mediterranean countries remain largely intact. -35-


II.1. Pillars of the authoritarian bargain

b. Politics of fear and repression

The “authoritarian bargain” refers to an implicit arrangement or contract between the regime and the population whereby people renounce their political freedom and political participation in exchange for public goods and other economic benefits. In operational terms, the authoritarian bargain relies on two pillars: redistributive policies and the politics of fear and repression.

The authoritarian bargain faced opposition, from its early days, and was challenged by those who refused to trade freedom for bread or by the crowds that occasionally took to the streets to express their anger and dissatisfaction. The regimes co-opted or harshly repressed dissidents and potential rivals. Sporadically, the regimes granted some degree of freedom and political rights as security valve to avert radical uprising and secure their survival. Frequently, the authoritarian rulers implemented legal means of repression through “emergency laws”, restricted people’s freedom of expression, assembly, movement and residence. They have also resorted to massive and disproportionate use of force and violence against bread riots as well as peaceful protesters, arbitrary arrests, cruel torture and widespread intimidation [3] [4].

a. Redistributive policies Economic and social policies in the Mediterranean countries have been utilized to channel benefits to loyal supporters. In the first era of the authoritarian bargain (before the eighties for most countries), policies such as land reform and nationalization of private assets were used to alter the prevailing social balance and build a new social order in favor of peasants and workers. To deliver benefits and secure loyalty of the educated elite and urban dwellers, the regimes set up a large bureaucracy. In the second era, with structural adjustment programs and market reforms, the terms of the bargain were dramatically affected. The liberal policies slashed or phased out most of the benefits and restricted access to public jobs. The authoritarian regimes started to lose their legitimacy within their traditional supporters, mainly landless and small-sized farmers, public sector employees and poor and middle-class households. The regimes shifted gradually their social base to a minority of influential business elite and built new networks of patronage through privatization and other large private-sector-friendly policies. By doing so the regimes achieved two goals. First, they created a new social coalition as a counterweight to their traditional supporters hit by market reforms. Second, they avoided any potential threat that an autonomous business community may represent for the stability of an authoritarian state. The regimes in the Mediterranean countries managed to form a loyal elite made of private sector capitalists, landed elites, the military officer corps and top state officials [2].

III. The dismantling of the authoritarian bargain Beyond the toppling of the authoritarian rulers or formally introducing constitutional reforms, the shift towards a new state-citizens relationship cannot occur without pulling apart the foundations of the authoritarian bargain. The latter relies on a strong network of alliances entrenched in the business sector and within a wide range of state institutions among which are the security sector, the bureaucracy, the media and the judiciary. It also relies on high profile corruption, abuse of position and embezzlement of public money. So far, too few of the fundamentals of social and economic pillars of the authoritarian bargain have been effectively contested and there is little down the road that ensures that the ongoing transitions are reaching crucial institutions or setting the scene for a new social order. III.1. The resilience of the repressive apparatus A key pillar of the ABM is repression, which is administered by the security sector. The latter refers to the police, the intelligence services, the military and paramilitary forces and government agencies in charge of them. The reasons behind the security -36-


sector development, the various bodies’ position, their institutional interactions and the general apparatus architecture, are issues that lie at the heart of the political and social decision-making process [5]. Authoritarian regimes in the Mediterranean countries used the security sector that was supposed to ensure people’s safety and security, as a repressive apparatus and an extension to their executive power to repress domestic political opponents. Such pattern persists even when political leaders in some of the countries are now showing a willingness to tolerate more open political expression and civic participation. The disconnection between political openings and the culture of security personnel trained to prevent change and oppress all forms of opposition stand as obstacles to change.

In Morocco and Tunisia, the army is not a major economic actor. But the origin of wealth of the security sector personnel remains highly opaque. In Morocco, officers have been granted certain privileges and material advantages, thereby making them more influential. This included facilitating the acquisition of permits for sand pits, marble quarries, fishing concessions and exceptional bank loans [11].

The process of transition in Tunisia was hampered by the police resorting to excessive force against continuing protests, delays in adopting decisive reforms toward a more independent judiciary, and challenges to freedom of expression that the interim government did not properly address [6].

Parliaments in some of the Mediterranean are formally vested with a wide-range of oversight powers on the military and security sectors. However, there is no real effective oversight exercised on them. The Equity and rehabilitation entity (IER) created in Morocco to investigate the state’s human right violations under the former monarch requested in its 2006 final report to clarify and made public the statutory provisions on the duties, organization, decision-making processes, modes of operation and system of monitoring and evaluation of all Morocco’s security and intelligence services. This recommendation has received no follow-up since then.

The military’s involvement in the economy also represents a barrier towards a different social model. The Egyptian armed forces have their own hospitals, stores and factories. Recently, the military has shifted into electronics services, tourism and the aviation sectors. Although these activities are legal they can cause an unfair competition to the private sector and it is not clear how much they are subjected to outside audit, transparent accounts including paid taxes [7].

A real shift away from the authoritarian bargain requires changing the security system’s culture and reforming all components of the security sector. Security forces should become accountable to elected civilian authorities; comply with the same principles of financial management and transparency as the non-security sectors. Such shift would also need to build capacity within civilian government and civil society to engage in debating security matters [12].

The status of Egypt’s governors is also revealing of the military’s hegemony. More than half of Egypt’s governors are coming from the military or the police [8]. Some military officers were routinely deployed to ministries, government agencies and localities to exercise political control on the Egyptian bureaucracy [9]. Most of the new governors appointed by the Military Council on 14 April 2011 were chosen from the military and the police [10].

III.2. Hesitant fight of corruption and rent-seeking Corruption and cronyism can be broadly defined as the abuse of state power in issuing laws, decrees and regulations that would allocate public assets or ensure favored market positions to a politically selected few [13]. Cronyism may not be illegal and usually takes subtle forms of close ties between the state and big businesses. It favors a few cronies -37-


over all other market-actors in clear violation of free market competition. Crony capitalism and corruption have frequently been underlined as major sources of the discontent that fueled the uprising in the Mediterranean countries. In Tunisia, the investment code under Law 120-93 and its multiple amendments costs each year the equivalent of 2.2 percent of GDP, or 11 percent of the state’s fiscal revenues [14] without effectively stimulating the private investment. By discriminating between enterprises on the basis of their characteristics—such as size, economic sector, location, and export orientation—the investment code in Tunisia has granted significant discretionary power to the bureaucracy and generated large misallocation of state resources [15]. In Egypt, for instance, three main segments benefited extensively from corruption and cronyism. The first is high-echelon officials and their families. The second segment has been made up of businessmen and business families that could establish mega enterprises operating in diversified sectors. The third segment consisted mainly of foreign and Arab capital that could get involved in the domestic networks of corruption and cronyism through bribery of officials, or partnership with local cronies [16]. The elected governments in Egypt, Tunisia and Morocco (led by Islamist parties Muslim Brothers, Ennahda and PJD respectively) highlighted in their electoral platforms the urgent need to fight corruption and rents, revamp the state incentives to the business sectors and introduce more transparency in public procurements. In Tunisia, Ennahda’s platform pledges the establishment of a high commission for combating corruption and the adoption of disclosure policies for senior officials’ assets [17]. The Morocco’s PJD has emphasized that the party’s first priority is “fighting corruption,” and the phrase “good governance” has frequently been touted as a party slogan. The party has also expressed considerable interest in improving Morocco’s standing

in global economic indices, including the Transparency International’s Index. The results so far, however, have fallen dramatically short of expectations. In December 2011, nearly one year after the uprising, Transparency International’s annual index on corruption, which ranks countries from least corrupt (number 1) to most corrupt, had dropped Tunisia’s rank from the 59th country to the 73th [18]. A national commission of investigating corruption and wrongdoings was established in the weeks after Ben Ali’s overthrow, and included public accountants and legal specialists in administrative and real estate laws. The commission examined some 5,000 complaints and released its first report in November 2011. The report revealed a vast system of structured corruption by which the Ben Ali in-laws and their cronies put their hands on the most lucrative businesses, extended their ownership to public land and escaped from tax and customs duties [19]. The commission has built evidence on 400 cases that it transferred to courts. Over seven months after the commission issued its report, very few concrete steps have been taken. The stalemate is partly due to the death of the commission’s president in January 2012. A new president was only appointed in May 2012. The commission has over 6,000 files to investigate and refer to the as-yet-unreformed court system. Parties, both inside and outside the government, refuse to grant the commission too much power and fear that it might abuse its authority to target specific interests. So far, many of those who benefited from corruption remain in power and have influence over ministries in the new government. The head of the commission declared that “the main obstacle lies with those people who gained from the old system and their defensive strategy [20].” Recently, the Morocco’s head of government declared [21] that it is “difficult to fight against corruption” and expressed his willingness to pardon corrupt officials on the grounds that bringing to -38-


justice corrupt officials can spark chaos in the country. Oddly, the head of government used the Quran to justify his “new philosophy” to stop fighting corruption. The Transparency Maroc (TM), the Moroccan branch of the corruption watchdog Transparency international, emphasized that the PJD-head of the government’s attitude towards fighting corruption has come as a real shock a time when Moroccans have been waiting for the government to put an end to all forms of corruption. TM indicated that the head of the government is encouraging impunity. Yet, the government is not in the position to decide whether to abide by the law when it comes to the embezzlers of public funds. The fight against corruption “is not an option for the government but a constitutional, political and moral obligation and the cornerstone of accountability”. It is essential to understand the role and influence of crony capitalists empowered by the old regimes. They tend to act as a counter-revolutionary force. Vested interests, threatened by meaningful economic change could bring together the crony capitalists of the old regime with their supporters still embedded in the highest ranks of the state’s bureaucracy. Alternatively, and more likely, as has already happened in Egypt, Vested interests may use their collaborators within the state to place clear limits on how transformative the post-revolutionary governments can be. The new elected governments are facing resistance in tackling crony capitalism and pervasive corruption. This in turn may discourage private domestic and foreign investment and undermine the credibility of any announced reforms. The international experience reveals that the transition from authoritarianism to a more pluralistic and balanced society requires a vibrant civil society that can channel the voices of different social groups and advocate for change. It also requires a strong professional and independent media sector. The next section investigates the extent to which

such new social forces have emerged in the Mediterranean countries in transition. IV. Emergence of new social forces The authoritarian regimes in the region mastered the art of using government-organized nongovernmental organizations especially well [22]. They created and nurtured a clientelistic solidarity network, which, though no part of the government, was led by the ruling party’s elite. The network, by granting access to favors and social services in exchange for the regime’s support, transformed the culture of patronage into widespread corruption across all segments of society. Strict restrictions have been imposed restrictions on independent civil society organization as well as on the freedom of the press. Different forms of civil society share a common core meaning that refers to the process through which individuals negotiate, argue, struggle against, or agree with each other and with the centers of political and economic authority [23]. Strong civil society provides venues for participation in the public sphere; helps to fight corruption and forces accountability of public officials. The civil society’s impact is conditional, to a large extent, on its ability to generate sufficient public pressure which, in turn, depends on the press being free [24]. Such findings point to the need for policy to target both civil society and press freedom in order to promote a new and balanced social contract in the Mediterranean countries. IV.1. The empowerment of civil society Civil society forces in Egypt and Tunisia contributed through their cohesive and yet spontaneous uprisings to end the ruling of their former autocrats. From an organizational point of view, however, most civil society components remain weak and fragmented. The adoption of a new decree laws on political parties and associations in Tunisia allowed various social groups to demonstrate, express themselves, and form parties and -39-


associations. For instance, since Ben Ali has been deposed, Tunisia witnessed the legalization of more than 106 political parties [25]. Yet most of them are unknown to the Tunisian voters. They lack experience and need time and resources to develop in order to counterbalance pressures status-quo forces and keep the momentum for authentic change. The new social forces failed so far to come up with a common political and economic platform for the future. a. The business sector The political economy of previous policies regarding the private sector was straightforward: ensure support of the influential business community to secure the survival of the regime. By promoting corruption, rent-seeking, poor rule of law and lack of transparency; such an arrangement impeded the process of structural transformationa and led to a growing informal sector and high unemployment rates. In many countries in the region, the image of the private sector has been tarnished by scandals of corruption and misuse of public resources. The rehabilitation of the private sector is critical as no country can grow sustainably and create jobs without a vibrant private sector. The relationship between the state and the private sector can take different forms depending on the nature and bargaining power of the business organization. Such organization can be set by the state to perform specific duties that the bureaucracy fails to do as they serve to secure a close control of the business community from within. In such setting, business organizations behave as a mere extension of the state bureaucracy [26]. In a context of high concentration of the private capital, both the state and large business interests may prefer to deal directly with each other rather than through a formal organization. Each of the individual businesses lobby for its own rents and privileges and the state is immune from any threat a coalition of business interests may represent.

The Tunisia’s case seems to fit within the first framework and the Egyptian with the second. In both cases, not all the business community has benefited from the former regimes. Small and medium-sized entrepreneurs but also wealthy people that earned their money independently of the government support suffered from cronyism and the politics of selected privileges. Although those entrepreneurs did not organize collectively to take part in the uprisings but some played an important role as individuals. Those whose income did not depend on state favors or privilege, or those that saw themselves as losing opportunities owing to corruption and inequality supported the uprisings [27]. The moderate Islamists in Tunisia and Egypt have presented a “business-friendly” face for “clean” entrepreneurs and more balanced policies towards small and medium enterprises and referring the neoliberal Islamist AKP in Turkey as their model [28]. So far, there are no cases where business organizations have come up with full-fledged proposals for reform and pushed them effectively in the policy making arena. However, the undergoing political change has been gradually opening opportunities for a broader and mature contribution of business organizations in the reform process. Even so, implementation of policies may still be problematic due to bureaucratic red tape and ineffective administration. The dynamics of the Business community in Egypt In Egypt, the most prominent businesspeople were very close to the old regime. They formed their networks incrementally ever since the first partial liberalization that took place under Sadat in the mid-1970s. The 1990s and the neoliberal reforms of Nazif government (2004-2011) provided more space for expansion and sophistication of such networks. They often use their money power to make their way to power and then use their power to make money [29]. The top ten companies in the -40-


Egyptian stock exchange in 2008, comprising more than 45 percent of market capitalization, were controlled by less than 20 families, while almost 40 percent of private sector credit went to just 30 companies [30].

international levels [33]. The president Morsy has recently tasked EBDA’s president to chair the new council for business development to research the recommendations of the business community to attract more investment [34].

From the first months following the overthrow of Hosni Mubarak, some businessmen began to flee the country, in particular after the fall of steel magnate and ruling party leader Ahmed Ezz. From the army’s perspective, the revolution’s most important dividend was to see off the potential threat to its economic and political prerogatives posed by the aggressive privatization agenda of the Nazif government and Mubarak’s would-be heir, Gamal.

A broad section of entrepreneurs, both large and small, remain skeptical about the inclusiveness of the EBDA. Some businessmen fear the Brotherhood will elbow out entrenched companies to favor firms run by its members [35].

After the revolution many businesspeople became active in advocating for parties or movements opposed to what remains of Egypt’s former Mubarakled regime [31]. The Brotherhood includes some powerful and wealthy business figures with significant interests in consumer goods and services, as well as in the financial sector. They have recently established a new business association in July 2011, the Egyptian Business Development Association (EBDA), which intends to reach out beyond the Brotherhood’s own support base [32] and takes its inspiration from Turkey’s 22-year-old Independent Industrialists and Businessmen’s Association (MUSIAD), with whom it has a cooperation agreement. Officially, the EBDA is inspired from 25th of January spirit a made of a community of Egyptian businessmen seeking to stimulate, enable and integrate the business ecosystem aspiring for sustainable development of the society. The EBDA started with 100 members and has currently over 250 selected members, representing different sectors and industries in Egypt. EBDA offers a wide range of services to support members’ business development and opens channels of communication between businessmen, investors and decisionmakers. The ultimate purpose of the EBDA is to convey current key business issues and lobby for the best positions at the country, regional or

Naguib Sawiris, the founder and owner of Orascom Telecom [36] and one of Egypt’s richest men, cofounded a new political party, the Free Egyptians in 2011. It is a secular and liberal party that aims to counter the influence of Islamists but at the same time advocates social programs to reduce poverty. The party publicly opposed the proposal to increase capital gains tax in the summer 2011. Ahmed Heikal [37], CEO of the private equity firm Citadel Capital, co-founded the Justice party. This party takes a more socially conservative approach than the Free Egyptians party and essentially offers a non-Islamist alternative for social conservatives on the centre-right. A number of young entrepreneurs have launched initiatives designed to stimulate political and economic participation and debate. For instance, the movement “Masrena ” (our Egypt) [38], established in December 2011 bring together Egyptians from all socio-economic and intellectual backgrounds and provides a vibrant channel for youth to present proposals for the country’s social and political development. “Tahrir 2” is another initiative that offers a mentoring scheme to assist young entrepreneurs to develop new business models. The dynamics of the Business community in Tunisia Ben Ali’s regime in Tunisia used different public policies—such as privatization, investment code’s fiscal and financial incentives as well as export promotion grants—to create and nurture a form of -41-


crony capitalism in which businessmen were heavily dependent on the state for access to power and favors [39]. After the “Jasmine revolution”, some 480 wealthy businessmen suspected of corruption have been forbidden from travel abroad. The Tunisian business union UTICA (Union of Industry, Trade and Handicrafts) was an instrument in the hands of Ben Ali’s political party the Constitutional Democratic Rally (RCD). Only after the revolution, the administrative board of UTICA announced its separation from the RCD and its autonomy from any political influence. UTICA has renewed a large part of its top administration, elected a new president [40] to regain confidence and stop the wave of dissidence. Yet, a veteran member in the executive committee of UTICA and a former president of the National Chemical Federation decided to break UTICA’s monopoly and established a new employer’s organization in September 2011: The Confederation of Tunisia’s Citizen Enterprises (CONECT) with the objective of becoming “the reference entrepreneurial partner for a fair economic and social development.” To a large extent, UTICA gained credibility under its new presidency. Heading a delegation of business leaders, UTICA’s president accompanied the country’s president, in his working visit to France in July 2012. UTICA has also signed a framework agreement on labor negotiations with the General Union of Tunisian Workers (UGTT) at the Ministry of Social Affairs. UGTT played a critical role in the uprising that led to the overthrown of Ben Ali. The involvement of the UTICA in the policy making process, however, is still limited. The UTICA’s president presented early July 2012 an outline of the organization’s views on how to save Tunisia’s economy and boost its investment at the headquarters of the National Constituent Assembly. The organization exhibited its dissatisfaction with the negligence of its proposals in the 2012 supplementary budget law.

Recently, the Tunisia’s Minister of Investment and International Co-operation held a meeting with presidents of the two Tunisian employers’ organizations UTICA and CONECT in order to have their views on the incentives granted under new Investment Code, which will be submitted to the National Constituent Assembly (NCA) in December 2012. UTICA’s president insisted that the incentives should be regionspecific to encourage private investment in the deprived regions and recommended a partial revision of the current code to save time while measures likely to attract investment in inland regions. She complained about the bureaucracy that delays the implementation of projects and called to ease administrative procedures. The President of CONECT requested a full revision of the Code. For regional investment, he recommended to strengthen the decentralization of services and create appropriate infrastructure to attract investors [41]. b. Labor movements Trade unions are essential social institutions. Beyond their role in managing the relationships between employers and employees, they mobilize workers to strengthen political participation and ensure that government policies are responsive to the needs of workers. The nature of state-labor relations varies substantially across the Mediterranean countries. In general, however, trade unions have historically been captured and repressed through cooptation and close control. Labor movements played a crucial role in the uprisings against the authoritarian regimes in Egypt and Tunisia although largely overlooked by analysts. They are tempting now to establish themselves in the political field by focusing on issues beyond labor relations. In the declaration for “democracy and social justice” signed by 77 national trade union centers and sectoral trade unions across the Arab region, the signatories asserted that trade unions are an indispensable vehicle for change and transition from dictatorship to democracy and rule of law. They also insisted that wor-42-


kers’ rights are at the heart the region’s development issues such as democratic governance, job creation, and economic and social justice [42]. The dynamics of labor movements in Egypt Prior to the downfall of Mubarak, the state-controlled Egyptian Trade Union Federation, (ETUF), was the sole trade union in the country. The ETUF was established in 1957 by the President Gamal Abdel-Nasser, to incorporate 23 general syndicates in all economic sectors across the country. Since its creation, it opposed demands by workers and their movements, condemned strikes and sit-ins [43]. The right to form and join trade unions other than ETUF was denied by the law and the key role of the trade union was to secure labor’s loyalty to the government, and later on, to the private business. The ETUF was run by appointed government bureaucrats and NDP members [44]. The years leading up to Mubarak’s ousting saw an undermining of the Federation’s power as independent trade union movements, formally illegal, grew and carried out mass strikes. The shift towards independent unionization has only grown after the 2011 revolution. Before its dissolution, the EFTU board included 23 members, 21 of whom were NDP members. Two major independent workers unions have been established: the Egyptian Federation of Independent Unions (EFIU) and the Egyptian Democratic Labor Conference (EDLC). The first was founded by Member of Parliament and president of the independent union of Real Estate Tax Authority employees. The EFIU boasts two million members including the independent syndicates of the real estate taxes, health and education sector employees. The EDLC was formed by the Center for Trade Unions and Workers Services (CTUWS [45]) and includes 220 independent syndicates mostly representing employees of business sector companies [46].

Since the outbreak of the 25 January revolution, wave of strikes by workers sparked throughout the country, with a multitude of demands expressed, including a higher minimum wage, permanent contracts and better working conditions. As these strikes are hurting an already fragile economy, labor movements are increasingly being involved in the government consultations. The general coordinator of the CTUWS (Kamal Abbas) pointed out that he met the Minister of Manpower (El-Boraie) [47] several times to draft a new labor union’s law. The draft was, however, shelved by the Supreme Council of the Armed Forces (SCAF), which issued a decree criminalizing worker’s strikes and blaming trade unions. More recently, with the Muslim Brotherhood (MB) leading the government, more meetings with union leaders are expected in order to amend labor laws and address workers’ concerns, including the trade union freedoms law [48]. The MB and the associated Freedom and Justice Party have made social justice a core theme of their political program [49]. The Prime Minister has decided that every ministry will allocate one day per week to address the demands of respective sector workers [50]. The working force has more space than before to voice their economic and social demands. Their effective participation in the policy process is still to be seen. Despite the emergence of new unions, the ETUF remains as key force and its leaders have recently met the Egyptian Prime Minister to discuss a plan to halt workers’ protests and strikes at all production sites for a year [51]. The dynamics of labor movements in Tunisia The Tunisian General Labor Union (UGTT) had a greater degree of leverage against the Ben Ali regime than the ETUF, although it had opted for an obedient stance towards the regime since the late eighties. The union played a crucial role in the 2011 uprising, and acted as one of the key forces -43-


that helped not only to take down Ben Ali’s regime, but also determine the shape of the post-Ben Ali government [52]. After the October 2011 elections, in which the Islamist Ennahda party took power, relations between the UGTT and the ruling party have treaded a fine line between tense, polite cooperation [53] and mutual distrustful, finger-pointing, and suspicion. In a recent TV interview, the PM indicated that Tunisia’s future could not be planned as part of a conflict between the government and the UGTT. The PM insisted that the government welcomed the union’s initiatives but events had occurred to paralyze the dialogue process pledged by the government [54]. The UGTT has taken an active part in the country’s political life – to the extent that some observers compare it to a political party. The union presented several candidates running as independents at last October’s elections to the Constituent Assembly and proposed its own draft constitution [55]. The UGTT is perceived a threat for the Ennahda party [56]. c. Youth’s participation dynamics The demographic factor has for a long time been highlighted as a key determinant of the social transformation in the Mediterranean countries. These countries are characterized by a large share of youth in their population, which is often referred to as the “youth bulge.” The literature on young people has shifted from an emphasis on young people as problems to young people as assets. To this end, Youth need to participate in their society to build their capacity and benefit their community. Youth, however, cannot ‘participate’ effectively unless political and cultural structures allow them to do so [57]. The context of political engagement of youth has been significantly shaped by the recent youth-driven uprisings in the Mediterranean countries. The youth movement Egypt is diversified in its social composition and in its political ideological expressions; yet, it still considers itself as a whole lef-

tist opposition. The April 6th movement has been the most active, effective and dynamic youth coalition to emerge out of the region. Originally formed in solidarity with a 2008 workers’ strike in Mahalla El-Kubra, the movement was a tremendous force in Tahrir Square and has been actively involved in bringing young voices to the post-Mubarak political arena in Egypt [58]. April 6th’s core focus concerns free speech, nepotism in government and the country’s stagnant economy [59]. The movement endorsed the muslim brotherhood’s candidate Mohammed Morsi driven by the fear of disappointment that might follow the victory of Mubarak’s former PM Ahmed Shafiq [60]. The capacity of the April 6th’s and the coalition of January 25 Revolution youth to maintain momentum and serve as an effective pressure vehicle on the new President remains to be seen. The revolution’s youth in Egypt seem to pay the price for opting to focus on protests at the expense of engaging in the mainstream politics by establishing political parties. The youth who were branded as heroes after autocratic leader Mubarak left office on February 11 may not have any significant role to play in the future of Egypt [61]. In Morocco and Jordan, the respective youth movements February 20th and the March 24th both initially focused their demands more on a process of democratic transition, including constitutional reforms, the dissolution of the present parliament and the creation of a temporary transitional government than policies addressing corruption and rent seeking [62]. It appears until now that the regimes in both countries have been successful at holding back the protests through a minimal package of socio-political reforms. Despite continued demonstrations and sit-ins, youth coalitions’ movements have lost momentum and become sporadic and disorganized. In Tunisia, un-politicized youth took to the streets in protest against Ben Ali’s authoritarian ruling. After the revolution, youth seized the opportunity of political openness and became aware of the benefits of organizing to achieve the objectives -44-


of their revolt. They developed into three categories of movements: youth-driven political parties; non-governmental organizations; and unstructured youth groups working together, reporting and informing the public on various political and social developments, in the hope to safeguard the ‘right to know’ [63]. Overall, Tunisia’s youth influence on the policy process has been on the decline since the revolution. While they have staged some protests and walkouts, they have become increasingly apolitical and disillusioned. d. Women’s participation dynamics The expansion of women’s rights and their broader economic and political participation are essential ingredients for a more inclusive and balanced society. Women lack of empowerment has been identified as a key deficit in the Arab region by the first Arab Human Development Report issued in 2002. Women in the region face strong barriers to get access to education and job opportunities. They are also severely constrained in their participation to the decision making process. Yet, women account for half of the society and their effective participation is essential to their countries’ prosperity [64].

The issue of women’s representation in political offices has re-emerged as a policy concern after the uprisings. Although in many countries quotas and gender equality laws were put in place before 2011. Women’s issues frequently served authoritarian regimes in the region to publicize their modernity and shift attention away from their human rights abuses. The new imposition of quotas in some countries of did not always resulted in more gender equality in parliament neither has the “Islamic wave” resulted systematically in an abrupt decline in women’s representation in parliament [68].

Women’s movements in the region have a long history [65]. Overall, their main focus was on three key issues. First, organize and campaign for changes in national laws that discriminate against women. Second, fight against institutional, social and domestic violence against women. Third, contribute to the struggle for democracy and democratic states that fully recognize and respect the rights of women [66].

The most impressive progress in women’s political representation occurred in Algeria’s May 2012 legislative election in which women took nearly a third of the seats, making Algeria’s national assembly the most gender-balanced in the region. Tunisia’s new parliament, elected in October 2011, counted more than one-fifth of women (49 seats out of 217), supported by the decision to impose gender parity on electoral lists made by the Elections’ High Independent Authority. The number of seats reserved for women in Morocco’s parliament increased in 2011 from 30 out of 325 to 60 out of the 395 seats, which is the equivalent of 15 percent of the seats. The election held in November 2011 allowed 67 women to enter the parliament [69]. In Egypt, however, the share of women in parliament fell to 2 from 12 percent in the first post-Mubarak election. The Egyptian Alliance for the Participation of Women, which is made up of 450 associations and NGOs, is calling for at least 30 percent of women in the constituent assembly to draft the new constitution [70].

Women have played a pivotal role in the uprisings that led to the overthrow of authoritarian regimes in Tunisia and Egypt and put pressure for reforms in other Mediterranean countries. They have been a consistent voice in the demands and agendas for democracy. The Coalition of Women’s NGOs in Egypt, for instance, articulated clear demands for a place for women in decision-making in the process of democratization [67].

Overall, women were active and engaged in initiating and sustaining uprisings, their participation and visibility in the post-uprisings’ power positions remain modest and their role in the future development of their own countries remains unclear. History reveals an abundance of democratic paradoxes: cases in which progress on women’s rights regressed or even reversed in the aftermath of revolution [71]. -45-


IV.2. The struggle for the media freedom Immediately following the ousting of their respective dictators, Egypt and Tunisia seemed to be on track to roll back decades of censorship and making steps towards substantive media reform. The sector has been shifting from a tedious and uniform content that broadly echoes the state line to a more vibrant and diverse output. According to the National Authority for the Reform of Information and Communication (INRIC), the body that was tasked with overseeing the reform of the media after the revolution, in total, 228 new Tunisian print publications sprang up after the uprising [72]. Meanwhile, the legal framework and state institutions governing the media sector are being reformed. The reforms, however, are not deep enough to prompt tangible changes. “Red lines” remain that cannot be crossed. The boundaries of what is and is not permissible are certainly not as narrow as they used to be, but they are not clear either [73]. The media sector remains a favored ground for manipulation and intimidation, and media outlets are becoming the main field for the fierce political and ideological battle between the opposing camps. The interim military government, that only left power recently, had issued directives for any media coverage of the military to be sent to the Armed Forces Morale Affairs Department for review before broadcast or publication [74]. Censorship and manipulation of the media remain routine, and pro-democracy NGOs are persecuted with much the same caprice as they were during the Mubarak era [75]. The expiration of the emergency law on May 31, 2012, did little to alter the Egyptian government’s practices of detaining journalists and activists for allegedly criticizing the government. Use of excessive force, arbitrary detentions and military tribunals has continued in the months following the lifting of the state of emergency [76]. The recent law passed by the president Morsi in late August 2012 to bans

pre-trial detention of journalists was referred to by the Freedom House as “window dressing,” and a shallow detail that does nothing to remedy the “broader campaign against freedom of the press and free expression in Egypt [77]. Journalists have recently condemned attacks on freedom of expression [78]. Moreover, editors-in-chief at state-owned newspapers were replaced in a major reshuffle in early August with a number of new appointees from the Muslim Brotherhood. In Tunisia, Islamist-led government gradually awakened to the ongoing influence of the national media and turned to old regime tactics. For instance, the Ministry of Communications was shut down after the revolution, but the functions of that institution did not entirely disappear. After the October 2011 election, a special committee was formed at the office of the prime minister to manage relations with the national and international media. The majority of post-Ben Ali legal suits against journalists have been brought on religious grounds—that is, the journalists are accused of violating Islamic values—and are simultaneously presented as charges of disturbing public order. Yet, the Islamist-led government and its supporters are raising their voices against what they view as the “leftist lobbies” that are using the media as a weapon against government policies. The struggle to transform the media sector from a closely controlled tool that serves the regime’s interests into a free voice that reflects diversity and pluralism in society remains an unfinished business. Such state of affairs offers strong evidence that the transition from an authoritarian bargain model to a more balanced and inclusive social order requires not just regime change at the top but changes in all the regime’s institutions. V. Conclusions The chapter argues that although the former political leadership in Egypt and Tunisia collapsed, the foundations of the authoritarian bargain proved to be solid and resilient. -46-


The authoritarian bargain is empowered by state structures either in charge of redistributive policies or those dedicated to repression. It secured its grip on society thanks to a network of support coalitions in the business community, the security apparatus as well as in the bureaucracy. The experience so far shows that toppling the political leaders has been the easiest part of the transition process. The shift in state-society relations toward a more balanced social contract requires tangible changes in power equations. State structures that have long been dedicated to channel rents to supporters, co-opt or to intimidate opponents should be transformed into transparent entities, serving people’s interests and subjected to checks and balances.

on the new governments’ policies. International experience reveals that when political change is not accompanied by extensive economic change, there is widespread reversion on the political front. Old vested interests regain control over the political process through their dominance of the economy [79].

So far, too few of the fundamentals of social and economic pillars of the authoritarian bargain have been effectively contested and there is little down the road that ensures that the ongoing transitions are reaching crucial institutions or setting the scene for a new social order. Even among the more advanced transitions in Egypt and Tunisia, the process has proven to be obstinate and little progress has been achieved. Overall, the shift away from the authoritarian bargain is unclear.

In the long term, certain ossified institutions and alliances will have to be dismantled to ensure a full transition. Which institutions act as the biggest obstacles is a question with a different answer for each country. Deep reform of the security sector and the bureaucracy seem however to be a common priority in all the Mediterranean countries.

Such finding is not unexpected as the transformative process ignited by the so-called Arab Spring is only a year and half along. It would be indeed a naïve understanding of local politics to imagine that a system over half a century in the making could be undone in a number of months. The Arab Spring has certainly blown a wind of change in a Mediterranean long stagnant political landscape. The implications of the regime change for state-society relations are still uncertain, however. On one hand, unstable governments and difficult economic situation have been imposing constraints on the scope of reforms. On the other hand, the pockets of resistance mostly apparent within the business community and the old regimes’ military and security apparatuses seem to be using their collaborators within the state to place limits

The challenge of reforming the “pillars of the authoritarian bargain” is intimidating and complex, but focusing on some influential components could be a wise strategy to keep up the momentum of change growing forward. In particular, providing support for a growing free press, independent business and labor organizations, and the fighting of corruption would be effective focus points for moving forward.

The scope and depth of reform will very much depend on the capacity of political and civil society forces aiming for change to take active part in the transition process and influence the course of policies. Pro-change civil society forces remain weak and fragmented in most countries, lack experience and need time and resources to counterbalance status-quo forces and keep the momentum for an authentic change. Endnotes: 1. According to Desai et al., (2009) 2. Stephen King (2009), The new authoritarianism in the Middle East and North Africa 3. According to Friedman the slogan among the Arab autocrats was: “Rule by fear -- strike fear in the heart of your people by letting them know that you play by no rules at all, so they won’t ever, ever, think about rebelling against you. http://www.nytimes. com/2011/08/03/opinion/the-new-hama-rules.html -47-


4. Chutter Andrew (2006), “Understanding of the Security Reform”, in Journal of Security Sector Management, Vol. 14, n°2 5. Abdellah Saaf (2012), Democratic Governance of Security in Morocco, Arab Reform Initative 6. Human Rights watch (2012), Country report: Tunisia 7. Sayigh Yazid (2007), “Security sector Reform in the Arab Region: Challenges to Developing an Indigenous Agenda”, The Arab Reform initiative, 2007. 8. Said Kadry and Noha Bakr (2011), Egypt Security Sector Reforms, Arab Reform Initiative 9. Said Kadry (2007) “Egyptian Experience in Security Sector Reform”, Halki International Seminar, Greece. 10. “New governors appointed by the old Mubarak method”, al Masry al Youm, 14/04/2011 (http:// www.almasryalyoum.com/en/node/400373). 11. Saaf (2012) 12. Sayigh Yazid (2007) 13. Amr Adly (2011), The State of Corruption under Mubarak (1991-2011), Arab Reform Initiative 14. Kamel Ghazouani, Evaluation des incitations à l’investissement privé: Cas du CII (Tunis: Institut Arabe des Chefs d’Entreprises, 2011). 15. Achy (2011), “Tunisia’s economic challenges”, Carnegie Middle East Center 16. Adly (2011) 17. Saif, Ibrahim & Muhammed Abu Rumman (2012), “The Economic Agenda of the Islamist Parties”, Carnegie Middle East Center 18. Fitouri, Samia (2011) “Tunisia: In Spite of Regime Change, Country Falls in International Corruption Index.” Tunisia Live. http://allafrica.com/ stories/201112081146.html 19. Chayes, Sarah (2012) 20. Melki, Wiem (2012) “Tunisia: National Commission of Investigating Corruption to Cease All Activities.” Tunisia Live. http://allafrica.com/stories/201201100176.html; Aliriza, Fadil (2012) “The Godfathers of Tunis.” Foreign Policy. http:// www.foreignpolicy.com/articles/2012/05/25/ the_godfathers_of_tunis?page=0,1; http://www. tunisia-live.net/2012/03/30/tunisian-anti-corrup-

tion-commission-to-restart-work-after-4-months-of-dormancy/ Aliriza, Fadil (2012) “Tunisia’s Quiet Counterrevolution.” Egypt Independent. http:// www.egyptindependent.com/news/tunisia%E2%80%99s-quiet-counterrevolution 21. The declaration was made on July 25th, 2012 on an Aljazeera program. For more details on the Transparency Maroc reaction: http://www.transparencymaroc.ma/uploads/projets/Fr/5025_1.pdf 22. Fadhel Kaboub (2011), “The Middle East’s Neo-Liberalism–Corruption Nexus,” June 2011 23. Kaldor, Mary, (2010), “The Idea of Global Society”, in: Arches Quarterly, 4,6 (Summer):7-14: 10. 24. Nuno S. Themudo (2012), “Reassessing the Impact of Civil Society: Nonprofit Sector, Press Freedom, and Corruption”, Governance, Vol. 25, Issue 3. 25. Fatima El-Issawi (2012), “The Tunisian Transition: The Evolving Face of the Second Republic”, in LSE. 26. Schneider and Maxfield (1997), “Business and the state in developing countries”, Cornell University Press, New York 27. Jane Kinninmont (2012), “The New and Old Economic Actors in North Africa”, Mediterranean Paper Series, the German Marshall Fund 28. “Muslim Brotherhood Looks West in Bid to Revive Egyptian Economy.” (2012), in Wall Street Journal. Hammond, Andrew (2011), “Tunisia’s Ennahda likely to back an open economy.” Reuters. 29. Adly (2011) 30. Tarek Osman (2011), Egypt on the Brink: From Nasser to Mubarak, Yale University Press, Revised edition. 31. Goldberg, Ellis (2011) “Egyptian Businessmen Eye the Future.” Foreign Policy 32. The president of EBDA is Hassan Malek one the Muslim brotherhood leaders who was released from jail after the overthrown of Mubarak. Malek spent four years and three months in prison on charges of illegally funding the Muslim Brotherhood, a group that was banned under Mubarak, and for alleged money laundering. Malek comes from a trading and industrial family that deals in textiles and ready-made clothes. His business empire, which is consolidated under the Malek -48-


Group, deals in furniture, clothing, yarn, industrial raw materials and electronics. (Egypt Independent April 15th 2012) ((http://www.egyptindependent. com/news/brotherhood-businessman-urges-business-play-role-development)) 33. Based on the Facebook page of the EBDA: http://www.facebook.com/EBDA.Egypt/info 34. Omar Abdelhameed and Abdelrazik El-Shewikhy (2012), “Morsy tasks EBDA’s president to chair the new council for business development”, Daily News Egypt (July13th, 2012) 35. “Ex-military man taps Islamist fears in Egypt vote.” (2012) Aswat Masriya. http://en.aswatmasriya. com/news/view.aspx?id=d88e43c7-5d6f-48a28a28-33a4d9a3ff7b; “Ahmed Shafiq al-i’timaad ‘ala makhawof al-nakhba al-masreeya.” (2012) Today Heads. http://www.todayheads.com/2012/0world/ahmed-shafik-counting-on-egyptian-elitesfears/?lang=ar 36. The companies under Orascom conglomerate are the largest private sector job provider in Egypt and Sawiris has claimed to be the country’s single largest taxpayer as reported by Jane Kinninmont (2012). 37. Ahmed Heikal is the son of Mohammed Hassanien Heikal, who was an advisor to President Gamal Abdel Nasser. 38. Details on the movement available on its website: http://www.masrena.org/ 39. Achy (2011), “Tunisia’s economic challenges” 40. The former president Hédi Djilani resigned after the revolution. Hamadi Ben Sedrine was elected but resigned but gave up the job only one month and half after his election due to internal struggle and external accusations. A femal president Wided Bouchameoui is currently leading UTICA. In the spirit of the revolution, she is acting as the president of the National Committee for Transition. 41. Tunis Afrique Press (August 15, 2012), “Tunisia: New Investment Code to Be Submitted to NCA Late December”, http://allafrica.com/stories/201208160624.html 42. The declaration was signed in May 2011. Details are available through: http://www.ituc-csi.org/ IMG/pdf/May_Day_Declaration_Arab_World_-_ english.pdf

43. The words «Trade Union» in Egypt automatically bring to mind the following stereotypical image: On 1 May of each year, the president of the republic, who is also chairman of the ruling party, stands up during official celebrations ... to give his address on May Day. He repeats the same words on this date of every year over the past 30 years, amid applause and praise from an audience of key state officials, businessmen and trade union members who are all members of the ruling National Democratic Party (NDP). After the president’s speech, it is time for the trade union chairman to praise the achievements of his boss and declare his support for him in the name of Egypt’s workers. This is the image of the General Federation of Trade Unions (EFTU) for millions of Egyptians. It finally collapsed under the blows of Egyptian workers on 4 August 2011. Extract from Haitham Mohamedein, (2011), “The Road to Trade Union Independence.” Ahram Online (September 20th , 2011) http://english.ahram.org.eg /NewsContent/4/0/21615/Opinion/The-road-to-tradeunion-independence.aspx 44. Shenker, Jack (2011), “Hosni Mubarak’s Puppet Trade Union Federation Dismantled”, The Guardian http://www.guardian.co.uk/world/2011/ aug /05/mubarak-trade-federation-dissolved-egypt 45. CTUWS is a pro-labor NGOs established in early nineties and played a critical role in providing support and guidance to labor strikes and protests in Egypt. 46. Hania, Moheeb, (2012), “The Tough Road for Syndical Liberties”, Business Today (March 8th, 2012). http://businesstodayegypt.com/news/ display/article/artId:336/The-Tough-Road-forSyndical-Liberties/secId:4 47. Minister of Manpower from March to November 2011. 48. Egypt Independent (August 24th 2012), Qandil (Egypt’s PM) meets with union heads to discuss labor strikes. http://www.egyptindependent.com/news/ qandil-meets-union-heads-discuss-labor-strikes 49. Policymic (August 2012), “Egyptian Workers Demand a Say in the New Egypt Under President Morsi” -49-


50. Ahram Online (August 2012), Egypt government to allocate one day per week to tackle workers demands http://english.ahram.org.eg/NewsContent/1/64/51308/Egypt/Politics-/Egypt-government-to-allocate-one-day-per-week-to-t.aspx 51. Idem 47 52. Lee, Eric & Benjamin Weinthal (2011) “Trade Unions: The Revolutionary Social Network at Play in Egypt and Tunisia.” The Guardian. http://www. guardian.co.uk/commentisfree/2011/feb/10/ trade-unions-egypt-tunisia 53. Ajmi, Sami (2012) “Ennahda Party Calls for Tunisians to Join UGTT Protest on Labor Day.” Tunisia Live. http://www.tunisia-live.net/2012/04/28/ ennahda-party-calls-for-tunisians-to-join-ugttprotest-on-labor-day/ 54. The interview took place on August 5th, 2012. More details on the official communiqué made the Tunisian Press Agency (TAP) http://www.tap. info.tn/en/en/politics/17462-pm-qtunisias-future-could-not-be-envisaged-as-part-of-a-conflictbetween-the-government-and-ugttq.html 55. Anne Wolf and Raphael Lefevre (May 2012), “Tunisia: the Islamic politics of trade unionism”, Open democracy, http://www.opendemocracy.net/anne-wolf-raphael-lefevre/tunisia-islamic-politics-of-trade-unionism 56. “UGTT is the only weapon the leftists still have at their disposal!” asserts a member of the Islamic party’s communications team; Wolf and Lefevre (2012). 57. UNESCO (2011), “Arab Youth: Civic Engagement and Economic Participation”, Beirut. 58. Wolman, David (2008) “Cairo Activists Use Facebook to Rattle Regime.” http://www.wired.com/ techbiz/startups/magazine/16-11/ff_facebookegypt?currentPage=2 59. Wolman, David (2008); Shapiro, Samantha (2009) “Revolution, Facebook-Style.” New York Times. http://www.nytimes.com/2009/01/25/ magazine/25bloggers-t.html?pagewanted=2 60. Al-Masry Al-Youm ((2012), http://www.almasryalyoum.com/node/911321 61. Ahram online (October 20, 2011), “Egypt’s revolution youth on the back foot as parties steal limelight”

62. Lalami, Laila (2011) “Arab Uprisings: What the February 20 Protests Tell Us About Morocco.” The Nation. http://www.thenation.com/ blog/158670/arab-uprisings-what-february-20protests-tell-us-about-morocco# 63. Rama Halaseh (2011), Civil Society, Youth and the Arab Spring 64. UNDP (2006), “The Arab Human Development Report 2005: Towards the Rise of Women in the Arab World”, New York. 65. Naciri, Rabéa; Nusair, Isis, (2003), “The Integration of Women’s Rights into the Euro-Mediterranean Partnership: Women’s Rights in Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestine, Syria and Tunisia (Copenhagen, Euro-Mediterranean Human Rights Network). 66. Colm Regan (2011), “Women, Citizenship and Change: The Role of the Women’s Movement in the Arab World” 67. Idem 68. El-Shanawi, Eman (March 5th, 2012), “Quota, what quota? How parliaments lack female touch in Arab region”, Al-Arabiya http://english.alarabiya.net/articles/2012/03/05/198766.html 69. Basch-Haron, Heidi (2012), “Uncertainty for the future of the Moroccan women’s movement.” Open Democracy. http://www.opendemocracy.net/heidi-basch-harod/uncertainty-for-future-of-moroccan-women%E2%80%99s-movement ; Bennhold, Katrin (2011) “Women’s Rights a Strong Point in Tunisia.” New York Times. http://www.nytimes.com/2011/02/23/world/ middleeast/23iht-letter23.html?_r=1 70. Garcia-Navarro, Lourdes (2012) “In Egypt’s New Parliament, Women Will be Scarce.” NPR. http://www.npr.org/2012/01/19/145468365/inegypts-new-parliament-women-will-be-scarce 71. Goulding, Kristina (2011, June 13). Tunisia. Will democracy be good for women’s rights? Available at: http://www.opendemocracy.net/5050/kristine-goulding/tunisia-will-democracy-be-good-forwomens-rights?utm_source=feedblitz&utm_med. 72. Fatima El-Issawi (2012), Tunisian Media in Transition, Carnegie Endowment for international peace, Washington DC. -50-


73. Idem 74. Amin, Shahira (2012) “and “Egypt’s media must undergo its own revolution.” The Guardian. http://www.guardian.co.uk/commentisfree/2011/nov/05/egypt-media-revolution 75. Ewan Stein (2012), “Revolutionary Egypt: Promises and Perils”, LSE report 76. Amnesty International (June 2012), “End army abuses in Egypt” http://www.amnesty.org/en/ appeals-for-action/end-army-abuses-in-egypt 77. Freedom House (2012), “New Press Law Enacted as Media Crackdown Continues”, http:// www.freedomhouse.org/article/new-press-lawenacted-media-crackdown-continues 78. The talk show host and head of the “Fareen” satellite channel (Tawfiq Okasha), was convicted of inciting violence against the president in early August and his channel was forcibly closed down. Ahram Online (August, 28, 2012) http://english. ahram.org.eg/NewsContent/1/0/51440/Egypt/ President-Morsi-considering-new-emergency-laws-Jus.aspx 79. Brookings (2012), After the spring : Economic transitions in the Arab world

-51-


-52-


CHAPTER 3. Opening up intelligently

in Annex for the list of agreements). The authors report on the opening up of these economies through the presentation of the evolution of customs duties and of non-tariff measures (NTMs).

Economic openness defines the capacity of a country to become an integral part of the international economy through the export of goods and services to external markets, the inflow of foreign direct investments (FDI) into the country, the use of foreign capitals to finance the domestic economy, the acceptance of external technical or financial assistance, the adoption of regulations from either international institutions, a foreign country or a so-called «hub» zone (such as Europe for the Mediterranean Partner Countries — MPs), access to its domestic market for foreign goods and services and more. The present chapter does not claim to cover all dimensions of the opening up process. Hereinafter, the term “openness” defines the fact that foreign goods enjoy better access to a given domestic market. This is indeed the economic policy measure which has left the strongest mark on the economic evolution of MPs in the last fifteen years. Thus, this chapter serves a double objective: (i) taking stock of this opening up process of Mediterranean markets to international competition and assessing its effects; (ii) determining the continuing modalities of this on-going process.

I.1. Customs duties reduction In the last twenty years, all MPs have significantly reduced their customs duties on industrial goods. Figure 1 illustrates the evolution of such customs duties as a function of the origin of the imported products. Differences have been made between tariffs on industrial goods coming from the World (dark blue), from the EU (red), from low and medium income economies (green), from MENA countries (purple) and from the USA (light blue). The sharpest and most recent drop concerns intra-MENA customs duties. They dropped from 33% in 1993 to 1% in 2009, despite still being at an average of 8% in 2008. Tariffs on industrial goods from the EU dropped from 28% in 1992 to 6.5% in 2009. Tariffs on goods from the USA and from medium-low income economies followed the same evolution globally and in 2009 they were only 2 points above the tariffs on European goods, i.e. approximately 8.5%.

I. Trade openness beyond the global trend

I.1.a Relative situation of Mediterranean economies versus other large regions of the world

For the last fifteen years, MPs have entered into a phase of opening up their economy, which has translated into (i) the entry of Egypt, Morocco, Tunisia, Turkey and Jordan into the WTO, and (ii) the signing of a large number of trade agreements (cf. table A1

Figure 2 compares the evolution of industrial goods customs duties applied by low-medium income economies from five geographic zones. In addition to the 9 MPs (MP9, light blue), the figure compares the European economies (dark

Figure 1. Evolution of customs duties on industrial goods for all MPs between 1992 and 2009, as a function of the origin of imports (Rates effectively applied, simple average) 35 30  

World

25

EU25

20 Low  and  middle  income   economies  

15 10  

Low and  Middle  income   MENA  

5 0   1990  

United States   1995  

2000

2005

Source : UNCTAD - TRAINS database. -53-

2010


Figure 2. Comparison of the evolution of customs duties on industrial goods between the years 1992 and 2009 (rates effectively applied, simple average) 60 Low  &  middle  income  Europe  

50 40  

Low &  middle  income  East  Asian   &  Pacific  countries  

30

Low and  middle  income  LaAn   America  and  Caribbean    

20

Low and  middle  income  South   Asian  countries  

10 2009  

2008

2007

2006

2005

2003

2004

2001

2002

1999

2000

1998

1997

1996

1995

1993

1994

PM9     1992  

0

Source : UNCTAD - TRAINS database. Figure 3. Comparison of the number of domestic tariff peaks in 2007* 40000 35000   30000   25000   20000   15000   10000   5000   0  

Canada

EU15  

Low &  Middle   income   Europe  

Japan

Low &  middle  Low  &  middle  Low  &  middle   income  East   income  LaAn   income  South   Asian  &   America  &   Asian   Pacific   Caribbean   countries   countries   countries    

PM9    

United States  

blue), Pacific and East Asian economies (red), Latin American and Caribbean economies (green) and South East Asian economies (purple) which all lowered their tariffs. The mean customs duties on industrial goods applied by the 9 MPs dropped from 28% in 1992 to 7% in 2009. These tariffs are equal with those of East Asian and Pacific economies. The economies of the European continent form the only group with mean tariffs lower than those of MPs, with a mean value of 5% in 2009. All the other groups of countries apply tariffs that are higher than those of Mediterranean economies, with a mean value of 8% for Latin American economies and 12% for East Asian economies.

Source : UNCTAD - TRAINS database. The comparison between domestic * Trains data is available until 2009. We noted, however, a certain number peaks (which corresponds to the nuof discrepancies for certain countries, as of 2008. For reliability sake we mber of tariff positions three times have decided to take 2007 as the most recent year.

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

0

1995

higher than the simple average of all Figure 4. Comparison between the number of international tariff peaks in 2007 goods), illustrated by figure 3, and between international peaks (nu400000 350000   mber of tariff positions the rate of 300000   250000   which exceeds 15%), illustrated by 200000   150000   figure 4, confirms the improvement 100000   50000   0   of the relative position of MPs and Canada   EU15     Low  &  Middle   Japan   Low  &  middle  Low  &  middle  Low  &  middle   PM9       United  States   income   income  East   income  LaAn   income  South   the efforts achieved in tariff reducEurope   Asian  &   America  &   Asian   Pacific   Caribbean   countries   countries   countries     tion in the industrial sector. As to domestic peaks, their number for Source : UNCTAD - TRAINS database. MP9 economies is significantly below Figure 5. Comparison of the evolution of customs duties applied on agricultural that of East Asian countries, Pacific goods between 1995 and 2009 (Rates effectively applied, simple average) countries, Latin American countries, 50   Canada and the USA. It stands just Low  &  Middle  income  Europe   45   40   above the number of Japanese do35   Low  &  middle  income  East   mestic tariff peaks. There are less in30   Asian  &  Pacific  countries   25   ternational tariff peaks in MPs than 20   Low  &  middle  income  LaBn   15   America  &  Caribbean   in Latin American, East Asian, Pacific, countries   10   and European economies. 5   Low  &  middle  income  South   Asian  countries  

MPs still apply very high customs duties on agricultural goods. Figure

Source : UNCTAD - TRAINS database. -54-


5 shows that they have the highest mean rates together with South Asian countries (almost 25% in 2009).

ties. Egypt, Jordan and Tunisia dismantled their tariffs at an almost similar pace. They dropped their customs duties between 14 and 18 percentage points, which amounted to variation rates of about 60%. Lebanon and Syria reduced their mean customs duties from 14% in the reference year (1999 for Lebanon and 2002 for Syria) to 5% for Lebanon and 7% for Syria. As for Israel and Turkey, initially they were applying the lowest customs duties (8% for Israel and 7% for Turkey in 1993, reference year for these two countries). They reduced their tariffs to 5% in 2009 for Israel and to 1% in 2010 for Turkey. Finally, Algeria has enforced the least customs duties reduction, from 21% on average in 93 (reference year) to 14% in 2009 (most recent year).

I.1.b Situation of tariffs on industrial goods in each country Figure 6 illustrates the simple average of customs duties on industrial goods, for each of the MP9. It compares the reference year specific to each country (usually 93 or 95) as well as the most recent year specific to each country (usually 2009, see Table A2 in Annex which indicates the reference year and the most recent year for each country). Moreover, this Figure specifies imports as a function of their origins, with a distinction made between the Rest of the World (World), low-medium income countries (noted as Developing C on the figure), the USA, the European Union and the MENA countries. Table 1 completes the information displayed on the Figure by indicating the tariff variation level (in percentage points and in variation rates). Several observations can be made.

The second observation is that the mean customs duties gap between the lowest and highest rates has considerably narrowed. In the nineties, the mean tariffs applied to all countries of the World ranged between 7% (Turkey) and 64% (Morocco). For the most recent years, the range stretches from 1% (Turkey) to 14% (Algeria). Countries with the lowest means are Turkey (1% as we have just noted) Lebanon and Israel (5%), followed by Syria (7%), Morocco (8%), Egypt and Jordan (9%). Algeria and Tunisia apply the highest customs duties on average among the MP9, with values of 14% and 12% respectively. It must be noted that Tunisia is singled out from the other MPs due to high heterogeneousness of the mean rates it applied as a function of the origin of the imports. Indeed, Tunisian imports

The first observation is that all countries have reduced their customs duties regardless of the origin of imports, albeit at a different dismantling pace. Morocco has enforced the sharpest tariff reduction. Indeed, its tariffs dropped, on average, from 64% in 93 (Morocco’s reference year) to 8% in 2009 (Morocco’s most recent year). It must be noted that at the beginning of the nineties, Morocco was enforcing the highest customs du-

Figure 6. Evolution of customs duties applied to industrial goods by each Mediterranean country (Rates effectively applied, simple average) Reference year Année de  référence  

Algeria

Egypt

Israel

Jordan

Source : UNCTAD - TRAINS database. -55-

Morocco

Syrian

Tunisia

USA

World

Developing C.  

EU25

MENA

USA

Developing C.  

World

MENA

USA

Lebanon

EU25

World

Developing C.  

MENA

USA

EU25

World

Developing C.  

EU25

MENA

USA

World

Année la  plus  year récente   Most recent Developing  C.  

70 60   50   40   30   20   10   0  

Turkey


Table 1. Evolution of customs duties applied to industrial goods by each Mediterranean country (Rates effectively applied, simple average) Most Change Rate of recent (points Market change year of %)

Market

Origin

Base year

Algeria

World

21%

14%

-7

EU25

20%

13%

Developing C

25%

MENA

Egypt

Israel

Jordan

Lebanon

Most Change Rate of recent (points change year of %)

Origin

Base year

-35% Morocco

World

64%

8%

-56

-87%

-7

-36%

EU25

63%

4%

-59

-94%

15%

-10

-40%

Developing C

66%

14%

-52

-79%

24%

1%

-23

-94%

MENA

70%

1%

-69

-98%

USA

21%

17%

-4

-21%

USA

62%

9%

-53

-85%

World

24%

9%

-15

-62%

World

14%

7%

-7

-52%

EU25

22%

10%

-12

-55%

EU25

12%

6%

-5

-46%

Developing C

25%

9%

-16

-64%

Developing C

15%

8%

-8

-51%

MENA

26%

1%

-25

-97%

MENA

19%

1%

-18

-94%

USA

23%

10%

-13

-56%

USA

13%

7%

-6

-48%

World

8%

5%

-2

-31%

World

29%

12%

-18

-59%

EU25

8%

5%

-3

-38%

EU25

29%

5%

-24

-83%

Developing C.

8%

6%

-2

-29%

Developing C. 31%

22%

-9

-28%

MENA

9%

7%

-1

-14%

MENA

31%

1%

-30

-98%

USA

3%

5%

2

73%

USA

28%

20%

-9

-30%

World

23%

9%

-14

-61%

World

7%

1%

-6

-83%

EU25

22%

10%

-12

-54%

EU25

5%

0%

-5

-99%

Developing C

25%

9%

-16

-66%

Developing C

9%

2%

-8

-82%

MENA

25%

0%

-25

-98%

MENA

8%

1%

-8

-91%

USA

22%

11%

-11

-50%

USA

9%

4%

-5

-56%

World

14%

5%

-9

-64%

EU25

13%

5%

-7

-58%

Developing C

16%

5%

-12

-71%

MENA

15%

1%

-15

-96%

USA

12%

5%

-7

-58%

Syria

Tunisia

Turkey

Source :UNCTAD –TRAINS database.

are submitted to a mean tariff of 1% when they come from MENA countries, 5% on imports from the EU, 20% on imports from the USA and 22% on imports from developing countries.

were signed a long time ago (Arab Maghreb Union, Pan Arab Free Trade Area, Agadir process; Cf. Table 2 that illustrates all the regional Agreements signed by the MPs).

The third observation is that customs duties on industrial goods between MENA countries have almost been eliminated (they range on average from 0% and 1%). As shown on figure 1, this reduction is recent and results from the enforcement of regional Agreements, some of which

Finally, the fourth observation is that customs duties on industrial goods from the EU are lower than those on US imports in only 4 countries: Algeria, Morocco, Tunisia and Turkey. In the other five countries the mean tariffs seem to be almost identical. -56-


I.1.c Evolution of effective protection The effective protection of economies depends on the evolution of the customs duties structure. Figure 7 illustrates the evolution of customs duties countrywise. A distinction has been made between (i) consumer goods (red square), (ii) intermediate consumptions (green triangle), (iii) raw materials (purple cross), and (iv) capital goods (blue losange). A country’s effective protection increases when the gap between customs duties applied to inputs and those applied to consumer goods increases. For the 9 MPs, the rate of reduction of customs duties on consumer goods was either stronger or identical to the reduction rate of tariffs on inputs. In the last 10 or 15 years, in most countries, all tariffs dropped and converged. It should be noted however that in the case of Algeria, Egypt, and Jordan and, to a lesser extent, Lebanon and Israel, customs duties on consumer goods remained on average higher than for the 3 other categories of tariffs. Generally speaking, it clearly appears that as a whole the MP9 did not benefit from increased effective protection. In fact, there is every indication that this protection has grown weaker. This analysis reveals that even if the customs duties situation is still rather heterogeneous between the countries of the zone, there has been a considerable dismantling of tariffs on industrial goods undertaken by the MPs. The continuation of this process will give rise to new reductions which are not on the scale of the reductions already implemented in the past. At best we can observe tariff drops ranging from 5 to 10 percentage points depending on the countries concerned, whereas Morocco, for example, reduced the average of its tariffs by 56 percentage points between 1993 and 2009. The main reduction margins – which potentially remain to be achieved – concern essentially MC tariffs on imports from developing (nonMENA) countries. As shown on Table 1, tariffs remain indeed very high (22% for Tunisia, 15% for Algeria, 14% for Morocco and 10% for Egypt). We

must, however, insist on the recent quasi elimination of customs duties between MENA countries, since they dropped from 7.8% in 2008 to approximately 1% in 2009. Consequently, in the future MPs will no longer be able to use the lowering of customs duties on industrial goods as an economic policy device to initiate changes in their economies. The customs duties reductions which remain to be implemented concern the fields of services and agriculture, both highly sensitive and far more complex to dismantle. I.2. Changes in Non-Tariff Measures The issue of Non-Tariff Measures (NTMs) becomes increasingly important in the agenda of MPs governments, firstly because they may hinder the development of Mediterranean exports and secondly because these countries are being pressed by their trade partners to streamline such measures on their domestic market. Moreover, it should be noted that the issue of standards with the EU contains the condition of trade growth in the region through access to the EU internal market. In the present section, we are going to specify what we mean by Non-Tariff Measures then we shall describe the situation in the Mediterranean region versus other geographic zones. I.2.a Definition and classification of NTMs NTMs define the conditions for access to a given market, specifying a certain number of requirements which may concern the production process of goods, their content, their technical characteristics, their labelling, the price or quantity controls, as well as the procedures implemented to ascertain that these requirements are met (Baldwin, 2000). This is therefore a very wide set of extremely disparate measures. Traditionally, NTMs are assimilated to non-tariff barriers. Yet, although NTMs can potentially -57-


Figure 7. Evolution of customs duties per category of goods (Rate effectively applied, simple average) Egypt

Algeria 35   30   25   20   15   10   5   0  

50 40   30   20   10   0  

1995

1997 1998  2001  2002  2003  2005  2006  2007  2008  2009  

1998

Israel

2002

2004

2005

2008

2009

Jordan

40

15

30

10

20 5   0  

10 1993  

2004

2005

2006

2007

2008

0

2009

2000 2001   2002   2003   2005   2006   2007   2008   2009  

Lebanon

Morocco

25

80

20

60

15

40

10

20

5 0  

0

1999 2000   2001   2002   2004   2005   2006   2007  

1993 1997  2000  2001  2002  2003  2005  2006  2007  2008  2009  

Tunisia

Turkey

60

15

40

10

20

5

0

0

1995 1998   2002   2003   2004   2005   2006   2008  

1993 1995  1997  1999  2003  2005  2006  2007  2008  2009  2010  

Syria 40   20   0  

2002

2009

2010

Capital goods  

Consumer goods  

Intermediate goods  

Raw materials  

Source :UNCTAD –TRAINS database. -58-


either block trade or lower it since they increase production and/or transaction costs, they can also correspond to an increasing demand from consumers (and producers for the supply of inputs), in terms of quality, safety, information or environmental protection. In that respect, NTMs can meet the collective interests of a society and at the same time contribute to trade increase. As shown by the European countries with the «acquis communautaire», increased trade can be expected when NTMs are adopted within the framework of regional trade agreements, for example, to foster the institutional and regulatory convergence of the economies. It is therefore clear that NTMs do not constitute, strictly speaking, a border instrument devised to limit the entry of products, firstly because, as we have stated, they can contribute to human and environmental protection and facilitate inter-country regulatory and institutional rapprochement, and secondly because NTMs do not apply solely to imports. Most NTMs must be met by domestic producers as well. The complexity and multiplicity of NTMs imposed the creation of an international classification system of measures designed to render NTMs more transparent and to provide a common methodology for inter-country data collection. In order to meet such a need, the UNCTAD (United Nations Conference on Trade and Development) initiated the setting up of a MAST (Multi-Agency Support Team) comprised of representatives from the main international organizations (World Bank, IMF, CCI, EOCD, UNIDO, WTO, etc.). In August 2009 the MAST proposed a new classification which has been updated and adopted by the WTO in March 2012. This new classification segregates measures in 16 chapters, identified by a letter (from A to P). Each chapter is divided into sub-categories, with 3 levels of breakdown identified by a one-, two- and threedigit code (for example, A100 is the first breakdown

Figure 8. NTM Classification

Import measures  

Export measures  

Technical measures  

Non-­‐ technical measures  

A. SPS  

B. TBT   C.  Pre-­‐shipment  clearance  and   other  formalities   D.  Price  control  

E. Licenses,  quotas,  prohibition,  and   other  quantity  control  measures  

F. Charges,  taxes,  and  other   para-­‐tariff  measures   G.  Finance  

H. Anti-­‐competitive  

I. Trade-­‐related  investment  

J. Distribution  restrictions   K.  Post-­‐sales  services   L.  Subsidies   M.  Government  procurement   N.  Intellectual  property   O.  Rules  of  origin   P.  Export-­‐related  measures  

Source : MAST 2009. NB: NTM data are collected only for catégories A-I. The shaded categories J-P are used only to collect information from the private sector throuh surveys and web portals.

level of chapter A, A110 is the second level, and a possible third breakdown level would be identified as A111). Most chapters comprise only two breakdown levels. The 16 chapters shown on Figure 8 are as follows: (A) sanitary and phytosanitary (SPS), (B) technical barriers to trade (TBT), (C) pre-shipment clearance and other formalities, (D) price control, (E) licences, quotas, prohibitions and other quantity control measures, (F) charges, taxes and other para-tariff measures, (G) finance, (H) anti-competitive measures, (I) trade-related investment, (J) distribution restrictions, (K) post-sales service, (L) subsidies, (M) government procurement, (N) intellectual property, (O) rules of origin, and (P) export-related measures. On the basis of this new classification, as of 2011 the World Bank financed a series of data collection campaigns in 16 developing countries – 7 in Africa, 4 in Asia and 5 in the MENA region. Data collection in the 5 MENA countries (Egypt, Jordan, Lebanon, Syria and Tunisia) was carried out in collaboration with Femise between May and October 2010, under the supervision of P. Augier and N. Péridy. Other initiatives carried out jointly by the World Bank, the CCI and the UNCTAD have made it possible to extend this data collection effort to 10 Latin America countries. NTM data is thus available -59-


for 26 developing or emerging economies, plus the EU and Japan. I.2.b The situation of MPs Traditionally the analysis of NTMs calls on two main measurement methods. The first one, a simple inventory, consists in calculating the share of products covered by one or several NTMs (referred to as “frequency index”) or the share of trade in value (referred to as “coverage ratio”). The second method proposed by Kee, Nicita & Olarreaga (2009) is more sophisticated. It consists in assessing the ad-valorem equivalents (AVE) of the NTMs by means of an econometric approach the purpose of which is to determine the tariff level that should apply in lieu of the existing protection structure while maintaining exports at their current level. Thus, we obtain an estimation of the NTMs’ AVE together with an Overall Trade Restrictiveness Index which includes customs duties. Figure 9, through the aggregation of data for the 26 developing and emerging countries, shows that the measures most used are the TBT, since they concern 28% of goods and 31% of trade. They are followed by the quantity control measures (Chapter E), which apply to 16% of goods and to 20% of trade, then the SPS measures (A) with 13% of goods and 14% of trade. It must be noted that these sanitary and phytosanitary measures apply mainly to agriculture, and to a lesser extent to wood, chemistry, plastics and rubber.

On the contrary, taking into account the pressures exerted by the WTO to eliminate quotas, the frequency index and the coverage ratio of quantity control measures remain surprisingly high. On average, the 5 MPs for which information is available use TBT slightly more than all the 26 developing and emerging countries (cf. Figure 10). Conversely, they are below the average of the 26 countries for the 4 other categories of measures and mostly they are significantly below the frequency index and coverage ratio applied by the EU on TBT. Moreover, it can be observed that Latin American, Asian as well as African countries use quantity control measures more than the MPs. Figure 11 shows the same indicators i.e. the share of goods (frequency index) and the coverage ratio of imports concerned by one or several NTMs per country. Although the situation is not homogeneous – as is the case in other regions MPs cannot really be singled out. On the contrary, it can be observed that versus other countries, the shares of goods and imports subjected to one or several NTMs are not very high. Indeed except for Egypt, which has high frequency index and coverage ratio (respectively 91% and 87%), and Syria to a lesser extent (47% and 63%) the 3 other MPs - Lebanon, Morocco and Tunisia – are characterized by rather low indicators (15% and 42% for Lebanon, 25% and 21% for Morocco and 21% and 36% for Tunisia). They are in the first third of the 28 countries with the lowest share of imports concerned by NTMs. Japan (with a

The preponderance of TBT comes as no surprise Figure 9. Frequency index and coverage ratio in the 5 main since this category embodies all measures that chapters for 26 developing countries 35 31   concern (i) environmental safety and protection Frequency  raBo  (%)   28   30   Coverage  raBo  (%)   through the regulation of the trade of hazardous 25   20   16   and sensitive products including when such pro- 20   14   13   15   11   11   ducts are integrated into other products, and (ii) 10   5   the conditions for the fabrication and composition 2   5   0   of products, requirements on goods quality, labelA:SPS   B:TBT   C:  Pre-­‐ D:  Price  Control   E:  QuanBty   Shipment   Control   ling and packaging, traceability, product testing, inspection and issuance of conformity certificate. Source: Nicita & Gourdon (2012) -60-


Figure 10. Frequency Index and coverage ratio in the 5 main chapters by region Frequency 90 80   70   60   50   40   30   20   10   0  

A:SPS

B:TBT

La.n America  

C: Pre-­‐Shipment  

East Asia  

D: Price  Control  

100 90   80   70   60   50   40   30   20   10   0  

E: Quan.ty  Control  

Middle East  &   Sub-­‐Saharan   North  Africa   Africa  

European Union  

A:SPS

B:TBT

La.n America  

Coverage C: Pre-­‐Shipment  

East Asia  

D: Price  Control  

E: Quan.ty  Control  

Middle East  &   Sub-­‐Saharan   North  Africa   Africa  

European Union  

Source: Nicita & Gourdon (2012)

frequency index of 39% and a coverage ratio of 56%) and the EU even more (82% and 89%) are well above them. Figure 12 shows another interesting fact. For Egypt, Lebanon, Morocco and Tunisia it compares the NTM frequency indexes calculated from data available in 2001 as well as those calculated from data collected in 2010. This comparison shows that between the years 2001 and 2010, MPs appear to have significantly reduced the percentage of products on which one or several measures are applied.

For this analysis to be complete we should now take into consideration the number of measures applied per product on average, the hypothesis being that several measures imposed to a single product complicates the market access procedure, especially when these various NTMs do not belong to the same categories of measures. Figure 13 shows that except for Tunisia where more than half the goods are in fact submitted to at least 5 types of measures, the other countries seldom apply this cumulative set of measures. Here again, MPs are well below the EU situation which uses almost systematically several types of NTM for a single product.

Figure 11. Frequency Index and coverage ratio by country Frequency

Coverage

Phillippines Philippines Lao   Laos Indonesia   Indonesia Cambodia   Cambodia Uganda   Uganda Tanzania   Tanzania Senegal   Senegal Namibia   Namimbia Mauri>us   Mauritius Madagasgar   Madagascar Kenya   Kenya Venezuela   Venezuela Uruguay   Uruguay Peru   Peru Paraguay   Paraguay Mexico   Mexico Ecuardo   Ecuador Colombia   Colombia Chile   Chile Brazil   Brazil Agen>na   Argentina Tunisia   Tunisia Syria   Syria Morocco   Morocco Lebanon   Lebanon Egypt   Egypt EU   EU Japan   Japan

Phillippines Philippines Lao   Laos Indonesia   Indonesia Cambodia   Cambodia Uganda   Uganda Tanzania   Tanzania Senegal   Senegal Namibia   Namimbia Mauri>us   Mauritius Madagasgar   Madagascar Kenya   Kenya Venezuela   Venezuela Uruguay   Uruguay Peru   Peru Paraguay   Paraguay Mexico   Mexico Ecuardo   Ecuador Colombia   Colombia Chile   Chile Brazil   Brazil Argentina Agen>na   Tunisia Tunisia   Syria Syria   Morocco Morocco   Lebanon Lebanon   Egypt Egypt   EU EU   Japan Japan  

0

20

40

60

80

100

0

Source : World Bank/UNCTAD NTM Data. -61-

20

40

60

80

100


In parallel with the collection of national NTMs carried out in the 26 developing and emerging countries, UNCTAD initiated surveys at the firm level in 7 countries (Brazil, Chile, India, Philippines, Thailand, Tunisia and Uganda). These surveys revealed that exporters from these countries were mainly hindered by procedural barriers, that is to say the NTM enforcement procedures most often associated with sanitary and phytosanitary measures (SPS, chapter A) and with technical barriers (TBT, chapter B). More precisely, this concerns the certification, inspection, labelling and customs clearance procedures. These procedural barriers affect the importing firms from these countries as well. Tunisian firms are those that complain most about these procedures by blaming, in 72% of cases, the inefficiency as well as the blocking and delaying effect that such measures induce. Another interesting point stems from the fact that most of the difficulties mentioned by the firms concern not only agricultural products, but also the industrial fields. This particularly holds true for the exporting Tunisian firms as more than 91% of their products which face one or several NTMs are mainly nonagricultural goods (slightly less than 9% for agricultural products)[2].

Figure 12. Frequency index in 2001 and 2010 100 80   60  

2001

40

2010

20 0  

Egypt

Lebanon Morocco  

Tunisia

Source: World Bank/UNCTAD NTM Data. Figure 13. Average number of measures imposed by product EU

1 type  of  NTM  

Tunisia

2 types  of  NTM  

Syria Morocco  

3 types  of  NTM  

Lebanon

4 types  of  NTM  

Egypt 0  

20

40

60

80

100

5 and  more  

Note: Types of measure defined by the new classification (2009) at the one-letter, one-digit level (e.g. A100 or A200 or A300, etc.). Source: World Bank/UNCTAD NTM Data.

The most recent estimation of the Overall Trade Restrictiveness Index (OTRI)[1] carried out by Kee, Nicita & Olarreaga in July 2012 confirms the previous observation, that is to say (1) MPs have very heterogeneous market protection levels and (2) they are not differentiated by high restrictiveness indexes, except for agricultural goods, where their level never exceeds that of India anyway. Once again, except for Egypt and Algeria, the OTRI of Morocco, Turkey and Syria on manufactured goods imports are lower than those of Brazil and India (cf. figure 14).

Finally, to complete this analytical description of the way MPs utilize NTMs, it must be specified that these countries make little use of temporary trade barriers, such as anti-dumping measures.

Figure 14. Overall Trade Restrictiveness Index (ie tariffs+ AVE des NTM) in 2009

ALL ALL Agriculture Agiculture   Turkey  

Syria

Morocco

Japan

Jordan

Israel

India

EU

Egypt

Algeria

China

Manufacturing Manufacturing Brazil  

70% 60%   50%   40%   30%   20%   10%   0%  

Note: The Overall Trade Restrictiveness Index (OTRI) captures the trade policy distorsions that each country imposes on its import bundle. It measures the uniform tariff equivalent of the country tariff and non-tariff barriers that would generate the same level of import value for the country in a given year. Here tariffs are based on the applied tariffs which takes into account the bilateral trade preferences. The ad-valorem equivalent of NTM (AVE) were estimated by Kee, Nicita & Olarreaga. Source: World Bank data. -62-


Bown (2011) [3] has indeed shown that even though developing and emerging countries globally have not increased their use of temporary trade barriers, the value of Indian and Argentinian imports concerned by temporary trade barriers has significantly increased. Two main facts stem from this analysis. A comparison between the situation in 2001 and the situation in 2010 shows that the share of products covered by one or several NTMs has diminished in the 4 MPs for which data is available for these two years, and more specifically in Morocco, Tunisia and Lebanon. This decrease has been lesser in Egypt. The second fact is that based on the latest data available and when countries are classified as per their frequency index and their coverage ratio, Tunisia and Morocco are in the first third of the countries with the lowest number of NTMs. Syria enforces more NTMs, yet it is well behind a certain number of countries in Latin America, Africa and Asia. Egypt, the indicators of which are relatively high, remains either at the same level or below the EU ratios. In general terms, it clearly appears that regardless of the measurement method used, the EU significantly applies more NTMs than the 5 MPs taken as a whole. Hence, there is some normative asymmetry between the EU and the MPs. Therefore, the question which must be addressed concerns the way this asymmetry should be corrected. One way consists in implementing harmonization measures in MPs, which means, as we shall later see, clearly identifying the costs and benefits for these countries. Another important element implies that the region should be able to undertake the correction of this asymmetry in a united manner, not only to balance the power struggle versus the EU, but also to create potential sources of returns of scale. II. Did the opening up efforts pay off? The opening-up of economies by means of lower customs duties and more generally through wider

access of foreign goods to domestic markets can have a positive impact on countries by means of one or several of the following mechanisms: √ Increase of exports that in turn stimulates demand and possibly the productivity of firms through knowledge transfer and economies of scale; √ Increased productivity of firms that can be achieved by means of (i) increased foreign competition on the domestic market (X-efficiency effect) which creates incentives that foster innovation, and/or (ii) the use of higher quality and cheaper imported inputs. Concerning this point, it should be noted that Aghion et al. (2009) specified that the firms that are able to significantly increase their productivity when the domestic economy opens up are those which were initially the most productive ones; √ The increase of aggregate output linked to a more efficient re-allocation of the economy resources (under the effect of external competition, the least productive firms disappear and the most productive ones - especially those that export - increase their market shares). This effect has been revealed by Melitz (2003); √ The progressive diffusion of positive externalities to the whole economy coming from (i) the increasing number of exporting firms and/or a higher number of importing markets, (ii) from the increase of imports and, (iii) a larger presence of foreign firms in the country due to increased FDI. Several Femise studies have shown that MPs gained limited direct benefits from tariff dismantling. Firstly, as demonstrated by the study conducted by Michalek (2007) for the whole region and that coordinated by Ghoneim (2005) for Egypt, openness has not contributed to higher exports from MPs. This comes as no surprise since within the framework of Euro-Med agreements, the opening-up process was asymmetrical: only the MPs have lowered their customs duties on industrial goods imported from the EU. The cooperation agreements signed in the seventies already provided for customs duties-free access to the European market for industrial goods coming from MPs. The -63-


study carried out by Michalek shows that the association agreements led essentially to increased Mediterranean imports from the EU. Moreover, as we shall see, MPs have not yet been able to use the diagonal or even complete cumulation (the latter being provided for in the text of the agreement between Algeria, Morocco and Tunisia, without being ever applied). As a consequence, the Euromed agreements did not increase trade between partner countries. Secondly, concerning the effect on productivity, using data from Moroccan firms, researchers from Femise[4] have evidenced 3 main results which contradict the expected effects. First, tariff reduction only had a very limited effect on the productivity of firms. In the case of Moroccan firms, a customs duties drop of 10 percentage points made it possible to achieve a productivity increase that only ranged between 0.5% and 1%. Moreover, it is observed that the increased penetration rate of imports did not have any impact on the productivity of firms. It must be noted that an increase of the import penetration rate means both an increase of foreign competition on the domestic market for consumer goods and an increase of inputs imported by the firms (intermediates and capital goods). Moroccan data does not make it possible to differentiate these two dimensions present in this indicator. Conversely, another study conducted by researchers from Femise[5] using data from Spanish firms, has shown that the increase of the share of imported inputs used by the firms could make it possible to increase their local productivity only in the case where the proportion of qualified labor is sufficient. Second, the empirical literature shows that there is no homogeneous reaction of firms to economy openness, an observation confirmed in the case of Moroccan firms. But contrary to the results obtained by Aghion et al., the drop of customs duties has had a higher positive effect on the firms most remote from the efficiency frontier. In other words, firms that were the least productive at the beginning of the liberalization process experienced the highest productivity increase following

tariff dismantling. Third, contrary to the theoretical predictions of Melitz type models, the reallocation effect (i.e. the change of market shares and the firms’ input/outputs) contributed negatively to the aggregate productivity growth of Morocco, which reached only 5% between 1993 and 2002. These results could be neither contradicted nor confirmed for other countries of the region due to the lack of firm data. In the case of Morocco, the Ministry of Industry carries out an annual census of industrial firms, thus making reliable and rigorous scientific research works possible. Although this data is not available to researchers, it however exists. In the other MPs, there is almost no annual census of firms. For researchers, it is often a long and complicated process to learn about the existence of this data and almost impossible to get access to it. For several years now, Femise has been insisting on the huge difficulty researchers face when trying to obtain micro-economic data bases in the countries of the region. Yet, it is essential to carry out deep and rigorous empirical analyses to correctly understand the on-going processes and provide decisionmakers with the information they need to make the most efficient decisions as a function of the goals pursued. Moreover, the lack of transparency in the field of data removes a large share of credibility from a certain number of results, especially those concerning the sectorial growth rates and the productivity measures. For example, in certain countries, figures for the industry are based on annual surveys including a small number of firms, with 30% of the sample being renewed each year, a situation that leads to questioning the value of their representation. Decision makers must be aware of the fact that researchers must have access to reliable data on industrial firms or households to be able to contribute to the implementation of true democracy based on the participation of populations. Thirdly, it is difficult to achieve an empirical demonstration of the externalities-related effects that can propagate into production lines, regions or even into the whole economy. This difficulty is -64-


even greater in the case of MPs, taking into account the issue of access to data as mentioned above. To date and to the best of our knowledge, no study has demonstrated the positive effects of externalities on the whole of the economy in MPs. On the contrary, empirical analyses carried out on the sectorial or aggregate data base have evidenced the following results: √ When considering all MPs over the period 19802000, openness (measured by the ratio of the sum of imports and exports on the GNP) had a negative effect on total factor productivity (Cecchini and Lai-Tong, 2008, article from a 2004 Femise research report supervised by K. Sekkat[6]. √ Still considering all the countries of the region, foreign direct investments have a positive effect on the total factor productivity only when human capital is sufficiently skilled (Cecchini and Lai-Tong, 2008). This result is corroborated by a recent Femise study (2012)[7] which indicates that for most MPs the main difficulty to attract FDI is the lack of human capital and know-how. Is there an explanation to these mixed results? First, it must be made clear that nothing in the economic literature makes it possible to unquestionably demonstrate, from a theoretical or empirical basis, a systematically positive causal link between the openness through tariff dismantling and the growth of economies. From a theoretical view point, several arguments can challenge this positive link. √ Firstly, increased competition can induce pessimistic anticipation in firms as to the evolution of their future production, which will then reduce their incentives to innovate and to improve their human capital (Rodrik, 1988). This passive watchful behaviour of firms diminishes the innovation rate [8] and, consequently, diminishes investment which in the long term will have a negative effect on productivity and growth.

√ Secondly, the theoretical frameworks which demonstrate the positive link between openness and growth have been designed to deal with this question when the countries concerned are close in terms of their development level. These theoretical frameworks do not lend themselves to the analysis of the effects of Association Agreements since firms in the North and in the South of the Mediterranean region do not operate within a similar context and where the openness has been asymmetrical as we have already stated. In order to overcome this inadequacy issue of the existing theoretical frameworks vis-a-vis the issue addressed, Femise [9] researchers have developed a theoretical model suited to the context of trade liberalization between a developed country and a developing or emerging country. The specificity of this model is that it takes into account the financing difficulties faced by firms in developing or emerging countries and makes it a central element of differentiation between firms in the South and in the North of the Mediterranean. Within this theoretical framework, it can be observed that trade reform can incite firms to invest only if customs duties liberalization solely concerns intermediate goods or if this tariff liberalization is symmetrical, in other word if it is compounded by an equivalent openness to export market for developing countries. In the case of asymmetrical liberalization which concerns both intermediate goods and final goods, the model shows that there is no guarantee that firms are incited to invest and thus to improve their productivity. On the empirical side, there is no clear cut and unquestionable result concerning the positive effect of customs liberalization on growth. The econometric research works which have evidenced a positive relation between economic openness and growth of countries where all sharply criticized for the chosen methodology [10]. Recent works which have provided solutions to these methodological issues have shown that there is no causal link between openness and growth (Rodrik, Subramanian & Trebbi (2002), Dollar & Kray (2003), Rigobon & Rodrik (2005)). -65-


The reason put forward for the inability to systematically verify the positive effect of openness on growth is the weakness or imperfection of institutions in the fields of property rights, governance; of the relations between the private business sector and the administration; of the industrial organization; of the financial system; of the labour market; of international capital flows, and of the role of the public sector in the economy. Undoubtedly, we consider that institutions are an important issue although it would be absurd to use that issue to explain everything without a global and in depth analysis of each country’s situation, especially since beyond the implementation of “proper institutions” arises the issue of their applicability, sequenciality and of their interdependence, required to ensure efficacy. Moreover, the experience of East Asian countries and of China has shown that openness had been, in their case, favourable to growth within an institutional context rather removed from the so-called “good institutional practices”. Concerning the case of the MPs, Femise considers therefore that the mixed results achieved with the Association Agreements show that tariffs dismantling alone is insufficient to initiate new economic dynamics, for at least the following two reasons: √ First, because firms cannot behave as expected when faced with increased foreign competition either because the conditions stipulated in the theory are not met, or because – on a more pragmatic manner – their environment does not allow them to do so. These obstacles that hinder the creation, development or even normal operation of firms [11], can be multiple and of different nature as a function of the countries, or even regions within each country. These obstacles can be difficulties to access credit, the lack of infrastructures, difficulties to procure inputs (imported or domestic), difficulties to export, problems induced by corruption, administrative difficulties, unfair competition from the informal sector (or from foreign goods at very low prices or even subsidized), difficulties to recruit skilled labour, etc.

√ Second, because in the past MPs have demonstrated a relative weakness in their ability to handle the complexity of the openness policy. From the view point of the productive system of these economies, this has translated into a drop in public investment, the abandonment of the exchange policy as potential competitiveness tools on export-driven markets, and the abandonment of structural (or industrial) policies susceptible to induce an evolution of the position of MPs in international trade (by developing new comparative advantages, fostering a shift towards higher ends of the market, etc.). Priority was clearly given to stabilizing actions in order to return to large macroeconomic balances and to commercial openness to pull growth. Actually it should be noted, moreover, that growth in MPs has essentially been pulled by household consumption, thanks notably to the development of personal credit. It is clear that the current conditions of operation of the world market, especially in developed countries (namely Europe), characterized by weak domestic demand, necessitate a return to incentive internal structural policies for the MPs. We shall address this issue again later. Tariff dismantling corresponds to the so-called shallow integration. Through the adoption of the New Neighbourhood Policy and the implementation of action plans, the EU provides MPs with the opportunity to make this integration evolve towards deeper integration between each Mediterranean country and the EU, in other words, by adopting certain components of the “acquis communautaire”. This rapprochement may contribute to an acceleration of the headways of countries in governance, political and legal fields. Therefore, a high number of positive effects can be expected for the MPs, especially through easier access to the European market for MPs. In the case of Morocco – a country which enjoys the advanced country status which should make it possible to implement the ALEGA (Comprehensive and Deeper Free Trade Agreement) leading subsequently to the European Economic Area - L. Oulhaj, researcher in the Femise network has pro-66-


duced a detailed report [12] including an inventory of Moroccan regulation with regards to the “acquis communautaire”, an analysis of the gaps in 5 priority sectors and has highlighted the expected effects of the adoption of the “acquis communautaire”. One of the main arguments brought forward is that the “acquis communautaire” would make it possible for the country to take advantage of the EU’s legal label, which would legally secure the economic operations and transactions. According to the author of the report, this progress could be an important element to attract and maintain foreign direct investments. It could also be considered that this type of change could fuel the dynamics of business creation in the domestic private sector. It could also be a source of improvement in the field of education and research. The author insists on the following points: “...the adoption of the “acquis communautaire” should have positive impacts on the global competitiveness of Morocco, since it will have a leverage effect on standards that govern the economic activity. Yet, this process shall be effective only when all the conditions (institutional, administrative, psychological, etc.) shall be met”. Moreover, the author specifies that “the adoption of regulation and the compliance with European standards does not mean that there is an automatic and integral openness of outlets for the various products and services from Morocco”.

pean countries. As we shall later see with the issue of the harmonization of non-tariff measures, this convergence choice is likely to have a negative effect on the economies of the MPs. Therefore, the issue is to be able to identify them and mainly to understand the mechanisms so as to anticipate them and to implement adequate measures or create an environment for their mitigation. Femise considers that it would be useful to be able to better understand the economic consequences of this institutional and regulatory harmonization to correctly understand the adjustment costs from a microeconomic (firms, households, public authorities) and macroeconomic view point (effects on trade, on growth and on the different forms of inequalities – income, regional, gender). At the international level, one means to attenuate the adjustment cost of deeper integration could be the implementation of a large scale North/ South cooperation including several fields, such as the mobility of skills, business creation, elaboration of standards, etc.

The economic consequences for the MPs of the implementation of an institutional and regulatory convergence device on the “acquis communautaire”, or more broadly of a deeper mode of integration, have not yet been clearly identified. This issue is compounded in the case of the MPs by the fact that these countries are not in a situation of pre-adhesion. Hence, they do not benefit from the help and assistance – financial, administrative and technical – provided for within the framework of a pre-adhesion process. Moreover, a Femise study (Ghoneim, 2005) underlined the high cost that would be induced for the MPs if they were to opt for this deep integration, taking into account the difference in the development level of the MPs versus the levels of the Euro-

III. Evolution of EU-MPs trade: lesser deterioration of the trade balance with the EU than with all other partners

In this section, we take stock of the results of the main studies which attempted to establish a causal link between tariff dismantling in MPs and the development factors of their economy i.e. mainly the increase of exports and productivity growth. In the following section we examine the evolution of EUMPs trade during this opening-up period.

III.1. Evolution of European exports to MPs As shown by figure 15, European exports to MPs increased significantly. They increased by 186% between 1995 and 2011 i.e. from US$61 billion to US$174.5. The highest export level was reached in 2008 translating into approximately US$184 billion or 202% increase since 1995. However, the widening gap shown by the Figure between the curves of exports to the MPs, with and without Turkey, shows that exports to this country have signifi-67-


Figure 15. Evolution of European exports to MPs, with/without Turkey 200 000  000   180  000  000   160  000  000   140  000  000   120  000  000   100  000  000   80  000  000   60  000  000   40  000  000   20  000  000  

1995 1996   1997   1998   1999  2000   2001  2002   2003  2004   2005   2006   2007   2008   2009  2010   2011   PM10  

PM9 (without  Turkey)  

Source : COMTRADE. Figure 16. Evolution of European exports to each Mediterranean country 80 000  000  

Algeria

70 000  000  

Egypt

60 000  000  

Israel

50 000  000  

Jordan

40 000  000  

Lebanon

30 000  000  

Morocco

20 000  000  

Syria

10 000  000   0  

Tunisia 1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010   2011  

Turkey

Source : COMTRADE. Figure 17. European exports to each Mediterranean country in 1995, 2008 and 2011 80 000  000   70  000  000   60  000  000   50  000  000   40  000  000   30  000  000   20  000  000   10  000  000   0  

Algeria

Egypt

Israel

Jordan Lebanon   Morocco   1995  

2008

Syria

Tunisia

Turkey

2011

Source : COMTRADE.

cantly contributed to this high growth. European exports to Turkey have indeed increased by 362% between 1995 and 2011. Thus, excluding Turkey, European exports increased from US$ 43.8 billion in 1995 to US$ 95 billion in 2011 i.e. a 117% increase. Globally, this evolution followed that of European exports (intra-European included), since the share of exports to MPs excluding Turkey remained constant. It was 2% in 1995 and in 2011. When we take into account trade with Turkey, this share changed from 3.1% in 1995 to 3.7 in 2011.

Figures 16 and 17 confirm the high increase of European exports to Turkey and show that the increase of EU exports to MPs concerned all countries, even if the increase rate is different for each country. As shown on table 2, after Turkey, the strongest export growth took place on the Algerian market (+214% between 1995 and 2011), followed by the Jordanian (+170%), Egyptian (+141%), Tunisian (+141%) and Moroccan (+125%) markets. In the case of Morocco, European exports increased strongly between 2003 -68-


Table 2. Growth rate of European exports to Mediterranean countries from 1995 Algeria

Egypt

Israel

Jordan Lebanon Morocco

1996

-16,9%

7,1%

3,6%

1997

-19,0%

18,7%

1,9%

1998

-3,0%

27,8%

-5,3%

1999

-11,3%

26,8%

2,4%

-5,1%

2000

-10,5%

11,2%

16,1%

2001

4,5%

-4,6%

2,3%

2002

23,6%

-9,0%

0,3%

2003

43,9%

2,9%

2004

82,3%

36,4%

2005

106,8%

53,7%

2006

99,5%

9,9%

Syria

Tunisia

Turkey

PM

PM (exclud. Turkey)

0,2%

28,4%

7,8%

-0,2%

6,2%

-5,0%

-2,0%

1,6%

8,9%

-4,6%

-15,3%

7,6%

43,2%

12,9%

1,0%

-6,0%

-2,2%

6,4%

-4,3%

16,5%

38,2%

14,1%

4,6%

-14,0%

7,1%

-7,4%

13,6%

19,0%

8,4%

4,3%

7,5%

-19,1%

14,1%

-12,3%

19,6%

60,0%

22,4%

7,6%

21,3%

-16,3%

8,1%

1,1%

26,7%

2,9%

4,1%

4,6%

35,0%

-15,4%

17,9%

8,6%

29,1%

32,7%

15,3%

8,5%

2,5%

48,0%

14,2%

48,4%

29,5%

46,7%

90,3%

42,6%

23,9%

23,5%

73,8%

16,5%

76,4%

51,7%

68,7%

169,7%

83,2%

49,1%

30,4%

108,4%

11,6%

86,1%

77,5%

76,4%

201,2%

100,8%

61,3%

68,9%

35,5%

147,8%

14,0%

111,6%

90,0%

98,3%

237,4%

119,0%

72,4%

2007

145,7% 111,0%

51,5%

167,7%

29,2%

172,2% 117,5% 136,0% 286,9%

157,2%

106,1%

2008

260,0% 175,7%

58,6%

218,9%

61,3%

241,1% 143,9% 162,6% 328,0%

201,9%

152,3%

2009

224,6% 159,0%

23,1%

161,4%

67,1%

166,6% 107,2% 123,0% 235,1%

149,7%

116,0%

2010

227,0% 191,2%

47,9%

167,0%

77,1%

186,3% 136,2% 164,5% 336,9%

194,6%

138,6%

2011

214,0% 141,0%

51,3%

170,2%

87,3%

124,9%

186,1%

117,0%

79,7%

140,8% 361,7%

Source: Comtrade Figure 18. Evolution of MPs exports to the EU (total trade and oil-excluded, with/without Turkey), in US$ billion 160 000  000   140  000  000   120  000  000   100  000  000   80  000  000   60  000  000   40  000  000   20  000  000   0  

1995 1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010   2011  

Source : COMTRADE.

PM-­‐Total trade  

PM-­‐Total trade  (exclud.  Turkey)  

PM-­‐NonOil

PM-­‐NonOil (exclud.  Turkey)  

and 2008 (with a growth rate of 241% between 1995 and 2008). On the Lebanese and Israeli markets, European exports increased at a lower rate (with growth rates of about 87% and 51% between 1995 and 2008 respectively). III.2. Evolution of MPs exports to the EU

Moreover, without Turkey, total MPs exports to the EU which increased by about 160% amounts to slightly less than US$ 77.8 billion. The oil price increase can partly explain this growth. Excluding oil products, this growth rate falls to 105%, which puts MPs exports to EU at about US$ 40 billion in 2011.

As shown on figure 18 and tables 3 and 4, total MPs exports to the EU increased by 216% between 1995 and 2011, from US$ 42.3 billion to US$ 133 billion. The highest growth rate was recorded for Turkey (354% over the same period).

All countries increased their exports to the EU. Between 1995 and 2011, very strong growth rates characterized Egypt (245%) and Lebanon (204%, although as shown by figure 19, the level remained low). These two countries were followed by Tuni-69-


Table 3. Growth rate of exports from Mediterranean countries to the EU compared to 1995 (total trade, ie including petroleum products) PM

PM (exclud. Turkey)

5,0%

8,7%

10,2%

6,8%

12,7%

11,9%

11,6%

-27,4%

13,2%

26,9%

11,7%

5,4%

-0,1%

17,8%

35,4%

14,3%

5,7%

5,8%

41,8%

16,8%

37,3%

32,2%

30,1%

-24,6% 20,1%

9,1%

65,9%

27,5%

53,9%

34,9%

27,1%

-17,6% 18,6%

18,2%

81,0%

33,9%

81,8%

44,9%

29,8%

40,1%

49,8%

61,7% 143,6% 75,2%

47,1%

71,8%

61,3%

36,0%

90,9% 218,3% 114,7%

72,3%

68,2%

83,2%

68,9%

58,8%

94,7% 247,9% 145,0%

102,8%

183,8% 198,1% 104,6% 80,0%

91,8%

78,7%

86,6% 120,4% 306,7% 182,8%

131,9%

2007

170,9% 200,1% 155,0% 87,7% 186,0% 119,2% 98,6% 184,4% 388,0% 224,6%

157,5%

2008

285,3% 276,1% 171,9% 162,6% 241,6% 145,5% 124,8% 220,9% 418,0% 272,3%

212,6%

2009

203,2% 173,6% 108,0% 59,8% 135,6% 86,4%

36,4% 154,7% 299,2% 184,8%

137,9%

2010

251,2% 203,6% 144,8% 108,6% 174,6% 110,7% 103,4% 191,6% 344,0% 225,7%

177,2%

2011

238,8% 245,3% 129,6% 64,0% 204,2% 56,1%

159,7%

Year

Algeria Egypt

Israel

Jordan Lebanon Morocco Syria

Tunisia Turkey

1996

10,8%

16,2%

12,7%

31,1%

5,9%

3,2%

15,0%

6,9%

1997

20,3%

-3,0%

22,2%

33,5%

20,8%

2,3%

2,2%

1998

-3,4%

-18,3%

33,0%

16,4%

24,1%

7,3%

1999

-18,6% -18,7%

40,3%

0,6%

20,8%

7,9%

2000

43,2%

-2,4%

56,5%

-20,9% 50,6%

2001

29,8% -14,7%

47,2%

2002

30,1%

-5,5%

37,2%

2003

56,9%

16,9%

45,7%

3,8%

48,8%

2004

81,8%

58,5%

76,6%

70,7%

2005

151,1% 96,7%

96,8%

2006

42,6% 185,7% 354,3% 216,3%

Source: Comtrade Table 4. Growth rate of Mediterranean countries exports to the EU compared to 1995 (excluding oil)

Syria

Tunisia

Turkey

PM

PM (exclud. Turkey)

3,3%

-15,0%

3,5%

5,2%

5,6%

5,9%

26,0%

2,9%

-3,3%

4,6%

13,1%

11,8%

10,9%

26,9%

7,1%

-7,7%

16,4%

28,0%

21,3%

17,1%

28,4%

7,4%

-17,6%

18,6%

36,0%

19,9%

10,0%

60,6%

2,5%

4,3%

14,6%

37,2%

22,3%

13,1%

28,8%

7,5%

2,4%

26,4%

54,5%

29,9%

14,8%

-16,1%

26,1%

17,8%

13,7%

32,1%

83,0%

41,9%

16,7%

4,5%

49,9%

38,8%

24,4%

58,2%

145,1%

76,0%

33,7%

72,6%

71,4%

78,4%

59,0%

45,4%

86,7%

219,5%

120,4%

59,7%

-51,3% 112,8%

88,7%

68,6%

91,7%

63,2%

33,5%

85,0%

247,9%

136,7%

68,6%

-50,3% 176,7%

94,8%

76,5%

100,8%

74,9%

37,8%

113,1% 303,4%

167,9%

84,9%

2007

-60,9% 258,9% 143,8%

88,6%

202,6% 117,3%

48,7%

156,4% 388,4%

226,5%

127,2%

2008

-43,5% 298,8% 154,4% 166,0% 266,0% 144,4%

50,7%

189,9% 414,5%

251,0%

150,7%

2009

-71,7% 185,6%

97,6%

62,2%

152,3%

-10,9% 134,4% 302,1%

170,9%

90,5%

2010

-46,1% 242,3% 129,9%

96,7%

193,2% 107,2%

25,0%

165,8% 348,0%

207,7%

121,7%

2011

-66,9% 261,4% 115,5%

67,0%

223,9%

38,6%

172,7% 356,5%

200,7%

105,1%

Year

Algeria

Egypt

Israel

Jordan Lebanon Morocco

1996

13,9%

-15,0%

13,2%

29,8%

10,8%

1997

27,2%

-3,0%

20,8%

28,3%

1998

23,5%

-6,9%

31,8%

13,0%

1999

-84,7%

-6,6%

40,5%

1,7%

2000

-82,7%

5,0%

52,2%

-21,6%

2001

-82,8%

8,2%

45,2%

-23,2%

2002

-81,3%

13,6%

36,0%

2003

-72,9%

45,4%

42,6%

2004

-71,0%

94,4%

2005 2006

83,3% 57,3%

Source: Comtrade -70-


Figure 19. MPs to EU exports in 1995, 2008 and 2011, including/excluding oil, in US$ millions Total Non-oil 70 000  000  

70 000  000  

60 000  000  

60 000  000  

50 000  000  

2008

Turkey

Tunisia

Syria

Morocco

Lebanon

Jordan

Syria

Lebanon

Israel 1995  

0

Israel

10 000  000  

Egypt

0

Turkey

20 000  000  

Tunisia

10 000  000  

Morocco

30 000  000  

Jordan

20 000  000  

Egypt

40 000  000  

Algeria

30 000  000  

Algeria

50 000  000  

40 000  000  

2011

Source: Nicita & Gourdon (2012)

sia (186%), Israel (130%), Jordan (64%), Morocco (56%) and Syria (43%). It should be noted that in the case of Morocco and Jordan, the strongest exports increase had taken place before the crisis, since the growth rate between 1995 and 2008 were 145% and 163% respectively. In the case of Algeria, the strong increase of exports to the EU (+239% between 1995 and 2011) was linked to the rise in oil prices, Algeria being the only country to register a negative growth rate of exports (-66% between the years 1995 and 2011). III.3. Evolution of MPs-to-EU trade balance The increase of Mediterranean exports to the EU was not enough to reduce the MPs-EU trade deficit. Following about ten years of relative stability marked by two periods —1999-2001 and 20042006– during which this balance improved and neared a deficit of US$ 6.5 Billion (instead of the US$ 18.8 Billion observed in 1995), this balance has been dropping sharply since 2006, reaching Figure 20. Evolution of MPs-to-EU trade balance (Total trade, including/excluding Turkey), in US$ millions

about –US$ 42 bn for all MPs in 2010, and about –US$ 24 bn excluding Turkey in 2009 (cf. figure 20). Since then, this balance tends to narrow slightly, yet the total deficit in 2011 was largely higher than the deficit of 1995. Figure 21 shows that only two MPs exhibit a positive trade balance: Algeria, owing to its oil exports, and Syria which is close to balance, and in deficit certain years. Among MPs the trade balance of which is negative Israel and Tunisia kept a deficit almost stable. The deficits of the other countries have degraded, especially in the case of Turkey the trade balance of which dropped from –US$ 5 bn to –US$ 25 bn in 2011. Figure 22 shows the trade balance per country for three years: 1995, 2008 and 2011. The left hand Figure comprises all trades, whereas the right hand Figure only includes MPs exports excluding oil. In the case of Algeria, the trade balance excluding oil products went from positive to significantly negative. Figure 21. Evolution of MPs-versus-EU trade balances (total trade) in US$M Source: Comtrade

2011

2010

2009

2008

2007

2006

2005

2004

2002

2003

2001

1999

2000

1998

1997

1996

1995

1995 1997   1999   2001   2003   2005   2007   2009   2011   10  000  000   5  000  000  

0 -­‐5  000  000   -­‐10  000  000   -­‐15  000  000   -­‐20  000  000   -­‐25  000  000   -­‐30  000  000   -­‐35  000  000   -­‐40  000  000   -­‐45  000  000  

0 -­‐5  000  000   -­‐10  000  000   -­‐15  000  000   -­‐20  000  000   -­‐25  000  000  

PM10

Source : COMTRADE.

PM9 (without  Turkey)  

Algeria Jordan   Syria  

Source : COMTRADE. -71-

Egypt Lebanon   Tunisia  

Israel Morocco   Turkey  


Figure 22. MPs-versus- EU* trade balances, * In US$ millions. Total 0 -­‐5  000  000   -­‐10  000  000  

Turkey

Tunisia

Syria

Jordan

Israel

Morocco

2011

Egypt

-­‐25 000  000  

Algeria

Turkey

Tunisia

Syria

Morocco

Lebanon

2008

-­‐20 000  000   Lebanon  

1995

Jordan

Israel

Egypt

-­‐15 000  000   Algeria  

10 000  000   5  000  000   0   -­‐5  000  000   -­‐10  000  000   -­‐15  000  000   -­‐20  000  000   -­‐25  000  000  

Non-oil

Source: COMTRADE

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

Figure 23. Evolution of the trade balance between MPs and the EU and all partners (Total trade and excluding oil) in US$ billions

0 -­‐20   -­‐40  

EU (Total  trade)  

-­‐60

World (Total  trade)  

-­‐80

EU (Non  Oil)  

-­‐100

World (Non  Oil)  

-­‐120 -­‐140   -­‐160   -­‐180  

Source : COMTRADE.

Moreover, there is a clear deterioration of trade balances in 2008 and 2011 versus their level in 1995. Since customs duties on goods from the EU dropped more significantly within the framework of association agreements, one could have expected a stronger deterioration of the trade balance within the framework of trade with the EU, compared to all MPs trades. In a rather counterintuitive manner, the opposite occurred, whether one considers total trade or only imports and exports excluding oil (cf. Figure 23). The deficit of the total trade of MPs amounts to US$ 140 bn i.e. 3.5 times the level of deficit vis-à-vis the EU. It is therefore possible that devices linked to the association agreements buffered this deterioration of trade balances. At the same time, figure 24 shows a sharp drop of MPs-to-EU exports (this share dropped from 52% in 1995 to slightly less than 40% in 2001) and of EU-to-MPs imports (over the same period, this

share dropped from 52% to 35%). In order to get a better understanding of the on-going adjustment processes, it will be necessary to look in depth into this descriptive analysis of trade and to attempt providing some explanatory elements. This quick descriptive analysis of trade during the last 15 years lends itself to several observations. Firstly, although trade with the EU – both import and export – remains predominant, one can observe a growing trend in trade between the MPs and with the rest of the world. This is a positive movement towards a wider diversification of origins and destinations of traded goods. This movement should be the subject of a deeper analysis in order to identify which sectors (or at least which types of products) and which partners are concerned, and what are the consequences on Mediterranean economies. Secondly, the trade deficit with the EU increased, but strangely enough did not deteriorate as much as the trade deficit with the rest of the -72-


Figure 24. Evolution of the share of MPs imports from the EU and of MCs exports to the EU 0,55 0,5   Part  des  exporta7ons  des  PM   vers  l'UE  

0,45

Part des  importa7ons  des  PM   en  provenance  de  l'UE  

0,4

2011

2009

2010

2008

2007

2006

2005

2003

2004

2001

2002

1999

2000

1998

1997

1996

0,3

1995

0,35

Source : COMTRADE.

world, whether one considers total trade or only import-export flows, oil products excluded. This observation raises several questions which shall be addressed in the agenda of future Femise works. IV. Why and how to continue the opening up process? According to Femise, MPs should continue the process of opening up their economies for the following reasons: √ Reversing the process would induce dramatic medium/long term economic costs. Although one cannot confidently guarantee that a country will be able to draw immediate benefits from opening up its economy through tariff dismantling, no country has been able to achieve economic development when being isolated from the world economy. √ Openness is an opportunity as countries can take advantage of this potential growth vector (via possibilities of technological transfers and improvements of labour skills by means of FDI and imported inputs, increased innovations due to competition, etc.), which is not automatic but the positive effects of which occur when a certain number of conditions are present in domestic economies. Thus, the opening up process must continue, but in a controlled manner. First, it must not be perceived as an objective in itself or as a central element of

the transition process. Next, it must be managed as a function of changes and improvements achieved by the domestic economies owing to the implementation of structural policies. Femise considers that the necessary conditions required for a country to benefit from the positive effects of openness are not limited to the sole institutional field. The continuation of the opening up process must be linked to the progress of structural policies, to fit this continuation of the openness within the framework of a medium and long term development strategy defined by the countries. Femise considers that in the case of MPs, it is essential to challenge the hypothesis underlying the strategy followed so far, according to which openness, through the drop of customs duties and the reduction of non-tariff barriers, combined with the implementation of institutional reforms, was going to trigger and accelerate the changes necessary to improve the efficiency of their economy and place them on the road to dynamic growth. Institutional changes are necessary, but they do not constitute a sufficient condition for countries to take full advantage of the benefits induced by the openness process. Finally, a certain number of measures must be understood to manage the opening up process. It is striking to note that countries are encouraged to adopt a certain number of measures the effects of which are poorly known, or have even almost -73-


never been analyzed in the literature. The case of the NTMs – discussed in the following sub-section – is the illustration thereof. If these measures produce negative effects, it will only be possible to take note of them without being able to suggest to decision-makers mitigation or compensation measures. Moreover, the definition of a development strategy must rely on in-depth analysis of dysfunctions and specificities of each economy, as well as the needs and expectations expressed by the operators and the whole population, in order to take into account correctly the initial conditions that characterize each country. The following sections describe the stakes of the three main fields concerned by a continuation of the opening up process i.e. non tariff measures (NTM), agriculture and services. IV.1. NTM-related stakes In order to report on the situation of MPs relative to other regions in the field of NTMs, we used the traditional indicators i.e. those based on a simple inventory of measures (expressed as the percentage of the number of product lines or as the percentage of the import value), and those based on an econometric assessment method (ad-valorem equivalent). These indicators are usefull albeit limited since they rely on the hypothesis that NTMs are trade barriers. Thus, these indicators will show an improvement of the situation of the countries when the number of NTMs drops. It is not advisable to apply this principle to all measures, regardless of their nature and objective. For example, should the measures that regulate the trade of hazardous goods or which improve the precautions taken in the field of food safety be eliminated (or not adopted)? Should the international or European standard harmonization measures be eliminated (or once again not adopted)? It is indeed important to insist on the fact that a country that uses these traditional indicators «deteriorates» its conditions, even if newly adopted

NTMs correspond to harmonization measures or if they are justified by environmental or public health concerns. These traditional indicators are no longer suited to the increasing complexity of NTMs, even more so as what could constitute an obstacle to trade could be linked more to the way the measure is implemented than to the measure itself, especially in developing or emerging countries where firms face problems to obtain information, where regulatory systems may lack transparency and where business support structures are inexistant or insufficient. A synthetic indicator making it possible to take into account the different dimensions of NTMs (and not only the trade barrier dimension), remains to be invented. In as much as each category of measures does not have the same impact on the country trade flow and economy, so far the only stringent – albeit amazingly tedious analysis method consists in making a distinction productwise, between the different NTMs applied when data is available in the UNCTAD classification. Because of the multiplication of different forms of NTMs, approaches in this field must be renewed, as this would facilitate the understanding of (i) the impact on MPs exports of the NTMs applied by their trading partners, especially by the developed countries, (ii) the effects of the NTMs applied by the MPs on the one hand on their imports as a function of their geographical origin and on the other hand on domestic firms and therefore on the dynamics of their productive system and on the evolution of their comparative advantages. (i) Impact of NTMs applied by the trade partners on Mediterranean exports The whole economic literature agrees on the negative role of the increasing number of NTMs on exports from countries of the South applied especially by the developed countries. If one focuses on MPs, a Femise [13] study has shown that the EU harmonization policy creates trade barriers against exports from third countries. On the basis of interviews with Israeli exporting firms, this study has brought -74-


Box 1. Rules of origin and cumulation in the MCs: implementation of the Pan-Euromed Protocol During the third ministerial conference of Palermo in July 2003, it was decided to extend the Pan-European system of cumulation to MCs concerned by the Barcelona process. This progressive enlargement led to replacing the Pan-European system by the Pan-Euro-Mediterranean system of cumulation and origin (a.k.a PanEuromed Protocol). This sytem functions between the European Union and the countries of the European Free Trade Association (Iceland, Liechtenstein, Norway and Swisstzerland) and Turkey, as well as the Barcelona declaration signatory countries i.e. Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Syria, Tunisia, the West Bank and Gaza Palestinian Authority. The system has been extended to the Faeroe Islands. However, the cumulative mechanism can only be applied if all the countries have signed free trade agreements that include identical rules of origin, as well as a system of administrative cooperation that makes it possible to control it. In order for this process to become operational within a reasonable time frame, it has been admitted that the Pan-Euro-Mediterranean system should be enforceable gradually between a certain number of countries even if they do not all fulfill all the necessary conditions. This stepwise extension has been nicknamed as “variable geometry� process. It gives the possibility to apply the Pan-EuroMed cumulation upon the conclusion of agreements that comprise the same rules of origin between 3 countries, while waiting for the enforcement of the Pan-Euromed Convention* within the framework of which all the countries of the zone will form only one cumulative zone. This choice of application of the Pan-Euromed Protocol leads to the progressive construction of the Pan-Euromed zone by means of sub-zones. The countries notify the European Commission of each agreement signed with other countries**. To date, the Pan-Euromed system comprises the following

5 sub-zones in which the PanEuroMed cumulation is applied: - EU, EFTA, Morocco, Tunisia, Egypt, Turkey and Jordan (entry into force March 1st, 2011). - EU, EFTA, Israel, Turkey and Jordan (entry into force March 1st, 2011). - EU, EFTA and Faeroe Islands (entry into force January 1st, 2006). - EU and Algeria (entry into force November 1st, 2007). - EU and West Bank and Gaza (entry into force July 1st, 2009). * This Pan-Euromed Convention (open to signing since June 2011) is accessible on the web site of the Council of the Euopean Union. ** These notifications are published in the Official Bulletin of the European Union ( (JOUE series C). forward the difficulty of such firms to adapt to standards imposed on the European market. A second series of Femise [14] studies carried out between 2001 and 2008, dealt more specifically with the impact of the rules of origin and cumulation on trade. These studies have shown that the shift from bilateral cumulation to diagonal cumulation [15] had had very positive effects on trade development between the EU partner countries, which led Femise to recommend the extension of the Pan-European [16] system to the MPs. These works also tried to identify the factors that explain the restrictive degree of the rules of origin (other than the possibility of cumulation). Thus, it was shown that the use of the added value criteria (instead of the rule requiring a change in the tariff position or of the criterion of specific manufactured product) [17] makes the rules of origin less restrictive. Since the 2003 Palermo Declaration which ratified the decision to broaden the Pan-European system to MPs involved in the Barcelona process, these countries are not yet integrated within a unique zone which would make it possible to use diagonal cumulation with all the partners. Yet, progress has been achieved. Box 1 describes the current -75-


situation of MPs in terms of rules of origin and cumulation. (ii) The effects of NTMs applied by the MPs As already seen, the number of NTMs applied by the MPs has significantly shrunk and for most of them, the frequency indexes and coverage ratios are largely below the levels of the EU. In parallel with this reduction of the number of measures, MPs have adopted an increasing number of harmonization measures, within the framework of either the WTO, or regional agreements (essentially EuroMed). This adoption of measures that comply with international, European or American standards is recent. The analysis of the World Bank NTM bases shows, on the contrary, that no measure has been adopted within the framework of inter-MC regional agreements. To date, MPs have been unable to reach agreements in any given sector to implement their own harmonization system. Yet, in order for NTMs not to function as a trade barrier, it is necessary to either agree on common standards, or to adopt joint recognition agreements. Since MPs have not yet acheived one or the other, it comes as no surprise that a certain number of Femise studies insist on the negative role played by NTMs on trade in the region (example: Le Cacheux, 2005[18]; Neaime, 2005[19]). MPs have adopted (and keep adopting) international or European (and sometimes American) harmonization measures. The compliance process to European standards and regulation is widely encouraged by means of the action plans signed between each MC and the EU, within the framework of the New Neighbourhood Policy and/ or the adoption of the Advanced status. As already indicated above, these action plans contain elements that make it possible to achieve deeper integration between each MC and the EU. NTMs, which correspond to harmonization measures, fit within this framework.

The effects of the implementation of these harmonization measures are poorly known. Their main objective is to facilitate access to markets of developed countries and, more specifically, the EU market. The compliance process of producers of the South with the standards of the North can, indeed, favor an increase of external demand for their products, owing to the improvement of the quality of exported goods, but at the same time it can also increase the production costs. In such a situation there is a risk of shifting exports from South markets to North markets, which could be understood as a “new effect of trade diversion”. These harmonization measures can also modify the competitive structure of domestic markets, by facilitating the entry of goods from developed countries to the detriment of low cost products, which could be an additional factor for the increase of price levels on domestic markets. To the best of our knowledge, the only empirical study which looked into this question, through empirical tests designed to assess the effects of the adoption of harmonization measures within the framework of North-South regional agreements, leads us to strike a note of caution. This study by Disdier, Fontagné and Cadot (2012), shows that this compliance process favors «hub-spoke» type trade between the countries of the South and the country(ies) of the North concerned by the regional agreement, to the detriment of South-South trade, without developing trade with the countries of the North which are not included in the regional agreement. Their conclusion is particularly pessimistic, since they consider that the implementation of harmonization measures within the context of regional agreements the objective of which is to improve the integration of developing or emerging countries into the world economy, can lead to opposite results since these measures would tend to marginalize the countries of the South which would focus on their trade with “hub” countries mainly. The result of this work should encourage a deeper understanding of the effects of the harmoniza-76-


tion measures. Femise considers that it is just as inappropriate to advocate for the end of the implementation of harmonization measures, which most probably are very useful and beneficial in some sectors, as to push at all costs the MPs to streamline their NTMs, regardless of the context and the products concerned.

with the EU was positive only in 2005 and 2006. As shown on the following Figure, agricultural imports grew much more than the exports, partly under the effect of the grain price increase. The 2012 CIHEAM report (a member of Femise), stipulates that MPs constitute de zone of the world with the deepest deficit in the field of agricultural products. In the current context of high price volatility, this situation is not sustainable and it raises the acute question of food safety. Femise is of the opinion that it will no longer be possible to discuss agricultural liberalization without taking into account the need for a form of independence or autonomy of MPs in terms of basic food product imports.

IV.2. Openness of the agricultural sector As seen in the first section, MPs apply very high customs duties on agricultural goods (25% on average in 2009). This tariff protection did not prevent agricultural imports to grow more significantly than exports (cf. figure 26). This resulted into a deterioration of the MPs agricultural trade balance not only with all the partners, but also with the EU and the USA (cf. figure 25). The agricultural deficit with the EU grew from about US$ 410 million in 1996 to more than US$ 6 billion. Trade balance

According to agricultural specialists (cf. Abis, 2011), association agreements have had a very limited impact on agricultural trade. This does not come as much of a surprise since very few operational initiatives have been adopted in this field. It should

Figure 25. Evolution of the agricultural trade balance of MPs (US$ millions) 4000000 -­‐1000000   -­‐6000000  

EU25

-­‐11000000

USA

-­‐16000000

World

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

-­‐26000000

1996

-­‐21000000

Source : COMTRADE. Figure 26. Evolution of MPs agricultural imports and exports (US$ millions) 50000000 40000000   30000000   20000000   10000000   0  

1996 1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010   2011  

EU25 Export  

EU25 Import  

USA Export  

USA Import  

WLD Export  

WLD Import  

Source : COMTRADE. -77-


be noted, however that in the last 15 years, the Barcelona Process and mainly the adhesion to the WTO, which obliges member states to implement the Agreement on Agriculture, have induced reforms of agricultural markets initiated by most MPs. As explained by the 2003 Femise report, these reforms translated mainly into a reduction of the support to the grain sector. Since the future negociations within the framework of the WTO will be difficult (the Doha Round is almost at a standstill since 2011), and since trade agreements between MPs rarely include agricultural goods (cf. table A1 in annex), medium and long term changes are most likely to stem from the Barcelona process which provides for agricultural liberalization[20]. Femise considers that the central issue is not whether agricultural markets should be opened or closed, but rather to know when and in which conditions this could possibly take place. Femise considers that the liberalization of agricultural goods cannot be approached the way liberalization is approached for industrial products for the following reasons. √ First, because of the position occupied by agriculture. This sector represents respectively between 3% and more than 23% of the GDP and between 1.7% and 41% of jobs in some countries (cf. table 5). Yet, in reality, agriculture plays a role that goes beyond mere figures. One bad crop diffuses significantly to the whole economy not only via the revenues of the formal sector, but mainly via the revenues of the informal sector generated by agriculture and via the major role played by agriculture as a form of livelihood. √ Second, the amount of risks faced by the MPs if

they dismantle their agricultural market. Such risks are: aggravation of poverty, increased regional unbalances, rural exodus, and aggravation of social and political instabilities. √ Third, the very heterogeneous situation of countries especially in terms of water resources, which calls for opening up strategies and specific internal reforms as a function of the conditions in countries. As any opening up process, that of agriculture will generate adjustment costs, with losers and winners. The winners shall be the agro-food industrialists and urban households who will benefit from the drop of grain, milk and meat prices (products for which MPs suffer from a comparative disadvantage). The losers will be the small farmers and all rural households. The economic and social cost of this adjustment shall be especially high for several reasons. First, farms are small, farmers are often old and illiterate, which further affects the possibilities for reallocation of this labor. Second, farms in MPs are characterized by a very low productivity. Farmers have a poor knowledge of fertilizers and seeds and scarcely get any information on the different varieties and on the sanitary controls imposed on export products. Third, infrastructure problems further complicate the conditions of exploitations in rural areas (irrigation, transport, conservation of perishable goods, etc.). The losers will be found in populations already close to the poverty threshold and will exacerbate the existing unbalances. Femise considers that agricultural trade must be preceded by a broad and aggressive agricultural policy[21] which will enable a large number of operators to gain from openness. It is therefore essential to set the conditions that enable agricul-

Table 5. The agricultural sector in MPs economies Algeria

Egypt

Israel

Jordan

Agriculture, value added (% of GDP)

6,9

13,9

na

3,3

6,2

Employment (% of total employment)

20,7

31,6

1,7

2

na

Source: WDI, 2011 -78-

Lebanon Morocco

Syria

Tunisia

Turkey

15,1

22,9

8,3

9,2

40,9

14,9

na

23,7


tural productivity to be increased, namely training farmers, disseminating information, promoting the use of new technologies, etc. For example, it would be useful to create structures to support farmers (or to reinforce the existing structures) to help them in their choices of crops, in the development and sustainability of their activities, obtain finances, distribution to the domestic markets and to export markets, the adoption of new forms of production and commercialization (labelling, packaging, etc.). It would also be useful to foster the regrouping of small producers in order to reach sufficient export volumes, improve the income of small farmers and develop technological capabilities in order to meet quality and profitability requirements. It is therefore essential to implement a set of actions which will both help small farmers in making their organization and production activities evolve as well as ensure the upgrading of products and the continuation of the development of large farms. It is clear that the agricultural policy that will be launched shall have major impacts on the economic dynamics, on local development and on poverty mitigation. IV.3. Opening up the services sector Services cover a wide array of very different activities, such as tourism, healthcare, construction, distribution, education, recreation, electricity, gas and water distribution, communications, transport, financial activities, retailing, etc. (see services sectorial classification list on WTO website). It is one of the most dynamic sectors in terms of the creation of added value in the Mediterranean countries and it plays an important role in these economies. Table 6 shows that the services sector’s share of added value in the countries varies between 31%

(for Algeria) and 72% (for Lebanon). In terms of employment, the sector accounts for between 37% (for Morocco) and 79% (for Jordan) of total employment. The proximity to Europe (and the share of non-tourism services in the countries’ exports) suggests that these countries have not yet fully exploited the sector’s potential. A well-conducted process of openness, based on a detailed, in-depth analysis of the current situation, opportunities and risks, could further boost development in this sector and, above all, make it more efficient. Opening up services, however, proves to be a difficult task for several reasons [22]. First of all, unlike the trade of goods, the obstacles are not related to the presence of customs duties or non-tariff measures, but to the existence of national regulations. Secondly, a number of services affect the countries’ societal and even cultural fields. The question must therefore be asked as to how far the countries wish and are prepared to go in the process of convergence with the societal norms of the Northern countries. Thirdly, when liberalization measures are envisaged in the framework of a North-South agreement, the developed countries are cautious since these measures are generally associated with a greater liberalisation of the flow of persons, and the developing or emerging countries, for their part, fear they may not be in a sufficiently strong position to vie with competition from the service providers of the developed countries. Is this fear on the part of the Mediterranean countries founded? The answer is yes, without a doubt. Service activities in the Mediterranean countries are characterized by lower productivity and efficiency than their equivalents in the developed countries and, above all, by major gaps with res-

Table 6. The services sector in MPs economies Algeria

Egypt

Israel

Jordan

Services, value added (% of GDP)

31

49,3

na

65,6

72,4

Employment (% of total employment)

53,1

45,3

77,1

79,2

na

Source: WDI, 2011 -79-

Lebanon Morocco

Syria

Tunisia

Turkey

55,1

46,5

58,3

63,8

37,2

52,8

na

50,1


pect to qualification, skills and experience acquired not only in the area of regulations, but also in the internationalization of activities. The service providers in the developed countries generally have experience in foreign markets, a better technological level and the benefit of major financial centres, for example. Better access to the services markets of developed countries calls for harmonization of the regulatory frameworks of the Mediterranean countries with those of the developed countries, since the regulatory regimes in the Northern countries are generally more stringent. The process of convergence or alignment with international or European regulations is under way in most of the Mediterranean countries, either in the framework of the WTO or in the framework of the New Neighbourhood policy action plans, although at a different pace in the different countries. These developments should not make us lose sight of the fact that services must not be viewed as an undifferentiated whole that can be dealt with in a uniform manner. It is important for the Mediterranean countries to first identify the services for which the alignment of regulations with EU or international regulations is beneficial and would not incur high costs for their economies. For this type of services, the necessity and the need to open up is no longer questionable. The countries cannot help but derive short and long-term benefits. Femise research, conducted by J. Costa Font and M. Borrell Porta (2012), shows that an improvement in services trade between the EU and the Mediterranean countries could have a very positive impact on foreign direct investment flows and, thereby, further fuel the beneficial effects on growth. The regulatory changes expected to provide the greatest benefits are those pertaining to factor services (also referred to as federal services), the external effects on the production system of which will be highly positive. These services include transport, telecommunications, infrastructure, the banking and finance sector, etc. These services determine the quality of the business environment (or investment climate).

A Femise research coordinated by P. Augier published in 2012 [23] has highlighted the role played by this environment in differences in productivity of firms in Morocco and the negative impact of a defective financing system. This was also the aim of the Femise research [24] conducted by P. Plane (2010) on four Mediterranean countries (Algeria, Egypt, Morocco and Lebanon). Again, in Femise research (2010) [25], S. Neaime et al. give a detailed analysis of the financial systems of Mediterranean countries and show their weakness in financing growth. In addition, in a context in which production processes are increasingly fragmented, the presence of barriers and/or malfunctions in this type of service is a major factor since these services are an essential element in decision-making by operators, both domestic and foreign. For the Mediterranean countries, Femise research [26] headed by J.A. Camacho (2009) focused on the role played by business services in innovation for Spanish, Turkish and Moroccan firms. On the other hand, more sensitive categories of services call for greater caution and it would not be advisable for them to be opened up immediately. As a result, Femise considers that the Mediterranean countries, with the support of the EU, should first improve, by means of internal structural reforms, the efficiency and operation of these services, while simultaneously adopting a number of regulations from the acquis communautaire in the framework of action plans. EU assistance is also required to meet the need for harmonisation of regulations between the Mediterranean countries. In a number of areas, the lack of integration of the services market within the region has a substantially adverse effect on trade between the countries. The issue of the role of services as a Euro-Med integration factor has been given very detailed consideration in Femise research codirected by S. Togan and J. Michalek (2007) [27]. With a highly unequal pace of use of the Community legacy in the different countries, the regulatory frameworks governing services are liable to diverge more and

-80-


more, which could further reinforce certain types of barriers between the countries in the region. Particular attention should therefore be focused on this point, primarily in the area of infrastructure such as telecommunications, energy and transport. The entire international community, not only Europe, should support and strongly encourage regional project initiatives in the area of these services, whose external effects on the economy as a whole are especially important. This type of services could also serve as a catalyst for the economic integration of the area, for example through a common energy policy or the setting up of large-scale infrastructure projects. The gains in terms of economies of scale to be derived from the integration of the services market in the region could be substantial: (i) for the services sector, first of all, since in order to compete with service providers in the international market, it is in the best interests of the service providers of the Mediterranean countries to operate in a market that is broader than the domestic market and, (ii) for the economy as a whole, with positive external effects on the competitiveness of all sectors. Also, a way of limiting adjustment costs is, when possible, to make use of mutual recognition. This point was already raised in the section on harmonisation of non-tariff measures, but it is especially true for services. In education, for example, mutual recognition (level of studies, professional qualifications, etc.) is important in facilitating the flow of persons and the initiation of North-South partnership with the aim of raising the levels of skills and qualifications in the Southern Mediterranean countries. V. Recommendations The recommendations of Femise ensuing from the analysis above are as follows: 1. For non-tariff measures, whereas the Mediterranean countries’ main export market is the Euro-

pean market, in which product quality requirements are increasingly high, it makes no sense to advise these countries to simply reduce or streamline their NTMs. The Mediterranean countries should, in some sectors, continue to implement European or international norms and standards. However, decision-makers should also keep in mind the dual risk of the “price effect” (i.e. the implementation of harmonisation measures may raise prices in the domestic market by increasing the cost of production for businesses and by changing the competitive structure of the markets) and the “effect of a new type of trade diversion” (with redirection of the exports of developing and emerging countries toward the developed countries in which growth rates are comparatively lower, or even redirection of the exports of the developed countries toward the “hub” country in the framework of regional agreements). NTMs are the area in which the Mediterranean countries have a real interest in cooperating and agreeing. If they set up, between themselves, a credible standardisation system, recognized by the main trading partners (Europe, in particular) and if, in parallel, when possible, they make use of mutual recognition, South-South trade will be largely facilitated and, above all, this could accelerate the setting up of diagonal (or even full) cumulation and facilitate the use of the mutual recognition principle with other trading partners. One of the main obstacles to progress in this area is the lack of equipment, the lack of laboratories and qualified personnel. The recommendation of Femise is for the EU to step up its technical and financial assistance in this area so as to reinforce the countries’ skills and capability. All of the trading partners could thereby have greater confidence in the countries’ control and evaluation systems, which is a vital condition for wider use of the mutual recognition principle. 2. It is still too early to liberalize agricultural trade. Given the situation of the Mediterranean countries, the economic and social cost would be too high. On the other hand, the Mediterranean countries should seize all opportunities to prepare for -81-


this with the support of Europe, by setting up a large-scale agricultural policy capable of first responding to the numerous structural difficulties that characterize Mediterranean agriculture and which would make it possible to (i) modernise the sector by ensuring a technological adjustment and a shift toward the higher end of the market, (ii) define a transparent and stable structure for the implementation of a group of technical and phytosanitary norms specific to the Euromed region, in collaboration with the EU, (iii) understand all of the consequences on agriculture and the rural environment in general of the climate changes that will presumably affect the region (choice of varieties, techniques, etc.), (iv) favour relations between fundamental research and applied research and, above all, encourage the dissemination of research results to all stakeholders, (v) ensure better food security, by regaining a certain quantitative security, particularly in cereal production, and also by guaranteeing the qualitative security of agricultural products in order to protect consumers’ health and the environment, (vi) promote agricultural and rural development capable of optimising the use and management of land and water resources (vii) upgrade transport and energy infrastructure, (viii) encourage better vertical integration between industrialists, producers and exporters, while limiting the risks of the misappropriation of funds by intermediaries or any other sector stakeholder and, lastly, (ix) set up dialogue tools so as to enable greater participation by farmers in the upgrading of the agricultural sector and in the emergence of new projects. To help the Mediterranean countries rise to the challenge, the EU has included in the definition of its new strategy for the Neighbourhood policy the launch of pilot programmes aimed at supporting agricultural and rural development. The EU also implemented in mid-2011 the European Neighbourhood Programme for Agriculture and Rural Development Rural (ENPARD). In the process of improving the agricultural sector, it would be advisable for Europe to open up its market to Mediterranean products that provide

comparative advantages, such as fruit and vegetables, as well as olive oil, for example, primarily by reducing barriers (quotas, reference prices, seasonal restrictions and other non-tariff measures that are not justified by consumer food security reasons) which are the most complicated obstacles for Mediterranean producers. Femise therefore recommends a progressive and reciprocal opening up of agricultural markets, with asymmetrical sequencing: Europe should begin by progressively opening up its market during the phase of restructuring of the Mediterranean countries’ agricultural sector. In this respect, the proposal for reform of the CAP in 2013 should make support for European farmers and the European agricultural world more compatible with wider external openness. 3. Services call for specific treatment according to the activity concerned. Factor services, which determine the quality of the business environment, should be liberalised, at least partially so. However, the liberalisation of more sensitive services may not be undertaken in the immediate future. Modification of the regulations of some of these services amounts to changing societal specificities. It is also important in this area to be able to hear and consider the population’s point of view and not to shake up, sometimes unnecessarily (in the sense that the effects on growth are minimal) societies that are already vulnerable due to political changes under way and social instabilities related to situations of poverty and inequality. On the other hand, it is not advisable to let the regulations and norms regarding factor services (transport, telecommunications, energy, etc.) diverge within the Mediterranean region. On the contrary, the creation of a Southern regional services market should be strongly encouraged. Similarly, Femise recommends that all of the Mediterranean countries come to a general agreement framing foreign direct investment. It would also be very useful for measures to be adopted to favour -82-


the mobility of competencies and North/South partnerships, regardless of the area. As in the case of agriculture, structural reforms are necessary in the services sector. Here too, the technical and financial assistance of Europe will be very useful in initiating and encouraging the progress required in this area. For Femise, priority should be given to actions aimed at services that improve the conditions for the creation, development and innovation of businesses. One way of defining the sequencing of these reforms and of determining the specific needs of each country (or region) is to very carefully diagnose the obstacles with the operators concerned and provide appropriate answers, in view of the countries’ overall situation. 4. Generally speaking, regardless of the area concerned, Femise recommends moving toward stronger regional integration between the Mediterranean countries. The gains linked to economies of scale will have short, medium and long-term repercussions in all of the countries, regardless of the sector. 5. Femise recommends the pursuit of the opening up process, but while considering the process simply as one of the tools that can help the countries’ economic development, provided it is combined with structural policies suited to the each economy’s situation. These structural policies are necessary in order to identify new comparative advantages and to set up structures that are capable of ensuring their emergence (by public support, for example, based on public-private partnerships, by temporary, targeted tariff protection, etc.). Similarly, a shift toward the higher end in international trade and the development of businesses that generate higher value added may not occur without, not only, an improvement of the business environment in domestic markets (such as, for example, the issue of access to bank financing), but, above all, without an active policy on the part of the public authorities, supported by the international community in general and, even more so, by Europe).

In the future, it will be essential to consistently mobilise the three levels of public action, namely (i) external openness in tune with the countries’ progress and structural advances, (ii) targeted industrial and structural policies, aimed at particular segments of the production system and/or those that open up new opportunities for particular categories of the population (women, young people, rural populations) and (iii) broader policies that modify the operators’ environment and better prepare the populations for the changes to come (through training, the mobility of competencies, greater freedom of expression, involvement of the populations in public debates, etc.). Broader policies also encompass macroeconomic stabilization policies (control of deficits and inflation) and the need to make the foreign exchange policy more active so as to reinforce the export competitiveness of Southern businesses or, at least, not let it deteriorate with respect to their main competitors in the developing or emerging countries due to a difference in foreign exchange rate movements that would put Mediterranean products at a disadvantage on foreign markets. Endnotes: 1. The data is available on the World Bank’s site at the following address : http://econ. worldbank.org/WBSITE/EXTERNAL/EXTDEC/ EXTRESEARCH/0,,contentMDK:22574446~pagePK:64214825~piPK:64214943~theSitePK:469382,00.html 2. Research was conducted between May 2008 and January 2009 across an average of 300 firms per country. For a detailed analysis of this research see Basu, Kuwahara & Dumesnil (2011). 3. The Temporary Trade Barriers Database is available at the following address: http://econ.worldbank.org/ttbd/. 4. P. Augier, M. Gasiorek, M. Lovo and G. Varela (2011). 5. P. Augier, O. Cadot and M. Dovis (2012). 6. FDI Inflows to the MENA Region: An Empirical Empirical Assessment of their Determinant and -83-


Impact on Development (2004), leaded by Khalid Sekkat, Research Femise n° FEM21-15. 7. Foreign Direct Investment and the liberalisation of trade in services: An evaluation of the Euro-Mediterranean Partnership influence (2012), leaded by Joan Costa-Font & Mireia Borrell Porta, Research Femise n° FEM34-19. 8.We note that the causality link between the opening and lowering of the innovation rate can also be explained by the beneficial advantages that can push a country to specialise in industries with a low-level of R&D (Grossman & Helpman, 1995). 9. La conceptualisation du comportement des firmes dans le contexte d’ouverture des pays méditerranéens (2007), leaded by Patricia Augier, Research Femise n° FEM31-26. 10. These methodological critiques were formulated by Edwards (1993), Rodriguez & Rodrik (2001), Hallak & Levinsohn (2004). 11. We showed, at Femise (Augier et al, 2011), that in the case of Moroccan firms, contrary to what was thought, the problem wasn’t so much the exit of firms (firms who stop their activity have a global production generally superior to those who enter) but the development of small firms and those who entered. At the start of their activity we can see the productivity of firms grow before rapidly reaching a ceiling that stops them from converging, within a reasonable delay, towards the productivity of firms that have been around for longer. In another Femise research Sekkat et al. (2009) show that the process of firms’ entry and exit has contributed positively to the growth of productivity at work (and not of global productivity) in Morocco, Jordan and Turkey. 12. Synthesis report on the regulatory convergence and the reacceptance of the ‘acquis communautaire’ by Morocco, IRES, December 2011. 13. Comparative analysis of importance of technical barriers to trade (TBT) for Central and Eastern European Cuntries’ and Mediterranean Partner countries’ exports to the EU (2005), leaded by Jan Michalek, Research Femise n° FEM22-03.

14. The role of rules of origin in the proces of Euro-Med integration (2008), leaded by Michael Gasiorek, Research Femise n° FEM31-13. Ces recherches initiées par des membres du Femise dés 2001, ont donné lieu à plusieurs autres rapports et publications (Gasiorek, 2003 ; Augier et al., 2003, 2004, 2005a, 2005b, 2009). 15. Cumulation is said to be bilateral when its scope of application is limited to preferential trade between the EU and only one partner. It appears in all preferential agreements signed by the EU. Within the framework of the bilateral cumulation, products originating from one of the parties (EU or Mediterranean partner) which will be transformed in the country of the other party (Mediterranean party or EU) are put in the same category as products originating from the other party. In other words, the added values of the importing country and of the exporting country are cumulative. Diagonal cumulation is a bilateral cumulation broadened to several countries by means of identical preferential systems. If such a cumulation were to be implemented between the EU and Mediterranean partners, Morocco for example could integrate into its fabrication process not only products originating from the EU, but also products originating from other partner countries with which Morocco would have estbalished similar preferential links, without such products being submitted to the obligation of the transformation sufficient in the determination of the origin of the finished product. Thus, diagnonal cumulation constitutes a means to relax the constraint imposed by the rule of origin in order for the partner country to enjoy the preferential agreement when it exports. 16. In terms of cumulation, the Pan-European system was implemented in 1997 between the EU, the EFTA, Central and East European countries and the Baltic States. It enables all these countries to benefit from the diagonal cumulation. This sytem was extended to Turkey and Slovenia in 1999. 17. Any preferential system is based on the principle that products said to be originating from a -84-


country must be obtained either fully or through sufficient transformation of the products which are imported into that country. In order to determinate whether a transformation is sufficient or not, several criteria are used: either the rule on changing tariff position, or the added value criterion (the value of the imported products incorporated into the product obtained must not exceed a given percentage – usually 40% - of the value of the product), or the criterion of specific processing (such as the double transformation for the garnment industry for example). 18. Obstacles to South-South Integration, to trade and to foreign direct investment: The MENA countries case (2005), directed by Jacques Le Cacheux, Research Femise n° FEM22-36. 19. South-South Trade Monetary and Financial Integration and the Euro-Merditerranean Partnership: An Empirical Investigation (2005), directed by Simon Neaime, Research Femise n° FEM22-39. 20. For a detailed analysis of the effects of the creation of a free trade zone between the EU and the MC4 (Morocco, Egypt, Turkey and Tunisia), see the Femise study led by A. Lorca Corrons (2000). Concerning more specifically the case of horiticulture in Jordan and in Palestine, refer to the Femise study conducted by S. Muaz (2000). 21. Cf. the Femise study coordinated by A. Lorca Corrons (2005), Titled «A Box Evaluation Tool for Alternatives Mediterranean Agricultural Policy». 22. Research Femise n° FEM32-02, published in 2009, coordinated by Subidey Togan and Jan Michalek emphasizes the inherent difficulties of liberalising services. 23. “Deep Integration, Firms and Economic Convergence”, directed by Patricia Augier, Research Femise n° FEM33-23. 24. «Performances productives et climat de l’investissemnt dans quatre pays de l’espace MENA : Algerie, Egypte, Maroc, Liban», directed by Patrick Plane, Research Femise n° FEM33-09. 25. “Financial Systems in Mediterranean Partners and the Euro-Mediterrranean Partnership”, directed by Simon Neaime, Research Femise n°

FEM33-20. 26. “The Role of Business Services on Innovation, Productiviy, Employment and Exports of Spanish, Turkish and Moroccan Manufacturing Firms”, directed by José Antonio Camacho, Research Femise n° FEM32-12. 27. “The Role of the Services as the Factor of Integration of Euromed”, co-directed by Subidey Togan & Jan Michalek, Research Femise n° FEM3d-01.

-85-


ANNEXES Table A1.Trade agreements that include MPs WTO Members

Date

Egypt

1995

Jordan

2000

Morocco

1995

Tunisia

1995

Turkey

1995

Observers

1987

Algeria

1999

Lebanon

2001 negotiation

Syria Multilateral Regional Agreements Members

Coverage

Date of entry into force

Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Pan-Arab Free Trade Libya, Morocco, Oman, Qatar, Saudi Arabia, Sudan, Area (PAFTA) Syria, Tunisia, United Arab Emirates, Yemen

Goods

1998

AGADIR

Egypt, Jordan, Morocco, Tunisia

Goods

2004

Arab Magreb Union (UMA)

Algeria, Libya, Morocco, Tunisia, Mauritania

Goods

2012

EC-Algeria

Goods

2005

EC-Egypt

Goods

2004

EC-Israel

Goods

2000

EC-Jordan

Goods

2002

EC-Lebanon

Goods

2003

EC-Morocco

Goods

2000

EC-Palestinian Auth.

Goods

1997

EC-Syria

Goods

1977

EC-Tunisia

Goods

1998

EC-Turkey

Goods

1996

EFTA-Egypt

Goods

2007

EFTA-Jordan

Goods

2002

EFTA-Lebanon

Goods

2007

EFTA-Morocco

Goods

1999

EFTA-Palestinian Auth.

Goods

1999

EFTA-Tunisia

Goods

2005

EFTA-Turkey

Goods

Apr 1992

EuroMed Agreements

FTA with EFTA

-86-


Table A1.Trade agreements that include MPs (continued) Bilateral Regional Agreements intra PM9 Algeria-Jordan

Goods

1998

Turkey-Morocco

Goods

2006

Turkey-Palestinian Authority

Goods

2005

Turkey-Syria

Goods

2007

Turkey-Tunisia

Goods

2005

Turkey-Egypt

Goods

2007

Turkey-Israel

Goods

1997

Turkey-Jordan

Goods

2011

Egypt- Palestinian Authority

Goods

1994

Egypt-Liban

Goods

1999

Jordan-Syria

Goods

2002

Jordan- Palestinian Authority

Goods

1995

Lebanon-Syria

Goods

1999

Israel-USA

Goods

1985

Jordan-USA

Goods & Services

2002

Morocco-USA

Goods & Services

2006

Bilateral Regional Agreements with USA

Table A2. Year of reference and most recent year available in TRAINS database for obtaining data on tariffs for MP9 Base Year

The most recent year

Algeria

1993

2009

Egypt

1995

2009

Israel

1993

2009

Jordan

2000

2009

Lebanon

1999

2007

Morocco

1993

2009

Syria

2002

2010

Tunisia

1995

2005*

Turkey

1993

2010

* For Tunisia, the data on tariffs is available until 2008. However, there is from 2006, a sharp rise in interest rates, including on imports of industrial goods from the EU, which is not conceivable in the context of the Association Agreement, unless this Agreement had been suspended, which was not the case.

-87-


-88-


References Abdelhameed, Omar and Abdelrazik El-Shewikhy (2012), “Morsy tasks EBDA’s president to chair the new council for business development”, Daily News Egypt (July13th, 2012). Abis, S. (2011). “ Libéralisation du commerce agricole et coopération pour la sécurité alimentaire», Euromed Survey, Barcelone, IEMed. Achy, Lahcen (2011), “Tunisia’s economic challenges”, Carnegie Paper, Carnegie Endowment for International Peace, Middle East Center. Adly, Amr (2011), “The State of Corruption under Mubarak (1991-2011)”, ARI Thematic Studies, Arab Reform Initiative. African Development Bank – AfDB (2012), “African Economic Outlook 2012: Promoting Youth Employment”. Aghion, Ph., R. Blundell, R. Griffith, P., Howitt, S. Prant. ((2009)). “ The Effects of Entry on Incumbent Innovation and Productivity», Review of Economics and Statistics Vol.90, No.1, pp.20-32. Ahram online (2011), “Egypt’s revolution youth on the back foot as parties steal limelight” Ahram (October 20, 2011) Ahram Online (2012), “Egypt government to allocate one day per week to tackle workers demands” Ahram (August 26, 2012). Aliriza, Fadil (2012), “The Godfathers of Tunis”, Foreign Policy, (May 25, 2012). Aliriza, Fadil (2012), “Tunisia’s Quiet Counterrevolution”, Egypt Independent, (April 14th, 2012). Amin, M. et al. (2012), After the Spring: Economic Transitions in the Arab World, Oxford University Press. Amnesty International (2012), “End army abuses in Egypt”, (June 29, 2012). Anne Wolf and Raphael Lefevre (May 2012), “Tunisia: the Islamic politics of trade unionism”, Open democracy, (May 21, 2012). Augier P. (leader), (2007). “ La conceptualisation du comportement des firmes dans le contexte d’ouverture des pays méditerranéens”, Research Femise n° FEM31-26.

Augier P. (leader), (2010). “ Deep Integration, Firms and Economic Convergence», Research Femise n° FEM33-23. Augier P., M. Gasiorek & Ch. Lai-Tong, (2005a). “ Rules of Origin and the EU-Med Partnership: The Case of Textile», in “The World Economy. Global Trade Policy (2004)”, David Greenaway Editor. Augier P., M. Gasiorek M. & Ch. Lai-Tong, (2003). “ The EU and the Southern Mediterranean: The impact of Rules of Origin», ERF VIIIth Annual Conference Volume, March 2003. Augier P., M. Gasiorek, M. Lovo & G. Varela, (2011). “ Paradoxes of Productivity: Trade Liberalization and Morocco», WP Caris, University of Sussex. Augier, P., M. Dovis & M. Gasiorek, (2012). “ The Business Environment and Moroccan Firm Productivity»s, Economics of Transition, Volume 2, Issue 2, pp 369-399. Augier, P., M. Gasiorek & Ch. Lai-Tong, (2005b), “ The impact of rules of origin on trade flows”, Economic Policy, Volume 20, Issue 43, July, pp 568-624. Augier, P., M. Gasiorek & Ch. Laitong, (2009). “ Multilateralizing regionalism: lessons from the EU experience in relaxing rules of origin», in “Multilateralizing Regionalism: Challenges for the Global Trading System”, Richard Baldwin and Patrick Low Ed., World Trade Organization and Cambridge University Press. Augier, P., M. Gasiorek, & Ch. Lai-Tong, (2004). “ The EU-Mediterranean partnership and cumulation of rules of origin: the case of textiles», World Economy, 27, N°9, pp 1449-1473. Augier, P., O. Cadot & M. Dovis, (2012). “ Imports and TFP at the Firm level: The Role of Absorptive Capacity», Canadian Journal of Economics, forthcoming. Baldwin, R. E., (2000). “ Regulatory Protectionism, Developing Nations, and a Two-Tier World Trade System”, in Susan Collins and Dani Rodrik (eds.). Brookings Trade Forum 2000, Washington,D.C. Brookings Institution Press. -89-


Basch-Haron, Heidi (2012), “Uncertainty for the future of the Moroccan women’s movement”, Open Democracy, (March 1st, 2012). Basu, S. R., H. Kuwahara & F. Dumesnil, (2011). “ Evolution of Non-Tariff Measures: Emerging cases from selected developing countries», Policy Issues in International Trade and Commodities, UNCTAD. Bennhold, Katrin (2011) “Women’s Rights a Strong Point in Tunisia”, New York Times, (February, 22, 2011). Blanc, Frédéric (2012), “Environmental Action and Job Creation”, in CMI/WB « Toward Green Growth in Mediterranean Countries: Implementing Policies to Enhance the Productivity of Natural Assets», Marseille, CMI. Blanc, Frédéric (2011), “Employment Perspective in the Mediterranean” In «Tomorrow, the Mediterranean: Scenarios and Projections for 2030» (69– 108). Paris: IPEMED. Bloomberg (2012), “ Arab Spring Unrest Sent 2011 Tourism Down 30% In Egypt, Tunisia”, March 6th. Brookings (2011), “Will Europe Shrink from the Arab Spring?”, December 21st . Camacho, J. A. (leader), (2009). “ The Role of Business Services on Innovation, Productiviy, Employment and Exports of Spanish, Turkish and Moroccan Manufacturing Firms», Research Femise n° FEM32-12. Cecchini, L. & Ch. Lai-Tong, (2008). “ The links between openness and productivity in Mediterranean countries», Applied Economics, Volume 40, pp 685-697. Chayes, Sarah (2012), “Corruption is Still Tunisia’s Challenge”, Los Angeles Times, (June 10, 2012). Chutter, Andrew (2006), “Understanding of the Security Reform”, in Journal of Security Sector Management, Vol. 14, n°2 CIHEAM, (2012). “ Mediterra, La diète méditerranéenne pour un développement regional durable», Rapport Annuel, Les presses de Sciences Po. CMI (Center for Mediterranean Integration) (2012). Toward Green Growth in Mediterranean Countries: Implementing Policies to Enhance the Productivity of Natural Assets. Marseille, CMI.

Colm Regan (2011), “Women, Citizenship and Change: The Role of the Women’s Movement in the Arab World” in Change and Opportunities in the Emerging Mediterranean Edited by Stephen Calleya and Monika Wohfled. Costa-Font, J. & M. Borrell Porta (leaders), (2012). “ Foreign Direct Investment and the liberalisation of trade in services: An evaluation of the EuroMediterranean Partnership influence», Research Femise n° FEM34-19. D’Alema, Massimo (2011), “The Arab Spring and Europe’s Chance”, Project Syndicate, October 25th. Deliberacion (2011), “The European Union and the Arab Spring – Yet Another Blunder?”, August 3rd. Desai, Raj M., Olofsgård, Anders and Yousef, Tarik, “The Logic of Authoritarian Bargains”, Economics & Politics, Vol. 21, Issue 1, pp. 93-125, March 2009. Dollar, D. & A. Kraay, (2003). “ Institutions, Trade, and Growth: Revisiting the Evidence», World Bank Policy Working Paper N°3004. Dutz, Mark A. (2007), Unleashing India’s Innovation: Toward Sustainable and Inclusive Growth, The World Bank. Edwards, S., 1993. “ Openess, Trade Liberalization, and Growth in Developing Countries», Journal of Economic Literature, XXXI(3), 1358-1393. EIB (2012), “Note on the Mediterranean Region”, April 2012. El-Issawi, Fatima (2012), “The Tunisian Transition: The Evolving Face of the Second Republic”, in After the Spring: Power Shift in the Middle East?, London School of Economics. El-Issawi, Fatima, (2012), “Tunisian Media in Transition”, Carnegie paper, Carnegie Endowment for international peace, Washington DC. El-Shanawi, Eman, “Quota, what quota? How parliaments lack female touch in Arab region”, AlArabiya website (March 5th, 2012). European Training Foundation - ETF (2012), Union for the Mediterranean Regional Employability Review: The Challenge of Youth Employment in the Mediterranean. Femise, (2003). “ L’impact de la libéralisation agricole dans le contexte du partenariat Euro-Méditerranéen», Rapport. -90-


FEMISE (2010), “Global Food Price Shock and the Poor in Egypt and Ukraine: A Comparison of Impacts and Policy Options”, Research n°FEM33-14, June 2010. FEMISE-EIB (2010), “The Crisis and Ways Out of it in the Mediterranean Countries”, November. Fitouri, Samia (2011) “Tunisia: In Spite of Regime Change, Country Falls in International Corruption Index.”, Tunisia Live (December 06, 2011). Freedom House (2012), “Egypt: New Press Law Enacted as Media Crackdown Continues”, Freedom House Website. Galal, A. (2004), ‘The Economics of Formalization: Potential Winners and Losers from Business Formalization’, Working Paper No. 95, March, Cairo, Egypt: The Egyptian Center for Economic Studies. Garcia-Navarro, Lourdes (2012) “In Egypt’s New Parliament, Women will be Scarce.” NPR (January 19, 2012). Gasiorek, M., (2003). “ Study on the economic impact of extending the pan-European system of cumulation of origin to the Mediterranean partners’ part of the Barcelona process», with P. Augier, D. Evans, P. Holmes and Ch. Lai-Tong, European Commission, DG Trade. Gasiorek, M., (2008). “ The role of rules of origin in the proces of Euro-Med integration», Research Femise n° FEM31-13. Ghazouani, Kamel (2011), “ Evaluation des incitations à l’investissement privé: Cas du CII «, Tunis: Institut Arabe des Chefs d’Entreprises. Gold, Andrew, (2012), “Egyptian Workers Demand a Say in the New Egypt Under President Morsi”, Policymic. Goldberg I., Branstetter L., Goddard J.B. and S. Kuriakose (2008), “Globalization and Technology Absorption in Europe and Central Asia : The Role of Trade, FDI, and Cross-border Knowledge Flows”, World Bank. Goldberg, Ellis (2011) “Egyptian Businessmen Eye the Future.” Foreign Policy, (February, 10, 2011). Goulding, Kristine (201), “Tunisia. Will democracy be good for women’s rights?” Open democracy (June 13, 2011).

Grossman, G. & E. Helpman,1995. “ Technology and Trade», in G.Grossman and K.Rogoff, eds., Handbook of International Economics, vol.III, North Holland. Halaseh, Rama, (2011), “Civil Society, Youth and the Arab Spring” ” in Change and Opportunities in the Emerging Mediterranean Edited by Stephen Calleya and Monika Wohfled. Hallak, J.C. & J. Levinsohn, (2004). “ Fooling ourselves: Evaluating the Globalization and Growth Debate», NBER Working Paper N°10244. Hammond, Andrew (2011), “Tunisia’s Ennahda likely to back an open economy.” Reuters (October, 26, 2011). HotStats (2012), “MENA Chain Hotels Market Review”, APRIL 2012. Human Rights watch (2012), “Country report: Tunisia”, Human Rights Watch, NY. International Business Times (2012), “Post-Arab Spring Travel And Tourism In The Middle East: A Country-By-Country Look”, June 2nd. Istituto Affari Internazionali – IAI (2011), ” The Arab Spring: Socio-economic Challenges and Opportunities”, Documenti IAI 1115E, December. Istituto Affari Internazionali – IAI (2012), “One Year On: A Balance Sheet of the EU’s Response to the Arab Spring”, Op-Med, May 2012. Joseph K.J. (2006), Information Technology, Innovation System and Trade Regime in Developing Countries : India and the ASEAN, Palgrave Macmillan. Kaboub, Fadhel (2011), “The Middle East’s NeoLiberalism–Corruption Nexus,” Web comment, June 2011. Kadry, Said (2007) “Egyptian Experience in Security Sector Reform”, Halki International Seminar, Greece. Kadry, Said and Noha Bakr (2011), “Egypt Security Sector Reforms”, ARI Thematic Studies, Arab Reform Initiative. Kaldor, Mary, (2010), “The Idea of Global Society”, in: Arches Quarterly, 4,6 (Summer):7-14: 10. Kee, H. L., A. Nicita & M. Olarreaga, (2009). “ Estimating trade restrictiveness indices», Economic Journal, vol.119, pp. 172-199. Keith Cowling and Philip R. Tomlinson (2011), “Post the ‘Washington Consensus’: Economic -91-


Governance and Industrial Strategies for the Twenty-first Century”, Cambridge Journal of Economics 2011, 35, 831–852. Khalaf Hunaidi, R. (2011), “Reconciling with the Newer Middle East”, speech delivered at the conference “The Economics of the Arab Spring”, September 12th. King, Stephen (2009), The new authoritarianism in the Middle East and North Africa, Indiana. Kinninmont, Jane (2012), “The New and Old Economic Actors in North Africa”, Mediterranean Paper Series, the German Marshall Fund. Kuwait News Agency (2012), “Arab Spring led to loss of 7 mln tourists – ATO chief”, May 26th. Lalami, Laila (2011) “Arab Uprisings: What the February 20 Protests Tell Us About Morocco.” The Nation, (February 17, 2011). Le Cacheux, J. (leader), (2005). “ Obstacles to South-South Integration, to trade and to foreign direct investment: The MENA countries case», Research Femise n° FEM22-36. Lee, Eric & Benjamin Weinthal (2011) “Trade Unions: The Revolutionary Social Network at Play in Egypt and Tunisia.” The Guardian, (February 10, 2011). Lorca Corrons, A. (2000). “ L’impact de la libéralisation commerciale Euro- Méditerranéenne dans les échanges agricoles», Research Femise n° FEM01-43. Lorca Corrons, A. (2005). “ A Box Evaluation Tool for Alternatives Mediterranean Agricultural Policy», Research Femise n° FEM22-11. Magdi, Amine et al. (2012), “After the spring: Economic transitions in the Arab world”, Brookings. Melitz, M.J., (2003). “ The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity», Econometrica, Vol. 71, pp.1695–1725. Michalek, J. (leader), (2005). “ Comparative analysis of importance of technical barriers to trade (TBT) for Central and Eastern European Cuntries’ and Mediterranean Partner countries’ exports to the EU», Research Femise n° FEM22-03. Moheeb, Hania, (2012), “The Tough Road for Syndical Liberties”, Business Today (March 8th, 2012).

Muaz, S. (2000), “ The impact of Euro-Mediterranean Partnership on Jordan’s and Palestines’s agricultural sectors from a water perspective: The case of horticultual exports to EU Markets”, Research Femise n° FEM01-11. Naciri, Rabéa; Nusair, Isis, (2003), “The Integration of Women’s Rights into the Euro-Mediterranean Partnership: Women’s Rights in Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestine, Syria and Tunisia (Copenhagen, Euro-Mediterranean Human Rights Network). Navaretti G. B., Schiff M. and I. Soloaga (2006), “The Knowledge Content of Machines: NorthSouth Trade and Technology Diffusion”, in Hoekman B. and B.S. Javorcik Gloabal Integration & Technology Transfer, Palgrave Macmillan and the World Bank. Neaime, S. (leader), (2005). “ South-South Trade Monetary and Financial Integration and the Euro-Merditerranean Partnership: An Empirical Investigation», Research Femise n° FEM22-39. Neaime, S. (leader), (2009). “ Financial Systems in Mediterranean Partners and the Euro-Mediterrranean Partnership», Research Femise n° FEM33-20. Nicita, A. & J. Gourdon, (2012). “ A Preliminary Analysis on Newly Collected Data on Non-Tariff Measures», Policy Issues in International Trade and Commodities Study Series, N°53. Nuno S. Themudo (2012), “Reassessing the Impact of Civil Society: Nonprofit Sector, Press Freedom, and Corruption”, Governance, Vol. 25, Issue 3. Osman, Tarek (2011), Egypt on the Brink: From Nasser to Mubarak, Yale University Press, Revised edition. Plane, P. (leader), (2010). “ Performances productives et climat de l’investissement dans quatre pays de l’espace MENA : Algerie, Egypte, Maroc, Liban», Research Femise n° FEM33-09. Reiffers, Jean-Louis (2012), “Employment and Economic Challenges in the Mediterranean Region”, An ENP South Regional Seminar for EU elegations and Development Partners. Reiffers, Jean-Louis and Constantin Tsakas (2012), “What responses can we give as to the economic -92-


and social reasons which led to the Arab Spring?”, Contribution to the seminar on the “Arab Spring” JICA/AFD, Tokyo, Japan, 15 October 2012. Rigobon, R. & D. Rodrik, (2005). “ Rule of Law, Democracy, Openness and Income: Estimating the Interrelationships”, Economics of Transition, Volume 13, 3, pp 533-564. Rodriguez, F. & D. Rodrik, (2001). “ Trade Policy and Economic Growth: A Skeptic’s Guide to Cross-National Evidence ”, in B. Bernanke and K. Rogoff (eds.), NBER Macroeconomics Annual 2000, MIT Press, Cambridge, MA. Rodrik, D., 1988. “ Imperfect Competition, Scale Economies, and Trade Policy in Developing Countries ” in R.E. Baldwin (ed.), Trade Policy Issues and Empirical Analysis, Chicago and London, University of Chicago Press. Rodrik, D., A. Subramanian & F. Trebbi, (2002). “ Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development”, mimeo. Saaf, Abdellah (2012), “Democratic Governance of Security in Morocco”, ARI Thematic Studies, Arab Reform Initiative. Saif, Ibrahim & Muhammed Abu Rumman (2012), “The Economic Agenda of the Islamist Parties”, Carnegie Paper, Carnegie Endowment for International Peace, Middle East Center Sayigh Yazid (2007), “Security sector Reform in the Arab Region: Challenges to Developing an Indigenous Agenda”, ARI Thematic Studies, The Arab Reform initiative. Schiff M. and Y. Wang (2006), “On the Quantity and Quality of Knowledge: The Impact of Openness and Foreign R&D on North-North and North-South Technology Spillovers”, in Hoekman B.and B.S. Javorcik Global Integration & Technology Transfer, Palgrave Macmillan and the World Bank. Schneider and Maxfield (1997), Business and the state in developing countries, Cornell University Press, New York. Sekkat, K. (leader), (2004). “ FDI Inflows to the MENA Region: An Empirical Empirical Assessment of their Determinant and Impact on Deve-

lopment”, Research Femise n° FEM21-15. Sekkat, K. (leader), (2009). “ Economic Policies, Firms’ Entry and Exit and Economic Performance in four MENA Countries”, Research Femise n° FEM32-05. Shenker, Jack (2011), “Hosni Mubarak’s Puppet Trade Union Federation Dismantled”, The Guardian (August, 5, 2011). Stein, Ewan (2012), “Revolutionary Egypt: Promises and Perils”, in After the Spring: Power Shift in the Middle East?, London School of Economics. Stevenson, L. (2010), “Private Sector and Enterprise Development: Fostering Growth in the Middle East and North Africa”, International Development Research Centre (IDRC), Cairo, Egypt. Thomaswhite.com, 2012, “A Postcard from the Middle-East & Africa : MENA tourism blooming again after Arab Spring”, May 18th. Togan, S. & J. Michalek (leaders), (2007). “ The Role of the Services as the Factor of Integration of Euromed», Research Femise n° FEM3d-01. Togan, S. & J. Michalek (leaders), (2009). “ Liberalization of Services in Poland and Turkey: A Comparative Analysis», Research Femise n° FEM32-02. Tommy Clausen, Mikko Pohjola, Koson Sappraserty and Bart Verspagenz (2011), “Innovation Strategies as a Source of Persistent Innovation”, Industrial and Corporate Change, Volume 21, Number 3, pp. 553–585. UNDP (2006), “The Arab Human Development Report 2005: Towards the Rise of Women in the Arab World”, New York. UNESCO (2011), “Arab Youth: Civic Engagement and Economic Participation”, Beirut. Wolman, David (2008) “Cairo Activists Use facebook to Rattle Regime”, Wired Magazine: 16.11. World Bank (2008), “The Growth Report : Strategies for Sustained Growth and Inclusive Development”, Commission on Growth and Development.er 2012.

-93-


-94-


DETAILED SITUATION IN MP’s : COUNTRY SHEETS

-95-


-96-


ALGERIA: Partial immunity to the Arab Spring but a very long road towards inclusive growth Introduction As noted in last years FEMISE report, Algeria did not seem to face situations of the same magnitude to those of Tunisia and Egypt. However, the domestic political scene had been unstable, with the president entering his third mandate following constitutional amendments. Since early 2012, the country had to face a wave of peaceful protests in several regions, mostly led by the Algerian youth. Issues of unemployment, housing and public services have been at the forefront of contestations, having engendered social solidarity (OpenDemocracy, 2012). All in all, last year the Algerian economy registered a rate of growth below its pre-crisis trend, after the initial decline in 2010. The domestic economy performed modestly but rather well when taking into account international economic instability. As always, oil prices have been determining the level of Algerian exports which in turn affect growth. The macroeconomic management throughout the last decade allowed for currency reserves to be ample and thus reduce Algerian debt. However, past studies by FEMISE (2010) had noted how oil-led growth contributes to maintaining domestic structural foundations, how Algeria is remarkably import oriented, with agriculture and Table 1. Main Indicators of the Algerian economy Key indicators

2010

2011

2012

2013

Real GDP growth (%)

3.3

2.4

2.6

3.4

Consumer price inflation (av; %)

3.9

4.5

8.4

5

Budget balance (% of GDP)

-0.6

-0.2

-2.4

4.2

Current-account balance (% of GDP)

7.5

10.0

6.2

6.1

Commercial banks’ lending rate (av; %)

8.0

8.0

8.0

8.0

Exchange rate AD: US$ (av)

74.39

72.94

Source: EIU

77.84 73.15

industrial production below their potential. It was also noted that Algeria could be becoming aware that the wealth of its hydrocarbon economy cannot support growth eternally. Meanwhile, it was suggested that the focal point should be on structural policies to support employment and strengthen the link between vocational training and the job market. Indeed, while unemployment has been on the decline, the Algerian youth has been suffering. Now, the Arab spring put a number of things in perspective for Algeria, while the country managed to respond to the challenges of the 2008-09 international crisis (maintaining structural voluntarist policies), it still has a long way towards an inclusive productivity based-regime that allows for more employment, less inequalities and poverty all the while maintaining growth (see FEMISE 2011). The questions are the following: Can Algeria solely base its growth regime exclusively based on public initiative? Can the country maintain structural policies that are not always profitable? Can the authorities deal with an unusually low fiscal balance? Could financial reform be efficiently implemented in order to ensure better allocation of funds to productive projects? All in all, the macroeconomic, social and political situation in Algeria allows for the following observations: Economic growth is expected to reach 2.6% √ in 2012, with GDP being as always fueled essentially by the industry and services sectors. Internal political stability and increased world and EU growth could provide better prospects starting from 2013. While total unemployment is close to the √ 10% mark, the Algerian authorities have not been able to generate enough high skilled jobs. Meanwhile, the country will need to create about 3.7million jobs by 2030 if it wishes to just maintain its 2007 unemployment and inactivity rates. This implies a 1.57% annual rate of job creation to ensure the feasibility of this scenario. Currently, the persistently high -97-


level of youth unemployment is due to low elasticities while the low level of sensitivity of employment and unemployment to GDP growth can be attributed in part to the inflexibility of the labor market. √ After reaching a rate of 4.5%, inflation could climb to 8.4% in 2012. The situation is rather serious, prices rose by 9% year on year in the first quarter of 2012, especially because of a rise in the price of foodstuffs. Meanwhile, between 2001 and 2012 the purchasing power of Algerians appears to have literally collapsed. √ The current account should continue its upward trend in 2012, estimated at 10% of GDP. But, major exporters to Europe, including Algeria, are seeing and will continue to witness a decline in the volume of their exports. All in all, while Algerian prices increased, this should not mask the fact that the volume of Algerian gas sold has fallen. The fiscal policy in Algeria for 2012 has √ been essentially focusing on measures to support the domestic economy, supporting SMEs and diversify more in order to become less dependent on the oil-sector. The Algerian draft 2012 budget proposes the extension of last year’s social and economic actions to assist the less privileged and support employment. The fiscal balance is, expected to reach -2.4% of GDP in 2012, from -0.2% in the prior year. The social aspect of growth has been very √ limited in offering opportunities. Growth needs to be shared by the majority of the labour force and working age population to be inclusive. But, the labour market participation rates are still very low in absolute terms, in 2011, more than half of the working age population in Algeria was not participating in the labour market while the situation for the Algerian youth is also extremely difficult. All in all, indicators of inclusive growth that were used show that the degree of inclusiveness of growth in Algeria has been overall very low. Algeria agreed with Portugal on providing √ easier access of Portuguese companies on Algerian soil. Tax incentives and attractive conditions of funding would allow strengthening economic relations through this bilateral agreement, in sectors that could include hydrocarbons, information and com-

munication technologies (ICT), construction, services and others. √ Authorities also announced some initiatives for the support of the private sector. The Bourse d’Alger is going to become open to foreign capital in order to add liquidity to encourage more domestic firms to list. Meanwhile, plans to boost investment in tourism were announced, aspiring to attract 3.5 million tourists per year starting in 2015. √ We conclude that Algeria clearly needs to choose appropriate policies for economic diversification. But broadening an oil-exporting economy can be complicated by relative price variations. Income from oil-extraction might boost the demand for goods, however, in the case of non-tradable goods one should expect increasing marginal costs, thus price rises visa-vis internationally traded goods and finally real exchange rate appreciation which confines the firms capacities to pierce the markets of new tradable goods. Investment trade freedom and resource dependence all determine the level of export diversification. Here will be a need to reconstruct the ins√ titutional framework. In order to have a chance to create conditions needed to generate an endogenous industrial dynamic, institutional reforms should reconcile the required time for “learning” and the need to put an end to rent-seeking behaviour through radical changes. Relying more on total factor productivity can only be accomplished through regulatory reforms that allow for transparent competition. The elevated rates of unemployment √ among the graduate youth is also the result of a labor market demand and supply mismatch. Focusing on employment, highlighting the significance of active policies, as opposed to passive ones, should be the way to go for Algeria to prevent future issues instead of trying to find a cure. I. Political developments and interaction with economics I.1. Algeria immune to the Arab-Spring? Last year in Algeria was of an interesting nature, while it was not costly in terms of economic -98-


growth, unemployment and fiscal deficits as in Egypt and Tunisia, the economy slightly underperformed while there were still worries as to the future of political tensions that could ensue. There was no particular indication of political change as in neighbouring MPs, Algeria’s president has been appointed until 2014 and is expected to fulfil his mandate. Meanwhile, cases of unrest among Algerians have been noted but did not seem to be as widespread as in neighbouring MPs to lead to a change in government. The major political event was the one of parliamentary elections which were held in May. What may come as a surprise Is the fact that the Islamist party was met with a reverberating defeat which marks a departure from the trends observed in neighbouring MPs. The Islamist Green Algeria Alliance (made up of the Movement of Society for Peace, the Movement for National Reform and the Islamic Renaissance Movement) only managed to win 48 out of 462 seats in parliament while the National Liberation Front and the Democratic National Rally respectively won 220 and 68 seats. Some may think that Algeria is immune to the happenings in the rest of the region. But one must not forget that the last time Islamists, with the Islamic Salvation Front, had won an election in Algeria the result was for the second round to be cancelled, emergency law to be declared which later lead to civil war. Perhaps the Algerian population is still under the influence of these memories and did not want to make such a choice again (Malashenko, 2012). This opinion is shared by Achy (2012) who adds that, unlike the islamist parties in Tunisia and Egypt, the moderate Islamists in Algeria were already part of the presidential majority underscoring that the population might have perceived «their last-minute decision to run as an “opposition” as mere political manipulation». Let it also be noted that Algerian authorities are flexible enough to rapidly the needs of the population when tensions appear to rise. For instance,

during the Arab Spring food prices were lowered, civil servants’ wages increased and housing construction was accelerated. Public spending increased by more than 50% in the last two years while young entrepreneurs received interest-free loans to start their businesses (Achy, 2012). Thus, Algerian authorities seem to be more pragmatic which could explain why secular forces have met such success in Algeria and constitute a « trend apart » (Malashenko, 2012). In conclusion, is Algeria immune from the ArabSpring? The answer could be yes in the short-run but would not be so clear for the longer term. Indeed, it seems the Algerian regime has been protected by oil-resources, which allow appeasing public opinion, and memories of the 1990s civil war, which are still fresh. But, the authorities’ ability to control the fiscal deficit could be in jeopardy in the medium-run, especially if oil-prices start falling. Meanwhile, the turnout figure of roughly 42% during the elections signifies that the population is not necessarily content with the current state of affairs. I.2. What is likely to happen in the coming months and beyond? Now that the elections are over things are « going back to normal » and no particular change in economic policy is expected. The most probable scenario is that Algeria will keep avoiding political and social unrest. Even so, some political instability could progressively rise since the issue of Bouteflikas’ succession is not an easy one. All in all, as noted by EIU (2012) the need for economic reform will remain strong « as Algeria’s dilapidated infrastructure, obsolete industrial complexes and underperforming educational system all need upgrading ». As noted by Achy (2012), « Algeria is a rich country with deep economic, social, and regional imbalances... Most Algerians suffer from declining quality in basic social services, including education and healthcare ». Meanwhile, the rate of youth -99-


unemployment is above 20%. Thus, more spending to diversify economic activity should be expected. Whether the private sector ends up playing a larger role in the economy remains to be seen. Let it be noted that, Algeria had undergone a profound restructuring in order to promote a market economy open to private initiative and trade liberalisation. But there are always fears that, as noted by FEMISE-EIB (2010), “Algeria is once again moving towards protectionism... Although on the surface the principle is to re-establish the Government’s role in addressing market failures and support local businesses as well as place general recommendations in a local context – all legitimate responses – in practice it looks more like a return to support via protectionism”. Indeed, in the short-run protectionist tariffs will probably remain to control domestic prices, while repatriating profits will still be difficult for companies considered earning « excessive income » in the Algerian market (EIU, 2012). Finally, Algeria’s’ relations with the international community, especially the EU and the US, are expected to remain positive. The country remains EU’s fifth-largest energy provider while the European market is also its largest trading partner, the destination of roughly half of Algerian exports. Meanwhile, Algeria is also a strategic partner of the United States and the EU in their fight against terrorism. These facts contributed to the fact that both the EU and the US rapidly approved the result of the parliamentary elections in May 2012 despite some calls for fraud (Achy, 2012). II. Macroeconomic and sectoral estimates II.1. An economy to grow, though still modestly, in 2012 Economic growth in Algeria is expected to reach 2.6% in 2012, with GDP being as always fueled essentially by the industry and services sectors, respectively representing a share of 63.5% and 29.5% in 2011. The share of the later sector is ex-

Table 2. Economic growth indicators 2010

2011 2012* 2013*

World GDP growth

-2.3

3.9

2.6

2.2

EU27 GDP growth

-4.3

2.1

1.6

-0.4

Middle East and North Africa growth

1.7

5.2

3.4

3.4

Algeria’s GDP growth

3.4

2.4

2.6

4.3

Origin of GDP (% of factor cost GDP) Agriculture

8.9

8.9

8.9

8.7

Industry

62.1

63.5

62.8

63.8

Services

31.0

29.5

30.2

29.4

Origin of GDP (real % change) Agriculture

3.3

2.2

2.3

2.1

Industry

3.3

4.7

1.5

5.9

Services

3.3

-0.4

3.9

2.5

Source: EIU, * forecasts

pected to slightly grow in 2012, meanwhile, agriculture should represent no more than 9% of the value-added. All in all, the largest real change in output is expected to come from the service economy (3.9% expected growth) followed by a timid increase in agriculture (2.3%) and the industry sector (1.5%). The still modest GDP growth that is anticipated for 2012 derives from relatively weak hydrocarbons performance since a partial shutdown at Algeria’s largest refinery depresses industrial production, thus, net exports are expected to amount to half their value in 2008 (33 ADbn at 1980 prices versus 66 ADbn at 1980 prices). Meanwhile rising inflation could impede on private consumption. On the other hand, the expansion of the civil service and increases in the wages of public servants will probably boost private consumption. As for investment, the GFCF could meet a lack of financing and uncertainty over possible protests and riots. Infrastructure projects in housing and road/ rail construction will increase public consumption but let it be noted that such projects are often delayed (EIU). Internal political stability and increased world (estimated at 2.2% for 2013) could provide better pros-

-100-


Real expenditure on GDP (AD bn at constant 1980 market prices)

Figure 1. Contribution to GDP growth 500

5 4,5

4,3 400

4

3,4 300

200

78

71 52

3,1

56

1,8

87 61

2,4

94

101

2,4

110

104

65

73

77

2,4

84

2,6

3 2,5

91

84

80

66

45

41

38

33

31

102

103

108

115

122

131

136

141

2006

2007

2008

2009

2010

2011

2012

2013

100

3,5

115

2 1,5 1 0,5

0

0

Private consumption Public consumption Stockbuilding

Net exports GFCF Economic growth

Source : EIU

pects starting from 2013. The energy sector is and will undeniably continue to be the main sector of interest. High oil prices and an expected increase in oil production will ensure that (EIU). But to ensure long-term growth, less restrictions on foreign direct investment (FDI) will be need to attract foreign investors. II.2. Unemployment pressures Some might say that the unemployment rate in Algeria has followed a downward in recent years. Nonetheless, the labour force is growing at a fast pace and employment creation is insufficient to cover for the needs of the Algerian youth. The facts are the following: despite many years of constant growth, the rate of unemployment was still high compared to other emerging countries. More precisely, as in other MPs youth unemployment has been prevailing and could worsen when demographic pressures are taken into account. While total unemployment is close to the 10% mark, it is more than double for the Algerian youth. One notes that the ratio of youth unemployment to adult unemployment is equal to 3 which means that for every jobless adult there are also 3 young people without employment. The Algerian authorities have not been able to generate enough high skilled jobs, meanwhile, there is a large share of unemployed students in the

fields of social sciences (28.7% unemployed) and humanities (27.3% unemployed), leading to a shortage of the skills that are essential to the private sector. Moreover, almost three quarters of the unemployed are below 30 years of age while inequalities are also present across genders with young women suffering the most (37.4% rate of unemployment).

A recent paper by Furceri (2012) analyzes unemployment and labor market developments in Algeria and presents those factors that might be impeding on job creation. More precisely, employment-GDP elasticities for main sectors and different age groups are calculated, meanwhile, the outcome of progress in labor market flexibility on unemployment is also measured. The author suggests that the persistently high level of youth unemployment is due to low elasticities while the low level of sensitivity of employment and unemployment to GDP growth can be attributed in part to the inflexibility of the labor market. The labor market is characterized as rigid, faTable 3. Unemployment indicators in Algeria (2010) Unemployment rate

Men Women Both

Total

8.1

19.1

10

Youth (16-24)

18.6

37.4

21.5

Adults (25+)

5.4

15

7.1

Ratio of youth unemployment on adult unemployment

3.4

2.5

3

Ratio of unemployed youth on total unemployed

46.7

35.8

43.2

Ratio of unemployed youth on total youth 15+

8.7

3.3

6.1

Ratio of unemployed youth on total youth 16+

9.5

3.7

6.7

Long term unemployment

5.4

11.6

6.4

Incidence of long term unemployment

66.2

60.6

64.4

40

25.3

% of unemployed youth (15-24) 11.3 neither in work force nor schooling Source: ONS

-101-


Table 4. Algeria : Employment needs by 2030 Scenario B: Limiting the Scenario A: Maintaining rates increase of the number of of inactivity and unemployment inactives and unemployed of of 2007 SCA by 50% Jobs to create 2007-2030

Annual rate of Annual rate of Jobs to create needed jobneeded job2007-2030 creation 07/30 creation 07/30

Observed rate of employment change

2011

2012*

Algeria

3 710 613

1.57%

7 666 398

2.81%

1.50%

2.10%

MPs (average)

3 423 581

1.65%

6 461 494

2.74%

Source : Blanc (2011) for scenario projections. EIU for observed rates of employment change.

voring insider versus outsider workers. The paper stresses that improvement in labor market conditions could have a significant impact in reducing unemployment both in the short and medium run. Taking into consideration demographic trends as well as trends in economic activity, Blanc (2011) calculates the employment needs of the Mediterranean labor markets for the next decades. Several « target scenarios » are taken into account and two of them are presented in Table 4. The first scenario highlights the number of jobs that are going to be necessary to maintain the unemployment and inactivity rates of 2007, a year which was taken as a benchmark since in the 2005-2007 period there was no issue in MPs regarding shortage of labor for newcomers (employment creation of 2%). In the case of Algeria the study finds that the country will need to create about 3.7 million jobs by 2030 if it wishes to just maintain its 2007 unemployment and inactivity rates. This implies a 1.57% annual rate of job creation to ensure the feasibility of this scenario. But if the authorities are more ambitious in their strategy and wish to reduce the increase in the number of the unemployed and in the number of inactives by 50% then they will need to create about 7.7 million jobs by 2030. This supposes an even higher annual rate of job creation of roughly 2.8%. One would ask the following question, can any of these scenarios be fulfilled by Algeria? When looking at the rate of employment growth in 2011 (1.5%) one notes that it is below the needed rate of job-creation in both scenarios. This means that

the current trend of job creation is not even sufficient to cover the needs of the newcomers into the labour market. Thus, in a long-term perspective, if authorities did not manage to improve their efficiency in creating more jobs, unemployment would be expected to rise even more. There is however some room for hope since current projections suggest that employment will grow in Algeria in 2012 at a rate close to 2.1% which, while not high enough to cover for the needs of “Scenario B”, would be sufficient in covering the annual needs to maintain unemployment and inactivity rates stable. Undeniably, more jobs are necessary for the Algerian youth. According to the Chairman of the Forum of Heads of Enterprises (Northafricaunited. com, 2012) the Algerian economy will need to create roughly 350 000 job positions every year which, despite recent initiatives, is far from what is happening currently since the real economy only creates between 100 000 to 150 000 jobs. Initiatives for employment creation seem to often be precarious which means that after a while the young recipients are going to lose their benefits. There also seems to be an inability to generate a large number of employment positions due to the limited number of SMEs; Algeria is currently home to around 600 000 units a figure that is far from what it should be. It is believed that Algeria should have a number closer to 1.5 million companies but such a possibility finds the obstacle of a mismatch between the industry framework and the needs of the economy, with training being below expectations.

-102-


II.3. Inflation: Has it become a major threat? After reaching a rate of 4.5%, inflation could climb to 5.1% in 2012. The situation is rather serious, prices rose by 9% year on year in the first quarter of 2012, especially because of a rise in the price of foodstuffs. Inflation appears to have progressively become an issue, one that must be imminently dealt with by the authorities. Only in April, the gross index of consumer prices in Algiers would record additional higher prices in foodstuffs (1.5% monthly increase) due to a 2.4% monthly rise in the price of agricultural products. These include vegetables and potatoes which marked a 9.6% and 12.6% rise respectively. Compared to April 2011, the price of foodstuffs increased year-on-year by 15.9%. Hopefully, inflation will ease back throughout the year with progressively lower commodity prices and extensive subsidies to contain price growth. Meanwhile, authorities will try to impose price ceilings and manage distribution (EIU). But the fact remains, between 2001 and 2012 the purchasing power of Algerians appears to have literally collapsed. Looking at the official figures does not reflect the real evolution of the cost of living inside the country. The reference basket used by the ONS does not take into account the real housingcosts that one may find in the real-estate market. Meanwhile, the rise in food prices is not only a recent phenomenon, for example the price of mut-

ton increased by 129.9% from $ 501.33 dinars per kilo in 2001 to 1,152.92 in March 2012, the price of eggs surged by 72.54%, the price of chicken by 52.52% while the most dramatic increase comes in the fish category where one may find increases between 133% and 320% depending on the product. Similar increases can be found in the price of fruits and vegetables, red potatoes marked a 198.59% increase (74.26 dinars in March 2012 versus 24.87 in 2001) while the price of lettuce increased by 168.40% (TSA-AlgĂŠrie, 2012). All in all, prices have soared since 2001 while wages have not changed to the same extent, leading to a progressive collapse in purchasing power for many. II.4. External Finances are improving Throughout recent history, Algeria has traditionally been recording a high current account surplus, owing to an impressive oil-led trade surplus which more than compensates for limited service exports and a deficitary income balance. But, in recent years one notes that exports performance has been much less successful, affecting the trade balance and thus lessening the surplus in the current account. After the massive degradation of the current account in 2009, owing to the high volatility in oil-prices and decreased external demand, the current account progressively bounced back reaching a surplus close to 10% of GDP in 2011.

Table 5. Inflation by group of products 2001=100 Weight

Variation Variation Variation 8 Index - August August 2012 / August 2012 / months 2012 / 2012 July 2012 August 2011 8 months 2011

TOTAL

1000

155.97

1.17

7.19

8.87

Foodstuffs, non-alcoholic drinks

430.9

170.94

2.34

9.16

11.55

Clothing, shoes

74.5

117.88

0.16

5.71

5.74

Housing

92.9

140.6

0

4.5

4.42

Furniture

49.6

123.01

0.78

3.67

4.16

62

128.36

0.3

3.51

4.6

Transport and Communications

158.5

157.44

0.16

4.23

4.83

Education, culture etc

45.2

123.39

-0.28

2.82

3.05

Others

86.4

183.76

0.1

11.15

15.66

Health

Source: ONS -103-


Figure 2. Algeria Composition of Current Account Balance 2006-08 (+ FDI inflows), (average) bn US$

Source: EIU

Exports rose by 27.7% in 2011, aided by the 39.3% rise in the price of oil, with the price of brent per barril reaching 110.9 US$ in 2011 up from 79.6 US$ the prior year. Revenues from the hydrocarbon sector increased by roughly 8 billion euros in 2011 (+20%) representing more than 48 billion euros (European Commission). The EU remained the first trading partner with trade amounting to roughly 44.7 billion euros in 2011 and has long been Algeria’s main source of imports and exports destination with an average share of 50% for total trade.

2010-2011 (+ FDI inflows), (average) bn US$

for 2012 suggest the trade surplus could rise even further to roughly 29.6 bn US$ owing essentially to relative stability in the price of oil, expected to remain close to 109.5 US$ per barril.

As a result, the current account is estimated at 9.7% of GDP which is still far from its levels reached prior to the 2008/09 international crisis. But, all is not as bright as it seems for the medium-run. Undeniably, since the 2008/09 financial crisis the demand for the hydrocarbons sectors, especially from Europe, has been heavily affected. Thus, major exporters to Meanwhile, price rises worldwide also had an in- Europe, including Algeria, are seeing and will contiflationary effect on the Algerian import bill which nue to witness a decline in the volume of their exattained 44.9 bn US$, a 15.4% year-on-year rise. At ports. In the case of Algeria, the IMF (2012) notes this point one must again highlight that the produc- how contracts with partners such as Italy and Spain, tive sectors of the domestic economy have conside- which ensure stable export markets, might not be rably weakened which influences on Algeria’s ability viable for long since “ the viability of these markets to meet domestic demand. Thus, to do so it must is highly dependent on the economic performance rely on imports, the value of which has doubled in of these buyers. It appears that these key buyers, the past five years despite administrative measures locked into their indexed contracts, responded to confine imports (Carnegie, 2012). As a result the to the decreased demand by purchasing only the trade balance reached a surplus of 27.9 bn US$ in minimum volume required by their long-term, oil2011 corresponding to a 53.3% rise. Current trends price-indexed gas supply contracts”. All in all, while Algerian prices increased, this should Figure 3. External finances (US$ bn) and current account (% of GDP) not mask the fact that the volume of 25 50 24,7 22,6 Algerian gas sold has fallen. So these 20 40 20,1 15 30 10 7,5 9,7 long-term contracts have the effect 10 20 8 5 10 of making Algeria’s gas prices less 0,3 0 0 -5 -10 attractive as oil prices increase. As -10 -20 for future prospects of the Algerian -15 -30 2006 2007 2008 2009 2010 2011 2012 2013 export sector, let it be noted that if Current transfers balance (US$ bn) Income balance (US$ bn) gas prices become decoupled from Services balance (US$ bn) Trade balance (US$ bn) Current-account balance (% of GDP) European oil-prices, Algeria might be Source : EIU forced to sell at a new set of prices -104-


“that reflect a whole slew of factors —the total supply, the new gas deregulation laws, environmental concerns, and the cost of other energy sources— rather than just the evolution of spot oil prices” (IMF, 2012). Thus, macroeconomic and financial forecasts could become ambivalent and impede on the anticipated results of economic policy. II.5. Debt that remains sustainable due to foreign reserves The fiscal balance is expected to reach -2.4% of GDP in 2012, despite being unusually low for Algerian standards the fiscal constraint is not particularly worrisome for the domestic economy. External debt is expected to continue declining, from 4.7 bn US$ in 2011 to an estimated 4.3 bn US$ in 2012. Thus, total external debt could reach 2.1% of GDP in 2012 and could even fall below the 2% mark starting from 2013. This is not surprising since authorities have been drawing on the reserves of the oil stabilisation fund for some time. Meanwhile, the debt to exports ratio is expected to fall to 5% in 2012, from 5.6% in 2011 and 7.8% in 2010. III. The long-term challenge: achieving inclusive growth is currently far from a done deal At this point, one may ask if Algeria favors a model of growth that is inclusive, one that is broader and provides not income but opportunities for all. We

represent the inclusiveness of growth through both social a social standpoint (equality of opportunities through labor participation) and an economic view (enlargement of the scope of the economy, for example through trade diversification). III.1. The social aspect of growth: a very limited capacity in offering opportunities expressed by receding participation rates in the labor market As suggested in the report, growth needs to be shared by the majority of the labour force and working age population to be inclusive. Unfortunately, data for Algeria suggests that growth has been all but inclusive from a social viewpoint. First, the labour market participation rates are still very low in absolute terms, in 2011, more than half of the working age population in Algeria was not participating in the labour market. Meanwhile, not only are the rates observed considerably lower than in other emerging regions such as MERCOSUR or even Eastern European transition economies, they are also lower than in the rest of the Mediterranean region. The situation in 2011 suggests that nothing changed in a decade, with an average participation rate of 43.6% in 2011 versus 44% in 1999. The only positive element to be highlighted is the increase in the participation rate for women which was of 15% in 2011 versus 11.9% in 1999. But even so, women are still too few in the labour market when compared to regional shares (about 20% on average for MPs).

Table 6. Labor Market Participation Rates Evolution in Algeria and Selected Emerging Countries 1999-2011 1999 Male Female

2005

2008

2011

TTL

Male

Female

TTL

Male

Female

TTL

Male

Female

TTL

76

11.9

44

73.2

13

43.2

71.7

14.1

43

71.9

15

43.6

MPs (Median)

74.8

22.4

49.4

72.2

22.2

46.8

71.3

24

47.3

71.5

24.6

48.3

MPs (Median ex. Isr, Turk)

74.9

20.4

47.3

74.5

18.3

46.3

72.7

18.8

45.6

71.8

19.7

45.6

MERCOSUR (median)

82.7

49.6

65.8

81.5

52.8

66.4

80.1

54.7

65.3

80.2

55.6

66.1

ASEAN (median)

83.6

69.3

75.3

83.5

69.6

75.3

82.5

69.1

74.9

82.7

68.5

74.4

East. Europe

65.5

52.6

58.5

63.9

51.4

57.1

63.8

51.2

56.9

64.6

51.8

57.6

Algeria

Source : Own calculation based on ILO. LaborSta EAPEP database -105-


Table 7. Labour Market Participation Rates of the Youth in Algeria & selected regions 1999-2011 1999

2005

2008

2011

20-24 25-29 20-29 20-24 25-29 20-29 20-24 25-29 20-29 20-24 25-29 20-29 Algeria

47.9

56.6

51.9

38.9

56.7

47.1

34.0

56.8

45.0

31.8

57.4

44.6

MPs*

48.8

60.1

53.8

45.6

59.9

52.7

44.3

60.5

51.6

42.7

61.7

51.4

Latin America

64.5

78.4

70.6

70.2

80.2

74.7

73.8

81.1

76.8

74.6

81.5

78.4

East Asia

72.9

86.9

79.9

71.5

87.8

80.2

71.2

87.8

79.6

69.3

86.7

78.1

Est. Europe

71.5

85.5

60.0

64.5

80.4

56.3

57.0

78.1

54.3

53.5

77.6

54.4

Source : Own calculation based on ILO, LaborSta EAPEP database

Second, regarding youth participation the situation seems unfortunate to say the least. Indeed, for young people at the 20-24 age-range only 31.8% were active in 2011, this is a decrease of more than 15 percentage points when compared to their share in 1999. Inactivity among those young Algerians is worse by about 43 percentage points compared to Latin America, more than 20 percentage points compared to Eastern Europe and about 10 percentage points vis-à-vis the Southern Mediterranean as a whole. Less severe is the evolution in the participation rate of 25-29 year olds, it actually increased (though not by much) to reach 57.4% in 2011 though remaining below regional values. All in all, from a social standpoint, Algeria appears to have a very low capacity in offering opportunities.

III.2. Economic aspect of inclusive growth: Limited opportunities since the scope of the economy remains narrow As for tackling the economic feature of “inclusive Growth” in increasing opportunities through the extension of the scope of the economy, we focus on: (i) economic diversification measured by the trends in exports concentration; (ii) opportunities for firms to develop funding availability through banks; (iii) global labour and factor productivity trends. Unfortunately, the growth model is all but inclusive when looking at the economic aspect of growth. First, for growth to be inclusive, this implies that the share of sectors that contribute to the economy

Table 8. Concentration of Exports in terms of products and markets (based on SITC rev3 3-digit data) 2000 share 2000. Trade 2010 . Trade of top 10 Concentration Concentration products in Index Index total export value

2008 share of top 10 products in total export value

2010 share 2000 share 2010 share of top 10 of top 10 of top 10 products in Partners in Partners in total export total export total export value value value

Algeria

0.301

0.311

98.80%

99.10%

99.30%

89.28

83.71

MPs (Median)

0.067

0.057

62.6%

60.3%

57.0%

73.33

69.10

MERCOSUR* (av.)

0.030

0.043

41.9%

46.9%

51.5%

66.60

57.46

ASEAN (Median)

0.094

0.043

67.0%

53.7%

52.7%

71.79

72.89

Ukraine

0.036

0.034

45.4%

52.7%

57.0%

56.74

56.44

Belarus

0.052

0.094

41.3%

62.7%

52.1%

83.28

80.56

China

0.018

0.026

31.4%

35.7%

52.7%

73.56

60.36

India

0.041

0.048

34.6%

42.0%

57.0%

56.80

52.96

Note: The Trade Concentration Index is aimed at assessing the degree of concentration/diversification of a given country’s exports. Based here on the Hirschmann-Herfindahl Index, it ranges from 1 to 0: the lower the indicators, the more diversified the economy. Similarly, the lower the share of the top 10 products, the more diversified the economy trade. *: Only Argentina & Brazil Source: Own calculations using tradesift and Comtrade -106-


ria since the share of the top 10 partners in 2000 was almost 6 percentage points higher.

Table 9. Firms using banks to finance investment (% of firms) Average 2002- Average 20062006 2010 Algeria

27.16

8.88

MPs (median)

20.09

12.29

MERCOSUR (median)

8.24

19.15

ASEAN (median)

29.38

21.48

Ukraine

16.71

32.08

Belarus

14.95

35.82

China

28.76

India

46.58

46.58

Source: WDI

ultimately increased, thus offering more economic opportunities. When using the level of the concentration of exports as an indicator of the economy’s ability to benefit from openness we see that Algeria made no progress whatsoever in the recent decade, with an index of trade concentration (the lower the TCI index, the more diversified the economy) at 0.311 in 2010, a value well above the Mediterranean median and what is observed in the developing world. The level of trade concentration can be understood in relation with the limited degree of diversification in terms of products. Indeed, in 2010 the share of the top 10 exported commodities reached of 99.3% versus 98.8% in 2000. The commodity export structure of Algeria probably did not include more products in 2010 than it did in 2000 thus limiting the creation of opportunities for inclusiveness. A sole commodity, not surprisingly that is petroleum oils and crude, represented 43.4% of total exports in 2010, versus an already colossal 42% in 2000.

Second, since inclusive growth favors opportunities and productive employment this makes the issue of firms productivity of the utmost importance. But did the banking system attribute an increasing share to finance firms and contribute to making them more productive? Unfortunately, the answer seems to be no, in Algeria the percentage of firms using banks to finance investment decreased considerably, the share of Algerian firms using banks to finance investment was of 8.9% in the late period versus 27.2% initially. This means that while at the beginning of the 2000s the share of Algerian firms using banks was above the Mediterranean median, far above what was observed in MERCOSUR and close to what was happening in ASEAN economies, in later years their share fell so much that it was at the bottom of the grid compared to the other economies. Last but not least, there were not any consistent increases in factor productivity to allow for the increase in real wages that respects macro equilibrium. Algeria has traditionally followed a capital intensive model of accumulation and has not yet managed to perform a shift towards Total Factor Productivity. Thus, Algeria has not yet followed a factor productivity trend that may allow for its growth model to be more inclusive. All in all, indicators of inclusive growth that were used show that the degree of inclusiveness of Table 10. Trends in Factor Productivity in Algeria and selected emerging economies 1990-2010 Factor Productivity (Average An. Rate in %)

After seeing the less than encouraging results in terms of product diversification, one could ask if Algeria also lacked contracted in terms of trading partners. Here results are somewhat more positive though far from ideal. The share of the top 10 export partners is still very high (83.7%) in 2010, especially compared to similar economies of the developing world, but it is an indication of increased trade partner diversification on the behalf of Alge-

90-95

95-00

00-05

05-09

Algeria

1.20%

-0.30%

0.40%

-1.00%

8 MPs Median

-0.30%

0.20%

-0.10%

-0.40%

Mercosur

-0.50%

0.10%

0.80%

-2.20%

Asean

0.20%

0.20%

-0.20%

-0.90%

Non Eu East

0.00%

1.10%

-0.80%

-3.70%

All emerging Ref 0.20%

0.20%

0.00%

-1.40%

Source: FEMISE

-107-


growth in Algeria has been overall very low. Considerable efforts in terms of labor market participation will have to be deployed. Substantial breakthroughs for product and partner trade diversification will be needed, while support for small businesses and the degree of TFP should fall back to its level of the early 2000s. As we will further elaborate in our conclusion, Algeria well definitely have to rely on measures that allow more investment and trade freedom all the while implementing active labor market policies with a coherent employment strategy for sustainable development.

However, authorities have not always been meeting specific spending targets in the past (EIU, 2012).

IV. Policy Responses and Recent Measures

IV.2. Banque d’Algérie launches measures to combat inflation

All in all, the rise in public expenditure is expected to amount to an additional 1.4 ercentage points in terms of GDP, from 39.8% in 2011 to 41.2% in 2012. But, government revenue to 38.8% of GDP, following a rather stable evolution for Algeria in the price of oil, is expected to counterbalance the expenditure increase. Thus, the fiscal balance is, as noted earlier, expected to be close to 2.4% of GDP in 2012, from -0.2% in the prior year (EIU, 2012).

IV.1. Fiscal balance almost in equilibrium The fiscal policy in Algeria for 2012 has been essentially focusing on measures to support the domestic economy, supporting SMEs and diversify more in order to become less dependent on the oil-sector. Meanwhile, authorities have maintained the system of food, transportation and housing subsidies which means that rising public spending has been driving prices upwards, eroding purchasing power. The Algerian draft 2012 budget proposes the extension of last year’s social and economic actions to assist the less privileged and support employment. Such measures are expected to amount to a total cost of about 4% of GDP while let it be noted that civil service salaries are continuously revised and have increased by about 50% on average from 2008 (IMF, 2012b). Such high level of expenditure on public-sector wages could be taken as a sign to prevent political instability. But can Algeria keep up increasing its expenditure? It appears that existing savings and high levels of budget expenditures can go hand in hand for the time being. However, the latest raise could have detrimental effects on both inflation and competitiveness (IMF, 2012b). The budget for 2012 estimates spending at 7.7 trn AD, a 7.2% decrease compared to the prior year’s supplementary finance law. Meanwhile, Algeria is in the middle of carrying out its five year investment plan (2010-2014) worth 286 bn US$.

Banque d’Algérie is expected to initiate two technical measures that should influence liquidity and the reserve requirement ratio. As noted earlier on, soaring prices are an issue for Algerian citizens which see the prices of basic consumer products (oil, sugar, cereals, vegetables) vastly increase. Since the government has been inefficient in controlling inflation, Banque d’Algérie decided to take action and announced two measures. One relates to an increase in term deposits and the other to raising the reserve requirement ratio. The objective is to recover some of the large sums of money currently lying idle in banks and to avoid credit expansion. The collection of fixed term deposits, previously capped at 1000 billion dinars (10 billion euros, around) now climbed to 1250 billion, an increase of 25%, meanwhile the reserve requirement ratio went from 9 to 11% (Lexpressiondz, 2012). Meanwhile, the BdA will continue to manage the float of the Algerian dinar. International reserves would allow countering any serious downward pressure (EIU, 2012). IV.3. Banking system modernization The capital adequacy ratio of Algerian banks reached 24% at the end of 2011. It should be noted that in countries hit by the economic and

-108-


financial crisis this ratio usually does not exceed the symbolic 10% mark. Meanwhile, the new rating system was initiated. Implementing a new rating system was decided two years ago, now the system is operational and one public and one private bank have already been graded. Banks in Algeria are now classified according to their level of performance compared to their level of risk management. A type of ÂŤ risk mapping Âť should also be established in 2013 to maintain financial stability and detect early signs of vulnerability of the local financial system. Meanwhile, the revival of the joint Maghreb Bank project was announced. The latter would have had an initial capital of 500 million US$ to finance projects within the Maghreb region but was postponed due to political turbulence in the region (Econostrum, 2012b). IV.4. Authorities produce efforts for more international cooperation The European Union and Algeria resumed negotiations on tariff dismantling in Algeria. Meanwhile, in an effort for more international cooperation, Algeria agreed with Portugal on providing easier access of Portuguese companies on Algerian soil. Tax incentives and attractive conditions of funding would allow strenghtening economic relations through this bilateral agreement, in sectors that could include hydrocarbons, information and communication technologies (ICT), construction, services and others (Econostrum, 2012). Meanwhile, Portugal has been an advocate of Algerian entrance in the WTO. Furthermore, there were also some positive developments in relations with neighbouring Morocco. Algerian authorities temporarily re-opened borders with Morocco to allow for Moroccans participating in a cycling tour to pass. This could be seen as a sign of willingness for better relations with their neighbours taking into account that borders between the two countries have been

shut for more than 15 years. Whether the climate of regional instability encourages more cooperation between the two countries and an opening of borders for economic relations as well will remain to be seen (Al Arabiya, 2012). IV.5. Measures to support the private sector Lastly, authorities announced some initiatives for the support of the private sector. The Bourse d’Alger is going to become open to foreign capital in order to add liquidity to encourage more domestic firms to list. But, investment could still be limited by foreign-ownership caps and reluctance among domestic companies to open up their accounts to outsiders (EIU, 2012). Meanwhile, recently, plans to boost investment in tourism were announced, aspiring to attract 3.5 million tourists per year starting in 2015, versus only a 2 million maximum per year currently despite a variety of tourist sites. A combination of private and public investment could be used to improve hotel offer, for instance 70 new hotels are expected to be built, with the private sector allocating 4 billion US$ of investments joining public efforts that amount to 1 billion US$ to improve the infrastructure of existing hotels. This should raise the accommodation capacity from 90 000 beds to 160 000 beds in three years with the ultimate objective being to increase income from the sector to 600 million US$ in that period, versus 400 million in 2011 and also versus a massive 70 billion US$ brought by oil and gas (Reuters, 2012). Foreign firms have also shown interest in the Algerian economy. Emirates International Investment Company (EIIC) restarted work on the first phase of the USD 5.9 billion Dounya Park project in Algiers which includes the establishment of green spaces, recreational areas, an international school, villas and residential buildings. V. Conclusion and recommendations Djoufelkit (2008) had already noted that Algerian state seems to be eager to learn from previous oil

-109-


shocks, saving a great share of rents and using the other share to promote economic diversification with means that include developing macroeconomic incentives for the development of production. But the current incentives are mostly insufficient and inhibited by the lack of microeconomic incentives, such as relating to transaction costs and access to credit as well as by countless institutional disincentives that result ultimately in a cost prohibitive market entry for “new players”.

The diversification strategy to be followed by the authorities should thus identify investments that boost productivity and outweigh the costs of holding foreign assets (AfDB, 2012). It appears that Algeria is seriously thinking of becoming, at least partly, less reliant on hydrocarbons when considering recent measures to boost the tourism industry. More measures of the king will be needed however for the transition to a new model of growth to be successful.

There is a striking fact of economic history to be found, indeed, countries like Algeria with vast resources have experienced slower economic performance compared to poorer economies. In countries like Algeria, having a powerful domestic industry is an issue of economic and political independence and allows substituting imports. But by following such an economic trajectory, the economic model is doomed to fail. All in all, the Algerian industrialization process was undertaken in a time when external resources were thriving, but it soon began to slow-down and then enter a process of degradation (during the recent decades). One could think of a negative and significant relation between growth and resources, a relation that is in line with the theory of the «Dutch disease».

V.1. Diversification and the need to rebuild the institutional framework

Oil exporters such as Algeria have the luxury of not having to worry excessively on fiscal space. On the other hand, Algeria clearly needs to choose appropriate policies for economic diversification. For Algeria there is a vital need to substitute hydrocarbons, which are progressively depleting, with another asset. Algeria is in front of the need of diversification into non-resource based activities. But broadening an oil-exporting economy can be complicated by relative price variations. Income from oil-extraction might boost the demand for goods, however, in the case of non-tradable goods one should expect increasing marginal costs, thus price rises vis-a-vis internationally traded goods and finally real exchange rate appreciation which confines the firms capacities to pierce the markets of new tradable goods (AfDB, 2012).

Infrastructure is a determinant of successful economic diversification. But, as noted by Esanov (2012) the quality of institutions is also a key determinant. Which brings us to the following point, one could also argue that for the Algerian economy to thrive there is a need to reconstruct the institutional framework. A study of Algeria’s political evolution shows oil rents and the oil-based development policy contributed in a negative way to the domestic political economy. As noted by Lowi (2009) “the seeds of the instability that gripped Algeria in the late 1980s and evolved into civil war are not to be found in the oil endowment. Rather, they can be found in the particularities of state-building and of leadership choices – hence, the combination of structure and agency – that preceded the inception of oil-based development, in fact, but were invigorated by it”. Oil rents had been distributed in ways to restrain divisions and overcome any opposition to the governing elites, contributing to corruption and clientilism. Currently, Algeria’s economic freedom score is 51, which means the country is the 140th freest in the 2012 Index. Furthermore, Algeria is ranked only 15th among the 17 countries in the MENA region. Regulatory efficiency continues to be undermined by a track record of unproductive reform (Heritage Foundation, 2012). But, Algeria did not erupt during the “Arab-Spring”. This could be explained by the fact that stability was maintained by authorities at important junctures

-110-


by extending “political resources via the creation of, however meager, crude, or illusory, participatory political structures” (Lowi, 2009). However, truly investing in the development of political institutions should be the way to go for long-term stability, not just a short-term redistributive approach to ease tensions for a limited time. In the context of an economy that still relies on rent-seeking, Bellal (2009) highlights the institutional dimension of the industrialization issue. The author notes that the “deindustrialization” that occurs in the public sector has not been offset by the private sector. Meanwhile, privatization efforts seem to often face serious obstacles, mainly of a political nature, that prevent the private economy to develop. Thus, the project of industrializing the country requires a reconstruction of the institutional context. All in all, in order to have a chance to create conditions needed to generate an endogenous industrial dynamic, institutional reforms should reconcile the required time for “learning” and the need to put an end to rent-seeking behaviour through radical changes. V.2. More investment and trade freedom and expected impact In a recent article Esanov (2012) separates economic diversification into two types: economic (product) diversification, meaning the process in which the economy develops into a more diverse one in terms of goods and services it produces and, export diversification meaning policies planned to modify the shares of commodities in the export mix, export new products and to new markets. The author finds that investment and trade freedom and resource dependence determine the level of export diversification. The two freedoms appear having a positive effect on the level of export diversification while resource dependence slows it down. Meanwhile, FDI seems to ease economic diversification, but has insignificant effects on export diversification. This is in line with previous findings that suggest that countries which have not yet opened up to FDI other than for raw material resour-

ces and infrastructure, would gain to attract it into different sectors with FDI not necessarily conflicting with long-term planning combined with an industrial policy. Indeed, FDI can be a successful driver of long-term growth provided that the beneficiary country manages to absorb the technology and if investment is obtained in an organized and regular manner to facilitate growth (FEMISE – EIB, 2010). Thus, government policies to improve government effectiveness and regulatory quality are necessary for promoting economic diversification (Esanov, 2012). There is an imminent need for Algeria, as for other MPs as well, to rethink its regulatory strategy for business and entrepreneurship. Relying more on total factor productivity can only be accomplished through regulatory reforms that allow for transparent competition. Such reform agenda could include financial support oriented towards innovation that benefits all the social strata. Moreover, more investment and trade freedom will be needed to encourage export diversification. But here lies a major issue that Algerian authorities need to understand: policies that aim at economic diversification could partly impede on export diversification. Potential winners and losers need to be identified for reforms to be efficiently prioritized. V.3. The need for active labor market policies and an employment strategy As noted by Furceri (2012), the elevated rates of unemployment among the graduate youth is also the result of a labor market demand and supply mismatch. More precisely, the private sector has not been able to generate enough demand for skilled workers while at the same time the allocation of young graduates is excessively oriented towards humanities, social sciences, law and education disciplines which generate a shortage of skills required by the private sector. Thus, one could note that adequate and active labor market policies could reduce unemployment

-111-


by “improving the efficiency of the job matching process and by enhancing the skills of the unemployed” (Furceri, 2012). A restructuring aspiring to remove imperfections could also reverse the trend regarding job turnover and the incidence of longterm unemployment. But, as suggested by Fischer (2002), active labor market policies are only one element in the policy package and their influence depends strongly on the overall package as well as the system of employment. In the case of European member states in the past decade one would observe distinguishing differences in the way unemployment responded to favorable employment prospects. In some, unemployment remained high for a long period, in others it responded rather quickly. All in all, active labor market policies helped uphold the employability of the unemployed which helped a quick return to work at the first occasion. Perhaps redefining an Algerian Employment Strategy would help putting employment at the core of Algerian policy. Again, an example from the EU could be useful, at least to some extent. Since 1998 the Employment Guidelines contributed to the improvement of the employment situation across EU countries. There is reason to believe that a four-pillar structure, similar to the one found in the EU, could also help Algeria address issues of employability, entrepreneurship and equal opportunities. More specifically, such structure would address (André, 2002): √ The skills gap, for people both young and old to be able to continuously upgrade their skills so as to adjust to economic and social change, √ The jobs gap, that is the need for good entrepreneurship to save and create high- quality jobs, something Algeria currently lacks, √ The partnership gap, that is the need for partners concerned to discover new ways of working together to implement new forms of work organization, deal with change and improve quality of work, productivity, and competitiveness,

√ The gender gap, that is the need to increase the gender approach in all related policies to combat discrimination. All in all, focusing on employment, highlighting the significance of active policies, as opposed to passive ones, should be the way to go for Algeria to avert issues of unemployment rather than having to solve an evil that has already happened. References: Achy L. (2012), “Algeria Avoids the Arab Spring?”, Carnegie Endowment, May 31st. African Development Bank – AfDB (2012), “Jobs, Justice and the Arab Spring: Inclusive Growth in North Africa”, Paper prepared for the North Africa Operations Department (ORNA) African Development Bank. Alarabiya.net (2012), “Algeria agrees to briefly re-open borders with Morocco: report”, January 16th. André M.H. (2002), « Comparative Experience with Labor Market Reform », in Bernard Funck and Lodovico Pizzati eds. « Labor, Employment, and Social Policies in the EU: Enlargement Process Changing Perspectives and Policy Options, The World Bank. Bellal S. (2009), “Problématique des arrangements institutionnels dans la réflexion sur les politiques d’industrialisation – cas de l’Algérie”, Communication au Colloque international de L’Ecole Nationale Supérieure de Statistique et d’Economie Appliquée (ex INPS) sur le thème: « Croissance, développement et nouvelles politiques industrielles », 17 /18 Mai 2009, Hôtel Hilton , Alger. Blanc, Frédéric (2011), “Employment Perspective in the Mediterranean” In «Tomorrow, the Mediterranean: Scenarios and Projections for 2030» (69– 108). Paris: IPEMED. Carnegie (2012), “Algeria’s Financial Surplus and Socioeconomic Struggles”, May 15th. Djoufelkit H. (2008), “Rente, développement du secteur productif et croissance en Algérie”, AFD Document de travail n° 64. Econostrum (2012), « Le Portugal et l’Algérie dé-

-112-


veloppent leurs relations économiques », February 15th. Econostrum (2012b), “L’Algérie dynamise et modernise son système bancaire”, June 25th. EIU (2012), “Algeria: Country Forecast”, various issues. Esanov A. (2012), “Economic Diversification: Dynamics, Determinants and Policy Implications”, Revenue Watch Institute. European Commission (2012), “ENP Package – Algeria”, MEMO/12/XXX, Brussels, 15 May 2012. FEMISE – EIB (2010), “FEMIP: The crisis and ways out of it in the Mediterranean countries”, November. Fischer G. (2002), « Discussant Notes », in Bernard Funck and Lodovico Pizzati eds. « Labor, Employment, and Social Policies in the EU: Enlargement Process Changing Perspectives and Policy Options », The World Bank. Furceri Davide (2012), “Unemployment and Labor Market Issues in Algeria”, IMF Working Paper, WP/12/99. IMF (2012), “IMF Study Examines Changing Patterns in Global Gas Markets”, IMF Survey online, February 1st. IMF (2012b), “Algeria: 2011 Article IV Consultation—Staff Report; Public Information Notice”, IMF Country Report No. 12/20, January. Lexpressiondz (2012), “LA BATAILLE CONTRE L’INFLATION EST ENGAGÉE: La Banque d’Algérie passe à l’action”, May 10th. Lowi, M. (2009), “Oil Wealth and the Poverty of Politics: Algeria Compared”, Cambridge University Press. Malashenko A. (2012), “An Unexpected Result in Algeria’s Parliamentary Elections”, Carnegie Endowment, May 23rd. Northafricaunited.com, (2012),” The Algerian economy must create 350,000 jobs annually to absorb unemployment”, May 7th. OpenDemocracy.net (2012), “Algeria: reform or securitization of civil society?”, January 30th. Reuters (2012), “Algeria to develop tourism to diversify economy-minister”, April 17th. TSA-Algérie (2012), “Inflation: Les chiffres qui illustrent l’effondrement du pouvoir d’achat des Algériens en dix ans”.

USATODAY (2012), “Algerian president sets elections for May 10”, February 10th. Zawya (2012), “Emirates International begins phase one of Dounya Park in Algiers”, May 18th.

-113-


-114-


EGYPT: Navigating the Economic Transition during Political Instability Introduction A year and a half after the January 2011 popular uprising, the political transition is still incomplete. Progress has been made with the election of a civilian president - which is no doubt a major step forward in the process of democratization - and the military officially stepping down from political life. Yet, some fear remains about significant further progress in the future as the new president retains both executive and legislative powers, after stripping away the remaining political powers of the military. Another important challenge is the re-writing of the constitution which has also been an uneven process. Coming to power is long-awaited chance for the FJP but they will be confronted with 60-year old challenges left unaddressed by previous regimes, in addition to economic hardships of the past year. This means that the new government must give way to crisis management. Their ability to respond to these challenges will determine their popularity in future elections. In particular, the short-term financing constraint is getting tighter and the need for significant capital inflows from abroad to cover seems like a plausible option to explore. Political uncertainty has hovered over economic prospects, especially as progress was uneven and unrest continued. In FY11, economic growth had dropped to 1.8% down from 5% a year before. In FY12, growth is expected to barely close the year at 2%. The outlook for FY12 is as follows: The current account deficit decreased to √ 2.6% of GDP in FY11 further to 3% of GDP in FY12. The exchange rate has only depreciated √ by 5% and reserves fell by close to USD 20 billion. Pressures on the exchange rate may compel the CBE to allow more room for flexibility as reserve depletion may have reached its limit. Inflation has subsided to high single digits √ from 11% in FY11 and is expected to remain so in the immediate term.

√ The fiscal deficit is expected to reach around 9 % of GDP, down from close to 10% of GDP in FY11. Expansionary measures as a reply to rising popular requests raise fiscal sustainability concerns. √ Private credit growth is marginal and there could be evidence of crowding out with government credit accounting for 53% of total credit up from 48% a year ago. This country profile assesses the current economic situation in Egypt and future prospects. The first section takes stock of recent political developments and the second presents a descriptive analysis of the main macroeconomic aggregates. The final section concludes. I. The rise of political Islam: will it succeed? A year after the January 2011 popular uprising, the political transition is still incomplete and progress towards political stability has been somewhat uneven. On the positive side, the emergency law that has been in place since 1981 was finally lifted in May 2012. This law gave police the right for extensive powers of arrest and attention. Nevertheless, civilians continue to be tried in military courts. Also, parliamentary elections took place in late 2011/ early 2012 and their results were in favour of the Islamists parties. The Freedom and Justice Party (FJP) (derived from the Muslim Brotherhood organization) won the largest number of seats (47 %) followed by Al-Nour (a Salafist conservative party) (25%). Yet, barely 6 months after the elections, the parliament was dissolved by a Supreme Constitutional Court ruling invalidating one-third of the 508 seats. The reason for this ruling was that these seats had been reserved for independents, but the candidates elected had been put forward by parties. Accordingly, new parliamentary elections should be held after a new constitution is passed. After several delays, presidential elections also took place in May/June 2012 in two rounds “à la francaise”. For the first time in modern history, Egyptian citizens participated in presidential elections,

-115-


yet the the turnout was low (47%). The results of the first round confronted Mubarak’s last prime minister and the head of the FJP. In the second round, the FJP candidate won 51.7% of the vote. Three weeks after the president took office, a new prime minister was appointed and a week later a new government was formed. The new cabinent is dominated by politically neutral figures drawn from the civil service. Some critics have complained that this means that the government will lack the ability to elaborate and execute innovative policies and reforms. And because the cabinet retained some old members, some see this as a sign of policy continuity. Yet, some concerns could overshadow further progress in the future. First, the constitution-writing, has been an uneven process. A first attempts was made to form a 100-member constitutional assembly to draft the new constitution. Yet, because it had an overwhemling majority of Brotherhood-Salafi members, it was boycotted by most other political forces and was eventually declared unconstitutional by a court. A second assembly was formed in June 2012 where 39 seats were allocated to political parties and the remaining 61 seats to judges, lawyers, unions, professional bodies, religious institutions and youth. New articles must be agreed on by 67% of the assembly. Failing that, a second vote will be held 48 hours later and approval will be by a 57% majority. This assembly will prepare a draft constitution within 6 months. Citizens will vote on the draft constitution in a referendum. Most importantly, the real challenge will be for political forces to agree on the nature of the new constitution. The constitutional debate will have to address aspects related to political system pertaining to the nature, powers, and composition of the presidency, the legislature, and the courts. However, according to Hamad (2012), there is a number of competing visisons about Egypt’s consititution: secular vs. theocratic; and civic vs. militaristic. Hamad explains that the role of the religion is quite debatable with the dominance of Islamic political parties but that there is a need to guarantee the rights of non-Muslim Egyptians. In addition, the military are seeking to influence the

writing of the constitution to guarantee three main objectives: (i) ensure the institutional autonomy of the armed forces away from the elected officials and particularly the parliament; (ii) maintain the army’s financial independence and the privileges of senior staff with minimal intervention from the state; and (iii) safeguard a voice in the policy making process through the establishment of a national security council with strong military membership. Second, the new elected president has dismissed most of the members of the Supreme Council of the Armed Forces (SCAF) – which has been overseeing the transition since president Moubarak was ousted and revoked a constitutional addendum issued by the military council before he took office that curtailed his powers. While the disappearance of SCAF from political life has been a prime demand from many opposition members, the president now retains both executive and legislative powers, pending the approval of a new constitution and the election of a new parliament. More worryingly, the president reserves the right to appoint a new constitutional assembly (this power had been vested in the SCAF, according to its declaration) if the current one failed to accomplish its task. Finally, during the past year and a half, political instability continued with the appointment of four transient cabinets. Moreover, street protests continued in cairo and other governorates over the past year, even though they have become less frequent and for shorter durations. II. Real sector, inflation, external sector developments In general, the real economy showed a mild recovery in Q3-FY12, helped by positive base effects. Inflationary pressures have subsided. II.1. Uncertainty weighs on growth prospects GDP growth slowed down during the first 9 months of FY12 to 1.8% compared to 2.3% during the

-116-


Figure 2. Composition of investment, FY03-FY11 8%

9%

7%

7%

6%

5%

5%

3%

4%

1%

3%

-1%

2%

-3%

GDP growth

Contribution to GDP growth

Figure 1. Contribution to GDP growth (%)

1% 0%

-5%

FY03

FY05

Net exports

FY07

FY09

Domestic demand

FY11

9M-FY12

Economic growth

Source: Author’s calculation based on national data.

Source: Author’s calculation based on national data.

same period last year (figure 1). According to the ministry of planning, there was a rebound to 5.3% in Q3-FY12 compared to previous quarters, but this is the result of positive base effects, as the economy had contracted by 4.3% in Q3-FY11. The growth deceleration in 9M-FY12 came on the backdrop of a sharp decline in exports (down by -1.3% vs. 8% last year) which could not be offset by increases in private consumption (up to 6.1% from 5.6%) and investment (up to 6.8% from -6%). In particular, private investment went slightly down to 9.6% of GDP from close to 11% last year (figure 2). The current government recently announced that that Egypt will require LE 276 billion (US$ 45 bn) in investment to meet its target growth rate of 4-5% in FY13. Of this, the private sector is expected to contribute LE 170 billion.

11% to 6%) and revenues have grown by only 1.2% for the period January-May 2012 compared to 12% last year. Moreover, construction and telecommunications, considered among the high growth sectors, slowed down (to 2.1% from 4.6%) and (to 5.3% from 8.6%) respectively. Finally, growth in transportation and storage sector doubled to 2.6%, but remains much lower than in previous year (figure 3). The economic slowdown is expected to continue as a result of political uncertainty and the lack of clarity around the future direction of economic policy which both undermine investor confidence and tourism. Projections for 2012 place GDP growth at around 1.6%, slightly lower than last year’s modest 1.8%.

On the supply side, some sectors contracted, some II.2. Unemployment remains high witnessed limited growth and others continue to show some resilience in 9 months of FY12 com- Unemployment has increased to 12.6% in Q3-FY12, pared with 9 months of FY11. In particular, oil GDP up from 12% last year and 9% before the uprising. has declined by 0.6% compared with a growth of The initial increase in unemployment following the 0.6% (especially oil manufacturing which dropped uprising was mainly driven by a large increase in by 5.6% in 9 months of FY12) (figure 2). Also, non- male unemployment but has stabilized (at 9% afoil manufacturing contracted by Figure 3. Sectoral growth rates, FY05-FY12 0.3% versus growth of 0.3%. On the one hand, tourism posted a 30% 25% modest recovery (up by 0.3%) af20% ter suffering large output losses 15% 10% last year (down by 3.4%). In fact, 5% 0% tourist arrivals have marginally FY05 FY06 FY07 FY08 FY09 FY10 FY11 9M-FY11 9M-FY12 -5% increased by 4.2% between Ja- -10% nuary-April 2012 compared to a Construction & Building Communication Tourism Non-oil manufacturing fall of 42% during the same period Oil GDP last year. On the other, Suez Canal growth was almost halved (from Source: Author’s calculation based on national data. -117-


Figure 4. Unemployment remains high, FY07-FY12

Figure 6. External finances (% of GDP) 15%

25

10% 5%  

20

0%

15

-­‐5%

10

-­‐10%

5

-­‐15%

0

-­‐20%

Q3-FY07 Q1-FY08 Q3-FY08 Q1-FY09 Q3-FY09 Q1-FY10 Q3-FY10 Q1-FY11 Q3-FY11 Q1-FY12 Q3-FY12

Male

Female

Total

Workers's RemiEances  

CURRENT ACCOUNT  BALANCE  

Source: Author’s calculations based on Central Bank of Egypt’s monthly statistical bulletin.

Source: Author’s calculation based on national data.

ter having increased from 4.8% before the revolution). Meanwhile, female unemployment, which is already high, went up to close to 24% in Q3-FY12 from around 22% last year (figure 4). On a more positive tone, employment growth has turned positive in Q3-FY12 (1.1%) after 4 quarters of contraction. Unemployment is expected to at least stabilize at its current rate (EIU estimate). II.3. Food inflation still high and is a near-term risk Double-digit inflation, which has persisted for the past five years, has declined to an average of 8.6% between August 2011 and May 2012 down from 11% in FY11 (figure 5). This downward trend occurred on the backdrop of decreasing food price inflation (40% of the Egyptian CPI basket) which has gone down to 11% from 19% during the same period. Meanwhile, core inflation (excludes fruits, vegetables and regulated prices) has remained high, fluctuating around 8% since last August 2011. Inflation is likely to subside in the near future unless a depreciation of the currency takes place. In the latter case, higher inflation may require a restrictive monetary policy stance, which may not be consistent with the policy of maintaining economic momentum. Figure 5. Inflation measures, FY06-FY12

FY02 FY03   FY04   FY05   FY06   FY07   FY08   FY09   FY10   FY11   FY12        Trade  Balance        Net  Services  

5% 4%   3%   2%   1%   0%   -­‐1%   -­‐2%   -­‐3%   -­‐4%  

II.4. The external sector remained under pressure a. Current account earnings widens The current account has widened from 2.6% of GDP FY11 to 3% in FY12, the highest deficit since FY98 (figure 6). In part, this was the result of a larger trade deficit (from 10 to 11.5% of GDP) following a decline in non-oil exports (from 6.3 to 5.3% of GDP). Despite the global economic slow-down, exports to Europe (one of Egypt’s main trading partners) have increased to 47% of total exports in H1-FY12 compared to 43% last year. Exports to the US, which have been on a dramatic decline since FY08, have further declined to 13% of total exports from 16% over the same period (figure 7). In other part, the large contraction in the services surplus, (by 1.3 percentage point of GDP) also contributed to the deterioration in the current account. Services receipts fell following a sharp drop in the revenue of almost all service exports, namely tourism (from 4.5% to 3.6% of GDP). Meanwhile, services payments remained at 6% of GDP. However, the increase in private transfers (mostly remittances) from 5.2 to 6.8% of GDP was able to partially offset the deterioration in the current account.

25 20 15 10 5 0

FY06

FY08

FY10

Headline

Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12

Food and beverages

Core

Source: Author’s calculation based on national data.

In the short-term, the current account deficit is not expected to improve, following further declines in export earnings, and growth in Suez Canal dues due to the slowdown in Europe and global trade. Also, tourism activity is expected to continue to be affected by domestic unrest. Remittances, which have proven to be a good buffer to external fi-118-


Figure 7. Geographical composition of exports (% of total) 120% 100%   80%   60%   40%  

Other

Arab countries  

US

H1-­‐FY12

FY11

H1-­‐FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

0%

FY02

20%

Europe

Source: Author’s calculations based on Central Bank of Egypt’s monthly statistical bulletin.

nances so far, may also decline, with the slowdown in the Eurozone. External finances could improve should the government decide to resort to foreign borrowing or should the external environment improves and helps boost foreign exchange earnings. b. Capital inflows are becoming scarcer Due to political uncertainty over the past year and a half, foreign direct investment which had already taken a large hit last year, has gone down by only 5% in FY12 (to USD 2 billion compared to USD 2.1 billion last year). The last quarter alone witnessed the inflow of around USD 1.8 billion. Nevertheless, FDI inflows are 69% less of what they were in FY10. Short-term capital has continued to post net outflows (close to -2% of GDP compared to -1.1% of GDP last year). Compared to June 2010, foreigners’ holdings of government securities in May 2012 were halved. In May 2012, the stock market index had lost 15% of its year-on-year value and around 34% of its value since before the revolution. These outflows were in part cushioned by the decrease in Egyptian commercial banks’ assets abroad (2% of GDP). Consequently, the balance of payment’s deficit almost doubled from 4.3% of GDP, the highest in the past 7 years. Egypt’s financing gap was estimated (in March/ April 2012) at around US$ 11 billion for the next 18 months. After long and delayed negotiations over the past year and a half, the government formally requested a loan for a US$ 4.8 billion stand-by credit facility from the IMF (higher than the the intial

amount of US$ 3.2 billion), an arrangement it had initially declined in June 2011. Preliminary information show that the five-year loan, would have an interest rate of 1.1% and would be used to support the FY13 budget and compensate for the depletion of Egypt’s foreign reserves. The IMF wants Egypt to suggest a plan for fiscal consolidation that includes bolstering revenue and curbign public spending, particularly on subsidies. Egypt must also secure financing from other lending institutions as part of the loan terms. The details and condition of the loan should be negotiated in September 2012. The IMF loan will act as a positive signal to boost the confidence of investors and other potential lenders. There is a growing feeling of national identity/sovereignty that accompanied the uprising and is associated with a skeptic perception of economic reform promoted by international institutions; and a clear preference for homegrown reforms. In fact, public opionion has been overly concerned with issues of conditionality and implications of the loan on Egypt’s sovereignty than with the actual reform program which has not been discussed half as much. In part, this could be due to the lack of awareness about economic problems and solutions but mostly, this is because international organizations are perceived to be the ones who have advocated the reform which have widened the gap between rich and poor during the late Mubarak era. External debt is not high (US$ 33.6 billion in end 2011, and declining as share of GDP, from 14.8 to 13%) and it is very unlikely that the IMF loan will comprise external debt sustainability. However, it could boost the confidence of investors and other potential lenders in the government’s creditworthiness. This would be needed given that Egypt’s sovereign ratings had been downgraded several times since January 2011 (see table 1). The early downgrades in 2011 came on the back of political uncertainty and further cuts reflected the weakening external situation and ongoing political turbulence. The latest wave of downgrades occurred in June 2012 following the ruling by the Supreme Constitutional Court to annul parliamentary

-119-


Table 1. Egypt’s Sovereign Ratings Fitch

S&P

Moody’s

foreign currency local currency foreign currency local currency

bond ratings

Prior to January 2011

BB+

BBB-

BB+

BB+

Ba1 stable

Jan-Feb 2011

BB+

BB+

BB

BB

Ba2 negative

Mars-11

-

-

-

-

Ba3

Oct-11

-

-

BB-

BB-

B1

Nov-11

-

-

B+

B+

-

Dec-11

BB-

BB

-

-

B2

June-12

B+

B+

B

B

-

Source: websites for all rating agencies

elections and dissolve parliament. Fitch cut the ratings to B+. The short-term foreign currency IDR has been affirmed at ‘B’. The rating has a negative outlook, meaning there is a greater than 50% chance of more downgrades in the next 12 to 18 months. Similarly, Sandard and Poor’s (S&P) downgraded Egypt’s long-term ratings (both on foreign and local currency) to a grade of B, 5 notches below the investment grade. The short-term local currency ratings was also cut to B. All the ratings currently have a negative outlook, suggesting further cuts in the future. Moody had already downgraded Egypt’s bond ratings to B2 in December 2011, the fourth downgrade of the year. III. Indicators of long-term growth: Increased labour market participation but no movement towards Total-Factor productivity

First, some efforts in terms of participation in the labour market should be mentioned. Indeed, while only 48.9% of the working age population participated in the labour market in 2011, an increase was noticeable in the participation rate of women (+ 4 percentage points between 1999 and 2011) above the Mediterranean median (Turkey and Israel excluded). Meanwhile, youth participation in the labour market also evolved. For the youth of 20-24 years of age we notice a lower participation rate of roughly 48.2% in 2011 versus 49.1% in 1999, indicating a decrease in inclusiveness. However, for the 25-29 age group the situation has been quite different: in 1999 they were 50.3% with a formal job while in 2011 they have reached roughly 62.5%, a considerable catch-up in slightly more than a decade.

Our indicators of inclusiveness show mixed results in the case of Egypt.

Second, the Gini coefficient and the share of consumption in the lower and upper deciles both indicate that

Table 2. Labor Market Participation Rates Evolution in Egypt and Selected Emerging Countries 1999-2011 1999

2005

2008

2011

Male

Female

TTL

Male Female

TTL

Male

Female

TTL

Male Female TTL

Egypt

73.8

19.7

46.7

75.8

20.6

48.2

73.9

23.1

48.4

74.3

23.7

48.9

MPs (Median)

74.8

22.4

49.4

72.2

22.2

46.8

71.3

24

47.3

71.5

24.6

48.3

MPs (Median ex. Isr, Turk)

74.9

20.4

47.3

74.5

18.3

46.3

72.7

18.8

45.6

71.8

19.7

45.6

MERCOSUR (median)

82.7

49.6

65.8

81.5

52.8

66.4

80.1

54.7

65.3

80.2

55.6

66.1

ASEAN (median) 83.6

69.3

75.3

83.5

69.6

75.3

82.5

69.1

74.9

82.7

68.5

74.4

East. Europe

52.6

58.5

63.9

51.4

57.1

63.8

51.2

56.9

64.6

51.8

57.6

65.5

Source : Own calculation based on ILO. LaborSta EAPEP database -120-


Table 3. Labour Market Participation Rates of the Youth in Egypt & selected regions 1999-2011 1999

2005

2008 20-29

20-24

2011

20-24

25-29

20-29

20-24

25-29

25-29

20-29

20-24 25-29 20-29

Egypt

49.1

50.3

51.9

56.2

62.2

58,9

47.9

62.0

54.4

48.2

62.5

55.1

MPs*

48.8

60.1

53.8

45.6

59.9

52.7

44.3

60.5

51.6

42.7

61.7

51.4

Latin America

64.5

78.4

70.6

70.2

80.2

74.7

73.8

81.1

76.8

74.6

81.5

78.4

East Asia

72.9

86.9

79.9

71.5

87.8

80.2

71.2

87.8

79.6

69.3

86.7

78.1

Est. Europe

71.5

85.5

60.0

64.5

80.4

56.3

57.0

78.1

54.3

53.5

77.6

54.4

Source : Own calculation based on ILO, LaborSta EAPEP database Table 4. Evolution of Inequity in Egypt and Selected Emerging regions 1990’s-2010’s Share of 2 lowest decile in Income or Consumtion

Share in Consumption of Middle Class**

Share of the 2 highest decile

Gini 90’s

Gini begin 00’s

Gini end 00’s

90’s

beg. 00’s

End 00’s

90’s

beg. 00’s

End 00’s

90’s

beg. 00’s

End 00’s

Egypt

1995-20042008

30.1

32.1

30.8

9.5

9

9.2

39.9

41.5

40.3

29.4

28.7

29.4

MPs (Median)

Ex.Turk, Pal. 39.2

36.8

38.2

6.6

7.1

7.1

46.3

44.7

45.7

26.9

25.9

26.1

MERCOSUR

Median

48.9

54.7

45.3

3.9

2.8

4.3

53.7

57.5

50.9

21.6

18.6

22.7

ASEAN

Median

38.3

41.9

37.9

7.8

6.9

7.4

46.8

49

45.9

25.4

23.9

25.9

Non EU East C.

Median

34

29.4

26.8

7.3

8.6

9.4

41.5

38.2

36.3

26.5

28.5

29.6

Sel.. Emer.

Median

42.4

42

42.5

6.1

6.3

6

48.1

49.4

47.9

24.9

23.9

24.8

Source: Own calculation using PovcalNet developed by the Development Research Group of the World Bank. http:// iresearch.worldbank.org/PovcalNet. access in July 2012 *: Alg. Egy. Jord.. Mor. Tun.; **: **: 3rd to 7th Decile Table 5. Concentration of Exports in terms of products and markets (based on SITC rev3 3-digit data) 2000 share 2008 share 2010 share 2000 share 2010 share 2000. Trade 2010 . Trade of top 10 of top 10 of top 10 of top 10 of top 10 Concentration Concentration products in products in products in Partners in Partners in Index Index total export total export total export total export total export value value value value value Egypt

0.136

0.035

47.4%

59.3%

44.90%

60.77

49.54

MPs (Median)

0.067

0.057

62.6%

60.3%

57.0%

73.33

69.10

MERCOSUR* (av.)

0.030

0.043

41.9%

46.9%

51.5%

66.60

57.46

ASEAN (Median)

0.094

0.043

67.0%

53.7%

52.7%

71.79

72.89

Ukraine

0.036

0.034

45.4%

52.7%

57.0%

56.74

56.44

Belarus

0.052

0.094

41.3%

62.7%

52.1%

83.28

80.56

China

0.018

0.026

31.4%

35.7%

52.7%

73.56

60.36

India

0.041

0.048

34.6%

42.0%

57.0%

56.80

52.96

Note: The Trade Concentration Index is aimed at assessing the degree of concentration/diversification of a given country’s exports. Based here on the Hirschmann-Herfindahl Index, it ranges from 1 to 0: the lower the indicators, the more diversified the economy. Similarly, the lower the share of the top 10 products, the more diversified the economy trade. *: Only Argentina & Brazil Source: Own calculations using tradesift and Comtrade -121-


Table 6. Trends in Labour Productivity and Factor Productivity in MPs and selected emerging economies 1990-2010

Table 7. Firms using banks to finance investment (expressed as a % of firms)

Labor Poductivity (Average An. Rate in %. based on Values in 90$)

Country Name

Average 2002- Average 20062006 2010

90-95

95-00

00-05

5-Oct

Egypt. Arab Rep.

10.5

7.12

Egypt

0.6%

3.6%

1.2%

3.5%

MPs (median)

20.09

12.29

8 MPs Median

0.6%

1.4%

1.8%

2.2%

MERCOSUR (median)

8.24

19.145

Mercosur

2.4%

1.6%

0.0%

1.6%

ASEAN (median)

29.38

21.48

2.8%

Source : WDI

Increasing the latter can increase real wages significantly without negative effects on the macroeconomic equilibrium. But with the exception of the early 1990s, Egypt did not seem to have reduced the gap in terms of factor productivity compared to other emerging economies, preferring to increase labour productivity instead.

Asean

5.7%

2.3%

2.6%

Non Eu East

-9.0%

3.2%

7.5%

3.7%

All emerging Ref

2.7%

2.5%

2.6%

2.8%

Factor Productivity (Average An. Rate in %) 90-95

95-00

00-05

5-Sept

Egypt

0.5%

0.0%

-0.1%

-0.5%

8 MPs Media

-0.3%

0.2%

-0.1%

-0.4%

Mercosur

-0.5%

0.1%

0.8%

-2.2%

Asean

0.2%

0.2%

-0.2%

-0.9%

Non Eu East

0.0%

1.1%

-0.8%

-3.7%

0.0%

-1.4%

All emerging Ref 0.2% 0.2% Source: FEMISE calculations

Egypt is in a better position compared to the regional median value, and also in a better position compared to the ASEAN and MERCOSUR countries.

In addition, to be inclusive, the growth rate should allow firms to benefit from the opportunities to «seize opportunities» to ultimately increase the potential for creation of productive employment. However, the percentage of firms using banks to finance investment decreased over time in Egypt. IV. Macroeconomic management

Third, for growth to be inclusive, the share of sectors that contribute to the economy must increase, which seemed to be the case in Egypt. During the last decade, the index of trade concentration increased from 0.136 in 2000 to 0.035 in 2010, a significant diversification and a much better value than the median in the Mediterranean. One notes some heterogeneity of trade diversification in terms of products. In 2000 the share of the top 10 exports accounted for 47.4% of total trade, this share increased to 59.3% in 2008 before falling to 44.9% in 2010, a level similar to the diversification observed in MERCOSUR and ASEAN economies. Egypt also made efforts in diversifying its business partners with a share of the top 10 export partners in 2010 of 49.5% (against 60.8% in 2000), exceeding diversification levels of developing countries. Even so, on the negative side, there were no consistent increases in total factor productivity.

IV.1. Monetary policy and exchange rate management Monetary policy attempted to balance between multiple goals including exchange rate management, maintaining price stability and preserving economic momentum in a context of political and economic uncertainty. In an attempt to control inflation and boost the value of the Egyptian pound, the Central Bank of Egypt (CBE) raised policy rates in November 2011, for the time since September 2008. Overnight and deposit lending rates increased respectively to 9.25% and 10.25% from 8.25% and 9.75%. The discount rate was also raised by 100 bps to 10.5%. However, these hikes could have depressed economic growth. Meanwhile, the CBE has continued a tight management of the exchange rate regime, and continued to rely mainly on foreign exchange reserve

-122-


depletion to do so. In fact, following the reversal in portfolio investment that occurred in the post-uprising period, the exchange rate has only cumulatively depreciated by close to 5% between December 2010 and July 2012. Meanwhile, official reserves have sharply gone down by close to USD 20 billion between December 2010 and May 2012. In June 2012, official reserves stand at USD 15.5 billion, covering only 3.2 months of imports (figure 8). Nevertheless, the depletion rate of reserves had declined in recent months, with reserves increasing marginally since April 2012. In an attempt to mitigated the deterioration in reserve, the government started to sell US$-denominated T-bills, Egypt’s first dollar bond issuance since 2010. Saudi Arabia bought US$ 500 million of seven-year US dollar-denominated treasury bonds and deposited an eight-year deposit of US$ 1 bn. In August 2012, Qatar also deposited $500 million as the first installment of $2 billion financial support package. A slowdown in the depletion of reserves is a positive indicator, but the critical challenge will be to build reserves back up to a more secure level. In this regard, the agreement with the IMF may boost Egypt’s credibility and reassure foreign investors. Moreover, reserves are highly likely to edge up in the coming months on the back of Saudi Arabia’s decision to start disbursing funds from a US$4 billion financial support package first announced in May 2011.

Figure 9. Foreign exchange earnings, % of GDP, FY08 - FY12 45% 40%   35%   30%  

10% 3%  

25%

7%

20%

5%

6% 2%   6%   4%  

4% 2%   5%   4%  

3% 2%   4%  

3% 2%   4%  

5%

7%

13,3%

10,9%

11,4%

10,3%

2009

2010

2011

2012

15% 10%   5%   0%  

18,1%

2008

other

Suez Canal  

Tourism

Remi=ances

Merchandise exports  

Source: authors calculations based on national data

ciate if Egypt’s foreign exchange earnings continue to drop and market expectations do not improve. In FY12, total foreign exchange earnings accounted for 25% of GDP, compared with 43% of GDP in FY08. Merchandise exports accounted for 18% of GDP (and 41% of total earnings), followed by remittances (7% of GDP) (and more than a quarter of total earnings) (Figure 9). Increasing exchange rate flexibility is an option to consider but it is likely to induce some pass-through effects on domestic inflation, especially that it is occurring in a high and volatile inflation environment. A depreciaition could be beneficial to Egyptian exports but some of these benefits could be offset by the increase in the price of imported inputs that enter into the production of exports. IV.2. Public finances remain worrisome

Jun-­‐10 Jul-­‐10   Aug-­‐10   Sep-­‐10   Oct-­‐10   Nov-­‐10   Dec-­‐10   Jan-­‐11   Feb-­‐11   Mar-­‐11   Apr-­‐11   May-­‐11   Jun-­‐11   Jul-­‐11   Aug-­‐11   Sep-­‐11   Oct-­‐11   Nov-­‐11   Dec-­‐11   Jan-­‐12   Feb-­‐12   Mar-­‐12   Apr-­‐12  

The central government budget deficit slightly inIt would seem that intervention through reserves creased to 8.8 from 8.2% of GDP, between July-May to limit the depreciation may have reached its li- 2012 and the same period last year (figure 10). This mit. The exchange rate is likely to further depre- increase occurred despite an increase in revenues by 2.2 percentage points of Figure 8. Exchange rate and reserves GDP (to 16.8 % from 14.6%) fol40 8,00   35   lowing an increase in property 30   7,00   25   income (up to 3.4 from 2.3% of 6,00   20   GDP) and in particular dividends 15   5,00   10   4,00   (up to 3.3% of GDP from 2% last 5   0   3,00   year). Grants also increased by 0.5 percentage point of GDP. foreign  reserves   LE/US$  exchange  rate   So far, tax revenues seem to reserves    in  months  of  imports   be surprisingly resilient to the Source: authors calculations based on national data economic downturn (accoun-123-


Figure 10. Public Finances (% of GDP) 40%

0%

30%

-2%

20% -4%

10% 0%

-6%

-10%

-8%

-20% -10%

-30%

-12%

Jul-May 2012

FY11

FY10

FY09

investment spending subsidies and social benefits Non-tax revenue

Jul-May 2011

Wages and salaries other current spending interest expenses

FY08

FY07

FY06

FY05

FY04

FY03

-40%

Source: authors calculations based on national data Figure 11. Interest rates in Egypt 16 14   12   10   8   6   4  

Lending 1  year  or  less  loans  

The budget deficit is expected to slightly increase in FY12. However, the approved FY13 budget forecast a decline of the budget deficit to 8% of GDP. On the one hand, the budget includes some expansionary measures such an increase in wages by close to 16%, reflecting the government’s intention of giving permanent contracts to some 400 thousands civil servants on temporary contracts. Interest spending is also forecasted to grow by 26%, on the back of

mars-­‐12

déc.-­‐11

3-­‐months T-­‐bills  

Source: authors calculations based on national data

ting for around 11.6% of GDP, slightly higher than the pre-uprising level). Meanwhile, expenditure also increased to 25.6% of GDP from close to 23% of GDP, following a tremendous increase in energy subsidies to 5.6% from 3% of GDP, bringing the total subsidy bill to close to 8% of GDP. Interests also rose by 0.8 percentage point of GDP to 6% of GDP and to a lesser extent wages and salaries which have gone up by 0.75 percentage point of GDP to close to 6.6% of GDP. Meanwhile, investment spending declined from 2% of GDP to 1.5% of GDP.

sept.-­‐11

juin-­‐11

mars-­‐11

déc.-­‐10

sept.-­‐10

juin-­‐10

déc.-­‐09

mars-­‐10

sept.-­‐09

juin-­‐09

déc.-­‐08

3-­‐ month  deposits  

mars-­‐09

sept.-­‐08

juin-­‐08

mars-­‐08

déc.-­‐07

juin-­‐07

0

sept.-­‐07

2

an increase in the cost of government financing. On the other hand, cuts in fuel subsidies are expected to take place in FY13 falling by more than a quarter compared to FY12. In fact, following reported fuel shortages in 2012, the government has announced plans to reduce energy subsidies using a coupon system for the sale of subsidized butane. Coupons will be distributed to households with monthly incomes of less than LE 1,500 (US$250). The number of coupons will depend on the size of the family. Each coupon will entitle the holder to buy one 12.5kg canister every two months at a price of LE5 (80 US cents); the canisters will cost LE25 without a coupon. If these cuts prove problematic, it will be very difficult to meet its FY13 target.

Another disturbing fact is the continued increase in the cost of government borrowing reflecting an increase in sovereign risk premium. In fact, the 91day T-bill rate had continued to escalate, increasing by 257 bps since June 2011 until May 2012 (figure 12). Moreover, the interest rate on the most recent T-bond issue was 16.2% for three-year notes, compared with 14.5% for an issue of 91-day T-bills. The budget sector domestic debt has increased to close to 60% of GDP in March 2012 from 57% of GDP last year. In an attempt to reduce refinancing risk, the ministry of finance plans to lengthen the average maturity of government securities issued to 1.8 years, after it had fallen to 1.3 years at the end of 2011 from 1.7 years in 2010. Although higher interest rates on longer-maturity securities may be attractive to banks, they may prefer shorter-term instruments on the grounds that they are perceived to be less risky.

-124-


Figure 12. Composition of domestic credit

V. Liquidity and credit market developments

100%

25,0%

In addition, the CBE launched last June a “28-day repurchase agreements (repos)” to be auctioned at a variable rate currently set at a floor of 9.75%. This should allow the CBE to inject market liquidity without influencing interest rates. Repos are offered in exchange for t-bills collateral. It is believed that such operations would stimulate feeble demand for t-bills following the rise of their yields.

80%

20,0%

70% 60%

15,0%

50% 40%

10,0%

30% 20%

credit growth

The CBE has reduced twice the statutory reserve requirement for commercial banks from 14% of total deposits to 12% in March 2012 and then once again to 10% in June 2012. The purpose of these cuts was to “provide permanent liquidity into the banking system and help ease credit conditions in the market.” The increase liquidity in local currency could also help reduce the pressure on the limited amount of foreign currency.

share in total credit

90%

5,0%

10% 0%

0,0%

FY07

FY08

FY09

FY10

Household Sector Claims on Public Business Sector

FY11 Sep-11 Dec-11 Mar-12 Private Business Sector Net Claims on Govt.

domestic credit growth

Source: Author’s calculations based on Central Bank of Egypt’s monthly statistical bulletin.

Finally, in June 2012, Fitch cut its ratings on three Egyptian banks from ‘B+’ to ‘BB-’ while keeping their outlook negative. Moody’s had already downgraded five Egyptian banks three times once in February 2011 and in April 2011 changed the outlook for the Egyptian banking system to negative from stable. More downgrades took place in November and December 2011. VI. Conclusion

As for credit market developments, overall domestic credit grew by 19% in March 2012 compared to 16% last year. However, most of the growth is due to buoyant growth in credit to the government (up by 31%) and to a lesser extent credit to public sector enterprises (up by 24%). Credit to the private sector only grew by only 6%. The share of government credit expanded to 53% of total credit in March 2012 compared to 48% a year ago, while that to the private sector has dropped to 42.5% from 48% (figure 13). Herrera et al. (2012) showed that during the uprising, the expansion of the credit to the government accounts for the fall in the observed credit to the private sector. Furthermore, it accounted for 70–80 % of the estimated total decline in credit whereas the slowdown in economic activity accounted for between 15 and 20 % of the predicted total fall in credit. So far, the banking sector has not shown any liquidity problems (loan to deposit ratio is about 50 %). Egyptian banks still prefer investing their deposits in low but safe return of t-bills instead of engaging in somewhat riskier lending activities.

The analysis has shown that the first year of transition towards democracy in Egypt was associated with costs in terms of economic growth, unemployment, and rising current accounts and fiscal deficits. The Eastern European experience tells us that it is normal to expect such costs. Transitions are associated with uncertainty, frequent changes in government and blurred visions. New policies and new institutions take time to put in place and to have their effects felt. The election of a new president (from the FJP) is a first step towards democratic gains but some unclear aspects still remain about the direction of economic policy, beyond the fact that they intend to pursue market reforms with social justice as well as fight corruption instituted by the old regime. More importantly, the constitution-writing process is crucial and should define the balance of power among the different branches of the state. Coming to power is long awaited chance for the FJP but it will also be a reality-check given their

-125-


limited experience in policymaking. They will be confronted with 60-year old challenges left unaddressed by previous regimes, in addition to economic hardships of the past year. This means that the new government must give way to crisis management. Their ability to respond to these challenges will determine their popularity in future elections. In particular, the short-term financing constraint is getting tighter and the need for significant capital inflows from abroad to cover the budget deficit and ease the pressure on the balance of payment and the Egyptian pound, seems like a plausible option. In this context, a firm decision needs to be taken with respect to about borrowing from abroad as the previous government’s “jerky actions” may cause donor fatigue. Finally, once the short-term challenges are addressed, the government should promote policies of inclusive growth and address long-run problems that will stimulate the private sector to become an engine of growth. In addition, the government must address issues of distribution. In particular, spatial inequalities in Egypt are important. A recent World Bank report shows that differences in per capita consumption of the rich living in Greater Cairo and those living in Upper Egypt doubled between 2000 and 2010 (World Bank, 2012). More worryingly, the report shows that Egypt exhibits large disparities related to several indicators of standard of living, social development and inequality of opportunity across regions within the country. For instance, √ Poverty is concentrated in Upper Egypt. In FY09, 67% of the poor lived in Upper Egypt as well as 83% of the extreme poor. √ In Upper Egypt, 43% of rural females were illiterate; almost three times that in Lower Egypt’s urban areas (15 %). √ In rural Upper Egypt, the mortality rate of 50 per 1,000 children under five is somewhat similar

to the urban rate of 40 per 1,000, but in Lower Egypt it is 30 per 1,000 in rural areas and about 10 per 1,000 in urban areas. √ In 2008, 15% of urban women had no antenatal care services, while 33% of rural females did not. √ Any child born in an urban household had a 40 % more likely to receive post natal care than a child born in a rural household, the difference between a child born in the leading region and one born in the lagging area was more than three times as high. References: Central Agency for Public Mobilization and Statistics (CAPMAS) Database. Cairo. www.capmas.gov.eg Central Bank of Egypt. Monthly Statistical Bulletin. The Central Bank of Egypt: Cairo. Various issues. Economist Intelligence Unit (EIU). 2012. Egypt Country Report The Economist Intelligence Unit Limited, London. Various Issues. ________. 2012. Egypt Country Forecast. The Economist Intelligence Unit Limited, London. July. Hamad, Mahmoud. 2012. “The Constitutional Challenges in Post-Mubarak Egypt.” Insight Turkey 14(1):51-69. Ministry of Planning and International Cooperation Database. Cairo, Egypt. Ministry of finance. 2012. “Monthly Financial. Various issues. Herrera, Santiago; Christophe Hurlin and Chahir Zaki. 2012. “Why Don’t Banks Lend to Egypt’s Private Sector?” World Bank Policy Research Working Paper Series 6094. Washington, D.C. World Bank, 2012. Arab Republic of Egypt: Reshaping Egypt’s Economic Geography: Domestic Integration as a Development Platform. Washington, D.C.: World Bank

-126-


ISRAEL: Inclusiveness that needs to rise to the high level of economic development Introduction The Israeli economy is one of the most open economies worldwide “compensating by means of trade its complex location and lack of natural resources” (FEMISE, 2005). A growth regime based on openness allowed the economy to flourish and the domestic industry and service sectors turned into the principal growth engines. Naturally, both the international context of crisis and the regional situation matter a lot for Israel; the global economic crisis can have considerable negative effects on an open economy while the uprisings in neighbouring MPs are of crucial importance for regional stability and domestic policy. It appears that the Israeli economy withstood the general climate of negativity in 2011 rather well, showcasing an impressive 4.8% rate of growth and with a low level of general unemployment. However, as we will later see, there are concerns regarding the inclusiveness of the Israeli model of growth, most particularly, employment for the youth is still insufficient for a country that has such a level of economic development. In the current state of affairs, the following shortterm elements and long-term concerns deserve particular attention: A relative slow-down in GDP growth to √ 2.9% in 2012, particularly attributable to a fall in export performance. But, private consumption could be recovering in 2012. A slight increase in unemployment to 6.7% √ (based on revised data), though the rate is still much lower than in the rest of the region, √ Israel will need to create about 1.03 million jobs by 2030 if it wishes to maintain its 2007 unemployment and inactivity rates. This implies a 1.43% annual rate of job creation, the rate of employment

growth in 2011 (4.4%) is well above the needed rate of job-creation. But, let it be noted that employment seems to be growing a lot slower in 2012. √ With tax receipts declining the fiscal deficit could remain close to -3.8% of GDP. √ Despite low inflation for 2012, there is a fundamental purchasing power issue in Israel with domestic prices that are much higher than in the OECD economies. √ The current account has been in continuous deficit since the second quarter of 2012. It is expected to be affected and fall to -2.1% of GDP, a record deficit for Israel in recent history. √ There are real concerns regarding the participation of the youth in the labor market which is still insufficient for a country that is economically more developed than its neighbors. There is reason to believe that there is still much to be done to achieve inclusive growth. Among recent measure, a financial proto√ col representing more than NIS 1 billion (US $ 300 million) between Israel and China was signed for the export of Israeli water technologies for agricultural use in China. Furthermore, a series of programs designed to increase joint research with India and China were recently signed. All in all, the population keeps a lower √ standard of living than individuals in other developed countries, the country is at the forefront of hi-tech innovation but suffers from high prices and low disposable income levels. What is needed is a broad conceptual framework for Inclusive Growth, which could provide a “leap” in the quality of life of all citizens. In that respect, the ISRAEL 15 Vision has Table 1. Israel’s Key indicators 2011 2012* 2013* Real GDP growth (%)

4.6

2.9

3.2

Consumer price inflation (av; %)

3.5

1.7

2.1

Budget balance (% of GDP)

-3.7

-3.3

-4

Current-account balance (% of GDP) 0.8

-2.1

-1.3

Lending rate (av; %)

5.5

4.8

4.3

Exchange rate NIS:US$ (av)

3.58

3.9

4.03

Exchange rate NIS:US$ (year-end)

3.82 3.98 3.96

Source: WEO, EIU, estimates for 2012 and 2013

-127-


become a formal national objective and stresses the need to understand Israel’s standing through the indicator of “quality of life” instead of purely “monetary” conventional measures.

Figure 1. Growth rates (%), Israel VS OECD countries 8 6 4

5 3,2

4,9

5,6

5,5

4,8

4 2,7

3,1

4,8

3,1

2,7

2,8 1,7

2

0,1

0,8

1,3

3,5 1,8

0

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-2

I. Political outlook

-4

-3,8

-6

Political stability was surprisingly strengthened since the formation of a coalition government in May. But, recently, the KADIMA party that has the most seats in parliament left the coalition government. This makes it harder for authorities to implement an austerity budget while early elections should not be ruled out.

OECD countries

Israel

Source: OECD, estimations for 2012, 13.

out Cabinet posts and largesse to their members to stay in power” (CNN, 2012). Thus, there is an issue of political fragility that remains more than ever. II. Macroeconomic and sectoral estimates

At the forefront of disagreements one could find the possibility to draft haredi (ultra-Orthodox) men into the army with a new law. The Kadima party blamed the prime minister “of kowtowing to the two haredi parties, Shas and United Torah Judaism, rather than backing a parliamentary committee’s draft bill designed to force most haredi youngsters to enlist” (Economist, 2012). Othe sources of political debate may rise following declarations of several official former officials questioning current leadership judgment on issues related to Iran (CNN, 2012).

II.1. A slight slowdown in 2012 is to be expected

Other important issues remain, most importantly authorities must deal with dissatisfaction over economic concerns, inequalities and lack of inclusiveness. Furthermore, regional political developments such as the victory of the Muslim Brotherhood in Egypt’s presidential elections may redefine relations with Egypt. All of this must be dealt with in a political system of “weak coalitions... that are forced to dole

Already, the Israeli economy had grown fasterthan-expected in the first quarter (3%) due to a relative rebound in exports. The trend continued in the second quarter with GDP growing y-o-y by 3.5%. As for trade and private consumption, they appear to be recovering in 2012. Since exports account for more than a third of Israeli GDP, foreign demand will determine growth.

The OECD forecasts growth to reach 2.8% in 2012 (IMF estimates it at 2.9%) versus 4.8% (4.6%) in 2011. The economic activity might appear relatively slow but is actually faring better than expected, such rate could be attributed to limited export market performance due to recent developments but stronger external demand is to be expected in the months that follow. Moreover, Israel is still expected to outpace the growth rate of OECD economies.

Table 2. Output indicators

But, sluggish growth in the US and contraction in Europe could contribute to 2010 2011 2012 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr total net exports for 2012 falling to an estimated -12.1 NIS bn (constant priGDP at constant 2005 prices (NIS bn) 188.1 189.1 192 192.5 197.8 194.7 198.4 199.2 ces) (EIU). But in both forecasts growth Real GDP (% change, is expected to bounce back starting year on year) 5.3 6.4 6.9 3.5 5.2 3 3.3 3.5 from 2013, to 3.6 % in 2013 accor Index of goods exports (2005=100)a 163.2 162 179.7 180.7 180.9 182.2 176.1 173.2 ding to the OECD (and to 3.3% in the alternative EIU scenario) due to rising Source: EIU -128-


Real expenditure on GDP (NIS bn at chained 2005 market prices)

Figure 2. GDP growth and GDP components 900

5,7

800

5,5

700 600 500 400

112,8 159,8 5,4

300 200

5 136,7

158,8

168,3

179,3

172,2

177,2

182,2

187,3

192

17,4

22,3

6,8

1,3

0,5

134,6

126,9 4,4121,8

167,4

168,8 11,3

10,3

350,2

382,3

2006

2007

390,2

397,6

418,8

4,6

2,4

3

434,8

442,7

451,6

2011

2012

2013

1,2

100 0 -100

2008

2009

Private consumption Public consumption Stockbuilding

2010

Net exports GFCF Economic growth

Source: EIU

exports, solid growth in investment and growth in consumer spending. II.2. Unemployment pressures Employment seems to remain relatively stable in Israel, the unemployment rate increased to 6.9% in March, from 6.5% the prior month, because of the increase in the participation rate. All in all, one observes a quarterly decline in the unemployment rate, from 6.8% in Q4 2011 to 6.7% in Q1 2012 with increases in both participation and employment (Bank of Israel, 2012). Bearing in mind the current demographic and economic trends, Blanc (2012) calculates the employment needs of the Mediterranean labor markets until 2030. Many « target scenarios » are taken into account and we focus on two representative ones in Table 2. The first scenario highlights the number of jobs that will be necessary just to maintain the unemployment and inactivity rates of the benchmark year 2007 (used as a benchmark since in the

2005-2007 period there was no shortage of labor for newcomers in the Mediterranean). 6 In the case of Israel one observes that it will 5 need to create about 1.03 million jobs by 4 2030 if it wishes to maintain its 2007 unem3 ployment and inactivity rates. This implies a 2 1.43% annual rate of job creation to ensure 1 the feasibility of this scenario. When looking 0 at the rate of employment growth in 2011 (4.4%) one notes that it is well above the needed rate of job-creation in the first scenario. This means that the current trend of job creation is more than sufficient to cover the needs of the newcomers into the labour market. But if the authorities are more determined and wish to reduce the increase in the number of the unemployed and in the number of inactives by 50% (scenario B) then they will need to create about 1.7 million jobs by 2030. This supposes an annual rate of job creation of roughly 2.16%. Again the rate of employment growth in is well above the needed rate of job-creation of the second scenario. Even so, while such results allow for optimism, let it be noted that employment seems to be growing a lot slower in 2012, indeed the observed rate of employment change for 2012 is estimated at 2.4% which is almost twice less than in the prior year. While this rate still covers the needs of both scenarios there is reason of concern if employment creation continues to decelerate in the coming years. In 2013, our estimations point to a 0.2% rate of employment growth which naturally will not be enough to even cover the minim requirements of the first scenario.

Table 3. Israel: Employment needs by 2030 Scenario B. Limiting the Scenario A : Maintaining rates increase of the number of Observed rate of employment of inactivity and unemployment inactives and unemployed of change of 2007 SCA by 50% Jobs to create 2007-2030

Annual rate of needed jobcreation 07/30

Jobs to create 2007-2030

Annual rate of needed jobcreation 07/30

2011

2012*

Algeria

1 033 445

1.43%

1 698 403

2.16%

4.4%

2.40%

MPs (average)

3 423 581

1.65%

6 461 494

2.74%

Source : Blanc (2011) for scenario projections. EIU for observed rates of employment change. -129-


Table 4. Israel’s Trade by Countries - Imports and Exports. Millions US$ Imports

Exports

2012 (I-VIII)

2011 (I-VIII)

% variation

2012 (I-VIII)

2011 (I-VIII)

% variation

Total

173950

148604.6

17.1%

117260.2

110684.3

5.9%

E.U.

60232.9

51763.9

16.4%

35529.7

35219.3

0.9%

Asia

35856.7

32591.7

10.0%

25267.5

20177.9

25.2%

USA

22015.7

17512.5

25.7%

27776

28486.9

-2.5%

Other

55844.7

46736.5

19.5%

28687

26800.2

7.0%

Source : Central Bureau of Statistics

Thus, while in a short-term perspective the situation is positive, in a long-term perspective, if authorities do not allow for creating more jobs, unemployment would be expected to rise. Moreover, as we will later highlight in our section on inclusiveness, there are still low employment figures in specific communities such communities. II.3. Inflation Inflation in Israel rose by about 3.5% in 2011, in part because of the rise in the price of fuel. In 2012, it could be less of a concern, it already started declining at the end of 2011 and house price inflation growth is now moderate. According to Bank of Israel, the CPI declined by 0.3% in June, both below forecasts and the seasonal path for realizing the inflation target. Declines in the transport and communication component and energy prices, as well as the more modest than anticipated increase in the housing component have been responsible for that trend. Thus, official forecasts range from 1.7% to 2%, compared with 1.8 – 2.2 % the previous month. The deceleration in economic growth will probably reduce demand-side pressures, for inflation to average 2% a year in the 2012-2013 period. But one must note that there is a fundamental purchasing power issue in Israel. Indeed, domestic prices are much higher than in the OECD economies. The major price markups are to be found in cars (70%), milk and eggs (44%), meat (28%), non-alcoholic drinks (48%), as well as bread and cereals (17%) and fish (17%). In fact, Israelis pay less for two items only: fresh fruit and vegetables

(13%) and telecommunications (4%) (JerusalemPost, 2012). II.4. External Balances and FDI Regarding Israeli trade, one notes that exports increased during the first eight months of 2012, according to recent figures the rise is equivalent to 5.9%. More specifically, exports to asian countries in January-August 2012 point to a 12month rise of 25.2%. Meanwhile, exports to the USA appear to have decreased by 2.5% during the same period. On the other hand, exports to Europe appear to have risen by only 0.9%. A decomposition by main commodity groups shows that exports of diamonds perform well +27.5% year-on-year in the first eight months of 2012) while industrial exports also marked a 12.5% annual increase. As for agricultural exports, they seem to be closer to last years levels, only marking an annual increase of 4.1%. On the import side, one notes a year-on-year rise in the value of imports close to 17.1% during the first eight months of 2012. This is in part attributable to a 16.4% rise in imports from the EU while imports from the USA also increased by 25.7%. Thus, following recent evolutions, the trade deficit is expected to further escalate and could reach 12.9% of GDP in 2012. Regarding the service balance, one should expect stability throughout the year, indeed estimations point towards a value close to 7.3 bn US$ in 2012

-130-


Table 5. Main commodity export groups. million US$ Other industrial exports excluding Thereof: Total ships. aircraft citrus Seasonally Seasonally Seasonally & diamonds Unadjusted Unadjusted Unadjusted Unadjusted adjusted adjusted adjusted Unadjusted Agricultural exports

Polished diamonds net

1

2

3

07/11

49

112

0

08/11

51

96

07/12

52

08/12

55

4

Industrial exports excluding diamonds

5

6

7

8

714

781

3 878

3 769

0

1

487

702

3 993

3 853

0

119

0

273

285

4 107

3 834

6

128

0

375

442

3 476

3 585

6

Monthly data

Change, percent annual rate of change (year - on - year) 2009

-7.6

-11.1

-11.5

18.6

-32.2

2010

0.3

36.8

-37.3

-13.9

-86.9

2011

7.9

20.0

48.7

16.3

-60.9

2012

4.1

-7.1

27.5

12.5

392.0

Source: Bank of Israel

up from 7 bn the prior year. This could be due, among others, to the performance of the tourism sector, regarding the latter, regional uncertainties have not yet had a significant impact. While the industry recorded a 2% drop last year in arrivals, it appears that tourists spent a record 7 billion â‚Ź. Meanwhile, the political landscape in the region does not appear to affect perspectives for 2012 with arrivals of tourists in the first eight months of 2012 reaching a year-on-year 4% increase.

modest one when expressed in terms of GDP, corresponding to a -2.1% deficit for 2012 (WEO). As for foreign investment in Israel recent trends are not particularly encouraging. Non-resident investment in Israel registered a year-on-year fall of 112.1% in the first two quarters of 2012 essentially attributable to a fall in the highly volatile portfolio and other investment which respectively decreased by 670.6% and 126%. As for foreign direct investment in Israel it remained more than solid marking a slight 33.5% decrease. The fall in nonresident investment is essentially attributable to the banking sector, indeed, foreign investments in banking reached considerable lows in early 2012 already marking a negative 3571 million US$ (Bank of Israel).

The current account has already started showing negative signs and has been in continuous deficit since the second quarter of 2012. It is expected to be affected and fall to a negative 5.2 bn US, a record deficit for Israel in recent history though a

Table 6. Nonresident Investment in Israel and Resident Investment Abroad. net transactions (millions of US$) Quarters Q1 2011 Nonresident investment

5543

Q2 2011 Q3 2011 Q4 2011 Q1 2012 5528

-2230

-858

Q2 2012

Q2 2012 - Q2 2011

-1 570

-670

-112.1%

1 565

2 591

33.5%

By investment type Direct investment

2 291

1 941

2 436

4 707

Portfolio investment

1 845

428

-2 440

-5 391

-597

-2 444

-670.6%

Other investment

1 407

3 159

-2 226

-174

-2 539

-817

-125.9%

Source: Bank of Israel -131-


Figure 3. Israel’s foreign currency reserves

II.5. Outall on debt, foreign reserves, exchange rates

80 78

As noted previously, a modest current-account deficit emerged in Israel. Even so, there are no particular worries as to managing foreign debt which is not alarming while foreign reserves are still ample.

Regarding the exchange rate, we should note that the shekel strengthened against the dollar, it appreciated by about 2.9% against the dollar in September, and weakened by about 0.5 vis-a-vis the euro. Against the currencies of Israel’s main trading partners, in terms of the nominal effective exchange rate of the shekel the shekel strengthened by about 1 %. In September, standard deviation of changes in the shekel-dollar exchange rate, which represents its actual volatility, increased to 7.9 percent, compared with 7.1 percent in August (Bank of Israel).

74 72 70 68 66

Reserves excluding IMF

April

February

October

August

June

April

February

2010

64

December

Total external debt is expected to rise to 104.2 bn US$ in 2012 (44.4% of GDP), up from 102.6 bn US$ in 2011 (42.1% of GDP). Domestic foreign exchange reserves at end May 2012 stood at roughly 74,792 million US$, a monthly decline of 1,837 million US$ which resulted from government transfers to abroad, private sector transactions and a revaluation that decreased the reserves.

76

Reserves at the IMF*

Source: IMF

credit rating would suffer. At first, S&P would change Israel’s outlook from «stable» to «negative », then it could go as far as drop the long-term credit rating to A (Ynetnews , 2012b). In October 2012, Israel’s credit rating was then reaffirmed at A+ by Standard and Poor, according to which the economy continues to generate solid economic growth and enjoy a net external asset position despite the current account being temporarily negative.

II.6. Still limited risk in financial and credit markets as well as to banking sector stability

Meanwhile, the outlook on Israel’s banking system was changed to negative from stable from Moody’s. This was due to the anticipated slowdown in economic growth and the current operating environment. While recognizing the resilience of Israel to shocks, the agency notes that capital metrics that are used to monitor banking health are “tight” to those of “global peers”. Meanwhile, geopolitical tensions could further impede on business confidence and economic activity.

The Fitch credit rating agency in April had announced that it had ratified Israel’s credit rating and set it to «’A,’ with a stable outlook.» The domestic macroeconomic performance was considered satisfactory and the rating was ratifies despite the economic situation in the international markets (YNETNEWS, 2012).

The Tier 1 ratio is expected to remain below those of international peers, a gradual increase in non-performing loans to 4.5% - 5.0% by mid-2013 is expected (from 3.8% in September 2011), while credit risks remain elevated because of the banks’ “concentrated loan exposures to highly-leveraged, Israeli conglomerates” (Moody’s, 2012).

But, in July, the Standard&Poor’s (S&P) agency warned Israel that a credit rating drop could be imminent due to the authorities’ inaptitude to meet the deficit goal. Less than a year after raising Israel’s credit rating to A+, the agency announced that if income taxes for 2013 are not raised, the country’s

III. Inclusiveness has been surprisingly limited and below potential for such level of economic development Israel is a case apart among MPs, nonetheless one could ask if the country has followed a path towar-

-132-


ds sustainable and inclusive growth. A growth that is inclusive means emphasis on the welfare of a larger segment of the population in terms of opportunities.

Figure 4. Rise in wealth goes hand in hand with a rise in well-being 66

31

65

Initially, one could note that wealth and well-being appear to be going hand-in-hand in Israel. In the MPs of the Arab spring the impressive rates of economic growth and GDP per capita went hand-in-hand with a worsening in standard of living as expressed by Gallup’s thriving index. This is not the case of Israel, as opposed to the Arab-sping economies, Israel benefits from a rising number in people thriving and expresing in a way their happiness towards the distribution of the fruits of growth. Between 2009 and 2011 one would note a 9.9% increase in per capita GDP and a 4.8% improvement in the Israeli thriving index. As a matter of fact, Israel comes 4th in the international classification of well-being according to Gallup (2012), only behind Denmark, Canada and the Netherlands. Even so, the very high cost of housing, the considerable cost of living along with relatively low wages suggest that in the possibility of an economic downturn well-being will not be untouched (The Times of Israel, 2012). To measure IG both social (equality of opportunities) and economic perspectives (enlargement of the scope of the economy) are considered. III.1. Social perspective: Decreasing labor market participation for the 20-24 year olds The present economic approach followed by Israel is based on the principles of a market economy, openess and privatization. Despite numerous achievements, this path, followed since the Stability Package of 1985, has created convoluted difficulties. More particularly it “increased societal gaps, eroded the middle class and enlarged the circle of poverty, and failed to precipitate a leapfrog... not only is Israel not growing fast, but its growth is not inclusive” (Reut-Institute, 2011). For growth to be inclusive it needs to be shared by the majority of the working age population. The

65 30,4

64

30

63

29,5

63

62

62

29

28,88

61

28,5

60 59

30,5

28 27,66

27,7

27,5

58

27

2008

2009

Thriving Index

2010

2011

GDP (US$ bn at PPP)

Source: Gallup (2012) for thriving index, EIU (2012) for GDP

Reut-Institute (2011) underscores that the quality of life is deteriorating through the fall in real wages, rising cost of basic services and products and declining public services. Meanwhile, the increasing “financial challenges of many households and the erosion of public services” are harmful to the education, health of the Israeli youth and hence their participation in the labor market. One may ask if the situation is really that dramatic. The answer is not straightforward, data for Israel highlights the country is doing better than the MPs average though less than in other regions. When considering labour market participation rates we see they are well above the regional average and have grown throughout recent times. In 2011, about 57.3% of the population was participating in the labour market versus 53.8% in 1999. This corresponds to average participation rates found in Eastern European economies but still below what one may find in ASEAN countries. The female participation rate has considerably increased (by more than 5 percentage points) and is more than double the regional value, close to the values of MERCOSUR and Eastern Europe. But youth participation rates show another picture, they are also encouraging when compared at regional levels but are indeed below the rates observed in other regions. For young people at the 20-24 age-range, 50.9% are active in 2011 versus

-133-


Table 7. Labor Market Participation Rates Evolution in Israel and Selected Emerging Countries 1999-2011 1999

2005

2008

Male

Female

TTL

Male

Female TTL

Israel

60.7

47.3

53.8

60.8

50

MPs (Median)

74.8

22.4

49.4

72.2

22.2

MPs (Median ex. Isr, Turk)

74.9

20.4

47.3

74.5

18.3

MERCOSUR (median)

82.7

49.6

65.8

81.5

ASEAN (median)

83.6

69.3

75.3

East. Europe

65.5

52.6

58.5

2011

Male

Female

TTL

Male

Female TTL

55.2

62.4

51.4

56.7

62.4

52.5

57.3

46.8

71.3

24

47.3

71.5

24.6

48.3

46.3

72.7

18.8

45.6

71.8

19.7

45.6

52.8

66.4

80.1

54.7

65.3

80.2

55.6

66.1

83.5

69.6

75.3

82.5

69.1

74.9

82.7

68.5

74.4

63.9

51.4

57.1

63.8

51.2

56.9

64.6

51.8

57.6

Source : Own calculation based on ILO, LaborSta EAPEP database Table 8. Labour Market Participation Rates of the Youth in Israel & selected regions 1999-2011 1999

2005

2008

2011

20-24

25-29

20-29

20-24

25-29 20-29 20-24 25-29 20-29 20-24 25-29 20-29

Israel

53.4

72.3

62.3

51.1

73.6

62.2

51

73.6

62.1

50.9

73.9

62.5

MPs*

48.8

60.1

53.8

45.6

59.9

52.7

44.3

60.5

51.6

42.7

61.7

51.4

Latin America

64.5

78.4

70.6

70.2

80.2

74.7

73.8

81.1

76.8

74.6

81.5

78.4

East Asia

72.9

86.9

79.9

71.5

87.8

80.2

71.2

87.8

79.6

69.3

86.7

78.1

Est. Europe

71.5

85.5

60.0

64.5

80.4

56.3

57.0

78.1

54.3

53.5

77.6

54.4

Source : Own calculation based on ILO, LaborSta EAPEP database

53.4% in 1999 which means that the path was progressively less inclusive for this age-range. Also, this performance is well below what one finds in Latin America and East Asia. However, the participation rate of the 25-29 years olds increased to 73.9% (from 72.3%), above the regional value, though remaining at least 15 percentage points below the Latin America and ASEAN values. Thus, one could say that there are real concerns regarding the participation of the youth in the labor market which is still insufficient for a country that is economically more developed than its neighbors. Meanwhile, let it be noted that with a CIA-Gini index of 39.2 the country is currently much more inegalitarian than the majority of EU countries and its rank is even worse than the ones of Algeria (35.3) and Egypt (34.4). Let it also be noted that despite a very low official level of unemployment for the total population, one finds low employment figures in specific com-

munities such as the Arab and Haredi communities (low employment figures for Arab women and Haredi men). These communities face impediments to labor participation such as high implicit marginal tax on employment and high reservation wages. As noted by the IMF (2012), some impediments are the result of past policy decisions, culture, discrimination, and linguistic disadvantages. The study stresses that the Haredi and Arab participation problem should not be taken lightly, it has led these populations to poverty and could potentially cause growth to slow sharply in the medium run. It seems the Haredi population is projected to grow much faster in the coming years and could exceed 20% of the total population by the late 2030s. This implies that if employment rates of do not improve (and as mentioned earlier there are sources of concern), the dependency ratio adjusted for the structural employment problem of minority groups will grow even more (IMF, 2012). Thus, all in all, there is reason to believe that there is still much to be done to achieve inclusive growth.

-134-


Table 10. Concentration of Exports in terms of products and markets (based on SITC rev3 3-digit data) 2000 share 2008 share 2010 share 2000. Trade 2010 . Trade of top 10 of top 10 of top 10 Concentration Concentration products in products in products in Index Index total export total export total export value value value

2000 share 2010 share of top 10 of top 10 Partners in Partners in total export total export value value

Israel

0.146

0.102

60.30%

27.10%

63.60%

73.33

67.98

MPs (Median)

0.067

0.057

62.6%

60.3%

57.0%

73.33

69.10

MERCOSUR* (av.)

0.030

0.043

41.9%

46.9%

51.5%

66.60

57.46

ASEAN (Median)

0.094

0.043

67.0%

53.7%

52.7%

71.79

72.89

Ukraine

0.036

0.034

45.4%

52.7%

57.0%

56.74

56.44

Belarus

0.052

0.094

41.3%

62.7%

52.1%

83.28

80.56

China

0.018

0.026

31.4%

35.7%

52.7%

73.56

60.36

India

0.041

0.048

34.6%

42.0%

57.0%

56.80

52.96

Note: The Trade Concentration Index is aimed at assessing the degree of concentration/diversification of a given country’s exports. Based here on the Hirschmann-Herfindahl Index, it ranges from 1 to 0: the lower the indicators, the more diversified the economy. Similarly, the lower the share of the top 10 products, the more diversified the economy trade. *: Only Argentina & Brazil Source: Own calculations using tradesift and Comtrade

III.2. Economic perspective: Mixed results regarding inclusiveness As for addressing the economic aspect of “inclusive Growth” in offering more opportunities through the enlargement of the scope of the economy, we focus on: (i) economic diversification (trends in exports concentration) and (ii) global labour and factor productivity trends. First, for growth to be inclusive the number of sectors contributing to the economy needs to increase, thus offering more opportunities and reducing exposure. The evolution of the level of the concentration of exports is used as an indicator of the economy’s aptitude to bear fruits from its openness. As shown in Table 10, Israel made considerable improvements, with an index of trade concentration that fell from 0.146 in 2000 to 0.102 in 2010. While this remains above the levels of concentration found in the Mediterranean region as a whole, the path has been a “pro-diversification” one. This is especially apparent when looking at the share of the top 10 export partners which decreased by more than 5 percentage points in a decade. Compared to the

Mediterranean median there is no overdependence on the major trade partners, meanwhile Israel seems much less dependent than ASEAN economies where the share of the top10 partners is above 70%. But, Israel appears to be more dependent in terms of products, indeed the country did not diversify in terms of products, actually the a share of the top 10 exported commodities went from 60.3% in 2000 to 63.6% in 2010. While this could be labeled an achievement in terms of specialization it is less so from an inclusiveness point-of-view. Second, increases in factor productivity may allow increasing real wages without causing macro dis-equilibrium. In that respect TFP growth has an inclusive component. It was already noted by Helpman (2003) for growth in the 70s and 80s that “seven-tenths of the rise in its GDP is explained by an increase in hours worked and investment in machinery, structures, and equipment, so that most of its growth was through ‘sweat and tears’... this investment was made possible, to a large extent, by the increase in productivity...R&D investment has the highest rate of return ”. Nowadays, openness and productivity have gone hand

-135-


Table 10. Trends in Labour Productivity and Factor Productivity in MPs and selected emerging economies 1990-2010 Labor Poductivity (Average An. Rate in %. based on Values in 90$) 90-95

95-00

00-05

05-10

Israel

1.7%

1.5%

0.3%

0.8%

8 MPs Median

0.6%

1.4%

1.8%

2.2%

Mercosur

2.4%

1.6%

0.0%

1.6%

Asean

5.7%

2.3%

2.6%

2.8%

Non Eu East

-9.0%

3.2%

7.5%

3.7%

All emerging Ref 2.7%

2.5%

2.6%

2.8%

Factor Productivity (Average An. Rate in %) 90-95

95-00

00-05

05-09

Israel

-0.5%

0.5%

-0.4%

-0.6%

8 MPs Media

-0.3%

0.2%

-0.1%

-0.4%

Mercosur

-0.5%

0.1%

0.8%

-2.2%

Asean

0.2%

0.2%

-0.2%

-0.9%

Non Eu East

0.0%

1.1%

-0.8%

-3.7%

All emerging Ref 0.2% Source: FEMISE

0.2%

0.0%

-1.4%

in hand, labor productivity of exporting firms in Israel is 32 percent higher than that of non-exporting firms, while total factor productivity (TFP) is 43 percent higher. Exporting firms are 116 percent larger than non-exporting firms, while after five years the TFP of the exporting firms seems to be 12% higher than that of the non-exporters (Bank of Israel, 2011). Taking into account that exporting firms pay wages on average 27% higher than those paid by non-exporting firms, and with a capital/ labor ratio 29% higher, there is reason to believe that, at least to some extent, increases in factor productivity allowed for the increase in real wages in an inclusive manner in exporting firms.

who highlight that while the high-tech sector has been an important growth engine it did not allow for more inclusiveness. The high-tech economy increased GNP, trade and FDI among others, but it also “increased societal gaps, and failed to contribute to overall national productivity or to create new jobs in recent years”. Finally, one should also note that about 70% of loans in Israel go to just 1% of the borrowers, a fact that perfectly illustrates a lack of inclusiveness (The JerusalemPost, 2012). All in all, indicators of inclusive growth that were used show that the degree and path towards inclusiveness of growth in Israel has been surprisingly limited, both from a social and economic perspective, despite some positive trends and an increasing “thriving-index”. Most importantly, one notes that Israeli growth has not been optimal for the participation of the 20-24 year old youth in the labor market, with rates of participation that are far less from those observed in some developing economies. There seems to indeed be a need for a new inclusive strategy that allows for more participation, especially for young Israelis. IV. Policy Responses and recent measures IV.1. Monetary policy

But this is not necessary true for the economy as a whole, granted, Israel appears to have decreased labour productivity since the 90s. However, Israel did not follow a positive factor productivity trend (TFP was negative in the recent decade) for its economy as a whole and hence its growth model was not optimal for job creation.

The central bank of Israel maintained the benchmark interest rate at 2.5% for fourth month on May 28th. According to the CBI this decision is consistent with its interest rate policy that targets « to entrench the inflation rate within the price stability target of 13% a year over the next twelve months, and to support growth while maintaining financial stability ». Moreover, it notes that « the path of the interest rate in the future depends on developments in the inflation environment, growth in Israel, the global economy, monetary policies of major central banks, and developments in the exchange rate of the shekel» .

This might seem surprising at first but seems to be in line with the remarks of the Reut-institute

In taking this decision the CBI had to take into account the fact that actual inflation over the pre-

-136-


Box. The 2010 New Bank of Israel Law and Inflation targeting As noted by FEMISE (2005), Israel has been a country with a history of high inflation and disinflation was a long process that lasted roughly 20 years. Until the 1980s, both monetary and fiscal policies were expansionary which contributed to inflation rates increasing rapidly (up to 450%) and growth falling. After the Economic Stabilisation Plan of 1985 the inflation rate was reduced to 18% per year on average until 1991, even so, the reduction was the result of targeting other variables than inflation (ex. nominal exchange rate targeting). It was in 1992 that Israel adopted inflation targeting policy along with a crawling exchange rate band regime. While this policy was succesful, weathering the recent global financial crisis rather well among others, the Bank of Israel was operating under an obsolete law of 1954. Thus, in June 2010 a new law became effective, stressing that the Bank’s main objective is price stability, granting the BoI with the objective to support the stability of the entire financial system and putting in place a monetary Committee to determines monetary policy (IMF, 2012). Does that mean that the new framework is going to be more effective? Among other changes, the Bank of Israel is going to be more accountable, indeed as with other central banks that focus on inflation targeting, the new law will impose a trade-off between greater operational freedom and greater transparency and accountability. Lessons from the recent financial crisis are also being taken into account since the new law, among others, encompasses tools to implement quantitative and qualitative easing such as performing actions in the stock exchange and purchasing or selling government paper with maturity over thirteen months. Meanwhile, the BoI’s role as a “Lender of Last Resort” is emphasized since the BoI can grant credit to banks determining the conditions and « autonomously amend (e.g. loosen) such conditions and extend borrowing to non-bank financial institutions under exceptional circumstances that

the Committee believes may threaten the orderly functioning of financial markets » (IMF, 2012). Discretion in foreign exchange intervention is also given, allowing for unilateral actions in case of emergency. All in all, the law does seem to allow for better policy coordination among the authorities in charge. vious year had been at the center of the inflation target range in recent months. Meanwhile, in the first quarter of 2012, GDP had grown at a similar rate to that in the second half of 2011 while in May 2012 uncertainty about future economic developments in Europe intensified and interest rates in the major economies remain low. The Bank of Israel decided to lower the interest rate for July by 0.25%, and to leave the interest rate for August unchanged at 2.25%. It was stressed by authorities that monetary policy was formulated to reinforce the ability “ to deal with the deepening recession in the global economy and with its potentially adverse effects on Israel’s economy”. IV.2. Fiscal Policy Under the two-year budget for 2011-12, growth in real spending has been capped at 2.7% a year (EIU, 2012). However, as noted earlier, spending surpassed the levels aimed for 2012 in part due to rising social spending. The trial is a difficult one, on the one hand, the fiscal position is challenging considering the international situation, on the other hand, there is a “revival of the social protest which is perceived not to have achieved the results that were hoped for last summer” (Bank of Israel - Dr. Karnit Flug, 2012). The budget deficit in 2012 could be close to 3.8% of GDP, about twice the initial goal of 2%. Authorities announced that tax increases will be necessary to avoid completely missing the target for 2013. It was agreed that the budget deficit target set for 2013 would be of 3% of GDP instead of the originally proposed 1.5%. Even so, the Bank of Israel Governor warned of higher inflation and interest rates if the deficit target was raised, arguing that

-137-


relaxing “the purse strings” was conflicting to Israel’s needs for tighter policy to endure a potential worsening of the global economy (REUTERS, 2012). IV.3. Recent Economic and Social-related Policy measures Strategic trade ties with China on water technologies that could deepen trade relations A financial protocol representing more than NIS 1 billion (US $ 300 million) between Israel and China was signed for the export of Israeli water technologies for agricultural use in China. The agreement is expected to allow setting up a line of credit for financing trade and Israeli investment in China, it shall allow the « insurance of long-term loans granted to export transactions from Israel on conditions that give the Israeli exporter an edge over his competitors worldwide » (Ministry of Finance, 2012). Plans to change Israel’s rental market that could allow for more opportunities for young households Israel, contrary to the developed world, is one of the few economies without rental apartment projects which is penalizing for the social well-being of younger individuals. Meanwhile, Israel’s ranking is low compared to the OECD countries in terms of investment in real estate. But there are plans to solve this, on July 2nd the Minister of Finance announced that there were plans to change Israel’s rental market, the objective being massive rental construction that will make it possible to lower rents and give young households the option of long-term rental at relatively affordable prices. About 25% of these construction projects will be price controlled to deliver low-cost rental housing (Ministry of Finance, 2012). Academic Cooperation Programs with India & China which could boost innovation A series of programs, with attached scholarships, designed to increase joint research with India and China were recently signed. The programs aim is to

reinforce economic ties and entice researchers from those two countries to Israel’s research institutes. The first program is addressed to post-doctorate students (in the universities and in the Volcani Institute of Agricultural Research) while the second program is addressed to “outstanding students” to allow them to integrate into extra-academic programs, ultimately making them “ambassadors” for Israel on their return home (Ministry of Finance, 2012). V. Conclusion and Recommendations A recent article by the Jerusalem post makes a worthy appraisal of the economic situation in Israel. What one preserves is that the population keeps a lower standard of living than individuals in other developed countries which constitutes an Israeli economic paradox. The country is at the forefront of hi-tech innovation but suffers from high prices and low disposable income levels. The per capita GDP is close to $32,000 (the level of Spain and Cyprus) but the economy’s capabilities should have allowed it to reach $50,000 (closer to Singapore and the Netherlands). V.1. The need for more competition and less inequality in economic opportunities There is an “economic fight” that needs to be fought, particularly with special interest groups that have no incentive of backing public policies that increase competition and lower prices. One would note, among others, that there is need to: √ End protectionist laws that only benefit an elite of few and that render imports too expensive, √ Reduce price of housing, Israelis currently need almost 11 years of salary to buy an apartment, versus 8 for the OECD economies (The JerusalemPost, 2012). While recent measures for the housing market are welcome, they need to be intensified. √ Offer more opportunities for finance to broader segments of the population (having 70% of all loans awarded to 1% of the borrowers is simply non-acceptable). A committee has recently recommended

-138-


liberalizing the banking market (60% currently dominated by two large banks) to Internet banks and letting non-bank institutions to lend more to households and SMES in order to increase competition and reduce borrowing costs (Reuters, 2012). V.2. The need of a new inclusive vision It was shown that there are some limitations regarding the degree and path towards inclusiveness of growth in Israel which has been surprisingly limited, both from a social and economic perspective. What is needed is a broad conceptual framework for Inclusive Growth, which could provide a “leap” in the quality of life of all citizens. In that respect, the ISRAEL 15 Vision has become a formal national objective and stresses the need to understand Israel’s standing through the indicator of ‘quality of life’ instead of purely “monetary” conventional measures. √ A community-building approach is viewed as key to local prosperity and inclusiveness and could include many platforms that are regulated and cooperate, among others, early childhood centers; schools and other educational institutions; medical centers (Kupat Cholim); youth movements and centers. √ Meanwhile, improving services that are essential to inclusiveness, such as education, vocational training, healthcare would be of great importance. All in all, Israel is in need of a new social contract, one that can be built through discussions between the government, the civil society, the business sector and various non-for-profit organizations, implemented through political measures and legislation. References : Bank of Israel (2011), “Export and Productivity— Evidence from Israel”, Lior Gallo, Discussion Paper 2011.08.

Bank of Israel (2012), « Foreign Exchange Reserves in the Bank of Israel, May 2012 », June 7th. Bank of Israel (2012), « The Bank of Israel keeps the interest rate for June 2012 unchanged at 2.5 percent », May 28th. Bank of Israel (2012), Remarks by Dr. Karnit Flug, Deputy Governor of the Bank of Israel at the Caesarea Forum session “The State Budget in Light of the Social Protest”, June 28th. Bank of Israel (2012), “The Bank of Israel keeps the interest rate for August 2012 unchanged at 2.25 percent”, July 23rd. Blanc, Frédéric (2011), “Employment Perspective in the Mediterranean” In «Tomorrow, the Mediterranean: Scenarios and Projections for 2030» (69–108). Paris: IPEMED. CNN (2012), “Israeli politics in tailspin over Iran”, May 2nd. Economist (2012), “Israeli politics: The power of the ultra-Orthodox”, July 21st. FEMISE (2005), « Israel Country Profile », August 2005. Globes, (2012), « Israeli gov’t debt down to 73.3% of GDP », February 27th. Helpman E. (2003) , « ISRAEL’S ECONOMIC GROWTH: AN INTERNATIONAL COMPARISON », OIsMraICelGERcOonWoTmHic: ARNevINieTwER 1N(2A0T0IO3)N, A1–L1C0OMPARIS. IMF (2012), « Israel: Selected Issues Paper », IMF Country Report No. 12/71. Ministry of Finance (2012), “Press Release Minister of Finance and Minister of Education Launched Academic Cooperation Program with India & China ”, February 26th. Ministry of Finance (2012), “ISRAEL DEEPENS ECONOMIC TIES WITH CHINA”, February 29th. Ministry of Finance (2012), “Press Release: Minister of Finance at the Model for Long-Term Rental Housing Conference: «We will change Israel’s rental market»”, July 2nd. Moody’s (2012), « Moody’s: Israel’s banking system outlook changed to negative », May 8th. Reut-Institute (2011), “Israel’s New Social Contract for Growth, Inclusiveness and Community Building”, Reut-Institute.org, 8.12.11.

-139-


Reuters (2012), “Israel cabinet OKs rise in 2013 budget deficit target”, July 1st. Reuters (2012), “Israeli Internet banking would boost competition: panel”, July 16th. TheJerusalemPost (2012), « Israel’s economic miracle: Where do we go now? », April 25th. The Times of Israel, (2012), « Brace yourself for Israel’s economic downturn », June 13th. Weizman, S. (2012), « Israel’s Economy and the Arab Spring: Isolation Serves as a Buffer », Mediterranean Policy Program—Series on the Region and the Economic Crisis, GMF – The German Marshall Fund of the United States, May. YNETNEWS (2012), “Fitch gives Israel ‘A’ credit rating”, April 27th. Ynetnews (2012b), “S&P warns: Raise taxes, or credit rating will drop”, July 15th.

-140-


JORDAN: For how long will piecemeal reforms buy political stability? Introduction The year 2011 was a difficult one for Jordan. Political reforms accelerated but have fallen short of the expectations of the opposition and were slower than in Egypt and Tunisia. The King is offering only piecemeal reforms that do not threaten his power and that of the entrenched elite. In tandem with political unrest, economic activity has slowed down sharply in 2011 to 2.6% from 3.1% in 2010 and from robust growth of 6.5% during the period 2000-2009. Moreover, unemployment is chronically high averaging around 13% during 2000-2011. Jordan’s energy dependence has been a source of severe current account pressure with the recurrent interruption of Egyptian gas supplies and the high cost of oil imports. In addition, other current account inflows such tourism receipts and remittances have not recovered. In the meantime, an accommodative fiscal policy in 2011 forced the government to announce austerity measures in 2011 within a larger plan for fiscal consolidation. Finally, as the drawdown on foreign reserves to meet external financing needs reached its limit, the Jordanian authorities have reached an agreement to borrow from the IMF. Taking into account the regional political instability; particularly the unrest in Syria; and rising commodity prices, the outlook for 2012 is as follows: GDP growth is forecasted at around 3%, √ Inflation is forecasted to rise to close to √ 5% following the expected hikes in energy prices, The current Account deficit is expected to √ rise to 14% of GDP of a higher energy import bill, lower tourism and remittances, Following announced austerity measures, √ the fiscal deficit is expected to come down to 5% of GDP, slightly above the target for 2012 (set at 6.5% of GDP), The IMF loan could help boost confidence √ and contribute to the resumption of capital flows.

This country profile discusses the current situation in Jordan and underlines the challenges ahead. After presenting the limitations of the current political context, it presents an overview of recent economic developments. I. Sluggish political reforms The Jordanian king was relatively quick to react following the anti-government protests that took place early last year. However, compared to countries like Egypt or Tunisia, political reforms (including a range of constitutional amendments, the establishment of a constitutional court and an independent electoral commission) were of a much smaller scale and occurred at a more sluggish pace. Naturally, opposition (which is composed of Islamists, leftists and youth groups) has continued to demand greater accountability, transparency of government, and an increased voice in the decision-making process, which are met with resistance from the elite. For instance, two bodies were created with the purpose of suggesting electoral and constitutional changes: the Royal Committee on Constitutional Review (RCCR) and National Dialogue Committee (NDC). However, both bodies were dominated by regime loyalists. More importantly, the RCCR’s 42 proposed constitutional amendments made in late 2011, to better balance power between the executive, legislative, and judicial branches of government, did little to reduce the power of the monarch. Also, several attempts were carried out to revise the electoral law, a prime demand from the opposition, to allow for a fairer representation and less biased towards loyalists and tribally-oriented members. A first version of the law was finalized by parliament in mid July, and later ratified by the president and the prime minister. Yet, the revised law only weakly attempted to change the “single non-transferable vote system” (known locally as one person, one vote) and which is responsible for the limited representation of the parliament. The new law gives the electorate two votes: one for a district representa-

-141-


Figure 1. Contribution to GDP growth, (%) 2007-2011 160% 140%   120%   100%   80%   60%   40%   20%   0%   -­‐20%   -­‐40%   -­‐60%  

II. Real sector, inflation, external sector developments 8% 7%   6%   5%   4%   3%   2%   1%   0%  

2007

2008

External demand   Government  consumpAon  

2009

2010

2011

Gross fixed  investment   Private  consumpAon  

Source: Author’s calculation based on EIU data.

tive and one for a national list that includes political parties. The new law raised the number of nationallist seats (which are apportioned to political parties) to 27 from 17 (with another 15 seats reserved for women), while 108 seats will be elected according to the district format. However, this small percentage for the national list seats of the total of 150 seats precludes the possibility of any political party gaining a substantial presence in parliament. Consequently, the Muslim Brotherhood have threatened to boycott the upcoming elections, scheduled in December 2012; and some 400 former officials and leading public figures have called for their postponement to allow time for further changes to the law. In response, the King has recalled parliament to draft a new version of the law. In 2012, many challenges remain for a meaningful democratic transition. They include, first, passing legislation on the new electoral law and an independent electoral commission, a political parties’ law, as well as holding parliamentary and municipal elections. Second, achieving inclusion of all groups like the Muslim Brotherhood and the Jordanian Palestinians, in the formal political process seems to lack genuine political will. Without political concessions, advances in democracy will be neither meaningful nor satisfactory for the public. The King’s policy relying on offering piecemeal and insufficient concessions may eventually undermine the broad support he still retains. It is to be noted that demonstrations in Jordan never sought to topple him. Nevertheless, should his governments fail to deliver on tangible democratic advances; this is likely to stir further unrest. Then, how long will the King be able to buy-off political stability?

Like many Arab spring countries, political instability continued in 2011 with frequent cabinet changes. As a result, economic activity was subdued but growth remained positive. Unemployment has not increased so far but remains high, and inflation remains low. Moreover, the outlook for 2012 remains challenging but the IMF loan could eventually help boost confidence in the economy. II.1. Economic growth was subdued in 2011 The Jordanian economy slowed down in 2011 to 2.6% from 3.1% in 2010, a result of political instability, fiscal austerity and a sluggish global economy (figure 1). This weak growth performance was primarily due to modest growth in investment (up by 2%). Private consumption grew by 3.4% (compared to 2.8% last year) and exports by 3.3% (compared to 1.1%). Imports also rose by 4.2% compared to 0.3% last year. In the first quarter of 2012, growth slightly picked-up to 3% from 2.3% a year ago. Given Jordan’s weak trade and financial linkages with Europe, their slowdown has only indirectly affected the Jordanian economy, through the impact on regional oil exporters, particularly the Gulf Cooperation Council (GCC) countries to which Jordan’s business cycle is closely linked. According to Mohaddes and Raissi (2011), remittances from Jordanian immigrants in the GCC amount to 15-20% of GDP. In addition, the GCC are also the source of substantial grants and foreign direct investments, and the primary destination for Jordanian exports and in turn supplies most of its energy requirements. Mohaddes and Raissi (2011) estimate that the impact of a 10% demand driven increases in the price of oil (which both has a negative effect on the Jordanian economy derived from increased import costs and a positive one derived from larger inflows of external income) would raise Jordan’s GDP by about 2.5% after 10 quarters. This means that Jordan’s dependence on the GCC could help buffer negative demand shocks but it also renders

-142-


Figure 2. GDP growth by economic activity, (%) 2006-2011

to them, sectors like manufacturing and finance, insurance services and real estate have traditionally been the most important engines of growth in Jordan. In fact, between 1980 and 2011, they accounted for around 38% of GDP growth but their contribution dropped to one fifth of GDP growth in 2011 (table 1).

120 100   80   60   40   20   0  

Israel

Tunisia Turkey     Jordan   Morocco   Algeria   Lebanon   Egypt  

Syria

Source: Author’s calculation based on Central Bank of Jordan’s data

its output volatility largely exposed to fluctuations in net income received from abroad. Most economic sectors posted positive growth rates in 2011, except for construction which contracted by 4% (compared with a drop of 4.6% in 2010) (figure 2). Meanwhile, strong growth was recorded in mining and quarrying (up by 18% compared to a decline of 19% in 2010), following an increase in global demand of phosphate and other minerals. Most other sectors posted low single digit growth rates. In particular, manufacturing growth remained low, 4%, but it doubled from the 2010 rate. There seems to be the beginning of a recovery in some sectors in Q1-2012 such as construction (up by 9% compared to -1% last year), tourism (up by 3% vs. -24%) and to a lesser extent mining and quarrying (up by 3.5% vs. 2.3%). However, the manufacturing sector has contracted by -1% compared to a growth of 43% last year. IMF (2012a) analyses the main drivers of long-term growth. According

The outlook for 2012 remains challenging on the back of fiscal austerity, domestic political instability and higher commodity-import prices. Moreover, the ongoing regional political instability (Syria) is expected to continue to have negative spillovers on economic activity through lower tourism receipts and FDI. Taking into account continued growth in the GCC, economic growth is expected to be modest in 2012 around 2.75 % (IMF estimate). II.2. Unemployment remains high Jordan’s unemployment rate remained in the double-digit over the past 10 years. It had slightly increased to 13% in 2011 from 12.5% in 2010. In early 2012, it came down to 11.5% (figure 3). This was driven by a decrease in female unemployment (from 21% to 18%). Meanwhile, male unemployment has remained unchanged (around 10%). IMF (2012a) explains that Jordan has a both a very low labor force participation rate (about 40%) and a ratio of working-age people actually employed (about 35 %) compared to elsewhere. More im-

Table 1. Sectoral contribution to real growth in percentage points (median) Agriculture, forestry and fishing

1980-2010

1980-1989

1990-1999

2000-2010

2011

0.16

0.07

0.11

0.29

0.17

Mining and quarrying

0.08

0.19

0.04

0.14

0.32

Manufacturing

0.90

0.24

0.68

1.21

0.24

Electricity and water

0.12

0.12

0.14

0.1

0.10

Construction

0.23

-0.24

0.1

0.42

-0.25

Trade, restaurants and hotels

0.37

-0.30

0.24

0.54

0.42

Transport and communications

0.50

0.48

0.47

0.74

0.57

Government services

0.47

0.84

0.46

0.45

0.45

Finance and real estate

0.88

0.53

0.93

1.13

0.47

Source: IMF (2012a), except for 2011 which is calculated by the author based on Central Bank of Jordan’s data -143-


Figure 3. Unemployment rates 30 25 20 15 10 5 0

2001

2003

2005

National

2007

Male

2009

2011

Female

Source: Department of Statistics, Jordan.

portantly, IMF (2012a) estimates that in order to absorb the unemployed and new entrants to the labor force, Jordan will need to increase employment by 0.8 million full-time positions over the period 2010-20. However, this would leave the employment to working-age population ratio in 2020 at 43%, lower than the average ratio currently observed in any region in the world; and would require an annual real GDP growth of 9.3%, a rate that is difficult to achieve given current external and internal conditions. However, if the elasticity of employment with respect to output were to stay constant and the pace of output growth unchanged from the last decade, only 0.5 million new jobs would be created. More worryingly, taking into account modest but more realistic growth prospects over the period 2010-20 (an average annual GDP growth rate of 3.3 %), then a mere 0.2 million new jobs would be created.

Q2-2012

headline inflation is projected to slightly rise to close to 5% as the effect of the government’s decision (in May 2012) to raise fuel and electricity prices takes place, and also as the government intends to increases other energy prices for industrial users.

II.4. The external position worsened Following several interruptions of natural gas supplies from Egypt, energy imports soared. Meanwhile, with declining tourism receipts, the current account worsened. In addition, domestic regional instability is still undermining investor confidence and thus capital inflows remain scarce. a. Current account worsens following soaring energy imports and tourism receipts In 2011, the external position worsened as the current account widened significantly to 12% of GDP from 7% of GDP on the back of increased energy imports and declining remittances and tourism receipts (figure 5).

On the one hand, the trade deficit rose sharply to II.3. Inflation has fallen 30.5% of GDP from 25.7% of GDP, despite a boost in export earnings (to almost 28% of GDP from 26.6% Inflation has eased to 4.4% in 2011 from 5% in 2010 of GDP a year ago). In particular, export revenues (figure 4). It has been on a steady but moderate of crude materials increased (both phosphate and decline during 2012 (January-June) averaging 4% potash were up to 5.6% of GDP compared with down from 4.7% a year ago, probably because of 4.2% of GDP a year ago), following a substantial the expansion in food and fuel subsidies. For 2012, upturn in prices last year. In general, Jordan’s exports are dominated by low-tech Figure 4. Inflation trends, 2008-2012, (%) products, which represent more 80% 70%   than a third of its export basket 60%   50%   40%   between 2003 and 2010 (figure 30%   20%   6). High tech products consti10%   0%   tute only 12% of total exports -­‐10%   -­‐20%   -­‐30%   and this share has been declining Jan-­‐08   May-­‐08   Sep-­‐08   Jan-­‐09   May-­‐09   Sep-­‐09   Jan-­‐10   May-­‐10   Sep-­‐10   Jan-­‐11   May-­‐11   Sep-­‐11   Jan-­‐12   May-­‐12   overtime due to the rapid rise of CPI  infla;on   food  infla;on   Fuel  and  ligh;ng   exports of textiles products (Diop Source: Authors calculations based on Department of Statistics, Jordan and Ghali, 2012). -144-


Figure 5. Current account inflows, 2006-2011

international markets (EIU, 2012). Food imports also rose to 10% from 30% 8% of GDP. On the other hand, ex20%   10%   port of services also deteriorated 0%   significantly (to 2.3% of GDP in 2011 -­‐10%   from 4.5% of GDP in 2010) following -­‐20%   2006   2007   2008   2009   2010   2011   Q1-­‐2011   Q1-­‐2012   a decline tourism receipts (to 10% of exports   tourism   remi<ances   grants   current  account   GDP, down from 13.6% of GDP). Net Source: Author’s calculations based on Central Bank of Jordan data. transportation payments have also increased to 4.5 from 3.8% of GDP. Figure 6. Share of manufacturing industries by technology levels (percent In addition, remittances have gone of total exports), 2003-2010 100   down (to 10.5% of GDP compared 90   80   to 12%) but their decline has been 70   60   largely offset by an increase in public 50   inflows to 7% of GDP from 4% of GDP. 40   %  of  GDP  

40%

30 20   10   0  

In Q1-2012, the trade deficit wide2003 2004   2005   2006   2007   2008   2009   2010   ned further (to 9% of GDP from 7% Low  tech   Medium  low  tech   a year ago) following a decline in exMedium  high  tech   High  tech   ports (to 5.8% of GDP from 6.7%) and Source: Diop and Ghali (2012) an increase in imports to 14.8 from 13.5% of GDP following an increase However, the increase in export earnings was more in fuel imports (to 8.4% of GDP from 5.9%). The than offset, by a significant rise in imports to 58% of GDP in 2011 from 52% of GDP in 2010 (figure import bill rose following the renegotiation of gas 7). This increase was in large part due to soaring prices imported from Egypt in late December and fuel imports, which accounted for around 30% of which raised the price that Jordan pays by more total imports in 2011, and have increased from 13 than three-fold (from less than US$2 per 1,000 cu to 19% of GDP. Although partly reflecting higher ft to over US$6), similar to European market prices. global prices, the increase also resulted from the Moreover, despite the resilience of tourism receipts interruption of natural gas supplies from Egypt fol- in Q1-2012 (2.5% of GDP) and remittances (2.3% of lowing ten explosions on the Egyptian pipeline in GDP), the current account soared to 6% of GDP from 2011 (supplies from Egypt dipped from 220m cu ft/ 2.3% of GDP following a deterioration in the overall day in 2010 to an average of 80m cu ft/d in 2011), balance of current transfers to 2.2% of GDP from forcing Jordan to buy more expensive oil on the 5.5% of GDP. Figure 7. Imports (% of GDP), 2007-2011 90%   80%   70%   60%   50%   40%   30%   20%   10%   0%  

2007

2008

2009

food and  live  animals  

2010

2011

Jan-­‐April Jan-­‐April   2011   2012   minerals,  fuels  and  lubricants   imports  

Source: Author’s calculations based on Central Bank of Jordan data. -145-

Higher energy prices (resulting from more expensive natural gas imports from Egypt) will sustain an expensive import bill in 2012. At the same time, regional tensions and the global economic downturn will adversely affect tourism and worker remittances. As a result, the current account deficit is expected to widen to an estimated 14% of GDP in 2012 (IMF estimate).


b. IMF loan could boost scarce capital inflows Owing to regional instability and the global economic downturn, capital inflows declined. FDI was reduced to 5% of GDP in 2011, down from 6% in 2010, and portfolio investments were more than halved to 1% of GDP from 3% of GDP in 2010. The downward trend has continued in Q1-2012, with FDI declining to 0.8% of GDP (from 1.2% of GDP last year) and portfolio investment has almost come to a stop (figure 8). The IMF (2012b) estimated that the external financing needs in 2011 (after FDI, new borrowing and other capital flows, and including official transfers) at US$ 1 billion (3.3% of GDP). Initially, they were met by drawing down foreign reserves. For 2012, external financing needs, to be met by reserve drawdown, are expected to reach US$0.9 billion (2.7% of GDP). In this regard, the Jordanian authorities agreed with the IMF on a 36-month Stand-By Arrangement (SBA), allowing Jordan to have access to IMF credit amounting to SDR 1.364 billion (about US$2.06 billion). The SBA would support the country’s economic program during 2012-15 to address fiscal and external challenges and foster high and inclusive growth. The approval makes SDR 255.75 million (about US$ 385.35 million) immediately available, and the remaining amount will be phased in over the duration of the program, subject to quarterly reviews. The Stand-By Arrangement entails exceptional access to IMF resources, amounting to 800 percent of Jordan’s quota. The SBA will provide balance of payment and budgetary support and will Figure 8. FDI and portfolio investments (% of GDP), 2003-2011 30% 25%   %  of  GDP  

20% 15%   10%   5%   0%   -­‐5%   -­‐10%  

2003

2005

2007 por/olio  

2009

2011

Q1-­‐2012

also aim at supporting reform measures for a socially acceptable fiscal consolidation. It will provide liquidity during the next three years to allow the authorities to gradually implement the following program: √ short- and medium-term fiscal adjustment underpinned by expenditure and tax reforms; √ comprehensive reforms in the electricity sector to bring National Electricity Power Company (NEPCO) back to cost recovery and √ structural reforms aimed at improving the business environment, enhancing transparency, and fostering trade, while improving labor-markets skills through education and training reform. The IMF should boost investor confidence. In November 2011, Standard and Poor’s (S&P) had a lowered Jordan’s long-term, local-currency sovereign credit rating to BB from BB+ on the grounds of a negative economic and political outlook. Moody’s had also earlier changed the outlook for Jordan’s sovereign debt from stable to negative, in the aftermath of the protests in early 2011, fearing that the government might adopt a lax fiscal stance in order to respond to popular discontent. III. Managing the Economy III.1. Austerity measures in 2012 show concern for fiscal sustainability In an attempt to calm popular discontent in 2011, the government resorted to public spending increases (to 33% of GDP from 30% in 2010). Mainly, subsidies went up to close to 5% of GDP from 1.6%), in particular, energy subsidies represented close to 6% of GDP in 2011, as a result of higher international prices, the authorities’ decision in early 2011 to freeze fuel prices and stop implementing the monthly automatic adjustment pricing mechanism adopted in 2008; and frequent disruptions of Egyptian gas supplies (IMF, 2012b).

FDI

Source: Author’s calculations based on Central Bank of Jordan data.

Meanwhile, revenues only slightly increased to 26.4% of GDP in 2011 from 25% of GDP last year

-146-


Figure 9. Public Finances (% of GDP), 2006-2011 40% 30%   20%   10%   0%   -­‐10%   -­‐20%   -­‐30%   -­‐40%   -­‐50%  

2006

2007

2008

2009

Other Subsidies,  grants  and  social  benefits   Foreign  grants   Tax  revenues  

2010

2011 Jan-­‐May  Jan-­‐May   2011   2012  

Capital spending   CompensaGon  of  employees   Non-­‐tax  revenues   Deficit  excl  grants  

Source: Author’s calculations based on Central Bank of Jordan data.

but this was mostly due to a leap in foreign grants (to 6% of GDP from 2% of GDP) as Saudi Arabian aid flowed in to fund the additional cost of fuel subsidies. As a result, the fiscal deficit (including grants) increased to 7% of GDP in 2011 from 5.6% of GDP in 2010. Excluding grants, the overall fiscal balance registered a high deficit of around 13% of GDP from 8% of GDP last year (figure 9). In the first 5 months of 2012, the deficit increased to 1.1% of GDP from 0.2% of GDP a year ago as a result of a fall in foreign grants (to 0.1% of GDP from 1.5% of GDP) which subdued revenues (down to 9.6% of GDP down from 11% of GDP). Despite an increase in subsidies, grants and social benefits to 3% of GDP from 3.5% of GDP, expenditure has remained almost unchanged (11% of GDP), as miscellaneous expenditure decreased. In 2011, budgetary financing needs (excluding grants) were estimated to have reached US$2.84 billion (9.5% of GDP). Given large excess liquidity in the banking system, local banks were able to meet the growing private credit demand, in addition to providing for most of the fiscal financing needs. In 2011, fiscal financing needs (excluding grants), are expected to reach US$2.86 billion (9.1% of GDP) (IMF, 2012b). However, out of concern for Jordan’s fiscal sustainability, the Jordanian government announced a three-year fiscal reform agenda that targets a fis-

cal deficit of 3.5% of GDP by 2014. In 2012, the government plans to implement a number of austerity measures that would lower the overall deficit by about 1.5% of GDP. They include: √ raising domestic revenue (removing tax exemptions, revamping property transfer fees, and higher tax rates on luxury goods), √ reductions in capital spending, √ containment of current spending

through: √ freezing public sector hiring (except for in education and healthcare), √ reducing the operational costs of Ministries (salaries of civil servants were reduced by a symbolic 20%, and should be restructured to remove privileges offered to some state employees and ensure fair consideration of all applicants for civil service jobs. This would save JD9m (US$12.7m) in annual expenditure), √ raising electricity prices (albeit only for selected industries) in order to relieve pressure on the National Electric Power Company (NEPCO), which is facing a growing deficit as it is forced to import oil to substitute for disrupted natural gas from Egypt, √ improving the system of universal subsidies for gasoline and diesel. As mentioned earlier, energy subsidies accounted for 6% of GDP in 2011. Moreover, the IMF estimates that if international prices continue their upward trend, keeping domestic prices unchanged could result in subsidies increasing to 18 % of GDP by 2014. This would require a major fiscal adjustment, including substantial reductions in higher-priority public spending (e.g., on education, health, and public infrastructure). Given their untargeted nature, fuel subsidies disproportionately benefit rich households. Overall, the richest one-fifth (quintile) of households receives over 25% more in subsidies than the poorest

-147-


Figure10. Share of benefit from energy subsidies (% of total subsidies accruing to income groups), 2008 Gasoline Diesel 2,7

5,9

5,2 12,2  

7

30,6

bo,om decile    

16,4

2nd decile  

13

50,2

2nd quin6le   3rd  quin6le   4th  quin6le  

16,7

21,1

5th quin6le  

19

Source: IMF (2012a)

one-fifth of households. Figure 10 shows that the richest quintile receives around 50% of the gasoline subsidies and 31% of diesel subsidies while the respective figures for the bottom decile are 3 and 6% (IMF, 2012a). The austerity package announced was followed by news that the government was implementing a 25% hike in the price of premium petrol, with further, unspecified increases for propane and other oil derivatives. In addition, electricity prices would be raised for industrial users, but not for households. The political and social acceptability of some of the measures (such as removing tax exemptions) may delay their implementation. In any case, the fiscal austerity measures and generous donor support should reduce the fiscal deficit in 2012, to around 5% of GDP, slightly above this year’s target. Indeed, Kuwait had announced that it would provide a grant of US$ 1.25 bn this year, and the GCC also pledged some US$5bn over five years. Moreover, during the EU-Jordan Task Force held in February, the EU promised Jordan financial assistance of US$4 billion over the next three years, with US$1.6 billion available in the first year. The assistance will include grants and loans from the European Commission, the European Investment Bank and the European Bank for Reconstruction and Development. In the medium-term, the IMF suggests that in the absence of a greater fiscal adjustment, Jordan will not meet its fiscal deficit target until 2017. Jordan’s central government domestic debt to GDP ratio increased considerably to 47% in 2011 from

41% in 2011. This increase was due to a widening of the fiscal deficit caused by increased expenditure, a decline in external grants, and a cyclical decline in revenues. However, IMF (2012b) estimates that most of the increase was in large part due to increased borrowing on behalf f NEPCO to accommodate more expensive imported fuel following the interruption of supplies from Egypt). In fact, domestic borrowings by or on behalf of NEPCO amounted to US$1.1 billion (about 3.8% of GDP) in 2011. Of this, about US$0.7 billion (2.4%of GDP) has involved (mainly) borrowing by the government on behalf of NEPCO, and (partly) government guarantees of NEPCO’s borrowings, through both channels increasing public debt. The IMF projects that the debt ratio would slightly increase in 2012 and then decline over the medium term. However, the debt outlook remains vulnerable to adverse shocks including a contingent liabilities shock, an exchange rate depreciation (as about one third of the debt is foreign currency denominated, a 30 percent real exchange rate depreciation would increase the debt-to-GDP ratio by around 11 percentage points relative to the baseline in 2012). III.2. Monetary policy: preserving reserves The Central Bank of Jordan (CBJ) has tightened monetary policy three times between June 2011 and June 2012, cumulatively raising policy rates by 125 basis points. This tightened stance reflects a rise in sovereign risk premium and concern for rising inflation. According to IMF (2012b), the exchange rate peg to the US$ has been able to provide confi-

-148-


credit growth  

contribu/on to  growth  

dence in the Jordanian economy during the Figure 11. Credit market developments 200% 14%   recent turbulence in both regional and glo12%   150%   bal financial markets. Furthermore, the IMF 10%   100%   8%   (2012b) shows that Jordan’s real effective 50%   6%   0%   exchange rate appears broadly in line with 4%   -­‐50%   2%   its medium-term fundamentals and there-­‐100%   0%   fore is not undermining the country’s comfévr.-­‐10   juil.-­‐10   déc.-­‐10   mai-­‐11   oct.-­‐11   mars-­‐12   private  sector   Credit  to  public  en@@es   petitiveness. Central  government  credit  

credit growth  

Nevertheless, the external shock (with the Source: National sources stop in capital inflows) has forced the autios and provisioning remain high, while non-perthorities to resort to reserve depletion to meet forming loans increased slightly to 81⁄2 percent external financing needs. Since January 2011, Jor- at mid-2011. Nevertheless, Demirguc-Kunt and dan has depleted around 45% of its stock of foreign Martínez Pería (2010) show that bank competition reserves, which currently stand at US$6.7 billion in in Jordan is low and has decreased in recent years. June 2012. However, IMF (2012a) provides empirical results showing that Jordan’s actual reserve IV. Conclusion levels are adequate to cover a broad set of conventional risks (ie higher than the minimum suggested Following last year’s anti-government protests, the by empirical approaches estimating the adequacy King accelerated domestic political reforms in Jorof reserve levels). dan. Yet, as the reforms did little in reducing his III.3. Financial sector Despite the interest rate spikes, domestic credit accelerated by 11% in 2011 compared to 6% in 2010. In the first 6 months of 2012, it has slightly slowed down to 10% from 11.5% last year. Yet, this relatively strong credit growth is underpinned by buoyant growth of government credit, the share of which increased from 0.8% of total credit in December 2010 to 5% in June 2012. Credit to the private sector, grew by close to 10% in 2011 compared with 8% last year. It has slowed down to 7% in the first 6 months of 2012 compared with 11% last year but still remains thus the main contributor to credit growth. IMF (2012b) shows that The Jordanian banking system remains liquid with a loan/deposit ratio near 73 percent at December 2011). Moreover, the banking sector’s macro-prudential indicators remain strong — banks remain profitable and well capitalized, deposits (largely JD-denominated) continue to be the major funding base, liquidity ra-

power and in increasing representation of political powers, only limited advances have been tangibly felt. The King’s policy relying on offering piecemeal and insufficient concessions may eventually undermine the broad support he still retains. Like many Arab spring countries, political instability subdued economic activity, with adverse effects on growth and job creation. The external situation has also worsened significantly. Regional instability, particularly from Syria, is weighing on Jordan’s near-term growth prospects. The outlook for 2012 remains challenging but the IMF loan could eventually help boost confidence in the economy. In the long-term, the challenge in Jordan, like elsewhere in the Arab world, is to foster inclusive and sustainable growth. The following policy recommendations could help redefine the growth strategy towards more inclusiveness and job creation: √ Enhancing the efficiency of public investment which is currently very low (IMF, 2012)

-149-


√ Enhancing linkages with the GCC √ Upgrading skills in order to supporting productivity improvements in the manufacturing sector √ Reducing labor market rigidities in order to foster job creation, √ Diversifying the sources of external income inflows and energy imports, √ Redesign the targeting of safety net programs to reduce the leakage of benefits to higher income groups, and help protect the poorest households at much lower fiscal cost. References: Demirguc-Kunt, Asli and María Soledad Martínez Pería. 2010. “A Framework for Analyzing Competition in the Banking Sector An Application to the Case of Jordan.” Policy Research Working Paper 5499 WPS5499. World Bank: Washington, D.C. Diop, Ndiamé and Sofiane Ghali. 2012. “Are Jordan and Tunisia’s Exports Becoming More Technologica ly Sophisticated? Analysis Using Highly Disaggregated Export Databases.” Middle East and North Africa Working Paper Series 54. World Bank: Washington, D.C. EIU. 2012 Country Report Jordan. London. The Economic Intelligence Unit Limited. Various issues EIU. 2012.Country Forecast Jordan. London. The Economic Intelligence Unit Limited. August. IMF. 2012a. Jordan: Selected Issues. IMF Country Report 12/120. International Monetary Fund: Washington, D.C. _______. 2012b.Jordan: 2010 Article IV Consultation. IMF country Report No. 12/119. International Monetary Fund: Washington, D.C. Mohaddes, Kamiar and Mehdi Raissi. 2012. “Oil Prices, External Income, and Growth: Lessons from Jordan.” IMF working paper 11/291. Washington, D.C.

-150-


LEBANON: Navigating uncertainty

I. Domestic problems compounded by regional unrest

Introduction Lebanon has generally suffered during the past years from a fragmented and unstable political system. Since 1990, it has gone through 15 governments (the average life of each less than two years), political assassinations, and a volatile external environment (military conflicts with Israel in 1996, 2000, and 2006) (IMF, 2012a). The year 2011 was a year filled with heightened uncertainty. It started (in January 2011) with the collapse of the coalition government following the resignation of the Hezbollah members. Ongoing power struggles among the different political parties prevented the formation of a new government until June 2011. Moreover, the new cabinet was perceived as not representative of the wide array of political parties of Lebanese political life. Instead, it was heavily dominated by the members of the “March 8th” alliance (composed mainly of members of Hezbollah and its closest ally). In this context, it is thus natural that Lebanon scores poorly on political risk compared to most other emerging markets (figure 1).

Figure 1. Political Risk Rating in MENA Countries 80 70   60   50   40  

Note: August 2011 (100 least risk, 0 highest risk) Source: IMF (2012a)

Iran

Libya

Egypt

Lebanon

Jordan

Algeria

Israel

Tunisia

Saudi Arabia  

Oman

Kuwait

Morocco

Qatar

UAE

20

Bahrain

30

More recently, the unrest in Syria has had some adverse political repercussions on Lebanon and domestic tensions could flare up even further. First, it has meant a large influx of Syrian refugees, raising some fears that they will use Lebanon as a base to attack Syria. Second, the spread of protests inside Syria coincided with the deterioration of the security situation in Lebanon, including several attacks against the UN Interim Force in Lebanon. Third and more importantly, the divisions over the Syrian situation, which are quite apparent among the Lebanese political factions, have led to the eruption of clashes, requiring the army to intervene. In fact, the Lebanese Shias are broadly supportive of the Assad’s regime while the Sunni’s have taken a harder critical stance.

-151-

Sudan

Growth is expected to recover slightly to √ 2.5-3%, reflecting modest growth in tourism, Inflation is forecasted to remain at around √ 4% unless the government implement taxes, The current account is expected to remain √ worryingly high, at around 14% of GDP, as the tourism recovery will stagnate due to the events in Syria, The budget deficit is expected to rise to √ 8-9% of GDP following a rise in capital spending.

Syria

Further escalation of the political situations (whether external or internal) could increase risks thus dampen growth prospects and push-up the sovereign risk. The outlook for 2012 is as follows:

Yemen

For some time before the Arab awakening, Lebanon has been dealing with its own domestic political turmoil. The year 2011 started with the collapse of the coalition government on the 12th of January and the country ran without a government until June 2011. In this context, regional political developments, particularly in Syria, added to the already heightened uncertainty. In 2011, the Lebanese economy experienced a severe slowdown in activity with growth dropping to 1.5% from 7.5% in 2010. Domestic turbulence undermined investor confidence and in addition, given their close political and economic ties, the uprising in Syria also contributed to the deterioration in economic performance.


In response, the government has so far maintained a policy of disassociation neither criticizing nor condoning the Syrian government’s actions, despite growing pressure at home and from foreign partners. For instance, it has recently stated that it cannot support a UN Security Council resolution on Syria, but it will abide by international resolutions, irrespective of what it thought of them. Further escalation of the uprising and sanctions by the Arab League could have far-reaching political and economic repercussions on Lebanon. Last May 2012, Standard & Poor’s (S&P) lowered its outlook on Lebanon’s sovereign credit risk to negative, citing “prolonged domestic and geopolitical risks” and the outbreaks of violence in Tripoli and Beirut. S&P currently rates Lebanon at B, well below investment grade. The agency said that it could revise the outlook back to stable if there was an improvement in regional stability or better government cohesion and policymaking. II. Growth, inflation and external sector II.1. The economy loses momentum due to political uncertainty

Meanwhile, export growth also slowed down sharply to 3% from 13%. In addition, given their close political and economic ties, the uprising in Syria undermined investor confidence, disrupted tourism, increased costs of bilateral and transit trade and prompted banks to reduce their exposure to Syria (IMF, 2012b). Taking into account regional and domestic developments, GDP growth is expected to recover slightly to 2.5-3% in 2012. The modest pick-up in growth reflects only moderate growth in services particularly tourism as perception of political risk should remain high. In addition, continued growth in the GCC (with significant economic linkages with the Lebanese economy) and planned increases in public investment (in electricity sector) could provide an additional boost (IMF, 2012b). However, growth prospects could be dampened if political risks increase and push up the sovereign risk premium and interest rates. Moreover, a worsening of the outlook in Europe is not likely to have a significant direct impact on the Lebanese economy but second-round effects could be sizeable if regional oil exporters were affected via lower oil price or financial losses. In the context of a longer-term perspective, Lebanon’s growth over the past decade (an average by 4.9% during 2000–10) has lagged behind the MENA region and other emerging markets top performers (which respectively grew by 5.2% and 6.4%). Moreover, Lebanese growth has also been volatile, because of security incidents or regional conflicts (IMF, 2012a). According to IMF (2012b), several binding constraints to growth must be

Domestic political unrest and uncertainty undermined confidence in the economy, particularly during the first half of 2011. And even though the political environment improved after the new government was formed, economic growth experienced a drastic drop to 1.5% in 2011 from 7.5% in 2010, the slowdown also compounded by the effects of the regional unrest (figure 2). Lower investment growth (up by 4% comFigure 2. Economic growth pared to 6.8% last year) depressed 35 domestic demand. In particular, 30   25   investments in the real estate sec20   tor, which had been experiencing 15   10   a boom in past years, experienced 5   a sharp drop. The number of real 0   2007   2008   2009   estate transactions is estimated Private  consump:on   Exports  of  goods  &  services   to have plunged by 14.5% y-o-y in GDP  growth   October 2011. Source: EIU -152-

2010

2011

2012

Gross fixed  investment   Imports  of  goods  &  services  

10 9   8   7   6   5   4   3   2   1   0  


Figure 3. Ranking of the Global Competitiveness Index 120 100   80   60   40   20   0  

Israel

Tunisia Turkey     Jordan   Morocco   Algeria   Lebanon   Egypt  

Syria

Source: World Economic Forum

addressed in order to increase medium-term growth beyond the potential rate of 4%. In particular, a large infrastructure deficit, high public debt, political risks, and a weak governance and business environment have weighed on Lebanese long-term growth (IMF, 2012a). In fact, among a group of 142 countries, Lebanon ranks 89th on the Global Competitiveness Index (GCI), behind most Euro-med countries and is only ahead of Egypt and Syria (Figure 3). The low rankings are driven by government instability, inadequate supply of infrastructure, and an inefficient government bureaucracy.

financial linkages with major oil exporters in the region which allow second-round effects of higher oil prices (higher exports, tourism receipts, deposit inflows, and private sector credit) to offset the negative first round effect of the adverse oil shock. In fact, an oil price increase by $10/ barrel is estimated to increase nominal imports by about 1.3% of 2010 GDP and more generally, oil price changes are a considerable source of volatility. However, a 1% increase in oil-exporters’ income would also generate: √ a 1% of GDP increase in good exports and tourism revenue, and √ a 1% of GDP increase in remittances. II.2. Inflation remains moderate Consumer price inflation has been stable in 2011, remaining at around 5%. In 2012, it has remained in the low single digits until July when it accelerated to close to 9% from 6% a year ago and 2% from the previous month (figure 4). This increase was mainly due to an increase in prices in the housing sector by 44%. Taking into account modest global economic conditions 2012, consumer price inflation is expected to remain close to 4.2%. Inflation could be higher should the government implement a VAT hike.

In particular, Lebanon ranks 115 on the quality of roads and 135 on the overall quality of infrastructure among 140 countries. With 31 internet users and 69 mobile subscriptions per 100 inhabitants, Lebanon ranked 100th and 144th respectively out of 233 countries worldwide in 2010. Figure 4. CPI Inflation (average, %) In addition to low penetration, Leba20% 15%   10%   non’s Internet and Communication 5%   0%   Technology services are among the -­‐5%   -­‐10%   most expensive and least competi-­‐15%   -­‐20%   tive in the region (IMF, 2012a). In ad-­‐25%   janv.-­‐09   juin-­‐09   nov.-­‐09   avr.-­‐10   sept.-­‐10   févr.-­‐11   juil.-­‐11   déc.-­‐11   mai-­‐12   dition, in terms of the ease of doing CPI   Food  and  non-­‐alocholic  beverages   Water,electricity,gas  and  other  fuels   business, Lebanon ranks 104th out of 183 countries on the World Bank’s Source: Central Administrative Statistics Doing Business indicators. Moreover, as in the case of Jordan, oil prices are a main determinant of long-run driver of growth in Lebanon (being a oil importer) and their increase has a positive overall impact on economic activity (IMF, 2012a). This counterintuitive finding is explained by Lebanon’s close trade and

II.3. The current account has weakened following higher imports and lower tourism earnings The current account has deteriorated to 14.4% of GDP in 2011 from close to 11% of GDP in 2010 (figure 5). This was due to a widening of the trade

-153-


Figure 5. External balances 20% 10%   0%   -­‐10%   -­‐20%   -­‐30%   -­‐40%  

2007

2008

Trade Current  transfers  

2009

2010

Services Current  account  

2011

Income

Source: EIU and IMF

deficit to 37% of GDP from 33% of GDP following a rise in imports (up by 12%) due to rising oil prices. Meanwhile, export growth almost came to a halt as many goods struggled to transit through Syria (Blominvest Bank, 2012). Moreover, the services balance narrowed to 4.7% of GDP from 6.7% of GDP following a drop in tourism revenues. In fact, tourist arrivals have dropped by 15.6% (y-o-y) in 2011. An increase in the balance of current transfers to close to 6% of GDP from 2% of GDP was able to buffer the deterioration in all of the current account earnings.

the U.S. and Australia have increased in recent years, reflecting higher remittances and tourism. For 2012, Lebanon’s wide current account deficit is expected to stabilize at 14% of GDP. Services will suffer as long as the crisis in Syria continues, causing some Arab tourists to avoid visiting Lebanon out of 2012 a fear that the unrest could spill over the border. Remittances could help to offset the trade deficit (although remittances may decline, as the UAE has hardened its visa policy towards Lebanese nationals). Low returns on Lebanon’s stock of foreign reserves and high external debt payments will keep the income balance in deficit. IV. Macroeconomic management IV.1. Public finances Lebanon’s fiscal deficit continued to improve in 2011, impressively declining to 5.8% of GDP from 7.8% of GDP in 2010 (Figure 6). This was mainly owed to increase in revenues to 23.3% of GDP from 22.7% of GDP and a cut in public spending to 29.2 of GDP from 30.5% of GDP, following a reduction in fuel subsidies.

In order to secure financing needs in 2012, Lebanon successfully placed $1.5 billion 7-, 9-, and 15-year Eurobonds in November 2011 ($1.2 billion of which involved exchanging Eurobonds maturing in 2012) (IMF, 2012b). IMF (2012b) observes that current The cabinet approved the 2012 budget in midaccount links are strongest with Arab countries, es- July, the first budget to be passed in 5 years. The pecially the GCC. In fact, MENA accounts for two- latter will still have to be approved by Parliament thirds of tourism and remittances inflows and more where it may face greater opposition. The budget than 40 percent of goods exports, with the region’s envisages an increase in primary expenditure by oil exporters contributing most. Among countries 4% of GDP, largely for capital spending, including affected by the Arab Spring, Egypt, Libya, Figure 6. Public finances (% of GDP) and Tunisia make up 4% of goods exports 40 35   and 0.5% of tourism. While bilateral trade 30   with Syria accounts for 6-9% of goods ex- 25   20   ports and tourism, transit trade and tou- 15   10   rism through Syria from the GCC, Jordan, 5   0   and Turkey are reportedly more substantial. 2007   2008   2009   2010   2011   2012   Exposure to Europe stems primarily from Central  government  revenue   Central  government  expenditure   Central  government  deficit   exports of goods (4.5% of GDP), mainly sales of gold items to Switzerland. Links to Source: EIU -154-


investment in electricity generation capacity. Revenues would increase by 1% of GDP, reflecting a drop in non-tax revenue and substantial tax measures including an increase in the VAT rate (to 12 from 10%), an increase in the withholding tax on interest (to 8 from 5%) and a 3% fee on real estate sales. The full implementation of the budget would imply a primary deficit of 2% of GDP. In this context, the deficit is forecasted to increase to 8-9% of GDP in 2012.

2006 war with Israel and the 2005 assassination of the Prime Minister. According to the IMF (2012b), the government had also resorted to high-yielding 7-year t-bills twice in order to provide domestic currency liquidity following some drying-up in 2011. As a result of the liquidity squeeze, M2 growth considerably slowed down starting early 2011, reaching 1% in December 2011, compared to 15% in December 2010 and much higher rates in previous years (see figure 7).

Meanwhile, Lebanon’s public debt remains at 134% of GDP in 2011 (40% of which is in foreign currency), one of the highest in the world and gives rise to large recurring financing needs (IMF, 2012b). Much of the government’s foreign-currency debt is held by local banks, and debt servicing is in effect a form of government support to the banks. In turn, the banks’ heavy exposure to the government, and the high interest rates on offer, encourages them to keep buying government debt. Nevertheless, the government’s heavy debt burden soaks up a considerable portion of bank domestic claims, depriving the economy of a large share of financing.

Growth of foreign currency deposits also eased to 3% from 10% during the same period. Indeed, dollarization remains high (close to 50% of the monetary aggregate M3 but has come down from around 70% in 2008 (Figure 8). Stress tests have shown that banks have sufficient buffers to absorb a moderate deterioration in asset quality (IMF, 2012b). Yet, financial stability of the system rests squarely on continued inflows of deposits, which depend on domestic political stability and a favorable regional environment. The IMF estimates that almost 40% of total bank deposits belong to nonresidents, a significant share of which comes from Lebanese living in MENA. The largest exposure in terms of assets and loans is to Syria, with $7.5 billion assets in seven subsidiaries and $1.5 billion in direct loans from Lebanon. Banks’ expan-

IV.2. Monetary Policy, Banking and Finance

The exchange rate has so far proven to be Figure 7. Growth rates of monetary aggregates 70% a strong anchor, especially given the high 60%   50%   40%   dollarization of the economy. IMF (2012b) 30%   20%   estimates that the real effective exchange 10%   0%   -­‐10%   rate is modestly overvalued. To date, Le-­‐20%   -­‐30%   -­‐40%   banon’s foreign exchange reserves are janv.-­‐04   déc.-­‐04   nov.-­‐05   oct.-­‐06   sept.-­‐07   août-­‐08   juil.-­‐09   comfortable, estimated at USD 42.3 bilM2  growth   Deposits  in  Foreign  Currencies   lion in June 2012, despite strong interSource: Banque du Liban vention in 2011 to support the peg to the U.S. dollar. The BdL maintains a policy of Figure 8. Evolution of monetary aggregates holding high levels of foreign reserves to 100%   90%   80%   70%   compensate for any flight to quality and 60%   50%   40%   to maintain the currency’s peg. 30%  

juin-­‐10

mai-­‐11

avr.-­‐12

NFA growth  

20% 10%   0%  

janv.-­‐09 juin-­‐09   nov.-­‐09   avr.-­‐10   sept.-­‐10   févr.-­‐11   The IMF (2012b) estimates that the current Deposits  in  Foreign  Currencies   large stock of reserves is sufficient to withstand a shock of similar magnitude as the Source: Banque du Liban

-155-

juil.-­‐11

déc.-­‐11

M2

mai-­‐12


sion abroad has made them further vulnerable to regional developments. On a more positive note, IMF (2012a) shows that Lebanon’s financial system is inclusive compared with other MENA countries in the sense that it the sense that it provides- access to small businesses and thus allow for faster growth and employment creation. Compared with MENA, Lebanon has one of the lowest loan concentrations and the largest shares of SME loans in total loans. At 16 percent in 2009, loans to SMEs are on par with middle-income countries, and much higher than the MENA average of 7 percent (World Bank, 2011a). Consistent with this story, survey data find that SMEs do not identify access to finance as a constraint to doing business. In fact, 70 percent of firms have access to a line of credit, which compares favorably to the regonal average of 20 percent; and 50 percent of firms use banks to finance expenses while the regional average is 24 percent (World Bank, 2011b). Long-term financing (i.e., housing finance) is also well developed (20 percent of total loans) compared to MENA and other regions V. Conclusion Recent events prior to the Arab spring highlight Lebanon’s political system vulnerability and fragmentation. The year 2011 was a year filled with heightened uncertainty. It started (in January 2011) with the collapse of the coalition government leading the country to operate without a government for a period of 5 months. The regional unrest, particularly in Syria, a country with which Lebanon has political and economic ties, has only added to this volatile set-up. The political turbulence, whether internal or external, have affected economic activity and external finances. In this context, further escalation of the political tensions could dampen growth prospects and push up the sovereign risk. Like most other south med countries, Lebanon’s challenge is to sustain medium-term growth and make it inclusive. In particular, this requires:

√ Reducing vulnerabilities including the worryingly high current account deficit and debt-to-GDP ratio. √ removing the binding constraints to long-term growth including improving the infrastructure bottlenecks and the business climate in order to foster private sector and job creation, √ Strengthening trade and financial linkages with the region’s oil exporters would help in hedging against oil price shocks, √ Improve the targeting of Lebanon’s social safety nets subsidies which are badly-targeted, and fragmented and offer limited benefits for poor households (IMF, 2012a). References: Blominvest Bank. 2012. Lebanon Report: An Overview of Lebanon’s Economic Performance in 2011. Blominvest Bank. Economist Intelligence Unit (EIU). 2012. Egypt Country Report The Economist Intelligence Unit Limited, London. Various Issues. International Monetary Fund (IMF).2012a. Lebanon: Selected Issues. IMF Country Report 12/10. International Monetary Fund: Washington, D.C. _______. 2012b. Lebanon: 2011 Article IV Consultation—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Lebanon. IMF Country Report 12/39. Washington, D.C. World Economic Forum. http://www.weforum. org/issues/global-competitiveness World Bank. 2011a. Financial Access and Stability Report: A Road Map for the Middle East and North Africa. Washington, D.C.: World Bank. _______. 2011b. Enterprise Survey.

-156-


MOROCCO: Efforts towards inclusive growth but uncertainty vis-a-vis the efficiency of the reform agenda Introduction When the revolutions were starting in countries of the Arab Spring Morocco was benefiting from relative stability due to a growth regime coupled with a series of democratic reforms that had taken place. But now, after the parliamentary elections in November 2011, the impact of reforms is yet to be seen. Encouraged by uprisings throughout the Mediterrannean, Morocco followed with some anti-government demonstrations in early 2012. Like in some of its neighbours, protests would revolve against high cost of living, inequalities and security. While Morocco could claim that its stability is due to a progressive approach of openness, this year might prove crucial in proving such development path is fully undertaken. This is due to the fact that, as we will later explain, data for Morocco shows evidence of an unlikeable social situation, a model of growth that is not very inclusive, an increase in inequality throughout the past decade and a relative position below what is observed in the region as a whole. Furthermore, while authorities have generally been reform-minded, the impact of recent reforms is yet to be seen. Thankfully, the new government seems to prone a «participatory approach» prioritizing justice, education, employment, housing and health as central concerns. The macroeconomic situation and path to longterm sustainable growth suggests that: GDP growth is forecasted close to 2.9%, √ below its 2011 level, reflecting slower private consumption. On the supply side, one would find a decrease of respectively 10.4% and 12.5% of agricultural value added for the first two quarters of 2012 and positive growth of 4.3% and 4.2% of the non-agricultural economy. As a result of recent trends the trade ba√ lace for 2012 is anticipated to reach a deficit of

20 bn US$. The current account deficit is expected to remain close to last years levels to 7.9% in 2012. √ When looking at the rate of employment growth in 2011 one could be pessimistic, indeed a rate of employment growth of 1.1% is not even enough to cover for the needs of new job-seekers let alone the “stock” of the previously unemployed. √ The fiscal deficit is expected to widen to 7.5% of GDP (from 6% last year). √ Our indicators used to measure the inclusiveness of growth show that more efforts are needed from a social standpoint. The Gini coefficient and distributional shares in consumption of extreme deciles both indicate that Morocco is worse-off compared to the regional median value, also in a inferior position compared to ASEAN economies and non-EU eastern countries. The employment situation remains worrying to say the least with a great share of the youth working age population that does not participate in the formal labor market. Finally, Morocco appears to have gradually increased labour productivity throughout the decade. But, Morocco did not follow a factor productivity trend and hence its growth model was not optimal for job creation. √ In mid-January the new government program was presented, among its main features one would find social issues which could allow for more participation and inclusiveness. Most precisely, authorities plan on dealing with the housing deficit, it was announced that the target was to reduce the deficit by roughly 50%, bringing it from 840 000 housing units to just to 400 000. A new health care regime was announced, the so-called « Regime d’Assistance Medicale » (RAMED) was recently launched and is expected to cover 2.8 milTable 1. Key Economic Indicators 2011 2012 2013 Real GDP growth (%)

4.9

2.9

5.5

Consumer price inflation (av; %)

0.9

2.2

2.5

Budget balance (% of GDP)

-6

-7.5

-6.7

Current-account balance (% of GDP) -8

-7.9

-5.4

Exchange rate Dh:US$ (av)

8.09 8.69

8.86

Exchange rate Dh:€ (av)

11.26 11.06 11.19

Source : WEO. EIU

-157-


lion people in a state of absolute poverty and 5.7 million people in relative poverty. √ Furthermore, regarding education, the government has promised to promote good governance and improve quality. In its fight against illiteracy, the new government now seeks to reach an illiteracy rate of 20% by 2016 (against 30% currently). The so-called “Tayssir” national programme is being put into motion, providing direct financial help to the poorest households, to prevent school drop-outs. √ There is an objective of creating more than 7000 public sector jobs targeting university graduates for the entire 2012. Moroccans holding graduate degrees, royal letters promising employment, children of retired members of the armed forces and the handicapped seem to be those prioritized. All in all, the employment issue is the most crucial one and has to be dealt with, Moroccan authorities, NGOs, unions and the private sector should work closely together so as to foster a growth regime that can have a greater influence on job creation. Among the steps that could be taken one could note improving labour regulation to match international standards and a flexible labour market. √ Moreover, it may be time for Morocco to fully benefit from the “advanced status” it has obtained vis-à-vis the EU, acquiring a better access to the EUs labor market and attract more investment. The entry into force of the Agreement on liberalisation of agricultural trade could open new opportunities. Meanwhile, enhancing trade in services with the EU through a new agreement could boost FDI levels in Morocco. But, precautions should be taken when considering the signature of trade agreement in services and Morocco should ensure that this is not a one-way deal that will ultimately bring more benefits to its major trading partner. I. Political developments and interaction between economics and politics I.1. What happened in Morocco since last year ? In last years’ FEMISE report, it was noted that, contrary to the situation in other MPs, Morocco

had been facing less political uncertainty having started a path to democratic openness a while ago. Meanwhile, the country had continued its reform process both regarding institutions and economic development, in a year full of uncertainty for most of its neighbours. The Moroccan King had introduced a number of political reforms granting more power to the parliament and government. Then, after the parliamentary elections in November, the Islamist party rose to power. It was suggested that the Moroccan reform process could serve as an example to other MP’s since it appeared to marry democracy and Islamic concepts in an effective way. But apparently the impact of reforms is yet to be seen. During 2011, the government had sent people to prison for political reasons and “curbed the right of Moroccans to assemble in the streets” (Human Rights Watch, 2012). In early 2012 protests and clashes with the police were ongoing. Most precisely, people in the city of Taza demonstrated against the high cost of living and persistent inequalities putting to the test the newly elected government. The regime was also asked to reassess its security approach which was considered ineffective in easing social tension (Alakhbar, 2012). The Human Rights Watch (2012) also suggested that authorities “overhaul repressive domestic laws, curb police violence, and enhance judicial independence” in order to effectively materialize the promises contained in the new constitution. Among other recommendations the freedom of assembly “consistently and regardless of the purpose of the assembly” was proposed. The situation is the following, Morocco has been for long a good example of pro-democratic reforms and could claim that its stability is due to a progressive approach of openess. But this year might prove crucial in determining whether the country is ready to fully embrace such development and follow a concrete motion in protecting human rights.

-158-


I.2. What is likely to happen in the coming months and beyond ? Rarely has a government led so many expectations and promises than the one of Benkirane. The latter seems to prone a «participatory approach» prioritizing justice, education, employment, housing and health labelling them “central concerns” for Moroccan citizens (Achnoo.com, 2012). But, progress in all these areas could be slow due to limited fiscal resources. One should expect a considerable fiscal deficit since authorities will probably increase spending to prevent social unrest. Meanwhile, providing tangible solutions to the governements priorities could be impeded by the ever present issues of bureaucracy and corruption (EIU, 2012). It is also highly doubtfull that pre-election promises be fulfilled in the current context of regional turbulence and of international instability. Among the challenges for the next 5 years: giving a new image of Morocco to the international community by adopting transparency in the management of national affairs, eradicate corruption, provide an independent judiciary system intended to encourage foreigners to invest in Morocco, open up rural areas, relieve the citizens of soaring prices of essential commodities (L’Economiste, 2011).

for Western Sahara, having stalled. But, tensions should not necessarily aggravate, in what could be deemed a diplomatic effort, the two countries sealed in Algiers a memorandum on cooperation in the field of communication. The latter should ensure, among others, facilitation of the movement of newspapers and periodicals from respective countries and bringing the two populations « closer together » (Les Echos, 2012). However, despite easing tensions, a full rapprochement still seems improbable in the short-run (EIU, 2012). II. Macroeconomic and sectoral estimates II.1. Economic growth slow down It was above all the rise in private consumption (7.4%) and gross fixed investment (2.5%) that allowed Morocco to maintain growth at a high level in 2011. In 2012, investment has been growing steadily due to government efforts and internationally financed projects, thus, the GFCF is expected to grow by 3.7%. Government consumption should rise by approximately 4%, but private consumption is expected to grow by only 2.2%. In 2012, the domestic final consumption is being directly impacted by the decline in agricultural income as well as relatively unfavorable trends observed in the labor market. It is also influenced indirectly, especially through the downturn in current transfers and the weakening of activity in major partners. One could say that the situation

Real expenditure on GDP (Dh m at constant 1980 prices)

The domestic political state of affairs will probably remain stable, but continued protests, especially over poverty and unemployment is- Figure 1. Contribution to GDP growth sues should be expected. Meanwhile, 800 700 one should expect that the government 7,8 217,9 207,7 600 200,3 195,5 196,9 faces an opposition ready for criticism 191,9 500 172,2 114,2 5,5 150,7 5,6 109,4 105,2 at the slightest misstep. It remains to be 101,5 400 4,9100,6 86,4 90,6 4,9 82,8 300 3,7 seen If the new authorities introduce a 414,4 200 398,4 389,8 363,0 355,2 339,6 2,7 2,9 320,4 308,8 marked change in policy and if the king’s 100 advisors confer power over policyma0 -6,4 -25,1 -37,6 -32,4 -39,9 -49,2 -52,6 -53,2 -100 king as promised. 2006

2007

Private consumption GFCF Political relations with Algeria have been tense, with negotiations over the dispute Source : EIU, WEO

-159-

2008

2009

2010

Net exports Stockbuilding

2011

2012

9,0 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0

2013

Public consumption Economic growth


Table 2. Evolution of quarterly GDP in chained prices of 1998 by major industries, (%) yoy 2011

2012

q1

q2

q3

q4

q1

q2

Agriculture

3.7

4.6

4.1

4.5

-10.4

-12.5

Non-agricultural VA

4.8

4.2

4.7

5.8

4.3

4.2

Mining industry

13.7

2.3

-1.8

9.2

-2.9

-2.2

Processing industry

2.7

2.3

1.9

3.4

2.8

3.2

Electricity and water

2.3

6.2

4.9

9.5

8.6

6.5

Construction and public works

2.5

3

7.1

7.2

6.8

6.1

Trade

3.8

4.1

4.7

4.7

3.1

3.1

Hotels & restaurants

7.5

-3.7

-2.6

-5.5

-2.6

-2.6

Transport

5.5

4.3

3.7

1.9

2.1

2.1

Post and telecommunications

7.7

10.5

19

18

16

15

General government and social security

6.5

6.6

6.6

6.6

5.5

5.5

Other Services *

5.8

5.8

6

6

5

4.5

Taxes on products less subsidies

7.9

3.6

6.6

4

4.3

4.2

Non-agricultural GDP

5.5

4.3

5

5.4

4.3

4.2

5

4.2

4.8

5.3

2

1.5

GDP Source: National sources

in Europe is hampering growth, about 20% of the domestic workforce is working in the EU which has an effect on private consumption. All in all, in mid2012 Moroccan output is on the increase close to an estimated 2.9% rate of growth but at a five-year low and well below pre-international crisis rates of growth.

first and second quarters of 2012, compared with 3.4% in the fourth quarter of 2011. II.2. Unemployment pressures

When looking at the evolution of quarterly GDP by major industries one notes that in the first quarter 2012 a 2% growth was recorded followed by only 1.5% in the second quarter. This was due to a decrease of respectively 10.4% and 12.5% of agricultural value added for the first two quarters and positive growth of 4.3% and 4.2% of the non-agricultural economy.

The unemployment rate in Morocco increased after the revolutions, in part because of returning Moroccan workers from Libya and work disruption in some cities during protests calling for reforms. The rate of unemployment in recent years decreased, however urban areas still showcase rates higher than the national average. The unemployment rate in Morocco seems to have recently decreased to stand at 8.1% in Q2 2012 which is explained by the fall in urban unemployment from 14.4% in q1 2012 to 12.3% and of rural unemployment from 4.8% to 3.5%.

Non-agricultural activities remained rather solid due to to the dynamism of sectors such as construction (+6.1% in q2), electricity and water (+6.5%), positive development of tertiary branches, though tourism activities have been underperforming (2.6%). Mainly due to weakening foreign demand, the growth of the processing industry has been slower, falling to 2.8% and 3.2% respectively in the

The highest rates of unemployment are in the regions of l’Oriental (18% in 2010), Rabat-SaléZemmour-Zaer (12.2%) and the three regions of southern Morocco (11.4%). Meanwhile, Marrakech-Tensift-Al Haouz (5.8% in 2010), Taza-Al Hoceima-Taounate (6.1%), Fès-Boulemane (6.1%) and Tadla-Azilal (6.2%) are among the least affected regions.

-160-


Figure 2. Unemployment rate by region, quarterly 16

14,7

13,8

14

13,7

13,5

13,3

12,7

14,4

13,5

13

12,3

12 10

10

9

8,2

9,2

9,1

9,1

8,7

Urban

9,9 8,5

8,1

8

Rural

6

4,6

4,3

4,2

3,8

3,3

4

4,8

4,1

3,6

3,5

3,4

Total

2 0

2010T1 2010T2 2010T3 2010T4 2011T1 2011T2 2011T3 2011T4 2012T1 2012T2

Source : Bank-Al-Maghrib Figure 3. Duration of unemployment, by region (% share) 80

71,3

67,1

70 60

40

32,4

2011T2

50,1

49,5

50

2011T3 2011T4

28,1

30

2012T1

20

2012T2

10 0

0 to 11 months

12 months and above

0 to 11 months

National

12 months and above

0 to 11 months

Urban

12 months and above Rural

Source : HCP

The unemployment rate for the youth (aged 1524) was 17.1% in Q2 2012, marking an annual decline of 0.3%. Similarly, for the 25-34 age range, it fell by 0.5% to 12.3%. As for the workforce, it apparently rose in late 2011 by roughly 2% in urban and rural areas, reaching 11.63 million people and resulting in a slight increase in the participation rate of 0.1% to about 49.2%.

Finally, the duration of unemployment has increased. At the national level about 67.1% of the unemployed have been without a job for more than 12 months. But the share is even higher when looking at urban trends, apparently 71.3% of the urban unemployed have been jobless for more than a year versus a corresponding share of 50.1% when focusing on the rural unemployed.

Table 3. Morocco : Employment needs by 2030 Scenario A : Maintaining ratios of inactivity and unemployment of 2007

Scenario B. Limiting the increase of the number of inactives and unemployed of SCA by 50%

Observed rate of employment change

Jobs to create 2007-2030

Annual rate of needed jobcreation 07/30

Jobs to create 2007-2030

Annual rate of needed jobcreation 07/30

2011

2012*

Morocco

3 901 346

1.44%

6 496 769

2.19%

1.10%

1.70%

MPs (average)

3 423 581

1.65%

6 461 494

2.74%

Source : Blanc (2011) for scenario projections. EIU for observed rates of employment change. -161-


Taking into account the growing labor supply as well as past economic activity, a recent study by Blanc (2012) offers valuable insights on the employment needs of the MPs, including Morocco, until the year 2030. A series of scenarios are considered and two of them are presented in table 3. The first scenario presents the number of jobs that will be needed to maintain recent unemployment and inactivity rates. In the case of Morocco the study finds that the country will need to create about 3.9 million jobs by 2030 if it wishes to just maintain its 2007 unemployment and inactivity rates. This corresponds to a 1.44% annual rate of job creation to ensure the feasibility of this scenario. In a more ambitious alternative, if authorities wish to reduce the increase in the number of the unemployed and in the number of inactives by 50% then they will need to create about 6.5 million jobs by 2030. However, this would necessitate an annual rate of job creation of roughly 2.2%.

One must note that at the international level higher prices mean an increasing bill for imports which could result in higher prices in the domestic market. Recent problems with climatic conditions, excessive cold and drought, have been threatening crops and thus increase the dependency to imports but also contribute to imported inflation (Yabiladi, 2012).

When looking at the rate of employment growth in 2011 one could be pessimistic, indeed a rate of employment growth of 1.1% is not even enough to cover for the needs of new job-seekers let alone the “stock” of the previously unemployed. However, one could argue that 2011 was a peculiar year, one of instability in which the regional turmoil impeded, at least partially, on the economy’s capacity to foster more jobs. Estimates for employment growth in 2012 (at 1.7%) allow for some optimism since such a rate could be sufficient in covering the annual needs of Scenario A while marginally reducing the total number of inactives and unemployed.

Data from Bank-al-Maghrib show a further widening of the trade deficit due to a rapid rise in imports which surpasses the rate of growth in exports. Indeed, in the first six months of 2012, one would note a 6.4% annual increase in the value of exports (which stood at a cumulative 91 599 million dirhams in June) overshadowed by an increase of 6.2% in imports. Hence, the trade balance showcased a deficit of roughly 98 808 million dirhams, which corresponds to a year-on-year deterioration of about 3%.

II.3. Inflation In recent history inflation does not appear to be a dangerous issue for the Moroccan economy. It has remained low, close to 0.9% in 2011 since subsidies on foodstuffs and energy have been keeping prices stable for consumers but with a counterpart of a considerable burden on domestic finances. In June, consumer prices grew year on year by 1.9%. Estimates by the WEO point to a rate of 2.2% for 2012.

II.4. Continuous pressures on the current account following a rise in the import bill As noted by the IMF (2011), a terms-of-trade shock had caused a worsening in the external balance. Indeed, although Moroccan exports, tourism receipts and remittances performed rather well giving the context, they were not sufficient to offset the imports increase caused by rising international food and oil prices. Meanwhile, the shock was aggravated by keeping fuel and certain food prices stable.

The exports trend can be attributed to increased sales in the sector of phosphates, marking an annual increase of 9.6% to 6.3 billion for the first half of 2012. In highly traded agricultural products such as tomatoes one would a rise in exports of 1.4%, however, in the case of citrus export activity for the first six months of 2012 fell by 18.7%. All in all, exports of goods and services increase to a projected 1% for 2012 but this will not be enough to cover for the increase in the import bill due to infrastructure investment (EIU). On the import side, a great share of the growth is attributable to

-162-


the energy bill, imports of oil amounted to 15.7 billion dirhams in the first half of 2012 which corresponds to a 3.1% rise. On the whole goods imports are expected to grow by 3.2%, amounting to 42.3 billion US$ (EIU). Imports of consumer goods show mixed performances, one notes an increase in the sectors of passenger cars (16.4%) a modest rise in imports of medicine, but a relative fall in tissue fibers imports (-0.2%) for the first half of 2012. The import bill of foodstuffs have been limited due to the decline in wheat (-19.2%) though sugar imports increased by 16.8%. As a result of recent trends the trade balace for 2012 is anticipated to reach a deficit of 20bn US$, a 3.1% fall compared to 2011. The service balance on the other hand is expected to remain positive at 5.2 bn US$, though marking a slight 4.4% fall compared to 2011. Let it be noted that Morocco was among the rare exceptions in the region with tourism numbers rising by 4% during the Arab Spring which contributed to a robust service balance (International Business Times, 2012). Now, in the second quarter of 2012 the number of visiting tourists increased annually by 0.8% while non-resident hotel nights also rose by 4.6%. However, spending seems to have decreased slightly by 2.2%.

equilibrated and lessen the current account deficit in 2013. As for FDI, estimations point towards a 14.8% decrease in 2012, to 2.15 bn US$ down from 2.5 the prior year. But, this result should not come as a surprise, one must note that FDI inflows in 2011 were already high, more than double the amount of 2010. II.5. Outall on debt and exchange rates General government net debt is expected to continue to rise and could reach 57.7% of GDP in 2012, up from 53.9% of GDP in 2011. Total public debt for 2012 is expected to be at least equal to 500 Billion dirhams which corresponds to 61.2% of total GDP, close to 2003 levels though nowadays the economic environment is less prosperous and the upward rend in government debt is a reality (The Moorish Wanderer, 2012). Such high levels of public debt combined with the impact of a worsening Balance of Payments deficit may impede on further interest rate decrease and could even lead to increases at some point.

Regarding the managed float exchange-rate regime, in the end of Q1 2012 and compared to the prior quarter, the dirham had slightly appreciated by 0.49% against the euro. However it respectively All in all, the rise in the import bill shall prove to be depreciated by 2.16% and 2.12%, against the U.S. a burden, thus the current account should remain dollar and the pound sterling. This was an ongoing at last year levels, with a deficit estimated at 7.9% trend in April and May 2012, with an average inof GDP in 2012. Only if the international situation crease of 0.20% against the euro and declines of improves, could the trade balance start to be more 2.41% and 0.89% against the pound sterling and the dollar. In August 2012, the diFigure 4. External finances (US$bn) and current account (% of GDP) rham (8.74 for 1US$) had marked a 5 10 5 year on year depreciation of 12.6% 2,2 0 -0,1 0 -5 compared to the US$. Meanwhile, -4,3 -10 -5,4 -5 -5,2 -5,4 the real effective exchange rate -15 -8,0 -7,9 -20 -10 depreciated by 1.6% in mid 2012 -25 -30 compared to the same period in -35 -15 2006 2007 2008 2009 2010 2011 2012 2013 2011. All in all the dirham is expecTrade balance (US$ bn) Services balance (US$ bn) ted to remain rather competitive Income balance (US$ bn) Current transfers balance (US$ bn) Current-account balance (% of GDP) vis-a-vis the EU and should weaken against a strengthening US dollar. Source : EIU -163-


III. The long-term challenge: Morocco needs to produce more efforts to achieve inclusive growth As explained in the report, in the midst of their short-term challenges, MPs must not forget their long-term objective which should be achieving sustainable and inclusive growth. A growth that is inclusive means granting greater emphasis to structural transformation, concentrate on the welfare of a larger, broader segment of the population (not limited to the poor only) not only in terms of income but also in terms of opportunities. To measure IG both social (equality of opportunities) and economic issues (enlargement of the scope of the economy) are considered. III.1. A growth that leaves a lot to be desired from a social aspect Inequality matters as the participation of the middle-class is essential in the “inclusive growth” view, growth needs to be shared by the majority of the labour force and working age population to be inclusive. From this point of view, data for Morocco shows evidence of an unlikeable social situation, an increase in inequality throughout the past decade and a relative position below what is observed in the region as a whole. First, the Gini coefficient and distributional shares in consumption of extreme deciles both indicate that Morocco is worse-off compared to the regio-

nal median value, also in a inferior position compared to ASEAN economies and non-EU eastern countries though in a better position compared to MERCOSUR countries. Moreover, contrary to MPs as a whole, Morocco did not register a decreasing trend in inequity during the second half of the 90’s. Second, the labour market participation rates remain low in absolute terms, in 2011, about half of the working age population in Morocco was not participating in the labour market. The rates observed are considerably lower than in other emerging regions, though slightly higher than in the rest of the Mediterranean. One must note that the situation today appears to be worse than it was at the beginning of the 2000’s, with a loss of almost 5 percentage points in average participation rate versus a 2 percentage point loss for the region. The very low female participation rate explains the gap with other emerging countries though male participation also considerably receded. Third, youth participation shows the same negative trend. Similarly, for young people at the 2024 age-range, less than 40% are active. Moreover, since 1999, their proportion decreased by more than 12 percentage points, a fall twice as big as the one recorded at the regional level. Inactivity among those young Moroccans is more severe than in any other emerging region (by almost 30 percentage points nowadays) a gap that increased

Table 4. Evolution of Inequity in Morocco and Selected Emerging regions 1990’s-2010’s Share of 2 lowest decile in Income or Consumtion

Gini

Share of the 2 highest decile

Share in Consumption of Middle Class**

90’s

early 00’s

end 00’s

90’s

early 00’s

End 00’s

90’s

early 00’s

End 00’s

90’s

early 00’s

End 00’s

39.2

40.6

40.9

6.6

6.5

6.5

46.3

47.7

47.9

25.4

24.8

25

MPs (Median) Ex.Turk. Pal. 39.2

36.8

38.2

6.6

7.1

7.1

46.3

44.7

45.7

26.9

25.9

26.1

MERCOSUR

Mediane

48.9

54.7

45.3

3.9

2.8

4.3

53.7

57.5

50.9

21.6

18.6

22.7

ASEAN

Mediane

38.3

41.9

37.9

7.8

6.9

7.4

46.8

49

45.9

25.4

23.9

25.9

Non EU East C.

Mediane

34

29.4

26.8

7.3

8.6

9.4

41.5

38.2

36.3

26.5

28.5

29.6

Sel.. Emer.

Mediane

42.4

42

42.5

6.1

6.3

6

48.1

49.4

47.9

24.9

23.9

24.8

Morocco

90-00-07

Source: Own calculation using PovcalNet developed by the Development Research Group of the World Bank. http:// iresearch.worldbank.org/PovcalNet. access in July 2012 *: Alg. Egy. Jord.. Mor. Tun.; **: **: 3rd to 7th Decile -164-


Table 5. Labor Market Participation Rates Evolution in Morocco and Selected Emerging Countries 1999-2011 1999 Male Fem

2005

2008

2011

TTL

Male

Fem

TTL

Male Female TTL

Male Female TTL 74.7

Morocco

79.6

30.2 54.3

77.4

27.9

51.9

76.5

26.6

50.7

26.2

49.5

MPs (Median)

74.8

22.4 49.4

72.2

22.2

46.8

71.3

24

47.3

71.5

24.6

48.3

MPs (Median ex. Isr. Turk)

74.9

20.4 47.3

74.5

18.3

46.3

72.7

18.8

45.6

71.8

19.7

45.6

MERCOSUR (median)

82.7

49.6 65.8

81.5

52.8

66.4

80.1

54.7

65.3

80.2

55.6

66.1

ASEAN (median)

83.6

69.3 75.3

83.5

69.6

75.3

82.5

69.1

74.9

82.7

68.5

74.4

East. Europe

65.5

52.6 58.5

63.9

51.4

57.1

63.8

51.2

56.9

64.6

51.8

57.6

Source : Own calculation based on ILO, LaborSta EAPEP database Table 6. Labour Market Participation Rates of the Youth in Morocco & selected regions 1999-2011 1999

2005

2008

2011

20-24 25-29 20-29 20-24 25-29

20-29

20-24

25-29

20-29 20-24

25-29

20-29

Morocco

51.9

64.5

57.7

45.9

62.7

53.5

42.6

61.7

51.6

39.6

61.5

50.3

MPs*

48.8

60.1

53.8

45.6

59.9

52.7

44.3

60.5

51.6

42.7

61.7

51.4

Latin America

64.5

78.4

70.6

70.2

80.2

74.7

73.8

81.1

76.8

74.6

81.5

78.4

East Asia

72.9

86.9

79.9

71.5

87.8

80.2

71.2

87.8

79.6

69.3

86.7

78.1

Est. Europe

71.5

85.5

60.0

64.5

80.4

56.3

57.0

78.1

54.3

53.5

77.6

54.4

Source : Own calculation based on ILO, LaborSta EAPEP database

sharply. Meanwhile, contrary to what is observed at the MPs level, the participation rate of the 2529 years olds also decreased in Morocco. Very low participation rates for the youth along with a considerable gap vis-a-vis other regions should be a great concern in terms of the growth pattern to follow. Until now, from a social standpoint, Morocco appears to have a limited capacity in offering opportunities. III.2. More inclusiveness from an economic aspect, thoughs more can be done As for addressing the economic aspect of “inclusive Growth” in increasing opportunities through the enlargement of the scope of the economy, we focus on: (i) economic diversification measured by the trends in exports concentration; (ii) opportunities for firms to develop funding availability through banks; (iii) global labour and factor productivity trends. Thus, one may ask the following, does Morocco bode better in terms of the economic aspect of inclusive growth? The answer appears to be yes.

First, for growth to be inclusive, this implies that the number of sectors participating in the economy increased overtime, thus increasing economic opportunities and reducing vulnerabilities. The degree of the concentration of exports is used as an indicator of the economy’s capacity to bear fruits from its openness and from globalisation. As shown in table 7, Morocco made some progress, with an index of trade concentration that marked a reduction between 2000 and 2010, standing at a value below the Mediterranean median and close to what is observed in emerging ASEAN countries. Additionally, Morocco diversified in terms of products, with a share of the top 10 exported commodities of 58.1% in 2010 versus 64.9% in 2000. Furthermore, Morocco also diversified in terms of partners, with a share of the top 10 export partners that decreased by more than 12 percentage points in 10 years. Second, for growth to be labelled inclusive, firms should be able to to “catch opportunities”, which would ultimately increase the potential of productive job creation. Financing MPs’ firms has not been the strongest point among MPs and Morocco

-165-


Table 7. Concentration of Exports in terms of products and markets (based on SITC rev3 3-digit data) 2000 share 2008 share 2010 share 2000 share of 2010 share of 2000. Trade 2010 . Trade of top 10 of top 10 of top 10 top 10 Partners top 10 Partners Concentration Concentration products in products in products in in total export in total export Index Index total export total export total export value value value value value Morocco

0.054

0.045

64.9%

64.7%

58.1%

81.2%

69.1%

MPs (Median)

0.067

0.057

62.6%

60.3%

57.0%

73.33

69.10

MERCOSUR* (av.)

0.030

0.043

41.9%

46.9%

51.5%

66.60

57.46

ASEAN (Median)

0.094

0.043

67.0%

53.7%

52.7%

71.79

72.89

Ukraine

0.036

0.034

45.4%

52.7%

57.0%

56.74

56.44

Belarus

0.052

0.094

41.3%

62.7%

52.1%

83.28

80.56

China

0.018

0.026

31.4%

35.7%

52.7%

73.56

60.36

India

0.041

0.048

34.6%

42.0%

57.0%

56.80

52.96

Note: The Trade Concentration Index is aimed at assessing the degree of concentration/diversification of a given countryâ&#x20AC;&#x2122;s exports. Based here on the Hirschmann-Herfindahl Index, it ranges from 1 to 0: the lower the indicators, the more diversified the economy. Similarly, the lower the share of the top 10 products, the more diversified the economy trade. *: Only Argentina & Brazil Source: Own calculations using tradesift and Comtrade

marks no exception. In Morocco, the percentage of firms using banks to finance investment has decreased by more than half, the level of Moroccan firms using banks to finance investment is far worse than in all other regions. Last, increases in factor productivity may allow increasing real wages without causing macro disequilibrium. In that respect TFP growth has an inclusive component. Morocco appears to have gradually increased labour productivity throughout the decade. However, while in the other regions trends of labour productivity were stable or even declining, perhaps indicating a shift towards Total Factor Productivity to avoid high labour-capital Table 8. Firms using banks to finance investment (% of firms) Average 2002- Average 20062006 2010 Morocco

26.48

MPs (median)

20.09

12.29

MERCOSUR (median)

8.24

19.145

ASEAN (median)

29.38

21.48

Ukraine

16.71

32.08

Belarus

14.95

35.82

China

28.76

India

46.58

Source: WDI

12.29

46.58

substitution, Morocco did not follow a factor productivity trend and hence its growth model was not optimal for job creation. All in all, indicators of inclusive growth that were used show that the degree of inclusiveness of growth in Morocco remained low from a social standpoint. On the other hand, some noticeable efforts were made in terms of trade diversification but would need to be complemented by support for small businesses and factor productivity gains to allow for more opportunities to be given to all. Even so, the employment situation remains worrying to say the least with a great share of the youth working age population that does not participate in the formal labor market. Thus, if the employment issue is not properly dealt with, any efforts to improve the economic aspect (diversification etc) will not bear any fruits for inclusiveness since the youth and other groups will not be able to benefit from increased openess. IV. Recent Measures and Policies towards more inclusiveness In mid-January the new government program was presented, among its main features one would

-166-


Table 9. Trends in Labour Productivity and Factor Productivity in MPs and selected emerging economies 1990-2010 Labor Poductivity (Average An. Rate in %. based on Values in 90$) 90-95

95-00

00-05

5-Oct

-2%

1.4%

3.3%

3.2%

8 MPs Median

0.60%

1.40%

1.80%

2.20%

Mercosur

2.40%

1.60%

0.00%

1.60%

Asean

5.70%

2.30%

2.60%

2.80%

Non Eu East

-9.00%

3.20%

7.50%

3.70%

All emerging Ref

2.70%

2.50%

2.60%

2.80%

Morocco

Factor Productivity (Average An. Rate in %) 90-95

95-00

00-05

5-Sept

Morocco

-2.10%

1.90%

-0.10%

0.30%

8 MPs Media

-0.30%

0.20%

-0.10%

-0.40%

Mercosur

-0.50%

0.10%

0.80%

-2.20%

Asean

0.20%

0.20%

-0.20%

-0.90%

Non Eu East

0.00%

1.10%

-0.80%

-3.70%

All emerging Ref

0.20%

0.20%

0.00%

-1.40%

Source: FEMISE

find: economic governance, social issues, administrative reform and modernization of agriculture (AufaitMaroc, 2012). IV.1. Social issues at the forefront of government concerns Social sectors seem to be of considerable importance to the new authorities and a particular emphasis is being put on family, women, children and the Moroccan youth. The program aims at a drastic reduction in rates of infant and maternal mortality to achieve the Millenium Development Goals by 2016. One must note that, despite efforts, the infant mortality rate has recently been around 38%. Meanwhile, the difficulties faced by households living below the poverty line translates into their children being forced to drop out of school to seek work. As a consequence child labor affects 8% of children between 5 and 14 years of age and especially girls (Children’s Rights Portal, 2012). Regarding the youth issue, a national dialogue on youth was announced along with the creation of the Higher Council for Youth and community action and several regional youth councils.

As for the housing deficit, a persistent issue that affects hundreds of thousands of Moroccans, it was announced that the target was to reduce the deficit by roughly 50%, bringing it from 840 000 housing units to just to 400 000. Meanwhile, an increased supply of social housing was announced, with a cost per housing of 800 000 DH for the benefit of the middle class and young households. Since the announcement some real estate projects were launched most notably two (of 1 260 and 560 homes respectively) in the Dar Bouazza region. The latter should be a means of fighting to eradicate slums in the wilaya of Greater Casablanca, offering housing at a price of 250 000 dirhams essentially for slum dwellers. But the construction of social housing in the area of Casablanca needs to accelerate to about 30 000 houses per year to be able to cover for the rising demography (Nuqudy, 2012). Finally, one should mention that a new health care regime so-called « Regime d’Assistance Medicale » (RAMED) was recently launched an dis expected to cover 2.8 million people in a state of absolute poverty and 5.7 million people in relative poverty. In rural regions the difference between relative and absolute poor will be determined by criteria such

-167-


as exploited agricultural land, agricultural equipment and transportation, personal transportation etc (Nuqudy , 2012b).

and assessment organisation was announced for 2013/2014 for education to meet the needs of the domestic labour market (Cafeclock.com, 2012).

IV.2. Improving the quality of education and scientific research

IV.3. Plans to create job opportunities for university graduates

Regarding education, the government has promised to promote good governance and improve the quality of education. The National Teachers’ Union (SNE-FDT) has asked for « radical reform of education in rural areas, the construction of classrooms, canteens, boarding schools, and roads », indeed, an appeal was launched in early January 2012 to have education in rural areas in Morocco become a national priority. One must note that over 68% of women in rural areas are illiterate while young people from public schools in rural Morocco face more difficulties gaining admission to university (Education International, 2012). In its fight against illiteracy, the new government now seeks to reach an illiteracy rate of 20% by 2016 (against 30% currently). The so-called “Tayssir” national programme is being put into motion, providing direct financial help to the pooresr households, to ensure their kids go to school and prevent school drop-outs (Cafeclock.com, 2012).

There appears to be an objective of creating more than 7 000 public sector jobs targeting university graduates for the entire 2012. Moroccans holding graduate degrees (Masters or Doctorate degree), royal letters promising employment, children of retired members of the armed forces and the handicapped seem to be those prioritized (Morocco World News, 2012). But, the target of 7 000 new jobs seems low at best, while those with only a Bachelor degree do not seem to be concerned.

Meanwhile, authorities plan on paying particular attention to teachers and valorise their jobs. Authorities promised to give schools greater independence in management and decision-making to “enable teaching staff and school managers to be more motivated, bearing greater responsibility for results achieved” (Cafeclock.com, 2012). Developing scientific research through the creation of clusters, updating the national strategy, increasing public funding to 1% of GDP and increasing financing for private research from 25 to 30% have all been mentioned in the government’s plans (AufaitMaroc, 2012). Furthermore, greater focus is expected to be put In higher education on the preparatory classes for the “grandes écoles” while new specialist universities are being planned (ex. In medicine and engineering). Finally, a national quality

IV.4. Modernizing the agricultural sector

Meanwhile, as already noted in last year’s report (FEMISE, 2011), short term measures are not a panacea, the most important are the long term ones, those that have the potential of fostering an employment-intensive growth regime. If the authorities wish to efficiently deal with unemployment, especially of the youth, they must not forget that limited jobs in the private sector are those that need to be dealt with imminently.

Agriculture has been severely hit by shortage of rain. The lack of rain means Morocco will import more cereals and raw sugar than in 2011 the domestic harvest ataining levels that are « average » (Reuters, 2012). Meanwhile, until now the « Green Morocco Plan » seems to be misdiagnosing climate factors, without addressing « the sudden and unexpected arrival of cold weather, whose damages have been no less than disastrous » (GlobalIssues, 2012). In February, more than 8 200 of the 8 700 hectares of potatoes (one of Morocco’s primary export commodities), were ravaged, while 14,000 of about 21 000 hectares for sugarcane were also heavily affected by the cold. Agriculture also suffers from « archaic agricultural practices », the use

-168-


of fertilisers by hectare is four times less than in France and national mechanisation is eleven times less than in Spain. Now, domestic authorities seem to be well aware of the strategic place of agriculture and have announced that they will follow the implementation of the “Green Morocco Plan” taking into account the various needs to modernize the sector. In line with early January announcements, domestic authorities and the IFAD launched a project worth 9.13 million US$ and entitled “Agricultural Value Chain Development Project in the Mountain Zones of Al-Haouz Province” to improve the value chain for a series of agricultural and food products, namely olives, apples and lamb meat. The project will be implemented over five years and improve the olive, apple and lamb meat value chains which seem to have the greatest potential to impact on the incomes of rural households (Rural21, 2012).

IV.6. Monetary Policy and Fiscal Policy Bank al-Maghrib had held interest rates unchanged in both September and December 2011. But, in end-March 2012 Bank al-Maghrib decided to cut its main policy rate by 25 basis points bringing it to 3% from 3.25% previously. The Bank said on March 27th that «in this context where economic activity has declined significantly, central inflation forecast is permanently consistent with the price stability objective and the balance of risks is skewed to the downside, the Board decided to reduce the key rate from 3.25 percent to 3 percent, while continuing to closely monitor all of these elements».

Following this announcement, in early March and in an effort of combating corruption, the Minister of Transportation revealed a list of beneficiaries (among which wealthy businessmen, athletes, artists etc) of transportation licenses. The majority of Moroccans seem to believe that the beneficiaries earned their wealth through nepotism (Moroccoworldnews, 2012b).

The decision to lower the rate to 3% is justified by BAM’s projections for economic growth at 3% in 2012. However, despite the current price of oil being above 120 dollars a baril, the BAM estimates inflation to be fully under control. One should note that the fall in the key rate could be good news both for banks and investors since the price of money will be even lower. Potential positive repercussions could be derived in SMEs investments, the rate cut signifies that the BAM recognizes the unfavorable economic situation and sends a message to investors that states that now more than ever their support for investment projects is needed. It will be up to private investors to readjust their expectations, instead of keeping a passive stance they should grasp this opportunity for investment strengthening (Aswat, 2012). In June, BAM left its benchmark interest rate unchanged since economic growth has been slowing amid the debt crisis in Europe. Furthermore, increases in fuel prices in mid-2012 were considered of “contained impact” and therefore it was deemed they would not require any action (Bloomberg, 2012). The rate was maintained by Bank-al-Maghrib in September 2012 as well.

But, despite such welcome initiatives for transparency to materialize one would need concrete results, it remains to be seen if the government’s major plan of administrative reforms will be put in motion to improve efficiency and governance as a whole.

Regarding fiscal policy, Morocco is expected to post fiscal deficits in 2012 and in subsequent years, though deficits could narrow in the coming years. The budget deficit is expected to reach 7.5% of GDP in 2012 in part because of an increase in go-

IV.5. Economic and financial governance based on transparency Another main point of the government’s policy programme appears to be the one of economic and financial governance. Authorities have announced that they would make efforts towards an economic governance based on transparency, efficiency and with an improved business climate (AufaitMaroc, 2012).

-169-


vernment subsidies on basic commodities and a further increase in public-sector wages.

V.2. Benefiting from the advanced status and deepening ties with the EU especially in services

Since authorities aim at preserving political stability in the current context, a possible reform of the subsidy system is not expected to be on the shortterm agenda.

It may be time for Morocco to fully benefit from the “advanced status” it has obtained vis-à-vis the EU, acquiring a better access to the EUs labor market and attract more investment (IMF, 2011). More specifically, Morocco may benefit from (S. Fule, 2012): √ The entry into force of the Agreement on liberalisation of agricultural trade opening for new opportunities. √ The current bilateral negotiations, on services trade opening and the possible creation of a mobility partnership which could help better manage the migration issue. √ Technical and financial assistance to encourage economic and social development and human rights/governance.

V. Conclusion and recommendations After benefiting from stability induced by reformminded authorities, Morocco appears to be at crossroads. The tangible impact of reforms is yet to be seen and the degree of inclusiveness of growth seems low from a social standpoint despite some efforts. V.1. Dealing with the employment issue All in all, the employment issue has to be dealt with, as noted earlier the government should acknowledge that more jobs could and should be created in the private sector. Moroccan authorities, NGOs, unions and the private sector should work closely together so as to foster a growth regime that can have a greater influence on job creation. Among the steps that could be taken one could note (G. Ahmed, 2011): √ Improving labour regulation to match international standards and a flexible labour market.The reform of the Labor Code in 2004 did bring additional flexibility ( in the hours of work, collective bargaining etc) but further reforms could be needed regarding hiring costs (IMF, 2011). √ Strengthening a network of private employment agencies. √ Creating a committee to engage in a dialogue with the private sector and other parties on issues related to standards for industry operations, monitoring and evaluation standards, oversight mechanisms to ensure respect for workers’ rights. √ Ensuring proper communication and dissemination (ex. through a website) to inform jobseekers and employers about agency work.

All in all, the EU should continue to recognize the centrality of Morocco in regional stability and cooperation. But, now that the agricultural deal has been made, it could also provide more incentives to Morocco for change, which could also induce needed progress on the reforms front. Let it be noted that the focus on goods trade has dominated the attention of policy makers as far as economic integration is concerned. Meanwhile, services trade has been less developed and other pertinent economic aspects such as FDI have been hardly mentioned. A recent FEMISE research report (FEM34-19) has shown that enhancing trade in services could boost FDI levels in Morocco and that therefore the EMP/ENP should embrace liberalization of trade in services in its agenda to contribute to economic integration and growth. Focusing on Morocco and the rest of the Mediterranean, the authors find that trade in services has a robust effect on FDI that lies between 1.1 to 2.6, meaning a 100% increase in trade integration can further economic integration in a magnitude of 110-260%. From a policy perspective some precautions should be taken when considering the signature of trade agreement in services. The agreement should bene-

-170-


fit both parties which means that the EU could opt for clauses that allow «commercial presence» (FDI) in Morocco, while Morocco should ensure that this is not a one-way deal. Depending on the type of service trade barriers may differ, while trade may be feasible in a typical cross-border manner for some in others the presence of natural persons is required abroad to provide a specific type of service. Thus, both parties should ensure that there are no barriers that arise from employment regulations in the host economies. There is a recent trend in IT services offshoring and Morocco could benefit from a cost-driven competitive advantage. Until now, Morocco has already made steps in developing an attractive environment for offshore services, it now has to efficiently regulate the sector and develop knowledge process outsourcing activities that generate more added value (Institut numérique, 2012). Its proximity to Europe could be extremely beneficial and, provided necessary reforms are undertaken, allow Morocco to take a leading position in the specific industry. V.3. Can renewable Energies contribute to Sustainable Development in Morocco ? As known, the EU’s Mediterranean Solar Plan (MSP) has become a reality. Meanwhile, setting up and operating renewable energy source (RES) plants can have significant economic implications, for Mediterranean countries such as Morocco, both in terms of stimulating growth and creating employment. Thus, a recent FEMISE study (FEM3402, 2012) seeks to identify possible RES implementation scenarios in Morocco and simulate their economic consequences for the next 30 years in terms of GDP, sector-specific added value and employment creation. The purpose of the study is to present an assessment of the economic impact of various investment options of renewable energy production in the Moroccan economy. There is an obvious environmental and socio-economic benefit from being a producer of clean ener-

gy. Meanwhile, there is a human development aspect in developing a strategy that revolves around the MSP. More specifically, the authors separate five possible types of gains to be derived through a Moroccan energy development strategy, the latter can: (i) provide part of the energy required for economic growth, (ii) contribute to the supply of energy services required by economic development, (iii) contribute in eliminating energy poverty, (iv) use solar and wind energy resources to foster new economic activities, new jobs and new incomes and finally (v) provide technical cooperation, training and technology transfers for the country to reap the benefits of RES deployment. Taking into account the major changes in the economic structure of Morocco that could occur in a 30-year time-span, the FEMISE study observes the different effects on the domestic economy over the next 3 decades through seven simulation scenarios. The study finds that the economic impact on GDP ranges from 1.17% to 1.9% at the end of the 30-year period (horizon 2040). Meanwhile, a fulltime equivalent employment impact is found that ranges between 267 000 and 415 000 jobs. More specifically, the study suggests that most benefits in terms of impact on GDP and employment growth can be obtained through the installation of windmills. Regarding the technical cooperation, training and technology transfers aspect, the study notes that RES deployment requires a trained labour force for local workers to extensively contribute to each phase of the value chain. Moreover, while Morocco seems to have shown increasing interest in benefiting from training and technical cooperation programmes, especially in the electricity sector, much is still to be done for the country to be able to absorb a scaled up strategy for the deployment of RES. References: Achnoo.com (2012), “Maroc – Le gouvernement Benkirane : des attentes et des promesses”, January 4th.

-171-


Ahmed, Ghada (2011), “Private employment agencies in Morocco”, ILO, Working Paper 283. Alakhbar (2012), “Angry protests in Morocco despite reforms”, February 3rd. Aswat (2012), “Chronique économique - Signal fort de Bank Al Maghrib”, March 28th. AufaitMaroc (2012), “Déclaration de politique générale La feuille de route du gouvernement Benkirane”, 19/1/2012. Blanc, Frédéric (2011), “Employment Perspective in the Mediterranean” In «Tomorrow, the Mediterranean: Scenarios and Projections for 2030» (69–108). Paris: IPEMED. Bloomberg (2012), “Morocco Central Bank Keeps Key Interest Rate Unchanged At 3%”, June 19th. Cafeclock.com (2012), “Morocco Improving Schools”, 12/02/2012. Children’s Rights Portal (2012), “Children of Morroco and Western Sahara: Realizing Children’s Rights in Morocco and Western Sahara”. Education International (2012), “Morocco: Drive to improve public schools and teaching conditions in rural areas”, January 26th. FEMISE (2012), « Renewable Energies and Sustainable Development in the Mediterranean: Morocco and Mediterranean Solar Plan (MSP) », FEMISE research report FEM34-02, May. FEMISE (2012), “Foreign Direct Investment (FDI) and the Liberalization of Trade in Services: An Evaluation of the Euro-Mediterranean Partnership (EMP)Influence”, FEMISE research report FEM34-19, June. Fule, Stefan (2012), “EU-MOROCCO: PREPARING FOR THE ACTION PLAN ON REFORMS”, European Commission, April. GlobalIssues.org (2012), “‘Green Morocco Plan’ Fails To Confront Climate Change”, March 15th. Human Rights Watch (2012), “Morocco: Repression Undercuts Reform Pledges”, January 22nd. IMF (2011), “Morocco: 2011 Article IV Consultation”, IMF Country Report No. 11/341, December. International Business Times (2012), « Post-Arab Spring Travel And Tourism In The Middle East: A Country-By-Country Look », June 2nd.

Institut Numérique (2012), “IT SERVICES OFFSHORING IN MOROCCO”, July 7th. L’Economiste, (2011), “QUELLES SONT VOS ATTENTES POUR 2012?”, Édition N° 3688 du 2011/12/29. Les Echos, (2012), “Maroc-Algérie: Place à la communication”, March 27th. Morocco World News (2012), “Moroccan government pledges to create 7000 job opportunities this year”, March 13th. Moroccoworldnews (2012b), “Morocco’s Rentier Economy Under the Radar”, March 9th. Nuqudy (2012), “Morocco Launches Housing Projects”, March 18th. Nuqudy (2012b), « Morocco Increases Healthcare to the Poor », March 15th. Reuters (2012), “Morocco braces for lower crops after rain deficit”, March 2nd 2012. Rural21 (2012), “Agricultural Value Chain Development Project in Morocco”, 02.03.2012. The Moorish Wanderer (2012), “Taxes, Interest Rates and Hauser’s Law”, February 28th. Yabiladi (2012), “Maroc : L’inflation devrait doubler en 2012”, March 16th.

-172-


TUNISIA: Economic and social hardships are far from over but perspectives allow for cautious optimism

tain, there are reasons to believe that Tunisia is on a path of recovery.

Introduction

A difficult situation had to be endured in 2011, hardships are far from over but some positive perspectives could be expected for 2012 and for the longer-term as well. One notes that :

A year and a half after the revolution, Tunisia is still facing considerable challenges at the political, social and economic front. It was initially believed that the climate of uncertainty would be ever present due to the difficulties of the interim government to successfully organise democratic elections in late 2011. Meanwhile, economic insecurity led to a series of protests, demonstrations and rising social demands affecting economic activity. However, 18 months after the fall of the Ben-Ali regime, Tunisia has undergone a successful political transformation after the election process took place. Now, the new government has the task of drafting the constitution and proceeding to much needed reforms. Table 1. Main Indicators of the Tunisian economy 2011 2012 2013 Real GDP growth (%)

-1.8

2.7

3.3

Consumer price inflation (av; %)

3.5

5

4

Budget balance (% of GDP)

-5.9

-8.9

-8.3

Current-account balance (% of GDP) -7.3

-7.9

-7.7

Exchange rate TD/US$ (av)

1.41

1.56 1.63

Exchange rate TD/€ (av)

1.96

1.99 2.05

Source: EIU

Still, the situation is definitely not an easy one, with young unemployed people at the forefront of rising demands for economic and social change. Social and economic difficulties, a burden of the old regime’s lack of inclusiveness, are a threat to development. The issues that led Tunisians to the streets are far from being resolved and the population might have been disillusioned since, obviously, the new authorities cannot provide all the answers on such term notice. Similarly, authorities must reorganize the state, curb corruption, all the while relaunching growth and ensuring the population’s welfare does not worsen. But, while the short run is still relatively uncer-

√ Growth was negative in 2011 but is forecasted at 2.7% in 2012 before growing at close to 3.3% starting from 2013. The weakening EU economic prospects do not favour Tunisia, a frail domestic demand could translate into lower than usual demand for Tunisian products. On the supply side, manufacturing has kept a positive momentum, owing in great part to tremendous growth in the oil-refining industry. √ Unemployment climbed to 18.9% in 2011 and could remain high, close to 17% in 2012. If the new Tunisian authorities wish to reduce the increase in the number of the unemployed and in the number of inactives by 50% then they will need to create about 1.6million jobs by 2030. Inflation, initially considered not a consi√ derable risk, could rise with consumer prices expected to increase by 5.0% in 2012. The budget balance is expected to reach a √ deficit of 8.9% of GDP which is considerable when taking into account that the deficit was below 3% prior to the revolutions in 2009. √ In deficit, the current account balance is expected to reach -7.9% of GDP, from -7.3% in 2011. The degree and path towards inclusive√ ness of growth in Tunisia remained well below one could have hoped for. The gap between the income/consumption share grabbed by the richest deciles and the poorest was among the highest. There was a surprising dependence to major trading partners. Tunisian growth has not been optimal for job creation, even less so than in the rest of the Mediterranean. Tunisia rather needs to embrace a new √ path, a new innovative economic strategy is needed to overcome a series of challenges, such as high rates of youth unemployment, increasing

-173-


income inequality, insufficient investment in the private secor, and substantial regional disparities. The country needs a sustainable process of job creation that relies on a competitive private sector. Meanwhile, the authorities need to remove barriers to entrepreneurship and investment. â&#x2C6;&#x161; Furthermore, Tunisia needs to strenghten and advertise its business and investment potential. Undeniably, FDI should play a stronger role in the development process, not only can it have a positive effect on economic growth, but can also improve employment creation through spillover effects on productivity, and working conditions in Tunisian firms. The growth and development policy designed by the new authorities should also focus on improving education, most particularly its aptitude to nurture qualified individuals. This report is divided in four parts: first we focus on political developments and issues relating to interaction between economics and politics, second we present the recent macroeconomic and sectoral evolutions and estimates, third we present the situation regarding the inclusiveness of the Tunisian growth model, fourth we present recent measures and policies that were undertaken and finally in conclusion we provide a series of recommendations. I. Political developments and interaction between economics and politics Let us focus on some main questions of a pressing nature that relate to the interaction between economics and politics. Mainly we will talk about what has happened in Tunisia since the uprisings and what is ikely to happen in the short run. I.1. What happened in Tunisia since the revolution Last year in Tunisia was, as in Egypt, costly in terms of economic growth, unemployment, and rising current account and fiscal deficits. Tourism was greatly hit and the Tunisians employed in the sector witnessed job losses, FDI collapsed, international rating agen-

cies downgraded Tunisian banks and the import-cover ratio showed signs of decrease. This was to be expected since the country was in a state of unparalleled political uncertainty. The latter translated into economic insecurity which led to a series of protests, demonstrations and rising social demands affecting economic activity as a whole. While data on the subject is not always objective, it appears that throughout last year roughly 22 000 movements of protest were recorded leading to roughly 600 000 workdays being lost due to protests (PSL, 2012). Meanwhile, hundreds of businesses were damaged, coalfields and industrial sites were destroyed, with losses estimated at about 160 million dinars or 84 million euros, furthermore, 124 foreign companies employing nearly 40 000 workers were relocated (Mouley, 2012). As a consequence, unemployment rose and the unemployed went from 500 000 in end-December 2010 to nearly 750 000 in December 2011. The unemployment rate of the labor force was estimated at 16.2% in 2011 versus 14.8% in 2010, coupled with an unemployment rate that was even higher among young graduates, going from 30.7% in 2010 to 33.6% in 2011 (Mouley, 2012). However, it is common for political transition to go hand in hand with uncertainty. It was noted that a gradual transition towards â&#x20AC;&#x153;democratic capitalismâ&#x20AC;? was needed through a series of political reforms that would provide coverage for domestic needs, implement new institutions and reduce inequalities (FEMISE, 2011). But one must not forget that adopting a new political, economic and social model takes time. Meanwhile, the first very important step has been made, Tunisia made a successful political transformation after the election process in late 2011. Granted, the new government could not immediately transform the country and meet all expectations. But, some things needed and were done sooner rather than later. On the political front, Tunisia needed to go towards a new political road map. The process considerably advanced throughout the year, though some impediments were to be found along the way. First, members of the old regime were excluded/replaced and the

-174-


third interim government (March 7th 2011) was accepted by the political powers and the public. Second, the interim government was expected to be replaced after the election of a National Constituent Assembly (NCA). The latter would rewrite the constitution and call for presidential and parliamentary elections, initially set for October 2011 (EIU, 2011). Finally, this led to the NCA elections on October 23rd which were a success. The Islamist Nahda party won the elections (89 seats, or about 41% of the total), however they failed to form a majority. As a consequence, another coalition government was formed in late 2011 with the prime minister announceing later on that parliamentary and presidential elections would be held within 18 months (EIU, 2012). One could thus say that the political transition process is still in motion with the new government having the task of drafting a new Constitution. Elections, both presidential and parliamentary are expected no later than June 2013, until then tensions between Islamists and secularists will probably rise. On the economic front, the situation could be described as less clear. In reality, the new Government transposed most of the measures of the « jasmin plan » in a draft of a provisional state budget accompanied by a finance law. However, it did not seem to rely on a real budget or economic development plan and the state budget for 2012 was estimated with an increase in external financing needs. An important issue has been the one of mobilizing external financing by recourse to international capital markets. The risk of default on sovereign debt, measured by the spread of credit default swaps (CDSs), increased when the differential in spreads rose from 121 basis points before the revolution in 2010 when the wave of protests began to 223 points in April 2011. Despite the positive outcome of the elections the climate of uncertainty pushed back the differential to 257 basis points in November 2011. In July 2012, the tunisian five-year CDS finally jumped to 300 basis points, the highest since April 2009 and an increase of 60 bps since late-2011 (Reuters, 2012).

All in all, successive interim governments have tried to make advancements in the political reform front but provided limited reassurance about the economy. While the new authorities wish to pursue higher economic growth and increase social well-being, they do not yet have a realistically drawn plan to do so. I.2. What is likely to happen in the coming months? √ The social, political and economic climate in Tunisia does not yet allow for pertinent projections. Developments should be much more noticeable in the coming months now that the ratification of the Supplementary Finance Act has been completed. One may also ask what are the possible consequences of an Islamic government? Similar to the case of Egypt, the government will need confronting the « legacy » of the previous regime in the political, social and economic front. √ On the political front, the authorities will have to deal with « the commercial and financial legacy » of the former regime (EIU). Authorities will need to chose between nationalising stakes or completely taking over more complex projects that were undertaken. The new government is expected to walk along a thin line between «turning the page» while also listening to the concerns of foreign firms that were and still want to make business with Tunisia. √ Tensions between Islamists and secularists could much likely remain an important issue. For instance, a case that led to frictions on issues revolving around both religion and freedom of expression was the one of the arrest of the director of Nessma TV for showing a film (Persepolis) that was found «offending decent morals and causing public unrest» (AhramOnline , 2012). The broadcast of the film in October 7th 2011 had led to violent incidents before the elections, meanwhile, there were attempts by some to attack the headquarters of the Tunisian channel. Such incidents can test the capacity of maintaining a balance of views between members of the coalition.

-175-


II. Macroeconomic and sectoral developments

to the EIU scenario, the Tunisian rate of growth is expected to be close to 2.8% in 2012.

II.1. After the implosion the economy shows some signs of recovery The Tunisian economy contracted by -2.2% last year as output was affected by production stoppages and export-oriented firms being hit. Production in sectors such as phosphates and derivatives was catastrophic, production of the GPC (Gafsa Phosphate Company) in 2011 amounted to only 30% that of 2010 while the Tunisian Chemical Group did not exceed 45% of production in 2010. Meanwhile, exports of phosphate represented only 65% the value of those the prior year (Northafricaunited, 2012). But the economy could be entering a phase of recovery, though perhaps a timid one since the magnitude of the upturn also depends on external factors. The more optimistic scenarios predict a 3.9% GDP growth (IMF), or even a 4.5% rate (Central Bank of Tunisia). Naturally, for such expectations to materialize, foreign direct investment will need to return, the government will have to strengthen and apply reforms for a more business-friendly environment and exports will have to rise. But, the domestic economy is highly dependent on exports to the EU, its three major export destinations being France, Italy and Germany. The weakening EU economic prospects do not favour Tunisia, a frail domestic demand could translate into lower than usual demand for Tunisian products.

Reliable value added figures are only available for the first months of 2012, by looking at the evolution of sectoral growth in Q1 2012 one can infere potential growth carriers for the rest of the year. The agricultural & fisheries sector seems relatively resilient, it slightly grew compared to the previous quarter and showcased a year-on-year rate of growth of 2.9%. Meanwhile, manufacturing has kept a positive momentum, translating into a year-on-year rate of growth of 8%, owing in great part to tremendous growth in the oilrefining industry. Furthermore, the 9% increase in the value-added of the agri-food industry an 19.8% rise in the chemicals industry also helped mitigate the losses of the construction materials sector (-3.8%) and textiles (-2.6%). Business activities have shown relative growth, owing in part to positive performance in the sectors of trade (3.7%) and other business services (2%) while a 17.4 rise was noticeable in hotel and restaurant services. Political stability could provide better prospects post-2012, provided that the authorities adopt an approach that takes more into consideration the claims made by protestors and provided Tunisian trade partners, especially Europe, fare better in the coming year.

Figure 1. GDP growth and real expenditure on GDP Real expenditure on GDP (TD bn at constant 1993 prices)

According to EIU, total net exports 35 6,3 for 2012 could fall to -0.2 TD bn 30 5,7 (constant prices) owing to a 5.8% 25 4,5 5,7 5,7 5,7 5,2 increase in imports that exceeds 20 4,8 3,1 4,63 4 4,4 3,4 4,2 15 an estimated 4.9% increase in 0,3 0,1 10 exports. The recovery in growth 16,1 15,7 15 14,4 14,1 5 would be attributable to a rise 0 in public consumption (by 4.3%) -5 and gross fixed investment (by 2006 2007 2008 2009 2010 1.8%) while private consumpPrivate consumption Net exports GFCF Stockbuilding tion is also expected to rise by as much as 1.9%. All in all, according Source : EIU -176-

7 6 5

5,7

5,5

5,9

3,5

0,6 5,2 0,62,8 5,4

4,9 0,6

4 3 2 1

15,3

15

15,6

0 -1

-1,8

-2 -3

2011

2012

2013

Public consumption Economic growth


Table 2. Gross Domestic Product (GDP), Value added by industry at constant prices of 2005 Variations (in %) compared to Q2 2012

Q1 2012

Q1 2012

Q2 2011

AGRICULTURE AND FISHERIES

1179.6

1150.3

2.5%

3.9%

MANUFACTURING INDUSTRIES

1963.9

2031.8

-3.3%

-4.3%

…Agri-food industries

363.0

360.8

0.6%

-1.1%

…Textiles, Clothing and leather

441.3

443.6

-0.5%

-8.6%

…miscellaneous industries

241.4

240.6

0.3%

3.4%

…Oil refining

34.0

79.4

-57.2%

175.0%

…Chemical industries

134.7

131.8

2.2%

-8.0%

...Construction materials. ceramics and glass

155.5

156.0

-0.3%

-4.3%

594.1

619.6

-4.1%

-8.2%

NON-MANUFACTURING INDUSTRIES

…Mechanical and electrical industries

1203.8

1216.5

-1.0%

-1.9%

BUSINESS ACTIVITIES

5632.2

5549.3

1.5%

5.0%

… Maintenance and repair

52.1

51.9

0.4%

2.5%

… Trade

1034.8

961.5

7.6%

0.8%

… Hotel and restaurant service

588.8

614.9

-4.2%

13.4%

… Transport

867.3

903.5

-4.0%

9.5%

…Post and telecommunications

803.5

790.6

1.6%

9.0%

…Financial services

577.7

558.6

3.4%

3.8%

…Other business services

1708.1

1668.4

2.4%

1.5%

-229.2

-215.0

6.6%

5.2%

BUSINESS ACTIVITIES

Global intermediate consumption in financial services (in -)

9750.3

9732.9

0.2%

2.0%

NON BUSINESS ACTIVITIES

2396.9

2384.2

0.5%

6.4%

G.D.P AT FACTOR COST

13269.2

13231.6

0.3%

2.7%

Source : National Institute of Statistics (INS)

II.2. Unemployment pressures The political instability that followed the Tunisian revolution resulted in the upsurge of an unemployment rate that was already quite high to begin with. The country had to face additional factors of pressure in its unemployment market, not only did the revolution lead to production stoppages that affected the rate of joblessness but the Libyan conflict also meant the return of thousands of Tunisians while 2011 was a year with a considerable increase in the number of university graduates entering the market (FEMISE 2011). Thus, after reaching 13% in 2010 it climbed to 18% in 2011 and could remain close to that rate in 2012. Reversing the situation is a difficult task, sadly, there appears to be a lack of entrepreneu-

rial role models for young Tunisians, which in part reduces the job creation potential of the economy. Succesful entrepreneurs are often those who have studied in famous universities overseas or with an already wealthy financial situation. There is a pressing need for the right mentoring and tools that would allow the Tunisian youth to start their own businesses and create more employment (WorldPolicy, 2012). What are the needs for employment creation in Tunisia? A recent study provides some valuable insights on the employment needs of Tunisia and other MPs until the year 2030. Taking into account labor supply and prior rates of economic activity, Blanc (2011) offers estimates based on different scenarios, two of which are presented in table 3. The first scenario presents the number of jobs that

-177-


Table 3. Tunisia : Employment needs by 2030 Scenario A : Maintaining ratios of inactivity and unemployment of 2007

Scenario B. Limiting the increase of the number of inactives and unemployed of SCA by 50%

Annual rate of Jobs to create Annual rate of needed Jobs to create needed job-creation 2007-2030 job-creation 07/30 2007-2030 07/30 Tunisia MPs (average)

Observed rate of employment change

2011

2012*

794 035

1.00%

1 596 331

1.83%

-2.40%

2.30%

3 423 581

1.65%

6 461 494

2.74%

Source: Blanc (2011) for scenario projections. EIU for observed rates of employment change.

will be needed to maintain recent (of benchmark year 2007) unemployment and inactivity rates. In the case of Tunisia the study finds that the country will need to create about 794 thousand jobs by 2030 if it wishes to just maintain its 2007 unemployment and inactivity rates. This implies a 1% annual rate of job creation to ensure the feasibility of this scenario. But if the new Tunisian authorities are more determined and wish to reduce the increase in the number of the unemployed and in the number of inactives by 50% then they will need to create about 1.6 million jobs by 2030. This would require an even higher annual rate of job creation of roughly 1.83%. Both these scenarios could be feasible for Tunisia. Granted, the year 2011 found Tunisia with a negative -2.4% employment change but this was a year marked by revolutions, production stoppages and job losses following the turmoil. A gradual return to stability should materialize into employment growth falling back to positive trends and estimates for 2012 suggest a variation of employment by

2.3%. If Tunisia manages to attain such a raten not only in 2012 but in subsequent years as well, then it will be more than sufficient in covering the needs of the newcomers into the domestic market. Furthermore, such a rate would also suffice in covering for the needs of “Scenario B”, it would thus be sufficient in limiting the increase of the number of inactives and unemployed by at least 50%. II.3. Inflation on the rise In late 2011 inflation kept rising because of the increase of demand relative to a limited supply, meanwhile, the country had to to cover both the domestic and Libyan demand in a period of consecutive strikes as well as speculation and smuggling by industrials and traders (TunisiaLive, 2011). Now, the average rate of inflation in Tunisia appears to be on the rise for a third consecutive year. The domestic consumer price index (CPI) of inflation accelerated to roughly 5.4% year-on-year (y/y) in June 2012 in part because of the continuous increase in the price of tourism related activities and the rise in the price of foodstuffs.

Figure 2. Unemployment figures in Tunisia 20

6

19

18,8

17,9 16

4

2

12,5

13,3 12,4

13

12,4

12

8

0

2006

2007

2008

2009

Unemployment (m) Unemployment rate (%)

2010

2011

2012

2013

Employment (m)

Source : WEO October 2012, EIU -178-

The index of restaurants and hotels has seen a rise in recent months and has grown by approximately 7.9% year-onyear. Meanwhile, the price of miscellaneous goods and services has also been driven upwards, marking a 4.4% increase year-on-year. Both consumer and producer price inflation is affected, they are expected to both reach a rate of 5.9%. Finally, wages could increase


Figure 3. Household Consumer price index monthly rates (base 100 in 2005)

Figure 4. Tunisiaâ&#x20AC;&#x2122;s Top 10 export partners

148 144 140 136 132 128 124 120 2010-01 2010-05 2010-09 2011-01 2011-05 2011-09 2012-01 2012-05 2012-09

Household aggregate CPI

Food and drinks

Restaurants and hotels

Misc. goods & services

Â

Source : FEMISE calculations based on UN Comtrade data

Source: Institut National de la Statistique

at a slower rate than inflation, the rise in nominal wages is expected to keep slowing down (from 3.6% in 2011 to 3.5% in 2012) which should keep contributing to the competitiveness of the Tunisian labour force. II.4. External Finances and FDI The global balances of Tunisia are expected to remain in great deficit for 2012 as well. Regarding the external balance, as noted above a possible deterioration in EU conditions may keep lowering the demand for Tunisian exports. The fact of the matter is that Tunisia overly depends on exports to its European partners. About 44% of Tunisian exports go to France, Italy and Germany alone while in the top 10 of export partners for Tunisia one finds 6 European countries. Overall, one can

be cautiously optimistic on export performance. After the first eight months of 2012, energy and lubricants increased by 14.9% year-on-year while mining (+18.8%) and other manufacturing industries (+16.9%) have seen a strong export resurgence. Let it be noted that in early 2012, strikes blocked the carriage of phosphate destined for export, as a result the losses from missed exports in the sector reached approximately $ 300 mn in 2011 and it was announced in early 2012 that total losses have amounted to $ 2 bn dollars (FairObserver, 2012). Aa considerable year-on-year fall was recorded in textiles (-9.6%), one of the largest export orienting sectors. This situation has brought a year-on-year increase of only 3.2% for total exports. Such export increase cannot cover for the import bill. After 8 months, agricultural imports bounced

Table 4. Year-on-year evolution of Tunisian Trade, by sector grouping. million dinars Agriculture and agri-food industries

Energy and lubricants

Mining. phosphates and derivatives

2011 - 8 2012 - 8 % 2011 - 8 months months variation months

2012 - 8 months

% variation

2011 - 8 months

2012 - 8 months

% variation

Exports

1691.7

1743.3

2859.8

14.9

891.1

1058.9

18.8

Imports

-2520.3

Trade balance

-828.6

3.1

2488.9

-2621.1

4.0

-3039.1

-4185.0

37.7

-390.6

-564.1

44.4

-877.8

5.9

-550.2

-1325.2

140.9

500.5

494.8

-1.1

Textile. apparel and leather

Mechanical and electrical industries

Other manufacturing industries

2011 - 8 2012 - 8 % 2011 - 8 months months variation months

2012 - 8 months

% variation

2011 - 8 months

2012 - 8 months

% variation

Exports

4379.7

3960.6

-9.6

6172.3

6336.1

2.7

1238.8

1448.7

16.9

Imports

-2971.4

-2799.2

-5.8

-9308.5

-10402.0

11.7

-9308.5

-4261.1

-54.2

Trade balance 1408.3 1161.4 -17.5 Source: Institut National de la Statistique

-3136.2

-4065.9

29.6

-8069.7

-2812.4

-65.1

-179-


Figure 5. Monthly evolution of the Tunisian trade balance, by sector grouping, million dinars 400

400

200

200 0

0 -200

-200

-312,6

-400

-400

-575,7

-559,3

-600 -800

-538,9

-623,3 -781,8

-841,2

-1000 -1200

-897,5 -975,1 -1058,7 -1177,8

-980,4

-1027,4 -1009,4

-600

-702,9

-800 -1000 -1200 -1400

2012-08

2012-07

2012-06

2012-05

2012-04

2012-03

2012-02

2012-01

2011-11

2011-12

2011-10

2011-09

2011-08

2011-07

2011-06

2011-05

2011-04

2011-03

2011-02

2011-01

-1400

Other manufacturing industries

Mechanical and electrical industries

Textile, apparel and leather

Mining, phosphates and derivatives

Energy and lubricants

Agriculture and agri-food industries

Trade balance TOTAL

Source : Institut National de la Statistique

by 4% compared to last year, mechanical industries by 11.7% but it was mostly energy by an impressive 37.7% that kept the bill at a high. In total, imports fell by 9.8% in great part because of a massive fall in other manufacturing (-54.2%). Understandably, the trade balance will see a large deficit, in June 2012 the latter had attained -975.1 million dinars that is an 54% deterioration compared to a year ago.

grow to 2.1 bn US$ in 2012 from 2 bn US$ the prior year. But again, potential disruptions in EU demand could also translate into a fall of remittances revenue and thus a negative impact on the transfers balance. As for the income balance, the latter is expected to remain in deficit, down to -2.1 bn US$ in 2012 from 1.5 bn US$ in 2011. The combined effect of these evolutions should thus bring the current account balance to an estimated -4 bn US$ which would represent approximately -8.6% of GDP in the year 2012, that is to say even farther from the performances that preceded the international crisis (about -2% in 2006).

Regarding the tourism sector, while it could grow, it is not expected to resume soon to its full capacity. It is expected to accommodate activity levels of approximately 30 to 35% less time that the infrastructure of the industry is adapting to the new customer which is referred by the newly elected authorities (Northafricaunited, 2012). In Finally, regarding foreign direct investment (FDI) the second quarter of 2012, tourism spending one should remeember that 2011 was a catasincreased by 20.5% compared to the same pe- trophic year. The total amount of FDI for the riod of 2011 (to 630.7 MDT). It had already in- year had fallen to 0,85 bn US$ which is three creased by 15.7% year on year Figure 6. External finances (US$bn) and current account (% of GDP) in the first three months of 2012 8 4,0 6 with tourists fleeing back to Tu4 0,0 2 nisia (38.9% volume increase in 0 -1,8 -2,4 -2,8 -2 -3,8 -4,0 -4,8 -4 February). Even so, the services -6 -7,7 -7,3 -8 -8,0 -7,9 balance is still expected to attain -10 -12 -14 -12,0 1.7 bn US$, a modest rise com2006 2007 2008 2009 2010 2011 2012 2013 pared to the 1.5 bn US$ of 2011. Trade balance (US$ bn)

Services balance (US$ bn)

Income balance (US$ bn)

Current transfers balance (US$ bn)

Current-account balance (% of GDP)

Similarly, the current transfers balance is expected to slightly Source : EIU

-180-


Box. Linking trade to migration: the case of Tunisian migrants There have been many ideas supporting the existence of an important link between trade and migration. There is a rationale stating that social networks formed by migrants decrease trade costs and facilitate trade, meanwhile, colonial and cultural linkages between EU countries and their former colonies continue to matter and foster trade. In the case of Tunisia the country had been for centuries a country of destination for migrants, then in the 1950s a reversal started which was intensified in the 1960s and now about 10% (1 million) of the Tunisian population lives abroad. Because of geographic, linguistic and cultural proximity Europe, and especially France, is the most attractive destination for Tunisian migrants. The number of Tunisian students in Europe almost doubled between 2003 and 2008, meanwhile, those who decide to seek work in Europe are also increasing since salaries (up to 10 times higher) and working conditions are better in Europe. Nowadays, more than 900 thousand Tunisians are currently in Europe, about 600 thousand in France, followed by Italy (16% of Tunisian migrants), Germany (10%) and Belgium (2%). Supporting the idea that a link exists between trade and migration, these same European countries are Tunisia’s main trading partners in almost the same proportions. With that in mind, a recent FEMISE study (FEM3401, 2012) verifies to what extent there is any relation between trade and migration and to what extent migration could be trade enhancing. Let it be noted that migration already produces a clear form of trade given by the remittances in kind that are sent back home. Meanwhile, migrants are more attracted by countries where Tunisian “social networks” have already been formed. These social networks are expected to decrease trade costs and create trade, meanwhile immigrants also keep a preference for their home country’s commodities, a fact that encourages imports.

Thus, the FEMISE study tests the impact of immigration on trade between Tunisia and its main EU partners, controlling for the impact of geographic distance, the size of countries’ GDP, as well as cultural (common language) and historical colonial linkages. The results highlight that migration is highly significant both for exports and imports, the use of lagged values of migration meaning that migration generates and causes trade. Trade also depends to a less extent on geographical distance than on the demand variables (levels of GDP and per capita GDP). This finding is not so surprising since only European countries are considered in the study and are almost equidistant for Tunisia. Furthermore, language and colonial factors are clearly eroding. But, the effect of migration on trade should not be amplified, indeed the obtained estimate for the elasticity of trade (for both imports and exports) with respect to migration varies from 0.27 to 0.65. This means that, a ten percent increase in the number of migrants will lead to a trade increase that ranges between 2.7% and 6.5%. Since the rate of growth of the Tunisian migrant population in Europe was at 3.2% in 2008, migration could then explain at most 2% of trade growth. Nevertheless, including more destination countries would be needed to give a clearer picture. Source: FEMISE (2012), “The Trade creation effect of Immigrants: Characterising Socioeconomic opportunities arising from linkages between People ś and Goods ́ flows inside the MENA region”, Research Project FEM 34-01. times less than the figures of 2008. A complete return to normalcy is still far, nonetheless estimations point towards a 30% rise in 2012 which should bring FDI value to roughly 1.1 bn US$. Hence, in terms of GDP, inward direct investment would represent approximately 2.4% in 2012 versus 1.9% the prior year, but this would be still far from the 5.9% of 2008 or even the 10.5% of 2006 right after the privatization of Tunisie Télécom.

-181-


III. A lack of inclusiveness in both social and economic perspectives As explained in the report Mediterranean partners, and especially those of the Arab spring in which an elite of few crony capitalists prevailed, must follow a long-term objective towards inclusive growth that offers more opportunities for the population. To measure IG it we use both social (equality of opportunities) and economic indicators (enlargement of the scope of the economy). III.1. Social perspective: Mixed results but low capacity in offering opportunities considering the potential. For growth to be inclusive it needs to be shared by the majority of the working age population. From this point of view, data for Tunisia highlights a relative lack of inclusiveness that is mostly apparent in labor market participation rates. First, the Gini coefficient indicates that Tunisia only registered a temporary decrease in inequity between 1990 and 2000 before observing a rise in 2005. The country is worse-off compared to the regional median value and though its level is not as bad as in MERCOSUR countries, it lacks the necessary dynamism since MERCOSUR at least managed to become more inclusive (3.6 point drop in the Gini index). Furthermore, when looking at

the distributional shares in consumption of extreme deciles one sees that Tunisia is in a much inferior position compared to all economies but MERCOSUR. Even so, it should be noted that the 2 lowest deciles in Tunisia slightly increased their share in income/consumption (from 5.7% in the 90’s to 5.9% in recent times) a positive trend that did not take place neither in ASEAN (from 7.8% in the 90’s to 7.4% in recent times) nor in selected emerging economies (from 6.1% in the 90’s to 6% in recent times). Moreover, the middle class also increased its share to 24.9%, remaining close to what is observed in the developing world. But perhaps the biggest issue with the distribution of the fruits of growth is the one revolving aroung the richest deciles. Indeed, their share remained consistently high at 47.9% surpassing all regions but MERCOSUR. Second, the labour market participation rates were very low in absolute terms, even below the regional average. In 2011, about only 47.6% of the population was participating in the labour market versus 47.9% in 1995. The female participation rate has been extremely low, though it did increase slightly over the years and is slightly above the regional value. Third, youth participation shows results that are mixed. For young people at the 20-24 age-range, 44.5% are active in 2011 versus 48.6% in 1999. This is above the regional value but well below what

Table 5. Evolution of Inequity in Tunisia and Selected Emerging regions 1990’s-2010’s Share of 2 lowest decile in Income or Consumtion Gini 90’s

Gini begin 00’s

Gini end 00’s

90’s

beg. End 00’s 00’s

Share of the 2 highest decile 90’s

beg. 00’s

End 00’s

Share in Consumption of Middle Class** 90’s

beg. 00’s

End 00’s

Tunisia

1990-00-05

41,7

40,8

41,4

5,7

6

5,9

47,9

47,3 47,9 24,6 25,1 24,9

MPs (Median)

Ex.Turk, Pal.

39,2

36,8

38,2

6,6

7,1

7,1

46,3

44,7 45,7 26,9 25,9 26,1

Median

48,9

54,7

45,3

3,9

2,8

4,3

53,7

57,5 50,9 21,6 18,6 22,7

MERCOSUR ASEAN

Median

38,3

41,9

37,9

7,8

6,9

7,4

46,8

Non EU East C.

Median

34

29,4

26,8

7,3

8,6

9,4

41,5

38,2 36,3 26,5 28,5 29,6

49

45,9 25,4 23,9 25,9

Sel.. Emer.

Median

42,4

42

42,5

6,1

6,3

6

48,1

49,4 47,9 24,9 23,9 24,8

Source: Own calculation using PovcalNet developed by the Development Research Group of the World Bank, http:// iresearch.worldbank.org/PovcalNet. access in July 2012, *: Alg, Egy, Jord., Mor. Tun.; **: **: 3rd to 7th Decile -182-


Table 6. Labor Market Participation Rates Evolution in Tunisia and Selected Emerging Countries 1999-2011 1999

2005

2008

2011

Male Female

TTL

Male Female

TTL

Male Female

TTL

Male Female TTL

Tunisia

72.2

23.6

47.9

68.3

24.3

46.2

69.1

24.9

46.9

70

25.5

47.6

MPs (Median)

74.8

22.4

49.4

72.2

22.2

46.8

71.3

24

47.3

71.5

24.6

48.3

MPs (Median ex. Isr, Turk)

74.9

20.4

47.3

74.5

18.3

46.3

72.7

18.8

45.6

71.8

19.7

45.6

MERCOSUR (median)

82.7

49.6

65.8

81.5

52.8

66.4

80.1

54.7

65.3

80.2

55.6

66.1

ASEAN (median)

83.6

69.3

75.3

83.5

69.6

75.3

82.5

69.1

74.9

82.7

68.5

74.4

East. Europe

65.5

52.6

58.5

63.9

51.4

57.1

63.8

51.2

56.9

64.6

51.8

57.6

Source : Own calculation based on ILO, LaborSta EAPEP database Table 7. Labour Market Participation Rates of the Youth in Tunisia & selected regions 1999-2011 1999

2005

2008

2011

20-24 25-29 20-29 20-24 25-29 20-29 20-24 25-29 20-29 20-24 25-29 20-29 Tunisia

48.6

63.9

55,7

45,2

63.5

53,9 44.8

63.9

54.0

44.5

64.4

54.3

MPs*

48.8

60.1

53.8

45.6

59.9

52.7 44.3

60.5

51.6

42.7

61.7

51.4

Latin America

64.5

78.4

70.6

70.2

80.2

74.7 73.8

81.1

76.8

74.6

81.5

78.4

East Asia

72.9

86.9

79.9

71.5

87.8

80.2 71.2

87.8

79.6

69.3

86.7

78.1

Est. Europe

71.5

85.5

60.0

64.5

80.4

56.3 57.0

78.1

54.3

53.5

77.6

54.4

Source : Own calculation based on ILO, LaborSta EAPEP database

one finds in the developing world. Meanwhile, the participation rate of the 25-29 years olds increased to 64.4% (from 63.9%) though remaining far from the Latin America and ASEAN values. All in all, results regarding inequity and labor participation have been mixed. Even so, the gap between the share grabbed by the richest deciles and the poorest was among the highest compared to any other region. Also, very low participation rates for the youth aged 20-24 cannot be explained in a country that was an example of growth and which should have had a far better capacity in offering opportunities. III.2. Economic perspective: Overdependence to major trading partners, lack of TFP limit inclusiveness As for addressing the economic aspect of “inclusive Growth” in increasing opportunities through the enlargement of the scope of the economy, we put emphasis on: (i) economic diversification (trends in

exports concentration) and (ii) global labour and factor productivity trends. First, for growth to be inclusive, this suggests that the number of sectors contributing to the economy increased overtime, thus increasing opportunities and reducing exposure. The degree of the concentration of exports is used as an indicator of the economy’s aptitude to bear fruits from its openness. As shown in Table 8, Tunisia made improvement, with an index of trade concentration that fell between 2000 and 2010, below the Mediterranean median and close to what is observed in emerging ASEAN and MERCOSUR countries. Additionally, Tunisia considerably diversified in terms of products, with a share of the top 10 exported commodities of 55.9% in 2010 versus 70% in 2000. On the other hand, while it also diversified in terms of trading partners, the share of the top 10 export partners is still very important (more than 80%) and higher than in any other country or region in our sample. This overdependence on major trade partners could be detri-

-183-


Table 8. Concentration of Exports in terms of products and markets (based on SITC rev3 3-digit data) 2000 share 2000. Trade 2010 . Trade of top 10 Concentration Concentration products in Index Index total export value

2008 share 2010 share 2000 share of top 10 of top 10 of top 10 products in products in Partners in total export total export total export value value value

2010 share of top 10 Partners in total export value

Tunisia

0.067

0.047

70.00%

61.20%

55.90%

86.87

80.95

MPs (Median)

0.067

0.057

62.6%

60.3%

57.0%

73.33

69.10

MERCOSUR* (av.)

0.030

0.043

41.9%

46.9%

51.5%

66.60

57.46

ASEAN (Median)

0.094

0.043

67.0%

53.7%

52.7%

71.79

72.89

Ukraine

0.036

0.034

45.4%

52.7%

57.0%

56.74

56.44

Belarus

0.052

0.094

41.3%

62.7%

52.1%

83.28

80.56

China

0.018

0.026

31.4%

35.7%

52.7%

73.56

60.36

India

0.041

0.048

34.6%

42.0%

57.0%

56.80

52.96

Note: The Trade Concentration Index is aimed at assessing the degree of concentration/diversification of a given countryâ&#x20AC;&#x2122;s exports. Based here on the Hirschmann-Herfindahl Index, it ranges from 1 to 0: the lower the indicators, the more diversified the economy. Similarly, the lower the share of the top 10 products, the more diversified the economy trade. *: Only Argentina & Brazil Source: Own calculations using tradesift and Comtrade

mental since not only does it comprise a threat of crisis contagion through limited demand but it also limits opportunities for the broader population.

IV. Recent Measures and Policies

Last, Tunisia appears to have gradually increased labour productivity throughout the decade and stands above the regional value and close to the developing worldâ&#x20AC;&#x2122;s average. While this might seem encouraging, let us not forget that the shift towards Total Factor Productivity did not take place, meaning high labour-capital substitution has not been avoided.

The new state budget for 2012 was approved in late 2011, it forecasts an annual increase in spending of roughly 7.5% (to TD22.94bn or US$16bn) to fund a series of needed infrastructure projects but also to cover the cost of the rise in the publicsector wages (EIU).

All in all, indicators of inclusive growth that were used show that the degree and path towards inclusiveness of growth in Tunisia remained well below one could have hoped for. First, the gap between the income/consumption share grabbed by the richest deciles and the poorest was among the highest. Second, there was a surprising dependence to major trading partners. Finally, when considering the high rates of growth that were achieved since the Barcelona process it is surprising to see how Tunisian growth has not been optimal for job creation, even less so than in the rest of the Mediterranean.

IV.1. Fiscal Policy

The fiscal policy challenges are naturally immense, there were technical difficulties on the final adoption of the budget, the budgetary procedure will soon expect each ministry to present and defend their budgets to the Constituent Assembly for approval. Heated debates among members of the Constituent Assembly revolved around Articles 17, 39, 40 and 50. Most particularly, Article 17 refered to the lowering of customs duties imposed on imports of certain raw materials and semi-manifactured products. It had to be rewritten in order to protect local pneumatic industries before being adopted. Let it be also be noted that the budget law for fiscal year 2012 (loi de finances) was not adopted ar-

-184-


Table 9. Trends in Labour Productivity and Factor Productivity in MPs and selected emerging economies 1990-2010 Labor Poductivity (Average An. Rate in %. based on Values in 90$) 90-95

95-00

00-05

05-10

Tunisia

0.60%

3.00%

2.40%

2.70%

8 MPs Median

0.60%

1.40%

1.80%

2.20%

Mercosur

2.40%

1.60%

0.00%

1.60%

Asean

5.70%

2.30%

2.60%

2.80%

Non Eu East

-9.00%

3.20%

7.50%

3.70%

All emerging Ref

2.70%

2.50%

2.60%

2.80%

90-95

95-00

00-05

05-09

Tunisia

-1.00%

0.20%

0.00%

-0.20%

8 MPs Media

-0.30%

0.20%

-0.10%

-0.40%

Mercosur

-0.50%

0.10%

0.80%

-2.20%

Asean

0.20%

0.20%

-0.20%

-0.90%

Non Eu East

0.00%

1.10%

-0.80%

-3.70%

All emerging Ref Source: FEMISE

0.20%

0.20%

0.00%

-1.40%

Factor Productivity (Average An. Rate in %)

ticle by article as is usually done, but instead it was debated in a very short amount of time and without real consideration of the budget (Tunisie Numerique, 2011). Let it be noted that the state budget for 2012 expects a quite generaous growth rate of 4.5% in 2012, with plans to create 75000 jobs, an annual 7% growth in exports of goods and services and an investment rate of 24% of GDP with increased public sector investment in basic infrastructure. Fiscal policy could remain relatively expansionary in the short term to provide support for development expenditure in the interior regions (EIU). The minister of finance had stated that budget rectifications should be introduced in March 2012 (Fair Observer, 2012). The budget deficit, could go from 5.9% of GDP in 2011 to 8.9% of GDP in 2012. IV.2. Tunisian and foreign-led initiatives for employment creation have been launched Vocational training and employment are now under the authority of one ministry which offers a positive message as to the prospects of matching

skills with the private sector’s needs. Steps should probably be taken to boost integration of ICTs in vocational training centers, following the initiatives of February 2012 to elaborate a framework of agreement between Microsoft and the Ministry to boost the vocational training image of Tunisia (Tap.info, 2012). Meanwhile, the Ministry of Regional Development and Planning was created but the five-year development plan (2012-16) targets on average an annual GDP growth of 6.3% which is overly ambitious (EIU, 2012). In early 2012 the EU Delegation in Tunisia evaluated the Support Programme for the Modernisation of Secondary Education and the Programme for the Improvement of Professional Training (MANFORM II), both funded by the European Union. Not surprisingly, the link between the preparation of secondary education graduates and the pathways to professional training was identified as one of the issues that could have been more improved. Thus, a new program has been launched, entitled “Education, professional training, and higher education related to the employability of young graduates” (PEFESE) funded by the European Union (ENPI, 2012).

-185-


Box. Tunisian post-election expectations

maximize the chances for the youth of finding an employment (Tunisia Live, 2012).

The National Democratic Institute (NDI) conducted research throughout Tunisia to provide policy makers the necessary information on the social, economic and political expectations of the population during the beginning of this new era. Among others, the study stressed that (NDI, 2012): √ Political, social and economic dignity has been identified as the main goal of the revolution. The latter, according to Tunisians, has led to new freedoms and strengthened political pluralism. √ While slow political progress can be understood, Tunisians wish for rapid economic and social improvement, through more employment, a decrease in the cost of living and more security. √ Tunisian understanding of democracy also includes individual responsibilities such as accountability for lawmakers. However, it appears that Tunisian citizens (especially women) lack « clear avenues » that would allow them to stay engaged between elections. √ The newly-elected NCA was considered at the time of the study as responsible for drafting the new constitution and for creating new jobs. Expectations for both priorities are high, the population now clearly demands for more transparency and responsiveness all the while voicing concern on the lack of “party outreach” since the elections were held. Meanwhile, some non-governmental Tunisian organizations have undertook a series of measures that could foster employment and benefit the qualified workforce which has traditionally been among the worst hit. For instance, the Association of Tunisian International Financial Experts and Bankers (AIFEBT), has launched a platform of communication that acts as an intermediary between job applicants and potential employers. This initiative has the goal to help young individuals in tasks that have been penalizing their job-finding prospects, such as writing a structured and consistent CV. A specific sets of practical skills and advice are thus provided to

One may also find projects for employment promotion that are being conducted in a cooperative manner between Tunisian representatives and foreign stakeholders. One of these is the Swiss-led project I-SEMER, an initiative for jobs and rural SMEs which has been developed in cooperation with Tunisian partners. The project in question is the first operational support in vulnerable regions after the revolutions and has the objective of creating 10000 jemployment positions in the next 3 years for youth concentrated in disadvantaged governorates. During the July-November 2011 period (pilot phase) 35 business enterprises had already received support to create 266 potential jobs (SDC, 2011). IV.3. Urgent measures for purchasing power The Minister for Trade announced that urgent measures were being undertaken to preserve the level of domestic prices and supply and also to allow for purchasing power of citizens to be maintained. Through an agreement with the national chamber of hyper and supermarkets it was agreed that the price of a kg of beef would be fixed at 14 dinars while beef with bones would be at 10 dinars and the price of a kg of mutton at 14.5 dinars. It was also agreed that supermarkets would decrease their profit margin by 50% on products such as eggs, poultry derivatives and yoghurt and vegetable oils (Ministère de l’Industrie et du Commerce, 2012). IV.4. Measures to boost investment A number of measures to ease administrative procedures and encourage investment were introduced in late 2011. The export companies exemption for income and profits derived from exports was extended up to 31 December 2012. Furthermore, the allowable quota for FY2011 was been increased from 30% to 50%.

-186-


Additionally, regarding companies that were greatly affected by the 2011 events, authorities specified that depreciation on fixed assets acquired during FY2011 could be taken at an exceptional rate of 33.33% (usually at rates ranging from 5% to 33.33%). Moreover, the full employer social contribution would not need to be paid but authorities would cover up to 50%. Meanwhile, a 100% advance on tax could be obtained without prior tax audit. Lastly, an exemption would be granted indefinitely from the Business Training Tax and the Employee Housing Fund Contribution for firms established in the regional development area (Deloitte, 2011). IV.5. Monetary policy support for exchange rate stabilization and a better investment climate Already in 2011, the Central Bank of Tunisia had highlighted the importance of controlling the social and security situation for the economic situation to rebound. For now, the appointment of the new government has not yet reassured national and international investors (Nuqudy, 2012). One

Board met again on February 15th it was decided to keep the key rate unchanged and focus instead the necessity reassure the investment climate and closely monitor the trend prices, with the recommendation of reenforcing the control of distribution channels. The central bank could maintain a loose monetary policy throughout the year to boost the domestic economy and focus on maintaining liquidity to support bank lending (EIU). On 27 june 2012, the CBT also decided to keep unchanged the key rate. It was in August when Tunisiaâ&#x20AC;&#x2122;s central bank raised the rate to 3.75% in an effort to fight rising inflation, a measure it might reproduce in end October. Regarding the domestic currency it has shown signs of resilience throughout the year. Until now, the authorities have used foreign-exchange reserves to defend the currency, but the unrest could potentially add a downward pressure on the dinar (EIU). Meanwhile, taking into account that the dinar is pegged to a basket of currencies (mostly the euro), potential negative evolution in the EU could impact the currency. The dinar is expected to strengthen vis-a-vis the euro from 2012 and on

Table 10. Key Monetary Indicators 2010

2011

2012

2013

Exchange rate TD/â&#x201A;Ź (av)

1.90

1.96

1.91

1.90

Real effective exchange-rate index (av; CPI-based, 1997=100)

79.24

77.87

82.07

83.16

Purchasing power parity TD/US$ (av)

0.70

0.72

0.74

0.74

Money supply (M2) growth (%)

11.3

9.5

8.9

7.5

Domestic credit growth (%)

16.1

14.9

7.3

11.7

Deposit rate (av; %)

2.4

2.3

2.4

2.5

Money-market rate (av; %)

4.4

4.0

4.1

4.3

Source: EIU, estimations for 2012, 2013

must note that monetary policy has helped the banking system to keep showing liquidity, ending 2011 with an additional budget allocation of 14% (Nuqudy, 2012). In September 2011 the key rate of the Central Bank had been lowered to 3.5% in an effort to both relaunch economic activity and allow for investment to flourish. When the Executive

while it is expected to weaken in the coming years against the US dollar. But, one should mention however that the Governor of the CBT was fired in end-June, a fact that could be perceived as undermining the central bankâ&#x20AC;&#x2122;s independence which is critical for the macroeconomic stability (The Globe and Mail, 2012).

-187-


Box. Retrospect : Constraints and potential errors in conducting monetary policy throughout 2011 Internationally, unconventional monetary policies are dictated by the imperative of reactivity against the risks of deflation. Moderating the risks of inflation allowed such central banks with the opportunity to relax and ease monetary policy by an unprecedented reduction in interest rates. But in Tunisia, the situation is quite the opposite: there is an issue of stagflation and not deflation, that is to say a particular context of weak growth associated to a high inflation rate. There was thus a series of a « new generation » of measures undertaken in 2011 that are worth noting. First, there were three unprecedented cuts in the rate of reserve requirements, the first in February 2011 (2.5 percentage points on outstanding deposits and 0.5 points on outstanding certificates of deposits), the second in March 2011 (5 percentage points on outstanding deposits) and the third in May 2011 (of 3%, that is cumulatively from a rate of 12.5% to only 2%). Second, one would note cumulative cuts in the policy rate by 100 basis points which went from from 4.5% to 3.5%. However, despite these measures, bank lending to productive sectors (not individuals) did not really increase and banks continued to use weekly refinancing at the CBT. In other words, it appears clearly that the measures adopted thus far were used in channeling additional liquidity to the provisioning of nonperforming loans (NPLs) of tunisian banks. The unprecedented cuts in the key interest rate and the rate of reserve requirements should have promoted bank liquidity without the BCT needed to intervene once again. In fact, although the additional liquidity had thus far allowed to circumvent the risk of a declining ability of the banking sector, it became clear that monetization was not enough, for instance, during the last three

quarter of 2011, obvious tensions on bank liquidity reappeared and forced the Central Bank to massively re-intervene in the money market by injecting 3,673 MTD in October 2011 and 3,616 MTD in December 2011. This strategy then fueled inflationary pressures, also induced in Tunisia by channels of monetary transmission and inadequate monitoring of bank liquidity. As a matter of fact, one must note that investment in Tunisia is not much elastic or even totally inelastic visà-vis the rate of the CBT. Instead, investment is rather elastic to other more fundamental determinants that form the business, investment and even regulatory climate. In fact, the low governance rating given to Tunisia for governance responds primarily to poor access to bank credit by operators. At the same time, current regulations limit the required rate of return on savings to the average monthly money market rate (MMR) minus two percentage points. In other words, any decline in the MMR inevitably leads to lower yields to savings and so to negative real interest rates. In addition, « disarming » monetary policy to only serve the recovery of NPLs without any significant effect on growth will only generate monetary inflation and inevitably lead to a sharp depreciation of the dinar, a fact which was also verified recently relative to the euro. All in all, in addition to structural and cyclical factors in the post revolution period, this is an additional explanation for the deterioration of the Tunisiancurrent account and trade deficit. Source : Sami Mouley (2012) V. Recommendations: Improving the «quality» of growth Focusing on growth alone in Tunisia would be a mistake. Despite the rather impressive rates of economic growth in the recent decade and despite a continuous rise in GDP per capita, the lives of Tunisians progressively worsened which finally led to the revolution. According to Gallup (2012), in recent years one notes that fewer Tunisians have been «thriving» despite the simultaneous GDP gains observed. Between 2008 and 2011 one

-188-


Figure 7. Rise in wealth VS fall in well-being 26

8,7

24

24

8,6

20

8,2

8,118

8

18 16

8,6 8,4

8,375

22

while sufficiently presenting the efforts it has been conducting. This is true more than ever and taking into account the recent firing of the CBTs governor the credibility of Tunisia on the international stage could need to strenghtening.

8,8

7,8 16

7,673

14

14

15

7,6 7,4

12

7,2

10

7

2007

2008

Thriving Index

2009

2010

V.2. Sustainable job-creation, strengthening business, investment and education

2011

GDP per head (US$ at PPP)

Source : Gallup (2012) for thriving index, EIU (2012) for GDP

would note a 12.1% increase in per capita GDP but a 37.5% deterioration in the Tunisian thriving index. Thus, this is in line with the general perception among the public that Tunisians did not benefit equally from the domestic economic success. Tunisia rather needs to embrace a new path, a new innovative economic strategy is needed to overcome a series of challenges, such as high rates of youth unemployment, increasing income inequality, insufficient investment in the private secor, and substantial regional disparities. With the analysis of the evolution of the Tunisian economy in mind, the following recommendations are worth noting. V.1. Ensuring political stability First, political stability is a prerequisite to everything else. Tunisian economic problems are related to political will, resources are available but the government needs to reinforce the means of work (FairObserver, 2012). Until now, the process of transition has been evolving, three independent commissions were put in place to organize political reforms, investigate cases of abuse of power, corruption etc. The elections of 23 October 2011 were carried-out in accordance with the electoral process. The Constituent Assembly and the new government in place are expected to run a second transition period for up to one year until the new constitution is adopted. Then and only then can a government emerge ready to pursue “sustainable policy” (African Development Bank, 2012). For the time being, the government should reassure citizens, investors and organizations all the

Second, to overcome the unemployment issue, the country needs a sustainable process of job creation that relies on a competitive private sector. Meanwhile, the authorities need to remove barriers to entrepreneurship and investment. Until now the contribution of private investment has been low with the former regime pursuing a political agenda vis-à-vis the private economy. Also, until now most of the job opportunities provided by the private sector are for unskilled workers, as noted by Achy (2011), in tourism only 8% of the jobs created are for postsecondary educated employees. Undeniably, a series of structural changes are needed to go towards a model free of political agendas. But, initiatives such as I-SEMER that have been recently undertaken seem to be helping in creating employment through the private sector. Through microloans
they may reach the unemployed youth and facilitate the creation of micro-businesses. They also help strengthening the skills of young developers, give support in setting up their own businesses and focus on the number of jobs and innovation that can be derived (SDC, 2011). Furthermore, Tunisia needs to strenghten and advertise its business and investment potential. Undeniably, FDI should play a stronger role in the development process, not only can it have a positive effect on economic growth, but can also improve employ-ment creation through spillover effects on productivity, and working condi tions in Tunisian firms (ILO, 2011). But, as noted by the African Development Bank (2012), Tunisian firms perceive certain aspects of the business environment as being some of the major constraints they face. There are major constraints that include issues re-

-189-


garding the effectiveness of government services dedicated to businesses, business development and operation procedures, timeframes for availability of industrial land, labour market operation or low global integration of the onshore economy. Tunisia has dropped by eight ranks in the Global Competitiveness Report (40th at world level), the business and investment climate has been affected by 2011 events and the unclear economic policy of the government has not been of help. Thus, there is a need for a clear position, for more transparency in governance and business practices and to encourage investment. The measures announced in late 2011 aiming at improving investment can serve as a first step. In Tunisia, people from the Northeast region (Tunis, Ariana and Ben Arous) have better access to more employment than graduates in the regions of the Northwest and Central West (Ben Halima et al. 2010). For the regional inequalities issue to be resolved, there is a need for a comprehensive development strategy that promotes parity in the access to basic services such as education and health across the country’s regions (Achy, 2011). A qualified work force is needed in both urban and rural areas for the country to be more productive and be able to enjoy lower prices. The youth should be ready to be more “proactive in learning by doing, and developing skills that they can bank on” (Tunisia Live). All in all, the growth and development policy designed by the new authorities should also focus on improving education, most particularly its aptitude to nurture qualified individuals that can innovate. An external factor such as education policy can have an impact as much on inequalities and employment as on growth itself and contribute to the change of direction on the growth-inequality curve (Tsakas, 2012). The PISA education survey of the OECD places Tunisia among the worst ranked. The new government will have to remedy the jobs-education mismatch in sectors with growth potential, a skills-based approach could be adopted to define the additions to be made to general education and

training. One could think of applying a common core of basic skills relating to the aptitude of business creation and management which could improve the “quality” of the young workforce and progressively modernize the economic infrastructure. V.3. The role of the international community Finally, What about the international community? The latter and most particularly neighbouring EU could provide assistance. Direct finnancial assistance might be difficult since Europe is undergoing its own crisis. But concrete efforts for the transition to democracy could be offered for instance through the support given to civil society organizations. The EU could also finally grant Tunisia «advanced status» soon enough since political reform is ongoing. Additionally, the World Bank lent Tunisia 500 million US$ (development policy loan) for budgetary support however it remains to be seen if financial support from international organisations merits to be put on the table as a continuous option. Finally, political and economic relations with the Gulf countries and the wider Arab region could be deepened. As noted by Gallup (2011), international partners could channel investment towards improving the domestic infrastructure, health and housing sectors. Such opportunities would not only allow investing in Tunisia’s economic development but also improve the living conditions of the Tunisian population. Another sector that might be interesting to investi is the one of media; investments could be done in a now more open and free environment since state control and censorship have less risk of regulating and politicizing media investments such as in television and radio. Furthermore, the private-sector from the Gulf countries could also be pivotal. Keeping in mind that more than 20% of Tunisia’s labor force is working in agriculture, GCC countries with food resource challenges could deepen trade with Tunisia which would mark a sustainable investment in the country’s transition to democracy.

-190-


Meanwhile, international organizations can also be determinant: while monitoring GDP trends is important, they should invest in more accurate tools to assess the impact of policies and initiatives and test to what degree macroeconomic policies also have an impact at the micro-level, at the citizens’ level. Last but not least, let us note the following : there is also another crucial element deriving from the participation of international partners, whether they come from the EU, the US or the region. All of them now have an opportunity to « bolster their credibility as partners of the people » instead of friends of the previous regimes (GallupCenter, 2011). If they succed then trade and investment relations with Tunisia could deepen and bring benefits to all.

References: Achy, Lahcen (2011), “Tunisia’s Economic Challenges”, Carnegie Paper, December. AhramOnline (2012), “Trial of Tunisian TV chief who aired ‘Persepolis’ postponed”, January 24th. African Development Bank (2012), “Tunisia Interim Country Strategy Paper 2012 – 2013”, February. Blanc, Frédéric (2011), “Employment Perspective in the Mediterranean” In «Tomorrow, the Mediterranean: Scenarios and Projections for 2030» (69–108). Paris: IPEMED. Deloitte (2011), “Tunisia: Measures introduced to encourage investment”, October 28th. Economist Intelligence Unit (EIU) (2012) Country Forecast: Tunisia. The Economist Intelligence Unit: United Kingdom. Various issues. ENPI (2012), “Tunisia: EU helps improve the link between education and employment”, February 14th. FairObserver (2012), “Post-Revolution Tunisia: Still Waiting for its Economic Recovery”, February 27th. FEMISE (2012), “The Trade creation effect of Immigrants: Characterising Socioeconomic opportunities arising from linkages between People ś and Goods ́ flows inside the MENA region”, Research Project FEM 34-01. Gallup (2011), “Tunisia: Analyzing the Dawn of the Arab Spring”.

Gallup (2012), “Nearly One in Four Worldwide Thriving”, April 10th. International Labour Organization (ILO) (2011), “Tunisia: A New Social Contract for Fair and Equitable Growth”, March 28th. Ministère de l’Industrie et du Commerce (2011), “Les prix des produits subventionnés restent inchangés”, October 28th. Ministère de l’Industrie et du Commerce (2012), “Mesures urgentes pour préserver le niveau des prix”, February 22nd. National Democratic Institute (NDI) (2012), “Revolution to reform: Citizen Expectations on the oneyear Anniversary of the Tunisian Uprising”, Findings from Focus Groups in Tunisia, Conducted December 7 - 17, 2011 Northafricaunited (2012), “Tunisia: 2011, one year to forget about the economic performance!”, January 2nd. Nuqudy (2012), “Tunisia Central Bank Worried About Economy”, February 14th. PSL (2012), “Tunisie: Bas les pattes de l’UGTT !”, February 24th. Reuters (2012), “Tunisian debt insurance costs rise amid investor unease”, Reuters Africa, July 16th. SDC (2011), “Swiss initiative for jobs and rural micro and small enterprises: Job creation in disadvantaged regions of Tunisia”. Tap.info (2012), “Boosting Integration of ICTs in vocational training centres”, March 3rd. The Globe and Mail (2012), “Tunisia pays price for sacking central banker”, July 23rd. Tsakas, Constantin (2012), “Development in the Southern Mediterranean Countries after the revolutions: Social equity and employment challenges”, Casa Árabe-Instituto Internacional de Estudios Árabes y del Mundo Musulmán, forthcoming. TunisiaLive (2011), “Tunisians Suffering from Rising Inflation”, November 21st. TunisieNumerique (2011), “Assemblée nationale Constituante: Adoption du budget d’Etat et de la loi des finances 2012”, December 30th. WorldPolicy (2012), “Tunisia: After the Revolution”, January 18th.

-191-


-192-


TURKEY: An impressive economic recovery clouded by an uncertain external environment

This country profile assesses the current economic situation in Turkey and future prospects.

Introduction

I. Real sector and inflation developments

As Turkey entered the global crisis in a stronger position than many other emerging economies (see previous country sheet), the rebound after the strong outfall of the 2008 crisis was impressive. In fact, in 2011, growth remained high at 8.5% and was accompanied by job creation leading to a fall in unemployment below 10% a floor not breached before the crisis. To a large extent, this performance was underpinned by domestic demand which was buoyed by historically low interest rates and ample short-term capital inflows. Nevertheless, high growth was accompanied by a widening of the current account and a significant rise in inflation. The economic slowdown since mid-2011 is helping reduce these external and domestic imbalances. However, a moderation is expected in 2012. Forecasts for 2012 are as follows:

While some of the economies of southern Mediterranean region have continued to struggle over the past year following the ongoing political changes, the Turkish economy has continued its fasttrack recovery. This strong upturn is expected to cool down following the global slowdown.

The Turkish economy grew by 8.5% in √ 2011 but this rate is expected to subside to 2-3% in 2012, reflecting the global slowdown, In tandem with the growth rebound, √ unemployment has declined below the persistent rate of 10% in 2011, √ Inflation declined in 2011 to 6.5% but is expected to rise in 2012 to around 10% as a result of the depreciation of the Lira and energy price increases, √ The current account narrowed from 11.7% in 2010 to 8.8% of GDP in 2011 and is expected to remain at this level in 2012, reflecting a slowdown in domestic demand for import goods but also a slowdown in Turkey’s export markets, √ Turkey reported strong fiscal results in 2011, with a fiscal deficit of 1.4% of GDP in 2011. In 2012, the fiscal deficit is expected to slightly increase to 2% of GDP owing to weaker economic activity. Structural reforms are required to reduce √ the current account including enhancing competitiveness, changing the composition of capital inflows and improving energy self-sufficiency.

I.1. Strong recovery continued in 2011 but signs of moderation in 2012 As mentioned in last year’s report, the domestic recession in Turkey was short-lived and strong signs of recovery were already felt in 2010. In fact, the Turkish economy grew by 8.5% in 2011, slightly lower than last year’s 9% (figure 1a). Growth was mainly driven by domestic demand, particularly private consumption (up by 7.7%) and investment growth (up by 18%) which respectively accounted for nearly two-thirds and half of GDP growth. Moreover, the external sector’s contribution was negative, suggesting strong import growth (up by 10.6%) largely outpacing export growth (up by 6.5%). This impressive recovery has significantly moderated in Q1-2012, with year-on-year growth of 3.2% compared to 12% last year. This decline reflects subsiding base effects, weaker global conditions, especially in the Eurozone as well as monetary policy tightening (that took place in October 2011) to reverse the sharp currency depreciation that started in 2011. However, the drivers of growth have reversed with external demand (exports up by 13% and imports down by 5%) leading overall growth, while domestic demand has contracted (by 1.3%) due to flat yearon-year growth in private consumption. Short term indicators suggest that economic activity slowed further down in the Q2- 2012 as consumers continued to curtail their spending and investors’ appetite stagnated.

-193-


Figure 1a. Contribution to GDP growth (%)

Figure 1b. Sectoral growth rates (%) 25%

250% 150%   50%   -­‐50%   -­‐150%   -­‐250%  

2004

2005

2006

External demand  

2007

2008

2009

2010

2011 Q1-­‐2011  Q1-­‐2012  

Domes0c demand  

GDP growth  

14% 12%   10%   8%   6%   4%   2%   0%   -­‐2%   -­‐4%   -­‐6%  

20% 15%  

GDP growth  

Contribu0on to  growth  

350%

10% 5%   0%   -­‐5%   -­‐10%   -­‐15%   -­‐20%  

2004

2005

2006

2007

2008

2009

2010

2011 Q1-­‐2011  Q1-­‐2012  

Manufacturing Construc;on   Trade   Transporta;on,  storage  and  communcia;ons  

Source: Author’s calculation based on Turkstat data.

Source: Author’s calculation based on Turkstat data.

On the production side, growth is becoming increasingly broad-based. Activity was especially strong in the non-tradable sectors of wholesale and retail trade, construction and transportation sectors, which all grew at double digit rates in 2011, and to a lesser extent finance, real estate and tourism (figure 2). However, other tradable sectors like manufacturing posted robust growth of 9.4% even though this is a slowdown from last year’s 13% growth. Agriculture growth also doubled to 5% from 2.5% last year. In Q1-2012, growth in most sectors had slowed down (real estate, up by 7%, finance and transport, each up by close to 5%). Manufacturing growth has dropped to less than 3% from five times that growth last year. In May 2012, Turkey adopted a new investment stimulus package, which includes measures to encourage investments that entail the use of more advanced technology. The package divides Turkey into six regions, and each region will receive varying amounts of incentives in line with their level of development to address regional socio-economic differences. Taking into account the global financial and economic conditions, growth is expected fall to 3% in 2012. Risks to this scenario depend on the depth and duration of the global recession and the Euro area sovereign debt crisis. For the longer-term, Turkey still needs to achieve more significant income convergence. Gönenç and Rawdanowicz (2010) show that even though the income gap vis–à–vis the upper half of OECD coun-

tries has narrowed significantly since 2001 (mainly as a result of labor productivity growth, which was among the highest in the OECD), Turkey still has the lowest GDP per capita in the OECD. I.2. A strong employment performance in 2011 In tandem with the economic recovery, unemployment fell from 12% in 2010 to below the 10% a floor not breached before the crisis. Both male and female unemployment were brought down to respectively 9.2% and 11.3%, down from 12% and 11.4% last year. However, these improvements appear to have stopped as unemployment has edged again in Q1-2012 to 10.4% following an increase in male unemployment to 10.2%. Moreover, both urban and rural unemployment also declined in 2011. In particular, urban unemployment came down to 12% from 14% in 2011. Rural unemployment (which is half than urban levels) came down to below precrisis levels of 5.8%. In Q1-2012, rural unemployment was quicker to react and increased to 7%. In addition to economic growth, the resilience of employment to the crisis was also largely the result Figure 2. Unemployment by Gender (%) 15 14   13   12   11   10   9   8   7  

2005

2006

2007

2008

male

2009

Female

Source: Turkish Statistical Institute.

-194-

2010

2011 Q1-­‐2012  


Figure 3. Ranking of the Global Competitiveness Index

well identified. Notably, a severance pay reform is being prepared to make permanent labor contracts more flexible and a draft law liberalizing temporary work has been submitted to the social partners for discussion (OECD, 2012).

120 100   80   60   40   20   0  

I.3. Inflation has declined in 2011 but remains above target

Figure 4. Inflation measures, 2005-2012 50% 40%   30%   20%   10%   0%  

Headline infla=on  

mai-­‐12

ELECTRICITY, GAS  AND  OTHER  FUELS  

deprecia=on TL/EUR  

Source: Author’s calculation based on CBRT data.

-195-

janv.-­‐12

mai-­‐11

sept.-­‐11

janv.-­‐11

mai-­‐10

sept.-­‐10

janv.-­‐10

mai-­‐09

sept.-­‐09

janv.-­‐09

mai-­‐08

sept.-­‐08

mai-­‐07

-­‐20%

janv.-­‐08

-­‐10%

sept.-­‐07

In this respect, a new National Employment Strategy is being formulated to address the key shortcomings of the present regulatory framework are

According the CBRT, annual core inflation also increased to 10% in 2011, remaining well above the historical averages, due to the lagged effects of the depreciation in the Turkish lira. Furthermore, increases in core prices spilled over into all subcategories. However, as the effect of the depreciation faded and due to policy tightening, core inflation began a downward trend and stood at 7.4% in June 2012. Owing to positive base effects, slowing economic growth and lower commodity prices, inflation has

janv.-­‐07

The labor market suffers from many problems and rigidities. First, Turkey has by far the lowest employment rate (44.3% of the population employed) in the OECD (average 66.1%), and over 10% points below the next lowest, Hungary, at 55.4% (OECD, 2011). Second, job creation is constrained by high labor costs, particularly high legal minimum wages (even in the informal sector which hosts about half of the jobs), which are higher than in many countries and undermine Turkish competitiveness for labor–intensive products. Third, strict employment protection, including high firing costs for permanent workers, severance payments which are one of the highest in the OECD and in the world also hinder job creation.

mai-­‐06

√ A general reduction of social security contribution, √ Targeted reduction for hiring youth, women and long-term unemployed, √ Reductions for workers involved in training and research and development, and √ Significant social security and corporate and VAT tax reductions for enterprises investing in less developed regions.

Inflation had eased from 10% in 2010 to 6.5% in 2011, but still overshot the official target of 5% (with a tolerance band of ±2 percentage points). However, it had started accelerating since May 2011 and further rose to 10% in the first 6 months of 2012. Inflationary pressures were primarily due to the depreciation of the Turkish Lira during the second half of 2011. The Central Bank of the Republic of Turkey (CBRT) estimates that increased import prices (in foreign currency), notably for energy, and the sharp nominal depreciation contributed 5 percentage points to the surge in inflation in late 2011. In addition to this, price adjustments in electricity, energy tariffs and tobacco prices led to an increase in domestic fuel prices which surged to 17.3% in the first half of 2012 from less than 5% a year ago (figure 4).

sept.-­‐06

of a set of pro-employment incentives, introduced in 2008 by the government and which contributed to job creation (OECD/ILO, 2011). These measures aimed at reducing non-wage labor costs and have encouraged the recruitment of workers, increased employment outside agriculture and helped reduce informality. These have included:

janv.-­‐06

Source: World Economic Forum

mai-­‐05

Syria

sept.-­‐05

Tunisia Turkey     Jordan   Morocco   Algeria   Lebanon   Egypt  

janv.-­‐05

Israel


already come down to high single digits in the past few months and is forecasted to slowdown in the months to come but may still be higher than the annual inflation of 2011. IMF forecasts annual inflation to be in the neighboring zone of 10.6% in 2012. II. High growth widens current account Turkey’s current account remains worryingly high and is expected to remain so in the future. The structure of its financing which was almost entirely long-term before the global crisis, deteriorated sharply in 2010, with a surge in short-term investment. The economy thus remains vulnerable to changes in investment sentiment and to volatility in capital markets.

However, in Q1-2012, as a result of a weaker Turkish Lira and slower growth, growth of domestic demand for foreign goods was marginal (up by only 0.5% compared with 46% last year). And as exports grew (up by 13% compared with 19% last year), the trade deficit improved to 9% from 11% of GDP last year. It is worthwhile to note that the effect of the European slowdown has already been felt as exports to Europe have declined from 41 to 35% of total exports, but this has been compensated by growth in exports in non-European countries, particularly Arab countries, boosted by a more competitive lira (figure 6).

Turkey’s merchandise trade deficit rose from 7.7% of GDP in 2010 to 11.5% in 2011. This deterioration occurred on the back of soaring imports from 24% to 30% of GDP, driven in particular by a stronger domestic demand and more expensive oil imports (accounting for 7% of GDP in 2011 up from 5% of GDP a year earlier). Meanwhile, exports increased only from 16.5 to 18.5% of GDP. Meanwhile, this led to an aggravation of the current account from 6.4% of GDP to close to 10% of GDP, which was in part mitigated by slightly larger services surplus (up by 0.2 percentage point of GDP), which mainly reflects stronger tourism earnings (figure 5). In view of the country’s large current account deficit, the ratings agency Fitch Ratings has changed, last

Also an increased services surplus due to a rise in tourism receipts (from 2.8 to 3% of GDP) and reduced income balance deficit (from 1.5 to 1.1% of GDP), led to a narrowing of the current account deficit from 11.7 to 8.8% of GDP. Turkey’s external financing needs remain large in the near-term, estimated at about US$ 150 billion for 2012 or 18.2% of GDP (OECD, 2012). Given slower growth and falling energy prices, the current account is expected to further decline in the months ahead, although external economic conditions (particularly in Europe) may make it difficult to sustain export demand. The overall outcome will depend on Turkey’ success to further diversify its export markets. The current account is forecasted to decline to 8.8% of GDP in 2012, which remains worryingly large and leaves the currency vulnerable to a sudden loss of investor confidence.

Figure 5. External finances (% of GDP)

Figure 6. Geographical composition of exports (% of total)

% of  GDP  

II.1 Increased import demand deteriorates current account deficit

November 2011, the outlook on its BB+ sovereign credit rating from positive to stable.

100% 90%   80%   70%   60%   50%   40%   30%   20%   10%   0%  

4 2   0   -­‐2   -­‐4   -­‐6   -­‐8   -­‐10   -­‐12   -­‐14  

2006

2007

2008

2009

Trade balance   current  transfers  balance  

2010

2011 Q1-­‐2011  Q1-­‐2012  

Services balance   Income  balance  

10,3%

9,6%

8,2%

8,9%

14,9%

15,6%

14,4%

14,2%

23,0%

21,8%

23,5%

41,1%

40,1%

41,9%

2010

2011

Other Eastern  Europe  

Source: Author’s calculations based on data from Central Bank of the Republic of Turkey (CBRT).

28,7%

35,3%

Jan-­‐May 2011   Jan-­‐May  2012  

North America   Arab  countries  

Asia &  Australia   Western  Europe  

Source: Author’s calculations based on Turkstat data.

-196-


In response to the large deterioration of the external balance, the Turkish authorities have recently adopted some structural initiatives (OECD, 2012). A law was adopted in June 2012 offering new incentives for long-term private savings in an effort to encourage private savings and hence reduce the saving-investment gap. Another major structural initiative is the introduction of a new investment incentive system, extending the existing one and making it more generous. The incentives are expected to augment supply capacity in the tradable sector, which may help increase exports or reduce imports in coming years. Industries with high imported input dependence and projects with a potential to reduce such dependence will be granted additional incentives, but the list of these sectors has not yet been published. The scheme is likely to foster additional investment and growth in the business sector, but the effects will likely be more beneficial and less distortive if the horizontal and regional elements of the scheme prevail over its discretionary sectoral preferences.

2012. On the other hand, FDI increased to 1.7% of GDP in 2011 from 1% of GDP in 2010 and; declined from 1.8% in Q1-2011 to 1.3% of GDP in Q1-2012.

8% 7%   6%   5%   4%   3%   2%   1%   0%   -­‐1%   -­‐2%  

25% 20%   15%   10%   5%  

2006

2007

2008

Por2olio Gross  domes=c  savings  

2009

2010

2011 Q1-­‐2011  Q1-­‐2012  

0%

savings and  investment,  %  of  GDP  

Figure 7. Composition of capital flows and savings, 2006-2011 Capital flows,  %  of  GDP  

Rawdanowicz (2010) undertakes simulations to show that, given the current structure of the Turkish economy, strong demand growth is not compatible with low current account deficits and foreign debt. The implies that excessive growth in external imbalances would likely spark capital outflows and in turn a correction in the exchange rate and/or domestic demand, which might ultimately threaten macroeconomic and financial stability.

FDI Gross  fixed  capital  forma=on  

Source: CBRT

The World Bank (2008) estimates that Turkey would require investment at above 30% of GDP to sustain growth of 6–7%. The ratio was on average around 20% in the 2005–2010 period and further increased to 22% of GDP in 2011. Meanwhile, gross domestic savings (accounting for 16% of GDP in the 2005–2010 period and has been declining since 2009, reaching only 13% of GDP), have been insufficient and thus high investment was financed from abroad. III. Indicators of long-term growth: A decrease in labour market participation but increased scope of the economy and firm’s access to credit

II.2. Capital inflows have diminished following interest rate cuts

Our indicators suggest that the turkish growth model lacked inclusiveness in the past years regarding labour participation, though it seems to allow for more opportunities through the increased scope of the economy.

Despite some improvement in 2011, capital inflows continue to be dominated by volatile shortterm inflows which are subject to sudden reversal (figure 7). In fact, portfolio investments, which exhibit greater sensitivity to interest rate changes, accounted for almost 3% of GDP in 2011 up from 2.2% of GDP in 2010. With recent interest rate cuts, the share of portfolio investments fell from 5% of GDP in Q1-2011 to 3% of GDP in Q1-

Starting with the negative points, we observe that participation in the labour market apparently decreased. Indeed, only 49.5% of the working age population participated in the labour market in 2011 versus 52.8% in 1999. Particularly, a fall was noticeable in the participation rate of women (-2 percentage points between 1999 and 2011) though the rate still remains above the Mediterranean median rate.

-197-


Table 1. Labor Market Participation Rates Evolution in Egypt and Selected Emerging Countries 1999-2011 1999

2005

2008

2011

Male Female

TTL

Male Female TTL

Male Female TTL

Male Female TTL

Turkey

75.8

30.1

52.8

71.2

23.8

47.3

70.8

24.9

47.6

71.4

28.1 49.5

MPs (Median)

74.8

22.4

49.4

72.2

22.2

46.8

71.3

24

47.3

71.5

24.6 48.3

MPs (Median ex. Isr, Turk) 74.9

20.4

47.3

74.5

18.3

46.3

72.7

18.8

45.6

71.8

19.7 45.6

MERCOSUR (median)

82.7

49.6

65.8

81.5

52.8

66.4

80.1

54.7

65.3

80.2

55.6 66.1

ASEAN (median)

83.6

69.3

75.3

83.5

69.6

75.3

82.5

69.1

74.9

82.7

68.5 74.4

East. Europe

65.5

52.6

58.5

63.9

51.4

57.1

63.8

51.2

56.9

64.6

51.8 57.6

Source : Own calculation based on ILO, LaborSta EAPEP database Table 2. Labour Market Participation Rates of the Youth in Egypt & selected regions 1999-2011 1999

2005

2008

2011

20-24 25-29 20-29 20-24 25-29 20-29 20-24 25-29 20-29 20-24 25-29 20-29 Turkey

57.0

63.0

59.8

52.4

62.3

57.2

52.7

63.0

57.8

54.1

65.4

59,9

MPs*

48.8

60.1

53.8

45.6

59.9

52.7

44.3

60.5

51.6

42.7

61.7

51.4

Latin America

64.5

78.4

70.6

70.2

80.2

74.7

73.8

81.1

76.8

74.6

81.5

78.4

East Asia

72.9

86.9

79.9

71.5

87.8

80.2

71.2

87.8

79.6

69.3

86.7

78.1

Est. Europe

71.5

85.5

60.0

64.5

80.4

56.3

57.0

78.1

54.3

53.5

77.6

54.4

Source : Own calculation based on ILO, LaborSta EAPEP database

Second, youth participation in the labour market was practically left unchanged. For those aged 20-24 years we notice a lower participation rate (-3 percentage points), but, for the 25-29 age group the situation has been quite different: in 1999 they were 63% with a formal job while in 2011 they reached 65.4%, which is still lower than in the developing world. Third, the Gini coefficient and the share of consumption in the lower and upper deciles both indicate that Turkey is worse-off compared to the regional value, but appears more inclusive than MERCOSUR countries. On a positive note, the scope of the turkish economy appears to have increased in the recent decade, allowing for more opportunities. During the last decade, the already low index of trade concentration decreased from 0.024 in 2000 to

0.018 in 2010, suggesting trade diversification kept increasing. Granted, the share of the top 10 products exported increased to 32.9% in 2010, but this is very low and a much higher level of product diversification than the rest of the developing world. Most importantly, Turkey made efforts in diversifying its business partners with a share of the top 10 export partners in 2010 of 48.3% (versus 60.5% in 2000), again exceeding diversification levels observed in all developing countries. Last but not least, contrary to the Mediterranean region as a whole, firms in Turkey appeared to benefit from the chance to «seize opportunities» which could in the future increase productive employment. The percentage of firms using banks to finance investment more than doubled in the recent decade to about 51.9% (WDI) which exceeds the rates observed in both MERCOSUR and ASEAN economies.

-198-


Table 3. Evolution of Inequity in Egypt and Selected Emerging regions 1990’s-2010’s Share of 2 lowest Share of the 2 highest decile in Income or decile Consumtion

Evolution of inequity

Share in Consumption of Middle Class**

Gini Gini end begin 90’s 00’s 00’s

beg. 00’s

End 00’s

90’s

beg. 00’s

End 00’s

90’s

beg. 00’s

End 00’s

1994-200241.5 2008

42.7

39

5.8

5.6

5.7

47.7

48.9

45.1

25

24.4

26.8

MPs (Median) Ex.Turk, Pal. 39.2

36.8

38.2

6.6

7.1

7.1

46.3

44.7

45.7

26.9

25.9

26.1

MERCOSUR

Median

48.9

54.7

45.3

3.9

2.8

4.3

53.7

57.5

50.9

21.6

18.6

22.7

ASEAN

Median

38.3

41.9

37.9

7.8

6.9

7.4

46.8

49

45.9

25.4

23.9

25.9

Non EU East C.

Median

34

29.4

26.8

7.3

8.6

9.4

41.5

38.2

36.3

26.5

28.5

29.6

Gini 90’s Turkey

Sel.. Emer.

Median

42.4 42

42.5

6.1

6.3

6

48.1

49.4

47.9

24.9

23.9

24.8

Source: Own calculation using PovcalNet developed by the Development Research Group of the World Bank, http:// iresearch.worldbank.org/PovcalNet. access in July 2012 *: Alg, Egy, Jord., Mor. Tun.; **: **: 3rd to 7th Decile Source: Own calculation using PovcalNet, World Bank Table 4. Concentration of Exports in terms of products and markets (based on SITC rev3 3-digit data) 2000 share 2008 share 2000. Trade 2010 . Trade of top 10 of top 10 Concentration Concentration products in products in Index Index total export total export value value

2010 share 2000 share 2010 share of top 10 of top 10 of top 10 products in Partners in Partners in total export total export total export value value value

Turkey

0.024

0.018

28.3%

38.9%

32.90%

60.45

48.31

MPs (Median)

0.067

0.057

62.6%

60.3%

57.0%

73.33

69.10

MERCOSUR* (av.)

0.030

0.043

41.9%

46.9%

51.5%

66.60

57.46

ASEAN (Median)

0.094

0.043

67.0%

53.7%

52.7%

71.79

72.89

Ukraine

0.036

0.034

45.4%

52.7%

57.0%

56.74

56.44

Belarus

0.052

0.094

41.3%

62.7%

52.1%

83.28

80.56

China

0.018

0.026

31.4%

35.7%

52.7%

73.56

60.36

India

0.041

0.048

34.6%

42.0%

57.0%

56.80

52.96

Note: The Trade Concentration Index is aimed at assessing the degree of concentration/diversification of a given country’s exports. Based here on the Hirschmann-Herfindahl Index, it ranges from 1 to 0: the lower the indicators, the more diversified the economy. Similarly, the lower the share of the top 10 products, the more diversified the economy trade. *: Only Argentina & Brazil Source: Own calculations using tradesift and Comtrade

Table 5. Firms using banks to finance investment (% of firms) Country Name

Average 2002-2006

Average 2006-2010

Turkey

20.09

51.9

MPs (median)

20.09

12.29

MERCOSUR (median)

8.24

19.145

ASEAN (median)

29.38

21.48

Source : WDI

-199-


IV. Macroeconomic management Moody’s Investors Service raised Turkey’s government bond ratings by one notch to Ba1 from Ba2, and maintained its positive outlook. The agency cited a significant improvement in Turkey’s public finances and the resulting increased shock-absorption capacity of the government’s balance sheet. It also welcomed policy actions that have the potential to address the large current account deficit, which is the largest credit risk facing the country. IV.1. Monetary policy: Managing depreciation, inflation and capital inflows Monetary policy management in 2011 was challenged by several concerns including the growing current-account deficit which put downward pressure on the Turkish Lira, inflationary pressures, strong short-term capital inflows attracted by large interest rate differentials fuelling high credit growth. As a result of a soaring current account, the exchange rate has already been under downward pressure since the beginning of 2011 but stronger pressures occurred as of mid-year. In particular, the TRL/EUR cumulatively depreciated by 22% between December 2010 and December 2011 and the TRL/USD by 23% over the same period (Figure 8). In early 2012, the lira appreciated by 4% following some tightening measures and aggressive central bank interventions but weakened again in the second quarter of 2012, as a more lax monetary policy stance was adopted. To manage monetary policy, the CBRT relied on several measures. First, to manage depreciation, Figure 8. Exchange rate depreciation (%)

reserve depletion was tolerated with net international reserves falling from USD 122.8 billion in July 2011 to around USD 108.9 billion in May 2012. Second, a policy mix was initiated in late 2010 based on a two-pillar framework enabling the CBRT to pursue financial stability alongside price stability (Başçi, 2012). The first goal of this framework was to mitigate the appreciation of exchange rate through reducing short-term capital inflows, and the second was to control loan growth and domestic demand while rebalancing domestic and external demand. To these ends, the CBRT combined the use of the interest rate tool with non-interest rate monetary tools (such as reserve requirement ratios) to meet these objectives. On the one hand, moderate interest rate cuts (in addition to a widening the interest rate corridor) were implemented to deter short-term carry-trade inflows and thus prevent upwards pressure on the exchange rate. On the other, increasing the reserve requirements ratios intended to slowdown the acceleration of credit growth (which had reached 26% in December 2010). This new regime has gone through two phases since its inception (Başçi, 2012). From November 2010 until July 2011, the priority for monetary policy was to limit short-term capital inflows while letting the exchange rate depreciate. In late 2010, the overnight borrowing rate was reduced and the overnight lending rate was raised in order to widen the interest rate corridor (by 700 bps and then by 750 bps) and thus allow for increased interest rate volatility (Figure 9). The CBRT also determined on a daily basis the size of its repo auctions, allowing for considerable flexibility in moving market interest rates.

60% 50%   40%   30%   20%   10%   0%   -­‐10%   -­‐20%   -­‐30%  

janv.-­‐06 oct.-­‐06  

juil.-­‐07

avr.-­‐08 janv.-­‐09   oct.-­‐09  

TL/US$

Source:EIU

juil.-­‐10

TL/EUR

avr.-­‐11 janv.-­‐12  

As mentioned in last year’s report, to contain credit growth, the CBRT also introduced several increases in reserve requirements in 2010 and 2011 for short maturities and implemented comparatively lower ratios for longer maturities (Kenc et al., 2011). The CBRT halted the remuneration of reserve requirements and applying progressively higher rates on -200-


Figure 9. Policy rates, 2007-2012 (%) 25 20   15   10  

O/N borrowing  rate   1-­‐week  repo  lending  rate  

Jan-­‐12

May-­‐12

Sep-­‐11

Jan-­‐11

May-­‐11

Sep-­‐10

Jan-­‐10

May-­‐10

Sep-­‐09

Jan-­‐09

May-­‐09

Sep-­‐08

Jan-­‐08

May-­‐08

Sep-­‐07

Jan-­‐07

0

May-­‐07

5

O/N lending  rate  

Source: CBRT

shorter maturity liabilities and used moral suasion to target 25% increase on banks’ annual loan growth, adjusted for exchange rate movements (IMF, 2012). In March 2012, it changed commercial banks’ reserves requirements for foreign exchange and gold slightly so as to increase the central bank’s reserves. Since August 2011, with a dimmer global outlook leading to a deterioration in the global risk appetite, the priority of the CBRT shifted to coping with the acceleration of capital outflows and ensuing currency depreciation. The overnight borrowing rate was first raised to 5% from 1% followed by the overnight lending rate to 12.5% from 9% in October 2011, leading the interest rate corridor to narrow (to 400 bps) then widen again (to 750 bps). The interest rate hikes also sought to curb inflationary pressures arising from the sharp weakening of the lira and adjustments in administered prices. In February 2012, as the downward pressure on the exchange rate eased, a more relaxed monetary stance was adopted and the overnight lending rate was eased to 11.5% and slightly reduced the corridor (to 650 bps) at the higher end. The CBRT had also reduced the reserve requirement ratio for FX deposits (by some 0.5%), in order to provide additional market liquidity to compensate for the effects of monetary policy tightening. Moreover, the CBRT started to provide longer term liquidity via one-month repo auctions and allowed more flexibility in terms of currency composition of Turkish lira reserve requirements. Kenc et al. (2011) undertake a preliminary assessment of the

outcomes of the new policy mix. They show that it resulted in: √ a significant drop in the stock of short-term speculative inflows, mainly through cross currency swaps. √ tighter liquidity conditions evidenced by a slowdown in credit growth (a withdrawal of around 10% of the total credit stock of liquidity from the banking system). √ a reversal of appreciation pressures √ maturity extension in Turkish lira deposits from around 45 days to around 60 days. √ an increase in the share of Turkish lira swaps at longer maturities, and a decline in the share of short-term swaps declined significantly. √ increased volatility of overnight rates in the money market and a downward-sloping yield curve. IV.2. Strong fiscal results are reported in 2011 In 2011, Turkey reported strong fiscal results with the deficit narrowing to 1.4% of GDP from 3.7% in 2010. In large part, this was due to a cut in spending to 23.7% of GDP from 26% of GDP. All spending items declined, in particular interest payments declined to 3.3% of GDP from 4.4% of GDP, more than doubling the primary surplus to 1.8% of GDP. Revenues did not witness significant change and remain at around 22% of GDP (Figure 10). In Q1- 2012, interest spending rose to 5.3% of GDP from 4.9% of GDP a year ago but this was offset by a decrease in current transfers to 10.7% from 11.2% of GDP. As a result, expenditure accounted for 25% of GDP (the same level as last year) and revenues for 23% of GDP. The primary surplus improved to 3% from 2.8% of GDP and the overall deficit remained unchanged at 2% of GDP. Public debt accounts for 39% of GDP. About three-quarter is dominated in domestic currency and the remainder is in foreign currency. The 2012 budget targets a deficit of 0.8% of GDP in 2012. Yet, privatization revenues incorporated in the 2012 budget amount to 1% of GDP and are

-201-


therefore seen as a critical factor underlying Figure 10. Public Finances (% of GDP) 30% the overall budget performance (EC, 2012). 20%   In general, it is expected that the govern10%   0%   ment will keep fiscal policy relatively tight, -­‐10%   -­‐20%   in order to maintain the current account -­‐30%   -­‐40%   deficit under control. However, weakening 2006   2007   2008   2009   2010   2011    Q1-­‐2011    Q1-­‐2012     economic activity may bring public finances Other   Current  transfers   Interest  payments   Personnel  and  social  contribuDons   under pressure. Forecasts place the central Non-­‐tax  revenue   Tax  revenue   Primary  balance   Budget  balance   government budget at 2% of GDP in 2012. Looking ahead, the Medium-Term Pro- Source: CBRT √ Improving energy self-sufficiency (estimated gramme published in late 2011 foresees furaround 30% in 2008) to reduce energy import ther reductions in the headline public sector deficit dependency. In this context, the government and the general government debt stock to respecplans to supply 5% of energy by 2020 from tively 0.4% and 32% of GDP by 2014 (OECD, 2012). nuclear power plants, and obtain 30% of electricity generation from renewable sources by 2023. V. Conclusion Currently, Turkey is the world’s sixteenth largest economy, with 74 million inhabitants and per capita annual income above US$9,000 (World Bank, 2010). By 2010, it was perceived to have weathered the 2008 crisis relatively well and this robust performance continued in 2011. Short-run prospects are healthy but they will be clouded by an uncertain and sluggish external environment. Moreover, a high current account deficit remains a threat to financial stability in case of a sudden stop or reversal of capital inflows which could be the result of global risk aversion sentiment triggered by an event even outside the country. Structural reforms are thus needed to deliver a permanent improvement in the current account deficit. Areas of reforms that would enable Turkey to sustain high growth rates without excessively high current account deficits include: √ Enhancing non-price competitiveness and preserving price competitiveness (Gönenç and Rawdanowicz, 2010). √ Improving the composition of capital inflows (so that they become dominated by more stable FDI inflows relative to more volatile portfolio investments) is important mitigate the vulnerability to sudden stops and would also improve the trade balance.

In the long-term, inclusive growth requires not only high and stable growth but also shared growth across regions, sectors, and social groups. To achieve this, it is recommended that: √ Macroeconomic stability must be maintained especially given Turkey’s recent history of financial turbulence which have had high costs in terms of excessive output volatility and lower growth, √ Increasing employment would first require enhancing skills, productivity, and adaptability. In this regard, an action plan to strengthen links between vocational education and employment was issued in 2010, with 37 priorities, including establishing a national skills classification system, revising vocational school curricula according to new skill groups, and closer co-operation with employers on new vocational courses (OECD, 2012). It would also require introducing more flexible regulation in the labour market related to minimum wages, severance payments and social security contributions in order to increase employment and productivity growth. These measures should also contribute to reduce the size of the informal sector. OECD (2012) estimates that if Turkey were to increase labor participation (from 49% in 2012 to 60% by 2030 ) and the average years of schooling (to 10

-202-


years during the same period), then GDP growth would rise GDP growth by 1.3 percentage points annually relative to the baseline over 2012-30 and potential output would increase by 25% by 2030. √ Reducing large and persistent regional disparities. “Lagging” regions (Eastern Anatolia, Southeastern Anatolia and Black Sea) account for 40% of land area, 30% of population, but less than 20% of the economy’s income, and their per capita GDP is only 60% of the national average. In order to connect lagging regions to the centre, it is important to remove infrastructure bottlenecks (power and telecommunications lines, highways, railroads, port and airport facilities) and ensure market access. √ Reducing poverty: 17% of the population is relatively poor, above the OECD average of 11.1%). Nearly half (49%) of Turks find it difficult or very difficult to live on their current income, below Greece (63%) and Hungary (73%), but still the 3rd highest in the OECD (OECD, 2011). √ Improving infant mortality rate ( 17 infant deaths per 1000 births), which is the highest in the OECD and more than three times higher than the OECD average of 4.6. √ Improving access to services: At 64.1% of the Turkish population satisfaction with water quality is also the lowest in the OECD, well below the average of 86.1%. References: Başçi, Erdem. 2012 “Monetary Policy of Central Bank of the Republic of Turkey after Global Financial Crisis.” Insight Turkey 14(2):23-26. Central Bank of the Republic of Turkey (CBRT) database. Economist Intelligence Unit. 2012. Country Report: Turkey. The Economist Intelligence Unit: United Kingdom. Various issues. Economist Intelligence Unit (EIU). 2012. Country Forecast: Turkey. The Economist Intelligence Unit: United Kingdom. Various issues. International Monetary Fund (IMF). 2012. Turkey:

2011 Article IV Consultation—Staff Report; Staff Supplements; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Turkey. IMF Country Report 12/16. Washington, D.C. European Commission. 2012. “EU Candidate and Pre-accession Countries Economic Quarterly.” July. Brussels. Gönenç, R. and L. Rawdanowicz. 2010. “Regulatory Reforms to Unlock Long-Term Growth in Turkey.” OECD Economics Department Working Papers 821, OECD Publishing. Kenc, Turalay; M. Ibrahim Turhan and Onur Yildrim. 2011. “The experience with Macro-Prudential Policies of the Central Bank of the Republic of Turkey in Response to the Global Financial Crisis.” World Bank Policy Research Working Paper 5834. Washington, D.C. OECD. 2012. OECD Economic Surveys: Turkey 2012. OECD Publishing. doi: 10.1787/eco_surveystur-2012-en OECD. 2011. “Society at a Glance – OECD Social Indicators: KEY FINDINGS: TURKEY.” www.oecd. org/els/social/indicators/SAG OECD-ILO. 2011. “Supporting Employment Through Reduced Social Security Contributions.”G -20 Country Policy Brief, Meeting of Labour and Employment Ministers, 26-27 September, Paris. Rawdanowicz, L. 2010. “After the Crisis: Mitigating Risks of Macroeconomic Instability in Turkey.” OECD Economics Department Working Papers, 820, OECD Publishing. http://dx.doi.org/ 10.1787/5km36j745fbt-en Turkish Statistical Institute databases. http://www. turkstat.gov.tr World Bank. 2010. “Turkey: Achieving Results for Turkey’s Future: Sustainable and Equitable Growth.” October. Washington, D.C. ________. 2008. Turkey Country Economic Memorandum Sustaining High Growth: Selected Issues. Washington, D.C. World Bank.

-203-

Femise report  

2012 Femise report in English on Euromediterranean partnership

Read more
Read more
Similar to
Popular now
Just for you