With a lack of banking expertise, weak financial products and not enough transparency on the stock markets, the backward financial systems in Mediterranean countries are still a barrier to inward investment. However, things could alter quickly if the changes undertaken are followed through.
The €9bn invested by the European Commission between 1995 and 2006 to support economic modernisation and reform in Mediterranean countries were not enough to fully close the gap between countries to the north of the Mediterranean Sea and those to the south. The situation is likely to remain unchanged over the next few years, despite €3.2bn apportioned for 2007-2013 as part of the EU’s European Neighbourhood Policy and an increase in European Investment Bank interventions from €6bn between 2002 and 2006 to €10.7bn from 2007 to 2013.
There are myriad reasons, but delays in modernising the financial systems – banks and stock markets where appropriate – are a key factor. “As a result of these delays, the money that comes in is not directed towards productive investments”, explains Simon Neaime from the Institute of Financial Economics at the American University of Beirut. Not that existing efforts should be reduced. “It’s vital that the current aid programme is continued to help them grow,” he adds.
Embryonic stock markets
In a study published on the FEMISE website (FEM33-20), Mr Neaime takes a detailed look at the financial systems of seven Mediterranean countries (Egypt, Lebanon, Morocco, Tunisia, Algeria, Jordan and Turkey) and their links with economic growth. His findings can be summed up as follows: significant modernisation efforts are under way and have been accelerated in the last few years, but there are still major obstacles to investment.
One of these obstacles is that banks dominate the movement of capital despite not yet having the expertise required to evaluate investment projects. The study also highlights the weakness of banking products and a lack of transparency on still-embryonic stock markets. “The stock markets created in Casablanca and Tunis have only around 50 listed companies, most of which are publicly owned. It’s still nowhere near enough,” claims Mr Neaime, who also calls for total liberalisation of capital movement and more flexible exchange rates.
The right direction
In his view, whether an economy is open or closed does not determine how well it copes with global financial crises. “What matter are its growth and its ability to deal with the unexpected. Mediterranean countries were fairly successful in staving off the 2008 crisis because they were already going in the right direction. They must keep it up,” he stresses.
However, Mr Neaime acknowledges that the protection of capital accounts enables financial reform to go ahead without too much risk of being exposed to crises. That is why he advocates the “gradual” lifting of barriers to capital flows “at the same pace as financial reform”. More haste, less speed.
Article by Brigitte Challiol, from the website Econostrum. It belongs to a series of articles that will be published in the context of the partnership between Econostrum and Femise for the year 2010. These articles will also feed the “Mediterranean Reflection” part of the Econostrum Website. You can find this topic and all information at the following address: www.econostrum.info. Registration for the Econostrum newsletter is available here: http://www.econostrum.info/subscription/