Details about the research themes covered in this competition are provided in the Scientific Program 2010 (Click here). Details on the eligibility, submission process, new funding schemes and new evaluation processes are provided in the Admin notice for the 2010 Internal Competition, following this link.

(Photo BC-Econostrum)

The financial crisis has cut growth in southern Mediterranean countries by two percentage points on average, claims Jean-Louis Reiffers, chairman of the scientific committee and coordinator of the Femise. This is far less than the slowdown in Europe, but the state of the region’s public finances means governments must be more aware than ever of how profitable their modernisation programmes are.

Econostrum.info: What difficulties does the current crisis present for southern Mediterranean countries? Can we measure their impact on growth?

Jean-Louis Reiffers: This crisis has real effects on the Mediterranean countries – what economists call income effects. As growth in the EU – their main market – is very weak and their growth remains at around 4%, their trade deficit is naturally rising. On top of this, there is a fall in income transfers from expatriates and a drop in direct investments. The result is a loss of growth of two percentage points on average and a budget deficit of around 7% of GDP.

This may be less than the European average, but it is enough to threaten a recovery through internal demand. It must be pointed out that current growth is not enough to bring down unemployment in the southern Mediterranean countries, so they are being forced to turn to regions where growth remains strong, such as Central Asia and Africa.

Econostrum.info: These countries were relatively protected because of limited financial integration. Why are people still advising them to change their system?

Jean-Louis Reiffers: Financial integration is probably the most important issue for the future. First of all, you need to understand what it involves. In order for a country to integrate into the international capital markets and have access to global savings, it must make its capital account fully convertible, thereby allowing all national residents to put their money where they want.

You also need a flexible exchange rate to avoid financial crises like the one in Argentina with overvalued currencies and huge capital outflows. Macroeconomic control is totally different in this case because it involves being able to manage the volatility that comes with these changes. The economy is at the mercy of any event – be it a terrorist attack or something else – that causes capital outflows.

“Too many projects are still driven by political motives”

So should we definitively abandon plans to integrate into the international capital markets? I don’t think so, because the national savings are not enough for a true convergence. Moreover, the crisis has made our countries more reluctant to outsource and invest directly. Finally, the ageing populations of rich countries mean they are where the savings can be found.

That said, the march towards financial globalisation must be a cautious one. The development of futures markets, hedging, short-selling and other futures contracts, though limited, must be more closely linked to real needs. This must be an extremely gradual change conducted hand in hand with additional consolidation of macroeconomic management.

Econostrum.info: What is the state of their public finances? Is there enough to meet their modernisation requirements?

Jean-Louis Reiffers: The public finances are generally in a reasonable state, with the exception of some countries like Egypt and Jordan, which have focused more on global financial integration. With an average budget deficit of 7% of GDP, there is little room for manoeuvre for economies to grow through internal demand.

National modernisation programmes must conform to considerably improved economic and social profitability restrictions. There are too many projects still driven by strictly political motives and their results are rarely assessed. This new political resolve must go hand in hand with the ability to eliminate operations (especially in the service sector) functioning below their social and economic profitability threshold.

If there is a considerable advance towards international liberalism, you need to be able to manage volatility; where there are pro-active policies, you need to become more flexible so that resources are reallocated efficiently.

Overall, countries need to strike the right balance between the two by using political will that has the support of the people.

European market allows a better position in the global market

Econostrum.info: Predicted growth in these countries for 2010 and 2011 is generally greater than it is for European countries. Do they need Europe when their economic relations with the continent are giving way to dealings with other regions of the world?

Jean-Louis Reiffers: On average, Europe represents 50% of foreign markets of the southern Mediterranean countries, so it will remain the focal point of Mediterranean growth for a while yet. However, it is clear that the general dynamic of the European market is not favourable. Moreover, Mediterranean countries have to compete with new EU member states that receive convergence funds which bear no relation to the aid transfers of the partnership.

On top of this unfair competition, non-tariff barriers are growing fast through a system of rules and support measures for certain sectors.

Despite this, engaging with the European market allows you to position yourself better globally. That is what will happen everywhere in the years to come and it seems like a very good thing, especially for the growth of Africa as a whole.

Interview 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/

The seminar aims at bringing together economists, agricultural economists, modelers, and policy analysts in order to explore the adverse effects experienced by the agro-food sector and rural economies during and after the recent financial crisis, to measure and evaluate the depth of the damage in the affected areas, to develop and discuss solutions and to derive recommendations for the future to more easily cope with another severe crisis.

The seminar will be organized around five main topics:

a. Convergence of the food and financial crises

b. Governence of international institutions

c. Impact analyses

d. Policy processes

e. What is next?

Invited papers

The Program Committee will invite 4-5 prominent scholars and policy makers to present key-note papers covering seminar topics

Contributed papers and posters

The Program Committee invites contributed papers and posters regarding the topics mentioned above.The seminar seeks contributions bringing together economists, agricultural economists, modelers, and policy analysts. Both theoretical and applied papers are welcome.

Abstract submission:                                                                         August 31, 2010

Abstracts should be sent to medit@akdeniz.edu.tr

For more details

Universitat Pomepu Fabra – Cremed

London School of Economics – European Institute

CALL FOR PAPERS

To contribute to the book: “Economics of the Mediterranean and the Euro-Mediterranean Process” To be published by Routledge

Dr. Joan Costa Font (LSE)

Professor Jose Garcia Montalvo (UPF)

The book will conver the following :

Microeconomics and Institutions Macroeconomics and Markets

Market Liberalisation

Social Protection

Security

Climate Change

Privatisation

Decentralisation

Labour Markets

Fiscal Stability

Free Trade Agreement

Monetary Integration

Unemployment

Price Stabilisation

Financial Regulation

Market Equilibrium

Prospective contributors should email a first draft of the paper before June 30th to: eva.ventura@upf.edu and j.costa-font@lse.ac.uk

There will be a peer review process and in July 31st accepted contributors will be announced.

Please click here for an important electronic communications disclaimer: ]]> http://www.femise.org/en/2010/06/news-des-membres/appel-a-communications-london-school-of-economics-european-institute/feed/ 0 http://www.femise.org/en/2010/06/publications/5-nouveaux-rapports-de-recherches-publies-en-juin-2010/ http://www.femise.org/en/2010/06/publications/5-nouveaux-rapports-de-recherches-publies-en-juin-2010/#comments Fri, 25 Jun 2010 11:46:16 +0000 Staff Femise http://www.femise.org/?p=1725 FEMISE publishes in June 5 new research reports on its website. These researches have been carried out by members of the network FEMISE and financed by the European Commission. 3 of these new reports reports deal with macroeconomic issues related to the movement of financial flows and capital account liberalization, the performance of manufacturing and, finally, analysis of financial systems of the Mediterranean partners. The other two reports are more oriented on development issues, analyzing the impact of openness on social issues or the effects of food price shock.

FEM33-03: Libéralisation du compte de capital et cadres de gestion macroéconomique comparés: Indicateurs de mesure et implications sectorielles et de politique monétaire en Tunisie, directed by Sami Mouley, ESSEC Tunis, et Rafik Baccouche, Université de Tunis, El Manar, Tunisie.

See the summary / Download the Full Report

FEM33-09: Performances productives et climat de l’investissement dans quatre pays de l’espace MENA : Algérie, Egypte, Maroc, Liban, directed by Patrick Plane, CNRS-CERDI, Université d’Auvergne, France.

See the summary and annexed articles / Download the Full Report,

FEM33-20: Financial Systems in Mediterranean Partners and the EURO-Mediterranean Partnership, directed by Simon Neaime, Institute of Financial Economics, American University of Beirut, Lebanon.

See the summary / Download the Full Report

FEM33-11: International Openness and Social Development as Endogenous Determinants of Growth and Convergence of the Countries in the MENA Region, directed by Jan J. Michalek, University of Warsaw, Poland.

See the summary / Download the Full Report

FEM33-14: Global food price shock and the poor in Egypt and Ukraine: a comparison of impacts and policy options, directed by Marek Dabrowski, CASE – Center for Social and Economic Research, Poland

See the summary / Download the Full Report

Download the report // access to the other  2008-2009 Research Reports

June 2010

By: Marek Dabrowski, CASE – Center for Social and Economic Research, Poland.

In collaboration with: Soheir Aboulenein, CASE, Egypt; Heba El Laithy, CASE, Egypt; Omneia Helmy, CASE, Egypt; Hanaa Kheir-El-Din, Liudmyla Kotusenko, CASE, Ukraine; Maryla Maliszewska, CASE, Poland; Dina Mandour, CASE, Egypt; Wojciech Paczynski, Case, Poland.

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

Executive Summary

In 2006, following almost three decades of stability or decline, real global prices of agricultural commodities and food entered a surge that lasted till mid-2008. The scale of this upturn was not unprecedented, but nevertheless quite unusual and one can only quote two comparable episodes in the recent history: developments during World War II and during 1973-1974. The 2006-2008 food price surge coincided with major increases in oil and other energy commodity prices, creating a series of serious macroeconomic and social challenges around the world. The economies of several low- and lower-middle-income countries have been hit with lower income strata of populations bearing a disproportionate burden.

These developments have added a new perspective to the long ongoing discussion on the potential reforms of the large food subsidy programme in Egypt and in some other Middle East and North African countries. The food subsidy system has over the years created a partly effective, although poorly targeted social safety net, which has also increasingly drained budgetary resources. The external food price shock has put the existing systems to a test.

This paper analyses selected aspects of food and agricultural policies in Egypt. It does so by comparing the situation with Ukraine that shares some important common characteristics with Egypt (fairly large territories and populations, similar income levels) but also differs in several important dimensions (agricultural net exporter / importer, food consumption vs. food production subsidies). The analysis focuses on alternative policy options and the extent to which they can mitigate the development, macroeconomic and poverty effects of food price shocks.

In Egypt, prices of many goods and services are subsidized to make them affordable to consumers. Food subsidies are provided through two main channels: the universal subsidy for “baladi” bread available to every citizen with no quota restrictions and the ration cards which offer eligible households a pre-determined monthly allowance of basic foodstuffs including rice, sugar and edible oil.

Global food price surge in 2006-2008 almost doubled the subsidy bill for the Egyptian budget from 1.3% of GDP in 2006/07 to an estimated 2.1% in 2008/09. This signals that food subsidies could have become a major fiscal problem had food prices remained high or in the event of future price shocks. Moreover, food subsidies are poorly targeted with substantial leakage of resources to high-income households. It is believed that between one-quarter and one-third of the poor do not benefit from food subsidies, while majority of support is directed at non-poor households.

In Ukraine, there are no direct food subsidies governed at the central level. However, regional and local authorities use different schemes to provide bread subsidies and/or ensure availability of the so-called “mass consumption” bread at low price. This type of bread accounts for the large majority of all bread produced in the country proving that this cannot be considered an effectively targeted mechanism supporting the poor.

In response to the global food price shock the governments of Egypt and Ukraine responded using a variety of instruments. In particular, some export restrictions were introduced, some import tariffs were cut, ration card coverage was extended in Egypt and in Ukraine a few municipalities tried to switch from a general bread subsidy to targeted monetary support for the poor.

Egypt and Ukraine differ quite significantly with respect to the balance of domestic production, consumption and foreign trade in agricultural and food products. Egypt relies on food imports for at least 50% of domestic consumption and food accounts for more than 15% of all imports. The situation in Ukraine is markedly different. Close to 90% of food consumed in the country is domestically produced. Ukraine ranked among the top five global exporters of wheat and coarse grains and corn in 2008/2009.

Two comparable computable general equilibrium (CGE) models are developed for Egypt and Ukraine. The model simulates direct and indirect impacts of the food price surge and various policy options on the performance of the main macroeconomic indicators including economic growth, inflation, current account, and budget balance. The model sectoral coverage and level of households’ disaggregation allow for analysing the effects of policies on sectoral output growth rates, on the welfare level of households as well as on poverty outcomes.

The analysis starts from simulating the effects of two scenarios of international food price increases. They are constructed on the basis of historical price data from 2006-2008 assuming that a price surge of similar magnitude proves permanent (or highly persistent). In the next step, several policy responses to these price scenarios are introduced in simulations. Specifically, export bans and import tariff cuts are studied for both countries. In the case Egypt there are also other scenarios trying to capture the characteristics of potential changes in the food subsidy scheme, e.g. replacing the general system of subsidies with targeted cash assistance for the poorest 40% of the population.

The results of the analysis indicate that the macroeconomic effects of an external food price shock of the analysed magnitude (without any policy actions) can be quite pronounced. Estimated consumer price index or nominal exchange rate adjustments are of the order of several percentage points in both countries. Significant adjustment takes place through the foreign trade channel with Egypt’s pre-shock current account surplus almost disappearing. In Ukraine real absorption falls by 4.5% with real investment declining by almost 8%.

Household consumption is affected negatively in both countries – by close to 2% in real terms in Egypt and 4.5% in Ukraine in the high price increases scenario. Urban households suffer stronger losses in both countries – the difference between rural and urban outcomes is more pronounced in Ukraine. This is associated with visible rise in poverty levels.

Moving to various possible policy responses to the food price shock one striking observation is the limited ability of the policies to reduce the negative social consequences including a rise in poverty. The results for Egypt suggest that most policy interventions have a negative effect on household consumption across the income distribution. The only exception is a scenario where food import tariffs are cut. Also, the scenarios assuming that the two poorest quintiles can be perfectly compensated in cash for the losses incurred due to elimination of food subsidies by definition imply maintenance of consumption of these groups of households. To what extent such a policy could be executed in practise is not clear. Similarly in Ukraine, the elimination of tariffs on food products improves the real consumption of households, while an export ban slightly improves the situation of rural households at the expense of urban population suffering significant deepening of their consumption losses due to surging food prices. The poverty implications of these policy alternatives are similar with food import tariff eliminations slightly improving poverty situation in both Egypt and Ukraine. In Egypt, theoretical scenarios assuming perfect compensation of the two poorest quintiles also improve poverty outcomes.

Summing up, the CGE modelling exercises illustrate the severity of the shock, and inadequacy of several policy options suggesting cuts in food import tariffs as a partial remedy. Yet, it is also clear that from the analysis that in the case of Egypt maintaining the food subsidy scheme intact is not sustainable from the fiscal perspective.

The policy scenarios analysed in the CGE models are quite stylised and their practical implementation would be very difficult. It is therefore important to discuss the practical policy-relevant conclusions and recommendations.

The Egyptian system of food subsidies needs to be reformed with an objective of making it cheaper and better targeted to the poor. This implies that leakage to better off households should be limited. Several elements could be considered here.

One general direction of change could be a gradual switch from subsidising final products to direct support to farmers to allow them to better cope with the fluctuations of the international food prices. A system of guaranteed prices for strategic crops could be considered. Alternatively, a system of insurance against price shocks could be introduced. Direct subsidies to farmers conditional on their adoption of good practices such as modern irrigation and balanced fertilization might prove effective. With regard to the organisation of the market measures to reduce non-competitive practices by traders regarding food storage, distribution and supply timing could be introduced.

Reducing the fiscal burden of food subsidies while maintaining their poverty-alleviation role could involve geographical targeting of eligible households. As three quarters of the poor in Egypt are concentrated in rural areas, proxy means testing combined with poverty mapping could help identify the most vulnerable groups, reduce errors of inclusion (of least vulnerable groups) and errors of exclusion (of vulnerable households). Direct cash transfers to the poorest households instead of food subsidies could then be implemented. In a similar vein, certain types of support could be targeted only to the poorest farmers (instead of subsidised agricultural inputs) avoiding dual price distorting markets and leading to misallocation of resources. The baladi bread distribution system could be made more efficient if a separation between baladi bread production and distribution process was implemented. Providing direct cash transfers to the poorest households instead of food subsidies and to the poorest farmers instead of agricultural inputs could eliminate dual market pricing that results in distortions and misallocation of resources.

In Ukraine, there are potentially interesting lessons to be taken from an attempt of some regional/city authorities to replace the bread price control system with cash support for the poorest. The breakdown of these reforms due to local budget constraints in the wake of the financial and economic crises, i.e. when it was needed the most, suggests that a more crisis-robust scheme might be needed. The new scheme does not necessarily need to lead to a larger involvement by the government responsible for implementation and financing, but stronger guarantees of the functioning of the system might be needed to win the public support for elimination of the provision of subsidised bread.

Download the report // access to the other  2008-2009 Research Reports

December 2009

By: Simon Neaime, Institute of Financial Economics, American University of Beirut, Beirut, Lebanon.

In collaboration with: Nidal Sabri, Birzeit University, Palestine.

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

Executive Summary

This study presents an in-depth analysis of the MPs financial systems. It first describes the main functions and features of the MPs financial systems, and then analyzes the quantitative and qualitative linkages between MPs financial systems and economic growth. Country profiles are presented to outline the key characteristics of the current financial systems in 7 MPs economies. Financial sector regulation and practices in the MPs compared to international standards/norms are also evaluated, emphasizing the gap between the applied standards of MPs’ financial system relative to EU/international standards. In particular, considerations of prudential regulation (for example, Basel II), the mechanisms of informational efficiency and control, MED banks profitability, the contribution of the banking systems in providing credits to the private sector and in raising capital for new investment projects, and an evaluation of credit risk and credit risk management practices, are carefully highlighted. Recommendations for the development of the regulatory framework of the respective MPs financial markets with the purpose of serving the inter-connected objectives of economic growth and financial integration and liberalization are also highlighted. The issue of MED stock markets efficiency is explored to see whether funds are being efficiently allocated to productive investments. The issue of stock market integration in the MED region is also studied for the purpose of establishing whether these markets are regionally integrated. A more formal econometric analysis is conducted to understand the main determinants of growth and financial developments in the MED region highlighting the role of financial instruments in economic development of MPs.

The main results and policy recommendations of the study are as follows:

(1) Although the MED banking system is still playing an important and major role in channeling funds to various sectors of the economy, it is still not providing the kind of services and financial products that are needed to further sustain growth.

(2) MED banks still need to introduce new financial products to better develop its credit markets.

(3) Informational efficiencies of credit markets in the MED region are much lower than averages in other emerging economies worldwide. This factor is also hindering the expansion of credit markets in the region.

(4) The MED banking system is suffering from the lack of proper evaluation of investment projects and bank managers. In most instances funds are not channeled to the most productive projects and the costs of financing these projects are often higher than those present in more developed economies.

(5) A lot of preparation is still required on the part of MED banks before they can fully enjoy the benefits of the New Basel II Accord. Banks will have to still review their current credit processes, expand the range and significance of their risk management functions, and upgrade their Information Technology (IT) systems.

(6) MED financial markets still need to be more transparent. The disclosure of financial information is still weak and sometime totally absent. This is one of the reasons why until now MED stock markets have not yet been able to properly and efficiently channel funds to productive investments. The MED banking system is still the major source of funds for many of MED projects undertaken.

(7) MED countries are devoting genuine efforts to develop their accounting systems for better transparency and information disclosure. With the exception of Egypt and Morocco, it was shown that net external liabilities of the financial sector are relatively low for all the MED economies. This is due to high restrictions on capital flows to the MED region.

(8) With the exception of Egypt, Morocco, and Tunisia, all exchange rate systems in the MED region are either fixed to the dollar or to a basket of currencies. This would constitute a problem if the capital account were liberalized at a fast pace. If that were the case, then short-term capital would flow in and out very quickly causing currency depreciations a disruption of the financial system and a loss of foreign currency reserves.

(9) MED’s capital markets are showing positive performances in recent years particularly in terms of growth, liquidity and transparency. More investment is being attracted to the region and markets are heading towards more openness. However, much more can still be done to reach full liberalization.

(10) MED stock prices are weak form efficient. A strong form efficient financial market helps reduce information costs, overcome problems of asymmetric information, improve resource allocation and enhance growth by ensuring that capital is allocated to projects with the potentially highest returns. MED financial markets still need to be more transparent. The disclosure of financial information is still weak and sometime totally absent. This is one of the reasons why until now MED stock markets have not yet been able to properly and fully channel funds to productive investments.

(11) The MED banking system is still the major source of funds for many of MED projects undertaken. We were also able to confirm that that the MED region is maturing and on the verge of becoming the next ‘emerging region’. Our results have also cast doubt about the extent to which the MED markets are regionally integrated. Although, this is hindering the intra-regional flow of capital and growth in the MED region, however, in the case of a crisis erupting in one of the region’s financial market, its effects might be dampened quickly and financial losses minimized.

(12) It was also shown that Egypt, Jordan, Greece and Turkey have moderate financial markets developments with low liquidity and turnover, highly concentrated ownership, and limited types of traded financial instruments. However, the selected sample witnessed a significant improvement in the financial sector during the last two decades. This includes an increasing number of listed securities, trading value, market capitalization for shares and bonds, as well a the introduction of new products such as mutual funds and derivates instruments in the Northern part of the sample.

(13) Panel data regression models with growth as the dependent variable have shown that financial depth contributes significantly to GDP growth in the MED region. This result is in line with those of King and Levine (1993), who found a positive association between financial system development and economic growth in a cross-country context. It was also shown that national savings has a positive, significant and robust coefficient. This presents clear evidence that while the 7 MED countries are generating enough savings to contribute to growth, they did not succeed in using those savings through an efficient financial market to further stimulate investment and growth.

(14) Other empirical results show that the coefficients on investment and inflation are negative and insignificant which is not consistent with our expectations and related literature. The coefficient estimate of external debt as a share of GDP was negative and statistically not significant, which indicates that the burden of external debt may have contributed negatively to the observed slow growth in MENA countries. Debt obligations absorb an important fraction of resources that could be mobilized for investment purposes. The results on the other variables need to be interpreted with extreme cautious due to the potential heterogeneity in growth patterns among the seven countries.

(15) Financial reforms are indeed taking place although at a slow pace in the MED region. However, because of its relatively protected capital account, financial reform can take place without a financial crisis looming in the horizon. Removing barriers to capital flows should be slow and move in conjunction with financial reforms.

The MED region is now expected to move fast on those financial reforms, which will enable it to open up for foreign capital, an essential element for deeper integration with the EU and for sustained growth.  This at a time when the emerging MED region is expected to take the lead in attracting European international capital which took various hits after the crisis in East Asia, Japan, Russia and Latin America, the events of September 11^th in the US, and the very recent US financial crisis.

Download the report // access to the other  2008-2009 Research Reports

December 2009

By: Jan J. Michalek, University of Warsaw, Warsaw, Poland.

In collaboration with: Michal Brzozowski, University of Warsaw, Poland; Andrzej Cieslik,University of Warsaw, Poland; Lukasz Goczek, University of Warsaw, Poland; Dagmara Mycielska, University of Warsaw, Poland; Jerzy Mycielski, University of Warsaw, Poland; Agnieszka Pugacewicz, University of Warsaw, Poland; Victoria Roshal, Hebrew University, Israel; Alfred Tovias, Hebrew University, Israel.

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

Executive Summary

The main goal of the report is to evaluate the direct and indirect influence of various social indicators (human capital measures, education, inequality etc.) and aspects of openness (FDI and trade in goods and services) on growth and convergence in the MENA region, and offer policy recommendations in these areas. The report is motivated by the fact, that social development is an important factor affecting the quality of life and social cohesion. However, it is less obvious whether or not the level of social development exerts an impact on economic performance.

The report begins with the analysis of relationship between social development and international trade, then we move to the relationship between social development and foreign direct investment, and finally we discuss the relationship between social development and economic growth. We find that while social indicators strongly affect trade flows, they affect FDI inflows in a limited way and they have no direct impact on economic growth. However, we have identified a number of indirect effects. In particular, the higher level of openness to international trade leads to increased FDI inflows. Furthermore, a higher level of openness to both international trade and FDI is positively related to a higher rate of economic growth. Therefore, social development affects growth at least through the channel of external openness.

We first analyze the results obtained for general measures of social development such as the Human Development Index (HDI) – the most general and widely available measure of social development, the Gini index – the most widely used index of income inequality, the Gender-related Discrimination Index (GDI) – the composite index measuring inequalities between men and women; the Gender Empowerment Measure (GEM) – another measure of gender inequality, and the Human Poverty Index (HPI) that measures deprivations of population in access to resources. Then, we analyze the results obtained for specific measures such as the level of education and infant mortality rate.

Due to data constraints, we are able to use only two of the aggregate measures of social development (HDI and Gini) in the panel regressions for the period 1980-2004. Our panel results were complemented with cross-section results for 2006 for both the whole sample and the sample of Mediterranean countries only. The cross-section approach allows for a much broader analysis of various aspects of social development captured by both aggregate and specific indices that became available only in the recent years. In our project, we analyze the trade data of exporting countries (all EU, OECD, and MENA countries) and of partner countries (all countries of the world above 200 thousand inhabitants). For convenience, we use the terms of “exporters” in the case of exporting countries and “importers” in the case of partner countries.

Social development and international trade

Our empirical results for the relationship between social development and international trade show that in the case of the HD index there exists a positive and statistically significant relationship between social development and the level of trade. This relationship exists both for the whole sample and in the case of cross-section regressions for 2006. There the HD index is positively related to exports and imports, while in the case of panel regressions we found the positive relationship to exist only in the case of exports. However, in the case of the limited sample of Mediterranean countries only we were unable to confirm this relationship which may be due to a low variability of the HD index among these countries.

The empirical results for the Gini index show that in the case of cross-section regressions for 2006 for the whole sample there is a negative relationship between the level of the Gini index and the level of trade. This result suggests that a more equal distribution of income stimulates both exports and imports. However, this result has not been confirmed by the panel data analysis where the Gini coefficient was not statistically significant either in the case of exports nor in the case of imports. In the case of the sample consisting of only Mediterranean countries we were also unable to verify this relationship due to the small number of observations.

The empirical results for the GDI are statistically significant for both exporting and importing countries in the cross-section. These results confirm the positive relationship between the GDI and the level of trade. In other words, the higher value of the GDI index is associated with lower gender inequality. However, for a limited sample including only Mediterranean countries the GDI index appeared to be statistically significant only for the exporting country. This means that the lower level of gender inequality in the Mediterranean countries is positively related to their exports. The empirical results for the GEM reveal that it is positive and statistically significant only for the exporting country in the case of the cross-section. The lower gender inequality in economic participation and decision-making power is associated with a higher level of exports. The same result holds for the limited sample of Mediterranean countries. Finally, the empirical results for the HPI display a negative and statistically significant relationship for both exporting and importing. This means that the lower level of poverty is associated with the higher level of trade flows. This result is partially confirmed for the sample of Mediterranean countries in the case of reporters (exporters). This implies that the lower level of poverty in Mediterranean countries at least is positively related to their exports.

The disaggregation of the HDI into its components reveals that only some of them might affect international trade flows. In particular, we find that the lower infant mortality rate, which reflects the better quality of the healthcare system, is positively associated with exports both in the case of the cross-section regression for 2006 and in the case of the panel regression for the whole sample. The same result is obtained for the sample of the Mediterranean countries. At the same time, we did not find such a relationship for imports.

The results obtained for the level of education show that the literacy rate is positive and statistically significant for the importing country in the cross section for 2006 while the average level of schooling in the case of the panel regression is positive and statistically significant for the exporters. We do not confirm this result for the Mediterranean countries only.

The disaggregation of the GEM into its components in the cross-section regression for 2006 leads to mixed results. For example, the variable that measures political participation of women (i.e. the percentage of seats held by women in national parliaments) displays a positive sign. It means that the higher participation of women in parliament is positively related to the level of trade.

Finally, we studied the relationship between civil liberties and the level of trade. It turned out that in the case of the cross-country regression for 2006 the civil rights were statistically significant only for the exporting countries while in the case of the panel data for both the exporting and importing countries. This means that the higher level of civil liberties is positively associated with the level of trade. The latter results were confirmed for the sample of Mediterranean countries.

Social development and foreign direct investment

Our empirical results for the relationship between social development and FDI inflows show that in the case of the HDI there exists a positive and statistically significant relationship between social development and the level of FDI. However, this relationship exists only for the whole sample in the panel regression and it is not confirmed in the case of cross-section regressions for 2006. The HDI has been found to shape foreign investors’ decisions over a long time horizon, but not in any given year. Therefore, our empirical results only to some extent support the notion that higher level of human development attracts foreign investors.

The empirical analysis of specific components of the HDI based on the aggregate FDI inflows in the panel specification revealed that there is a positive relationship between life expectancy, the level of education and FDI inflows, while the relationship between the infant mortality rate and FDI inflows is negative. Therefore, a long and healthy life and the educational attainment have been found to be important FDI boosters. The role of education is more pronounced when coupled with positive income growth. On the other hand, decent standards of living are not critical to investors contemplating to locate their capital abroad unless income distribution is uneven.

However, not all of the aforementioned results were confirmed by the cross-section regressions. In particular, life expectancy in the importing countries hosting FDI turned out not to be statistically significant. In addition, the cross-section approach allowed us to identify the negative relationship between the HPI and FDI inflows, which means that a low level of poverty stimulates FDI inflows.

Moreover, the study of inward FDI determinants has revealed that there are crucial determinants of FDI inflows, which are robust to the selection of the estimation method and control variables, namely the degrees of openness to international trade and of civil liberties, which were statistically significant in all regressions. This can be interpreted as follows. First, the share of imports and exports in GDP plays pivotal role in attracting foreign investors, pointing to the fact that trade and FDI are complementary. Openness to trade should be a central part of development strategies because a more intense FDI inflow is its byproduct. Second, the prospect of social stability is conducive to FDI inflows. The fear of social and political turmoil is one of the most important barriers to foreign investment. In addition, a higher level of civil liberties, that is associated with the higher level of contract enforcement, promotes FDI and seems to be more important than gender equality policies.

It stems from our analysis that the greater commitment to gender equality is not an important facet of an FDI enhancing policy. Investment in education and health improvements are best suited to create an environment that encourages foreign investment. The greatest effort should however be made to maintain and to widen the degrees openness and of civil liberties. It should be noted that all these steps may turn out to be insufficient because the sample including Mediterranean countries attracts about 50 percent FDI flows less than countries sharing similar characteristics, but located in different parts of world.

Social development and economic growth

Our empirical results for the relationship between social development and economic growth demonstrate that there exists a positive and statistically significant relationship between the HD index and economic growth. However, this relationship should be treated with caution as the impact of this variable on growth was not theoretically obvious. Given the fact that none of the HDI social components were significantly related to GDP growth we hypothesize that that the significance of the HDI variable is driven mainly by the initial level of per capita GDP.

The component measuring life expectancy turned out not to be statistically significant as well as the impact of infant mortality rate on the rate of growth. Therefore, our empirical results suggest that proponents of efforts to improve health in developing countries, which have not already lowered infant mortality rates nor increased life expectancy, should rely on humanitarian rather than economic arguments. The third component of the HDI – education – was also not statistically significant. However, it should be remembered that there is a long lag between the actual investment in schooling and its ultimate impact on economic productivity. Nevertheless, improvements in educational activity do not translate into an upgrade in workforce quality for some 10–15 years, at least until the people who are now being educated finally enter the labour force. Therefore, our empirical analysis suggests that specific measures taken in favour of social development are not directly related to economic growth which would therefore continue to be explained by the set of standard explanatory variables used by economists: the initial level of GDP per capita, the investment rate, the inflation rate, the government’s size, exchange rate variability, and openness to international trade and investment flows.

From the perspective of this report, we are particularly interested in the relationship between external openness and economic growth. The empirical results reveal that external openness to both international trade and FDI are positively related to the rate of economic growth.  Even so, our empirical results demonstrated that the social development measures are important in determining both trade and FDI flows. Moreover, the positive relationship between social development and trade is stronger than the relationship between social development and FDI. At the same time FDI inflows are positively related to the level of trade openness. Although we were unable to confirm the existence of a direct relationship between social development and economic growth we found that social development affects growth in an indirect way through external openness.

Policy recommendations

Our empirical results demonstrated that the social development measures are important in determining the level of trade, foreign direct investment. According to these results, social development indicators directly affect trade and FDI patterns, while they have no direct impact on the rate of economic growth. However, they exert an indirect impact on growth as openness to trade and FDI are significant growth determinants. Thus, in our view, openness to trade should be a central part of development strategies as more openness to trade induces more intense FDI inflow and stimulates economic growth.

The majority of social development variables are positively related to both trade and FDI. However, the estimated impact of specific variables is highly differentiated. Among the aggregate variables, the most important role is played by the HDI and HPI.

The significance of the HDI variable is especially important for inducing exports and encouraging FDI inflows as it stems from our panel analysis of both trade and FDI flows. However, in the case of cross-sections our results are less clear-cut. The positive correlations between the HDI variable and trade and FDI flows are driven mainly by the quality of the healthcare system measured in our analysis by the infant mortality rate and various measures of the level of education.

This suggests that the investments in the healthcare and educational systems would result in the increased stock of human capital and consequently in a higher level of exports of Mediterranean countries.  Moreover, investments in education and health improvements are best suited to create an environment that encourages foreign capital inflows. Although, we were unable to confirm these results for Mediterranean countries, due to the small number of observations, we believe that these general conclusions are valid also in the case of these countries.

The significance of the GEM and GDI variables is demonstrated only when relying on trade regressions. In that vein, the policy oriented towards more equal gender treatment in Mediterranean countries could be conductive to more trade. At the same time, our empirical analysis shows that greater commitment to gender equality is not directly affecting FDI inflows. However, the impact of the higher participation of women in political and economic life may also indirectly affect both FDI inflows and growth through increased trade openness.

Moreover, we identified a negative relationship between the HPI, trade flows and FDI inflows. This means that the lower level of poverty stimulates both trade and FDI inflows. Thus, the measures of combating poverty are important not only from the social point of view – the better the prospects of social stability – but can have a positive impact on the level of trade and FDI inflows.

Finally, the higher civil liberties are positively related to trade and FDI. Higher standards in keeping the rule of law are encouraging international trade and the enforcement of contracts may encourage the inflow of foreign direct investment. In spite of the fact that the conclusions and policy guidance based on regressions should be treated with some caution, the obtained results provide an additional rationale for intensifying reform efforts to address the problem of relatively low levels of external openness of Mediterranean countries. These results suggest that the investment in the social development would result in more FDI and trade, and only then higher income growth. This is similar to arguing, that the indirect effect of social development on growth via FDI and trade is the more important transmission channel of social development on growth, than the direct effect of social development. The estimated effects were robust and insensitive to the specification tests. Social development enhances growth only through its impact on FDI and trade; it could be that it encourages entrepreneurship and productive activity. However, through its impact on trade and FDI, it could still increase the productive capacity of an economy, drive job creation, bring innovation and new technologies, and boost income growth. In sum, we can be quite sure that although more openness brings greater efficiency, it does not automatically lead to higher growth rates. We must therefore presume that while some permanent effect probably exists, freer trade and FDI are only two of many factors accounting for improved growth performance.

Although the conclusions and policy guidance based on regressions should be treated with caution, the obtained results provide an additional rationale for intensifying the reform efforts to address the problem of low openness of the Mediterranean countries. It could be argued that an economy tends to grow better and is less prone to shocks, if it follows policies that foster economic efficiency. Sound macroeconomic environment, liberalizing trade, and FDI to build an economy based on a nation’s true comparative advantage – work in these areas is important, pursuing such policies is not likely to generate a growth miracle, but it is possible to improve Mediterranean countries’ growth prospects over time.

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Annexes to the main report:

Do Investment Climate Deficiencies Explain Low Manufacturing Productivity in Developing Countries? An Application to the Middle East and North Africa, by Tidiane KINDA, IMF, Washington, D.C. USA; Patrick PLANE, CNRS-CERDI, Université d’Auvergne, France ; Marie-Ange VEGANZONES-VAROUDAKIS, CNRS-CERDI, Université d’Auvergne, France

Textile manufacturing in eight developing countries: How far does the business environment explain firms’ productive inefficiency? by Mohamed Chaffai, UREP, Sfax University, Tunisia ; Tidiane KINDA, IMF, Washington, D.C. USA ; Patrick PLANE, CNRS-CERDI, Université d’Auvergne, France

Firm Productivity and Investment Climate in Developing Countries: How Does MENA Manufacturing Perform? By Tidiane KINDA, IMF, Washington, D.C. USA; Patrick PLANE, CNRS-CERDI, Université d’Auvergne, France ; Marie-Ange VEGANZONES-VAROUDAKIS, CNRS-CERDI, Université d’Auvergne, France

February 2010

By: Patrick Plane, CNRS-CERDI, Université d’Auvergne, France.

In collaboration with: Mohamed Chaffai, Université de Sfax, Tunisia; Fouzi Mourji, Université Hassan II, Morocco; Marie-Ange Véganzonès, Université d’Auvergne, France.

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

Executive Summary

Firm productivity contributes to the competitiveness as well as the insertion within the World economy. It is determined by numerous factors including the investment climate that influences the rhythm of the investments and then, the dynamic of manufacturing firms. Different acceptions of the productivity concept are retained in this work allowing various calculations for a wide range of countries among which attention is more specifically brought on four of them: Algeria, Egypt, Morocco and Lebanon. Productivity or its variation reflects the capacity of producers to transform productive resources in an output. It is measured relatively to one or alternatively to all the productive factors, the second option defining the Total Factor Productivity (TFP). By considering a cross sectional analysis, this study also measures firm gap productivity with regards to most efficient enterprises within the empirical sample, those which are positioned on the production frontier and give the “best state of art” within the sample. In the stochastic version of the model, the frontier allows to decompose the residuals into two components: the classical random noise and the efficiency term. All the measures of the productivity are proposed by using the World Bank’s Investment Climate Assessment datasets. These data allow measuring technical efficiencies but also identifying which factors potentially determine them.

Among the MENA countries on which this study focuses on, Moroccan firms prove to be the best productive ones and take place with the most efficient countries just after the performance of firms in Brazil and South Africa. If we consider the median in all the manufacturing sectors, productivity of Moroccan firms ranks before those of Algerians and their productivity is about 20% higher, except for food processing. Algerian firms prove themselves more efficient than Egyptian enterprises. The conclusion we reach with TFP measurements is quite close from the results we get while considering partial productivity of labor. In MENA countries firms are not significantly less efficient than those in China or India. They would be even better in some sectors, but with average salaries which are significantly less.

Moving from the TFP to technical efficiency concept suggests once again that Brazil and South Africa are the most efficient countries although the performance of Moroccan firms is not far from what can be seen with these countries. On average, in comparison with the performance observed in Brazil or in South Africa, technical efficiency of Algerian firms is half the level of the firms standing on the frontier and one fifth for Egypt or Lebanese organizations. On large sector-based samples that combine firms of a numerous countries, stochastic frontier models incorporating a vector of inefficiency determinants have shown the statistically influential impact of variables reflecting financing or openness (i.e., the rate of exports, the foreign participation to the capital structure of domestic firms). The role of public institutions does not prove statistically significant. At least as regard the number of answers, information about this factor is quite poor. Most of these factors are appraised through qualitative variables that offer a poor approximation of the reality. Although the empirical analysis may suffer from an attrition bias because of the limited number of firms for which information is available, one may presume that these variables play a significant role in the explanation of technical efficiency differences. Moroccan institutions prove better than those of other MENA countries. On the different sectors, medians show, for example, that the importers has to assume from 2 to 6 days before benefitting their goods against 10 days in Egypt and from 15 to 26 days in Algeria.

From theses studies on the productivity issue than we expressed in absolute (TFP) or in relative terms (i.e., technical efficiency scores), one can say that the Moroccan manufacturing firms are the most efficient among the Four MENA countries. They are quite close to the efficiency scores observed in some countries of a higher level of development such as South Africa and Brazil and better that those currently observed in large emerging countries such as China or India. The scenario proved different for the three other understudied MENA countries. On average, Algerian firms rank second, suffering from poor public administrations. The institutional context also handicaps Egyptian and Lebanese firms. In these two MENA countries institutional factors including corruption have been a severe hindrance. In addition, the poor delivery of public services, especially for electricity, was a strong obstacle for promoting productive efficiency.

]]> http://www.femise.org/en/2010/06/resum-rech/fem33-09-rex/feed/ 0 http://www.femise.org/en/2010/06/resum-rech/fem33-03-rex/ http://www.femise.org/en/2010/06/resum-rech/fem33-03-rex/#comments Fri, 25 Jun 2010 09:07:09 +0000 Staff Femise http://www.femise.org/?p=1612 Libéralisation du compte de capital et cadres de gestion macroéconomique comparés: Indicateurs de mesure et implications sectorielles et de politique monétaire en Tunisie

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September 2009

By: Sami Mouley, Université de Tunis, Tunisia; Rafik Baccouche, Université de Tunis, El Manar, Tunisia.

In collaboration with: Philippe Gilles, Université du Sud, Toulon-Var, France; Nicolas Huchet, Université du Sud, Toulon-Var, France; Nicolas Péridy, Université de Nantes, France; Cécile Bastidon, Université du Sud, Toulon-Var, France; Hajer Zarrouk, Université de Tunis, El Manar, Tunisia.

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

Executive Summary

South-mediterranean countries run towards commercial and capital account liberalization. Especially, the relative strength of the Tunisian economy face to the recent crisis seems to bear the current strategy followed by authorities. Further, the identification of priorities and the sequencing of reforms (both in terms of change controls loosening and – its corollary – full convertibility) are pivotal for the process’ progress, that is, to get international attractiveness, international financial markets access, and risks diversification’ scope, without banking turmoil or currency crisis. Even though no consensus arises, theoretical and empirical literature first allows identifying the common principles for the Tunisian macroeconomic guidance, and then permits to resolve measure problems that can distort simulations’ results (or their reading). We then test the strengthness of the economy face to new financial liberalization measures, in a monetary way and in a real way (sectorial disaggregation). Beyond the need for implementing reforms, we demonstrate that the macroeconomic situation yet permits to loosen capital account restrictions. More accurately, such changes should first concern the tradable goods sector (namely manufacturing, competitive at a global scale and powerful for employment at a domestic scale) and the services sector (likely to draw many foreign direct investments, as transports and telecommunications).