National savings still not enough for true convergence

(Photo BC-Econostrum)

(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. 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. 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. 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 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.

(Photo BC-Econostrum)

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 Registration for the Econostrum newsletter is available here::