Discussion%20series%20on%20economic%20transition%20in%20the%20mediterranean paper%20for%20eu%20itali

Series of discussions on economic transitions in the Mediterranean. of 16

Series of discussions on economic transitions in the Mediterranean.

Paper for the Italian Presidency of the EU

Abstract

At the initiative of academics from both the Northern and Southern Mediterranean

who are convinced that there is a common destiny for the nations and peoples of

this region, a working group met to consider the transitions underway in the Arab

nations.

Over the last four years, Southern Mediterranean societies have been set in motion,

with all the upheaval, difficulties and potential for progress inherent in any major

change. At the same time, Europe has been struggling to regain its self-confidence

and define its future. Together, these factors make for a radical shift in

relationships between Northern and Southern Mediterranean countries.

Constitutions are being drafted in the South (primarily in Tunisia, Morocco and

Egypt), and the Arab revolutions are exploring new rules for the political

governance of societies. They have not yet properly tackled issues around new

economic and social models and the international relations, particularly with

Europe, required in order to support political transition.

These are the areas in which the working group has sought to provide the Italian

Presidency of the EU with an interpretation of the situation in the Southern

Mediterranean, highlighting the potential for progress and limiting factors, and

suggesting areas in which new relationships between North and South could be

jointly developed for mutual benefit.

The key theme is the reduction of youth and female unemployment, drawing

European attention to the following four areas, which are closely linked: 1/

reconstructing the value chain through coproduction involving the Northern and

Southern Mediterranean; 2/ supporting the rural economy and regional

development; 3/ fostering the development of the knowledge economy; 4/ securing

the mobility of individuals legally residing in the common space.

* * * * * *

The “Cycle of Economic Perspectives” discussion series on Economic Transition in the Mediterranean was launched in November 2013 at the initiative of academics from both the Northern and Southern Mediterranean. It was facilitated by the Center for Mediterranean Integration (CMI).


Series of discussions on economic transitions in the Mediterranean

Paper for the Italian Presidency of the EU

A working group made up of economists and political analysts from both the

Northern and Southern Mediterranean, who are deeply convinced that there is a

common destiny for the nations and peoples of this region, met to consider the

conditions behind the transitions taking place since the Arab and Mediterranean

revolutions1. Together they believe that economic issues are often determined

by political realities and mechanisms and that, in this region in particular, the

State is central to the processes of renewal, mobilisation and integration.

1 – Southern Mediterranean societies have been set in motion

For years, the countries of the Maghreb and the Mashriq had been stuck in

authoritarian systems that failed to meet the expectations of their people.

Europe had slid into in a major crisis which it is only just starting to recover

from. The Mediterranean integration plan put in place in Barcelona 20 years ago

was starting to show clear limitations and the Union for the Mediterranean was

going nowhere. The solutions proposed by the multilateral economic

institutions no longer seemed commensurate with the problems of the Southern

Mediterranean countries. For several years, the Mediterranean seemed

depressed, under pressure and left behind by major world developments.

The Arab revolutions have set the ball rolling, creating significant momentum, the

exact nature of which remains unclear.

Of course, this affects European countries too. Whatever their outcome, the Arab

revolutions offer both the Northern and Southern Mediterranean a common

opportunity to build fresh momentum and resume dialogue, to develop shared

approaches.

2 – The Arab revolutions – confrontation and compromise

The shake-up of Arab societies has involved upheavals whose scale has matched

the depths of previous intransigence. Aside from the tragedies being played out

in Syria and Libya, events in Southern Mediterranean countries have brought a

whole range of progress and positive transformations, alongside some clearly

negative issues. Beyond the crumbling of the old authoritarian regimes, the

ousting of Ben Ali and Mubarak in the wake of youth uprisings and the palpable

1 Please see the composition of the group at the end of the document.


tensions in almost all Arab countries reveal new issues and a variety of emerging

political stakeholders. These include the newfound voice of young people, of

course (60% of the population is under 25), the upsurge of regional players, the

revival of engaged civil society and the renewed popularity of Islamist parties.

These new players are getting involved in the long-running struggle of

democratic forces, offering a radical criticism of the authoritarian State and

demanding that regional issues be taken into account, and that leaders behave

with dignity and authenticity. Values of freedom and justice are reaffirmed, along

with a more individualistic but also more collective approach to politics, with a

sense of morality or at least citizenship in dealings with the State. For a large

swathe of the population, the State remains primarily responsible for the

inequalities, injustices, economic stagnation and, in particular, the rentier

system.

The traditional system has evidently been profoundly shaken and this movement

is the ongoing expression of claims which will have to be integrated into public

policy in one way or another.

More than just a revolutionary moment in time, a conflict is underway in the

heart of the Arab societies of the Mashriq and Maghreb. This brings together

powerful forces for change - young people, the underprivileged, parties in

rebellion against the State and some sections of the business world – with

formidable forces for order - the army, the middle classes, and part of the Islamist

movements - in a somewhat confused movement for reform and restructuring.

The situation in Libya and Syria shows the potential for disorder lurking behind

these confrontations, while Egypt demonstrates the power of the forces of order.

The Tunisian revolution, however, and the ability of political forces and Tunisian

society as a whole to reach a compromise, offer a model for collaborative

restructuring, a shared success story that the international community needs to

support and strengthen.

In any event, the construction and restructuring phase will be tough. Each

country has its own specific issues, and each State is developing its own

responses to which Europe has to offer varying attitudes.

Europe clearly cannot stand aloof from the process – it has to design, produce

and implement significant contributions to the movement underway in Southern

Mediterranean countries. It has the capacity and the means – for humanitarian

action where necessary, and everywhere else, for training, experience sharing

and technical and financial cooperation programmes to meet the democratic

challenges presented by the transitions in Arab countries.


3 – The constitutional process: towards a new social contract

The leaders of Tunisia and Egypt have faced multiple challenges: the political

challenge of implementing effective governmental structures in troubled

conditions; the security challenge of ensuring basic order; the economic and

social challenges of managing urgent problems associated with a downturn in

investments, exports and tourism. They have achieved some results, primarily

due to the resilience of structures and foreign aid from European and Arab

sources. The urgent issues have been addressed, and a constitutional process

has started.

In Morocco, constitutional change has been steady and gradual, through a

process of sustained reform born out of a consensus that has been skilfully

renewed according to the changing situation and political balance of power. It

has adopted three constitutions in the last two decades, focusing increasingly on

a universal understanding of human rights, declarations of gender equality,

recognition of cultural diversity and a separation of powers to strengthen the

role of parliament and the Head of Government and grant tangible rights to the

opposition and an increased role to civil society. This has helped Morocco find its

own responses to the Arab Spring, ensuring its stability and opening it further to

the tides of reform and change.

The constituent bodies in these various countries have worked in good faith to

define the principles of a new social contract, designed to organise the transition

around three themes: i) the identity of the State in line with the plurality of its

historical foundations, and in particular the place of Islam in society; ii) the

separation of powers and the place of the elected democratic parliament with

regard to the executive; iii) the promotion of new political principles - freedom,

justice, dignity and citizenship.

The constituent bodies are aware of the expectations and demands of civil

society, which centre on three broad issues: i) the question of the State - the

model of authoritarianism and cronyism that followed these countries’

independence is rejected in favour of a reformed State under the rule of law,

respectful of citizens and responsible for maintaining order, ensuring

redistribution of wealth and creating a fairer society; ii) the question of the

economic system, with explicit demands for a new economic and social pact that

breaks away from the rentier system and is concerned with social, generational

and territorial balance; iii) finally, the call from civil society for much greater

citizen participation in policymaking in nations with authoritarian and

bureaucratic traditions.

The Egyptian and Tunisian constitutions, the Moroccan constitution and, to a

certain extent, the draft Libyan constitution are useful, reasoned and, as a whole,

open-minded contributions. They create political and constitutional mechanisms


that now need to be tested. They define rights and objectives, laying out the path

to an ambitious social contract. For the moment, this work is just an initial draft,

a useful, healthy first step in the process – but one that needs to be honed,

confirmed and implemented in political practice.

This second stage has begun in Tunisia and Egypt, and is encountering obvious

difficulties. Firstly, the existence of a constitution does not in itself provide the

methods for implementing actual economic and social reform. In both Tunisia

and Egypt, the process of reframing economic and social policy is still in its

infancy. Finances are scarce, opposition is encountered, and there is a lack of

consensus. On a political level, the reform of the State and the strengthening of

civil society require compromises that are often hard to achieve. The influence of

rentier behaviours and cronyism remains an issue, and the temptation to

obstruct progress or return to the practices of an authoritarian past is very real.

The future of political reform in most of the countries – Egypt, Tunisia, Morocco

and Libya – is still unclear. It will depend on the balance of political power, the

strength of civil society, international support for these changes from both Arab

countries and the West, and to a large extent, on the economic and social

situation of young and low-income people.

4 – The rentier system

There is broad-based agreement that the political and economic development of

Arab societies is held back by the rentier system. Public- and private-sector elites

work together to maintain this system which works to their advantage, excludes

large swathes of society (particularly young people), and operates on both

national and local levels.

In a rentier system, status rather than work is the key to acquiring, consolidating

and improving social position. Connections to political and economic power

(status) are the principal means by which to access financial resources and social

status symbols. Rents and status are inextricably linked. Labour is undervalued,

particularly salaried work (because of a reluctance to accept subordination).

Civil service jobs are sought after because this kind of position provides access to

status and the security associated with it.

This issue is fundamental to the operation of pre-capitalist societies, due to the

precedence of relationships over law (loyalty to the group is more important

than complying with laws derived from an abstract rule). As D. North et al.

demonstrate, this is not abnormal, but the natural way that human societies

everywhere work. This analysis sheds light on much of the way that Southern

Mediterranean societies operate: rural areas are excluded because power is


concentrated in wealthy areas and capital cities; young graduates are

marginalised because jobs are accessed via social capital and not merit; the high

level of major corruption involving Governments and private companies occurs

because power and wealth are linked.

This system only produces enough growth to get the economy off the ground if

the State directs wealth from rents towards investment in industry, often in a

rather authoritarian manner. This is the path chosen by the emerging economies

of South-East Asia.

Powerful undercurrents are already at work in Arab countries, creating a tension

between the rentier system and society. Such elements include mass education,

in particular higher education (despite its shortcomings in terms of quality), and

demographic transition, which is both a cause and effect of these changes.

Urbanisation and access to global information networks have also fuelled the

tension, which has been given expression through the movements seen since

2010. The rentier system is starting to crumble – a cultural shift away from the

power of relationships towards the rule of law is underway.

However, we must not underestimate the opposition to be overcome, because

we are talking about the possibility of the rentier system being undermined in a

situation where the leaders (insiders) are still its main beneficiaries and where

this way of working operates at all levels of society. For example, free trade, the

basis of the Euro-Mediterranean partnership, was intended to undermine the

system of rents in Southern Mediterranean countries. This was not the case,

however, because private rents simply replaced public-sector rents when

countries cut their tariffs on industrial products.

5 – The priority of youth and women’s employment

The economic exclusion of young people is the most significant social injustice in

the region. The unemployment rate among young people in Southern

Mediterranean countries is over 20%. The vast majority of young people in Arab

countries can only find work in the informal sector, despite their qualifications -

just 40% are employed in the formal sector. In Morocco the formal sector

accounts for only 20% of the total workforce. Less than 10% of the jobs in

Southern Mediterranean countries are in the formal private sector (Graph 1).


Graph 1: Employment distribution by contract type

Source: World Bank

Young women face an even more difficult situation. The proportion of women in

the labour force is 25% (the lowest rate in the world), unemployment is almost 5

times higher than that for young men (statistics from Egypt) and their wages are

lower.

Youth unemployment can be explained, in part, by the fact that Small and

Medium Enterprises (SMEs) are underdeveloped and are not growing because

legal and regulatory frameworks are designed for corporations with political

links with the authorities.

Graph 2: Proportion of employment by company size

Source: World Bank

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Yemen Morocco WBG Tunisia Egypt Jordan Iraq UAE Nats. UAEExpats

Private Self Employed & unpaid Private Informal WagePrivate Formal Public


The rentier system in these societies - a system based on close links between

political and business elites - is the core reason for this situation. Recent studies

in Egypt and Tunisia have identified 469 Egyptian companies that were directly

or indirectly linked to businessmen close to President Mubarak and his son, and

220 Tunisian companies associated with the family of President Ben Ali and his

wife. This goes some way to explain why unemployment, inequality and poverty

can increase under crony capitalism, despite high economic growth.

The development of this system flourished in post-2004 Egypt, when a new

Government implemented reforms to liberalise the economy. Companies with

political connections (i.e. with support from the highest levels of Government)

invested in Sinai tourism, gas and oil, the banking system, telecommunications

and construction. As a result, economic growth accelerated. A few businessmen

who were close to power and held posts in Government or Parliament amassed

enormous fortunes. The majority of Egyptians, however, drew no benefit from

the growth and their sense of exclusion even increased.

Graph 3: Egypt – Concentration of politically-connected firms in high energy-

intensive sectors

Source: Diwan, Keefer and Schiffbauer (2013)

It seems that Egyptian economic policy was manipulated to encourage the

growth of politically-connected firms via three channels: commercial protection,

bureaucratic favouritism (e.g. failure to enforce applicable regulations), and

preferential access to energy subsidies. Graph 3 shows that politically-connected

firms were concentrated in high energy-intensive sectors and were therefore

major beneficiaries of the subsidy system.

In Tunisia, companies associated with the Ben Ali family accounted for 3% of

total private-sector output, but generated 20% of net profits, which reflects the

36%

21%

8%

29%

0%

5%

10%

15%

20%

25%

30%

35%

40%

high energy-intensive low energy-intensive

PC firms

all firms


political favours they received from the authorities. Politically-connected firms

in Tunisia were, on average, much larger than their competitors and were

significantly more profitable. Public policy in Tunisia was clearly used to favour

these companies. Graph 4 shows that the sectors in which Ben Ali companies

operated received protection such as prior authorisation, restrictions on foreign

direct investment and fiscal advantages.

Graph 4: Tunisia – Privileges granted to Ben Ali firms

Source: Rijkers, Freund and Nucifora (2014)

The demands of the Arab revolutions for democracy and social justice are closely

tied in with these inequalities. Political democratisation must be undergirded

with economic democratisation.

The Italian Presidency is an opportunity to address these crucial questions in a

radically new context. There are four priorities: a new approach to production

based on reorganising value chains and on SMEs; supporting the rural economy;

promoting education and innovation; and improving the mobility of individuals.

6 – Developing value chains linking Northern and Southern Mediterranean

countries

Job creation, particularly in SMEs in Southern Mediterranean countries, could be

promoted by encouraging Northern and Southern Mediterranean companies to

enter into co-contracting agreements with the use and training of human

resources in the South. These days, production in industry and services involves

worldwide value chains, and countries and companies specialise in certain

production segments or activities rather than specific sectors. The locations of


the various fragments of production processes are being reorganised around

regional bases (not just international hubs). This presents an opportunity for

cooperation between Northern and Southern Mediterranean countries.

Particular attention should be given to knowledge services and intangible

investment activities (research and development, consulting, marketing, etc.)

which would encourage the development of the knowledge economy and

graduate employment.

To encourage the development of value chains connecting the Northern

and Southern Mediterranean, the EU could initiate the renegotiation of free

trade agreements with Southern Mediterranean countries so as to

stimulate both North-South and South-South cooperation. These

negotiations should not shy away from improved integration for services

trade, labour mobility and agricultural interests in Southern countries.

They should also enable Southern Mediterranean countries to participate

in European research and innovation programmes.

7- Supporting the rural economy and regional development

In Southern Mediterranean countries, young people in rural areas experience

much higher levels of economic exclusion than those in urban areas. In 2010 in

Tunisia, graduate unemployment in Sidi Bouzid was 40%, almost three times

higher than the rate for young graduates in the Greater Tunis conurbation, at

14%. In Egypt, the Human Opportunity Index is 15% lower in rural areas, which

means that rural young people have significantly fewer employment

opportunities and lower incomes than their counterparts in urban areas.

Several regions in Southern Mediterranean countries that are a long way from

the seat of political power are ignored, marginalised and underdeveloped. For

example, the poverty rate in the Centre-West region in Tunisia is four times

higher than that of Tunis and twice the national average. In Egypt, the southern

region (Upper Egypt) accounts for 50% of the population, but 83% of those in

extreme poverty, and only receives 25% of public investment.

In general, poverty in Southern Mediterranean countries is a chiefly rural

phenomenon. The vast majority (70% on average) of farms are less than 5

hectares and are managed by a single family.

Table 1: Relative importance of agriculture (% of total, 2011)

Rural population Employment GDP

Algeria 38.4 20.7 8.1

Egypt 57.1 29.2 13.9


Morocco 41.7 40.0 14.3

Tunisia 32.1 16.3 8.2

Source: Arab Organization for Agricultural Development

Table 1 shows that the percentage of the population living in rural areas remains

high in Southern Mediterranean countries, ranging between 32% in Tunisia and

57% in Egypt. These communities depend directly or indirectly on agriculture

for survival. This explains why the contribution of agriculture to employment is

much higher than its contribution to GDP. Over 40% of jobs in Morocco and 30%

of jobs in Egypt are in farming, but this sector accounts for barely 14% of GDP in

both countries. Most of these jobs involve unpaid work on family farms.

Table 2: Relative importance of smallholders (under 5 hectares)

% of total number of

farms

% of cultivated land

Algeria 55.4 11.3

Egypt 98.2 70.7

Morocco 69.8 23.9

Tunisia 53.5 10.9

Source: FAO

Table 2 shows that the vast majority (70% on average) of farms in Southern

Mediterranean countries have less than 5 hectares of land and are generally

managed by a single family. The average size of a family farm is very small (0.7

hectares in Egypt, 1.8 hectares in Algeria, 2.1 hectares in Morocco and 2.2

hectares in Tunisia). The table also illustrates the dichotomy in agriculture in the

South. Despite their large number, smallholders only control an average of 30%

of cultivated land. The rest is in the hands of commercial agriculture.

In the next 20 to 30 years, we are not likely to see a rural exodus in the Southern

Mediterranean countries like that experienced in developed countries (where

the active farming population is between 1% and 5% as opposed to an average of

30% in the Southern Mediterranean). Agriculture in the Southern Mediterranean

is set to remain primarily dominated by a family smallholding model. We now

know, however, that productivity gains are not linked to farm size. The UN

declared 2014 the “International Year of Family Farming” to highlight the

significant potential for improving yields in this type of farm.

In this context, a sustainable and fair development strategy should

include programmes to support small agricultural producers. The EU could


increase the support it has already given these rural development

programmes. It could also play a significant role in opening up access to

European markets for small-scale farmers in Southern Mediterranean

countries.

8 – Fostering the development of the knowledge economy

For Southern Mediterranean countries to successfully become part of

international value chains they need to develop a knowledge and innovation-

based economy. A new youth-oriented social contract could be built on the

knowledge economy, covering education and qualifications, the innovation

system and information and communication infrastructures.

Graph 5: Proportion of unemployed University graduates, 2000 and 2010

Source: CMI

A high-quality education system is required in order to develop a knowledge

economy. The quality of education in Southern Mediterranean countries is

significantly under par, given the sizeable funds that have been invested in this

area since these countries gained their independence. Students' results in

international tests are disappointing. For example, 75% of primary school pupils

in Morocco and 65% of primary school pupils in Tunisia score below average in

international maths tests. Furthermore, education systems in Southern

Mediterranean countries do not encourage innovation, teamwork or risk-taking.

They are poorly suited to the requirements of today’s knowledge economies. As

a result, 40% of companies operating in Southern Mediterranean countries

consider that the lack of qualified personnel is a serious obstacle to their


development. It should be noted that unemployment in Southern Mediterranean

countries increases in line with education level.

Europe could consider launching an initiative with Southern Mediterranean countries to support their efforts to modernise their education systems and encourage research and innovation within the framework of a North-South partnership.

9- Mobility of individuals

Europe could re-examine its policy on mobility of individuals. The Partnership

for Democracy and Shared Prosperity reports that: “People-to-people contacts

are important to promote mutual understanding and business, which will benefit

the cultural and economic development of the entire Mediterranean region...” It

states that “the Commission will work with Member States on legal migration

legislation and visa policy to support the goal of enhanced mobility, in particular

for students, researchers and business persons.”

In order to support the processes of change in Southern Mediterranean

countries, the EU should encourage exchanges between diaspora

communities and their native countries by promoting mobility of

individuals. This does not mean completely opening borders to

international migration, but ensuring that those who are legally resident in

Europe have a stable and secure status.

An effective immigration policy manages migrant mobility while

guaranteeing them the transferability and continuity of their entitlements.

This means that migrants could return to invest and work in their native

countries, without losing their entitlements and the right to come and go.

This would encourage them to take investment risks in both their host and

native countries.

* * * * * *

Economic and social transition will inevitably entail rethinking previous

development models. Three points should be noted: i) it is essential to pursue

economic openness, but in such a way as to take into account the actual

conditions of Southern Mediterranean economies, their poor redistributive

capacity (apart from the oil-producing economies) and the new realities in

North-South relationships, especially with regard to the reorganisation of value

chains; ii) attention should be given to the resilience of economies at their points

of weakness (rural sector, small informal businesses) and iii) the goal is to create

an inclusive society by extending opportunities to groups in society that have

until now been excluded from jobs and decision-making (young people and

women), particularly in the regions (decentralisation).


Today, Mediterranean societies in the North and the South face common

challenges and opportunities. On both sides, the risk is ongoing slow growth,

persistent underemployment and increasing inequalities and identity-related

tensions.

They can decide to work together to define new policies for cooperation and

strategies for action that will create shared growth and prosperity - the only

realistic way forward both for a Europe struggling for growth and for Southern

Mediterranean economies struggling to ensure that development benefits

everyone.

* * * * * *


Members of the working group:

This group is made up of economists and political analysts from both the Northern and Southern Mediterranean, individually selected for their understanding of the region. Some members of the group have held or currently hold high office in public institutions in their respective countries. However, their contribution to the group is strictly personal, and any opinions expressed in the attached document reflect only the views of their authors.

Ms Ayça AKARÇAY-GÜRBÜZ, Mr Karim ALLAOUI, Mr Adel A. BESHAI, Mr

Mohammad CHAFIKI, Mr Jean-Claude COUSSERAN, Mr Shantayanan DEVARAJAN,

Mr Pedro DE LIMA, Mr Mourad EZZINE, Mr Hafez GHANEM, Mr Elyes JOUINI, Mr

Nejmeddine HAMROUNI, Ms Agnès LEVALLOIS, Ms Giulia MARCHESINI, Mr Henry

MARTY-GAUQUIE, Mr Radhi MEDDEB, Mr Mongi SMAILI, Mr El Mouhoub

MOUHOUD, Mr Jacques OULD AOUDIA, Mr Olivier RAY, Mr Jean-Louis REIFFERS.

Discussion%20series%20on%20economic%20transition%20in%20the%20mediterranean paper%20for%20eu%20itali

Documents

Transcript of Discussion%20series%20on%20economic%20transition%20in%20the%20mediterranean paper%20for%20eu%20itali