EU-MED and the Investment Climate

By Mustapha K. NabliChief Economist, Middle East and North Africa Region

World Bank

2

Outline

• 6 years after the Barcelona conference – where do we stand? – Low levels of private investment and FDI in MED countries– Linked to lack of improvements in the investment climate

• Why slow progress on structural reforms?– Oil and aid– Socio-economic pressures– Governance matters, especially in areas which affect the business

environment

• What can be done?

3

Private investment levels are stagnant or declining

(Private Investment as % of GDP)

0

5

10

15

20

25

Egypt Jordan Morocco Tunisia

90/94 95/98 99/2000

4

Unlike in countries with regional trade agreements like Poland and Mexico (EU accession and NAFTA)

(Private investment as % of GDP)

02468

101214161820

MED4 Poland Mexico

90/94 95/98 99/2000

5

FDI has increased in some of the Med countries and fallen in some…

FDI as % of GDP.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Egypt Jordan Morocco Tunisia

Perc

ent o

f GD

P

90/94 95/97 98/99

6

… but they lag behind CEE accession countries (Poland, Hungary and Czech Republic) and Mexico.

FDI as % of GDP.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

MED4 Mexico CEE3

Perc

ent o

f GD

P

90/94 95/97 98/99

7

Slow progress on structural reforms in the MENA countries. (Structural reform index, 100=best value of all countries,

all years 1990-1998).

45

50

55

60

65

70

75

80

85

90

MED4 Mexico Poland and Hungary

1990 1998Source: Dasgupta, Keller and Srinivasan, (2001), World Bank.

8

What accounts for the slow progress on improving the investment climate?

• Access to “easy money” reduces incentives to foster reform– Mineral exports and aid money has been reduced but

remains high compared to other countries• Political inertia in advancing broad reforms, in

relation to social and political tensions– Labor market pressures increase the risk for political

instability (which also blocks reform)• Governance issues

9

Governance matters

– The four MED countries generally performing well on

governance compared to other MNA countries– But not to the rest of the world, especially for areas

which strongly affect the business environment• Opportunities for voice and mechanisms ensuring

accountability of government:– Political rights, transparency of legal system,

responsiveness of government to its people, business community voice and access to information, etc.

– The level of political participation is key

10

MED countries have a low level of political participation and low level of voice and accountability mechanisms...

Voice and accountability vs. level of political participation

MOREGY TUN

JOR

HUNCZE

MEX

0

1

2

3

4

5

6

-10 -5 0 5 10Level of political participation

Leve

l of v

oice

and

acc

ount

abili

ty

MED (4) COMPARATORS OTHER MNA

Source: Kauffmann, Kraay, Zoido-Lóbaton (1999), World Bank, and UMC Polity Index

11

… and a low level of voice and accountability relative to their income levels :

Voice and accountability vs. GDP per capita

JOR

TUNEGYMOR

HUNCZEPOL

MEX

0

1

2

3

4

5

6

6.0 7.0 8.0 9.0 10.0 11.0GDP per capita (ln)

Leve

l of v

oice

and

acc

ount

abili

ty

MED (4) COMPARATORS OTHER MNA

Source: Kauffmann, Kraay, Zoido-Lóbaton (1999), World Bank.

12

Governance – an agenda