Mehmet Ugur Jean Monnet Reader

European Political Economy

Credible Commitments in Euro-Med Partnership : Evidence from Turkey and beyond

The Mediterranean and the New Euro-Mediterranean PerspectivesDaedalos Institute of Geopolitics

Nicosia, 9-10 October 2008

Plan

1. Credible commitments: an anathema in international politics?

2. 3 Pre-requisites for an effective EMP

3. Evidence from Turkey

4. Evidence from other Mediterranean countries

5. Conclusions

Credible commitments: Do they matter?

p

Reforms (R)

Constituent Support (S)

Ip

I’p

P’

Re

Se Sp S’p

R’p Rp

FPF’

”

EU Conditionality

FPF

Yes, they do!

Think of EU conditionality (for membership or in the context of EMP)

If both parties (EU and partner) can commit credibly, the partner can achieve higher policy reform at R’p > Rp and enjoy higher constituent support at S’p > Sp.

The difference can be labelled as credibility bonus.

But: there is no such thing as free lunch. Credible commitment implies reduced scope for discretion!

For 2 reasons: 1. Problems with discretionary policy 2. Reputational gains

Problems with discretionary policy a. Discretion has not been associated with:

i. good governance, ii. economic performance, or iii. political stability

b. Returns on discretionary policy declines as intra-country heterogeneity increases.

c. Returns on discretionary policy declines as international integration deepens.

Reputational gains (from tying one’s hands)a. Credible commitment reduces the cost of policy reform

(credibility bonus).b. In initial stages, the marginal cost of reform is low but the

marginal benefits are high.c. Credible commitments for ‘winning friends’.

Credible commitments: Why tie one’s hands?

The Euro-Med Partnership (EMP) will be effective if the following conditions can be satisfied:

1. Agreements must be as complete as possible

2. Unilateral EU side-payments to MCs must be large enough to:a. Reduce the cost of reforms; and b. Reflect the level of positive externalities associated with

reforms in MCs.

3. EU must come up with front-loaded side-payment offers, which must: a. Be as close as possible to the eventual offer, and b. Be related to the MC’s future discount rate

Tovias and Ugur (2004), ‘Can the EU anchor policy reform? The case of the Euro-Med Partnership, EU Politics, vol. 5, no. 4, pp. 395-418.

3 Pre-requisites for an effective EMP

Before 1999: Falling growth rates, increasing risks

Evidence from Turkey - 1

Evidence from Turkey- 2Before 1999: High and persistent inequality

Evidence from Turkey - 3

Before 1999: shorter government tenure

Number of governments and PMs

UK 1990-97 3 governments, 2 PMs

Belgium 1992-99 2 governments, 1 PM

Greece 1990-2004 3 governments, 3 PMs

Ireland 1989-97 4 governments, 3 PMs

Spain 1993-2000 3 governments, 3 PMs

Turkey 1989-99 10 governments, 7 PMs

Evidence from Turkey – 4After 1999: Growth expectations revised upwards

Benchmark Turkish GDP growth in the 1990s: 3.93%

1. Deutsche Bank (2005) - Projection period: 2006-2020– Turkey in the EU : 4.1%– Turkey returns to the 1990s : 3.1%– Turkey in the Middle East : 1.9%

2. ABN-AMRO (2004)– With accession reforms only : 4.9% (2005-2013)– Turkey in a slow-growth EU : 5.0% (2014-2024)– Turkey in a fast-growth EU : 6.2% (2014-2024)

Evidence from Turkey - 5After 1999: Growth expectations revised upwards

Benchmark Turkish GDP growth in the 1990s: 3.93%

3. OECD (2004) - Projection period: 2000-2014– Optimist scenario : 7.4%– Medium growth scenario : 5.2%– Low growth scenario : 3.1%

4. Dervis et al (2004) – Projection period: 2005-2025– In domestic currency : 5.0% – In foreign currency : 6.0%

Evidence from Beyond Turkey - 1After 1999: Improved consistency in MEDA?

MEDA I: 1995-1999 MEDA II: 2000-2006Commitment ( C )

Payment (P) P/C (%)

Commitment ( C )

Payment (P) P/C (%)

BilateralAlgeria 164.0 30.2 18.0 338.8 142.3 42.0

Egypt 686.0 157.0 23.0 592.5 695.4 117.0Jordan 254.0 108.4 43.0 331.4 345.5 104.0

Lebanon 182.0 1.2 1.0 132.7 181.5 137.0Morocco 660.0 127.5 19.0 980.1 917.4 94.0

Syria 101.0 0.0 0.0 179.7 90.9 51.0Tunisia 428.0 39.0 39.0 517.6 489.2 95.0

West Bank and Gaza 111.0 53.0 53.0 522.3 486.4 93.0Total bilateral 2586.0 25.0 25.0 3595.1 3348.6 93.0Regioanl 471.0 47.0 47.0 1052.1 711.9 68.0TOTAL 3057.0 874.0 29.0 4647.0 4060.0 87.0

Source: EU Commission

Evidence from Beyond Turkey -2 Any change in trade patterns?

Share of Mediterranean countries in EU-25 imports and expports

2000 2002 2002 2003 2004 2005 2006

Imports 6.5 6.9 7.2 7.2 7.3 7.5 7.3Exports 9.7 8.2 8.5 8.8 9.5 9.5 9.0Balance -3.2 -1.3 -1.3 -1.6 -2.2 -2.0 -1.7

Source: Eurostat 2007

Conclusions• Closer integration with the EU involves costs and benefits

• Mediterranean countries face high adjustment costs, associated with high returns.

• The EU faces low adjustment costs associated with high returns

• Credible commitment mechanisms are required to address this asymmetry

• Credible commitments can reduce the costs and increase the benefits of policy reform in the context of EMP

• Evidence suggests that credible commitment mechanisms have worked in Turkey from 2002 – 2005.

• After 2005, EU-Turkey accession negotiations lost not only pace, but also credibility.

• EMP: some improvement, but too much remains to be done.