Modern financial systems key to Mediterranean growth

MEDITERRANEAN COUNTRIES. The €9bn invested by the European Commission  between 1995 and 2006 to support economic modernisation and reform in Mediterranean countries were not enough to fully close the gap between countries to the north of the Mediterranean Sea and those to the south. The situation is likely to remain unchanged over the next few years, despite €3.2bn apportioned for 2007-2013 as part of the EU’s European Neighbourhood Policy and an increase in European Investment Bank  interventions from €6bn between 2002 and 2006 to €10.7bn from 2007 to 2013.

There are myriad reasons, but delays in modernising the financial systems – banks and stock markets where appropriate – are a key factor. “As a result of these delays, the money that comes in is not directed towards productive investments”, explains Simon Neaime from the Institute of Financial Economics at the American University of Beirut. Not that existing efforts should be reduced. “It’s vital that the current aid programme is continued to help them grow,” he adds. 

In a study to be published on the FEMISE  website (FEM33-20), Mr Neaime takes a detailed look at the financial systems of seven Mediterranean countries (Egypt, Lebanon, Morocco, Tunisia, Algeria, Jordan and Turkey) and their links with economic growth. His findings can be summed up as follows: significant modernisation efforts are under way and have been accelerated in the last few years, but there are still major obstacles to investment.

One of these obstacles is that banks dominate the movement of capital despite not yet having the expertise required to evaluate investment projects. The study also highlights the weakness of banking products and a lack of transparency on still-embryonic stock markets. “The stock markets created in Casablanca and Tunis have only around 50 listed companies, most of which are publicly owned. It’s still nowhere near enough,” claims Mr Neaime, who also calls for total liberalisation of capital movement and more flexible exchange rates.

In his view, whether an economy is open or closed does not determine how well it copes with global financial crises. “What matter are its growth and its ability to deal with the unexpected. Mediterranean countries were fairly successful in staving off the 2008 crisis because they were already going in the right direction. They must keep it up,” he stresses.

However, Mr Neaime acknowledges that the protection of capital accounts enables financial reform to go ahead without too much risk of being exposed to crises. That is why he advocates the “gradual” lifting of barriers to capital flows “at the same pace as financial reform”. More haste, less speed.

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