Towards a concerted economic strategy in the Mediterranean
Published : Friday 06 November 2015
Despite their geographical and cultural proximity, Europe and Southern and Eastern Mediterranean Countries (SEMC) have still not developed a real common economic strategy, as Japan managed to do in the 1960s in Asia, or Germany in the 1990s with Central and Eastern European countries. Yet each region could draw solutions from the other’s territory to address its own challenges.
Emergence of the concept of coproduction
The need to establish a new form of partnership is becoming increasingly apparent with the strengthening of structural complementarities, for countries and their companies. The concept of coproduction, defined as the joint development of a value chain engaging partners in long-term investments, has come about through successful inclusive industrial partnerships (such as Renault, Siemens, Safran and Sofiprotéol in the Maghreb region and Jet Alu Maroc and Cevital towards Europe). However, while this mechanism clearly has benefits for nations and companies on both sides of the Mediterranean, there is still not sufficient momentum to generate a sustainable and shared development.
How are complementarities being developed on both sides of the mediterranean?
In order to gauge the level of their complementarities, and therefore of the possible synergies, a comparative analysis of 4 Northern countries (EU4: France, Germany, Italy, Spain) and of 7 Southern countries (SEMC7: Algeria, Egypt, Jordan, Lebanon, Morocco, Tunisia, Turkey) came up with the following results:
Growth and development:
The SEMC7 have managed to get through the recent regional and global crises by maintaining a significant growth rate. Over the past 10 years, GDP has risen at an annual rate of 4.43%. However, these countries are relatively vulnerable to the European economic situation which has, nevertheless, hindered their economic potential.
Consequently, the level of growth is still too low compared to demographic pressure (1.5% a year) in order to address the economic and social challenges of sustainable development for all (real GDP per capita in the SEMC7 stands at USD 6,000 a year).
However, in the medium-term, thanks to the emergence of middle classes and the strategic positioning of the SEMC, which are at the crossroads of a dynamic Africa and a Middle East with increasing purchasing power, there are signs of a very promising market outlook (middle-class consumption expenditure in the MENA region is expected to exceed USD 2.2bn by 2030, against USD 0.9bn today).
Demography:
From a demographic standpoint, there is a clear complementarity between the EU4 and SEMC7. The sample countries today have an equivalent population level (some 251 million inhabitants in each area surveyed), but in Europe, the median age is 43 against 27.5 for the SEMC7. Consequently, the working population stands at 48% of the population in the North and only 34.5% of the population of the SEMC. The latter would therefore appear to be ideally positioned to provide a response to the generational challenges of the two regions.
Finance:
The two areas have strong financial links, especially in the Maghreb region, but they do not lead to sufficient structural and productive investments. Indeed, remittances from the EU4 to the SEMC7, mainly by migrants, reached USD 25bn in 2014. This is 12 times more than development assistance (USD 2.6bn in 2014) and approximately 6 times the amount of Foreign Direct Investments (some USD 4bn in 2014) in the SEMC7. However, as estimated by the African Development Bank, 75% of remittances are for immediate consumption. And among the remaining 25%, it is recognized that only a small proportion is destined for a productive use.
Trade and integration:
In Northern countries, regional integration fully plays its role. The development of the common market has boosted trade and allowed regional firms to reach a critical size, allowing them to be globally competitive.
Conversely, subregional trade in the Southern Mediterranean is sluggish due to the lack of economic integration (the share of trade between the SEMC7 accounts for 8% of their total trade). Domestic and regional markets have been unable to support the development of larger SEMC7 companies, which have now marginal access to European outlets. In contrast, these companies are highly dependent on their European suppliers for inputs and intermediate products. Nonetheless, manufactured and mechanical products have gradually surpassed agricultural production for SEMC7 exports. More technology-intensive sectors are also structuring themselves, but are slow in really taking off.
Investment dynamics:
Fluctuations in Foreign Direct Investments are highly correlated with the global economic and political situation, and therefore with the confidence and soundness of companies. This relationship is found in both the EU4 and SEMC7, where the succession of local and international crises has had a strong impact on the behavior of investors. FDI towards the South have provided too little added value: the oil industry in Algeria and Egypt, real estate in Morocco, and trade in Lebanon continue to be the niches preferred by investors.
Furthermore, in the SEMC7, the decline in European FDI in 2007 has not been offset by investments from other regions. The promise of growth in the Southern Mediterranean comes up against a perception of instability fostered by the excessive media coverage of negative news. Yet, according to data collected by the World Economic Forum Executive Opinion Survey, the financial and security risk is not systematically lower in the EU4.
Competitiveness and complementarity:
Finally, the alignment of SEMC production conditions with EU standards is now reflected in the results of the main international indicators.
The convergence of competitiveness on factor and efficiency endowments, as well as existing complementarities on innovation, are a perfect illustration of the interest of coproduction.
These dynamics are able to combine a redistribution of the value chain using the mutual competitive advantages, while developing the transfer of skills and capital in concerted market strategies. Consequently, the position of the EU4 and SEMC7 in the Global Competitiveness Index strongly suggests that there are now optimal conditions for the success of this type of operation.
Need to extend momentum to SMEs
Large groups have already taken the plunge, but there are still too few SMEs taking this path in order to fully benefit the economies. Due to a lack of knowledge of the local environment, incentive tax mechanisms, the facility to create links with relevant partners, or have appropriate support for their internationalization process, the perceived risk appears too high for these companies. Governments are seeking to respond to these needs by facilitating the creation of technology parks, liberalizing the business climate, centralizing assistance programs and planning infrastructure projects that contribute to transport or energy supply, but sometimes without an overall consistency and/or specific sectoral strategy. Major reforms are also needed to reduce bureaucracy, which really puts off smaller companies.
To optimize their resources, companies can also rely on sectoral associations or specialized agencies, and even count on employees from diasporas who can facilitate their establishment in a new context. However, the precondition for a large-scale movement by this business sector continues to be awareness of the synergies generated by coproduction, both by the companies themselves and public authorities, which can consequently reduce the risks perceived and entry costs (cost and time for procedures, assurance of the quality of interlocutors and of infrastructure for target sectors…).
A mutually beneficial alliance
In short, the EU and SEMC are following trajectories that are still too divergent, whereas each region has solutions to respond to the challenges of the other:
- Companies in the European Union are seeking greater competitiveness, at constant cost/quality, in order to remain competitive at international level. They will also need a workforce that the local labor market will not be able to provide. In return, they can offer and transfer knowledge and techniques that will bring about a division of labor, which ensures greater effectiveness.
- SEMC companies, for their part, are seeking a greater assimilation of technology, as well as a diversification of production and a redistribution of added value that can support local economic and social development. They can offer young and well-trained populations, as well as a much more flexible business environment.
The combination of the competitive advantages of the two regions would significantly boost companies that have opted for coproduction.
The renewed competitiveness would give them a promising position, both on the European market and in the SEMC. This type of partnership would also make it possible to capture the middle-class market in the Middle East and Africa on the periphery of this new set-up.
By grouping together, it is possible to achieve significant surplus growth, a positive-sum game that will create jobs and opportunities on both sides. This issue is even more crucial given that unemployment is today a feeding-ground for populism and weakens States, both in the North and South.
Martin Fleury, Economist and founding partner of R.M.D.A. and expert of the Mediterranean Coproduction Observatory