Naples – Castel dell’Ovo; June 8-9, 2006

1. Bridging the gap: the role of trade and FDI in the MediterraneanDiscussion of- Export catching up in the Mediterranean countries: long term trends and prospectsby J.R. Chaponnière and M. Lautier- Do Euro-med agreements improve democracy and the quality of institutions in EU partner countries?by C. Duc and E. Lavallee- In search of development along the Southern border: The economic models behind the Euro-Mediterranean Partenership and the European Neighbouring Policyby I. Martin Discussant: Sergio de Nardis Naples – Castel dell’Ovo; June 8-9, 2006

2. Three papers on Med countries: different (though related) questions, different approaches, but conclusions share a common (negative) flavour • Different questions addressed in the 3 papers 1. “C-L” paper: have the (Southern) Med countries upgraded the quality of their export baskets (converging towards those of the industrialized economies) during the last 35 years (a period which includes the EU-Med agreements)? 2. “D-L” paper: have the EU-Med agreements improved the quality of economic governance and institutions in the Med countries? 3. Martin paper: has the model underlying the Euro-Med Partenership (“just let the market forces work freely: trade liberalization+structural reforms”) proved adequate, delivering tangible results in the Med economies? • But conclusions have much in common: unfavourable average performance (with some exceptions) of the Med countries and negative evaluation of the economic and political achievements after the Barcellona Declaration and the subsequent bilateral trade agreements(mildly negative in “D-L”, strongly negative in Martin).

3. “C-L” paper main findings“wrong” product specialization in the Med countries? On the grounds of an indicator of the level of quality/productivity of the export basket of the Med economies (similar to the one used by Hausmann-Rodrick, 2003); “C-L” find • Contrary to what observed in other emerging countries (East-Asia, Latin America, Nic-1, Nic-2), the quality/productivity level of the export baskets of the (8) Med countries didn’t improve during the period 1967-2003; quality indicators were worse in 2003 than in 1967; exceptions were Israel and, to a lesser extent, Turkey and Egypt. • Contrary to what observed in other emerging economies, increase in propensity to export manufactures (X/GDP) has been accompanied by no clear trend of quality upgrading in the Med countries (actually in Tunisia and Morocco quality fell). • Not considering primary products based industries and textile-clothing, no export diversification in the manufacturing industry was observed (with the exception of Turkey and Israel). • Since 1994, in the period EU-Med agreements came into force, export niches were concentrated in products for which EU demand has been growing less than the average.

4. Some observations on “C-L” paper • The Chaponnière-Lautier/Hausmann-Rodrick indicator is interesting. A doubt on the capacity to disentangle properly quality differences. Is it a too raw measure? Example: footwear in considered a low quality/productivity product (this industry is large in low productivity countries), but there are high and low quality footwear industries, with the former located in industrial (high productivity) countries. • When constructing the “export niches”, primary products intensive industries and textile-clothing are excluded; not clear why, since Med countries have important comparative advantages in these sectors; how would the picture be considering also these products? • These observations do not impugn the general conclusion: findings of no appreciable quality upgrading and of no product diversification in the period 1967-2003 are clear.

5. “D-L” paper main findings“Instituion building” was hardly affected by EU-Med agreements On the grounds of econometric estimates (“within sample comparisons” and “difference-in-differences”), “D-L” test the influence of bilateral agreements between EU and Med countries on democracy (political rights and civil liberties) and governance (corruption, red-tapes, law and order); they find • Uncertain (unclear) effects of the agreements on general governance, but positive influence on the component of governance represented by judicial systems. • No effect at all of the EU-Med agreements on the indicator of democratic principles and institutions.

6. Some observations on “D-L” paper • The period of EU-Med agreements is too short (just Tunisia and Israel signed in 1995, Syria signed in 2004) and the implementation too slow to be able to detect some effect on democratic variables that show very small time variability. • The authors recognise this potential problem and propose difference-in-differences estimation, based on the testing of a treatment effect (EU-Med agreements) controllling for a non-treated group; they rely their conclusions mostly on these estimates. • Yet, the experimental group (the Med economies) and the control group are heterogeneous; a problem not eliminated by introducing extra independent variables. In the control group there are Mexico, the accessing Eastern countries, Asian economies, Latin American countries; all very different from the Med ones; morevoer they are affectd by free-trade agreements with economies other than the EU (e.g. Nafta, Mercosur) or by different (deeper) forms of agreements with the EU (Eastern countries). • Presumption; on the grounds of these observations, one could deem questionable the positive significant effect on “law and order”, detected for the treatment “EU-Med agreements”.

7. Martin’s paper main findingsFailure of the model underlying EU-Med partnership as to both economic and political targets… Ivàn Martìn’s critical assessment of the EU-Mediterranean partnership experience hinges on poor achievements in terms of economic growth and civil rights in Med countries. Main causes of the failure are • Agriculture excluded from FT agreements. • FT agreements substituted former preferential agreements, in force since the mid 70s’: no value added, on the contrary “value subtracted“ since the vanishing of the Multifiber agreement suppressed preference for Med countries’ textile products. • No significant FDI flows in the Med economies (no South-South integration, not reduced political prejudice, governance uncertainty). • Insufficient unilateral funds (MEDA: about 3 euro per person and per year in the receiving country in 1995-2002). • Asymmetry of the FT agreements since they regarded mainly the opening of the Med countries to EU industrial products, while agricultural goods were still excluded and Meds industrial goods had already granted free access in the EU market under previous provisions; no reallocation of Meds’ resources to new sectors; likely short run harm, with benefits (if any) only in the very long run.

8. Martin’s paper main findings …not much more than this can be expected from the European Neighbourhood Policy (ENP)? The ENP approach (based on the EU accession model) is Promising on paper • ENP replicates the accession process approach that proved effective in the case of Central-Eastern countries: pre-defined results (adoption of the EU legislation for the internal market) whose gradual realization is monitored by the EC that plays a technical role in supervising and assessing advancements. • In principle, full access to the EU markets for all products (even agricultural products) and free movement of people. • Participation in the EU Regional policy (cohesion funds). …quite uncertain in practice • Adoption of the EU legal framework is partial, free flow of workers removed from Action Plans, full access of agricultural goods subject to negotiation, increase of funds only marginal w.r.t. current MEDA. • Incentives to reform are not comparable with those of the Central-Eastern economies that, in exchange of the sovereignity loss, had/have the prospect of a real accessing in the EU (and the single market benefits); it is not the same for Med countries.

9. Summing up: what can be learned from these useful papers… • Substantially confirmed evidence coming from other authors (e.g. Ferragina, Giovannetti, Pastore, 2005) about the existence of large gaps between potential and actual trade of Meds vis-à-vis EU; despite post-Barcellona FT agreements, persistent and increasing potential of unexploited trade; integration between Med and EU didn’t accelerate, quite the opposite it slowed down. • These agreements are not only “young”, they are also being implemented extremely slowly: only Tunisia will be able to abate tariffs by 2010; difficult to detect trade creation effects (if any) with such a slow pace: trade liberalization is much late w.r.t. Barcellona schedules • Generally, it is unwise to expect much from this kind of agreements, particularly in terms of institution building and governance upgrading: barring the euro rethoric of solemn declarations, there are no enforcement and no incentives to make changes that are awkward as those involving institutions and governance.

10. …and what opinion I formed from reading • Unfairness. Med FTAs are umbalanced agreements: exclusion of agricultural products, where Meds have comparative advantagesl. NOTE: oppostion to liberalization is not from the rich farmers of North Europe (usually the fiercer opponent to changes of CAP), but from the “olive belt” of the EU, i.e. the countries that are mostly interested in deepening North-South trade, whose agricultural products are in direct competition with those of the Med economies. • Hub-and-spoke. The form of bilateral agreements discourages intra-Meds integration, particularly in manufacturing (since the main suppliers of these goods are the EU countries); at best these agreements may lead to a hub-and-spoke system, in which Meds remain isolated trading partners; not much to gain for a peripheric country in this perspective; weak capacity to attract Fdi. • Crucial, the global environment. Unfavourable environment. Eastward enlargement in the 2nd half of 90s was a too important process for the countries involved. Effective institutional changes and strong commitment to reform (due to the actual working of Europe Agreements: perspective of joining EU made rapid adoption of Acquis Communitaire possible) attracted resources and trade, with diversion effects elsewhere (crowding out Med goods and territory): no surprise that any other trade integration process, involving EU, was negatively affected by enlargement. • Bottom line: start again the experiment of Med integration from scratch, bearing the Europe Agreements experience in mind. But the point is: how feasible is to mimic that experience without the real perspective of EU accession?