Proceedings Benefiting from Globalization

Many developing countries are pursuing reform programs to liberalize their economies and foster greater integration into the world economy. These policies bring huge opportunities for attracting investment and increasing growth: but they depend heavily on governments creating a suitable business environment.

The workshop "Benefiting from Globalization" looked at the new trade agenda in MENA, especially the issues of regional co-operation. Participants examined the ability of the financial sector to withstand the stresses of the global market, and considered the experience of governments seeking to foster the competitiveness of domestic industries.

Managing global trade

How best can countries benefit from globalization? Should MENA countries not only build the AFTA (Arab Free Trade Agreement), but also follow a common strategy for negotiations with their largest external trade partner, the European Union? And would multiple agreements with other regional blocks put MENA in a stronger position at the Euro-Mediterranean talks and with the World Trade Organization (WTO)?

The discussions on managing global integration raised a welter of questions. Robert Lawrence, of Harvard University, highlighted an important dilemma in saying: "We may live increasingly in a global economy, but we still live in and are morally bound to nation states." The dilemma is strong in developing countries, explained Lawrence. After colonialism, they favored import-substitution and sheltering their industries behind high tariffs; "globophobia" saw them retreat behind sovereign frontiers in fear of invasion by multi-national companies.

Professor Lawrence stressed that sharing knowledge and technology is the way forward. There can be no return to isolationism: MENA captures only 3 to 4 percent of world FDI (foreign direct investment), and needs to attract more. Many speakers argued that integration into the world economy could come best through greater regional co-operation: without it, each country would be vertically attached to a powerful outside group, usually to the north.

Analyzing the Asian crisis

Might the severe financial crisis in Asia illustrate perils in globalization? Chalongphob Sussangkarn, of the Thailand Development Research Institute, argued against ready parallels between MENA and the Asian countries, stressing that MENA did not suffer significant spillover from the Asian crisis, except for decreasing oil revenues. MENA's problems lay elsewhere: with managing capital flow, high tariffs and a judicial system that in most countries is unacceptable for foreign investors. Karim Nashashibi, Director of the International Monetary Fund, identified six major problem areas for MENA: a danger of inflation; a lack of capital account convertibility; high interest rates with low domestic credit; fixed exchange rates; and a lack of standard accounting and reliable information.

From AFTA to Euro-Med?

Most participants supported strengthening AFTA. "Regional integration has too often been shallow, taking the form of preferential tariffs in highly protected economies," said Bernard Hoekman of the World Bank. The AFTA is to eliminate trade barriers between member-states over a ten-year period beginning in 1998. The case for strengthening AFTA was summarized by Imed Limam, of the Arab Planning Institute, Kuwait: all MENA countries have reform packages, and these need to be harmonized; a real free trade area will minimize subsequent costs of globalization; and MENA could enter North-South negotiations as a bloc; AFTA would help attract international investment, which has slackened in the past three years, and encourage the return of domestic investments now in international markets.

“Turkey has signed to reach zero trade barriers with the EU within ten years”

Some countries—including Israel, Turkey and Tunisia—have individual trade agreements with the EU. Some participants argued that such links benefit the regional economic power (the Hub; that is, the EU) at the expense of the individual partner countries—and many raised also concerns about the effect of Euro-Med on local industries. Subiday Togan, of Bilkent University, was skeptical, noting that "Turkey has signed to reach zero trade barriers with the EU within ten years, yet its industry and agriculture are healthy."

Alfred Tovias, of the Hebrew University, argued that the potential for new trade in MENA was limited compared to the possibilities offered by the EU. Israeli GNP equals one percent of EU GNP, and all Arab countries' trade together represents just four percent. MENA, even if integrated under AFTA, could not present a powerful position during the Euro-Med Trade Agreement. Indeed, it should seek to negotiate additional trade agreements with other Hubs prior to negotiation with the EU. Citing Israel, Tovias argued that individual countries could enter trade agreements with many Hubs—even though the EU represents 50 percent of MENA's trade.

Participants concluded that the Euro-Med Agreement is important to the region economically and politically. But prior integration as part of the AFTA would enable the countries to negotiate as a Hub. Time is critical since some countries are already negotiating their own agreements with the EU.

Opening up protected economies

The workshop reviewed country cases of mise a-niveau programs, which are designed to help enterprises rise to the challenge of international competition as countries open up their economies. Faycal Lakhoua, of Institut Arabe des Chefs d'Enterprises, Tunisia, explained that from 1986 onwards Tunisia's shift from protection led to higher growth rates and higher social spending. Success depends on clear macro-economic policies, a market economy without subsidies and monopolies, and an adequate legal framework. The mise a-niveau program began in 1995, with 242 enterprises, and total spending from 1996 to 2000 is put at $2.5 billion: the program involves reforming education and training to meet increasing demand for qualified, flexible professionals.

Slim Tlitli, Director of the Bureau de Mise a-Niveau in Tunis, said that Tunisian firms had gained 20-30 percent productivity by reorganizing their production; but remaining difficulties include a 35 percent average tariff barrier, and trade distortions caused by the partial lifting of barriers in some sectors. In Egypt, said Heba Handoussa (of the Economic Research Forum for the Arab Countries, Iran and Turkey), mise a-nouveau is about to be launched after a two-year pilot scheme. The government will use foreign experts at sectoral level, especially where the industry is dynamic, and will consider investment in training programs. Jameleddine Jameli, of the Moroccan Ministry of Industry, outlined his country's two-level approach at macro (fiscal reform, greater competition in banking, privatization) and enterprise (subventions, access to credit, training) levels. Professional association, he said, played a major role by creating technical centers. To evaluate outcomes, a monitoring unit follows up 70 indicators and makes comparisons with 16 other countries.

Banking: meeting the stress tests

Banks are a means of mobilizing resources for growth and so a key part of any mise a-niveau program. How direct should their role be? Moncef Cheikh Rouhou (of Assabah Press, Tunisia) argued that banks should assess the feasibility of the projects of the enterprises to which they lend money. Azzedine Saidane, the Director-General of the Arab Banking Corporation, Tunisia, stressed that the priority for banks was to put their own house in order—becoming quality-oriented, competitive, free of political interference and transparent.

Reviewing Tunisia, Saidane found the country "overbanked" with a central bank, 13 commercial banks, eight development banks, eight off-shore banks, two investment banks, and various companies ("quasi banks") competing over financial services. With the prospect of foreign competition in 2001, the institutions are too small to raise effective investment and improve training, and the NPL (non-performing loan) level and operational costs are high. The system needs fewer, more competitive institutions, suggested Saidane, with four or five "good-sized" banks.

Countries are integrating into the world economy and liberalizing capital flows at different rates and in different ways. Sultan Abou Ali, of Zagazig University in Egypt, differentiated four types within the Arab world: countries with liberalized capital and current accounts, and with the currency linked/indexed to one foreign currency or basket of currencies; countries with liberalized balance of payments accounts where the currency fluctuates (Lebanon); countries in a process of change due to structural adjustment (Morocco, Tunisia, Egypt); and centralized countries with a strong public and a weak private sector.

The mise a-niveau process, he explained, applies to the third group. Many Arab countries began reforms in the 1970s giving more freedom to the central bank, introducing competition between banks, allowing foreign banks to operate, and freeing up tariffs. The process still raises many questions for the financial sector. Is there a role for small banks in a world of mergers and acquisitions? Should large public banks—the four public banks in Egypt hold 75-80 percent of total deposits—be privatized? How far should banks specialize?

Faika El-Rifai, of the Central Bank of Egypt, noted that while some MENA countries have liberalized their capital account, ten have not. Liberalization in Egypt over five years has had a net benefit of $37 billion, with foreign direct investment followed by portfolio investment and the growth rate rising from 1.5 percent to 5.7 percent. Newly emerging Arab countries, he argued, have limited savings capacity, and need foreign capital to achieve higher growth rates.

Financial flows, capital markets

Mehdi Dezi, vice-president of Scudder Investment Group, said he was responsible for investing $1.2 billion, of which a third is in MENA. From the "top-down," he looks for structural reform, fiscal and monetary discipline, privatization and an absence of political "meddling." From the "bottom-up" he looks for "companies that are share-holder friendly and committed not just to high dividends but also to reinvesting in the companies."

Private capital inflows, Dezi noted, vary from the highest in Lebanon, "a country with virtually no exchange restrictions," to the lowest in Syria, "the country with the most exchange restrictions." In a review of capital account convertibility in Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Syria, Tunisia and Turkey, Salah Nsouli, of the IMF (International Monetary Fund), found growth rates generally lower in countries with less liberal systems.

An orderly move towards convertibility requires prudent fiscal and monetary policies, a market-clearing exchange rate, adequate international reserves, a sound financial system, and a market-oriented incentives system. Nsouli provided a paper, based on 1996/7, analysing how far the different countries reach these "yardsticks." On fiscal policies, Lebanon and Turkey were running "extremely high budget deficits," while Algeria and Jordan were "going well." Price decontrol has progressed well apart from in Syria; labour market rigidities persist everywhere outside Jordan and Lebanon; public enterprises still play an important role outside Lebanon; and, apart from Israel (7 percent), all countries had "fairly high and distorting" tariffs of between 15 and 35 percent.

But MENA's financial sector is hard to analyse, said Nsouli, due to "the paucity of data in many of these countries." The IMF would, he concluded, continue to assist the governments through policy advice, financial assistance in support of reforms, technical assistance, and training for government officials.

Rapporteurs: Pascal Collotte and Sofiane Ghali
Coordinators: Economic Research Forum (ERF), Arab Planning Institute (API), Syrian Consulting Bureau (SCB), Institut Arabe des Chefs d'Enterprise (IACE)

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