July, 2003

Regional Economic Integration: The Maghreb Countries and the EU

Sharit Abed

The EU devised an initiative for bilateral partnership to help the developing countries of the southern Mediterranean - Algeria, Cyprus, Egypt, Israel, Lebanon, Malta, Morocco, Syria, Tunisia and Turkey, in addition to the Palestinian Authority - which are currently beset by poverty and marginalisation in the international arena. The project crystallises Europe's willingness to reassert itself as a strong and viable competitor to the US, which has recently expanded its influence in the Near and Middle East and East Asia. In terms of trade and finance, the project is set to have a major impact on regional relations in the Middle East.

The strategic location and extensive markets of the countries of North Africa (the Maghreb) have the EU wanting to develop its cooperation efforts with these countries to ties of partnership. It is also in the interest of the Maghreb countries to work with the EU states through partnership agreements that endorse the principles of the Barcelona conference of November 1995, which set the basis for cooperation and partnership on the following levels:

- politics and security: establishment of a common zone for peace and stability

- economy and finance: establishment of an economically flourishing common zone

- social, cultural and humanitarian concerns.

The EU signed bilateral partnership agreements with various southern Mediterranean countries as part of the Euro-Mediterranean project. Such agreements were signed with Tunisia in July 1995 (coming into effect in March 1998), with Morocco in February 1996 (coming into effect in March 2000) and with Algeria in April 2002.

The signing of these agreements, however, raises several important questions: How will a free trade zone be established between the technologically and industrially advanced EU countries and the Maghreb countries, which are suffering from decreasing production and growth? Will this partnership be limited to trade exchange while new economies are based on knowledge and creativity in the framework of the global economy?

The centralised economies of the Maghreb countries suffer from a lack of production diversity and weak economic indicators. They thus turned to the International Monetary Fund (IMF), in an attempt to alleviate their foreign debt burdens and develop national economic programmes, concluding agreements whereby they would implement economic restructuring policies in return for debt rescheduling. Morocco did this in 1983 and Algeria in 1994/95.

Tangible results were soon seen on the macroeconomic level, such as reductions in budget deficits and inflation, and improvements in other macro indicators. Between 1996 and 2000, GDP grew by 5% in Algeria, 4.2% in Morocco and 5.5% in Tunisia, while unemployment rates in 1999 had decreased, albeit slowly, to 33% in Algeria, 19% in Morocco and 15.6 % in Tunisia.

During the 1990s, 70-85% of the Maghreb's exports went to the EU, which supplied 65-80% of the region's imports during the same period. While Europe is thus the Maghreb's major trading partner, there is a clear imbalance in the relationship. In the same decade, goods of European origin exported to the Maghreb accounted for less than 8.6% of total European exports, while goods of Maghreb origin imported to Europe represented less than 3.8% of total imports.

A major change in the structure of the Maghreb's exports to EU countries will not take place in the near future despite the partnership agreements and the establishment of the free zone due to take place by 2010 due to the inability of the region's producers to adapt swiftly to the prerequisites of the partnership. At the same time, an increase in EU exports to the Maghreb countries is expected as a result of both the lifting of customs barriers and Europe's desire to maintain its competitive position vis-à-vis the US. The establishment of a free zone and the gradual development in trade exchange in accordance with the partnership agreements will impact the economies of the Maghreb countries on the macro as well as micro levels:

Macroeconomic equilibrium:

The economies of the Maghreb countries are supported by large contributions from customs duties imposed on foreign trade, and any reduction in these tariffs will decrease the revenues available to their governments. In Tunisia, for example, customs tariffs account for 22% of government revenues, while imports from European countries represent 71.5% of the country's total imports. The reduction in tariffs will result in a 15.9% decrease in total revenues from taxes, equivalent to 3.2% of GDP.

For Morocco, revenues from customs tariffs will decrease by 10.3%, or 2.5% of GDP. while in Algeria the reduction will amount to 19.2% of customs revenues, or 2.2% of GDP.

The reduction in the value of customs duties will lead to a decrease in the level of public expenditure, already squeezed by amendments imposed in these countries within the framework of structural changes.

Microeconomic equilibrium:

The openness of the Maghreb's markets to European industries effects the region's industrial institutions and its overall industrial fabric. Industrial institutions in the region are passing through a stage of restructuring in order that they can empower and adapt themselves to function in the European market. In the short term, these institutions will suffer as a result of competition from European goods, especially as free access for European products with lower production costs will inevitably lead to a downturn in local industry. The production systems in these countries will also witness a decrease in supply levels for local manufacturing industries and a loss of job opportunities. In the medium and long terms, however, lower-priced imported goods will increase the level of competition in local markets and create opportunities for local manufacturers to export their products.

The Maghreb countries must thus do their best to avoid the formation of a new economic system that relies on the big European markets. A more favourable outcome would be a financial and technological system that contributes to developing the agricultural, industrial and tourism fields, and which is capable of generating a flow of technology. Such a system would give the countries of the Maghreb the chance to manufacture more than 50% of the goods they used to import, to develop scientific research institutions structurally and qualitatively, and to train the labour force to shoulder comprehensive development. European-Maghreb cooperation, then, should be directed to more than one field.

The EU orientation towards the Maghreb countries represents only a small part of the total sum of European investments worldwide, even if most investment in the Maghreb countries is of European origin - 70%, for example, in Tunisia. Europe's reluctance to direct its investment to the Maghreb countries can be attributed to various factors: the fragmentation of the Maghreb markets; political and economic instability; poor transportation and communications; a lack of qualified labour; the absence of legal and constitutional institutions; and bribery and administrative corruption.

The partnership agreements require the EU to expand its investment base within the countries of the Maghreb and to help them create an appropriate environment for investment. The Maghreb countries have to work to attract European investment, which would take the shape of development projects predominantly in infrastructure and education, training and rehabilitation, scientific research, and industrial and technological development. This would be in addition to industrial development achieved through direct investment and other financial aid and would be directly reflected in growth rates.
In the area of foreign capital flow, remittances from Maghreb citizens working abroad should be channelled into investment programmes to boost the development process.

Remittances to Morocco, for example, accounted for 8% of GDP in the period 1990-95, which equals 99% of the foreign debt service. In Tunisia, remittances accounted for 4% of GDP in the same period, representing 42% of the foreign debt service.

EU financial aid to the Maghreb countries as specified by the partnership agreements is meagre compared to what these countries will lose as a result of removing customs duties from European imports. During the past six years, EU aid to Eastern European states has reached 23 euros per capita, while those Maghreb states with partnership agreements are receiving not more than 4.5 euros per capita. A number of administrative impediments are also hindering the passage of this money.

Partnership agreements between the EU and each of Tunisia, Morocco and Algeria play an important role in encouraging economic openness in the region, attracting foreign direct investment and committing the governments to push through economic reform and make use of financial aid. However, the Maghreb states should make use of this partnership to serve their needs, namely increasing economic growth rates. This will not take place by means of a single partnership agreement but rather through an agreement composed of various components that target economic growth. The Maghreb states have to rehabilitate themselves from within in the first place.

The EU envisages that development in the Maghreb states will be achieved through the liberalisation of trade, though this, in itself, will not be sufficient. Statistics show that six years after the signing of partnership agreements, there have been no major changes in the balance of trade between the EU and each of Tunisia and Morocco.

The countries of the Maghreb urgently need to establish national projects on the economic, social, cultural, scientific and technological levels to promote their negotiating positions with the EU. These countries must also review the European vision for partnership, as without amendments to the agreements there will be a permanent deficiency in the balance of trade and payments between the two sides. This would lead to increased unemployment and poverty, giving rise to instability, thus encouraging immigration to European states. It should be remembered that it was this same phenomenon that contributed to the EU's decision to initiate the partnership project in the first place.