EU-MED and the Investment Climate By Mustapha K. Nabli Chief Economist, Middle East and North Africa Region World Bank

2 Outline 6 years after the Barcelona conference – where do we stand? –Low levels of private investment and FDI in MED countries –Linked to lack of improvements in the investment climate Why slow progress on structural reforms? –Oil and aid –Socio-economic pressures –Governance matters, especially in areas which affect the business environment What can be done?

3 Private investment levels are stagnant or declining (Private Investment as % of GDP)

4 Unlike in countries with regional trade agreements like Poland and Mexico (EU accession and NAFTA) (Private investment as % of GDP)

5 FDI has increased in some of the Med countries and fallen in some… FDI as % of GDP.

6 … but they lag behind CEE accession countries (Poland, Hungary and Czech Republic) and Mexico. FDI as % of GDP.

7 Slow progress on structural reforms in the MENA countries. ( Structural reform index, 100=best value of all countries, all years ). Source: Dasgupta, Keller and Srinivasan, (2001), World Bank.

8 What accounts for the slow progress on improving the investment climate? Access to “easy money” reduces incentives to foster reform –Mineral exports and aid money has been reduced but remains high compared to other countries Political inertia in advancing broad reforms, in relation to social and political tensions –Labor market pressures increase the risk for political instability (which also blocks reform) Governance issues

9 Governance matters –The four MED countries generally performing well on governance compared to other MNA countries –But not to the rest of the world, especially for areas which strongly affect the business environment Opportunities for voice and mechanisms ensuring accountability of government: –Political rights, transparency of legal system, responsiveness of government to its people, business community voice and access to information, etc. –The level of political participation is key

10 MED countries have a low level of political participation and low level of voice and accountability mechanisms... Voice and accountability vs. level of political participation Source: Kauffmann, Kraay, Zoido-Lóbaton (1999), World Bank, and UMC Polity Index

11 … and a low level of voice and accountability relative to their income levels : V oice and accountability vs. GDP per capita Source: Kauffmann, Kraay, Zoido-Lóbaton (1999), World Bank.

12 Governance – an agenda