The Genesis of the Barcelona Process

The Barcelona Process was initiated with the aim of establishing a regional entity which was advanced economically, politically and socially. This aim was to be achieved in three ways: Firstly, by maintaining stability to allow for the implementation of economic and social reform. Secondly, by economic development through gradually establishing a free trade zone which was mainly for industrial products. This was to be supported by financial support from the European Union (EU) to assist structural adjustment and the creation of an environment favourable to private enterprise and foreign investment. The third necessity was to reduce the social costs linked to structural adjustment.

The expectation was that the dynamics of the Barcelona Process would induce changes; the shock of competition would push the Mediterranean Partners (MPs) into modernising and would stimulate reforms. On the other hand, it was also expected that the South-South integration would be a natural consequence of the North-South opening, and that the “contract” agreed with the EU, and the credibility attached to it, was going to favour external investment. The result of these three points of view has been varied as we shall see below.

When the Barcelona Process began in 1993, the EU’s partners, the MPs, were slightly above the lower bracket of middle income countries, apart from Israel which had a per capita income close to high income countries. This situation has not evolved very much since then and at the end of this period the MPs were still below the average of middle income countries.

Elsewhere, if we compare the evolution of that indicator (i.e. income) to the E.U.15 and the New Member States (NMS10), we can only ascertain a process of divergence which has regularly increased since the start of the 1980s. It is also manifest that the Barcelona Process was unable to modify this trend.

Of course the partnership is not to be blamed for this setback which is largely due to the behavioural and structural conditions of the MP countries. In the mid 1990s the MPs’ situation was characterized by:

• An undeniable macroeconomic convergence due to the various structural adjustment programmes at work since the 1980s.
• A high level of vulnerability to external shocks (raw material and energy prices, and slow growth in more developed countries).
•  Self-centred systems still largely closed despite pockets of liberalization (tax free zones, passive improvement areas).
• Investment levels only just recovering to the levels of the 1980s, producing growth rates slightly under 3% per annum, with structural changes which had taken 15 years to realize: private investment had become greater than public investment.
• A relatively modest external anchorage to Europe through an updated Mediterranean policy.
• Less significant absolute poverty than in other parts of the world, but very high unemployment rate, particularly among the young.

The above issues shaped the risks for the MP countries. It became clear that these countries have to decisively move on to the next three stages of economic transition, which follow stability and good macroeconomic management. This refers firstly to the liberalization of the goods and services markets, starting with the opening up to external exchanges which would lead to replacing a domestic market pricing system, distorted by the protections and fixed price systems, to the system of relative international prices. This also involves modifying the law, the regulatory framework and above all how the institutions function to create a favourable business climate. Finally, it also means allowing a noticeable alteration of the growth path, due to a dynamic competitiveness and the attraction of portfolio investments.

The Performance of MPs after Barcelona

The economic logic of the process was essentially orientated towards the dismantling of industrial tariffs, whilst the bilateral accompaniment of MEDA has focused on structural adjustment and sector reforms. However, as the contract was relatively loose and not very structured for both public and private partners, the EU did not have the means to formulate its aid. On the other hand, joining the EU acted as a force attracting NMS10 countries and encouraging them to commit to structural adjustment, being backed up by funds from the EU. This can be seen in Turkey, who has placed joining the EU as one of its priorities since it accepted its status as candidate to the EU, and has used this as a basis to define its reform programme.

It is in the wider framework of European policy, called Neighbourhood, that the strategic partnership between the EU and MPs should be successfully completed. This is the second determining “unilateral” option for Barcelona. This new European policy originated in the Treaty Project establishing a European Constitution handed to the President of the European Council on July 18th 2003. It addresses Russia, Ukraine, Byelorussia, Moldavia, all the MPs, Azerbaijan and Georgia.

Several elements are necessary to attempt to appreciate the European Neighbourhood Policy (ENP). Firstly, we must emphasize that this initiative is situated in a deeply modified context for the MPs. In 1995, Barcelona covered a Europe of 15 + 12 whereas we have progressed to 25 E.U. members, 3 candidates and 9 MPs in 2004. As for the Neighbourhood Policy, it now involves 25 E.U. members, 3 candidates and 6 potential candidates, plus 16 neighbours (of which 9 are MPs).

The majority of the MPs have largely reduced their budget deficit and are now in control of it. In general¸ there have not been any defaults on the commitment to carry out a “healthy and credible” fiscal policy, except recently following serious external and internal shocks. MPs are encouraged to improve the convertibility of their capital account so as to attract foreign capital in face of commercial integration and the need for foreign exchange that emerges from it, as well as in the face of the need to create employment opportunities and attracting investment. 

The Barcelona Process was based to a large extent on tariff dismantlement.  From 1992 to 2003, the average customs duty in industry has fallen throughout the Mediterranean countries by about 11 points. However, compared to the new members (NMS10), in Latin America and in the Asian zones, Mediterranean countries still have the highest tariff protection. At the start of the process, levels of customs in the region varied from 8% in Israel to 64% in Morocco, with maximum tariffs going from 38% in Turkey to 160% in Egypt. Morocco, Tunisia, Egypt, Algeria and Jordan are considered to have the highest rates of custom duties. Countries have been dismantling at different speeds. Between 1993 and 2003, Morocco has reduced its tariffs and maximum duties by 57% and 65% respectively. During the same 10 years, Algeria and Tunisia have reduced their tariffs by 6% and Egypt by 8%.  Even Mediterranean countries with low customs duties like Turkey, Lebanon and Israel, who had almost identical level of duties of about 9% have reduced this average to 4% in Israel and Lebanon and 5.2% in Turkey. All Mediterranean countries impose high customs duties, especially on food and drink, manufactured tobacco based products, clothing and leather.

In all Mediterranean countries, with the exception of Tunisia and Jordan, the rate of customs duties on consumer goods has decreased the most. It is also interesting to note that the biggest fall in customs duty is that on goods from the USA; while customs duties between Mediterranean countries themselves has fallen the least, indicating the low level of integration between these countries. The failure of South-South agreements to lead to reductions in tariffs can be attributed to two main reasons: The first is the high number of ratified agreements recently, such as the Agadir Process signed in February 2004 by Morocco, Tunisia, Egypt and Jordan; the second is that in many cases implementation is limited particularly by lack of political will and the large size of the public sector. It should also be noted that the similarity in the production structures of the countries involved is likely to undermine the success of integration. In any case, tariff dismantling alone will not show much positive effect without other conditions being in place, such as progress in capital accumulation, education and institutional development.

Despite the general decrease in ad valorem rates, obstacles to developed countries’ markets have not been reduced. In fact these obstacles might be increasing due to a number of factors. One factor is the use of specific duties instead of ad valorem duties, and the former is much less transparent than the latter. Also, as the price of basic products is falling, they are being subject to specific duties which results in an increased rate of protection. Another factor is the increased use of non-tariff barriers such as technical norms and regulations concerning hygiene, food and environmental safety, which despite their importance are also considered protectionist tools. Moreover, the issue of agricultural protection in the EU is one of the major obstacles to the creation of a coherent EuroMediterranean partnership as the EU has developed a set of regulations that are making access to its markets more difficult.

As the internationalisation of the MPs economies continues the preoccupations with the real exchange rate become more significant. An overvalued exchange rate has proven inconvenient for those MPs who have progressed most in opening up their economies. It can be seen in most MPs where a recorded improvement the in balance of payments is linked to the depreciation of the real exchange rate (e.g. notably in Egypt, Tunisia, Jordan). On the other hand, Morocco which has witnessed a steady rising trend in real exchange rate has suffered a continual degradation.

The trade situation between the MPs and the EU is highly asymmetric as the EU contributes to about 50% of the MPs’ foreign trade while the MPs contribute only 6% of the EU foreign trade.  During the last 10 years, the MPs’ share in the European markets did not evolve notably. In 1993, the MPs accounted for 5.7% of total European imports, 4.9% in 1995, to finally reach 5.9% in 2003. Oil products excluded, the MPs’ market shares are even smaller. Starting from similar situations in the middle of the nineties with almost 12% of the European market shares, in 2003 the NMS amounted to twice the shares of the MP, all products combined, and almost three times that if the oil products are excluded. Among the MPs only Turkey and to a lesser extent Morocco experienced favourable growth on the European markets. During the same period, the Europeans lost market shares in MPs, as they amounted to 8.8% of MPs imports in 1993, 7.9% in 1995, and more than 7% in 2003.

The progression in some indicators-such as percentage of exports of GDP or the share of manufactured goods exports relative to total exports- suggests obvious progress of the MPs in terms of international openness. However these indicators do not take into account the nature of specialization and of its impact on national production structures. It is necessary to determine whether the direction of these production structures towards manufactured goods will be met by a favourable demand from the trade partners on the one hand, and will enable the countries to diversify their exports range on the other hand.  The exports from the MPs specialize increasingly in highly labour-intensive and average technology intensive products; a phenomenon that specifically characterizes exports to the EU to which more than  half the exports are based on the use of unskilled labour and natural resources. Exports to the Rest of the World (RoW) have a larger technological content than exports to the EU. It should be noted that the phenomenon has heightened over the period 1995-2002. 

TABLE 1 Share (in %) of the different categories of products in MPs exports

Industrial restructuring has enabled the development of the share of manufactured products with primary products and has led the MPs to specialize in low-technology products with little value added. They have hence not been able to develop intra-industry type trade relationships with their trade partners and their commercial structures do not compare with those of their close partners. A certain number of countries are moving increasingly closer to their European partners (Tunisia, Morocco, Turkey, and to a certain extent Jordan, at the end of the period), whilst the others (Egypt, Lebanon, Israel, Syria) are reinforcing their commercial relationships with the rest of the world. The first group has adapted themselves better to European demand but their exports have not diversified. Furthermore, the technological level of exports remains low and is developing slowly. The countries in the second group would seem better adapted to the demand of non-European countries and their exports to these partners have diversified.

TABLE 2 The overall trends of regional specialisation of the MPs and the AC10

Overall, structural adjustment in the south Mediterranean Partner Countries (MPs) aimed to withdraw from direct intervention and pave the way for the private sector to lead the growth process. As public investments were gradually being retrenched, the private sector failed to fully step in due to numerous impediments that remained prevalent in the business environment. Although the Barcelona Process offered a mechanism for the MPs through which they could anchor their regulatory reforms to successful models in the EU, this opportunity had been undermined by the lack of serious commitment to market-based reforms. Only in recent years have a number of MPs realized that the potential for growth in their economies relied on the capacity to attract sizable investment flows (both domestic and foreign) to accelerate the pace of economic growth and reduce current unemployment levels. The proliferation of benchmarking studies and analytical tools highlighted that most MPs lag behind their comparators in terms of attractiveness of the business environment.

TABLE 3 The regulation of Market Entry and Exit in the MPs

The effect of the trade liberalization inherent in the Barcelona Process on businesses in the MPs can be considered limited since the fall in prices of imported intermediary and capital equipment resulting from the reduction in tariffs is likely to be offset by the rise in the currency in which these products are priced. Trade liberalization should also increase competition through imports. In addition, trade liberalization can reduce the incentive to invest on research and development as well as new technology as businesses face competition from imports and expect a fall in their sales. However, the exact effects that took place in Mediterranean countries because of tariff dismantling is difficult to determine because of the lack of data on firms in these countries. Besides, only specific country case studies can enable us to reach any conclusions in this regard.

As for the FDI situation in the MPs, in 2003 FDI in MPs was at US$ 9 billion which is the same as the 1990 level and is a little more than what Poland alone has received. FDI in the New Member States has also witnessed a fall in FDI directed to them in favour of Asian countries. This is mainly attributed to an increase in labour cost per unit.

Investments in MPs mainly flow into the following sectors: energy, telecoms, GSM licensing, cement mills, tourism and hospitality, and food-processing. In comparison, FDI to NMS is more oriented towards the industrial sectors. The “green-field” based investment share remains marginal. For most MPs, privatization efforts and investment in infrastructure have managed to attract significant levels of FDI. Israel is the largest receiver of FDI among MPs, receiving 28% of FDI stocks. Egypt and Turkey receive 17% and 19% respectively of FDI stocks in the region. Tunisia accounts for 15% of FDI stocks and Morocco for 10%. In terms of the origin of FDI, EU seems to be the main provider.

The migratory phenomenon is also worth mentioning in the context of the EuroMediterranean Partnership. Considering only the legal inflows of migrants to Europe, we find that they follow an increasing trend particularly to European countries previously not very open to immigration. This increasing trend can be attributed not only to the income differential between the host countries and the source countries but also to the age differential between those countries. The European demographic structure has a progressively ageing population and the increasing rates of youth unemployment in most MPs result in the phenomenon of replacement migration.

So far, several Mediterranean countries have already signed association agreements and implemented other trade enhancing legal reforms, such as import liberalization measures, customs regulations, intellectual property rights laws, harmonized commodity description coding and duty drawback .Yet, a lot still has to be done in terms of the quality of these reforms in terms of administrative efficiency, decentralization, recognition of civil society and better law enforcement.

Future Prospects

With the establishment of the European Neighbourhood Policy emerges a need to formulate a vision for the future on how to deliver what the Barcelona Process failed to do. The new perspectives ahead for the EuroMediterranean Partnership depend on three fundamental points. Firstly, it is extremely important that the ENP strengthens and complements the Barcelona Process and does not result in watering it down through bilateral EU-Med relations that override the multilateral dimension. Secondly, more importance has to be given to South-South integration as it has a complementary effect with the proposed objectives of the Barcelona Process and is likely to promote economies of scale in the involved countries. The experience of countries newly acceding to the EU can be useful in specifying areas of development such as the participation in international production chains and subcontracting between North and South. Thirdly, the ENP allows for the possibility of anchoring reforms to EU benchmarks. This anchoring will act as a driver for reform in the region and is likely to facilitate the process of gathering stakeholder support (including governments, the private sector and the civil society).

The future vision for Euro-Mediterranean cooperation should be based on the following four primary axes. The first is the deepening of the reform process ongoing in the MPs and extending it to sectors of economic activity in addition to the sectors directly concerned with economic liberalization, through removal of tariff and non-tariff barriers, as well as administrative barriers, such as red-tape and customs formalities. There also has to be special attention given to the issue of the harmonization of rules and standards applied to imported products. Furthermore, it is important to improve infrastructural links (road, rail, sea) which if neglected also act as barriers to trade. The second is the active engagement of the private sector, the business community and the civil society. Financial and technical assistance from the EU should be linked to institutional reform. Greater funding needs to be directed towards enhancing links between civil society and the private sector and improving the rule of law and good governance.  The third is the crucial pre-requisite of improving the business environment for domestic and foreign investment, particularly by investing in human capital and know how. Finally, monitoring mechanisms should be established by building a knowledge community and emphasizing the role of research centres.