External and Internal Imbalances in South Mediterranean Countries

Abstract

South–MED countries are characterising by non-diversified economic structures. Some are heavily dependent on oil resources to support their economic growth and development; while others are relying disproportionately on real estate, tourism and low-value added export products. This makes them vulnerable to external economic conditions. Together with the wider geo-political situation of the region, which fuels economic uncertainty, this creates significant threats and problems, including with regard to trade deficits and the current account (external imbalances). The domestic political situation is also not conducive to economic stability. Governments in South–MED countries are rather centralised and often lack transparent and good-quality institutions. In the economic sphere, this contributes to exacerbating budget deficits and escalating government debts (internal imbalances). In conjunction, internal and external imbalances both reflect and reinforce the inability of these economies to climb up the value-added ladder, developing more competitive products and specialisations that will help them achieve more sustainable economic growth, balanced fiscal stances and trade account surpluses. Within this context, and largely in response to the new risks that emerged in the financial sphere, with regard to both internal and external imbalances, after the global financial crisis, government policies in the South–MED adopted – sometimes harsh – economic reform programmes as a way to stabilise their economies and manage the associated risks. Adjustment programmes, however, are socially painful and may also have adverse effects on the economy, thus increasing further the fragility of these economies and threatening a further deterioration of their external position. This raises two analytically interesting and, in policy terms, very pressing questions about, on the one hand, the extent and nature of internal and external imbalances in these countries and, on the other hand, the appropriateness of the adjustment policies that were pursued. This study provides an extensive analysis of these issues, focusing on the case of six South–MED countries, namely Algeria, Egypt, Jordan, Lebanon, Morocco and Tunisia. It examines in detail the internal and external imbalances of these countries, over the last three decades, both descriptively (through the use of graphs) and econometrically (through time-series econometric techniques). It subsequently reviews the range of adjustment programmes, austerity policies and other macro-economic adjustment mechanisms (e.g., exchange rate policies) that were deployed in these countries to deal with the internal and external threats to stability and, by reflecting on these two lines of research, it provides useful insights about the effectiveness and appropriateness of these policy responses in addressing the problem at hand.