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Workshop 08: International Financial Integration of Mediterranean Economies - Recent Developments and Future Opportunities

 

 

 

Abstract

The recent rapidly evolving developments in Arab Mediterranean countries open avenues that can offer advantageous opportunities for the Mediterranean region, also from an economic point of view. One opportunity is the further opening of economies. Especially financial liberalization can help to catch up more quickly with other emerging regions around the globe. 

This workshop concentrates on international financial integration. The international character of the domestic financial sectors, their broadness and depth, and legal aspects play central roles. Future economic growth performance of the Mediterranean will depend not only on the outcome of the ongoing revolts and the political and governance follow-up, but also on the speed of internationalization of the economies.

The main aim of this workshop is to discuss the recent developments in the field of international financial integration of the Mediterranean economies in-depth and to assess the economies’ prospective role from the global perspective.

The main reasons for putting international financial integration as theme of this workshop are the following:

1. The scientific literature on developments and prospects of the degree of regional and global financial integration of the southern Mediterranean region is scarce;

2. There is a growing need for more factual and analytical information on this subject from different angles for policy making purposes;

3. While keeping in mind that the recent global crisis in 2008-09 has shown the need for prudent supervisory frameworks and regulation to mitigate risks, further financial integration can benefit and accelerate economic growth and prosperity in particular in the southern Mediterranean countries.


Description

1: Introduction

A high degree of free trade of goods, services and in particular capital among the Mediterranean North and South has not been accomplished yet. The global crisis in 2008-09 showed a significant sharp and deep reduction in the volume of international trading (Gregory et al., 2010), though the North African and Middle Eastern economies showed their resilience. The region has a low degree of trade and financial integration in the region and world economy. Further trade and financial integration potential could help boosting their economic growth faster and further.

At the present juncture, just after the global crisis and facing the revolutions in North African and Middle Eastern (let us say “Mediterranean”) countries there are various likely scenarios for the global economic developments. One likely scenario is that the Asian economies will keep on gaining much speed, positively affecting global economic growth while other parts of the world (the Western developed economies, Africa, Latin America, the CIS and Russia), but in particular the Mediterranean countries remain for a longer period faced with subdued growth. In another, ideal scenario the Mediterranean countries will catch up with those economies across the globe that emerge fastest from the global recession, while catching up with the developed economies remains their ultimate aim.

2: Theoretical framework and justification for the workshop

Tapping of financial opportunities from cross-border banking by the business sector or households takes place limitedly in the Mediterranean region. In view of the recent crisis, that originated in the financial sector of developed economies and systemically and rapidly transmitted to partner countries, some modesty and prudence is warranted in discussing the issue of international financial linkages. Strong financial linkages should not be built without prudent supervisory frameworks and regulation that builds on checks and balances to assess the risks involved. Some studies indicate that there was no significant positive correlation between the selected samples of Arab and European stock markets in the recent past, based on two financial indicators including price earnings ratios and performance growth in the index shares (Sabri, 2002b). Further international financial integration will have to be monitored. Up-to-date sets of indicators can provide wake up calls or function as early warning systems, but they remain to be built. 

The literature has shown that globalization of economies can be a guarantee for accelerating domestic economic growth. International linkages can be mutually beneficial. Notably, those countries that are at a relatively low welfare level can move more rapidly to higher levels in case the degree of openness of their economies increases. However, the recent global crisis has also shown the drawback of economies’ dependencies. This was in particular true for the financial linkages that were strongest among the developed economies. For example, Cvikl (2008) found that although bilateral association agreements have been concluded between the EU and the Mediterranean countries, the creation of an actual regional market is still hindered, mostly because of the slow integration among the Mediterranean countries. He reported that the main barriers to regional integration among the Mediterranean countries relate to the relatively small sizes of the local markets, lack of industry diversification, high tariff protection and lacunas in infrastructure. Another study (El-Rayyes, 2007) examined the nature of intra-Mediterranean Countries partnership, in order to determine the obstacles for enhancing trade flows. The findings of this study show that the trade flow is improving but may slow down for various reasons. The geographical situation is relevant here as it can make trading easier; Turkey and Morocco are closer to Europe than Jordan, for example. In addition, the final report of Economic Integration in the Euro-Mediterranean Region (De Wulf and Maliszewska, 2009) found that the trade between the Mediterranean economies is very low but growing at a positive increasing pace. In 2006, the process of liberalizing of tariffs of the Mediterranean countries with respect to the EU was far from complete, and therefore it is too early to find evidence of a North-South trade impact beyond 2010. Also Adamo and Garonna (2009) reported that the southern Mediterranean countries still display a high level of protection and trade barriers. The Syrian Arab Republic and Egypt are examples in this respect. Interestingly, another study found that the association between financial instruments and economic growth is stronger in the South sample compared to the North and relatively more correlated to GDP rather than to gross fixed capital formation (GFCF), with the exception of the stock market capitalization. According to other analyses, the main merits of associations between financial instruments and economic growth measures as expressed by GDP and GFCF at both sides of the Mediterranean are similar with only slight exceptions (Sabri, 2011).

Although the southern Mediterranean region remained sheltered during the global crisis due to its low degree of global (financial and trade) integration in the world economy, there is a strong believe among macroeconomists that further integration can help boosting economic growth in this region. The region has a low integration level and faces high unemployment levels and high demographic growth for many years to come. Apart from recent trends in cross-border investments, cross-border banking and other cross-border financial linkages, the impact of these linkages on the mutual domestic economic growth, labour markets, public finances, private investment, prices and wages deserve attention. From the macroeconomic angle, the contributions of international financial linkages to the domestic economy compared across Mediterranean economies or among Mediterranean countries and the rest of the world (for instance Southern and Eastern Europe) can give insights in the pros and cons of certain degrees of international financial integration.

Accordingly, this workshop at the same time aims at examining whether financial aspects, for example interest rate differentials, price differentials, cross-border banking and cross-border portfolio investment as well as foreign direct investment in general. Exchange rate regimes are obstacles for enhancing inter-trade among Mediterranean countries, and intra-trade of Mediterranean countries with the rest of the world. The strength of financial linkages can hinge upon the type of exchange rate regimes, such as flexible, quasi-fixed or pegged currency regimes or common currencies (see the neighbouring trading partners as the European Monetary Union). In addition, increased exchange rate volatility may or may not affect international financial flows. A discussion on financial issues in combination with the existing barriers attached to trading with the northern region, from the point of view of the south Mediterranean countries should also take place.

The focus of this workshop will be on North African and Middle Eastern economies, but also Southern and South Eastern economies should gain attention. The interlinkages of the Mediterranean economies, as wide as possible, their mutual relationships and their relations with Europe over time can illustrate and possibly explain the stance of the domestic welfare state, public finances and labour market performance. We consider theoretical and empirical research to be complementary. Theoretical studies may strike the balance between the benefits and costs of the existing degrees of international financial integration. Empirical research, on the other hand, in all its aspects, and with econometric analyses using advanced methods and techniques, can shed light on causal relations that underlie the international financial linkages.

3: Subjects at the workshop

This workshop welcomes a broad range of international financial aspects in the context of regional, south-north Mediterranean or global integration, such as:

1. currency exchanges;

2. interest rate differentials;

3. cross-border banking;

4. cross-border portfolio investment (equity and bonds);

5. foreign direct investments;

6. international insurance trading;

7. international development banking;

8. financial and innovative securities (derivatives);

9. legal aspects related to international finance;

10. further cross border financial transactions;

11. barriers to financial transactions flows;

12. monetary or fiscal policy issues related to international finance;

13. the role of commodities (oil/food);

14. foreign exchange reserves;

15. other international financial issues.


4: Selection of papers and organisation of the Workshop

We encourage both junior and senior scholars to submit state-of-the-art papers on one or some of the subjects mentioned above, in particular those scholars from North African and Middle Eastern countries. The selection of papers will be based on the subject and quality of the papers. We aim at having a set of research papers that broadly cover the subjects mentioned above. As directors of this workhop, we will present a background paper at the start of the workshop and thereafter mediate the sessions. The further floor will be given to the participants. We will invite participants to take interactively part in the discussions during the workshop and, if desirable from the research point of view and if practically feasible, we will encourage future research collaboration among workshop participants. We will also promote to publish the presented papers.

5: List of References

The list of papers and articles shown here below, though far from exhaustive, provides background literature on international financial integration or adjacent fields that can shed light or cover the Mediterranean region.

1. Adamo, Katia and Paolo Garonna (2009) Euro Mediterranean integration and cooperation projects and challenges., Parliamentary Assembly of the Mediterranean.

2. Arize, Augustine C. (1995) Trade flows and real exchange-rate volatility: an application of cointegration and Error-Correction Modeling The North American Journal of Economics and Finance 6(1):37-51.

3. Arize, Augustine C. (1997) Foreign trade and exchange-rate risk in the G-7 countries: Cointegration and Error-Correction Models Review of Financial Economics 6(1):95-112.

4. Beji, Samouel (2007) Financial openness and financial development in the south Mediterranean sea countries: Institutional approach and calculation of development thresholds European Research Studies Journal X(3-4):107.

5. Bonfiglioli, Alessandra (2008) Financial integration, productivity and capital accumulation, Journal of International Economics, 76(2):337-355.

6. Claessens, Stijn and Sergio L. Schmukler (2007) Through equity markets: Which firms from which countries go global?, Working Paper no 07/138 of the International Monetary Fund Washington DC.

7. Cvikl, Milan M. (2008) Free trade In the Mediterranean - Strengths, weaknesses, and future development, 2nd Standing Committee On Economic, Social And Environmental Cooperation, Parliamentary Assembly Of The Mediterranean Assemble Parliamentarian De La Mediterranée.

8. De Wulf, Luc and Maryla Maliszewska (eds.) (2009) Economic integration in the Euro-Mediterranean region, Final report, Center for Social and Economic Research.

9. El-Rayyes, Thoraya (2007) Trade and regional integration between Mediterranean partner countries, Go-EuroMed, Working Paper Center For Strategic Studies Jordan.

10. European Commission (2010) The EU's neighbouring economies: emerging from the global crisis, European Economy Occasional Paper no 59 at the European Commission in Brussels.

11. FEMISE (2005) The Euro Mediterranean Partnership, 10 Years after Barcelona:  Achievements and Perspectives, Femise Association, France.

12. Gregory, Rob, Christian Henn, Brad McDonald, and Mika Saito (2010) Trade and the crisis: Protect or recover, Strategy, Policy, and Review Department, International Monetary Fund Washington DC.

13. Guiso, Luigi, Tullio Jappelli, Mario Padula and Marco Pagano (2004) Financial market integration and economic growth in the EU, 9(40):523-577.

14. Kalemli-Ozcan, Sebnem, Elias Papaioannou and José-Luis Peydro (2010) What lies beneath euro's effect on financial integration? Currency risk, legal harmonization or trade, (European Central Bank Working Paper No. 1216).

15. Kose, M. Ayhan and Eswar S. Prasad (2010) Resilience of emerging economies to economic and financial developments in advanced economies, European Economy Economic Paper no 411, European Commission, Brussels Belgium.

16. Lane, Philip and Gian Milesi-Ferretti (2003) International financial integration, CEPR Discussion Paper no 3769.

17. Lane, Philip and Gian Milesi-Ferretti (2004) Financial globalization and exchange rates, Center for Economic Performance Discussion Paper no 662.

18. Peeters, Marga (2010) The changing pattern of international trade and capital flows of the Gulf Cooperation Council countries in comparison with other oil-exporting countries, European Economy Economic Paper no 415, European Commission, Brussels Belgium.

19. Sabri, Nidal Rashid (2008) Financial markets and Institutions in the Arab economy, Nova Science Publishers, New York.

20. Sabri, Nidal Rashid (2011) The role of financial instruments in economic development for Mediterranean countries, International Review of Applied Financial Issues and Economics (3) forthcoming.

21. Sabri, Nidal Rashid (2002a) Cross listings of stocks among European Arab Markets, Finance India 16: 205-227.

22. Sabri, Nidal Rashid (2002b) Increasing linkages between global stock markets and price volatility Research in International Business & Finance 16: 349-373.

23. Sturm, Michael and Nicolas Sauter, 2010, The impact of the global financial turmoil and recession on Mediterranean countries’ economies, Occasional Paper Series no 118, European Central Bank, Frankfurt Germany.

24. Torre, Augusto de la, Eduardo Levy Yeyati and Sergio Schmukler (2002) Financial globalization: Unequal blessings, International Finance, 5(3):335-57.