After years of international isolation and embargo, Libya has begun a slow process of opening its economy to the outside world. Foreign players are acquiring stakes in Libyan banks, household-name hotel brands are muscling in on the market and the world’s largest energy firms are queuing up to get their hands on Libya’s immense oil and gas reserves.

On the back of this — particularly the record oil prices which have propelled impressive growth in the Libyan economy since 2003 — the real estate market is beginning to draw the attention of keen investor interests from Europe, the Middle East and further afield.

The fundamentals look good, but with an unwieldy bureaucracy, an untried market and an uncertain political future, many developers are still hesitant to enter into one of the few remaining virgin markets around the Mediterranean.

Potential awaits

With a population of just over six million and some of the world’s largest oil and gas reserves, Libya in some ways resembles the situation of several of the Gulf markets a decade ago. It is also relatively stable, has massive tourism potential and, even better, lies right on the doorstep of Europe.

Unsurprisingly, this has spurred greater interest in Libya’s real estate sector, which shows some indications of being on the verge of a boom. A burgeoning business sector is driving demand for new office and residential space, while investing in property is starting to gain popularity amongst local groups and wealthy Libyans. Construction costs are low, there is a ready supply of labor and a number of players have already dipped their toes in the water.

Yet until recently real estate in Libya was off-limits, and it was only in the late 1990s that the authorities eased legislation on private property ownership, which previously had been considered contrary to the socialist leanings of Colonel Gaddafi’s blueprint for the country.

Following the resolution of the long-running Lockerbie bombing trial in 2003 and the lifting of EU and US sanctions, Gaddafi has appeared to take a new track by gradually allowing foreign investment into various fields and seeking joint development ventures for large pieces of land on the coastline to support the country’s ambitious tourism program.

Even so, the real estate sector remains restrictive. Individual foreigners cannot buy property in Libya, with the apparent exception of Maltese citizens who enjoy a privileged status thanks to a longstanding reciprocal investment agreement between the two countries. Larger investors can lease land from the government for up to 99 years, as long as it falls within certain areas which have been designated for development, but so far there is no freehold.

Drivers of demand

Keen to invest enormous windfalls from oil revenues, the government is emerging as one of the key drivers of the real estate market. A number of rather opaque entities, usually controlled by the sons of Colonel Gaddafi, are teaming up with seasoned foreign firms to build a series of large-scale joint ventures which have only been signed within the past one or two years and have yet to break ground.

Other factors also give the market some rosy prospects. The first is the rising numbers of foreign visitors. Libya’s hotel market is seriously undersupplied, and even if tourist levels stay at their relatively modest current levels of around a million

arrivals per year, demand from business visitors is set to soar thanks to the burgeoning private economy and the growing numbers of energy companies operating in the country.

 For now, the only five-star hotel in Tripoli is the Corinthia Bab Africa, which reportedly enjoys an occupancy rate of between 95-100% despite commanding a rack rate of more than $450 for a single room. It will be joined by a series of other high-end hotels in 2009 and 2010, with the Sheraton and Intercontinental both set to manage properties in the capital and the other mega-projects including hotels in their master plans.

Another advantage is the thriving business environment, even if this still depends largely on energy-related companies. Tripoli suffers from a lack of quality office space, with many companies forced to convert residential villas or erect their own buildings. There are only three quality office towers in the capital, for instance, all of which have zero vacancy rates.

Libyans themselves also constitute an important market for new villas and apartments. Demographic growth is rapid, at around 2% a year, and there is a sizable Libyan diaspora that may look to move back home or acquire a second residence as the local economy becomes a more attractive place to work and live. The government is also building low-cost apartments to bridge the shortfall in housing, which is thought to be in the hundreds of thousands of units.

Scouting investments

The experience of a handful of foreign developers who already have projects running in Libya may be instructive for more risk-averse investors.

One of these is the Malta-based Corinthia Group, which already owns the Corinthia Hotel in Tripoli and enjoys a long-standing relationship with Libya, and now is building a beachside residential complex called Palm City. All the villas and apartments are for rent only, and the first phase is scheduled to be ready by the end of 2008.

The Pakistani Hashoo Group is another early mover, building a 92,000 square meter tower called the Burj al-Bahr on the eastern suburbs of Tripoli. The project has already been beset by delays and construction problems, but the developers say that the returns will still be more than worthwhile.

European investors are showing interest too, with the UK-based Magna Group building a mixed-use development and the Swiss company, Berocko, putting up two beachside hotels just outside Tripoli. Korean firm Daewoo is also building a hotel in the city center which will reportedly be managed by Marriott.

Emaar, the Dubai-based developer which has myriad projects around the region, has also been studying the potential for a completely new city on the shores of the Mediterranean which would have its own legislative system and free-zone status. If and when it goes ahead, the project will be by far the largest in the country.

Two of the other major Gulf groups believed to enter the market in the coming years are the Kuwait-based Kharafi Group and the government-owned Qatari Diar holding company, both of which are reportedly looking to develop seafront plots in Tripoli in partnership with the government. Lastly, in late 2007 the Bahrain-based Gulf Finance House announced plans to build an Energy City worth an estimated $3.8 billion. 

And while so far most of the investment has been in Tripoli, Libyan developers claim that even higher returns can be found in Benghazi, the second-largest city which lies further along the eastern coastline.

“You can buy something at 100 in Tripoli and sell it at 150 a year later,” says one Libyan property investor. “But in Benghazi, because the market is even more immature, you can buy at 100 and sell at 200. The margins are even higher.”

Tricky business

As one might expect though, things tend to move a little slower in Libya. Signing a multi-million dollar development deal is one thing and actually beginning work is another, as the long delays in these first projects have shown.

Investing here remains a cumbersome and bureaucratic affair, despite government promises to make things easier for foreign companies to establish a legal presence on Libyan soil, and there are also sizable risks. Rules and regulations can change suddenly, unaccountably and at the whim of an unpredictable leader, while no-one really knows for sure who will take over — and how — after Gaddafi’s reign comes to an end.

The laws on foreign investment mean that investors need to team up with Libyan partners in order to buy — as oppose to lease — property in Libya, and more importantly, it is too early to find many tried and tested examples of previous success stories.

 Other challenges include obtaining government permission to develop larger plots of land, which often requires the foreign investor to contribute to building local infrastructure, the idea being that investors should play a role in upgrading roads, electricity and water supplies and other amenities in undeveloped areas. And with unemployment unofficially running at more than 30%, large-scale tourism and hotel projects are also rated on how many jobs they will create for Libyans.

Yet despite the fact that regulations are unlikely to be liberalized further in the near future, opportunities to invest in such virgin markets as Libya are becoming increasingly scarce in the Middle East — and especially on the shores of the Mediterranean. With the market likely to be transformed by 2012, some might argue that now is the time to take the plunge.

As the second largest foreign exchange earner behind tourism, and the employer of a substantial amount of Tunisia’s workforce, the textile sector is an engine of economic growth for the country, but some minor changes in European legislation have challenged the competitiveness of Tunisian firms, who rely on Europe’s market for the bulk of their exports.

The European Union recently abolished import quotas on Chinese textiles, effectively opening the door for low-cost Chinese cotton and silk, while competitors are worried that Asian product might now flood the market, pushing down prices and affecting the volume sold of more expensive product offerings.

The end of quotas on Chinese textile exports weighs heavily on the economies of countries around the Mediterranean. “Approximately one third of jobs in the area is likely to be severely affected by this competition”, says Jean-François Limantour, President of Circle Euro-Mediterranean, an association of leaders in textiles and clothing in the region.

With seven million direct jobs, the textile and clothing sector is the leading industrial employer in almost all the countries of the region. In Tunisia and Morocco, over 200,000 people are employed in the textile industry. In Turkey, one million employees work in the sector, accounting for a quarter of all industrial jobs. These three countries export 90% of their production to Europe, virtually without tariffs.

As some might have predicted, Moroccan textile exports fell by 22% in January and February 2008, according to Mohamed Tazi, General Manager of the Moroccan Association of Textile and Clothing Industries.

However, while some might worry, Tunisian firms remain to a large extent unaffected and continue to celebrate 2007’s year-on-year growth of 18.5%. Garment exports also continue to perform well, buoying demand for Tunisian textiles with export increases of 14% in value and 4% in volume. Underwear, in particular, is the forte of Tunisian garment manufacturers and has continued to register strong increases. According to a local boss of lingerie production, Samir Ben Abdallah, “the Chinese are disarmed when they face us in the high-end of the market.”

Geographically, the customers and providers of Tunisian textiles did undergo slight changes in 2007; however, the country as a whole continues to retain its traditional clientele. Exports to France, Tunisia’s main market, grew by 12%, while Italy, Tunisia’s second largest recipient of Tunisian textile, saw an increase in its imports by over 20%, compared to 5% in 2005 and 9% in 2006. Portugal recorded the largest increases in textile imports from Tunisia, registering 78.7% in 2006 and 45.5% in 2007.

New models

Increased competition from China is forcing Tunisian firms to rethink their business models. Traders are looking to forge links with new markets and, more importantly, to put pressure on market niches such as textiles, which means technical fibers used in well-defined applications will have special characteristics like flammable and electro-conductive insulation. These so-called smart textiles are used in aerospace, flak jackets and sports equipment and would add to the repertoire of Tunisian firms who already specialize in the high-end textile market.

Tunisia has also pushed for certain sector reforms to boost the competitiveness of national firms. The country-wide effort to upgrade the sector’s capability has reported “more than encouraging” results, according to Mehdi Abdelmoula of Maille Group. The program has allowed his company “to strengthen its material and immaterial structures to modernize its process, organize its management, and therefore improve its productivity. The upgrade also enabled us to have more input from our management and develop strategic thinking in the medium and long term.”

Sub-or-co-contracting?

This also means that to adapt to the new situation created by the flood of Asian products on the European market, Tunisia has chosen to adopt a strategy oriented towards the finished product through co-contracting with other companies. The strategy appears to be bearing fruit as the amount of exports in the sector hit an all-time high of $4.3 billion in 2007.

To cope with competition from China, Mediterranean countries were encouraged to move to manufacturing finished products instead of remaining producers of unfinished products. Regional firms have asked the EU for technical assistance for retraining of textile workers.

However, the idea does have its critics. Abdelmoula does not believe partnering with other textiles firms as an alliance against Chinese firms is a viable option. Although he does believe that it is an alternative resource for his foreign clients, maintaining a long-term outlook helps further brand establishment and maintain better standards of quality. It also allows firms to develop a distribution and collection network.

Since Algeria’s privatization agenda began in 2005, the process has continued to play a lead role in attracting foreign direct investment (FDI), paving the way for further liberalization plans after the country’s economy suffered years of mismanagement under a socialist regime. However, the privatization of Algerian industry has not delivered the expected results. Investment has been hampered by delays in the privatization plans. Critics doubt the ability of the government to privatize the near 100 firms they targeted for sales in 2008. The question of land, in particular, is often among the main obstacles. Asked about the meager results, Algeria’s Minister of Industry and Investment Promotion Abdelhamid Temmar said “the economic problem regarding land will be permanently resolved before the end of 2008”.

Verifiable data is still hard to obtain as Temmar’s ministry does not follow the strictest of transparency standards. Balance sheets are not fully disclosed and parties involved in privatization deals are still kept in waters murky to the public eye. However, property transfers have amounted to $1.9 billion, with capital contributions of $507 million, which have allowed the government to sell companies without their debts.

The former Algerian Minister of Finance, Ghazi Hidouci Hamrouche, commented on the lethargic nature of the privatization process. He said “the lack of pseudo-liberal regulation and form leads to a deadlock. The origin of the crisis stems from the inability of the government to privatize banks and other large national companies, although attempts were made to sell off state assets to foreign companies.”

Hamrouche noted the particularly poor governance used in privatizing banks during the current credit crisis wondering “is this the time to open our system to uncontrolled speculation? Should we do so at a time when some are renationalized or bought cheaply? Be careful not to privatize the profits when things are going well and socialize the losses when everything goes wrong.”

“Banks are not like other businesses,” advised Hamrouche. He warned that “we must address the issue of their ownership in the context of fiscal and monetary policy. They are at the epicenter of the functioning of the economy. We cannot simply ignore these choices.”

Temmar himself recognized the poor policy of upgrading business at such a slow pace, mentioning “there is a quarantine of companies that have really been affected by the upgrade.” The lack of domestic enterprise is a situation that will be threatened as Algeria accedes to the World Trade Organization (WTO) sometime before the end of 2008.

Aware of privatization’s mixed results, Algeria’s government has decided to accelerate the process, mainly through financial incentives, simplifying administrative procedures, adopting a comprehensive strategy to transform the national economy, and promoting privatization, especially as foreign investors continue to attack Algeria for the lack of transparency on the sale of public enterprises.

Temmar has recently toured Europe to promote transparency of Algerian companies eligible for privatization to potential investors. According to him, “we are targeting the regions which will enable us to hold road shows based on the potential of the regions and what they can bring us.” For Algeria, foreign investment via privatization offers industries a chance for revival after much of the domestic industry remained stalled for several years.

With a privatization that could take three to six months with regular, transparent follow-up assessments made thereafter, Algeria could find an influx of foreign capital with a firm-state social contract implemented if the government pushes investors to adjust action plans to add value to the nation’s economy and workforce. One such possibility is strengthening economic links within Algeria’s economy. Large-scale infrastructure development through economic support programs promise to make significant improvements in integrating transport and telecommunications networks, in addition to upgrading payment systems.

For 2008, Algeria Telecom and Crédit Populaire d’Algérie (CPA) are set for privatization. The former has attracted attention from 45 possible buyers seeking a share varying between 35% and 51%. Although CPA’s privatization was stalled in 2007, the sale is likely to go through eventually, marking one of the largest privatizations yet. A slew of other companies also set for privatization, include electric and manufacturing firms as well as Sonatro and EVSM, who specialize in road works, chemical manufacturers Enasel Alphyt, and Aldar. Strategic firms like Sonatrach, Sonelgaz and Air Algeria remain off the privatization agenda.

On a swath of coastal land 40 km east of Tangier, a project is underway that bills itself as a revolution for the Moroccan economy and a solution to the problem of rural neglect. Comprising a brand-new mega-capacity port that opens onto the Mediterranean and Atlantic, road and railway infrastructural renovations, and special zones of logistics, industrial, and trade activity, the TangierMed project is set to become a nexus of international trade, investment, and manufacturing.

The project’s 2002 launch with a $5.57 billion investment was Moroccan King Mohammed VI’s “strategic decision to transform the region into an investment hub” through a “major restructuring project consisting of a commercial and industrial port on the banks of the straits, east of Tangier.” The King mandated the TangierMed Special Agency (TMSA) to administer the project’s free zones, Port Authority, and regional development

From its ideal geographical situation at the crossroads of Africa and Europe, Tangier has long attracted investors and traders. Even during Morocco’s colonization between European powers, the French, Spanish, and English signed a treaty declaring Tangiers an international zone of neutrality. The Tangier Free Zone continues to draw investors seeking a place to conduct their business without tariffs, taxes, and duties. TangierMed is a facelift to the region by maintaining the usual fiscal incentives in the free zone while adding high-capacity port facilities and incentives offered to designated industries like electronics, aeronautics and automotives. The project will include a deep-water port for containers and passengers, a 98 hectare free zone for storage and quality control, export-oriented industrial free zones throughout the region, and road and rail works as added transport infrastructure. The main container terminal was opened in 2007, but the project is expected to be fully operational by 2015.

In an interview with Executive, TMSA Chairman Said Elhadi explained the project as a “global concept” focusing on competitiveness and logistics. For him, the distinct advantage is “the geographical location, where you have a high concentration of maritime traffic.” Wedged between two continents, the location makes the project “very interesting for the optimization of flows.” He explained that a platform allows connections to Europe, Asia, Africa, the US, and South America with more effective operations and lower costs, as well as suitable transit times.

Rapid construction and the success of early operations are proving that business affairs in Morocco need not be marred by corruption and sluggishness. Experts attribute the remarkable efficiency of the TMSA to its special status as a business corporation with public power perrogatives. Another TMSA official explained “this kind of port would not be possible without a public-private partnership.” The private-public partnership gives TangierMed the best of both sectors, while eliminating the obstacles of corruption and lack of transparency that mark many business dealings in this country.

A marriage in political economy

The government supports the project with a large financial endowment and tax-free incentives that make it extremely competitive. But the private sector handles management of day-to-day operations and outsources contracts to proven experts in the shipping field. Shipping, as a monopolistic industry, is simply not the business of government. Shipping companies have the expertise and the ability to cut costs.

Taking its cues from this project, the government has been discreetly privatizing aspects of the state-run Casablanca port, which is reputed to be the most expensive and least efficient in the Mediterranean, as well as others. It inaugurated a port reform in 2006 that replaced the state monopoly Ports Exploitation Office (ODEP) with a new Ports Exploitation Company that the Minister of Transport and Public Works hints will be privatized later on.  Elhadi explained the near parity of investment between the public’s share, at $2.4 billion, and the private investment, at $2 billion. He believed that “to make the terminals work, you have to have a global reach. Otherwise it doesn’t work. You need to have operators that are global, which have the capacity to bring in global traffic to markets in Africa and Asia. You cannot do it with government or local means so you need to target the real partners. And it’s also an issue in the way to make sure that once you have these private partners there, you interface between the private partners and the public players but ensure that both parties will serve the project’s real purposes”.

Can shipping be that sexy?

Sheer magnitude and good taste are adding to high expectations for TangierMed. The port will feature four container terminals and special zones for industrial, logistics, and trade activity. So far, it is making international waves and has gained a reputation as a strikingly modern, glamorous and well-executed project. A TangierMed II is even underway to dramatically expand shipping capacity in response to growing demand. When TangierMed II is completed, the port will have a capacity of 8.5 million TEU, making it the largest port in the Mediterranean. Estimations put the overall cost of the complex, before the TangierMed II extension, at $1 billion, and major financing has come from a $200 million investment from the Hassan II Fund and a loan of $300 million from the Abu Dhabi Investment Fund.

As far as industry is concerned, insiders are saying there is a political will to court automotives. The automotive alliance Renault Nissan signed an agreement with the government in September 2007 for a joint manufacturing investment that CEO Carlos Ghosn predicts will be more cost-effective and competitive than existing plants in Turkey, Romania, and China. The complex will produce Renault’s Logan series and a new generation of low-cost Nissan vehicles, mostly for export. The operation will be the biggest in the country, and among the biggest in the Mediterranean, with a manufacturing capacity of 400,000 vehicles a year. Local press reports that planned investments will reach somewhere between $950 million and $1.6 billion.

Additionally, a US manufacturer of electric and electronic systems for the automotive industry will build a $36 million plant in the free trade zone, according to an agreement reported in March by local press. The main clients for the new 60-hectare Delphi Group plant will be Fiat, PSA, Renault and Opel. The firm cited low-cost labor and proximity to Europe as its principal incentives for moving into the region. Free trade agreements with the United States, Arab countries and Europe are sure to incite more investors to follow suit.

Importing development

Infrastructure improvements are also redefining the Northern landscape, in the interest of the King’s stated purpose to achieve an integrated regional development. Poor infrastructure has long proven a barrier to transportation of goods and people, but now government officials are prioritizing the transport sector. According to Karim Ghellab, Minister of Transport, the rate of road building has doubled over the past decade. In addition to bigger and better infrastructure, TangierMed will help job creation to the tune of 145,000 positions over the next 15 years as well as social development.

For employment, the TMSA has already implemented training and education programs in the region as the project will staunch the high urban unemployment, hitting 33% in some estimates”. However, according to one TMSA official, the target region is limited to 500 km, which can limit the impact of education and development of rural populations.

Elhadi believes that others might come from elsewhere in Morocco to take the up slack in a burgeoning job market, but “with the education and training programs in the region, within five to seven years it should be ok.” The project’s TangierMed Foundation is an initiative to devote 1% of all investments to social development in the region. The $16 million already secured will be going to the region’s primary schools to train the next wave of workers for 2020.

In 1988 the leaders of Algeria, Libya, Mauritania, Morocco, and Tunisia gathered to lay the framework for what would later become the Arab Maghreb Union (AMU), a regional organization mandated with several responsibilities, the most prominent of which is to facilitate regional economic integration between the five North African states. Over the years, the AMU has sought to establish itself as a veritable trading regime on par with the European Union (EU) in terms of scope and depth, but the organization’s goals have not been realized, nor have the region’s economies come even close to the integration found between other regional organizations.

While its members or leadership might not be at fault, the AMU specifically, and regional economic integration in general, need a rethink as other opportunities present themselves in the near future. Caught between saving a defunct organization like the AMU or starting anew with Europe under the framework of a Mediterranean Union, North Africa’s economies, particularly those of Algeria, Morocco, and Tunisia, might choose to opt for the latter.

North Africa continues to lack the proper atmosphere for regionalization, witnessed by both disappointing trade data signaling continued low regional trade flows and evidence of a lack of political will to overcome differences. The politics of the region remain fragmented, land borders are still tough, if not impossible to physically navigate, and the tariff schedules from years ago are still standing.

Executive examined the failures and future of economic integration à la Maghreb, and offers this insight on the lack of regionalization and its causes, as well as future prospects for the region’s countries.

Political problems

Few regional organizations have suffered the same number of political setbacks as the AMU. In the 1990s, Libya withdrew from the organization after AMU member states recognized the UN-imposed sanctions on the country following the verdict of Libya’s involvement in the Lockerbie bombing.

Every economic organization has a regional champion, usually the biggest of a group’s economies or another determinant based on scale. In the 1990s, Algeria faced its own domestic political strife, including a civil war with Islamic fundamentalists and other issues of stability, leaving it too embattled to head the AMU. With Algeria out, Tunisia and Morocco failed to pick up the torch, nurturing instead their own trade relations with the EU. The lack of political will and economic readiness left the AMU effectively stalled between 1995 and 1999, when the organization existed only in name.

While a lack of political will is no longer ubiquitous, the reemergence of old conflicts is brewing. This could at any moment severely threaten a weak organization like the AMU. Mauritania and Libya are still sorting out their own tensions after a coup d’état launched against Mauritania in 2005, which the authorities effectively squashed and afterwards accused Libya’s security services of having been involved in. Algeria and Morocco continue to stumble over their territorial chessboard in the Western Sahara, with Morocco remaining accusatory over Algerian support for the Polisario Front’s struggle for independence. With the land border still closed between Algeria and Morocco after fourteen years, the AMU will have a tough time bringing about the free movement of the means of production between the two biggest economies of the AMU.

Grabbing globalization

For the twenty years after the AMU’s inception, the neo-liberal paradigm came to dominate international trade theories. After watching Europe strengthen its international position, developing markets scrambled to form unified entities to mimic the EU. Countries pursued a mixture of strategies to best maximize their position, but the EU format — starting with a small core of states and basing itself at first on intra-industry trade, only later moving towards notions of a regional politico-economic entity — proved the strongest of the possible options.

For the AMU, working “towards the facilitation of the free movement of individuals, goods, capital, and services” was the most economically relevant of its five initial mandates. The AMU’s common development strategy for the Maghreb added three more goals, including a free trade zone for goods and services, customs union and common market, as well as a fully-fledged economic union. Progress, however, has been kept on the backburner as member states continue to rely on overlapping bilateral agreements with each other. This keeps intra-Maghreb trade accounting for little as a proportion of aggregate trade figures.

This lack of regional integration has continued to push North African governments to look elsewhere, rather than to their Maghreb neighbors, to export, to import, and to tie themselves economically. European neighbors have historically accounted for higher trade levels with AMU economies, but with little power to bargain collectively for a better trade status with Europe, the organization’s countries continue to show little prowess in trade negotiations, receiving instead the policies chosen by states on the northern side of the Mediterranean, the most prominent of which being France and Spain.

The past five years were perhaps the best in terms of investment climate and political fervor for North African states, particularly those of Algeria, Morocco, and Tunisia,  comprising French North Africa. However, the politics and inherent inability of AMU members led to an entity in name only, which left it toothless to establish a regional trading order. Having missed the past twenty years in catching the winds of globalization, can North Africa continue to pursue long term economic objectives of privatization, liberalization, and diversification as separate cells?

Skeletons in the closet

While recent AMU activity has centered on discussing the possibilities of an eventual monetary union and the creation of the Maghreb Bank of Investment and Exterior Trade, the organization has fundamental principles of economics that it must first address on the domestic front. The economic problems running rampant in AMU economies are posing a serious threat to any continued regionalization plans as countries have to be in good macro economic health and share similar figures for economies to merge and any customs union to become a success.

Algeria’s own internal troubles were highlighted by Abdulhamid Temmar, Minister of Industry and the Promotion of Investments, who believes “the transformation began 10 years ago. For this it was necessary to first assure the political and social stability, because we exited the 1990s from a very difficult situation.” Other AMU member states must keep this in the back of their mind and pursue regionalization within the framework used by the most successful organizations.

Among his ministry’s merits is its spending of around $30 million for local development in certain regions and to guarantee calm. As he noted, “We have partially reconstructed indispensable infrastructure. There were schools that had to be opened. There were necessary gifts to the poor and the most disadvantaged […] there was also macro economic stability and this is what we achieved between 2000 and 2004.”

Morocco’s Minister of Foreign Trade, Abdelatif Maazouz, believes that his country’s “biggest challenge is competitiveness and integration into regional economic groupings dynamic in order to cope with increasing global competition. Such a challenge can be met only through integration and the elimination of tariffs within the framework of a genuine free trade area guaranteeing the free movement of goods, services, capital and persons.” To this end, Morocco did support Algeria’s accession to the World Trade Organization (WTO), which Maazouz believes “is likely to boost bilateral trade between our two countries on the basis of WTO rules.”

More optimistically, however, countries in the region are pushing the right domestic plans for liberalization through privatization. Moves to liberalize telecoms and other markets has provided countries with more efficient systems and an influx of foreign capital to use in financing industrial diversification. Plans to establish off shoring sites for European firms as well as research and development (R&D) centers, is refreshing news from a region which has relied to a large extent on its natural resource abundance, in phosphates and hydrocarbons. While hydrocarbon prices have boosted export to import ratios — accounting for 243% in Algeria, 58% in Morocco, and 83% in Tunisia — price levels are not guaranteed forever.

Inter and intra Maghreb trade

Data indicates a boom is occurring in aggregate bilateral trade between Maghreb countries, but while the numbers look great on their own, intra-Maghreb trade is limited.

In 2006, Morocco registered an export growth of 13.5% to Algeria, 77.3% more to Tunisia, 17% more to Libya, and 32% more to Mauritania. On the import side, Morocco imported 26.8% more from Algeria in 2006, 6.4% from Tunisia, 31.7% from Libya, and 47% from Mauritania. But while these figures may suggest booming intra-Maghreb trade, they pale in comparison to Morocco’s trade figures with their main commercial partners, most of whom are European, as well as others, including the United States, Turkey, and Saudi Arabia.

Figures kept by the United Nations note the high tariffs applied to products imported to the Maghreb, hitting 21% in North Africa for trade partners holding most-favored nation (MFN) status. This figure dwarfs that of tariffs Asia applies to its imports, at 10.8%, as well as the 9.5% in Latin America. Morocco also decreased average tariffs by 57% in recent years and 65% for maximum tariffs over a ten year period, while Algeria and Tunisia decreased their average tariffs by 20% and 30%, but these drops imply only a growth in intra-regional trade, but not at the levels which could be achieved if the countries joined under the AMU and allow the supranational body to determine trade policy.

In fact, North Africa accounts for the lowest global intra-regional trade figures at only 3%, less than one-third against the 9.5% level for the next highest, the Common Market of Eastern and Southern Africa (COMESA), and much below the best performing area for intra-region exports, the EU, at 70%.

On the country level, the most popular bilateral trade in North Africa is not even within the confines of francophone Maghreb, where countries with shared languages, recent history, and geographical proximity would have a natural propensity to partner and trade. Libyan-Tunisian bilateral trade characterizes the highest figures of intra-AMU bilateral trade. Equalling $750 million per year, the trade is mostly in food, manufacturing, and fuel, and to a large extent determined by Tunisia’s relatively small economy and proximity, while Libyan fuel is in abundance. The second strongest of the AMU’s bilateral relationships is that of Algeria-Egypt trade, nearing $350 million, but composed largely of Egyptian exports to Algeria.

Intra-Maghreb investment flows also remain weak as Algerian, Moroccan, and Tunisian firms find little interest in the industries of their counterparts. This dynamic is also exacerbated by Gulf petrol dollars, which continue to make their way westward in new projects, throwing their capital into the support of, primarily, housing and tourism infrastructure development, but additionally, into downstream industries and related sectors in infrastructure development.

According to Morocco’s Ministry of Economy and Finances, “the revival of the Arab Maghreb Union could constitute a powerful lever for credible partnership with the European Union and enhance the attractiveness of the region for foreign direct investment, through its positive effects on regional stability and the expansion of the market size [of 80 million consumers].” The Ministry added however that although there is “an obvious complementary between the economies of the Maghreb, intra-Maghreb economic and commercial exchanges remain weak compared to their trade with the European Union.”

With common associations with other global players, including partnerships with the EU and the entry of Algeria to the WTO, where it will join both Morocco and Tunisia, North African countries seem to be focusing on opportunities in other global neighborhoods rather than those in their own region.

Maazouz also believes Algeria’s WTO accession and the bilateral trade it should promote with Morocco, which is already a WTO member, “will contribute to the strengthening of the Arab Maghreb Union and facilitate the construction of the free trade area Maghreb.”

Natural or unnatural partners?

Beyond these basic macro economic goals and the stability all member states must achieve before they can move forward, there are also questions of the complementary regional tradition of relationships and whether separate North African states are effectively natural partners. By specializing in the same industries, Maghreb countries are effectively ruling out the complementary natures of their trading relationships. In theory, the AMU would be an effective organ, as are other trading blocs, in harnessing specialization in agricultural production, accommodating member states under a bloc in setting prices on international markets.

Instead, the lack of an effective AMU has left states to pursue their own bilateral trade policies, most of which are through EU member states as Moroccans do not need to buy Algerian fruit or Tunisian textiles when they have an industry and costs are cheaper within their own borders.

Although integration prospects remain weak, the idea is certainly merited by theoretical underpinnings, as noted by the World Bank, which maintains that an AMU-like organ could foster a two-pronged support for economic growth, including scale and competition effects as well as “hub-and-spoke” effects through the Maghreb countries’ continued trade with Europe.

The Bank believes “Maghreb integration would create a regional market of more than 75 million consumers, similar in size to many leading trading nations and sufficiently large to exploit economies of scale and make the region more attractive for foreign investment.”

Maazouz maintained that “Morocco has always integrated regional dynamics in its strategy of developing trade relationships through preferential trade agreements with the countries of the AMU.” Highlighting Tunisia as the prime case of Morocco’s regional relations he noted that, “if trade relations with Tunisia have evolved from a classical preference towards free trade in line with WTO agreements as well the vision of free trade adopted from the framework of the Barcelona process, those of other countries remained governed by conventional commercial tariff agreements.” He explained that other bilateral relations with AMU members are “pending the adoption of the proposed free-trade zone being negotiation between countries in this grouping.”

Advice for revival

The impact of business on politics was apparent for EU-watchers when the European Coal and Steel Community was to a large extent the creation of industrialists in France and Germany. If the Maghreb has any plans to revive the AMU, it could follow Europe’s example, exemplified in the calls by Morocco’s Ministry of Economy and Finances upon AMU members to “develop synergies among private partner countries.”

Recent examples of private, intra-Maghreb partnerships include the 2007 creation of the Union of Maghreb Entrepreneurs as well as temporary institutions, like a proposed think-tank aimed at strengthening the Morocco-Tunisia partnership ties. Often, ad hoc bodies, if they prove useful, are further extended or formalized.

Financial integration could be another way to ensure similar, Maghreb-wide standards in the financial services industry with the aim of facilitating export promotion and large project financing.

The IMF has recently been working on two related products: harmonizing regional payment systems and banking regulations, as well as strengthening the relationships between financial regulators and operators. According to the Ministry of Economy and Finances, “some short-term measures could be implemented and play the role of catalyst for a deeper financial integration.

“These measures would reduce the financial barriers to intra-regional trade by simplifying administrative formalities applied to the banking transactions related to trade and reduce the cost and number funding tools of trade. In addition, it is necessary to remove the stress of transport, a basic factor determinant of boosting trade”.

European Commissioner for External Affairs Benita Ferrero-Waldner believes that “a more effective functioning of the AMU would strengthen Algeria’s relations with the EU. Algerian companies would be better equipped to trade with the EU if they had the possibility to benefit from the economies of scale of the larger AMU market. In addition, the negotiating power of the AMU would certainly be stronger than that of each of its individual participating countries. By stimulating trade, a successful AMU would also underpin the structural reforms necessary for achieving faster growth.”

Maazouz is still convinced that “the Arab Maghreb Union is an important economic potential which should enable the five member countries to cope with globalization and to position itself in a strong and credible relationship vis-à-vis other regional groupings such as the European Union. Morocco remains committed to the AMU and optimistic about its future.”

As French President Nicholas Sarkozy announced plans for a Mediterranean Union and the merits for such an organization, the main question left for AMU member states is which organization they will choose first. Based on the evidence, the progress to date and a European penchant for regionalization, what is left of the AMU will most likely continue to be phased out for better options.

Mediterranean Union or the AMU?

While intra-Maghreb integration has remained stalled since its inception, losing ground against the movement of time, inter-Maghreb integration is showing progress, manifesting itself in such treaty regimes as the Agadir Accord, the Greater Arab Free Trade Area, a host of bilateral deals, and most recently the idea of a Mediterranean Union as proposed by French President Nicholas Sarkozy as a formal trading organization integrating the economies of the European Union and of those states bordering the southern rim of the Mediterranean Sea, including Morocco, Tunisia, Algeria, and Libya, not to mention the economies of the Arab countries in the Eastern Mediterranean.

The formalization of an organization to supersede bilateral trading agreements remains the most likely path through which regional economic integration among the countries of North Africa will occur. Regionalizing isn’t zero-sum, in that acceding to a Mediterranean Union comes at the detriment of the AMU, but Maghreb economies will most likely still opt to associate with Europe in the short term, which will lead to a formalized partnership in the long term.

Spain, France, Italy, and others along the northern rim of the Mediterranean have long pursued strong trade policies with their southern neighbors, reflecting the benefits of a strong Euro abroad, historical trade ties, and the prospects of North African liberalization, which has presented firms with a host of off-shoring opportunities in Morocco and Tunisia.

Trade figures bolster these dynamics, denoting that 17% of Algerian exports were destined to the Italian market, 10% to Spain, 9% to France, and 4% to Belgium. On the import side, Algeria’s appetite brought 22% of the country’s total imports from France, 8.6% from Italy, 6% from Germany, and 6% from Spain. Tunisia’s figures mimic those of Algeria, with the European Union’s appetite for Tunisian exports standing at 80% of Tunisia’s total exports, while Tunisia imported 69% of their total from Europe.

More than geo-strategy

Sarkozy’s proposals for a Mediterranean Union during the 2007 French presidential elections is likely to mean more than just a pipedream driven by geo-political desires, but evidence does point to the lacunae left by Europe relative to other major economies and the relationships they maintain with their spheres of influence.

Although Zbigniew Brzezinski foresaw a growing role for France in maintaining its hold of the North African “cluster of states” in the late 1990s, there is a growing body of evidence that globalization has fostered a strong domestic position for the European Union, but without the same type of geo-strategic clout the US and China have gained. European FDI flows to Mediterranean economies remain meager, comprising only 1% of total European FDI, against 17% of the US’s FDI to Central and Latin America and 20% of Japan’s FDI to countries encompassed within their regional periphery of East Asia.

Pundits also criticize the idea of a Mediterranean Union, holding it in suspicion as a consolation prize for Turkey if the country grows tired with its seemingly endless EU accession plans, but plans to regionalize the Mediterranean could foster the sort of union needed by North Africa in any regional organization.

The idea includes plans to extend and deepen trade ties and promote cooperation in developing countries along the southern rim through institutions such as a Mediterranean Investment Bank, modeled after the European Investment Bank. Further details will likely be announced in July when Paris will host a Euro-Mediterranean summit to formally establish the Union. France’s Sarkozy is likely to partner with Egyptian President Hosni Mubarak, who will lead the southern side of the Union from its base in Tunis.

Regional stability was addressed in a 2008 report by Morocco’s Ministry of Economy and Finances, which noted of the most detrimental threats were: “Instability in the price of petroleum for importing countries and geopolitical instability, above all for most in the countries of the southern Mediterranean, who founded their development strategies on the attraction of foreign capital and the development of tourism.

“In total, the international environment was globally favorable for the national economy in 2006. In particular, the rebound of growth in Europe, our principal commercial partner, has strongly supported foreign demand addressed to Morocco, which has evolved to a rate of 7.1% against 6% in 2005.”

Ferrero-Waldner stated in April that Morocco could play a leadership role in the Mediterranean Union, underscoring that “Morocco expressed a great political will to lead at the beginning.”

The will expressed by Morocco includes with it possibilities for enlarging cooperation with the EU, a larger liberalization of trade, political dialogue supporting neo-liberal growth theories and strong association of theory with communal foreign and defense policies.