The Euro-Mediterranean Partnership and Inward FDI in Maghreb Countries

Inward FDI in developing Mediterranean countries is supposedly expected to soar as a result of the Euro-Mediterranean Partnership (EURO-MED) between the European Union and twelve Southern and Eastern Mediterranean countries that emerged from the 1995 Barcelona Conference. This is especially true in the case of the Maghreb countries, which have strong economic links to Europe. This investment boom, however, is far from certain, and the early evidence available so far does not support it. Indeed, the Barcelona framework contains no specific provision for investment. Nor is it clear how the Euro-Mediterranean Free-Trade Area (EMFTA) might affect incentives or reduce perceived risks in the region, since such risks are mainly political and structural in nature. In fact, the liberalization of Southern Mediterranean imports inherent in EMFTA will cause European investors to lose some of the incentives they already had to invest in the region (in order to side-step the high tariffs levied in some industries), especially since manufactured exports from these countries have long enjoyed free access to European markets. This could give raise to a “foreign investment diversion” effect. Besides that, any effective increase in FDI would most likely concentrate in certain areas within specific countries in each South Mediterranean sub-region (so-called investment hubs), and might, therefore, be detrimental to others as a result of agglomeration economies. This paper reviews the available evidence and literature on the determinants of FDI in the three central Maghreb countries: Algeria, Morocco and Tunisia. It then explores the possible future development of inward FDI in these countries within the framework of EURO-MED. Finally, the paper identifies possible future scenarios in which inward FDI in this sub-region might be positively affected, both through national economic policies and through the implementation of the Association Agreements with the European Union. As a conclusion, it argues that only the creation of a horizontal free-trade area between the three Maghreb countries -as opposed to the creation of parallel bilateral free-trade agreements between each individual country and the EU, as has been done so far- could boost FDI levels within the region.