Open up markets, or beef up coastguards

In 1989, the wall separating Europe suddenly collapsed. Within a few months, a hitherto seemingly immutable order gave way to commotion and impatience. At first, the old countries of Europe were paralyzed with fear of the unknown and anxiety about immigration - then they seized with both hands the opportunity history had offered.

Europe implemented financial assistance and technical assistance programs, opened trade talks and promised an eastward enlargement of the European Union, which eventually led to the free movement of workers across the former Iron Curtain. Two decades later, these efforts have proven a success. The economic and political transition of ex-communist Europe has been swift and deep. Moreover, with the dramatic exception of the former Yugoslavia, it was carried out peacefully, which contributed to strong economic performance.

Could a similar story unfold for the southern rim of the Mediterranean?

The EU's 500 million citizens have 170 million neighbors between Agadir (Morocco) in the west and Port Said (Egypt) in the east. These millions sit on Europe's doorstep, eyeing with longing its prosperity and democracy. In Tunisia and Egypt, they have demonstrated their resolve by overturning regimes that many in the West saw as guarantors of stability. They are now asking nothing more than to be able to invest their energies in bringing about their countries' recovery. But, unless they have reason to believe that improvement is coming, today's transforming dynamism will become the dynamism of despair - with all the risks that this implies.

The first priority is jobs. The young people driving the Tunisian and Egyptian revolutions are underemployed. We do not know if the official data, which report roughly 30 percent youth unemployment, are correct, but it is clear  these economies were incapable of absorbing the demographic wave of the past decades. Recent growth rates - 5 percent to 6 percent annually in Egypt, Libya, Tunisia and Morocco - look strong, but they are less impressive in light of 10 years of 2.5 percent annual growth in the working-age population. Much stronger growth is needed if jobs are to keep pace.

Obstacles to growth are not chiefly macroeconomic. It is true that Egypt is fragile, that public finances and current-account balances will slump and that inflation will take off if governments try to respond to protests by spending money they do not have. These countries must educate better, which will be costly. And international assistance will certainly need to be mobilized. But these are not the most pressing issues.

The main brake on development lies in these countries' economic institutions. According to the World Bank, a building permit in Egypt costs three times the average annual income, 11 different steps are needed to register a property sale in Algeria, and Morocco ranks 154 out of 183 countries for protection of shareholders against management abuses of power.

These are only a handful of examples. They all point to economies where development is impeded by bureaucracy, monopoly rents - often the result of nepotism - and sclerotic credit markets.

It is unworkable, and should thus be unthinkable, to try to export the solutions used in Eastern Europe, which were based on importing EU legislation with a view to enlargement. But the current political revolutions present a once-in-a-lifetime chance for economic emancipation, which the EU can support by creating reform incentives and mobilizing its development banks.

Given its dominant role in the region, Europe can exert a more direct impact on policies affecting trade and mobility. Today, migration is extremely circumscribed. Professional mobility must be allowed without delay. Free circulation of goods is also limited. As a proportion of GDP, Tunisia's trade with the EU is one-half that of the Czech Republic, and Morocco's is one-quarter that of Poland.

Openness is needed not only for goods, but also for services. So Europe should promote much more than it has so far an outsourcing model in the most labor-intensive segments of the value chain, as Germany has done with great success (particularly in Central and Eastern Europe). While this model may entail some initial job losses in Europe, it would also preserve jobs in the long run by keeping production sites competitive, and create jobs by fostering development - and thus export markets.

Europe's choice is now clear: Mobilize to help its neighbors open up their economies and societies, or start beefing up its coastguards and ordering patrol boats.

- The author is director of Bruegel, an economics think tank based in Brussels, and a member of the French Prime Minister's Council of Economic Analysis.

Copyright 2011 Project Syndicate

Jean Pisani-Ferry can be reached at
features@praguepost.com