When one thinks about the history of the Mediterranean region any number of images can come to mind. Great civilizations like the Egyptians, the Greeks, the Romans, the Ottomans have all left their mark on the region and the world. So it might have sounded a bit patronizing when the The Economist entitled one of its articles “The Med’s moment comes” [12 July 2008 print edition]. To be fair, it has been a while since any littoral country in the region has demonstrated the greatness of the past. The region’s rich history has continued to make it desirable destination for tourists, but not investors. According to The Economist, that has changed.
“Look southward from the southern tip of Spain, across the strait of Gibraltar. There, only 14km (nine miles) away through the slight sea haze, arises the vast construction works of a new seaport to the east of Tangier in northern Morocco. Tanger Med opened its first docks [in] July . Handling 3.5m containers a year, it is already as big as Felixstowe, Britain’s biggest port. A second terminal opens this summer, and within seven years its annual capacity will rise to 8.5m. It will be the largest container port in the Mediterranean, not far behind Europe’s biggest, Rotterdam (although merely one-third the size of the Asian giants of Singapore, Shanghai and Hong Kong). Similar ports are being finished in Algeria, Egypt, Malta and Tunisia.”
The Mediterranean Sea has always been an important regional shipping route. The completion of the Suez Canal in 1869 made it an important part of the global maritime system as well. Even so, one might wonder where all the goods being unladed in Morocco are going.
“One-third of the world’s container traffic already passes through the Mediterranean, bringing manufactured goods from China and South-East Asia to Europe and the east coast of America. The Moroccans, spending some €3.5 billion ($5.5 billion) on Tanger Med, and others along the coast hope that if they build, a big slice of global commerce will come to their shores. Goods will arrive to be broken down into smaller loads and sent around Europe. Manufacturers will set up factories in tax-free zones planned around the docks, bring in components for assembly and serve the huge market across the water.”
Without globalization, these Moroccan dreams would never have been more than that. The dreams, however, are already becoming reality.
“The Mediterranean’s southern and eastern coasts are pulling in huge quantities of foreign direct investment, on a scale second only to China among emerging economies. The wave started about five years ago, and now private-equity groups and large investment funds from the oil-rich Gulf states are joining in. Tanger Med is but one mighty symbol that something is stirring along the coastline.”
The fact that investment flows began before oil prices began rising sharply means that those investments remain risky. In an earlier post [Changing Supply Lines], I focused on the fact that high oil prices are affecting globalization and on the extended supply lines that support it. That could put a big crimp in Morocco’s plans. The good news is that if bad times are coming, the evidence of the dark clouds is not yet on the horizon. It’s important that globalization takes hold in an area more commonly referred to as part of an arc of crisis than an arc of opportunity. The article explains why development is so important.
“The MEDA ten (a group of southern and eastern economies) have an average income per head of only $6,200, putting them roughly where western Europe was in 1950 and Romania was in 1975. Even though the gap in GDP per head has been closing, thanks to falling fertility rates as well as relatively faster economic growth, at today’s pace it would take almost 160 years for the MEDA ten to catch up with the European Union average. Unemployment is probably between 20% and 30%, even though official figures say it is around 12%. This last figure helps to explain why Europeans have tended to see the other side of the sea as more of a threat than an opportunity: a source of immigrants, often young and illegal, mainly Muslim and frequently unwelcome. In Italy, Spain and tiny Malta, illegal arrivals are of especial concern. Another reason is nervousness about the region’s political health.”
The article eventually admits that region is not historically unfamiliar with commerce and that the Mediterranean has enjoyed a glorious history.
“Commerce is scarcely a novelty in the Mediterranean. Centuries ago, the Middle Sea was a hub of world trade: to the Romans, it became mare nostrum ‘our sea’—surrounded by the empire. Now the inflow of foreign direct investment may be reversing a long relative decline in the fortunes of the southern and eastern shores. The MEDA economies have managed to step up their growth rates to 4.4% since the turn of the century. … Tanger Med is a point of arrival for foreign investors. The leading shipping and port companies, such as Maersk and DP World will have terminals there. This February Renault and Nissan started preparing the ground for a huge car factory costing €600m. The Franco-Japanese alliance aims to build low-cost cars and vans not just for Europe but for markets around the world, mostly in emerging economies where the basic Renault Logan has already proved a winner. Annual output will start at 200,000 vehicles, but will double within a few years.”
Once again the high cost of oil may put a damper on some those plans. If the plans do continue, it will mean that globalization will have gained a crucial foothold on the African continent.
“Twenty years ago, Europe’s car industry stopped building new factories in low-wage Spain and Portugal, and turned to eastern Europe, including Turkey. The step across the Med, to a country where wages are one-fifth of what they are on the northern shore, is of great significance. Competitors will watch and may follow. Morocco has already attracted car-parts firms such as Leoni (from Germany), Valeo (France) and Clarcor (America). For 50 years Europe’s car factories have shipped in labour from Turkey and north Africa to their factories in Germany and France, and invested little to the south. Now the capital is moving to the labour: the mountain is moving to Muhammad, if you will.”
Southern European countries are interested in seeing a prosperous Levant for the same reason that the U.S. would like to see a prosperous Mexico — to reduce illegal immigration. As a result, the EU has been considering the benefits of a free trade area in the Mediterranean for over decade. Known as the Barcelona Process, it has been mired in politics since 1995.
“On taking office last year the president of France, Nicolas Sarkozy, launched his own plan for a Union for the Mediterranean. This was sold as a way of resuscitating the Barcelona Process—although its true purpose may have been to offer Turkey a consolation prize instead of membership of the EU. At first Germany’s chancellor, Angela Merkel, took a dislike to it, seeing in it a new club without the EU’s northern members but paid for with EU (ie, mainly German) money. Now it is within the purview of the EU, Ms Merkel seems more at ease with Mr Sarkozy’s scheme, which has been diplomatically renamed ‘The Barcelona Process: Union for the Mediterranean’. … The EU’s clout and money are probably necessary to get the new union going. But there is a risk that European governments will concentrate on immediate questions of security and migration rather than on measures to boost the economies of their southern neighbors (which in turn may improve security and limit northward migration).”
Although the same kinds of protests against free trade agreements that are currently plaguing U.S. politics could derail the Barcelona Process, bilateral agreements and private investments are keeping economic interest in the Mediterranean region alive.
“There is a groundswell of foreign direct investment in the region. According to figures collated by ANIMA, the southern and eastern shores of the Mediterranean are now attracting more investment than other emerging economies such as India, Mercosur or southern Africa; only China catches more. That raises three questions: where is it coming from; where is it going; and who is investing? For the first time the MEDA countries as a whole are punching their weight in terms of inward investment: they have about 4% of the world’s population and are now getting a slightly higher share of investment flows. Inward investment has grown sixfold in six years. The leading recipients have been Turkey, Israel and Egypt. The prospect of entry into the EU has fueled Turkey’s five-year inward investment boom, though political difficulties and the slow pace of adhesion to Europe may explain a recent slowdown. Israel, with its hyper-educated technical workforce, boosted by arrivals from the former Soviet Union, has been a happy, high-tech hunting ground for American investors. Renault have moved in too, to make electric cars. Egypt’s political stability and economic reforms since 2004 have attracted investment too—notably the €12.9 billion purchase in December last year of Orascom Cement by Lafarge of France, paid for in Lafarge shares. Behind these leaders, Algeria and Morocco have each seen inward investment grow tenfold since 2002.”
The article notes that there have been economic peaks and valleys over the past few years, but peaks have been higher than the valleys have been deep.
“Behind this groundswell lie several factors. The boom in energy and raw materials has brought in oil and gas explorers but also investors in petrochemicals, fertilizers and cement. The maturity and saturation of European markets is another reason to look south. Privatization of banks and telecoms firms has also attracted investors, notably from the Gulf. The recent strength of the euro against the dollar should help too. Safran, a French aeronautical firm, is directing investment to Morocco to escape the pain of the strong euro. It is a big supplier to Airbus, which has made it clear that it expects its suppliers to price in dollars. EADS Socata, another subsidiary of Airbus’s parent company, has also invested directly in Morocco for the same reason. The source of the funds has changed in the past five years. Europe still accounts for about 40%, but North America’s share has shrunk from 25% to around 10%. Meanwhile the portion coming from the oil-rich Gulf states has risen from 16% to over 30%. More intriguingly, the share of emerging economies such as Brazil and India has climbed from 8% to around 20%.”
In addition to building seaports, like Tanger Med, investors have been drawn to other sectors as well.
“Energy is an important draw for investors, [but] it accounts for less than one-sixth of the whole. Banking (led by European banks) has not been far behind. Industries such as telecoms, chemicals, metalworking, tourism and car parts continue to attract dozens of deals a year across the region. Europeans have been buying homes by the thousand. Many are long-term residents rather than tourists.”
A major part of the article describes what kinds of investors are risking their funds in the Mediterranean region and where those investors are from.
“The inward investors can be grouped into four types, according to Mr de Saint-Laurent. The first might be called ‘offshore’ investors. These are firms attracted by deposits of oil and gas in places such Algeria, Libya, Morocco and Tunisia. They are offshore in that they ship in all their labour, equipment and supplies. They pay the state for the resources they extract, but have little further effect on the local economy. The second group consists of European companies, led by the French but also including the Spanish and Italians. Reflecting their colonial histories, the French and Spanish tend to be found in the west, the Italians farther east. These investors usually form joint ventures or buy local small and medium enterprises, if only because such partners are needed in the Islamic Arab cultures of the region. Third comes a new group, the Gulf funds. Their billions tend to go to the huge resorts springing up along the coast. Investors from Dubai have a €10 billion project in southern Tunis, a €3 billion development in Algeria and €600m site in Morocco. With them come Spanish builders, such as Sacyr Vallehermoso, which see on the southern shores of the Mediterranean an opportunity to recreate the old boom on the Costas back home. These investors have something in common with the offshore oil-and-gas brigade: often, not much spills over into the local economy besides low-paid jobs for cleaners and waiters. The fourth group, also newcomers, are perhaps the most interesting: investors from emerging markets. Several Indian companies have set up shop in the region. Tata has invested in motor manufacturing and outsourced information-technology work in Morocco. Wipro Technologies, a computer-services firm, also does IT work in the region. Ranbaxy Laboratories, a drugmaker, has factories there. Gujarat State Fertilizers and Coromandel Fertilizers from India are investing in a Tunisian factory to make phosphoric acid from the rich local reserves of phosphorus. South Korean investors also pop up, for instance with a car-parts factory in Tunisia and hotels in Syria. These industrial investors have no qualms about taking over local companies with thousands of employees—meaning that they are thoroughly integrated into the local economy, and their activities have a big knock-on effect.”
The article goes on to discuss one final group of investors that regional authorities would like to attract.
“The region’s boosters would also like to attract more money from a fifth group of increasingly interested investors: private-equity funds. The rapid increase in foreign direct investment flows is encouraging, because they indicate the region’s attractiveness to international capital: the export markets it can serve, wage costs and so forth. Increased interest from private-equity groups in small and medium enterprises would be a measure of these investors’ confidence in the entrepreneurship on offer around the Mediterranean.”
The proof that globalization has taken hold in an area comes when local entrepreneurs are able to attract funding and help the local economy thrive. For one thing, the rise of entrepreneurs helps sluff off stereotypical notions that certain societies are lazy or uninspired. Given the tools needed to succeed, entrepreneurs in every society can provide an impetus that can underwrite broader economic success. Entrepreneurs provide jobs and are optimistic about the future. They provide the hope upon which dreams are built. For too long there has been little hope in many littoral countries around the Mediterranean.
“The falling away of the countries on the Mediterranean’s southern and eastern shores from their European neighbours has been sad and wasteful. Algeria once was the breadbasket of the Roman empire; today it is the biggest wheat importer in Africa. Many things hold the region back, not least bad infrastructure, poor education and dysfunctional politics. The new economic hope is not evenly spread: foreign direct investment is swallowed disproportionately by Egypt, Israel and Turkey. The boom in energy and raw materials should give many countries a start in building their economies up. If foreign investors do no more than harvest the oil and gas and leave, the region may simply stall again. What is needed is more of the joint-ventures and industrial projects represented by firms such as Safran and Renault-Nissan. But the real test will be whether the region’s economy can be broadened and deepened. Then clearer shapes may emerge through the haze across the strait.”
Although high oil prices may have slowed the pace of globalization, the Mediterranean region is a good reminder that it has not been stopped. Millions of impoverished people living in the region are waiting for benefits of globalization to reach them. If they do, then maybe the Med’s modern moment will truly have come.