T809555cov.indd 1 3/09/08 12:56:40 T809555cov.indd 2 3/09/08 12:56:47 European Commission Directorate-General for Economic and Financial Affairs European Neighbourhood Policy: Economic Review of EU Neighbour Countries EUROPEAN ECONOMY Occasional Papers No 40 ABBREVIATIONS AA Association Agreement AP Action Plan CIS Commonwealth of Independent States CPI Consumer Price Index EBRD European Bank for Reconstruction and Development EC European Commission EITI Extractive Industries Transparency Initiative ENP European Neighbourhood Policy ENPI European Neighbourhood and Partnership Instrument EIU Economist Intelligence Unit EU European Union FDI Foreign Direct Investment FTA Free Trade Agreement GCC Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE) GDP Gross Domestic Product GNI Gross National Income GSP General System of Preferences HDI Human Development Index ILO International Labour Organisation IMF International Monetary Fund JOD Jordanian dinar MAD Moroccan dirham MED Mediterranean Countries MEI Main economic indicators MENA Middle East and North Africa region NDF National Development Fund NEER Nominal Effective Exchange Rate NIP National Indicative Programme OECD Organisation for Economic Co-operation and Development oPt occupied Palestinian territory PA Palestinian Authority PPP Purchasing Power Parities SMEs Small- and Medium-sized Enterprises SPPRED State Programme on Poverty Reduction and Economic Development UAE United Arab Emirates UN United Nations UNDP United Nations Development Program USD US dollar VAT Value Added Tax WB World Bank WDI Word Development Indicators WTO World Trade Organisation yoy year-on-year iii CONTENTS Foreword 1 Part I: Thematic issues 3 1. Macro-economic policy reactions to soaring food prices in Mediterranean countries, Russia, the CIS and the GCC 4 1.1. Introduction 4 1.2. Stylised facts 6 1.3. Current macro-economic policy responses at the national level 12 1.4. Summary and macro-economic policy options 16 Part II: Regional issues 19 1. Overview of recent economic developments in Mediterranean countries 20 1.1. Summary 20 1.2. Macroeconomic developments 21 1.3. Trade liberalisation and economic opening 26 1.4. Business climate 29 1.5. Public institutions and governance systems 32 1.6. Concluding remarks 34 2. Overview of recent economic developments in the EU's Eastern neighbourhood 40 2.1. Macroeconomic developments 40 2.2. Trade liberalisation and economic opening 46 2.3. Business environment and public institutions 47 Part III: Country analysis 57 1. Algeria 58 2. Armenia 62 3. Azerbaijan 66 4. Belarus 70 5. Egypt 74 6. Georgia 78 7. Israel 82 8. Jordan 86 9. Lebanon 90 10. Libya 94 11. Moldova 98 12. Morocco 102 13. Occupied Palestinian Territory 106 14. Russia 111 15. Syria 116 16. Tunisia 120 17. Ukraine 124 v LIST OF TABLES I.1.1. EU neighbours - Overview exchange rate policies 12 II.1.1. MED - Competitiveness performance 2007 - 2008 31 II.1.2. Mediterranean countries - Main economic indicators 36 II.1.3. Mediterranean countries - MEI (continued -1) 37 II.1.4. Mediterranean countries - MEI (continued -2) 38 II.1.5. MED - Trade, business climate and governance reform 39 II.2.1. CIS - Indicators competitiveness performance 2006 50 II.2.2. CIS countries - Main economic indicators 52 II.2.3. CIS countries - MEI (continued-1) 53 II.2.4. CIS countries - MEI (continued - 2) 54 II.2.5. CIS countries - MEI (continued - 2) 55 III.1.1. Algeria - Main economic indicators 61 III.2.1. Armenia - Main economic indicators 65 III.3.1. Azerbaijan - Main economic indicators 69 III.4.1. Belarus - Main economic indicators 73 III.5.1. Egypt - Main economic indicators 77 III.6.1. Georgia - Main economic indicators 81 III.7.1. Israel - Main economic indicators 85 III.8.1. Jordan - Main economic indicators 89 III.9.1. Lebanon - Main economic indicators 93 III.10.1. Libya - Main economic indicators 97 III.11.1. Moldova - Main economic indicators 101 III.12.1. Morocco - Main economic indicators 105 III.13.1. OPT - Main economic indicators 110 III.14.1. Russia - Main economic indicators 115 III.15.1. Syria - Main economic indicators 119 III.16.1. Tunisia - Main economic indicators 123 III.17.1. Ukraine - Main economic indicators 127 LIST OF GRAPHS I.1.1. EU neighbours - Income & food weight in CPI-basket 7 I.1.2. EU-neighbours: Share of food & weight in basket 14 II.1.1. MED and Europe - Stock market developments '07-'08 20 II.1.2. MED - GDP versus unemployment in 2004 & 2007 22 II.1.3. Mediterranean countries - Imports by partner in 2006 28 II.1.4. Mediterranean countries - Exports by partner in 2006 29 II.2.1. CIS and Europe -Stock market developments '07-'08 40 II.2.2. Armenia - GDP, fiscal balance and public debt 42 II.2.3. Belarus - GDP, fiscal balance and public debt 42 II.2.4. Moldova - GDP, fiscal balance and public debt 42 II.2.5. Azerbaijan - GDP, fiscal balance and public debt 42 II.2.6. Georgia - GDP, fiscal balance and public debt 42 II.2.7. Ukraine - GDP, public balance and fiscal debt 42 II.2.8. Russia - GDP, fiscal balance and public debt 42 II.2.9. CIS countries - Imports by partner in 2007 46 II.2.10. CIS countries - Exports by partner in 2007 47 II.2.11. CIS countries - Doing business rankings 2006 & 2007 49 vi II.2.12. CIS countries - Regulatory quality 2005 - 2006 51 II.2.13. CIS countries - Government effectiveness 2005 - 2006 51 II.2.14. CIS countries - Governance indicators 2005 - 2006 51 III.1.1. Algeria - Contributions to real GDP-growth 58 III.1.2. Algeria - Fiscal balances, public debt, current account 58 III.1.3. Algeria - Doing business rankings for 2007 58 III.2.1. Armenia - Economic structure of GDP 62 III.2.2. Armenia - Fiscal balance, public debt, current account 62 III.2.3. Armenia - Doing business rankings for 2007 62 III.3.1. Azerbaijan - Contributions to real GDP-growth 66 III.3.2. Azerbaijan - Fiscal balance, public debt, current account 66 III.3.3. Azerbaijan - Doing business rankings for 2007 66 III.4.1. Belarus - Contributions to real GDP-growth 70 III.4.2. Belarus - Fiscal balance, public debt, current account 70 III.4.3. Belarus - Doing business rankings for 2007 70 III.5.1. Egypt - Contributions to real GDP-growth 74 III.5.2. Egypt - Fiscal balance, public debt and current account 74 III.5.3. Egypt - Doing business rankings for 2007 74 III.6.1. Georgia - Economic structure of GDP 78 III.6.2. Georgia - Fiscal balance, fiscal debt, current account 78 III.6.3. Georgia - Doing business rankings for 2007 78 III.7.1. Israel - Contributions to real GDP-growth 82 III.7.2. Israel - Fiscal balance, public debt and current account 82 III.7.3. Israel - Doing business rankings for 2007 82 III.8.1. Jordan - Contributions to real GDP-growth 86 III.8.2. Jordan - Fiscal balance, public debt, current account 86 III.8.3. Jordan - Doing business rankings for 2007 86 III.9.1. Lebanon - Economic structure of GDP 90 III.9.2. Lebanon - Fiscal balance, public debt, current account 90 III.9.3. Lebanon - Doing business rankings for 2007 90 III.10.1. Libya - Contributions to real GDP-growth 94 III.10.2. Libya - Fiscal balance, public debt and current account 94 III.10.3. Libya - Problematic factors for doing business 94 III.11.1. Moldova - Economic structure of GDP 98 III.11.2. Moldova - Fiscal balance, fiscal debt, current account 98 III.11.3. Moldova - Doing business rankings for 2007 98 III.12.1. Morocco - Contributions to real GDP-growth 102 III.12.2. Morocco - Fiscal balance, public debt, current account 102 III.12.3. Morocco - Doing business rankings for 2007 102 III.13.1. OPT - Economic structure of GDP 106 III.13.2. OPT - Fiscal balance, current account, budget support 106 III.13.3. OPT - Doing business rankings for 2007 106 III.14.1. Russia - Contributions to real GDP-growth 111 III.14.2. Russia -Fiscal balance, public debt and current account 111 III.14.3. Russia - Doing business rankings for 2007 111 III.15.1. Syria - Economic structure of GDP 116 III.15.2. Syria - Fiscal balance, public debt and current account 116 III.15.3. Syria - Doing business rankings for 2007 116 III.16.1. Tunisia - Contributions to real GDP-growth 120 III.16.2. Tunisia - Fiscal balance, public debt and current account 120 III.16.3. Tunisia - Doing business rankings for 2007 120 vii III.17.1. Ukraine - Contributions to real GDP-growth 124 III.17.2. Ukraine - Fiscal balance, public debt, current account 124 III.17.3. Ukraine - Doing business rankings for 2007 124 LIST OF BOXES I.1.1. EU neighbours & euro area – Price developments 5 I.1.2. EU neighbours – Price developments per country 8 I.1.3. EU neighbours - Food contribution to inflation 10 II.1.1. Subsidies in Mediterranean countries 23 II.1.2. MED – GDP, fiscal balance and public debt 25 II.1.3. MED – Governance and business indicators 33 II.2.1. Reforms in the fiscal frameworks in the CIS: The case of Russia 44 viii FOREWORD This is the fourth issue of the Economic Review of EU Neighbour Countries1. This year the review includes a special focus on a topical issue: the macroeconomic policy reactions to soaring (food) prices in Mediterranean countries, Russia, the CIS and the GCC. In addition to country-specific chapters, this review includes two overviews of the recent macroeconomic developments in the Mediterranean and the EU Eastern neighbourhood regions. These chapters are structured along the main areas of reform: macroeconomic developments, trade liberalisation and economic opening, business climate, public institutions and public finance management, and social development and poverty.