The Effects of Internal Integration of the MENA Region and its Integration with the EU: Impact on Real Effective Exchange-Rate Volatility, Institutional Quality and Growth for MENA Countries

This paper analyses two potential effects arising from the internal integration of the MENA region and from its integration with the European Union—increased quality of institutions and economic policies and reduced multilateral exchange-rate volatility—in a conditional convergence growth framework for MENA countries. To this end, the authors outline an ad hoc methodology which implements the traditional bilateral exchange rate measures to test effects of multilateral exchange-rate volatility on growth of per capita GDP. Estimates show that both factors (quality of institutions and reduction of multilateral volatility) significantly and positively affect growth and conditional convergence. The paper finds that MENA countries are not far from EU and OECD countries in terms of exchange-rate volatility, but much below in terms of institutional quality. Finally, the authors simulate the potential effects of an improvement in institutional quality in MENA countries on their process of growth and conditional convergence. The authors conclude by arguing that an external “anchor”, represented by requirements needed for closer regional and with EU integration, may be crucial to foster progress on institutional quality in these countries.