The developing countries of the Southern Mediterranean (SOM) have missed the extraordinary surge of private international investment in recent years. Although the SOM region was an important destination for foreign direct investments, its share of world FDI has declined. In 1994, private capital represented only 37 per cent of the SOM’s capital inflows (of which nearly all went to Egypt and Morocco) compared to 76 per cent for all developing countries.

There is great potential for expanding foreign investment in the region. Comparative econometric exercises in the study also suggest large gaps between actual inflows into SOM and into similar economies elsewhere. Moreover, the region’s history of emigration and capital flight have created a pool of resources that could quickly respond to opportunities.

This paper identifies a cluster of policy initiatives that could help increase private capital inflows:

• domestic measures — including privatisation, trade liberalisation, and currency ...