On 19 January 2011, the second Arab Economic, Social, and Development Summit that was held in Sharm El-Sheikh, Egypt. It took place against the backdrop of an Arab world in turmoil that keeps losing ground in the globalised world economy. The Summit made no major leaps forward on trade integration; but the novelty was that it came at a time when widespread popular protests in many Arab countries began to surface, focusing on the lack of civil and political liberties, the lack of economic opportunities—including high unemployment – and rampant corruption. The protests turned into political upheavals.
Although countries in the Middle East and North Africa (MENA) region have made progress in recent years in exploiting comparative advantage, the share of the MENA region in total world exports of non-oil goods has remained under 1% for more than 30 years, and despite doubling its services exports, MENA’s share in total services trade has also stagnated at around 2.8% during 1990-2006 (World Bank 2010). These outcomes reveal serious competitiveness issues and suggest that the region has missed opportunities to integrate into the world economy, increase growth, and create new productive jobs (World Economic Forum 2005).
Yet, with the emergence of formidable global competitors such as China, India, and Brazil, a more open Arab world may have an historical opportunity to tap new poles of growth through greater regional and global integration. A new, fast-evolving multi-polar world economy is emerging, in which some developing countries are becoming economic powers and others are moving towards becoming additional poles of growth (Zoellick 2010). MENA’s productivity is comparable to that of many middle-income countries of Latin America and surpasses that of Sub-Saharan Africa. However, a comparison with high growth East Asian countries and other emerging countries shows large gaps in total factor and labour productivity.
Trade as a means to consolidate the Arab revolutions
Today's historical circumstances present an opportunity for the Arab world to make a big push toward greater regional and global integration. Until now, the region has suffered from discretionary and arbitrary implementation of policies, and from lack of government credibility to really change a deeply rooted status quo of privileges and unequal treatment of investors (World Bank 2009). While the current political turmoil in the Arab region could end up further entrenching those privileges or creating new ones, it could also create the conditions for more open, non-discriminatory, and rule-based economies. In this scenario, the Arab world could start reaping the full benefits of global and regional integration.
As far as regional integration is concerned, completing the Pan-Arab Free Trade Area (PAFTA) would be a good place to start. This would essentially consist of:
- completing the free movement of goods within PAFTA, notably through the elimination of unnecessary non-tariff measures;
- implementing the regional initiative to liberalise services trade, including identifying a number of services sectors for early regional liberalisation (e.g., trade facilitation and transport, banking and finance, and communication and information); and
- strengthening the institutional rules and discipline applicable to regional trade and other policies of common interest (Chauffour 2011).
Free movement of goods
Completing the free movement of goods within PAFTA, notably through the elimination of unnecessary non-tariff measures (NTMs), and integrating better the region into global supply chains and production networks would create the conditions for the emergence of the “Arab factory”. A concerted effort to streamline all unnecessary NTMs in PAFTA countries will remove one of the major remaining bottlenecks to intra-regional trade in goods.
This would involve reviewing the substance of existing NTMs, streamlining them using methodologies experimented in other regional agreements around the world, including a guillotine approach when appropriate, and establishing regulatory impact assessments to improve the process through which new NTMs are created.
To facilitate the integration of the region into global supply chains and production networks, countries in the region could unilaterally reduce their most favoured nation (MFN) tariffs, especially tariff peaks, to the level of the most competitive regions of the world (e.g., East Asia). Such unilateral liberalisation has proven to be a successful strategy in a number of emerging economies that are now sustainable growth poles (Figure 1).
Figure 1. Overall trade restrictiveness index (OTRI) by region, 2008
Source: World Bank and UNCTAD staff estimates.
Liberalising services trade
Liberalising services trade within PAFTA and beyond is the next low-hanging fruit to boost regional integration, due in particular to the positive spillover effects of more open services trade on trade in goods (Figure 2). The Arab world should embark on a concrete plan to freeing services trade among Arab countries and beyond. This plan would involve developing a regional strategy for trade in services integration, establishing forums (or “services knowledge platforms”) to address knowledge gaps and facilitate the political economy of reform, conducting regional Regulatory Services Audits, and negotiating a pan-Arab agreement in services (Hoekman and Mattoo 2011).
To pave the way for services liberalisation, a number of pilot services sectors could be identified for early regional liberalisation. Key candidate sectors for such early liberalisation include:
- trade facilitation and transport, given the importance of facilitating trade in key corridors and improving trade facilitation and logistics services inside the Arab region, including customs and border agencies;
- banking and finance, to immediately promote banking sector competition, encourage further access to credit and intra-Arab investment, and facilitate capital movement among Arab countries; and
- information and communication, in order to enhance the competitive potentials of technology enterprises, develop legislative frameworks related to this sector, and encourage the private sector to attract investment.
Figure 2. Services trade restrictiveness index, by region, 2007/08
Source: Borchert et al. (2010)
Binding rules and discipline
A meaningful and credible pan-Arab free trade area requires that regional trade and other policies of common interest be subject to clear, non-discriminatory and transparent binding rules and discipline. A major institutional overhaul to strengthen the rules and discipline applicable to PAFTA and other regional institutions would provide additional credibility to the regional integration plans. This would involve strengthening or agreeing on a new set of basic principles for the governance of PAFTA, including prohibitions of NTMs unless they fulfil a set of basics principles, such as non-discrimination and necessity, effective national treatment provisions in services trade, and effective framework to guarantee the free movement of labour within the region.
An approach would be to strengthen the mandate of the General Secretariat of the League of Arab States to monitor the implementation of members’ liberalisation commitments, including the dismantlement of NTMs and the liberalisation of services. Regardless of the approach, regular monitoring of implementation commitments is important for policymakers to be able to assess the effects of the agreement. This would also involve creating a permanent and independent dispute settlement mechanism to oversee enforcement, including measures to ensure compliance.
Further integrating Arab countries among themselves and opening up the region to the rest of the world are two complementary avenues to gradually close the region’s productivity gap. In improving market access for exporters, promoting behind-the-border regulatory reforms, facilitating cooperation on regional public goods (e.g., infrastructure), and creating the conditions for the emergence of an “Arab factory” through regional supply chains and productions networks, regional trade agreements are a powerful tool for transformational changes (Chauffour and Maur 2010). Deeper regional integration could help address some key economic challenges that face the region, such as economic diversification and creating jobs for an expanding workforce.
To be sure, nowhere in the world is regional integration a painless and easy process. And the Arab world is no exception. Everywhere it requires leadership, resolution, and patience, including with temporary reversals. Above all, each regional integration process is unique in its historical and political context (Akhtar 2009).
The lack of trade integration of the Arab world is as much a cause as a consequence of the region’s economic difficulties. Low trade integration could be the result of poor production complementarities and other exogenous factors. Indeed, a number of Arab countries have similar resource endowments, production capabilities, and export structure. They may find it difficult to use regional integration as a means to establish patterns of specialisation and diversification. The lack of intra-regional trade is also policy driven. As recently analysed, public sector governance and participation, accountability and transparency, and rents and privileges remain key impediments to private sector development in the region (World Bank 2009). The very same causes also impede the region’s capacity to export. Without improved rule of law, participation, and governance, trading across borders is difficult and trade cannot sustainably flourish. In turn, the lack of integration and exposure to new technologies, innovation, and ideas hamper more rapid progress in the region and help explain many economic and social shortcomings: poor resources utilisation, insufficient human capital, gender inequality, high unemployment, oversized governments, unfavourable investment climate, limited foreign investment, and eventually lacklustre private sector performance.
Akhtar, S (2009), “Economic Integration in the Arab World”, MNA Knowledge and Learning, Fast Brief Number 36, October.
Borchert, I, B Gootiiz, and A Mattoo (2010), “Restrictions on Services Trade and FDI in Developing Countries”, World Bank, mimeo.
Chauffour J-P (2011), “Trade Integration as a Way Forward for the Arab World: A Regional Agenda”, World Bank Policy Research Working Paper 5581.
Chauffour J-P, and J-C Maur (2010), “Beyond Market Access: The New Normal of Preferential Trade Agreements”, World Bank Policy Research Working Paper 5454.
Hoekman, B and A Mattoo (2011), “Services Trade Liberalization and Regulatory Reform: Re-Invigorating International Cooperation”, World Bank Policy Research Working Paper 5517.
World Economic Forum (2005), Arab World Competitiveness Report 2005
World Bank (2009), From Privilege to Competition: Unlocking Private-Led Growth, MENA development Report.
World Bank (2010), MENA Regional Economic Update: Recovering from the Crisis.
Zoellick, R (2010), “The End of the Third World? Modernizing Multilateralism for a Multipolar World”, Speech at the Woodrow Wilson Centre for International Scholars, 14 April.