Economic integration with the rest of the world has eluded the Middle East and North Africa (MENA) region. It represents 5.5% of the world’s population and 3.9% of global GDP. Yet its share in world non-oil trade is 1.8 percent, rising to 6.2 percent when oil is included. The nature of the oil sector – with its uneven distribution – and broader protectionist policies prevent the higher growth and productive employment enjoyed by countries with liberal trade and investment regimes, especially those in South Asia. ‘East.
MENA has made several attempts to integrate in the region. To coordinate cooperation among Arab states, the Arab League was established in 1945, before the independence of most of its 22 members. In 1997, the Arab League proposed the Pan-Arab Free Trade Agreement (PAFTA), also known as GAFTA, agreeing in 2001 to eliminate most tariffs by 2005. Some success has been achieved: trade between members increased by 20% between 1998 and 2012, but with little significant impact on regional economies.
The sub-regional pacts have also had mixed results. The Arab Maghreb Union (1989) of five North African countries has remained ineffective, largely because of Algerian-Moroccan tensions. The Agadir Agreement for a Free Trade Area by 2007 between Egypt, Jordan, Morocco and Tunisia – later including Lebanon and Palestine – and an agreement with the European Union were also disappointed. The Gulf Cooperation Council (GCC) has had the most success with a customs union and a common electricity grid, but has failed to harmonize taxation and establish a common currency. Currently, with Bahrain, Saudi Arabia and the United Arab Emirates imposing a blockade on Qatar, it is inevitably weakened. There are also many bilateral agreements between different Arab countries and the EU, US and Turkey as well as others and between them.
What went wrong? Shanta Devarajan, former chief economist for the MENA region at the World Bank, notes that the benefits of regional integration may have been overstated. He states that “most [studies] focused on trade integration – the benefits for countries in a (region)… to trade with each other. Yet “trade integration has both a trade-creating advantage – the fact that countries trade more – and a trade-diversion drawback – countries trade within the trade bloc when it would be more. efficient to trade with the rest of the world ”. The big gains would be to integrate more with Europe or the United States, not with each other. Many countries have tried both ways, but again with limited success.
Beyond the economic arguments, politics played a decisive role in this disappointing record. Some accused the outside interference of preventing integration. Other factors are less ambiguous, notably the divisions of the Cold War and the wars with Israel. The current conflicts in Iraq, Libya, Syria and Yemen follow on from the anti-colonial struggles of the 1950s; the civil war in Yemen of the 1960s; conflicts in Western Sahara; civil wars in Algeria, Lebanon and Yemen (again); the Iran-Iraq war; the wars waged by the United States against Iraq; and others of varying intensity. Each conflict has divided the region, diverting attention away from the economy and effective regional solutions.
There are also challenges beyond conflict. Average fares in the region have fallen, but remain high compared to East Asia, the Americas and Europe. Even higher barriers are high non-tariff measures. The MENA region remains one of the most restrictive regions in services trade, the fastest growing segment globally. High transport costs and technical barriers also hamper progress and, despite advances in the Gulf and elsewhere, logistical delays, especially when it comes to lowering the cost of cross-border trade. Other challenges are the lack of common standards and bureaucracy. Often protectionist and withdrawn economies overlap, the incumbent operators of the public and private sectors protecting “their” markets, which prevents greater contestability of the market, which is essential for opening up to the outside world.
Thus, advancing regional economic integration seems a major challenge. Still, the idea remains compelling and efforts continue. In March 2019, the Arab Monetary Fund organized a conference on regional financial integration, and in February 2019, the IMF released the report “Economic integration in the Maghreb: an untapped source of growth”. There are also other efforts. The promise of economic gains and the many pan-Arab institutions ensure that regional integration will be on the agenda for the foreseeable future.
In fact, there are areas for improvement, almost all of which are based on previous or current work. Electrical connectivity is a promising avenue for further linkages, as is joint efforts on critical water and climate change issues. The harmonization of education systems and standards ranging from services to goods is part of the work in progress. Emerging areas include the regulation of digital technologies and the new economy, including its taxation. The work of liberating labor markets is on the way. There are fruits at hand dependent on political decisions, for example, allowing private companies to continue to trade regardless of political tensions. It is possible: despite strong political disagreements, Israel and Turkey maintain vigorous trade just like Egypt and Turkey.
There are also other opportunities. Transnational production and the growing impact of global value chains can mitigate the diversion typically associated with regional trade agreements. But for that to happen, the low tariffs and open economies associated with global value chains must be in place. There are also opportunities for closer integration with other regions, and many in the MENA region are eyeing sub-Saharan Africa.
The fact that the idea of regional integration continues is testament to the region’s deep conviction that many different countries and groups can come together around common goals and economic benefits.