59409 October 2010 . Number 33 ECONOMIC INTEGRATION IN MENA: THE GCC, THE MAGHREB, AND THE MASHREQ Shamshad Akhtar and Mustapha Rouis 1 benefits. But much remains to be done, especially in reducing nontariff barriers to Introduction: Though the Middle East and trade, harmonizing policies and procedures, North Africa (MENA) region has weathered the and facilitating cross-border trade through recent global financial and economic crisis development of infrastructure links and trade relatively well, it still faces daunting medium- facilitation. Fortunately, trade in services has term challenges. These include high recently emerged on the agenda of national and unemployment (especially among young regional authorities--this is an area of people), vulnerability to oil and food price substantial potential welfare gain for the shocks and water scarcity and inefficiencies of region. public sectors. Integration of the region into the global economy has been slow. Of particular Regional Integration and the World Bank: concern is the stagnation in the region's share Recognizing the problems, there has been an of global non-oil exports, an indication of increasing momentum on the part of the region missed opportunities for diversification and and the World Bank Group over the last year or growth. Integration within the region, while so to focus on a set of initiatives to promote rising, is also on the low side when compared more cooperation within the region. These with other middle- and high-income regional initiatives include the development and blocs. implementation of regional activities-- investment projects, institution-building, The region has been able to make some inroads, harmonization of policies and procedures--that albeit at different degrees in each of the are likely to enhance economic growth and geographical groupings, to support the address common challenges across the region. integration of the Arab world into the global They also include a host of analytical pieces to economy. To start off the removal of intra- examine the current state of regional regional tariffs under the Pan-Arab Free Trade collaborative arrangements with emphasis on Area (PAFTA) and the adoption of low assessing and exploring ways of fostering common tariffs by the Gulf Cooperation greater trade integration, labor mobility and Council (GCC) which coupled with migration prospects, prospects for energy improvements in infrastructure, especially integration and resource sharing and roads and telecommunications is generating infrastructure development to reduce nontariff barriers. 1Shamshad Akhtar, Vice-President, Middle East and North As part of this endeavor, the Office of the Chief Arica Region, The World Bank. Mustapha Rouis, Lead Economist, Middle East and North Africa Region, The Economist, MENA Region, has prepared a World Bank. The Quick Note was cleared by Acting MNA series of reports to assess the achievements of Chief Economist Farrukh Iqbal. the region with respect to integration. The first from the GCC to the rest of MENA are also report, 2008 Economic Developments and increasingly important. Nevertheless, because Prospects, looks at the role of integration in GCC integration occurs against the backdrop of global competitiveness for the region as a fairly similar circumstances in the member whole and special reports have been prepared countries, the mechanisms and drivers of to take stock of the regional cooperative integration are somewhat different than in frameworks, their issues and prospects. These other regional blocs that have larger variation reports examine economic integration among within their membership. three sub-regions: the Gulf countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the First and foremost, GCC countries are all highly United Arab Emirates), the Maghreb (Algeria, dependent on hydrocarbons, which remain a Libya, Mauritania, Morocco, and Tunisia), and core prerogative of national--not regional-- the Mashreq (Iraq, Jordan, Lebanon, Syria, and policy. Second, sovereignty is still shared West Bank and Gaza). Egypt is sometimes cautiously so supranational institutions are classified in the literature as a Mashreq country being built up slowly; key decisions work though with ties with North Africa given its through opaque intergovernmental processes location. rather than empowered regional institutions. Third, public sectors in each country are closely The GCC: The Gulf Cooperation Council linked to the sharing of benefits from (GCC) is the most advanced model of sub- hydrocarbon wealth among nationals. This regional integration in the broader Middle East complicates the political economy of economic and North Africa (MENA) region, and its reform strategies such as privatization and objectives are among the most ambitious in the subsidy reduction, which in turn limits the developing world. It has evolved well beyond a scope for regional integration in areas where focus on free trade in goods to embrace high the public sector is dominant. Fourth, GCC levels of national labor and capital mobility, countries compete with each other in sectors and the progressive opening of many sectors that might otherwise offer scope for regional within each economy to all member states. initiatives, such as finance, transport, and downstream energy. Intraregional GCC trade flows remain relatively small despite strong growth in recent Besides ongoing integration mechanisms years. The average nominal value of (particularly in infrastructure), addressing intraregional trade increased by approximately common challenges should impart further 30 percent per annum during 2004­2008, as momentum to the GCC. These include: labor compared to 6 percent during 2000­2003. market strategy, where there is scope to revisit However, the share of intraregional trade in the open immigration policy at the regional non-oil trade remained relatively unchanged at level; the financial sector, given the regional less than 10 percent, with the UAE taking the spillovers from country-level debt distress lead as a source of regional trade. This figure episodes; fiscal policy, given the countries' compares unfavorably with other trading blocs objective of diversifying revenue sources; and such as ASEAN (23 percent), NAFTA (41 service sector liberalization, which would percent), and EU-15 (57 percent), reflecting expand the size of markets and promote the weak complementarities among GCC member efficient allocation of resources for the GCC as a states and the relatively liberal trade regimes whole. However, a more empowered regional that had historically characterized the GCC secretariat will be necessary to push this economies. agenda forward. The GCC is much more integrated with the rest The Maghreb: Trade between the Maghreb of the world than with MENA because of the countries and the Arab world, as well as the role of oil and gas in trade patterns. But rest of the world, is relatively small, with integration via labor markets is significant in exports concentrated in a few commodities or MENA, especially for Mashreq countries and products. There are wide country variations, Egypt. Foreign direct investment (FDI) linkages October 2010 · Number · 2 however, with Morocco and Tunisia exhibiting they do among themselves and within MENA. higher trade volume and export diversification. In the services sector, the Mashreq accounts for a significant share of regional exports and Despite the establishment of the Arab Maghreb imports. Also, with the exception of Iraq, a Union over two decades ago, the bulk of the major oil exporter, the Mashreq countries Maghreb trade is with Europe. The level of export a relatively large share of manufactured intra-Maghreb trade is lower than that of many goods--only surpassed by Tunisia and of the world's trading blocs. In 2007, intra- Morocco. Furthermore, Mashreq exports are Maghreb trade represented less than 2 percent relatively less concentrated than other MENA of the sub-region's combined gross domestic countries, with the exception of Tunisia and product (GDP) and less than 3 percent of the Morocco. sub-region's total trade. Some of the reasons for this low performance include high barriers to Regional economic integration would be trade, logistical bottlenecks, lack of production enhanced by better trade facilitation processes base diversification, and political and procedures as well as by better transport considerations. infrastructure. Of course, policies related to a good climate for investment and private sector The focus on trade liberalization with the development matter as well. European Union (EU) provides an opportunity for individual Maghreb countries to lock in Conclusion: There is a great heterogeneity policies that would eventually help them among MENA countries in terms of reforms harmonize policies within their own region. and integration within the region, the The same argument can be made regarding subregions and the rest of the world. Overall, accession to the World Trade Organization the countries which have been more aggressive (WTO). The Maghreb countries would reap in trade reforms, managed to attract more FDI significant additional benefits if, in parallel to and diversify their economies. Accession to reforms undertaken to improve trade WTO and Regional Trade Agreements such as liberalization with Europe, they improved with Europe; do not exclude the need for conditions for streamlined trade among greater cooperation within MENA and its themselves. subregional blocs. The economic welfare gain from this regional cooperation is substantial. There is significant potential for trade in services in the financial sector, transportation and logistics, and communications and Contact MNA K&L: Emmanuel Mbi, Director, MNA Operational Core information, among other sectors. According to Services Unit some studies, comprehensive services reforms David Steel, Manager, MNA Development that involve increased competition and Effectiveness Unit regulatory streamlining would yield benefits that are at least twice the magnitude of those Regional Quick Notes Team: achieved through tariff removal alone. Morocco Omer Karasapan, Roby Fields, Hafed Al-Ghwell has seen the most substantive growth in recent and Aliya Jalloh Tel #: (202) 473 8177 years, while Tunisia is the most active country of the group. MENA K&L Quick Notes: http://www.worldbank.org/mena-quicknotes The Mashreq: The overall trade levels of Mashreq countries are significantly lower as a The MNA Quick Notes are intended to summarize share of GDP than those in the MENA region lessons learned from MNA and other Bank Knowledge more broadly. Once adjusted for oil, however, and Learning activities. The Notes do not necessarily non-oil trade in the Mashreq is only marginally reflect the views of the World Bank, its board or its member countries. lower than in MENA. Apart from Iraq, Mashreq countries trade the most within the MENA region. Nevertheless, Mashreq countries trade more with EU countries than October 2010 · Number · 3