78073 May 2013 – Number 95 Regional Economic Integration in the Middle East and North Africa Mustapha Rouis1 Introduction: Limited integration has stifled the Middle East and North Africa (MENA) region’s significant potential for economic growth and job creation. Home to 5.5 % of the world’s population and 3.9 % of the world’s gross domestic product (GDP), the region’s share of nonoil world trade is only 1.8 %. By contrast, countries opting for a liberal trade and investment regime—most notably in East Asia—have seen significant increases in trade, employment, and per capita income. If petroleum and gas are included, MENA is far more integrated in the world economy, with exports accounting for 6.2% of global trade. Oil and gas exports are three-quarters of total MENA’s exports. MENA is characterized by exports of primary commodities, largely oil and gas (76% in 2008–10). Manufactured goods account for just over 11% with other sectors accounting for the remaining 13 %. MENA countries’ exports are highly concentrated and less diversified overall in-spite of recent efforts, with Egypt, Jordan, Lebanon, Morocco, and Tunisia faring better than the rest. Also, exports are unsophisticated, needing only low skill levels. Only 21 % of exports from the finance are the leading export services and constitute above five countries are medium or high-technology 55% of service exports. products compared to 37% in other middle-income economies. This combination of limited export MENA and Regional/Global Integration: MENA is one diversification and low-technology industry hampers of the least globally and regionally integrated regions. already low productivity growth. Its share in total world exports of nonoil goods remained below 1% for many years, gradually increasing in the MENA’s service exports are currently dominated by low past decade to reach 1.8% in 2008–10. Similarly, despite value-added tourism-related travel services. Travel and doubling services exports, MENA’s share in total transport together made up 78% of total MENA service services trade has stayed at 2-3% in the past two exports in 2008. In contrast, South Asia, led by India decades. Last decade, however, most MENA countries where information and communications technology and began to open their economies. The United Arab Emirates (UAE), Qatar, Kuwait, Egypt, Jordan, Oman, and Iran have seen the fastest growth in exports in the 1 Mustapha Rouis, Consultant, Chief Economists’ Office, the Middle region. Among oil importers, Egypt and Jordan have East and North Africa Region (MNACE), the World Bank. This Quick made significant progress in diversifying exports. Most Note was cleared by Caroline Freund, Chief Economist for the MENA Region (MNACE), the World Bank. Gulf Cooperation Council (GCC) exports also show reduced dependence on crude exports in favor of backbone infrastructure and reducing trade barriers. The processed industries, including chemicals, fertilizers, GCC succeeded in bringing its common external tariff and other petroleum-based products. down to 5% on most imported merchandise and to zero on essential goods. North African countries continue to Integration within MENA is low compared to other have prohibitive trade restrictions vis-à-vis the rest of middle and high-income regions. Intraregional exports the world. In Morocco the common weighted average of goods averaged less than 8% of total exports in 2008– import tariff in 2011 remained high at 17 %. Studies 10, compared to 25% in the Association of Southeast suggest that comprehensive reforms to strengthen Asian Nations (ASEAN) and 66% in the EU (figure 1). competition and streamline regulatory frameworks The countries that trade the most within MENA are oil would yield benefits two to three times greater than importers, particularly Mashreq countries with strong those achieved through tariff removal alone. Opening links to the GCC (45% of their exports are within up the services trade would facilitate trade in parts and MENA) and Egypt (28%). Maghreb countries with close components and contribute to the emergence of regional ties to the EU, export the least within the MENA region production networks. (less than 5 %) and among themselves. Improving Infrastructure and Cross-Border Facilitation: Backbone services such as telecommunications, transport, and power are crucial to productivity and international competitiveness. Opening these sectors to competition and trade can help Figure 1: Share of Exports within Regions 2 reduce production costs, increase FDI, promote knowledge spillovers, and expand markets, all of which NAFTA enhance competitiveness. It is estimated that trade costs MERCOSUR can constitute 20 to 40 %of the final delivered price of Arab League MENA’s nonoil exports. The cost of trade between MENA neighbors is typically twice as high for MENA countries -10 10 30 50 70 as in Western Europe. Maghreb countries face lower 2008-10 1998-2000 trade costs when trading with Europe than with each other. MENA’s trade costs are consistently higher for agricultural products, reflecting high transportation costs (per unit value), time sensitivity for perishable Tariffs and Non-Tariff Trade Barriers: Over the last products, and the impact of border controls and decade, preferential liberalization under the Pan Arab nontariff measures. Although some MENA countries, Free Trade Area (PAFTA) and other PTAs has been like the UAE have excellent logistics facilities, most complemented by reductions in most favored nation require substantial improvements in logistics and trade (MFN) tariffs. The average uniform tariff equivalent of facilitation to decrease the cost of cross-border trading. all tariffs (ad valorem and specific) for the region fell from nearly 15% in 2002 to 6% in 2009. In fact, MENA was the Efficient ports, maritime, and aviation services are region where tariffs decreased the most during the crucial for the competitive export of goods. Most MENA global financial crisis, especially on manufactured countries have extensive road networks with high goods. Yet, despite progress made in the last decade, capacity in some areas, as well as important facilities for tariff protection in MENA remains high by international air and sea transport and, in several cases, a sizable rail standards. According to the Tariff-only Overall Trade network. Yet the quality of transport infrastructure is Restrictiveness Index (OTRI_T), only South Asia had often deficient and unable to support modern higher levels of tariff restrictiveness. The MENA region economies. Implementation of the Mashreq Corridor compares unfavorably with competitors in Europe and Program to remove cross-border constraints is to Central Asia, Latin America and the Caribbean, and East increase trade by US$ 15 billion per year by 2020 while Asia and the Pacific—the new dynamic poles of the generating some 250,000 permanent jobs. These jobs will world economy. mostly be in export-oriented light manufacturing that have a higher-than-average share of female jobs. Wide variations in trade restrictions exist across MENA. The GCC has made tangible progress in improving Economic integration in the power sector is at an early stage of development. Initiatives, such as the North 2 World Integrated Trade Solutions (WITS), WTO International Africa–Middle East–Europe Mediterranean Power Pool, Statistics and World Development Indicators. are taking shape, though much remains to be done to May 2013 · Number 95· 2 introduce competition in the power sector. Considerable Figure 2: Change in PTA Volume of Trade3 progress has been made in regional integration of Lebanon-EU mobile telephony, but there are many important cross- Algeria-EU border issues still to be tackled, particularly with regard Egypt, Arab Rep.-EU to fixed and mobile broadband infrastructure. Jordan-EU Morocco-EU Tunisia-EU The Mixed Effects of Preferential Trade Agreements Oman-United Sates (PTAs): Over the past 15 years, there has been an Morocco-US unprecedented worldwide increase in the number and Bahrain-United Sates scope of PTAs. The number of PTAs has doubled, Jordan-United Sates reaching 278 at the end of 2010. PTAs have been -50 150 350 550 750 950 employed in all regions with bilateral PTAs becoming the norm, often between countries in different regions. Imports (Million $) Exports (Millionb $) South–South PTAs represent about two-thirds of all PTAs and North–South PTAs about one-quarter. A large additional effect is negative in the case of the EU –MENA number PTAs have been adopted in MENA over the PTA, not significant in the case of the Turkey–MENA past decade and a half, both within the region and PTA, and largely accounted for by Jordan’s Qualifying between countries of the region, the EU, Turkey, and the Industrial Zone (QIZ) in the case of the US –MENA PTA. United States. This proliferation of PTAs, with their By contrast, PAFTA and the Agadir Agreement for the varying sector and product coverage, rules of origin, and Establishment of a Free Trade Zone between Egypt, implementation requirements, constitutes a formidable Jordan, Morocco, and Tunisia do have an additional implementation challenge for capacity-constrained effect in expanding the exports of their members. It MENA institutions. This explains, in large part, why should be highlighted, however, that this expansion is implementation of the PTAs has been a gradual process starting from a low intraregional trade base. that is still evolving. The ways in which rules of origin are calculated in In MENA PTAs have contributed to a significant different PTAs can inadvertently impede trade. Rules of reduction in trade and investment barriers, provided an origin exist in the different PTAs to preserve the value of impetus for behind-the-border economic reforms, and preferences accorded to PTA members when they helped spur rising trade. PTAs have also encouraged maintain different external tariffs. Typically, PTA countries to improve their trade infrastructure, members define a percentage of the value-added that harmonize border policies and procedures, and improve must originate in another PTA member for the product supply chains and logistics facilities. There is little to be deemed eligible for preferential tariff treatment. evidence regarding causality between PTAs and policy The rules of origin prevent products from entering the reforms, however, as countries such as Egypt, Jordan, member country with lower external tariffs for Morocco, and Tunisia have embarked on major reforms transshipment to another PTA member that maintains on their own. There is also no evidence that PTAs have higher tariffs against the third country’s goods. As a contributed to investment flows into the region. Total result, the rules of origin penalize regional producers by FDI has risen sharply in MENA over the past decade, forcing them to source from less efficient suppliers but the bulk of it comes from within MENA, essentially located within the region, rather than from the most from the GCC. EU and United States contributions have competitive sources globally. been relatively small. Scope for Regional and Global Economic Integration: The PTAs that MENA countries have signed with the Regional integration and global economic integration EU and United States have led to a more rapid should move hand-in-hand. There are tremendous expansion in imports into the region than exports (figure opportunities to strengthen the linkages between MENA 2). The findings from a gravity panel model prepared countries and wider and deeper global markets, suggests that trade preferences granted to MENA including through vertical integration in global countries by the United States, EU, and Turkey do not production chains. have an additional effect on exports compared to PTAs in general (which averages about 21 %). In fact, the 3 Figure 2 represents the change from 3-year average before entry into force to 3-year average after entry into force. See tables C27 and C28, pages 171 and 172 in the main report for sources. May 2013 · Number 95· 3 While good progress has been made overall, with wide measures and cross-border trade facilitation should be country variations, there remains substantial scope for high on the reform agenda. further regional and global economic integration. To strengthen trade in goods, MENA countries could The political change sweeping through the Arab world continue to unilaterally reduce their MFN tariffs, with provides an opportunity for the region to accelerate an emphasis on reducing tariff peaks to the level of the economic integration efforts. The Deauville initiative is most competitive regions of the world (for example, East timely in this regard. At its May 2011 meeting in Asia). Efforts could also be made to steadily roll back Deauville, France, the G8 launched a strategic nontariff barriers to trade, which would involve partnership with MENA countries undergoing political reviewing existing nontariff measures, reducing their and economic change. This partnership calls on partner scope, and phasing out those that are not deemed countries (Egypt, Jordan, Libya, Morocco, and Tunisia) essential for national security purposes. to formulate homegrown economic and governance reform programs to enhance domestic competitiveness Reforms to strengthen trade in services will be required and promote trade and FDI. In return, the Deauville and would include easing entry and licensing partners (which include, in addition to the G8, Kuwait, restrictions for domestic and foreign firms in services, Qatar, Saudi Arabia, Turkey, the UAE, and nine promoting competition, harmonizing and strengthening international and regional financial institutions) regulatory practices, and lowering restrictions on the committed to support the partner countries in achieving mobility of foreign workers in the region. Continued their goals of economic and political transformation public ownership in services is a potential hurdle to through three strategic pillars: governance, finance, and increased regional cooperation, given the caution of the trade and commerce. countries of the region on privatization. Addressing these issues would directly impact employment, the overriding challenge in MENA as services are labor- intensive and thus critical for more jobs. Reducing the cost of trading across borders will mean increasing the efficiency of border-crossings, including the harmonization of custom procedures. Logistics systems need to be vastly improved by abolishing policies reserving logistics activities for specific categories of domestic firms. Transport networks will need strengthening to improve the efficiency of ports and make better use of regional railways. In the power sector, institutional prerequisites for cross-border power trade will have to be established along with strategic investments in regional distribution and transmission. Opening up backbone telecommunication infrastructure to competition and encouraging inward investment in broadband services will bring telecommunications costs down and make Internet services more readily available. Conclusion: A development strategy based on regional and global economic integration has the potential to unlock MENA’s untapped economic potentials. For this to happen, a broad reform agenda is needed which tailored to each country specific circumstances and stages of reform, is needed. The GCC countries have made substantial progress on reducing tariffs and nontariff measures and in improving trade logistics and infrastructure, but reforms are needed in the services area. In the Mashreq countries, which have strong links to the GCC, good infrastructure and cross-border trade facilitation should be prioritized. In the Maghreb, which has strong links to the EU, reducing tariffs and nontariff May 2013 · Number 95· 4