by Nasser M. Suleiman
(Ph.D. student in Hungary researching economic integration in Arab countries)

Summary

Introduction

1. The regional characteristics of Mena

2. Why regional interaction has been limited

3. The scope for regional integration

4. Prospects for regional integration

5. Concluding remarks

Footnotes

References

Summary

The economic preconditions for integration in Mena (Middle East and North Africa) are improving for an increasing number of countries. The key to increasing integration now lies at country level. Some Mena countries have made considerable headway in stabilizing, reforming, and opening up their economies.

Despite such achievements, the Arab countries as a group still operate below their potentials. They are not taking full advantage of the opportunities that the global economy has to offer. Consequently, since the 1989 recovery in the region, real GDP growth has not kept pace with the robust growth in the developing countries as a group. More to the point, slower GDP growth and rapid population growth in the Arab countries has meant that for the region as a whole, average real, per capita income has virtually stagnated. At the same time, the Arab countries as a group have attracted very little of the private investment capital that has surged into developing countries in recent years. Furthermore, export growth has averaged only 1.5 per cent per year over the last five years. This does not come anywhere near the average annual export growth of almost 10 per cent achieved by the developing countries as a group, or the 6 per cent average annual growth in world trade.

The way forward, as most Arab governments now accept, is to pursue structural reforms and try to attract more foreign direct investment (FDI). Mena governments also need to adopt a trade-policy regime that fosters integration into the world economy and overcomes the protectionist tendencies of the past, to prevent further marginalization within the world economy. These efforts may well receive a boost from the process of negotiating Association Agreements between the EU and countries in the southern and eastern Mediterranean.

The long-term objective of the Euro-Mediterranean Partnership is free trade among SMCs (Southern Mediterranean countries), and not only between them and the EU. The creation of Mefta (the Mediterranean Free Trade Area) is necessary if the SMCs are to avoid the drawbacks of a ‘hub-and-spoke’ effect and attract FDI to the region. Ultimately, a huge Euro-Mediterranean Free Trade Area of 600–800 million people and about 40 countries may emerge by 2010, doing about 60 per cent of its trade within the region.

Successful integration efforts are more likely to come first among sub-sets of countries in the region, rather than in the region as a whole. As more countries in the Mena region progress in deregulating and liberalizing their economies, cross-links among these groupings will strengthen economic ties within Mena as a whole.

The processes of sub-regional integration can already be seen in the Gulf region and on a more limited scale in the Maghreb. The Gcc (Gulf Coopeation Council), covering Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE, was founded in 1981. It is the most successful integration in the region, both politically and economically, indeed the only one that actually works. Politically, this is because the tiny emirates need to club together to match the two regional powers in the Gulf, Iraq and Iran. Economically, Gcc states have removed all tariff barriers, but since they have no interest in buying one another’s oil, this hardly matters.

The plan for more intensive cooperation in North Africa has historical roots dating back to the medieval unity of the region. The presidents of Algeria, Libya, Mauritania, Morocco and Tunisia signed the treaty of the Arab Maghreb Union in 1989, with extensive and ambitious objectives. It was designed to remove trade barriers and create a regional common market by 2000, achieve economic integration, establish common institutions (a joint consultative parliament, investment bank and airline), and as an ultimate objective, a political union. However, the five countries adopted radically different positions in the Gulf crisis of 1990, ranging from Libya’s opposition to the resolution condemning Iraq, to Morocco, which sent troops against Iraq. The pace of cooperation slowed further due to political problems with Libya (the Lockerbie bombing) and internal problems in Algeria (the struggle against fundamentalism).

Another possibility may be for sub-regional integration in Mena to evolve from an initial subset of core countries, starting perhaps with the Israeli, Jordanian and Palestinian economies, and broaden to include other countries in the heartland of Mena: first Egypt, and then as the peace process unfolds, Syria and Lebanon, and eventually even Iraq. Israel’s neighbours are interested in developing this cooperation, in the form of labour flows or through trade. For Israel, regional trade will remain of low economic importance, but it has an interest in ensuring there is Palestinian and Jordanian social and political stability.

Introduction

Despite many attempts since World War II to promote economic integration and political cooperation among states in the Middle Eastern and North African (Mena) region (Box 1), economic interactions have remained limited. Increasing attention has been focused on the region’s economic potentials due to the recent progress in the Arab-Israeli peace process and the steps taken by several countries toward external economic liberalization. This attention comes at a time of renewed global interest in regional arrangements, whether among industrial countries (such as the EU), a mixture of industrial and developing countries (Nafta and Apec), or developing countries alone.

Any region needs a framework in which intra-regional issues — political, security or economic — can be addressed on a regular basis. Most have several overlapping regional organizations. We can identify three reasons why countries seek greater regional integration: (i) to make economic welfare gains, (ii) to increase the region’s collective political bargaining power in extra-regional issues, and (iii) to achieve other non-economic national goals, such as meeting security concerns and preventing future conflict.

A region is defined by several characteristics, the most basic being geography and culture. However, these two aspects say little about the extent of, or potential for welfare-enhancing regional economic interaction, which are also determined by economic and political factors. The more similar the economic and political systems of countries and the more similar their political goals, the easier it has proved to promote effective regional economic integration among them. The returns from economic integration also reflect the relative resource endowments of the participating countries, including human capital, albeit not in a unique or unambiguous manner. [2]

Section 1 of this paper discusses the characteristics of the Mena region in more detail. Section 2 looks at factors behind the limited extent to which the Mena countries are globally integrated. Section 3 discusses the scope for more regional integration, why regional interaction has been limited overall and skewed in terms of activities, despite various official initiatives and favourable initial conditions. Section 4 assesses the prospects for regional interactions (EU-Mediterranean partnership and sub-regional integration). Section 5 adds some concluding remarks.

1. The regional characteristics of MENA

This section considers the extent to which Mena constitutes a region. While geography and culture favour regional integration, the absence of political and economic prerequisites has so far limited the scale of market and institutional integration. [3]

The Mena region covers a contiguous geographical land mass extending from the Atlantic Ocean to the Arabian Sea. Its area of 15 million sq. km is almost equal to the EU’s and three-quarters of the area of Latin America. Although it has characteristically harsh climates and limited ground water and rainfall, it is rich in a wide range of natural resources. It contains important crude-oil and gas reserves, numerous non-fuel mineral and non-mineral resources, and some very productive pockets of agriculture. [4]

In some respects, Mena is unusually homogenous in its culture. Arabic is the main language in all countries in the region except Israel and Iran, and it is an official language in all countries but Iran. Furthermore, Arabic and Hebrew are closely related. The region is dominated by monotheistic religions, between which there are historical relations. In all countries but Israel, the population is predominantly, in most cases overwhelmingly, Muslim. The Arab countries share a rich historic heritage, part of which is also shared with Israel. However, relations have had a chequered history, and in recent years the region has been dominated by human suffering, hostilities and mistrust associated with armed conflict, particularly but not exclusively, the prolonged Arab-Israeli conflict.

This linguistic and religious coherence compares favourably with other regions. The linguistic coherence is much greater than in the EU, for example. Latin America has a similar coherence in language, but less diversity in religion. [5] Apec, an emerging regional bloc seeking to establish a free-trade area by 2020, is much less homogenous in language, religion and historical heritage.

Reflecting religious and historical influences, the culture in several countries in the region gives strong backing to business activities. Nationals of the region have a well-established commercial and entrepreneurial reputation. This is illustrated by the success of Lebanese and Palestinian minorities in Latin America, West Africa, North America and other parts of the world.

The populations of Mena countries (Table 1) range from almost 60 million in Egypt to around 0.5 million in smaller Gcc countries such as Bahrain and Qatar. Many countries in the region have experienced high population growth rates and a rapid increase in the labour force, so that there is a high proportion of young people in the population. According to World Bank data, the average annual rate of population growth in the region has been 3 per cent. Over half the region’s population is below the age of 17. The aggregate labour force has been increasing at an annual rate of 3.5 per cent (4.9 per cent for women), which is well above the developing countries’ average of 2.2 per cent. About 70 per cent of the population live in urban areas, which is well above the average proportion in developing countries (44 per cent), below that of the EU (74 per cent), and similar to that of the Apec and Latin American countries. Israel has the highest degree of urbanization (90 per cent) and Egypt the lowest (44 per cent).

The rhetoric of international relations within the region has been dominated since World War II by Arab nationalism and the Arab-Israeli conflict. Arab nationalism reached a political peak in the 1960s. However, the political unity of the Arab bloc, as exemplified in the activities of the Arab League and Arab regional organizations, was adversely affected by two events in the last 20 years: the Egyptian-Israeli peace in 1979, and the 1990–91 crisis triggered by Iraq’s invasion of Kuwait.

Notes: ^a At purchasing power parity. ^b Estimated to be lower-middle income (USD 786–3115). ^c Estimated to be high income (USD 9636 <). ^d Estimated to be higher-middle income (USD 3116–9635). ^e Estimated to be low income (USD 786>). Source: World Bank Atlas, 1998.

The erosion of Arab political unity has been accompanied by fluctuating tensions among certain Arab countries, and the emergence of security and economic arrangements among sub-regions, the most notable being the Gcc. There has also been a strengthening of the role of religion in everyday and political life.

More recently, the progress towards a comprehensive, just and durable Arab-Israeli peace has forged new links in the region, notably a developing Israeli-Jordanian-Palestinian nexus. Despite this, there are powerful divisions of opinion, between and within countries, on the desirability and pace of moving towards peace. These cast a shadow over the possibilities for regional integration involving Israel. While the history of regional integration efforts in Europe, and more recently in Asia, suggest that enhanced regional integration can help cement peace, progress requires the development of constituencies within each country supporting the peace.

The region remains divers in its political systems and governance. Democratization has not proceeded far in several countries. There has been little political commitment to regional goals. Very few of the numerous regional political initiatives have been translated into sustained and effective institutional foundations. Repeatedly, national considerations have undermined regional efforts.

On the economic front, Mena is remarkable for its lack of integration—in terms of the extent of economic interaction within the region, and the absence of an effective framework or institutions responsible for formulating and implementing rules and policies to influence, regulate, and supervise economic relations.

• The scale of intra-regional merchandise trade is limited, amounting to only some 7-8 per cent of total exports and imports; this compares to over 60 per cent in the EU, over 30 per cent in Asia and around 20 per cent in the Western Hemisphere (Table 2).

Source: International Monetary Fund, Direction of Trade Statistics.

• Capital transactions have also been relatively limited, with the exception of large official flows from the oil-exporting economies to other Arab countries, particularly after the 1973–4 and 1979–80 oil-price increases.

• Tourism and other non-factor service-flow patterns have been quite segmented. Some countries—primarily Egypt, Jordan, Lebanon, Morocco and Tunisia—have received substantial tourist flows from within Mena. For others, particularly Israel, regional tourism has been inhibited by political and security considerations.

• Labour flows have been important, taking the form of (i) flows from non-oil economies to the Gcc economies, and (ii) Palestinian labour working in Israel. In the 1990s, these flows have been subject to major restrictions and there has been recent substitution of Asian labour for Arab labour in both cases. Mena does not have the kind of labour mobility found, for example, in the EU, where the citizens of one country have the right to work in others.

• There has been little in the way of regional economic policy coordination, except for the Gcc and through the Opec mechanism.

Nonetheless, there is potential for far greater economic interaction within Mena. For example:

• The region has a diverse base of natural, human and financial endowments, spread among countries in the region.

• Its high initial trade barriers suggest there is scope for trade-creating gains from regional integration.

• With an average per capita income well above that of the developing countries as a whole, and almost 5 per cent to the world’s population, the region offers a large market with considerable purchasing power.

• It has well-established trade links and relatively accessible intra-regional trading routes.

• Community of language and cultural affinity should facilitate labour and tourist flows within much of the region.

Despite these potential advantages, it is often and correctly argued that the similarity of resource endowments among many countries in the region and the greater proximity of the Maghreb countries to Europe than to the Mashreq will continue to restrict intra-regional trade. Nonetheless, while countries in the region continue to trade mostly with non-regional partners, the current levels of trade within the region are below those attainable if economic relations within the region were freer. Furthermore, most types of economic interaction within Mena, with the important exception of labour flows, remain remarkably limited and inconsequential.

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