Economic co-operation could be the way out for the Middle East

By Georges Pierre Sassine on August 01, 2013

This article originally appeared on August 01, 2013 in the print edition of the Financial Times

Looking back at the past two years and a half, Arab countries have been slow at advancing effective economic reforms.

While countries face different economic challenges one common theme is emerging across the Middle East: local decision makers are constrained by tough choices of reform versus social discontent.

With very few levers at their disposal one way to shake out of economic stagnation is for Middle Eastern countries to go beyond their domestic focus and co-operate economically with each other. Regional economic integration could be a practical solution that Arab leaders should consider seriously.

Multinational organisations including the World Bank and the African Development Bank are advocating economic integration in order to create growth, generate employment and reduce poverty. They highlight that the Mena region is one of the least integrated in the world. From 2008 to 2010 less than 8 per cent of Arab exports were among themselves, compared with 25 per cent in the Association of Southeast Asian Nations (Asean) and 66 per cent in the EU.

If Arab leaders realise that their political survival relies on their ability to drive economic growth and that alone they are constrained to do so, then the situation is ripe for fresh and bold thinking.Georges Pierre Sassine

However, such initiatives are not new to the region. The Arab League was initially founded in 1945 with the goal of intensifying regional trade. Several regional trade agreements were implemented across the Middle East.

While progress is being made, Mena regional economic integration initiatives have been fragmented and slow. They were never fully implemented and have been ineffective so far.

The main challenges have been economics and politics.

From a purely economic standpoint, resource rich countries have no strong incentive for deeper preferential regional integration. They would have to substitute cheaper imports from the rest of the world and give preference to goods produced by less efficient regional firms. Countries such as Morocco, Lebanon and Tunisia have been benefiting from regional trade agreements, while resource rich countries such as Saudi Arabia, Qatar, Kuwait, and the United Arab Emirates have suffered trade diversion.

Another reason could also be the low degree of complementarity between countries. Regional trade blocs have similar resource endowments and production capabilities which make it difficult to increase intra-trade flows.

However, politics has been the main barrier to deeper Mena regional integration. The lack of political will has been driven by concerns about which nations would benefit most from these schemes and the impact it would have on regional leadership. Aligning foreign policy objectives with economic imperatives is a crucial requirement to implement these agreements.

Going forward, success requires a focus on three main goals: restore the credibility of renewed efforts, emphasise complementary strength and weaknesses across countries, and bolster political commitment.

The first step is to build the credibility of new efforts. All current bilateral agreements should be dissolved into a single framework, preferably an existing and functioning one, such as the Gafta international trade association. Institutions should be strengthened and an effective dispute settlement mechanism should be established to oversee that agreements are enforced. The objective is to signal that commitments are meaningful and serious.

The second goal requires a rethinking of the integration model. Traditionally, economic co-operation in the Middle East has focused on liberalising trade in goods. However, renewed efforts should shift to opening up cross-border investments and trade in service sectors, including banking, telecommunications, logistics, land, marine and air transportation. According to the World Bank, these service sectors have significant room for improvement in the Middle East and will be critical to create jobs and reduce unemployment. If not designed and implemented carefully such policies can do more harm than good. This is why the sequence and timing of policies should take into account each country’s circumstances and balance strengths and weaknesses across the region.

This being said, political commitment and leadership remain the critical factor that will make or break economic integration. As it stands today deeper economic integration is very unlikely in the Middle East. But if Arab leaders realise that their political survival relies on their ability to drive economic growth and that alone they are constrained to do so, then the situation is ripe for fresh and bold thinking.

Economic co-operation could be the way out for the Middle East.

Georges Pierre Sassine is a public policy expert and holds a master’s degree in public policy from Harvard University’s John F. Kennedy School of Government.

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