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Economic Integration in the MENA Region: More of a Hope than a Reality

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By Melissa Tomassini

In the post-World War II period, there was an outstanding proliferation of regional economic blocs. In the wake of the call by the General Agreement on Tariffs and Trade (GATT) to ease international trade policies, discriminatory treatments were progressively cut down in an effort to foster growth on a global scale.Against this backdrop, the Arab world was not immune from the liberalisation wave and, under the auspices of the Arab League, embarked on a project of regional integration in 1945, when most of the region was still under colonial rule. Although a Pan-Arab ideology had underpinned the post-independence organisation’s framework, it was only in the late 1990s that the push for increased economic cooperation among member states came to the fore through the  establishment of the Great Arab Free Trade Agreement (GAFTA), overseen by the Cairo-based Economic and Social Council of the Arab League.

Previous attempts to facilitate commercial relations and unitary development visions were pursued by dint of different degrees of integration. Nonetheless, the expected homogenisation of import-export procedures and dismantling of tariffs on agricultural products and manufactured goods were not achieved in the long-run.

In a deeply changed landscape, with an increasing number of Arab states having gained representation in the World Trade Organisation, the ambitious agenda of attaining region-wide integration was revitalised. The inauguration of the GAFTA in 1997 was therefore designed to benefit from the Ricardian comparative advantage and incorporate the area into global supply chain networks. The initially shallow GAFTA, signed by 17 Arab countries and coming into force in 1998, was meant to roll back tariffs on goods by 10% yearly until their complete removal by January 1, 2005. Interestingly, in a survey conducted to assess companies’ major stumbling blocks to trade efficiency, Hoekman and Zarrouk observed that tariffs, which constituted the main barrier to intra-PAFTA (Pan Arab Free Trade Area) cooperation in 2001, ranked at the bottom in 2008, indicating a significant advancement of the MENA region’s economic performance.

A commitment to cut quotas and non-tariff measures (NTMs) by 2010 and liberalise the services market was also included among the stated objectives of the PAFTA. Furthermore, in both the First and Second Economic Summit, Arab leaders reasserted their joint purpose of adopting a common external tariff in 2015 and creating a common market in 2020.

The picture of an Arab “spaghetti bowl” – what Bhagwati defined the multiplication of FTAs – is, besides, complemented by manifold bilateral and multilateral agreements, of which the Gulf Cooperation Council (GCC), the Arab Maghreb Union (AMU), and the Agadir Agreement (2004) are the most prominent. Founded in 1981 in Riyadh, the GCC (including Saudi Arabia, the UAE, Qatar, Kuwait, Bahrain, and Oman) appears to be the most successful and goal-oriented experiment in the whole region by virtue of its harmonised norms and regulations, capital and persons mobility, trade integration, and growing labour market. The organisation has moved forward considerably since 2003, when it first announced the introduction of a customs union. Not only has this become fully operational, but in 2008, the Gulf heads of state agreed upon a future common market status while advocating for a single currency to be embraced in 2010, although this is still under negotiation. Despite progress toward integrative mechanisms, the Qatar crisis that erupted in 2017 seriously impinged on the GCC’s proper functioning and exposed its members’ growing “personalisation” trend in the decision-making realm, hence relegating the institution to a marginal role.

The AMU, created in 1989 in Rabat and composed of the states of Algeria, Libya, Mauritania, Morocco, and Tunisia, laid the foundation for an optimised sub-regional production and distribution network to share the benefits of geographical proximity. It also encouraged greater factor movements (capital transfer, labour migration, and multinational corporations) under more flexible legislation, as set out in the political will of developing a customs union and common market. Notwithstanding, as well as failing to materialise these two aims, the union has not held a ministerial meeting since 1994 owing to the heightened political tensions among member states.

The EU-sponsored Agadir Agreement, headquartered in Rabat, was ratified in 2004 in order to form a free trade area that strengthened economic exchange among Arab Mediterranean countries. Accession is contingent on Arab League membership and the presence of an association agreement with the EU. In actuality, as it is in compliance with the Barcelona Process, Agadir is to be seen as a stepping stone towards the establishment of the Euro-Mediterranean Free Trade Area (Euromed FTA).

Despite the initiation of a variety of policy reforms and important leaps forward, economic integration in the MENA region “remains more a hope than a reality,” as Galal and Hoekman sharply argue. With the exception of the GCC, which is the most integrated group of the area in the global market, the other avenues have largely disappointed expectations. Between 1970 and 1998, the intra-Arab export rate registered an increment of 3%, but its share only accounts for 7% of total exports, a decidedly disheartening percentage when set against those of the European Union, the Association of Southeast Asian Nations (ASEAN), and the North American Free Trade Agreement (NAFTA). Moreover, tariff barriers, although lowered by the GAFTA, pale in comparison with the incentives put in place in East Asia and by members of the Organisation for Economic Co-operation and Development (OECD) to realise preferential market accesses. Significantly, in 2017, the weighted mean tariff equaled 4,9 and 6,7 excluding high income, while the share of tariff lines with international peaks totaled 8,8 and 22,8, respectively.

One of the main reasons identified by many to explain why the region’s economies are characterised by weak and constrained trade-offs is in the poor degree of complementarity among the countries’ productive structures, which prevents them from enjoying the net result between trade creation and diversion. Moreover, efforts to upgrade a Pan-Arab and sub-regional synergy have had to cope with the striking heterogeneity in income per capita of member states, with a gap of $62,142.60 between Yemen and Qatar.

Particularly detrimental to a fully-fledged integration process is the persistence of unnecessary NTMs that hinder products’ entry and obstruct competition, making the Overall Restrictiveness Index and the Market Access Overall Trade Restrictiveness Index for the region among the most prohibitive worldwide.
MENA’s paucity of dynamism and protectionism, originating from lengthy red tape, custom clearance and inspection procedures, and inadequate infrastructures, among other factors, is further corroborated by other indicators’ aggregate scores introduced by the World Bank. With the exception of the UAE, one of the world’s best performers, most Arab economies do not appear among the first 50 in the ranking of the 2018 Doing Business and the 2012–2018 Logistic Performance Index.

Finally, the major frontier in trade liberalisation, the service sector, has not yet been taken advantage of. With a marginal tradability of services, not only are the above regional initiatives old-fashioned, services being the key focus of present-day economic interactions, but they also underestimate the knock-on effects these have in other fields. In fact, they serve as intermediate inputs for goods’ productions, play a crucial role in reducing transaction costs and facilitating distribution and sales activities, attract investments, and ultimately expand employment opportunities.

Potential gains from deeper economic integration are, thus, substantial, and gravity models, predicting volumes of flows between countries in relation to their size and geographical distance, highlight that the Arab region has yet to exploit all the assets it could if governments were willing to loosen their authoritarian grip and open up to the outer world.

About the author:
Melissa Tomassini holds a M.A. cum laude in Public and Cultural Diplomacy from the University of Siena (Italy) and is currently working for the United Nations Industrial Development Organization. She developed an interest in the MENA region through experience as an exchange student at Bethlehem University (OPT) and a visiting scholar at the American University of Sharjah (UAE). Melissa has completed internships with the Italian Ministry of Foreign Affairs, the U.S. State Department, and the European Parliament.