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MENA Economic Integration (Research Paper Sample)


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MENA Economic Integration
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The Middle East and North Africa is one of those regions that elicit images of political instability and hardly that of economic integration. It is one of those regions associated with state run economies, dictatorial governments, and oil sheikdoms afraid of democracy and liberalization (Trip, 2006). Previous integrations attempts from the 1950s to the 1980s failed miserably; it was only after 1981 that some kind of economic cooperation started to show (Hoekman, 2000). Real progress towards economic integration has only been witnessed in during the last ten years or so. The economic achievements possible from the MENA integration are not by chance expected to be so dramatic (World Bank, 2009). The MENA integration is largely considered to be highly politicized driven mainly by the desire to achieve peace and stability as opposed to real economic fundamentals (Arnon, 2007).
Given this kind of a background, effective MENA regional integration will take a while to come into full fruition. September 11 created lots of uncertainty; however, it eventually provided the push for change by accelerating the liberalization process. As a result, GAFTA (Greater Arab Free Trade Agreement) and Agadir (Agreement for the establishment of a Free Trade Zone between the Arabic Mediterranean Nations) were formed in 2005 and 2004 respectively. The international financial crisis in 2008 caused drop in oil prices by a whopping 8 percent within just 8 months forcing most of the MENA states to seek economic diversification as a matter of urgency.
This paper will analyze the integration prospects of MENA states and how the integration has progressed since establishment. It will also evaluate how regional integration has been aided by joint infrastructure projects, financial institutions and Foreign Direct Investments amongst the MENA states.
Integration within the MENA region is basically integration between Arab states. The World Bank defines MENA region as consisting of Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Malta, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, West Bank and Gaza and Yemen. Some countries such as Malta will be excluded for the purpose of this since it joined the EU in 2004. Countries such as Iran and Israel are included even though they are a key obstacle in regional integration. Therefore, it MENA can be defined as extending from Morocco on the Western side to Iraq and Oman on the Eastern side. This is a region with a population of over 300 million people and a GDP estimated at USD 2,000 billion. The economy of MENA states is very diverse.
Intra MENA Trade
Trade within the MENA states constitutes a small percentage of overall trade with 5 percent for exports and 5.1 percent for imports as shown in table 1 (MENA Trade data, 2008). MENA countries’ exports to the EU are 10 times; imports are 8 times more that trade flows within MENA countries. Nevertheless, it is important to consider the diversity of imports and exports of individual countries. Of the more than 10 percent of exports to MENA countries, Jordan, Lebanon and Syria provide a larger export destination for Egypt than the rest. However, when it comes to imports Libya imports more than 10 percent of her purchases from MENA countries. In overall, trade with EU is more significant than trade amongst MENA states. As far as exports are concerned; Jordan, Lebanon and Palestine (Occupied territories) trade more within MENA than they trade with EU, but when it comes to imports none of the MENA countries import more from within MENA than from the EU. These statistics showing very limited intra MENA trade are the reason for the extremely slow pace of regional integration within the MENA region (IMF, 2011).
Table 1
From table 1, trade within the sub region (Intra Magreb and Intra Mashreq) show varying patterns. Exports within Maghreb constitute just a mere 2.5 percent of total Maghreb exports which very negligible. However, when it comes to imports, Tunisia and Libya have a greater share of intra Maghreb imports which is quite higher than the average share of imports within Maghreb states at 3.7 percent. From the other sub region of Mashreq, exports are more than intra Maghreb exports. Imports between the two sub regions are also very low at just 2.3 percent of the total imports.
Various models show trade within MENA countries is way below its potential (Balbol and Fadheldin, 2005). Increasing number and significance of trading blocs within MENA countries, deterioration in export global competitiveness, and very inadequate integration within MENA countries resulted into double problems for export driven MENA economies. The stagnation of non oil exports and very low non oil exports to GDP ratio suggest missed opportunities to diversify MENA economies. Economic models show that complete liberalization of trade within MENA states will create substantial benefits to these countries and their trading partners such as the EU (Iqbal and Nabli, 2010).
Even though, there has been a slight rise in intra MENA trade, the integration is still very low compared to that of other middle income regional blocks (Ahktar and Rouis, 2010). Several reasons have been given for this dismal performance of MENA integration.
Protection from imports through tariffs is very irregular throughout the region. Elimination of tariffs between jurisdictions with highly varying external import tariffs will cause different consequences to the exposed sectors. This is because imports have the potential to change completion dynamics within the individual countries. Opening up markets to regional partners may sometimes have the effect of diverting trade flows to the least efficient member state and from the more efficient exporters. Even though, the MNF tariffs within MENA countries, they have been reducing towards the global levels (Shui and Walkenhorst, 2010). Besides, particular industries within specific countries could be considered more critical, hence the willingness to expose them to competition from other companies could be very limited.
A study by Kee, Nicita and Olarreaga (2005) analyzed the impact of non tariff barriers in MENA countries and concluded that the MENA region has the highest non tariff barriers than anywhere else in the world. Besides, these non tariff barriers contribute to trade restrictions more than tariffs really do. In addition, Free Trade Area agreements exist in most of the MENA countries; however, they are never implemented and only remain officially on papers but never in reality. Occasionally, special import permits are needed for goods to enter the destination country and whenever the import is deemed to be competing with the local industry, permits may be denied or high MNF tariff is charged. In the same analysis by Kee et al (2005) of non tariff barriers, the found out that the costs of complying with non tariff barriers could be as high as 10 percent of the exported commodity price.
Most of the trade agreement within MENA usually leaves out service trade or treat it marginally at best (World Bank, 2010). A study by Konan (2003) also indicates that if Egypt and Tunisia were to conduct comprehensive services reform and open up the sector to competition, they would be able to achieve up to three times better performance than if they eliminated tariff alone. As a result of the differences amongst MENA countries in terms of regulations, currency restrictions, mobility of people, it is sometimes easier for service providers within the region to do business outside the bloc than inside the bloc (Shui and Walkenhorst, 2010).
The widely different and complex sets of rules of origin within MENA states tend to displace FDI investment to the Northern side of the Mediterranean (Ulgen, 2011). An investor from the EU often finds it easier to do business with an individual MENA country than an investor from the MENA state. This is because MENA investors are disadvantaged by the discrepancies in the particular trade agreements across MENA countries. This is made worse by the complications by the different rules of origin.
Operation costs including high transport cost, high communication costs, high logistics costs and poor infrastructure are proving considerable obstacles to trade within the MENA region. The institutions responsible have failed to streamline prices with costs and create an enabling environment for private enterprises to prosper (Page and Van Gelder, 2001). All these shortcomings combined have greatly impeded the establishment of small and medium sized firms which are known to be key drivers for intra regional commerce (Nabli, 2007). Other studies have also identified other obstacles to business within the MENA states which includes: intellectual property rights, complicated rules of origin, corruption, state interference, language barriers and cultural differences (Eurochambers, 2011).
Financial and Infrastructure Integration
The MENA region boasts of economic, geographical and cultural features that allows for deeper regional integration. Several attempts have been made towards achieving this, with the most comprehensive being the GAFTA also previously known as Pan-Arab Trade Agreement. FDI and portfolio investment between the MENA countries have grown in the recent past. Soaring oil prices have earned the GCC countries (Cooperation Council) enormous amounts of revenues. This has been replicated in most other countries within the MENA region. Between the years of 2002 and 2006, an estimated USD 60 billion, or roughly 11 percent of total capital investments from GCC countries went into other MENA countries.
Even though, the...
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