Regional Economic Integration in the Arab World

Seminar on Regional Economic Integration in the Arab World
Istanbul, Turkey
October 5, 2009
Regional Economic Integration in the Arab World
Ms. Shamshad Akhtar, Vice President,
Middle East and North Africa Region
The World Bank

One of the key priorities of the Arab World has to be to promote private sector led economic growth to generate the desired level of jobs. This is critical to productively employ the stock of 20 million unemployed, while accommodating new entrants as the labor force is expected to grow by 3.4% annually. To achieve this objective, there is need to launch renewed efforts and campaign to promote regional economic integration which will help the Region exploit its full potential and set it on a higher and sustainable growth path. Many factors have impeded MENA‟s economic growth potential. Among others, to quote a few constraints to growth are:

• Quality of education and lack of system ability to generate skilled work force,
  
• Institutional and regulatory barriers impacting responsiveness of firm,
  
• Labor market mismatches, and
  
• Uneven resource base with some serious environmental challenges.

One additional factor is limited economic integration in the Arab World – both within and outside the region.

Albeit fragmented and slow, progress is underway in MENA to foster regional cooperation. Steps taken include:

• Introduction of regional trading blocs and agreements;
  
• Sub-regional groups such as GCC are moving a step forward from a custom union to common market and is examining options for the formation of monetary union and has a number of infrastructure projects underway to improve connectivity;
  
• Establishment of different institutional bodies with different mandates;
  
• Reduction of tariffs on trade – scope for further reduction is clearly there;
  
• Development of intra-regional tourism and labor mobility that has facilitated remittances flow within the region;
  
• The air transport industry has benefited from elimination of Arab Civil Aviation restrictions and adoption of open sky policies and liberalization of airport transport systems;
  
• Arab power grids is to benefit from seven consortium electricity grids and GCC as well as Maghreb electricity grid interconnections projects bundled with formal power purchase agreements and other institutional arrangements regulating the flow of power energy trade;
  
• Cross-border gas pipelines are a reality: the Euro-Arab Mashreq Gas Pipeline Project that integrates gas markets of Egypt, Jordan, Lebanon and Syria and the GCC gas pipelines (the Qatar-Bahrain Pipeline, the Qatar-Bahrain-Kuwait Pipeline) to export natural gas from Qatar to UAE, Bahrain, and Kuwait.
  
• Telecommunications sector liberal policies have resulted in expansion of private operators that are moving towards common regulatory and technical standards under oversight of the Arab Network for Regulators.

Two models of regional economic integration offer some perspectives on how integration of Arab World can be promoted. On one hand is the EU framework that offers a centralized model of economic integration. Involving a long haul process, EU succeeded because of strong political commitment and motivation that helped translate EU Vision into a reality backed by well conceptualized policy and institutional framework that was nurtured by EU bodies. Aspects of the European model such as integrated factor and output markets (including facilitation of labor mobility through standardization of skills and portability of social services), shared production processes along the value chain, and infrastructure connectivity would contribute to creating economies of scale and benefit Arab World.

On the other hand, is the ASEAN that offers a decentralized and private sector led model of economic integration. This model relies on strong champion regional player i..e Japan (now accompanied by China and Korea) that saw the eventual merits of “competitiveness” of low cost producers and based on this invested in the region. This nurtured the „flying geese‟ model of development in East Asia driven by changing comparative advantage across countries in labor intensive production, which was exploited by regional firms and governments. In particular, Japan‟s transnational firms and government played an active role in moving labor intensive production from Japan to less developed regional neighbors –investing in local firms, transferring production technology and exporting finished goods back to Japan. This pattern not only fostered regional integration -- intra-regional trade accounts for fifty percent of East Asia‟s total trade volumes-- but powered East Asia‟s global competitiveness. The East Asia Economic Caucus accounts for twenty-six percent of World merchandise exports.

These two substantive regional blocs offer promising results. While the models cannot be replicated given different circumstances and conditions of Arab World but their experience is instructive and motivating and key lessons can be drawn from their analysis. For instance,

• While the “flying geese” model cannot be applied to the Arab region unless a country with the economic weight and technological lead takes the leadership to foster regional cooperation. However, GCC based on its edge could exploit comparative advantages of the countries by taking a lead in investing in production networks across the region complimented by technology and investment from Europe and elsewhere.
  
• Easing of restrictions on the movement of goods, services and labor within MENA in line with trends observed in other regional blocs would allow countries to develop specializations in the production of goods and services for the regional market and beyond.
  
• Cross border facilitation, removal of nontariff barriers and development of logistics and bonded movement of goods etc. can be easily replicated from EU experiences.
  
• Harmonization and standardization of variety of laws and regulations has high pay off for factor mobility.

Notwithstanding these arguments, the model of regional integration of Arab world should be based on trade in services, labor mobility and exploiting economies of scale to foster the development of regional production chains (as in East Asia). It is to be a model of regional integration nested in global integration as well as on building on the current progress of integrational efforts around the Mediterranean. The region needs to take greater advantage of the inter-country wage differentials, short transport distances, economies of scales and resource sharing. Capital rich countries in the Region have opportunities to invest in large scale profitable cross border investments and projects.

World Bank’s Role in MENA’s economic integration
In 2007, the World Bank launched the Arab World Initiative (AWI) that aims at leveraging client country demand with the Group‟s knowledge and investment resources. In parallel, the World Bank has now established the Marseilles Center to promote specific selected activities of the Union for Mediterranean Projects.

• So far, key programs in the AWI have consisted of:
  • Investments in ports, airports, and trade logistics in Djibouti, Egypt, Jordan, and Tunisia, at a total cost of about $1 billion
  • Assessing the progress in the implementation of the Pan-Arab Free Trade Agreement
  • Assessing cross-border infrastructure links in Iraq, Jordan, Lebanon, and West Bank and Gaza
  • South-South investments and trade finance operations of IFC.
    
    
• Going forward, the AWI will concentrate on activities with significant spillover externalities (cross-border benefits), in areas where consistency of policies and actions add to credibility, economies of scale, or potential competition. For that reason, the AWI is articulated around three pillars:
  • Regional projects: the AWI will support projects in regional and global trade facilitation and regional infrastructure as well as regional approaches to water management and environmental issues
  • Harmonization and standardization of policy and regulatory approaches:
    the AWI will support regional approaches in trade and financial
    integration, social services and education, as well as public good areas
    such as environmental management.
  • Knowledge and capacity building: the AWI will create knowledge on key regional challenges to underpin policy dialogue and project preparation, with at least one regional knowledge product every year over the next 3 years. In addition, a number of sub-regional knowledge products will lay the foundations for future projects.
    
    
• We will work with stakeholders – government, regional financial institutions
  and the private sector – to identify financial instruments and sources to
  finance AWI projects:
  • The WB will make use of existing financing instruments but will also go beyond traditional IBRD/IDA loans or credits. Funds such as GEF and CTF can help finance regional programs.
  • The IFC and MIGA will play an important role in fostering cross-border public-private partnerships to deliver infrastructure and financing.
  • The Bank Group will also seek to leverage its resources by attracting more co-financing to regional programs than has been the case in the past.