Arab integration set to accelerate

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The past decade or so has witnessed deepening economic integration among nations through formal regional trading arrangements. Spearheaded by the United States and the European Union, regionalism spread rapidly in the Americas, Europe and at a later stage in the Asia-Pacific region, but was slower to take hold in Middle East. Since the early 1990s, however, there has been added momentum in this region to fully embrace the idea of regional cooperation in order to leverage the growing interdependence among member economies.

Regionalism is now understood to be a process of regional integration which contributes to a successful merger with the world economy, that is to say, a process that goes hand in hand with multilateral liberalisation, not hampers it.

Although countries such as Jordan, Syria and Egypt, for a long time, seemed unaffected by the mood of integration, the recent attempts of various regional trade liberalisation measures involving sub-regional agreements, and at the same time progress in the implementation of an Arab Free Trade Area (AFTA) by 2007 (if not earlier), have put these countries in a new regional economic cooperation context.

Currently, regional alliances within the Middle East can be conceived as concentric rings of regional groupings. The processes of sub-regional integration can already be seen in the Gulf region and on a more limited scale in the Maghreb. The oldest and most successful of these groupings is the Gulf Cooperation Council (GCC). The GCC was formed in 1981 by six Arab Gulf states to promote cooperation, and integration in economic and social affairs. The Arab-Maghreb Union treaty was signed in 1989 between Morocco, Algeria, Mauritania, Tunisia and Libya to co-ordinate economic policies of these respective countries, on a road from free exchange to customs union.

On the economic side, the region has diverse natural, human, and financial endowments (most striking in labour and natural resources), as well as differences in the extent of economic diversification among its countries. Much of the trade within the region is based on this diversity, with oil the main traded commodity and labour the main traded factor.

Surprisingly, Arab countries are remarkably unintegrated – 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 thus limited, amounting to only some 10 per cent as a share of total trade (imports plus exports) in 2000; this compares to 60 per cent in the EU and over 37 per cent within NAFTA. In many cases, the most important trade partner of each Arab country happens to be outside the region.

For example, in 1999 only two Arab countries, Bahrain and the UAE, figured in the list of ten leading buyers of Saudi products. Almost 70 per cent of Saudi Arabia’s exports go to non-Arab countries. Similarly, more than 60 per cent of Jordan’s exports go to countries outside the region. This share is the same for the UAE, while Syria’s largest export markets are Italy and Turkey.

Arab leaders have, therefore, made the connection between these regional trading arrangements and the relative economic success that has accrued to member countries, and compared these findings with the low level of intra-regional trade in the Arab world. Coming out of the spirit of globalisation and regional integration, policy makers are now seeking to promote freer and fairer trade through the establishment of an AFTA; a multilateral agreement that envisages tariff free trade by 2007. So is an AFTA a solution?

Economists have differed in their opinions over the issue of an AFTA. Some have strongly supported the AFTA, insisting the agreement will be beneficial to each member country, because it will improve the economic efficiency resulting from stronger competition and provide a large prospective market of several hundred million consumers. In addition to the static bonus, they expect big dynamic gains from the strengthened international competitiveness, enhanced inflow of foreign direct investment from other regions, and learning-by-doing effects via more intense trade relations.

There are others who have raised scepticism about the success of an AFTA, based on the slow progress of past Arab economic cooperation, noting the small volume of intra-Arab trade, and similar production (oil) and trade structures in each country. These have meant that each member state’s economic structure was more competitive than complementary.

Researchers pessimistic about the AFTA also insist that cooperation among its members, each having very different tariff structures and making exceptions to the rule that tariffs must be cut, will not be feasible. These differences will therefore yield very different gains or losses from regional integration to each participating country and will hinder the movement towards a common market.

They claim that although the economic preconditions for integration among Arab countries are improving for an increasing number of states, the key to increasing integration still lies at country level.

Countries in the region should give economic-policy priority to embarking on the complex process of creating an EU- or NAFTA-type arrangement. Each Arab country should focus first on its domestic economic-policy reform, and second on the associated process of integrating into the world economy through multilateral trade agreements, the argument goes. Successful liberalisation will then promote regional interaction.

Today, the old forms and boundaries of countries have become less and less useful in organising economic activities. In effect, an economic alliance or network based on cooperation, and shared objectives, has emerged as a more effective approach to meet the new global environment. Regional blocs allow countries to defend themselves economically against the competition of other groupings outside their area. They also bridge cultural and structural differences between various nations of the world.

Considering the seriousness of such a threat (competition), Arab states have adopted the idea of a regional trade bloc as a measure to protect their national industries. Arab countries, though, have not changed quickly enough. They have not participated fully in the drive to liberalise trade and so have not derived the benefit they might have by doing so. Up till now, successful integration efforts have only come among sub-sets of countries in the region. As more Arab countries progress in deregulating and liberalising their economies, cross-links among these groupings will strengthen economic ties within the region as a whole.

Thus, an interesting future awaits the Arabs. Whether it will be good or bad depends on how effectively an economic strategy is formed. Such a strategy is essential in order to counter the policies of other already-formed economic blocs. Without socio-economic integration between Arab countries there is no true interdependence between Arabs and the West.

Against these trends, and in order to provide an effective counter to European, Asian, or American designs, the immediate formation of an AFTA becomes a most pressing imperative. There is no choice. Either Arabs can get their acts together or they will remain forever watching the participants in the world trading system move forward while they are left behind.

The writer is an economist with the Arab Bank Centre for Scientific Research

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