A must, not an option

Arab countries barely trade with each other, a situation that must change quickly if the region is to reverse its economic stagnation

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By  Massoud Derhally Published  November 5, 2002

|~||~||~|It would be unrealistic to think or believe that any one Arab country is in a position today to unilaterally achieve rapid industrialisation and diversified growth. Arab countries are simply too small to compete alone in any one industry on an international scale – which, according to economists, analysts and businessmen, is all the more reason why Arabs need to do more business with each other. Despite numerous attempts to promote regional integration, intra-Arab trade today remains a small portion (7.5% in 2001) of total Arab trade and accounts for 2% of global trade.

Policy induced factors have hindered trade and more fundamental structural differences that tend to encourage more inter-regional, rather than intra-regional, trade are some of the reasons for low levels in intra-Arab trade, according to the International Monetary Fund. Achieving economic integration through free trade areas, customs unions, a common market and an eventual economic union are options that Arab countries cannot continue to ignore. While countries may have made strides in some areas, fundamental challenges remain.

Nazem Abdalla, senior economist at the United Nations Economic and Social Commission for Western Asia, (ESCWA) says that if you exclude oil from the trade equation, then the 7.5% figure mentioned earlier jumps to 19% or more. “While it is not bad, it is lower than others when compared to Europe, which is 59%, NAFTA 19%, Asian countries that have 40% or Latin America, which is around 35%,” says Abdalla.

Arab economic integration is poor as a result of several factors. The composition of exports and oil playing a bigger part of exports is a key reason, says Abdalla. The Arab world competitiveness report published September echoed precisely this when it said, “The Arab world must strive to shift to higher value added exports.
“To achieve higher rates of growth, the region needs to shift from trading on advantages based primarily upon factor endowments towards trading based more on unique products and processes.” The report went on to say the region could do this by competing on quality and innovation, which in turn improve productivity, which allows for greater market share.

Another contributing factor is the similar level of development in Arab countries. Past inward oriented policies in Arab countries, says Abdalla, were too focused on looking for import substitutes and snubbed globalisation and integration in the world. “They have not looked towards producing and exporting, but to protecting their own industries. Even GCC countries are producing and exporting petrochemicals and competing with one another,” says Abdalla.

In the more diversified economies like Egypt, Lebanon and Syria, textiles are produced. Yet, Abdalla says, “we don’t have a Japan among us to lead the way and are competing with one another in that extent.”

“The position we are in today, to say it mildly is pathetic,” says Abdullah Al Zamil, senior vice president of Zamil Air Conditioners, which is part of the Zamil Group. “The only way for industries to flourish in the Arab world is if the Arab populations use each other’s products,” adds Al Zamil.

Jassim Al Mannai, director general of the Arab Monetary Fund (AMF), believes that the countries are capable of succeeding. “Arab countries have the basic ingredients that should allow for a far better mobilization and allocation of their resources within a framework of economic cooperation,” he says. But there are those who would say there is little to be proud of on the economic front, and much of the change we see today has really been a half-hearted effort by states that have no option but to liberalise and open their markets. For a period of 21 years, the average annual rate of growth of the Arab world as a whole was 3.3%, according to the UNDP report that was published in July.

“GDP in all Arab countries combined stood at US $531.2 billion in 1999, less than that of a single European country, Spain (US $595.5 billion),” said the report. But Al Mannai says, “Economic reform programs adopted by many Arab countries have greatly reduced the differences in economic philosophies and policies and this should be a cause for optimism.”
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Differences in per capita income have also affected intra Arab trade adversely. Richer countries prefer to import high quality goods more likely to be produced by industrial nations. This has been the case traditionally but Al Zamil says things have changed. “You still have in the Arab world people with the ‘foreign complex’ that if a product is made in one of the Arab countries then it is an inferior product,” he says. “That is not true, not any more at least. Maybe in the past it was. As of recently, a lot of Arab manufacturers have upgraded quality and innovation to match what comes in from Europe or the US, and hopefully the ministries of commerce and industry could play a role in promoting ‘made in the Arab world,’” he adds.

That is precisely what the Arab World Competitiveness Report published by the World Economic Forum in September said. If the Arab world is to succeed at diversifying its exports, it needs to think long term and have a “strategy anchored on two pillars: the promotion of domestic entrepreneurship, and the encouragement of foreign direct investment (FDI).”

High trade costs, including transport and communications, are other factors that have constrained intra Arab trade. “Today I could send a container to Australia cheaper than I could North Africa,” says Al Zamil. “Most of the shipping that goes to North Africa is through Europe and it’s all trans-shipped and that causes a huge challenge for exporters from one Arab country to the other,” he adds. Economic policies are not the only factor. There are also political factors. Economic sanctions have impacted bilateral trade in the region. Prior to UN sanctions, Saudi Arabia’s exports to Iraq exceeded US $150 million (1989). Since then, exports have been negligible, according to the IMF.

The current conditions have businessmen and economists calling on Arab countries to pay close attention to the Arab Free Trade Agreement (AFTA), which should be implemented in full by 2007. They point to successes in North America, Europe and Eastern Asia and to the benefits of regional economic integration. Yet the imperatives of AFTA have not been implemented, and the continuing trend to ignore the treaty may have long adverse effects on attracting FDI and engaging the private sector. “The idea was for the customs duty to come down 10% every year and by the year 2007 we should have zero customs duty among all Arab countries,” says Al Zamil. “Today we are almost half way through and are supposed to be paying half of the custom duty that others pay when going to Arab countries – but it is not being implemented.”

While he points out that Egypt has ratified the agreement and opened up its market, Al Zamil says, “You would be surprised that some countries are not adhering to this agreement. The sad thing is, if you go and talk to the governments they don’t tend be receptive to the idea and they don’t want to enforce the agreement. The second part, is that some countries have adopted implementation of the agreement but have levied other taxation and at the end of the day you find out you have gone back to square one.” He adds: “Some Arab countries have in fact levied more taxes. In one country you have to get an approval from the Ministry of Industry before you get a shipment in and that approval takes a month.” The Arab Monetary Fund’s director general, Jassim Al Mannai, says, “There should be no room for complacency in implementing the necessary economic reforms to induce sector contribution to economic growth and to promote efficiency and competitiveness.”

Implementing AFTA is a must says ESCWA’s Abdalla. A number of Arab countries have agreements with the European Union and this partnership could adversely affect the current situation even more.

If Arab countries don’t have an intra-Arab market, it could spell disaster because Arab countries will be able to import from Europe and export to it free of tariffs but between them they will be imposing tariffs, says Abdalla. More importantly in the next seven to eight years this could mean that all the benefits will be going to Europe. “Why will one country export to another Arab country and have tariffs levied on its products when it can do the same with Europe without tariffs?,” Abdalla points out.
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Amplified trade between Arabs will reinvigorate growth. It will nurture industries, alleviate unemployment and help countries develop stronger relations with one another. Greater integration will bring important benefits if compatible with multilateral liberalisation and greater efficiency with economies of scale.

Al Mannai says that integration, “should lead to increased product variety, greater efficiency and higher levels of foreign direct investment in addition to an enhanced bargaining power as a group on the global level.”

Arab countries have to strengthen the political will by creating a financial and technical assistance mechanism, Abdalla says when talking about integration. “They have to have some kind of compensation for those that lose at the beginning. Europe puts US $5 billion to encourage membership in the European Union. Arab countries don’t provide for one another,” he says. Countries must also minimise exemptions in trade agreements. “We have a lot of trade agreements but in every agreement, before the guy leaves the room, he says we are not talking about this item or that item, so whatever is left has no teeth at all,” says Abdalla.

Arab states should promote joint ventures. Once you get two countries having joint ventures and those involved are from the private sector and not the government, then you have lobbies in both countries that keep relations good, says Abdalla. “The more companies you have in different countries the more economiss will foster continuous harmony and political unity, but not the other way around,” says Abdalla.

If Arab countries succeed at integrating, and economists say they must, the benefits are plentiful, the potential infinite. The benefits of economic integration afforded by the development of the single market are enhanced by the elimination of the transaction costs of exchanging different currencies, a direct result of the introduction of a single currency, which as the European experience illustrates should increase competition, efficiency and economic growth in the area. While political considerations have undermined economic progress in the past, this can no longer be an excuse upon which development decisions should be based.

Jawad Abbassi, president of the Arab Advisors group based in Jordan, sums up the situation by saying the mindset in the region needs to change. “If labour barriers are down and Jordanian companies can go to Cairo and can send Jordanians to open an office there, pay taxes to the Egyptian government, that’s when you have cross border cooperation as opposed to ‘Hi nice to meet you here is my business card.’ When they start competing in the market, that’s when they see synergies and then you have regional companies with mixed offices of Jordanians, Lebanese, Palestinians, Syrians and Egyptians. That’s when you have critical mass, can talk to the outside world and say the region has these companies and total exports were US $1 billion, come talk to us. That’s where the attention is lacking.”

Essentially, the Arab world needs to decide whether it wants to remain on the margins of the modern world. As the UNDP report on Arab Human Development concluded, “The future of the Arab States is to a large extent contingent on the responsiveness and the will of their governments, their businessmen and their investors to initiate effective collective action.”||**||

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