World Bank Seminar on the Arab World Initiative Trade and Investment Integration

Mrs. Chair, Ladies and Gentlemen,

It is a serious challenge nowadays to develop a set of policies for the Arab World, mainly because of the sharp differences among Arab countries, not to mention the differences within each one of them, much like most of the other regions in the world. Some would divide the Arab World between Mashreq and Maghreb (where does Egypt fit?), others would add a separation between Gulf countries and the Levant within the Mashreq, and many would use economic indicators to conclude that Rauch and Kostyshak were right in defining three Arab Worlds: The Sub-Saharan African countries in addition to Yemen, the fuel-endowed countries, and the remaining – all Mediterranean – countries.

Having said so, this diversity within a region where populations share the language, and not ethnicity, for example, can prove to be a source of opportunities if the complementarities are well defined and properly exploited. Some obvious differences in the Arab land are, among others, the climate, the density in populated areas, the existence of large natural resources, and the availability of skilled or unskilled labor force. As a matter of fact, building on the said opportunities is already of utmost importance for a region that should find ways to create more than five million jobs a year for a minimum of twenty years ahead.

Despite the limited impact of the crisis on Arab countries for the time being , we need to bear in mind some long-lasting difficulties that characterize them, such as the inability to implement long-needed reforms, especially in the case of sizeable natural resources endowments, and the slow pace in the diversification of the economies in most of the Arab countries. It is therefore commonly admitted that boosting development is urgent in this part of the world, and it looks like a better regional integration is an available tool to achieve it.

Arab intra-regional trade figures are low by any standard when compared to any other integrated region in the world. The Arab Common Market represents less than 1% of the world merchandise exports, and intra-regional trade is around 8% of the total. Of course, this figure would be higher if we remove trade in oil and gas, but would still be below 16%. While FDI inflows are below their potential, hardly 10% of the oil-rich GCC countries’ FDI outflows are directed toward Arab countries, with a negligible share for manufacturing. However, interesting opportunities lie ahead of those facts. Moving labor intensive production from the rich areas to less developed neighbors through the investment in local firms and transferring technology will potentially make these countries richer, and will allow them to repeat the experience themselves, not to mention that they will export back toward the richest. This is more or less what happened in South-East Asia, and it clearly increased the global competitiveness of the region. In the Arab World, we witness very high flows of workers toward and within the region, with sizeable perverse effects on spatial allocation, resources – particularly water – and housing.

In the Maghreb, despite the Arab Maghreb Union and other formal agreements, the problem remains mostly political. The flows northward are by far the most important, and the situation has forced the economies to compete instead of searching for complementarities.

In the Mashreq, despite conflicts and tensions, the integration looks relatively stronger (Syria as a country is an extreme case with nearly half of its trade within the region, and tourism as an export product is nearly 50% intra-Arab), although variation is very high, and the potential seems extremely promising should a concerted and sustainable common action be pursued. There is a need for a common vision, an adequate regulatory environment, and some infrastructure work.

Practically speaking, we could define various ways to promote trade within the Mashreq. Harmonization in itself would be a very significant start, particularly in regulations, limitations on the movement of persons, merchandises and currency convertibility. It is true that tariffs have been significantly reduced, but non-tariff barriers remain heavy. What is needed is further easing customs regulations, but also trade facilitation through harmonized and interconnected systems, automated detection, common rules and standard cross-border infrastructure, in order to decrease the cost of trade and the red tape. The impact of such an investment would remain limited if the physical infrastructure is not adequate in terms of capacity, security, interconnection, and harmonized standards, whatever the kind of transport we are talking about.

But of course, economic cooperation and integration cannot neglect the strategic issues such as pipelines, but also water, electricity, and telecommunications.

The availability of oil and gas in the GCC, Iraq and Egypt can contribute through pipelines in substantially lowering the costs of energy supply. Lebanon has been for example waiting for years for Egyptian gas, through Jordan and Syria. Again, even if the infrastructure is more or less in place, it has not been enough to secure even part of the likely quantity. As a consequence, Lebanon continues to operate power plants that were designed for gas with fuel, at a higher cost and lower efficiency, and more than $150 million are lost every year.

Water is one of the biggest challenges of the region, and is an important source of conflicts. The inability to better distribute the available quantities among all countries has significantly increased the cost of supply on one hand, and contributed to the absence of proper management on the other due to the lack of incentives, not to mention the undesirable effects on agriculture. In Lebanon, heavy infrastructure is needed to secure the needs, but there is no potential for regional integration on this file. However, the boost given to some agricultural areas through the improvement of water conditions can trigger an interesting redistribution of agricultural production zones that would optimize quantities, quality, and availability of products.