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Economic Integration is the elimination of tariff and nontariff barriers to the flow of goods, services, and factors of production between a group of nations. The purpose of Economic Integration is to allow the free flow of goods and service between nations that can benefit from the economic resources of partner nations. The Economic Integration Model used for this paper is MENA; commonly known as Middle East and North Africa. The countries and regions included in MENA are labeled in the map below
The Middle East and North Africa (MENA) is an economically diverse region that includes both the oil-rich economies in the Gulf and countries that are resource-scarce in relation to population, such as Egypt, Morocco, and Yemen. The MENA region includes the following countries: Algeria | Bahrain | Djibouti | Egypt | Iran | Iraq | Israel | Jordan I Kuwait | Lebanon | Libya | Malta | Morocco | Oman | Qatar | Saudi Arabia | Syria I Tunisia | United Arab Emirates | West Bank and Gaza | Yemen
The MENA countries have signed a series of multilateral, regional, and bilateral trade agreements. Multilateral agreements are within the framework of the World Trade Organization (WTO), of which, with the exception of Syria and the West Bank and Gaza, all countries in the region are members or have observer status. Ten MENA countries have signed European Union-Mediterranean Association Agreements (EMAAs) with the E.U. These agreements replace the preferential access to European markets for goods from African, Caribbean, and Pacific countries with a reciprocal reduction in tariffs on many goods. However, these agreements generally exempt agricultural commodities.
The MENA region is also an oil rich region and the region’s economic fortunes over much of the past quarter century have been heavily influenced by the price of oil. During the recession of 2008 that effected global economies and the demand for oil, it led to increase uncertainty for the MENA region because of its high dependence on oil price in the international market. As an integrated unit MENA has been able to cope with global recession because of its combined trade policy. In the years to come, integrated regions similar to MENA might be the answer to future problems and hence makes it important to look at costs and benefits of economic integration in the light of MENA. The paper will firstly look at the current problems and challenges faced by the MENA region and then look at the benefits of integration to the region
Challenges faced by the MENA region
In order to understand the challenges faced by the MENA region collectively, it is important to divide the region into groups and look at these problems in a coherent segregated manner. According to a report by OECD titled ‘Opportunities and challenges in the MENA region’ these classifications are:
Resource-rich, labor-abundant countries are producers and exporters of oil and gas and have large native populations, which represent almost the totality of their residents. This group of countries includes Algeria, Iraq, Syria and Yemen.
Resource-rich, labor-importing countries are producers and exporters of oil and gas and have large shares of foreign or expatriate residents, who represent a significant percentage of the total population, even the majority in some cases. This group of countries comprises the Gulf Cooperation Council (GCC) members (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) and Libya.
Resource-poor countries are small producers or importers of oil and gas. These countries include Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Tunisia, and the Palestinian Authority. (OECD, 2003)
The challenges faced by MENA include high unemployment levels (in particular among youth); pervasive corruption and lack of accountability and transparency; bloated public sectors with state-owned enterprises that crowdout the development of private enterprise and investment; low levels of enterprise creation; and, for a number of countries, a high dependence on fuel and food imports generating extensive exposure to commodity price volatility. Given that these challenges are both structural and interconnected, they can be addressed only through a coordinated and comprehensive strategy that involves governments, the private sector, civil society, and the international community which I will show later in the essay. The chart below from the World Bank shows unemployment rates for 2000 and 2009 in the MENA region, indicating the change in unemployment over nine years. (World Bank, 2011)
Arab Spring Revolution
Immigration is expected to increase in those countries most affected by the Arab Spring. Immigration to GCC countries, which already host significant shares of Arab immigrants, is expected to rise. Numerous accounts have been reported of Immigrants fleeing from Northern Africa to Europe. Furthermore, a survey of Egyptian young people by the International organization for Migration found that the onset of protests and instability may have acted as a primary push factor for youth who reported prior intentions to migrate.
The survey’s results showed that two-thirds of respondents with migration intentions who were working prior to the start of the protests were negatively affected by the events: 26 percent lost their jobs, 20 percent were asked to take unpaid leave, and 19 percent witnessed a reduction in their working hours. (International Organization for Migration, 2011)
Data from OECD indicated that high inflation which is the product of a high dependence on fuel and food imports represents a major challenge for resource-poor countries. For the MENA region; consumer price inflation has remained high since the oil and fuel price spikes of 2007-08. This is particularly the case in Egypt, which registered an inflation rate of 5 percent during 1996-2005 and a significantly higher rate of 11 percent during 2006-10. A notable exception to high inflation has been Morocco, which has kept consumer price increases below 3 percent. (OECD, 2003)
Costs and Benefits of Economic Integration in MENA
Although the MENA region has registered a relatively high economic growth during the last few years, However;the absence of a vibrant private sector which would have been able to create more and better jobs, has meant that economic performance has not been reflected in improved living standards for the majority. As discussed earlier, some factors causing this deficiency are rigid labor markets, skills mismatches, the crowding out of private enterprise by SOEs and high corruption. But there are also other economic and structural factors, such as low levels of competitiveness in manufacturing sectors, lack of export-market diversification, and low intraregional integration which still exists in the region. Furthermore, although the Arab Spring provides an important opportunity for economic reform, although its immediate effects will be negative for those countries most affected by social and political instability
Transition examples from other regions suggest that the medium-run gains from moving to more open and accountable governments are sizable. Income growth tends to stabilize at a higher average rate in the decade after transition, and income volatility at a lower rate, as compared with the previous period. The results will depend on how swiftly and credibly governments can commit to reform. In the meantime, as investors wait for political uncertainty to be resolved in countries affected by political turmoil, it is inevitable that investment will be delayed and economic challenges will emerge. Evidence from earlier transitions shows that these difficulties tend to be limited; growth typically dips for only one year and then returns to or exceeds previous levels.
Integration via Trade in Goods
Regional trade agreements (RTAs) have proliferatedin the MENA region in the past two decades. Such agreements can make it possible to reap benefits from internationalintegration, while tailoring the provisions ofthe agreements to the particular needs and adjustmentcapacities of the countries involved. They canalso have beneficial indirect effects. Opening domesticmarkets to partner countries, for example, can increasecompetition in sectors with previously highlyconcentrated industrial structures. Such precompetitive impacts are particularly important for countriesthat have only a nascent domestic competition policy.Also, regional cooperation can be effective in harmonizingcustoms procedures and domestic regulations.Adopting common rules on investment, forexample, has the potential to encourage increased inflowsof foreign direct investment by enhancing thecredibility of FDI-related policies and providing a restrainton sudden policy reversals.
According to the World Bank many MENA countries have recently seen the share of intraregional trade in total merchandise trade increase dramatically over the past two decades. Compared to this; the extent of intraregional trade remains lowerthan in all other regions of the world, except for South Asia. Though the ratio of intraregional trade to GDP exceeds 15 percent in the Syrian Arab Republic and Jordan, in most MENA countries the ratio remains in the low single digits. In particular, resource-rich, labor-importing countries generally show a very low level of intra-MENA exports in relation to GDP, despite high total export-to-GDP ratios. (World Bank, 2005).
Integration through Services
For an economy, services typically contribute a major portion to the GDP. Therefore, it is important to remove barriers to entryfor both domestic and foreign firms and increasethe efficiency of services. The current regional integration agreements inMENA generally do not cover services trade, and in areas where the agreements do cover services, it is in the terms of intentions and tacit agreements. Moreover, there still exist differences in regulations and at times limits on the physical movement of individuals. In these cases it is currently creating a situation in which it is often easier for MENA countries’ service providers to operate in countries outside the region than within. The chart below from the World Bank represents the service exports for selected countries in the MENA region.
Integration through Labor reforms
If we compare the region’s integration through trade and labor we can see that the MENA region is more integrated in the globaleconomy through labor mobility than through tradeand investment. According to a report by the World Bank on the MENA region titled ‘Economic Developments and Prospects’ it has outlined that the region’s share of global trade flows is below 5 percent, andthe region receives an even lower share of globalFDI flows. However, about 16 percent of all remittancespaid out to migrants in the world originate inthe MENA region, essentially the GCC countries,and 10 percent of global remittances are received byresidents of MENA countries. (World Bank, 2008)
They have also explained a recent trend where MENA’s share in remittances has come down significantly since the 1990s, at atime when remittances to India, China, Mexico, andthe Philippines have increased exponentially. Thus looking closely at these huge labor flows in the past it becomes important to ask here if immigrations are entirely conflict-driven flows. This is not the case if we look at the chart below where the share of refugees as a portion of Migrants has decreased dramatically.
One of the primary factors favoring the increase in immigration still appears to be demographics. According to population projections from the United Nations in context with labor force participation rates, show that, if there is no migration then the labor force in GCC countries will keep growing at 2.2 percent per yearbetween 2005 and 2010, but after 2010, this growth rate will decline. Thus, without additional migrant workers, two GCC workers would still have to supportthree inactive persons over the foreseeable future. This shows that if there are no drastic changes then underlying demographic factors will continue to favor more migration.
Integration through Capital Flows
Two developments frame the context for recenttrends in capital markets in the MENA region:
countriessuch as Syria, Egypt, Libya, Morocco, and Tunisiahave begun to deepen structural and institutionalreforms, increasing the demand for capital
The oil boom has generated massive liquidity in theGulf states, thus increasing the supply of capital.
Compared with conditions in previous oil boomperiods, a higher amount of the surplus is now availableto the oil-exporting MENA countries and is beingchanneled into project-based investments in the region.GCC countries have already allocated over$1.3 trillion in infrastructure and manufacturing investmentsover the next 5 years according to the EIU outlook for 2007 (Economist Intelligence Unit, 2007)
On the other hand, Project-based investments have recently been increasingespecially in Egypt, Lebanon, Syria, andTunisia. These intra-MENA investments are mostly basedon telecommunications, infrastructure, real estate,tourism, and banking. The Multilateral Investment Guarantee Agency has list of multibillion-dollar investment projects in MENA which is getting longer. According to them some recent investment projects include: A$9 billion tourism project by Dubai Holding and Emaar Holding in Morocco, Kuwait’s Telecom Group (Wataniya) expanding into Tunisia, DubaiHolding acquiring 33.5 percent of Tunis Telecom ($2.25 billion), and the Bukhater Group’s $5 billion City Complex project in Tunisia. To date, there are 15MENA national investment promotion agencies,most of which were established in the past decade.New investments are facilitated by private groupsand finance houses, and governments are closelymonitoring reform indexes published by internationalagencies to analyze the effects of greater investments intra-region. (Multilateral Investment Guarantee Agency, 2011)
Integration through Infrastructure Investments
In terms of Infrastructure investment recently, there have been cross-border infrastructure projects that are becoming more prominent in the region. Some of the examplesinclude cross-border electricity grids, gas pipelines,transport links, and telecommunication networks. However, there are still many regulatory and financial challenges.In the past, interconnection of power grids in theMENA region was primarily driven by governments’concerns about preserving power supply securityin their respective markets. On the other handother benefits,such as capital investments saving, are also considered,though these are not yet the main drivers fornetwork interconnection. The amount of exported and imported power still remains low in many cases. For instance reports from the World Bank show that only 12 percent of total capacity of theAlgeria-Morocco links is used, 17 percent in the case of the Algeria-Tunisia interconnection. (World Bank, 2011)
With the exception of Yemen and Djibouti, transportsystems are well developed in MENA countries. Most countries have been able to develop extensiveroad networks, with high capacity in some areas, and modern facilities for air, sea, and railtransport. The key issue in the region is the quality of the transport assets as a result of the lack of appropriatemaintenance or of poor service operations due to institutional deficiencies. Cost-effectivetransport services, efficient facilitation, and transport infrastructure supplemented with good intermodalconnectivity are required to accommodate the growth in global and intraregional trade. However, regional integration initiatives still remain at an early stage of development in the transport sector.As a result of the closure of several borders in the region, land-based transport plays a minor role inintraregional trade in MENA.
In light of the recent developments and the challenges faced by the MENA region we can accurately see that there is still room for more substantial development in the region as a result of greater intra-regional economic region. Looking at results from the development of intra-regional trade and services we can see that the benefits outweigh the costs and it is important the reforms are taken at a governmental level to allow for greater de-regulation of markets and policies effecting trade flows between countries. Nevertheless, the recent oil boom and global commodity boom does leave tremendous room for development and growth in the region.
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