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Strengthening and Expanding Arab Economies

Published in Corporate Monday, 10 November 2014 19:04

 

  By   Anant Mishra, Former Youth Representative, United Nations

 

“No one should ever underestimate the resilience and determination of the Arab people or the great opportunities that exist in the region. The Arab region possesses important human and material resources. If this wealth is mobilized now, both the region and the global economy would benefit."

- UN Secretary General Ban Ki-moon

Introduction

From the signing of the Alexandria Protocol on October 7, 1944, establishing and maintaining international and intra-regional trade has been a primary focus of the League of Arab States (LAS). Though Arab free trade agreements have existed and provided preferential tariff duties to participating nations, intra-regional trade has remained flat and a trade deficit outside of energy source exports has existed in many Member States. In accordance, instability within the region continues to hinder the economic and social development needed to meet worldwide standards for international trade and investment for many Member States, thereby limiting their ability to establish or participate in international free trade agreements (FTA). This has revealed the importance of international trade relations in the economic development and stability of the Middle East and North African (MENA) region, as the world has become more economically connected over the last half century. Even when faced with the dawn of globalization, intra-regional trade and investment remain as a primary focus to encouraging successful financial  markets throughout the developing and least developed Member States of the LAS.57 With the continuous efforts made by the LAS to improve economic ties throughout the globe, the exact hindrances to development and economic stability plaguing the MENA region have reaffirmed the ultimate goal of Arab economic integration, and provided inspiration for new solutions in encouraging international trade relations.

The Economic Council of the LAS was formed in 1950, with the signing of the Treaty of Joint Defence and Economic Cooperation. Eventually being renamed the Economic and Social Council (ESC) in 1980, it has observed, promoted the funding for, and administered efforts in achieving economic and social development throughout the LAS. The ESC additionally supervises the efforts of specialized agencies which have been created under the LAS banner; for example, the Arab Fund for Economic and Social Development (AFESD), Arab Fund for Assistance to Arab and African Countries, Arab Monetary Fund, the Arab Bank for Economic Development in Africa, and a myriad of labour unions and social development councils.

In 1957, the ESC approved the Agreement on Economic Unity among Member States, creating the Council of Arab Economic Unity (CAEU). With the signing of the Arab Common Market (ACM), in 1964, the CAEU took its first significant step in establishing unified trade liberalization. It is important to note that Article one of the ACM calls for the implementation of fundamental equal human rights necessary for economic development, including freedom of movement, exchange, residence, and the right to private ownership. Even with the implementation of the ACM, the creation of a unified customs union was not yet possible. Then on February 19, 1997, with the adoption of resolution No. 1317, a Greater Arab Free Trade Agreement (GAFTA) was created. This agreement deviated from previous initiatives by providing a framework for progressive inclusions of Member States to stress the necessity of the private sector in stimulating economic development and integration in the region. Full exemptions for customs duties have been in effect for Member States belonging to GAFTA, as of 2005.

Current Situation

Globalization has inspired a degree of controversy due to the social, political, and economic changes which have been associated with its onset. Within the MENA region this has given rise to the misconception that globalization represents a western hegemony that seeks to undermine the cultural significance of the Arab world. Global economic integration therefore, has mistakenly been associated with development inequality and migration within the region. These fallacies have done little to silence public outcry for the improved standards of living that sustainable development can provide, and the significance of international trade relations in achieving this goal. An abundant supply of natural resources and human capital continues to provide Member States with international trade opportunities outside of the LAS, and the means to establishing lasting intra-regional trade liberalization.

European Union (EU) and European Free Trade Association (EFTA)

The Preferential Trade Agreements (PTAs) between MENA and the EU represent a crucial economic, geographic, and historic link between the two regions. Beginning in the 1960s, European nations endeavoured to establish new cooperative economic agreements throughout MENA. This has continued in the form of trade liberalization efforts by the EU and EFTA in establishing bilateral trade agreements with LAS Member States. As a part of the Barcelona Process, initiated by the EU in 1995, the establishment of a European Mediterranean Free Trade Area was conceived in the pursuit of a unified FTA between MENA and the EU.  In achieving this objective a proposal to encourage intra-regional trade and economic integration between the EU's primary trade partners in the Mediterranean was established, specifically Jordan, Egypt, Tunisia, and Morocco. This arrangement was promoted by the European Investment Bank, and expedited under its auspices by the Facility for Euro-Mediterranean Investment and Partnership (FEMIP). In 2001, the Agreement for Establishing a Mediterranean Free Trade Area (Agadir) was written, and in 2007 it was implemented. In addition, Algeria and Lebanon have signed interim bilateral agreements under the framework of Agadir, forming a Euro- Mediterranean agreement (Euromed). The EFTA has also established bilateral trade agreements with all members of Euromed, excluding Algeria. In 2009, the EFTA and the Gulf Cooperation Council (GCC) signed the EFTA-GCC Free Trade Agreement promoting international trade relations between the EU and MENA regions. This agreement will establish a free trade area between the EFTA and GCC states, and enters into force on July 1, 2014.

United States of America (U.S.)

The history of international trade between MENA and the U.S. has been largely driven by the oil and natural gas wealth within the region, currently representing more than 66% of the world’s reserves.85  With the importance of diversifying international and intra-regional trade becoming more vital for economic success in the region, the U.S. has played a facilitating role in assisting Member States in joining the WTO by promoting the internal social and economic reforms necessary for full accession into the body. Trade and Investment Framework Agreements (TIFAs) and Qualifying Industrial Zone agreements (QIZs) between MENA and the U.S. have provided a basis to which lasting economic relationships can be cultivated in the form of bilateral FTAs. One such agreement has set precedence and proved to be instrumental as a catalyst for further FTAs between the U.S. and MENA, creating immediate and lasting growth in bilateral trade, the Jordan-U.S. Free Trade Agreement of 2001 (JUSFTA). Pursuant to further economic cooperation, in 2003, an initiative was proposed by President George W. Bush to create a FTA between the U.S. and Middle East (US-MEFTA). This initiative provided for progressive inclusion of other Member States throughout the MENA region, with a target deadline of 2013 for a multi-lateral FTA (US-MENA) with the creation of TIFAs and bilateral FTAs between the U.S. and individual nations as a stepping stone. Though a multi-lateral agreement has not been reached, currently the U.S. has FTAs with Bahrain, Jordan, Morocco, and Oman. These agreements draw an important distinction from previous agreements in the region, requiring extensive liberalization of trade and FDI policy reforms. The efforts to complete a US-MENA FTA have continued throughout President Barack Obama’s administration with the announcement of the MENA Trade and Investment Partnership Initiative (MENA-TIP) in 2011, to promote U.S. trade and investment in Member States. Presently, trade with MENA represents less than 5% of total U.S. trade and 1% of global U.S. FDI, with the Member States belonging to the GCC accounting for a majority of U.S. Imports from MENA. The U.S. continues to maintain its commitment to providing support to Member States seeking WTO accession including Lebanon, Algeria, Yemen, Egypt, and Saudi Arabia.

Russia, India, and China – Future Projected Growth

Russia, India, and China are poised to become the fastest growing trade partners with MENA over the next three decades. The MENA region has traditionally been dominated by trade with the EU, but projections show that the fast emerging economies of these three BRICS nations will experience continued international trade growth with Member States in the foreseeable future.

The Russian Federation has become one of the most significant suppliers of agricultural staples to the MENA countries, signalling a trend in which food security in the region will continue to be directly tied to wheat production in the Black Sea nations. Russia’s geopolitical goals within the MENA region also continue to strengthen with the formation of joint business councils negotiating future industrial, agricultural, and developmental agreements. This has manifested in recent history with the formation of the Eurasian Customs Union (ECU) and its implementation of a Common External Tariff (CET), in 2010. The willingness of the ECU to negotiate free trade agreements with nations emerging from the political aftermath of the Arab Spring has strengthened its ties within MENA. This has bolstered its efforts to forge new FTAs with nations belonging to the WTO such as Egypt, as well as nations seeking WTO accession.

The expanded industrialization of China and India over the last two decades has dramatically increased their demand for oil, gas, and natural resources. Strong economic ties have therefore been forged between the nations of the GCC and China and India, but the competition from these two countries in global non-fuel source export markets has granted an additional challenge for developing Member States. Chinese National Oil Companies (NOCs) currently have a vested interest in oil and gas projects in Iraq, Kuwait, Oman, Qatar, Syria, the UAE and Yemen. It is also in China’s interests to expand its exports to the MENA region, as their need to establish lasting bilateral trade with Member States grows. To further this relationship, China has embarked to create FTAs with Member States not only in the GCC but throughout MENA to encourage trade and meet their demand for consumer goods and services with Chinese exports. The meteoric rise of India’s economy has made them the fifth largest oil consumer in the world, forging a strong link between India and the oil producing nations of the GCC, specifically Saudi Arabia and the UAE. Historically the GCC states and India have had preferential trade ties, and a FTA between the GCC and India (India-GCC FTA) is in the bilateral stages originating from the signing of its framework in 2004. Additionally India provides a significant amount of labour force to the nations of the GCC, as well as contributing heavily to the expansion of the services sectors within MENA in the form of science and technology. Although China and India present an economic challenge for labour abundant Member States, their interests also present the opportunities to forge economic connections which can further expand the international and intra-regional import and export markets throughout MENA and Asia.      

Intra-Regional Trade and Investment

The current status of intra-regional trade liberalization efforts encompasses various bilateral agreements, trading blocs, and FTAs seeking to realize a unified multi-lateral agreement, a GAFTA. The primary barriers to intra- regional trade integration among Member States have evolved with the shifting political, economic, and social climates throughout MENA. Successful implementation of a multi-lateral agreement has been negatively affected by tariff and non-tariff barriers (NTBs), as well as a stagnating effort to diversify exports within the region which economically separates the developed oil and natural gas producers from the LDCs among Member States. The most significant hurdle for ensuring long term intra-regional is centred upon the varying trade and FDI laws within the region, represented by a historical interventionist-redistributive economic model which in some Member States has not adapted or changed significantly enough to adequately promote more privatization and FDI.

With intra-regional trade currently accounting for only one tenth of total trade, the preferential tariff duties levied to members of GAFTA have not fully realized the potential for intra-regional trade within MENA. They have also failed to produce the formation of an all-encompassing free trade area, with tariff levels still being below global medians in certain industries which bear political significance for individual nations. Outside of tariff barriers, NTBs present a formidable opposition in the form of conflicting customs regulations and quality control standardizations which continue to hinder the economic progress of many nations in the region. This change continues to be centred on economic and governance reforms to promote lower costs and an evolving business environment among Member States. It is estimated that the removal of NTBs could create more than 2 million jobs and increase the total trade within MENA by 10 percent.

Export diversification is significant to any developing nation, but it has garnished a higher level of attention within MENA because of the historic and current level of export dependence on natural resources. The extent to which intra-regional trade success is measured has therefore been closely tied to the level of export diversification within the region. This has also drawn attention to the levels at which FTA and bilateral agreements between Member States creates new trade within MENA or adversely results in trade diversion, a decrease in imports from outside of MENA. Considering that the status of intra-regional trade is heavily concentrated in unskilled manufacturing, education and social reform programs must continue to be developed to add value to human capital within the least developed Member States and ensure a sustainable and diverse economic future for the entire MENA region The prevalence of state intervention in leading economic, social, and political reform has historically been an instrument for change in the MENA region from the dawn of Arab independence following World War II. The degree to which this has been illustrated has varied among Member States, but an interventionist- redistributive economic model has been used to facilitate the economic and infrastructural needs within the region. The emergence of globalization as a force for maximum resource allocation after the Cold War has necessitated trade and exchange rate policy reform within MENA to remain competitive in the global marketplace. A shift away from a protectionist economic mindset has accordingly surfaced to allow for FDI, entrepreneurship, and investment conditions with the advancement of more privatization among Member States. For the full potential of rising oil and natural gas revenues to affect neighbouring resource poor Member States, a progressive gaze must be fixed collectively upon a standardization of a privatization model throughout MENA. This will allow for the cumulative wealth of the GCC nations to continue to be a powerful tool for promoting FDI throughout MENA, allowing for vital job creation in developing Member States through the financing of small to medium businesses.

Actions Taken by the United Nations

The United Nations and the LAS have been working closely together to achieve the Millennium Developmental Goals (MDGs) in all Member States. The need to eradicate extreme poverty, promote gender equality, provide universal primary education, and establish global partnerships for development represent a few examples of how MDGs are necessary to successfully establishing an environment where international trade relations can be cultivated. To this end, resolution no. 365 was implemented by the LAS at the 19th Arab Summit held in March of 2007, calling for an Arab Economic and Social Development Summit to be held biannually. The first summit commenced in Kuwait on January 19, of 2009, signalling a new shift towards Arab social and economic integration for all Member States by allowing the private sector and civil society to play a crucial role in the development process. Initiatives were passed to provide the funding for the development of small & medium business enterprises, combat the poverty and unemployment which have plagued many resource poor Member States, and remove the barriers to private investment which have existed. The state of gender equality, youth empowerment, education, and food and water security were also discussed with the commitment of cooperation between governments and civil society organizations being promoted extensively. This collaboration continued into the second summit with the Third Arab Report on the achievement of MDGs composed by the LAS, the UN Economic and Social Commission for Western Asia (UN-ESCWA), and the United Nations Development Programme (UNDP) providing a basis to which developmental success could be measured. Projects like the inter-Arab railway and Arab Customs Union were revisited, and the Kuwaiti initiative for funding small and medium Arab enterprises was implemented. The third summit was held in Riyadh, Saudi Arabia, in 2013, where the initial goals of the Economic and Social Development summits continued to fuel the proposed initiatives, including achieving the MDGs, promoting inter-Arab trade and investment, and creating an Arab Customs Union and Free trade Zone. With a new era of cooperation between Member States and CSOs being evident through the assisted works of the UNDP, UNEP, UNESCO, and UNESCWA the economic and social reforms necessary to foster international trade are now taking place throughout MENA.

Conclusion

The LAS has continuously worked, from its inception, to strengthen and expand the economies of all Member States by integrating trade throughout MENA. Through the formation of several intra-regional agreements and trading blocs, international trade has been fostered through trade liberalization multilaterally, bilaterally, and regionally. Challenges have also been prevalent throughout the trade liberalization process; illustrated by non-transparent governance, high levels of unemployment, a weak private sector, and regional conflicts. With the establishment of a GAFTA, Member States have contributed significantly to achieving the ultimate goal of a truly free Arab trade area by promoting fair and standardized tariff duties and encouraging investment. 

Outside of MENA, Member States are engaged in several preferential trade agreements around the globe. The EU currently represents the most significant trading partner with MENA, comprising more than 60% of total trade annually for some Member States. The US has FTA with four Member States, trades heavily with the members of the GCC, and supports Member States through the processes of WTO accession. Russia, India, and China are projected to become the fasting growing trading partners with MENA, representing new economic opportunities throughout the region. Additionally, Intra-regional trade has not reached its full potential, representing a primary focus for the LAS in strengthening international trade relations. Member States must continue to diversify their export base, improve the living standards of their citizens, provide the infrastructure necessary for future trade, and enact the economic and social policy changes necessary to ensure their competitiveness in the global marketplace.

To accelerate the successful implementation of the MDGs throughout MENA, the LAS has taken a progressive step in providing a platform for the UN, Member States, and CSOs to work together in changing the economic and social landscapes within the region through Arab Economic and Social Development summits. Through this medium, the failures of the past have been brought to light, and new solutions to achieving the social and economic reforms necessary to encourage international trade have been devised. The goal of a unified Arab Customs Union is continuously nearing realization as inter-Arab trade and investment grows, human capital is cultivated, and living standards rise throughout MENA.  

 

 

 

 

Last modified on Monday, 10 November 2014 19:11
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