Daily Star | Tuesday, January 13, 2009
The Arab Economic Summit: a market approach to development
by Elias T. Ghantous
As a regional grouping, the Arab countries have shown great interest in fostering their economic cooperation and integration, but with relatively limited success. A fresh attempt in this direction is in the offing with the holding of an Arab Economic Summit in Kuwait on January 19-20.
The secretary general of the League of Arab States has appointed Ambassador Mervat Tallawy as the general coordinator for this summit, to ensure coordination between governments, NGOs, specialized agencies, Arab organizations and business associations. It is realized now that the private sector and civil society need to be involved with governments in the preparation for the summit, as private initiative is vital in the future growth and development of the Arab economies. There are many opportunities for the private sector to play a role in socioeconomic development, particularly since joint Arab economic action is geared in this direction with the creation of the Greater Arab Free Trade Area (GAFTA), which could form a stepping-stone toward the creation of the Arab Common Market.
It is useful to envisage the forthcoming summit as a fresh endeavor to rekindle past efforts to create an Arab economic community, that would take advantage of the pooling of markets and resources that are diversified and complementary in nature, with a view to enhance economic growth and development. In retrospect, it is possible to identify three phases in the attempt toward economic cooperation and integration within the framework of the League of Arab States.
The first phase started after the creation of the League of Arab States in 1945, with seven of the member countries (Jordan, Iraq, Syria, Egypt, Lebanon, Saudi Arabia, and Yemen) starting their integrative efforts in 1953 by launching multilateral trade and payments agreements, to replace post-independence bilateral agreements. This was with the objective of creating a multilateral preferential trading arrangement among the contracting countries by instituting preferential trade tariffs. However, the scope for trade exchange was limited by the fact that the production patterns of these countries were competitive rather than complementary, and the preferential trading arrangement could not provide a wide scope for specialization and reaping trade gains. The ratio of inter-Arab trade was very limited and did not exceed 7 per cent of total foreign trade.
The second phase came after the emergence of regional capital surpluses, following the first upsurge in oil prices in 1973, which helped in shifting the focus for Arab regional cooperation from trade to investment. However, the environment was not conducive to the flow of private capital for investment projects, although there was some flow of public funds helped by the creation of public funds for financing development projects. The Kuwaiti government was pioneering in setting up a fund for financing Arab economic development. Other unilateral funds were created by other oil-rich countries, including Abu Dhabi. In 1968, the multilateral Arab Fund for Economic and Social Development was set up to enhance the pooling of funds for regional development projects, and was effective in propagating confidence in such projects. As a supporting instrument, the Inter-Arab Investment Guarantee Corporation was created in 1974 to insure Arab capital investments against non-commercial risks.
The third phase came after the second upsurge in oil prices in the 1980s, which prompted the need for economic reform in the Arab countries, to benefit from the dynamics of market economies in the presence of the regional availability of capital. This involved a clear shift toward privatization and liberalization of trade and investment, and as an inlet toward liberalization, free zone areas - particularly in Egypt and Syria - were introduced. This approach was reinforced with the creation of the World Trade Organization in 1995, and the advent of globalization.
Against this basic change in economic setting, in 1997 the Arab Economic and Social Council of the League of Arab States adopted GAFTA as a multilateral trade liberalization scheme. Already 17 Arab states have joined this scheme, which became operative as of the beginning of 2005 with the complete removal of tariff barriers among the following countries: Jordan, United Arab Emirates, Bahrain, Tunisia, Saudi Arabia, Syria, Iraq, Oman, Palestine, Qatar, Kuwait, Lebanon, Libya, Egypt and Morocco. The effect of tariff liberalization has not been fully realized as there are still problems resulting from the presence of some non-tariff barriers, apart from other obstacles such as the lack of unified specifications and measurements of Arab goods and the lack of "rules of origin" to identify goods that could be subjected to preferential treatment. In addition, the flow of goods is also undermined by high transport costs and extensive formalities at border crossings.
Despite the liberalizing effect of GAFTA, inter-Arab trade remains relatively low, ranging between 8 percent and 12 per cent of global Arab trade. Taken separately, inter-trade among the Gulf Cooperation Council (GCC) countries amounts to 4.4 per cent of their global foreign trade. This ratio amounts to about 40 per cent in the Association of Southeast Asian Nations (ASEAN), about 50 per cent in the North America Free Trade Area (NAFTA) countries, and about 70 per cent in the European Union (EU) countries. A concluding observation is that these ratios reflect not only the level of economic development and the degree to which the production patterns are competitive (rather than complementary), but also the need to enhance trade liberalization efforts to allow wider freedom for the private sector to increase investments and trade exchanges.
Given the fact that economic activity in the Arab countries, as in most developing countries, is subordinate to economic policies framed by governments, the Arab Economic Summit in Kuwait will certainly bring about an opportunity to overcome the problems facing the private sector within GAFTA. It is believed that GAFTA provides a key step in the process of strengthening the shift toward economic liberalization and giving the private sector a wider scope to participate more actively in the process of growth and development in the Arab region as a whole. It is with this thesis that private sector organizations - specifically chambers of commerce and industry and business associations - are invited to join efforts in the preparation for the Economic Summit.
The Economic Summit represents the highest inter-Arab governmental body and in this capacity, it can address itself to the pending problems facing the full realization of GAFTA. Accordingly, it should aim at the removal of non-tariff barriers among the participating countries and at enhancing the efficiency of inter-Arab trade, particularly through the reduction of transportation costs and rationalizing formalities at border crossings. In conjunction, there is a need to liberalize the movement of services associated with the goods exchanged. Moreover, there is a need to provide trade financing at concessional terms through the expansion of the Arab Trade Financing Program, which is associated with the Arab Monetary Fund. In addition, there is a need to develop the financial infrastructures in terms of capital and money markets.
In the context of GAFTA it is very important to set selection criteria for regional projects that have a direct bearing on employment, income and social welfare. The participation of the private sector in such projects is eminent, in order to integrate it in the process of development and integration. It is important also to integrate the private sector in various areas of development.
About 50 per cent of gross domestic product in the Arab region is generated by the private sector, and this share is likely to increase in the coming decades. It is important, therefore, that the economic environment in terms of physical and financial infrastructures should be conducive to the work of the private sector, and this is one of the challenges facing the Arab countries. Other challenges relate to the need to tackle the question of poverty and unemployment, which has reached an average of 13 percent of the aggregate Arab labor force, though this rate ranges widely from one country to another. It is evident that the recent oil boom has served to suppress overall unemployment, and increased the migration of qualified Arab citizens. Though this is causing brain drain for some countries, and therefore represents a national loss and a real transfer of human resources to the outside, it could be viewed as a shift toward optimality in the use of human resources from a regional viewpoint.
With respect to joint projects involving the private sector, and possibly with some participation from the public sector, it is necessary to address those which, for reasons of economies of scale, tend to operate more efficiently on regional or sub-regional levels. One line of growth could start from the expansion of oil-refining capacities for the production of numerous petrochemicals which can feed many sectors with inputs. For instance, synthetic fibers could make possible the establishment of domestically based textile industries. Petrochemical products could also provide substitutes for traditional materials such as steel, wood and rubber. Another line of growth in this category could start from the establishment of gas-based metallurgical and construction industries. Of particular importance in this line are iron and steel, on which the manufacture of machinery and equipment depends, and aluminum.
Considering the relative diversity of resources and the fact that much of the potential for development in a number of Arab countries lies in the agricultural sector, there are great prospects for regional specialization and trade in certain food and agricultural industries. This is significant as the Arab countries have an alarming "food gap" and there is a great reliance on food imports amounting to no less than $20 billion a year.
This general outlook recently prompted the inception of the Arab-Maghreb Forum for Employers and Investors, in Casablanca, Morocco. The Forum is an independent, non-governmental, non-profit making body, and represents an aspiration to strengthen economic, trade and investment relations between the Maghreb and Mashreq countries which are bound by several multilateral agreements in the framework of the League of Arab States. It also is involved in the GAFTA scheme. It is anticipated that the forum will be a focal point for private sector activities and the creation of joint investment projects, and helping in indigenizing technology and knowledge which come at the heart of the process of economic development. The initial interest of the forum is to promote investments in Morocco, which despite the fact that it has made long strides in socioeconomic development is still in need of sizeable investments, particularly from the Gulf Arab countries. The scope for such investments is large and it is anticipated that it could reach about $100 billion in the coming decade. Morocco’s economy is essentially based on liberalized foundations. According to the 2008 Index of Economic Freedom, it is 56.4 percent free, and it ranks 12th out of 17 countries in the Middle East and North Africa region, with its overall score slightly lower than the regional average. Morocco scores exceptionally well relative to the world average in two areas: business freedom and investment freedom. Inflation is low, though price support for some goods is still in use. Business formation is generally efficient, though bureaucracy can sometimes be a deterrent to foreign investment.
A distinguishing feature of the forum is that it represents a gesture that springs from the Maghreb to the Mashreq on account of the fact that Arab economic integration is inevitable and is much needed to face the impact of globalization. Morocco presents a very attractive location for foreign investment. Being located close to European and African markets, and with its diversified resources and labor potential, it provides a focal point for investment in both agriculture and industry as well as in tertiary sectors, including tourism and other services. It is envisaged that this forum will shift its interest to other Maghreb and Mashreq countries to spread the role of the private sector in bringing cooperation and integration in the Arab region as a whole.
Elias T. Ghantous is secretary general of the Arab-Maghreb Forum for Employers and Investors (based in Casablanca, Morocco) and formerly secretary general of the General Union of Chambers of Commerce, Industry and Agriculture for Arab Countries. He wrote this article for THE DAILY STAR.