ECONOMIC INTEGRATION IN THE MASHREQ WORLD BANK MIDDLE EAST AND NORTH AFRICA REGION. Public Disclosure Authorized. Public Disclosure Authorized

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized WORLD BANK MIDDLE EAST AND NORTH AFRICA REGION ECONOMIC INTEGRATION IN THE MASHREQ

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3 WORLD BANK MIDDLE EAST AND NORTH AFRICA REGION OCTOBER 2010 Economic Integration in the Mashreq Office of the Chief Economist Middle East and North Africa Region The World Bank

4 2010 The International bank of Reconstruction and Development/The World Bank 1818H Street, NW Washington DC Telephone: Internet All rights reserved. This volume is a product of the Social and Economic Development Group of the Middle East and North Africa Region of the World Bank. The findings, interpretations, and conclusions expressed herein are those of the author (s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The World Bank encourages dissemination of its work and will normally grant permission promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc, 222 Rosewood Drive, Danvers, MA 09123, USA, telephone , fax , All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818H Street, NW, Washington, DC 20433, USA, fax , pubrights@ worldbank.org. Cover photograph: World Bank/Bunyad Dinc. A FREE PUBLICATION

5 Acknowledgements Foreword Acronyms and Abbreviations iv v vii Contents Executive Summary 1 1. Participation In Integration Agreements 2 2. Integration through Trade, Capital and Labor Flows 4 3. Integration through Physical Infrastructure 11 Conclusion 14 References 15 Boxes Box 1 Trade Routes and Corridors in the Mashreq 12 Tables Table 1 International Migrants by Development Group and Arab World Sub-regions 10 Figures Figure 1 MENA Trade by Country Sub-groups, Figure 2 Regional Exports as % of Total Exports, Figure 3 Concentration and Diversification Indices of Export Products in MENA 6 Figure 4 Trade in Commercial Services *(% GDP) 7 Figure 5 Ease of Doing Business Ranking 8 Figure 6 Logistic Performance Index 8 Figure 7 Remittances, FDI and ODA 9 Figure 8 Remittances as Share of GDP 2007 in Mashreq Countries 9 Annexes Annex 1 Trade Agreements in the MENA Region 17 Annex 2 Statistical Tables 18

6 A C K N O W L E D G E M E N T S Acknowledgements iv This report was prepared by Mustapha Rouis under the guidance of Farrukh Iqbal, Acting Chief Economist, and Shamshad Akhtar, Vice President, Middle East and North Africa Region. The author is grateful to Lili Mottaghi, Marie Alienor van den Boschand, and Komlan Kounetsron for their inputs and to Ali Al-Abdulrazzaq, Jorge Araujo, Hafed Al-Ghwell, Bernard M. Hoekman, Elena Ianchovichina, Farrukh Iqbal, and Christina Wood from the World Bank for their comments on earlier versions of the report. Isabelle Chaal Dabi and Liliane Vert (World Bank) provided valuable administrative assistance and Amanda Green (Consultant) edited the report.

7 Though the Middle East and North Africa (MENA) region has weathered the recent global financial and economic crisis relatively well, it still faces daunting medium-term challenges. These include high unemployment (especially among young people), vulnerability to oil and food price shocks and water scarcity and inefficiencies of public sectors. Integration of the region into the global economy has been slow. Of particular concern is the stagnation in the region s share of global non-oil exports, an indication of missed opportunities for diversification and growth. Integration within the region, while rising, is also on the low side when compared with other middle- and highincome regional blocs. Foreword Over the last year or so, there has been an increasing momentum on the part of the region and the World Bank Group to focus on a set of initiatives to promote more cooperation within the region. These initiatives include a host of analytical pieces to examine the current state of regional collaborative arrangements with emphasis on assessing and exploring ways of fostering greater trade integration, labor mobility and migration prospects, prospects for energy integration and resource sharing and infrastructure development to reduce nontariff barriers. The region has been able to make some inroads, albeit at different degrees in each of the geographical groupings, to support the integration of the Arab world into the global economy. To start off the removal of intra-regional tariffs under the Pan-Arab Free Trade Area (PAFTA) and the adoption of low common tariffs by the Gulf Cooperation Council (GCC) which coupled with improvements in infrastructure, especially roads and telecommunications is generating benefits. But much remains to be done, especially in reducing nontariff barriers to trade, harmonizing policies and procedures, and facilitating cross-border trade through development of infrastructure links and trade facilitation. Fortunately, trade in services has recently emerged on the agenda of national and regional authorities this is an area of substantial potential welfare gain for the region. Recognizing the problems, the World Bank has been working closely with the MENA region to develop and implement regional activities investment projects, institution-building, harmonization of policies and procedures that are likely to enhance economic growth v

8 F O R E W O R D and address common challenges across the region. As part of this endeavor, the Office of the Chief Economist, MENA Region, has prepared a series of reports to assess the achievements of the region with respect to integration. The first report, 2008 Economic Developments and Prospects, looks at the role of integration in global competitiveness for the region as a whole and special reports have been prepared to take stock of the regional cooperative frameworks, their issues and prospects. These reports examine economic integration among three sub-regions: the Gulf countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates), the Maghreb (Algeria, Libya, Mauritania, Morocco, and Tunisia), and the Mashreq (Iraq, Jordan, Lebanon, Syria, and West Bank and Gaza). Egypt is sometimes classified in the literature as a Mashreq country though with ties with North Africa given its location. Shamshad Akhtar Vice President Middle East and North Africa Region The World Bank vi

9 AMF AMU ASEAN AWI COMESA ECO EFTA ESCWA EU-MFTA EUROMED EU FDI GAFTA GCC GDP IMF IT MENA MERCOSUR NAFTA ODA PAFTA PTAs TRIST UAE UNCTAD WBG WTO Arab Monetary Fund Arab Maghreb Union Association of Southeast Asian Nations Arab World Initiative Common Market for Eastern and Southern Africa Economic Cooperation Organization European Free Trade Association Economic and Social Commission for Western Asia EU-Mexico Free Trade Agreement Euro-Mediterranean Free Trade Area European Union Foreign direct investment Greater Arab Free Trade Agreement Gulf Cooperation Council Gross domestic product International Monetary Fund Information technology Middle East and North Africa Mercado Común Sur (Argentina, Brazil, and Uruguay) North American Free Trade Agreement Official Development Assistance Pan-Arab Free Trade Area Preferential Trading Arrangements Tariff Reform Impact Simulation Tool United Arab Emirates United Nations Conference on Trade and Development West Bank and Gaza World Trade Organization Acronyms and Abbreviations vii

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11 This report reviews the status of Mashreq countries economic integration with the world, with the Arab world, and within the Mashreq subregion itself. It examines the drivers of progress to date and barriers to further integration. It focuses on Mashreq countries participation in integration agreements; integration through trade, labor, and capital flows; and physical infrastructure. Executive Summary The main findings are that Mashreq countries trade more with the European Union (EU) than with other countries in MENA or among themselves, but account for a significant share of MENA s trade in services. With the exception of Iraq, a major oil exporter, the Mashreq countries export a relatively large share of manufactured goods surpassed only by Tunisia and Morocco. Mashreq exports are relatively less concentrated than other MENA countries, with the exception of Tunisia and Morocco. Regional economic integration would be enhanced through better trade facilitation procedures and by better transport infrastructure. Policies relating to further improving the investment climate and private sector development also matter. 1

12 Chapter 1 Participation In Integration Agreements The Mashreq subregion includes five countries: Iraq, Jordan, Lebanon, Syria, and West Bank and Gaza (WBG). Egypt is sometimes classified in the literature as a Mashreq country. In 2008, the Mashreq subregion had a population of 60 million (18 percent of the total MENA population), a gross domestic product (GDP) of US$ 162 billion (8 percent of the MENA region s total GDP), and per-capita income of US$ 2,540 (less than half the region s average). The subregion (excluding Iraq and WBG) grew at 4.7 percent during Arab countries, including the Mashreq, are involved in multiple trade agreements among themselves and with African states, the EU, and the United States (Annex 1). Of the five Mashreq countries, only Jordan is a member of the World Trade Organization (WTO). However, several countries in the Mashreq participate in bilateral and regional integration agreements or in subregional economic blocs. The Pan-Arab Free Trade Area (PAFTA) agreement was signed in 1997 and became effective in January The eighteen Arab country members of PAFTA (including the five Mashreq countries) account for over 80 percent of total MENA trade. The main provisions of PAFTA concern the progressive removal of tariffs (by 2005) and nontariff barriers to trade in goods among members. More recently, signatories of PAFTA have launched efforts to further integrate trade and investment in services, and to address nontariff measures that restrict trade flows. Little is known about the extent to which PAFTA s provisions have been implemented. To address this question, a survey of trading firms in nine PAFTA countries (including three Mashreq countries: Jordan, Lebanon, and Syria) was conducted (Hoekman and Zarrouk 2009). The survey covered official trade and tax policies, administrative requirements confronted by traders, and the costs and quality of transport infrastructure. The main findings of the survey were that PAFTA had been beneficial through the removal of tariffs on intra- PAFTA trade, and through a marked improvement in customs clearance procedures. 2 The Agadir Agreement for the Establishment of a Free Trade Zone (Agadir) was signed in Rabat, Morocco, in Original members include Tunisia, Morocco, Egypt, and Jordan, with the potential to expand to Algeria, Lebanon, Libya, Mauritania, Syria, and

13 Pa r t i c i pat i o n I n I n t e g r at i o n A g r e e m e n t s C H A P T E R 1 WBG. The EU supported the agreement with the aim of establishing a free trade area and as a possible first step in the establishment of a Euro-Mediterranean Free Trade Area (EU- ROMED). In addition to these regional agreements, some Mashreq countries have entered into bilateral agreements with the United States, EU, and Turkey. The 1995 Barcelona Conference set the ambitious goal of establishing EUROMED, which would include the EU and MENA countries. This goal is to be achieved through association agreements between the EU and MENA countries and free trade agreements among MENA countries. Three Mashreq countries have already signed an association agreement with the EU: Jordan in 1997, WBG in 1997, and Lebanon in Syria initiated discussions in Using the augmented gravity model for all MENA countries for which association agreements have been signed, Cieslik and Hagemejer (2007) found that, while these agreements have significantly increased MENA countries imports from the EU, they have had no positive impact on their exports to the EU. A recent World Bank report (Pigato 2009) noted that preferential agreements with the EU have not helped MENA countries in general withstand competition from China and India. 1 All Mashreq countries are members of the League of Arab States, which has historically taken the lead on integration efforts in the region. The League s objective is to draw closer the relations between member States and co-ordinate collaboration between them, to safeguard their independence and sovereignty, and to consider in a general way the affairs and interests of the Arab countries. Through its various institutions, the Arab League helps to facilitate political, economic, cultural, scientific, and social affairs among its members. Since its inception in 1945, the League has served as a forum for member states to coordinate their policy positions, to deliberate on matters of common concern, and to settle disputes. 1 They have partially helped maintain a market in Europe, but the EU rules of origin may impede MENA s further export growth. They are strict, requiring a double transformation in qualifying countries. As a result, most of the inputs MENA producers use for exports to the EU come from Europe. Preferential agreements have thus locked MENA producers into production structures that shelter them from competition and handcuff their ability to source inputs from other locations. See Pigato (2009), page xxii. 3

14 Chapter 2 Integration through Trade, Capital, and Labor Flows Trade Volumes While Mashreq countries comprise the smallest share of total MENA trade, they account for a higher share of the trade within the region, apart from the Gulf Cooperation Council (GCC). The Mashreq countries account for only 8 percent of MENA s total trade (with or without oil), while GCC countries represent 60 percent of MENA trade, and Maghreb and other countries account for more than twice the share of the Mashreq (16 17 percent). If trade within MENA is considered, however, the Mashreq s trade accounts for a much higher share (15 percent) than all country groupings except the GCC. Trade within the Mashreq subregion accounts for 15 percent of its total trade within MENA. While the overall trade volume (as a share of GDP) of Mashreq countries is significantly lower than the MENA average, nonoil trade is only marginally lower (Figure 1). Valued at about 66 percent of GDP in 2007, the trade volume of Mashreq countries is below the average for MENA countries (76 percent) and GCC countries, but about the same as the average among lower-middle-income countries (61 percent). When nonoil trade is considered, the Mashreq average of 30 percent of GDP is close to the MENA average (37 percent) and similar to other country groupings in the region. It is, however, far below the average for lower-middle-income countries. Thus there is much to be done on trade promotion and competitiveness if the Mashreq countries (and other subregions in MENA) are to achieve meaningful trade within the region and the subregions. Mashreq countries trade more with EU countries than they do among themselves and within the MENA region. The EU is the main trading partner of Mashreq countries, accounting for 25 percent of exports and 28 percent of imports in The GCC is next in importance, with nearly 7 percent of Mashreq exports and about 17 percent of Mashreq imports. Only about half of imports from the GCC are nonoil products, and a large share of the value of these is of Asian origin. The proportion of imports from the EU is highest in Lebanon (over one-third) and lowest in Iraq (about one-seventh). Iraq is the largest exporter to the EU, mainly of crude oil. Reported trade with Asia is insignificant; most trade flows via the Gulf or other trading locations. 4 Mashreq countries have not taken full advantage of regional economic integration despite the existence of regional economic agreements. MENA and its subregions trade less among themselves than with other regions, with the GCC doing a bit better and the Maghreb trading the least (Figure 2). Intra-Mashreq nonoil trade accounted for only 6 percent of total trade in Although this compares favorably with other subregions in MENA (such as the GCC and Arab countries), the Mashreq lags behind interna-

15 I n t e g r at i o n t h r o u g h T r a d e, C a p i ta l, a n d L a b o r F l o w s C H A P T E R 2 Figure 1 MENA Trade by Country Sub-groups, A. Total Trade (% GDP) 50 B. Total Non-Oil Trade (%GDP) MENA GCC Maghreb Mashreq Other 0 MENA GCC Maghreb Mashreq Other Sub-region Rest of the World Other MENA Source: Annex 2, Tables A2.2 and A2.4. tional benchmarks such as ASEAN, the EU, and NAFTA. There is a great deal of variation among countries. Syria conducts as much as 42 percent of its nonoil trade within the Mashreq, while the corresponding figure for Iraq is less than 3 percent. Syria and Lebanon seem to trade more with each other than other countries in the group. Syria is also Iraq s main trading partner in the subregion; Iraq imports nearly one-third of its total nonoil imports from Syria. Figure 2 Regional Exports as % of Total Exports, 2007 EU-25 NAFTA ASEAN MERCOSUR GCC Mashreq MENA MENA (other) Maghreb Source: Annex 2, Table A2.1. Among the Mashreq countries, Jordan, Syria, and WBG trade the most within the MENA region. Over three-quarters of WBG s trade in 2007 was with MENA countries, followed by Jordan (one-third), Syria (one-fourth), and Lebanon (one-fifth). The two countries outside the Mashreq subregion that trade significantly within MENA are Djibouti and Kuwait. For most Mashreq countries, there has been a significant improvement in trade since 2000, with Syria showing a fourfold increase. Syria s relative success can be attributed to the government s efforts since the early 2000s to implement trade reform and export diversification (World Bank 2009c). An International Monetary Fund (IMF) study (Rodolphe 2001) shows that international and intraregional trade in the Mashreq (defined to include Egypt and Israel and exclude Iraq) are below levels predicted by the gravity model. 2 At least three policy variables 2 See also Lee and Gohar (2009) who found, using a conventional gravity model, that the majority of Arab economies trade less intensively with each other, though countries that are closer to each other trade relatively more. 5

16 C H A P T E R 2 I n t e g r at i o n t h r o u g h T r a d e, C a p i ta l, a n d L a b o r F l o w s explain this deviation: trade restrictions, real exchange rate appreciation, and political uncertainty. When Israel is not included in the model, however, trade in the Mashreq is found to be higher than predicted. This indicates that low levels of intraregional trade are explained by limited trade between Israel and its neighbors. A separate Arab Monetary Fund (AMF) study (2005) focusing on intra-arab exports for the period , concludes that intra-arab exports are modest and below their potential (as estimated by the gravity model). It is suggested that Arab free trade agreements could increase exports without the risk of trade diversion if countries made a strong commitment to address deficiencies in Arab export capacity. The paper also notes that low intra-arab exports arise mainly from the lack of exports between the GCC and the Maghreb, and between Mashreq and Maghreb countries. The same conclusion applies to the EU partnership agreements. The findings of this study cannot be compared with the findings of the IMF study discussed above due to variations in country coverage and model specifications. Export Concentration and Diversification Jordan and Syria are among the least concentrated countries in the MENA region with respect to export products, with a concentration index of less than 0.2 (Figure 3). These countries have seen some improvement between 1995 and 2007, but Lebanon (the only other Mashreq country for which information is available) has not 3. Both the Mashreq and Figure 3 Concentration and Diversification Indices of Export Products in MENA 6 Libya Bahrain Yemen Saudi Arabia Iran Kuwait Algeria Oman Qatar UAE Lebanon Syria Egypt Tunisia Jordan Morocco Source: Table A2.6 Kuwait Bahrain Qatar Algeria Libya Yemen Saudi Arabia Iran Morocco Oman Egypt UAE Jordan Syria Tunisia Lebanon

17 I n t e g r at i o n t h r o u g h T r a d e, C a p i ta l, a n d L a b o r F l o w s C H A P T E R 2 MENA more broadly are less diversified than the world average. The MENA region as a whole is characterized by exports of primary commodities, essentially oil and gas (86 percent); manufactured goods account for the remaining 14 percent. For the Mashreq countries, with the exception of Iraq, the reverse is true. Manufactured exports account for 79 percent of total exports in Jordan, 49 percent in Lebanon, and 36 percent in Syria. Tunisia and Morocco are the only two other countries doing well in terms of manufactured exports (72 and 66 percent, respectively). Table A2.5 provides detailed information on the type of export items from MENA and its subregions. Trade in Services Trade in services is scarcely covered in existing regional integration agreements in MENA. General attitudes toward openness to the services trade vary considerably across the region. For example, the two leading countries in this respect, Jordan and Saudi Arabia, have signed commitments in thirty or more of fifty-five services sub-sectors covered by the WTO General Agreement on Trade in Services, whereas other members have signed fewer than ten such agreements. Trade in services for Mashreq countries represents an impressive share of the MENA total (20 and 32 percent of MENA exports and imports, respectively). 4 The importance of this sector is reflected in the contribution of services trade to subregional GDP; in 2005, exports and imports were estimated to be 24 and 20 percent of GDP (Figure 4). The subregion is thus a net exporter of trade services mostly tourism. Lebanon is the economy most open to the services trade, with 50 percent of exports and 37 percent of imports. In 2005, the Mashreq as a whole exported mainly travel and information technology (IT) services, which amounted to 20 and 16 percent, respectively, of total service exports. 5 Imports also are dominated by travel and IT services, which account for 24 percent each, followed by transportation services at 10 percent. Insurance and financial services are the least traded by the region, reflecting the fact that the financial sector lags Figure 4 Trade in Commercial Services* (% GDP) 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Jordan Lebanon Syria WBG Mashreq MENA WORLD Export Import Source: GDF and WDI data *Commercial services include information technology services, insurance and financial services, transportation services, and travel/tourism services. 3 The concentration index ranges between 0 and 1, where 1 represents total concentration. The diversification index reveals the extent of the differences between the structure of trade of the country or group of countries and the world average. The index value ranges from 0 to 1. 4 World Bank Global Development Finance (GDF) and World Development Indicators (WDI), September Statistics on trade services are captured through the following components: computer, communications and other Services (IT); insurance and financial services; transportation services; and travel/tourism services. 7

18 C H A P T E R 2 I n t e g r at i o n t h r o u g h T r a d e, C a p i ta l, a n d L a b o r F l o w s behind in most Mashreq countries, with the notable exception of Lebanon. Lebanese banks have recently opened branches in Iraq, Jordan, Egypt, Oman, Saudi Arabia, and Libya. Constraints to Trade Integration The factors behind the low trade performance in Mashreq countries are multi-faceted. They include the low level of complementarity of trade (arising from similar production structures), poor investment climates, weak political commitment to economic integration, lack of a common vision, and ongoing conflicts in the region. 6 Figures 5 and 6 illustrate the poor enabling environment for trade in the Mashreq, first with respect to the ease of doing business, and second with respect to logistics performance. A recent World Bank study found the overall restrictiveness of services trade policies for the two Mashreq countries in the survey (Lebanon and Jordan) to be high by international standards, but slightly below the PAFTA average. 7 Capital Flows Mashreq countries have been the largest recipients of foreign direct investment (FDI) as a share of GDP in the MENA region. In 2007, FDI for the Figure 5 Ease of Doing Business Ranking Iraq Jordan Lebanon Syria WBG World Ranking MENA Ranking Figure 6 Logistics Performance Index Iraq Jordan Lebanon Syria MENA MIC Source: Doing Business 2010, World Bank and International Finance Corporation; Global Development Finance and World Development Indicators data, World Bank, A commentator at the conference on Trade and Investment Integration Opportunities for the Arab World, organized during the Annual Meetings by the World Bank in Istanbul on October 5, 2009, observed that a serious economic integration policy that would enable the region to reap the potential growth of further trade benefits in the Mashreq would need to address a number of issues. These included weak political commitment and lack of a clear vision, reduction in nontariff barriers, harmonization of regulations, establishment of common rules and standard cross-border infrastructure, liberalization of the choice of ports for imports and exports, and improvements in physical infrastructure. 7 This ongoing World Bank research project (by Ingo Borchert, Samantha DeMartino, and Aaditya Mattoo) hosts data on 102 countries from across the world, 11 of which are PAFTA countries. The survey covers five key sectors: financial services (banking and insurance), telecommunications, retail distribution, transportation, and professional services. Specifically, the survey covers cross-border trade in services (mode 1 in WTO parlance) in financial, transportation and professional services; commercial presence or FDI (mode 3) in each service sector; and the presence of service supplying individuals (mode 4) in professional services.

19 I n t e g r at i o n t h r o u g h T r a d e, C a p i ta l, a n d L a b o r F l o w s C H A P T E R 2 Mashreq countries represented 5.8 percent of GDP, followed by Maghreb countries (3.7 percent) and GCC countries (2.8 percent). Inward FDI stocks in Jordan, at nearly 102 percent of GDP, are the highest in the entire MENA region (and among developing countries), followed by Lebanon (83.5 percent) and Syria (22 percent). 8 The ratio in Syria is nearly half of what used to be in Over the long term, FDI flows have not been as dynamic as in other emerging economies, such as those in Eastern Europe. Financing through international capital markets still appears to be limited compared to other regions. While information on the sources of FDI is not available, it is likely that countries close to the Gulf region, such as Jordan and Lebanon, have received a large share of their foreign capital inflows from resource-rich MENA countries. 9 Mashreq countries rely heavily on remittances. The most intense intraregional remittance corridors are those from GCC to Mashreq countries, and between Mashreq countries (essentially WBG and Jordan). In most years, remittances have exceeded capital flows and have remained the most stable source of foreign capital in Mashreq countries. In 2007, remittances constituted a larger share of capital inflows in Mashreq countries than FDI and official development assistance combined and accounted for as much as 15 percent of GDP (Figure 7). Within the subregion, and compared to other MENA countries receiving remittances, Mashreq countries have the highest ratio of remittances to GDP (Figure 8). In 2007, for example, remittances were high and growing in Lebanon (24.4 percent of GDP), high and relatively stable in Jordan (22.7 percent of GDP), and rela- Figure 7 Remittances, FDI and ODA Countries (US$ billions) Figure 8 Remittances as Share of GDP 2007 in Mashreq Countries (US$ billions) 30% 25% 20% 15% 10% % Workers s remittances Official development assistance Foreign direct investment 0% Algeria Egypt Jordan Lebanon Morocco Syria Tunisia Yemen Source: World Bank, World Development Indicators, United Nations (2009). 9 World Bank and Arab Monetary Fund (2010) states that a large majority of FDI flows in the Arab world are between Arab countries. The main investors in Arab countries are European and GCC countries, as well as a few developing Asian economies (China, India, Malaysia). See page 19. 9

20 C H A P T E R 2 I n t e g r at i o n t h r o u g h T r a d e, C a p i ta l, a n d L a b o r F l o w s tively low in the case of Syria (2.2 percent of GDP). 10 Labor Mobility Labor mobility is an important element of regional integration in the Mashreq. All of the Mashreq countries have seen extensive migration, both temporary and permanent, since the 1970s. Migrants from Mashreq countries are often skilled and more likely to be temporary migrants in other Arab countries. Though this group of countries primarily sends migrants to other Arab countries, it also exports workers to Western destinations such as the United States, Europe, and Australia, though in these cases migration tends to be permanent. Migration trends vary widely between MENA subregions. Mashreq countries dominate regional migration. Between 1990 and 2010, the number of migrants increased by 132 percent in the Mashreq, compared to 75 percent in the GCC and 20 percent in the Maghreb (Table 1). Within the Mashreq subregion, many countries serve as both origin and destination. Emigrants typically head to GCC countries or to other Mashreq countries. In 2000, while only 27 percent of migrants to Mashreq countries originated from MENA countries, 56 percent of migrants coming from the Mashreq stayed in the region. 11 Emigration farther abroad has been significant, especially from Lebanon. Jordan, Lebanon, and Syria import low-skilled labor from Asia and host a large number of refugees. 12 The conflict in Iraq has added another dimension to migration in the subregion. The best available evidence suggests that, between 2003 and 2009, as many as one million Iraqis could have been displaced inside Iraq; and in what is often called the Iraq Diaspora, another 1.5 million could have been displaced to other countries, namely Jordan and Syria. 13 Table 1 International Migrants by Development Group and Arab World Sub-regions Number of Migrants (millions) Incremental Change (millions) Percentage Change Migrants as Percentage of Population World More developed regions Less developed regions Arab region of which Maghreb Mashreq GCC Source: International Migration Stock: 2008 Revision ( and Bank staff calculation See World Bank (2008), Figure World Bank 2008, Table Refugees represent 81 percent of total migrants in Jordan, 61 percent in Lebanon, and 44 percent in the Syrian Arab Republic. See United Nations (2006). 13 World Bank (2009a).

21 Integration through Physical Infrastructure Chapter 3 Inefficient trade facilitation processes and procedures and, to a lesser extent, underdeveloped transport infrastructure constrain the ability of Mashreq countries to trade more with each other, with the region, and with the world. According to the World Bank s Regional Cross-Border Trade Facilitation and Infrastructure Study, these impediments impose greater trade losses than formal trade tariffs or quota restrictions. While many of the constraints are technical in nature, others such as the lack of infrastructure require investment in new facilities and carefully selected locations. Most of the Mashreq region s external trade involves three distinct markets: Europe, the Persian Gulf, and Asia. Each presents a unique challenge, not only due to geographic location but also because of the limited modal choices available for the shipment of goods. All three markets can be served by airfreight, but at considerable cost. In addition, Asia is served by maritime routes, the Gulf primarily by road, and Europe by road and sea (Box 1). Among the various categories of physical infrastructure, the most relevant to regional integration are those needed to facilitate the movement of goods and individuals (for example, roads, railways, and ports). Other important infrastructure needs center around the exchange of services (such as pipelines, power grids, and telecommunication lines). The Mashreq countries are well connected through roads and air transport, but substantial investment is needed to improve the quality of road transport. The interconnectivity of energy (through electricity grids and gas pipelines) is limited, but a number of investment projects are under development. Telecommunications is relatively well advanced. Most of the 31,000 km of roads called for in the Agreement on International Roads in the Arab Mashreq are in use, but they are not always of good quality. 14 Rehabilitation and upgrading of certain sections of the existing network have become an imperative in many member countries. 14 World Bank (2008), p

22 C H A P T E R 3 I n t e g r at i o n t h r o u g h P h y s i c a l I n f r a s t r u c t u r e Box 1 Trade Routes and Corridors in the Mashreq The three trade corridors that connect the Mashreq countries to each other and to the longer routes that provide links to the rest of the world are: (i) a north-south corridor that links the EU via Turkey, Syria and Jordan to Saudi Arabia and the Gulf States, with connecting links to Lebanon and Egypt; (ii) an east-west corridor that links the Mashreq ports of Lattakia, Tartous, Tripoli, and Beirut via Syria to Iraq; and (iii) an east-west corridor that links the same ports via Syria and Jordan to Iraq. For trade with Europe, a complex multimodal network provides a variety of routes, most of which make some use of one or more of the above trade corridors. The choice between land and maritime routes depends on the relative importance of time, cost, and reliability for the goods being shipped. Although all of Europe can be served by road, destination countries beyond Eastern Europe pay a cost premium relative to maritime routes that is difficult to offset through faster times or greater reliability. The premium is lower for westbound road travel, as the dominant flow is that of goods shipped from Europe to the Middle East. The potential for roll-on/roll-off services (which refers to ships that allow road vehicles to be driven on and off the vessel without the assistance of cranes) between the Eastern Mediterranean and the Adriatic could present an attractive option for connections to central Europe. This mode of transportation offers a good compromise, providing faster times than all sea routes and lower cost than all land routes. For Mashreq shipments to and from the Gulf, the principal route remains the north-south corridor through Syria, Jordan, and Lebanon, connecting with the east-west corridor through Saudi Arabia. From Iraq to the Gulf, the main route is a north-south corridor from Baghdad through Kuwait. Despite uncertain border crossing times, especially when entering Saudi Arabia, the road route is much faster (less than one week) for the other four Mashreq countries than the alternative maritime route (up to two weeks). The door-to-door costs, including port charges and trucking at both ends, add a great deal to the cost of the maritime route. Source: World Bank (2010). 12 Sixty percent of the total railway network called for in the Agreement on International Railways in the Arab Mashreq has yet to be built. Furthermore, interconnection between existing railways in the Maghreb and Mashreq remains dependent on the decision of the Libyan authorities to proceed with construction of their railway project. More importantly, large sections of the existing railways in the region cannot be interconnected because of track gauge differences. Regarding the air transport sector, Jordan and Lebanon have adopted or signed open skies policy agreements. In Lebanon, foreign carriers are allowed to enjoy unrestricted use of services within their borders. A ministerial agreement for a multilateral Arab accord to liberalize air transport was signed by 12 countries in November The accord includes clauses on: (i) the award of air traffic rights; (ii) implementation of air traffic rights; (iii) granting of operating licenses and permits; (iv) commercial requirements for airlines; (v) government subsidies to airlines; (vi) flight safety and civil aviation security; (vii) protection of the environment and consumer interests; and (vii) consultation and dispute resolution.

23 I n t e g r at i o n t h r o u g h P h y s i c a l I n f r a s t r u c t u r e C H A P T E R 3 Most Mashreq ports have improved their performance over the last five years. The six mediumsized Mashreq ports (Lattakia, Tartous, Tripoli, Beirut, Aqaba, and Um Qasr) have seen strong growth in container traffic and improved productivity over the last decade, but all of them are feeder ports that cover only the transshipment of goods to larger hub ports. Lebanon and Syria interconnected their power grids through a 66kV transmission line in A 230kV transmission line was subsequently added to increase power exchange between the two countries, although energy trade on the first power line did not exceed 53 percent of the designed capacity (150 MW). Similarly, Jordan and Syria installed 66kV and 230kV transmission lines across their common border. Both lines were utilized to back up either of the two systems in case of network outages. There are power links between Iraq, Syria, and Turkey, but the system is not synchronized. The Euro-Arab Mashreq Gas Pipeline project is the most important cross-border gas pipeline project. Its aim is to help integrate the gas markets of Egypt, Jordan, Lebanon, and Syria with a view to creating a regional internal gas market to be integrated with the EU internal gas market. Egypt has ready-to-export gas of 1,651 bcm, out of 1,850 bcm in proven reserves. There are important gas pipeline projects under consideration in the rest of the region as well, including: (i) the Iraq Gas Pipeline, which aims to export Iraq s natural gas to Turkey through Syria, and will connect Iraq to the Arab gas pipeline as a backup for Egypt and Syria gas exports; and (ii) the Iraq-Kuwait Gas Pipeline, which will enable the export of 35mcf/d from Iraq to Kuwait after rehabilitating the existing pipelines. Significant progress has been made on investment and regional connectivity in the telecommunications sector, thanks to privatization and liberalization policies adopted by many countries in the MENA region. Kuwait exported US$ 3.4 billion in telecommunications services in 2006, connecting an estimated 27 million mobile subscribers in MENA. Egypt s Orascom connected 50 million subscribers, many in regional markets including Tunisia and Algeria. Qatar Telecom owns operators in Kuwait, Iraq, Algeria, Tunisia, Saudi Arabia, and WBG. This thriving source of both regional FDI and services trade provides a model for integration in other sectors. It has also led to the emergence of a regional institution that promotes common regulatory and technical standards, the Arab Network for Regulators. 13

24 Conclusion The overall trade levels of Mashreq countries are significantly lower as a share of GDP than those in the MENA region more broadly. Once adjusted for oil, however, nonoil trade in the Mashreq is only marginally lower than in MENA. Apart from Iraq, Mashreq countries trade the most within the MENA region. Nevertheless, Mashreq countries trade more with EU countries than they do among themselves and within MENA. In the service sector, the Mashreq accounts for a significant share of regional exports and imports. With the exception of Iraq, a major oil exporter, the Mashreq countries export a relatively large share of manufactured goods surpassed only by Tunisia and Morocco. Furthermore, Mashreq exports are relatively less concentrated than other MENA countries, with the exception of Tunisia and Morocco. Overall, the Mashreq, like other subregions in MENA, has yet to take full advantage of regional economic agreements. Opportunities for trade between the Mashreq and other countries in the region and elsewhere would be enhanced through better trade facilitation procedures and better transport infrastructure. While good progress has been made under PAFTA on the removal of intra-regional trade tariffs and in improving customs clearance procedures, more remains to be done on infrastructure, especially in the areas most relevant to regional integration (roads, railways, and ports). Mashreq countries are well connected through roads and air transport, but substantial investment is needed to improve the quality of road transport. The interconnectivity of energy (electricity grids and gas pipelines) is limited, though a number of investment projects are in the pipeline. Telecommunications, on the other hand, is relatively well advanced. 14

25 Bolbol, Ali A. and Ayten M. Fatheldin Intra-Arab Exports and Direct Investment: An Empirical Analysis. AMF Economic Papers, No. 12. Abu Dhabi. Cieslik, Andrzej and Jan Hagemerjer Assessing the impact of the EU-sponsored trade liberalization in the MENA countries. Hadad-Zervos, Faris Economic Integration in the Mashreq. December (Draft). Hoekam, Bernard and Zarrouk J Changes in Cross-Border Trade Costs in the Pan- Arab Free Trade Area, WPS5031. Kirchner, Emil The European Union as a Model for Regional Integration: The Muslim World and Beyond. Jean Monnet/Robert Schuman Paper Series, Vol. 6, No.1. Lee, Yu-Feng L. and Abdelaziz Gohar Trade and Intra-Regional Integration: Is Arab Region a Potential Candidate for Economic Union? International Trade and Finance Association, 19 th International Conference Working Paper, Paper itfa/19th/art12. Pigato, Miria Strengthening MENA s Trade and Investments Links with China and India. Orientation in Development Series. The World Bank. Rodolphe, Blavy Trade in the Mashreq: An Empirical Examination. IMF Working Paper WB/01/163. Romagnoli, Alessandro and Luisa Mengoni The Challenge of economic integration in the MENA region: from GAFTA and EU-MFTA to small scale Arab Unions. Springer Science + Business Media, LLC (online), University of Bologna, Strada Maggiore. United Nations Annual Review of Developments in Globalization and Regional Integration in the Arab Countries. Economic and Social Commission for Western Asia (ESCWA). World Bank Regional Cross-Border Trade Facilitation and Infrastructure Study for Mashreq Countries. Draft. World Bank. 2009a. Regional Economic Integration in the Arab World: Rational and a Role for the World Bank Group. October (Draft). World Bank. 2009b. Trade Reforms and Export Diversification in Syria. June. World Bank. 2008a. MENA Economic Developments and Prospects: Regional Integration for Global Competitiveness. References 15

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27 Trade Agreements in the MENA Region Annex 1 AMU United States EFTA European Union Morocco Algeria Mauritania Tunisia Libya AMU: Arab Maghreb Union (5) GCC: Gulf Cooperation Council (6) GAFTA: Great Arab Free Trade Agreement (18) ECO: Economic Cooperation Organization (10) Jordan Egypt Djibouti Burundi, Comoros, D. R. Congo, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritus, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, Zimbabwe Syria WBG Lebanon Agadir COMESA Iraq Kuwait Bahrain Qatar Saudi Arabia Yemen GAFTA Singapore COMESA: Common Market for Eastern and Southern Africa (19) EFTA: European Free Trade Association (4), includes Iceland, Switzerland, Norway, and Liechtenstein Agadir: Agadir Agreement for the Establishment of a Free Trade Zone between Arabic Mediterranean Nations (4) Oman GCC Iran MENA Turkey Afghanistan, Azerbaijan, Kazakhstan, Kyrgyz Republic, Pakistan, Tajikistan, Turkmenistan, Uzbekistan Sudan ECO Regional Agreements Bilateral Agreements Source: World Bank MENA Economic Developments and Prospects. 17

28 Annex 2 Statistical Tables Table A2.1 MENA Total Trade, 2007 (US$ millions) TOTAL TRADE WITH THE WORLD Total Exports (in US$ million) Total Imports (in US$ million) Total Trade MENA Region 752, ,435 1,234,489 By geographic sub-region GCC Countries 458, , ,509 Bahrain 6,878 11,511 18,389 Kuwait 57,799 21,248 79,047 Oman 22,137 15,952 38,088 Qatar 40,586 23,388 63,974 Saudi Arabia 220,359 89, ,899 United Arab Emirats 110, , ,112 Maghreb 132,697 78, ,020 Algeria 54,859 27,629 82,488 Libya 45,674 11,561 57,234 Morocco 17,188 31,624 48,812 Tunisia 14,976 19,071 34,046 (Mauritania)* 1,316 1,430 2,746 Mashreq 50,562 43,192 93,754 Iraq 36,302 10,437 46,739 Jordan 4,437 13,406 17,843 Lebanon 2,642 11,990 14,632 Occ.Pal.Terr 64 3,141 3,206 Syrian Arab Republic 7,117 14,655 21, Other 110,741 81, ,206 Egypt 24,344 26,927 51,271 Djibouti 202 2,051 2,253 Iran 79,407 43, ,392 Yemen 6,788 8,502 15,290 Source: World Trade Integrated Solution. *Mauritania is not part of the aggregates.

29 S tat i s t i c a l Ta b l e s A N N E X 2 Total Exports (in US$ million) TOTAL TRADE WITHIN REGIONS Total Imports (in US$ million) Total Trade 65,314 57, ,421 Total Exports (in US$ million) TOTAL TRADE WITHIN SUB-REGIONS Total Imports (in US$ million) Total Trade within each Sub-Region (in US$ million) 49,015 26,076 75,091 26,559 19,516 46,076 1,465 1,106 2,571 1,189 1,012 2,201 1,811 3,150 4,961 1,186 2,244 3,430 3,989 5,020 9,009 3,341 4,748 8,089 2,247 3,682 5,929 2,015 3,283 5,298 21,245 6,889 28,134 13,046 3,786 16,832 18,259 6,228 24,487 5,783 4,443 10,225 3,981 7,644 11,626 2,808 3,142 5,950 1, , , , ,328 4, ,091 1,288 1,431 1,639 3,070 1,157 1,022 2,179 4,444 14,531 18,975 1,380 1,380 2, ,976 2, ,285 4,708 5, ,197 1,731 2, ,386 2, ,635 3,729 5, ,109 7,873 8,857 16, ,671 4,752 9, ,807 1,236 4, ,154 2,

30 A N N E X 2 S tat i s t i c a l Ta b l e s Table A2.2 MENA Total Trade, 2007 (% GDP) TOTAL TRADE WITH THE WORLD Total Exports (% GDP) Total Imports (% GDP) Total Trade (% GDP) MENA Region By geographic sub-region GCC Countries Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirats Maghreb Algeria Libya Morocco Tunisia (Mauritania)* Mashreq Iraq Jordan Lebanon Occ.Pal.Terr Syrian Arab Republic Other Egypt Djibouti Iran, Islamic Republic of Yemen Source: Table A2.1. *Mauritania is not part of the aggregates.

31 S tat i s t i c a l Ta b l e s A N N E X 2 Total Exports (% GDP) TOTAL TRADE WITHIN REGIONS Total Imports (% GDP) Total Trade (% GDP) Total Exports (% GDP) TOTAL TRADE WITHIN SUB-REGIONS Total Imports (% GDP) Total Trade (% GDP)

32 A N N E X 2 S tat i s t i c a l Ta b l e s Table A2.3 MENA Non-Oil Trade, 2007 (US$ millions) TOTAL NON-FUEL TRADE WITH THE WORLD Total Non-Fuel Exports (in US$ million) Total Non-Fuel Imports (in US$ million) Total Non-Fuel Trade (in US$ million) MENA Region 142, , ,161 By geographic sub-region GCC Countries 71, , ,180 Bahrain 4,279 5,524 9,802 Kuwait 2,778 21,126 23,904 Oman 2,169 15,391 17,560 Qatar 3,993 23,263 27,255 Saudi Arabia 29,912 89, ,228 United Arab Emirats 28, , ,429 Maghreb 33,422 69, ,633 Algeria 2,478 27,319 29,797 Libya 1,548 1,210 2,758 Morocco 16,736 25,274 42,009 Tunisia 12,661 16,618 29,279 (Mauritania)* ,971 Mashreq 10,456 31,620 42,076 Iraq Jordan 4,397 10,460 14,857 Lebanon 2,636 9,372 12,008 Occ.Pal.Terr 64 1,917 1,981 Syrian Arab Republic 2,695 9,870 12,565 Other 26,748 81, ,272 Egypt 14,339 22,953 37,292 Djibouti Iran, Islamic Republic of 11,814 3,682 15,495 Yemen 420 6,678 7, Source: World Trade Integrated Solution. *Mauritania is not part of the aggregates.

33 S tat i s t i c a l Ta b l e s A N N E X 2 Total Non-Fuel Exports (in US$ million) TOTAL NON-FUEL TRADE WITHIN REGIONS Total Non-Fuel Imports (in US$ million) Total Non-Fuel Trade (in US$ million) 52,960 38,217 91,177 TOTAL NON-FUEL TRADE WITHIN SUB-REGIONS Total Exports (in US$ million) Total Imports (in US$ million) Total Trade (in US$ million) 40,124 24,904 65,028 21,182 18,514 39,696 1,457 1,064 2,521 1, ,154 1,801 3,066 4,868 1,179 2,161 3,340 3,444 4,617 8,061 2,800 4,345 7,144 1,215 3,576 4,791 1,001 3,178 4,179 14,166 6,834 21,000 9,320 3,743 13,064 18,041 5,747 23,788 5,701 4,114 9,815 2,276 3,776 6,051 1,516 1,660 3, , ,476 2, , ,035 1, ,307 4,207 6,615 10,822 1,158 1,158 2, ,284 2,003 3, ,191 1,251 2, ,167 1, ,627 2,172 3, ,352 2,923 9, ,164 1,210 5, , , ,

34 A N N E X 2 S tat i s t i c a l Ta b l e s Table A2.4 MENA Non-Oil Trade, 2007 (% GDP) Total Non-Fuel Exports (% GDP) TOTAL NON-FUEL TRADE WITH THE WORLD Total Non-Fuel Imports (% GDP) Total Non-Fuel Trade (% GDP) MENA Region By geographic sub-region GCC Countries Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirats Maghreb Algeria Libya Morocco Tunisia (Mauritania)* Mashreq Iraq Jordan Lebanon Occ.Pal.Terr Syrian Arab Republic Other Egypt Djibouti Iran, Islamic Republic of Yemen Source: Table A2.3. *Mauritania is not part of the aggregates.

35 S tat i s t i c a l Ta b l e s A N N E X 2 Total Non-Fuel Exports (% GDP) TOTAL NON-FUEL TRADE WITHIN REGIONS Total Non-Fuel Imports (% GDP) Total Non-Fuel Trade (% GDP) Total Non-Fuel Exports (% GDP) TOTAL TRADE WITHIN SUB-REGIONS Total Non-Fuel Imports (% GDP) Total Non-Fuel Trade (% GDP)

36 A N N E X 2 S tat i s t i c a l Ta b l e s Table A2.5 A MENA Exports by Products, as % of total Exports of Products, 2007 Table 3 as % of total exports of products Primary commodities (SITC ) Primary commodities, excluding fuels (SITC ) All food items (SITC ) Food, basic (SITC ) Food, basic excluding tea, coffee, cocoa and spices (SITC less 07) Beverages and tobacco (SITC 1) MENA GCC Bahrain Kuwait Oman Qatar Saudi Arabia UAE Maghreb Algeria Libya Morocco Tunisia Mauritania * Mashreq Iraq Jordan Lebanon Syria Other Egypt Djibouti Iran Yemen Source: UNCTAD, Statistical Report 2009 *Mauritania is not part of the aggregates. 26

37 S tat i s t i c a l Ta b l e s A N N E X 2 Agricultural raw materials (SITC 2 less 22, 27 and 28) Ores, metals, precious stones and nonmonetary gold (SITC ) Ores and metals (SITC ) Non-ferrous metals (SITC 68) Other ores and metals (SITC ) Pearls, precious stones and nonmonetary gold (SITC ) Fuels (SITC 3)

38 A N N E X 2 S tat i s t i c a l Ta b l e s Table A2.5 B MENA Exports by Products, as % of total Exports of Products, 2007 Table 3 as % of total exports of products Manufactured goods (SITC 5 to 8 less 667 and 68) Chemical products (SITC 5) Machinery and transport equipment (SITC 7) Other manufactured goods (SITC less 667 and 68) Iron and steel (SITC 67) MENA GCC Bahrain Kuwait Oman Qatar Saudi Arabia UAE Maghreb Algeria Libya Morocco Tunisia Mauritania * Mashreq Iraq Jordan Lebanon Syria Other Egypt Djibouti Iran Yemen Source: UNCTAD, Statistical Report

39 S tat i s t i c a l Ta b l e s A N N E X 2 Table A2.6 Concentration and Diversification Indices of Export Products in MENA Exporters Number of products Concentration Index Diversification Index Number of products Concentration Index Diversification Index MENA GCC Bahrain Kuwait Oman Qatar Saudi Arabia UAE Maghreb Algeria Libya Morocco Tunisia Mashreq Iraq Jordan Lebanon Syria Other Egypt Djibouti Iran Yemen Sources: UN Comtrade statistics Concentration index reflects the Herfindahl-Hirschmann index of the export product concentration of a country or a group of countries. It ranges between 0 to 1 where 1 represents total concentration. Diversification index reveals the extent of the differences between the structure of trade of the country or group of countries and the world average. The index value ranges from 0 to 1. 29

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41 WORLD BANK MIDDLE EAST AND NORTH AFRICA REGION Economic Integration in the Mashreq