Theoretical Principles of Various Forms of Complementarity

Until the middle of this century, the prevailing belief was that free trade confined to a specific number of countries would raise world income as long as it ultimately contributed to the achievement of international free trade.

Restricted free trade may in fact have an impact on world production and consumption, which, in turn, may have a positive or negative influence, depending on the levels of effective protection applied by the trade partners in a regional grouping. Customs duties applied within the framework of a unified external tariff, for example, have a direct and measurable impact on the distribution of income. Furthermore, the gradual comprehensive or partial elimination of customs duties between partners in a customs area would inevitably have an impact on the distribution of production within the area.

The change in trade patterns between the various trade partners would result either in a change in the direction of trade or would have a positive impact on production levels. It might also lead to an increase in consumption and to an improvement in the standard of living of consumers within the country that has abandoned production of a certain commodity.

Evaluating the effects of a restricted trade area requires estimating the net benefit or loss of that area and the world as a whole, by assessing the magnitude of change in the direction of trade and the impact on production and consumption levels. As is made clear below, examining developments within countries of a certain customs union is complicated, and has to take into account changes in the internal and external environment. Furthermore, it is the future developments in the union, as opposed to past performance, that take on added significance. Inasmuch as the share of a customs union increases in international trade, therefore, its impact on trade patterns worldwide also increases. For this reason, the European Community (EC) and the free trade area between the United States, Canada, and Mexico are still a matter of keen debate.

To complete this theoretical approach, various other factors requiring a more dynamic analysis should also be taken into consideration, such as communication structures; density of the commercial and banking networks; diversity of monetary systems; lack of full competition (presence of monopolies, etc.); and budgetary and taxation policies and nontradable factor costs. If these and other elements are not taken into account in the analysis, either the dynamics of a specific customs union would be overlooked or it would become clear that the maximum economic benefit for the union as a whole cannot be equivalent to the sum of the economic benefits accruing to each country separately. It is therefore necessary to outline the most important stages in the process of economic integration.

The first stage is the preferential area in which customs barriers are selectively reduced, in particular those that might impede the flow of trade. During this phase, a unified external tariff is not imposed. Such preferential areas are found in various forms in Africa and Latin America. With respect to Africa, reference should be made to the Lagos Plan, which aims at establishing a unified African market by the year 2000 through certain transitory stages, such as the preferential trade areas supported by the Economic Commission for Africa of the United Nations.

The second stage—the free trade area—is characterized by eliminating all trade barriers among the states concerned, without imposing a unified customs tariff vis-à-vis the rest of the world. Previous experience in this regard has shown that the elimination of nontariff barriers generally takes longer than the selective reduction of tariff barriers.

A customs union is the third stage. At this stage, a unified customs tariff vis-à-vis the rest of the world is imposed and gradually applied.

The fourth stage is the establishment of a unified market that allows for the free movement of labor and capital.

Finally, economic unity is considered to be the highest degree of regional integration. Within its framework, the states concerned place their economic sovereignty in the hands of a unified economic authority that supervises the adoption of unified policies covering monetary, tariff, tax, and other aspects.

External Trade Policies of the Arab Maghreb Union Countries: Basic Features

When the Marrakech Treaty was ratified in February 1988, on which the Arab Maghreb Union was established, the trade policies of the member states in the Union were vastly different. The states could be classified into two broad categories: countries that pursue a liberal trade policy (Morocco and Tunisia); and countries in which the government exercises a monopoly over trade (Algeria and Libya). Mauritania is unique as it is a least developed country and one in which the Government encourages private initiatives while at the same time it exercises strict control over foreign exchange.

Despite the variations in the nature of trade regulations of the five countries, they nevertheless face similar international pressures and are charactrerized by the same structural features. In this context both Algeria and Libya have started to implement—in varying degrees—structural adjustment reforms. In 1990 they adopted measures designed to lessen the Government’s grip on external trade and to enable those in the private sector to carry out their transactions freely.

In this study, it is not sufficient, however, to classify states according to their external trade policies, but it is also necessary to highlight those considerations pertinent to the existence of a more active private sector, the linkages within the industrial sector, and the level of self-sufficiency in areas of food and energy, to make possible a better portrayal of the Maghreb trade policies.

The Maghreb countries share a number of characteristics that can be broadly outlined as follows:

• Narrow internal markets, which make it difficult for these countries to adopt effective import substitution strategies, while at the same time their ability to place competitive goods in the world market is limited. Indeed, except for a few labor-intensive industries, those industries that are highly capital intensive are numbered (phosphate derivatives and liquid gas).

• National markets that enjoy levels of both tariff and nontariff protection far exceeding what the optimum allocation of resources requires.

• Excessive dependence on the international market—varying from country to country—with respect to agricultural food-stuffs, semimanufactured products, and technology.

• A significant concentration of Maghreb exports to those countries that colonized the region. This situation has arisen as a result of considerations such as exchange rate policies, cultural links, and a high level of financial dependency. Furthermore, the financing mechanisms that were laid down by the colonial powers implicitly supported their exports, which, in turn, caused a distortion in international competition within the markets of the region.

• The tariff and pricing policies adopted to curb inflationary pressures have in fact impeded the progress of traditional activities such as the agricultural sector. To correct this distortion, Morocco has implemented a series of measures aimed at adjusting the prices of its agricultural products. As a result, investment and production activities in the agricultural sector have started to improve. In general, it is possible to detect a certain degree of positive correlation between the level of subsidies on consumption and the level of food dependency in the countries concerned.

• Insufficient supply of goods for export and a lack of diversification, with primary commodities such as oil, phosphates, iron, citrus fruits, and primary products predominating. As a result, Maghreb exports enter into direct competition, rather than complementing one another, and trade between the Maghreb Union countries remains minimal. Indeed, such trade does not exceed 2 percent of the overall external trade of these countries. As will be seen later, this in turn justifies the importance of establishing a Maghreb trade area as the only means of mobilizing those capabilities of the Maghreb economies that are conducive to integration.

However, the above features do not conceal the inherent disparities that characterize the trade policies of the Arab Maghreb Union countries, some of which can be briefly outlined as follows:

• High levels of protection ranging between 45 percent to about 200 percent in Mauritania or Algeria.

• Quantitative restrictions in the form of import licenses or an administrative system for the distribution of hard currency for the import of goods, the levels of which vary between 10 percent and 100 percent for general imports.

• Taxes on production, which vary from one country to another; Morocco and Tunisia are the only two countries to succeed in introducing a value-added tax system. The lack of coordination in this regard may create large imbalances in intra-Maghreb trade.

• Varying exchange rate policies, some more realistic than others, with nonconvertible national currencies. This results in distortions in price levels and could consequently give rise to unbalanced competition among the various producers.

• Varying participation of private capital, national or foreign, in production or trade. Such participation is very much evident in Morocco and Tunisia but not in Algeria and Libya.

• Mechanisms for the control of quality, specifications, and health and plant protection, which are not unified.

• Investment incentives that vary from one country to another and that are based on varying mechanisms such as the exemption of profits from taxation and the subsidization of equipment and production costs.

• Variations in the pricing of nontradable factors of production, which, in turn, creates noticeable distortions in the prices of energy, water, and transport.

This exposition enables us to assess the magnitude of the process to establish the Maghreb economic area. It also shows that decision makers in the Maghreb Union can gain inspiration from the plan adopted by the European Community for the purpose of achieving integration gradually, although their respective environments are totally different. In this context, it should be mentioned that while there is a close resemblance rarely matched elsewhere in the cultural, social, demographic, and religious characteristics of the Maghreb Union countries, the disparities in their economic characteristics cannot be ignored.

The economic indicators of the Union countries are reviewed in the appendix to this paper.

Strategic Options for Achieving Integration of Maghreb Countries

On the basis of the principles set forth in the treaty on the establishment of the Arab Maghreb Union, the salient features of a Maghreb strategy for mutual development were defined with the objective of achieving economic unity and ensuring the free movement of individuals, goods, services, and capital among the Union countries. This strategy has several stages, each of which will require a predetermined time period. It aims to achieve common interests for all parties and to provide the human and material resources necessary to achieve the Union’s objectives, taking into account the level of growth in each member state. The stages for achieving complementarity among the Maghreb Union countries are as follows:

First stage. The realization of a free exchange of products of Maghreb origin by eliminating tariff and nontariff barriers before the end of 1992. This, in turn, requires implementing agreements ratified, completing the necessary procedures for those being studied, and introducing other related agreements.

Second stage. The establishment of a customs union, before the end of 1995, by unifying taxes and customs duties, imposing a unified customs tariff vis-à-vis the rest of the world, and unifying customs rules and regulations.

Third stage. The establishment of a common market among the Union countries before the end of the year 2000. This stage aims to achieve economic integration, establish a single market regime, and introduce unified arrangements within the Maghreb area. It also seeks to establish a single internal market free from customs duties and other barriers and characterized by the free movement of individuals, services, goods, and capital.

Fourth stage. Economic unity is achieved by unifying policies and economic development plans, on the basis of common objectives and with due consideration to reducing income disparities within each country and among them. General and sectoral policies must be formulated to pave the way for integration, particularly in areas of food security, human resources, energy, industry, transport, and communications as well as in the trade, financial, and monetary fields.

In addition to the strategic objectives mentioned above, the integration plan is based on specific priorities, the most important of which are

• The realization of self-sufficiency in food through cooperation in all related areas and elimination of all quantitative barriers to agricultural exchange.

• The accomplishment of a future industrial path that guarantees the achievement of integrated production by coordinating the various sectoral policies and introducing integrated industries.

• The establishment of joint energy projects to promote economic activity in the region, as well as the development of petrochemical industries.

• The implementation of programs that aim at linking the Maghreb countries and at enhancing road, railway, air, and sea transport networks as well as telecommunication networks.

• The coordination of policies relating to taxation, accounting, investment, insurance, reinsurance, and money.

• The coordination of policies in the area of human resource training and development, in line with the Maghreb strategy for mutual development.

In anticipation of realizing these objectives, a provisional trade and customs agreement has been concluded, based on the following principles: exemption from customs duties and taxes of similar effect; elimination of quantitative and administrative restrictions on a specific list of commodities, to be gradually expanded; imposition of a compensatory duty of 17.5 percent on goods benefiting from customs realignment, with the purpose of promoting sound competition among the region’s producers; and establishment of a mechanism to compensate a member country for losses it may incur as a result of customs exemptions.

Impact of Establishing Arab Maghreb Union

In view of the high degree of protection in the Maghreb economies, the establishment of a Maghreb customs union constitutes a large-scale structural adjustment process that is expected to result in a more rational allocation of resources.

It is also expected that the Union will attract investment, both domestic and foreign, taking into consideration the size and quality of the Maghreb market, and it represents a good base for exports to the EC and the rest of the world.

Countries of the Union do not individually constitute an important negotiating power vis-à-vis the EC, as the latter is an instrument for negotiations with groups rather than individual countries.

The ability of the European Community to reduce trade barriers is enhanced by the ability of other groups to do the same. Moreover, through the adoption of a common external trade policy, the Union countries will be in a better negotiating position vis-à-vis the EC and will therefore be able to overcome the influence of former colonial powers.

The geographical distribution of the Union’s trade will develop significantly, as it is expected that the Arab, African, and Iberian peninsular countries will constitute important partners for the Union countries. This also applies to the Asian and North American countries. In contrast, it is expected that France’s share, in relative terms, will decline, as will dependency on the French market.

At the level of multilateral negotiations, Africa, by virtue of the Maghreb Union, will impove its bargaining position in negotiations with the GATT, UNCTAD, and others. In this context, it should be noted that, in general, the permanent secretariats of regional groupings have developed their bargaining positions in multilateral negotiations in a way superior to countries that negotiate singly. With the worldwide return to market mechanisms, the Maghreb Union will constitute an added vehicle for defending the interests of its members vis-à-vis the industrial world.

Finally, in the Arab world, the establishment of the Maghreb Union alongside the Gulf Cooperation Council gives a new impetus to joint Arab economic action and orients it toward more realistic and effective policies.

Abdel Hamid Al-Zigallaie

The paper presents valuable information on the economic indicators of the Arab Maghreb countries, their foreign trade policies, and the stages of their agreement to achieve economic unity, including the establishment of the Arab Maghreb Union. In the closing section of the paper, there is a listing of the positive consequences of establishing economic integration among the Arab Maghreb countries. The most important gains cited are improvement in the allocation of resources, attracting domestic and foreign investment, and increasing trade, particularly with the developing countries.

The paper focused on important areas. I would have liked to see more emphasis and analysis devoted to the last two sections, since they are the purpose and objective of the paper. They relate to the strategic options for achieving integration among the Union countries, and the impact that establishing the Arab Maghreb Union will have on the economic and trade relations of the Union member countries with the rest of the Arab countries and with trading partners in general. While the paper presented the stages of Maghreb complementarity and the priorities of work, there was no analysis or comment. Its discussion of the potential impact of the establishment of the Arab Maghreb Union was also quite brief and general. It was also expected that the last two sections would constitute the bulk of the study, since they examine foreign trade and its role in economic integration among the Arab Maghreb Union countries.

The paper discusses the theoretical principles of economic integration among the Arab Maghreb countries with a view to achieving economic unity, but makes no reference to current experience and provides no assessment of its progress; nor does the paper discuss the institutional aspects of integration, including those institutions responsible for managing trade among the Maghreb countries, overseeing the implementation of agreements, and correcting deviations. In this regard, I would like to stress the importance of studying the various constraints to trade in these countries on intra-Arab trade flows, as well as the negative impact of the flow of foreign commodities along with the domestic commodities among the five Maghreb countries, particularly because of the weak potential for assessing and overseeing implementation of the value-added tax on domestic commodities. The paper fails to demonstrate clearly the impact of the lack of long-term industrial coordination on the volume of trade and on the allocation of investments in new projects. It therefore fails to recognize adequately the most important factor of integration, namely, the coordination of production and development plans, including joint projects. The growth of intra-Arab trade is directly associated with the growth of production, its distribution, and the division of labor within the group. To what extent have development plans and programs in the Arab Maghreb countries been coordinated? There is no evidence of any forthcoming action to establish a support system for payments clearance, not to mention the characteristics of such a system, which is regarded as one of the most significant bases for liberalizing and developing intra-Arab trade.

While the paper contains many constructive ideas, I do not agree with some of them. For example, at the beginning, it is stated that the strategies of the three Arab regional groupings directly conflict with the unity prevalent within the Arab League, particularly the Council of Arab Economic Unity. I believe that these regional groupings represent a method of action and are an addition to joint Arab endeavor. They constitute an alternative for rigidity and isolation and help to extend joint action constructively. The general legal framework of the League of Arab States, as we are aware, was based on historical and national linkages. The founding instruments of these groupings include objectives that go beyond that stage of cooperation toward deeper and more comprehensive stages of integration and union.

The paper divides the Arab Maghreb countries into two distinct classifications: countries that pursue a liberal market economy, and countries that exercise a monopoly over trade. This classification is not accurate and does not take the economic realities of these countries and their economic interdependence into consideration. Nor does it recognize the changes in those countries as a result of implementing, in one way or another, structural adjustment policies.

In each country within this group import and export controls and procedures are in effect, though with relative variations in the degree of freedom or restriction. The extraction of, and trade in, strategic and primary commodities by all countries of this group—including oil and gas in Libya, Algeria, and Tunisia, iron ore in Mauritania, and phosphate in Morocco—are the responsibility of state public enterprises. Quite recently, some Arab Maghreb countries, such as Libya, Algeria, and Tunisia, have tended to give the private sector a greater role in economic activity. The paper states that “the gradual comprehensive or partial elimination of customs duties between partners in a customs area would inevitably have an impact on the distribution of production within the area.” This statement, in my view, relates only to the negative impact of the comprehensive or partial elimination of trade restrictions, rather than considering the positive aspects as well. Moreover, the redistribution of production may lead to an overall improvement in the wealth and resources of the group, even though it might occur at the expense of production shortages in certain areas in a given country. Therefore, it is necessary to coordinate production and divide work among the countries of the group to strike a balance between the optimum exploitation of resources and equity in the distribution of profits and burdens for each party within the group, as one of the most important elements contributing to the success of integration.

The paper states that there is significant participation by the private and external sectors in production and trade in Tunisia and Morocco, but not in Algeria and Libya. In this regard I would like to mention that foreign participation is not necessarily advantageous, and in my view, the best orientation would be to replace foreign capital with Arab capital in the long run. This is related, from another perspective, to joint action to achieve progress in the area of the transfer and acquisition of technology.

The information provided on Arab Maghreb countries in the appendix of the paper is presented in a general descriptive form. It would have been more useful to analyze the data, and explain the impact on trade liberalization and the measures for economic integration among the countries of this group. It is not true that Algeria’s external indebtedness rose from a small amount to $25 billion in one year as a result of the decline in oil export prices in 1986.

On the Arab Maghreb countries’ experience in trade liberalization among themselves within a framework of economic integration, it is customary to eliminate customs barriers in any grouping seeking trade liberalization and the establishment of a unified market. Trade barriers, as a matter of fact, are simple obstacles, which is why priority is always given to their removal, since administrative and quantitative restrictions are considered, to a certain extent, the most burdensome barriers to trade, and unless an agreement is made on a schedule to lift those barriers, the freedom of exchange of trade is at risk. This is clearly demonstrated in the priorities of the plan for integration in the study, which specifies “elimination of quantitative and administrative restrictions on a specific list of commodities, to be gradually expanded.” In this connection, it is clear that restriction is the rule and freedom is the exception, because freedom of exchange is only for the commodities on the list. I believe that in the case of an ambitious project such as that of the Arab Maghreb countries, this list should have been for those commodities that are not freely traded and that fall under continued administrative restrictions for a specific transitional period, after which full liberalization of exchange of commodities is reached among the Arab Maghreb countries.

Another impediment facing intra-Maghreb trade is the presence of certain deficiencies in services, including banking, transportation, shipment, communications, and infrastructure. The cornerstone for building Maghreb economic integration is the achievement of an economic system and of economic policies that are consistent and convergent. The disparities in orientation and socioeconomic application in the five Maghreb countries are evident. The establishment of an integrated Maghreb economy requires that efforts be directed toward the formation of a consistent economic system and policies. To what extent have the five Maghreb countries actually followed the path of coordinating their economic systems and policies?

This discussant believes that the nature of the Arab Maghreb countries, as reflected in their limited scope, high protectionism, traditional relations with foreign markets, and diversity of economic policies, requires concentration on a number of areas, including the convergence of economic systems and the coordination of domestic and external legislation. Without such measures, the steps already implemented would come to a standstill or even collapse. The potential of those countries would remain restricted within the narrow area of similarity and homogeneity of the present economic systems and policies in the five Arab Maghreb countries. Another area is the coordination of production and development plans in the field of industry, with a forward-looking orientation. This is a sound basis for the growth of intra-Arab trade and the achievement of equilibrium in the joint interests of the Arab Maghreb countries. To maximize Arab production, priority should also be given to cooperation in education, scientific research, acquisition of technology, training, and the exchange of technical information.

One of the aspects often disregarded within the Maghreb countries and other cooperative groups is joint work with Arab institutions and companies established with Arab capital to serve the Arab economy. I believe it is vital to cooperate with them and to give them special incentives, and, instead of duplicating the institutional structures, to benefit from the existing ones. I would also like to underline the importance of designing a program to study and correct the negative consequences of eliminating tariff and nontariff restrictions and the impact of Maghreb integration on production, distribution, operation, and the balance of payments.