Chapter

5 Adjusting to the New Realities

Author(s):
International Monetary Fund
Published Date:
November 1996
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Author(s)
Alonso-Gamo Patricia, Fennell Susan and Sakr Khaled 

The MENA region, with the exception of the GCC countries, remains one of the most protectionist in the world. Furthermore, despite the remarkable growth in international trade over the past few decades, MENA has become even less integrated in the world economy in terms of its trading activities. World trade grew by about 9 percent in 1994 and 1995—more than twice that of world output in those years—and is estimated to grow by some 6 percent annually over the next decade. This, together with the opportunities presented by the recent multilateral trade arrangements—the Uruguay Round and the European Union’s Mediterranean Basin Initiative—have opened up new growth opportunities for countries in the MENA region.

As previous chapters have indicated, a key objective of MENA governments is to achieve higher growth rates so that they can ensure for their citizens adequate per capita income, employment opportunities, and needed social services. Recent studies have shown that greater integration, specifically through trade reform, leads to a higher level of economic growth as a result of improved resource allocation and economic efficiency. Furthermore, by improving the competitiveness of domestic production, trade reform can enhance export prospects, leading to an improvement in the trade balance and the overall balance of payments position. Other spillover effects from trade—higher productivity levels that stem from technology transfers from the industrial countries and the interaction between trade and the stock of foreign research and development capital—are also clear (Box 1).

An important element in the achievement of sustainable growth in the region will be countries’ willingness and ability to put into place appropriate policies that will enable them to take advantage of the welfare-enhancing opportunities presented by the multilateral trade liberalization initiatives. There are three reasons for optimism.

  • Policymakers in the region recognize that action is needed on a broad front—not only to implement measures to open their economies to the world, but also to introduce supporting measures aimed at stabilizing their economies and attracting foreign investment.

  • The opportunities are substantial: export markets are expected to grow rapidly in the wake of liberalization efforts under the Uruguay Round, and MENA’s export and growth opportunities will be enhanced in the context of the European Union’s Mediterranean Initiative.

  • The prospect of greater stability in the region would, if realized, promise rewards through closer intraregional integration, increased inflows of foreign capital, and greater retention of domestic resources for investment.

Box 1Growth, Trade, and MENA’s Challenge

In recent years, endogenous growth literature has focused on a number of factors, beyond the mere accumulation of resources, that can play a decisive role in promoting increases in productivity. In addition to traditional policies to improve human capital or foster technological progress, evidence indicates that government policies promoting macroeconomic stability, price liberalization, and openness lead to better growth. Trade openness, in particular, appears to be an important explanatory variable, and trade liberalization an indispensable component of successful reform, stimulating efficiency by increasing competition. Conversely, trade liberalization must be accompanied by other reforms in order to prove effective, and thus can act as a catalytic force, compelling other reforms.

The key to future growth in MENA thus lies in adopting comprehensive reforms in support of an outward-oriented strategy. A major challenge for the region, however, remains the need to diversify the productive base. More than half of MENA countries derive their GDP from natural resource-based sectors, particularly oil, gas, and mining. Oil exports currently account for two thirds of total MENA exports, and in some MENA countries—Algeria, Egypt, Oman, and the Syrian Arab Republic—the proven oil and gas reserves could be depleted in the next 20 to 40 years.

Are the countries of the MENA region in a position to meet the challenge of increasing economic growth through the diversification of the productive base? Riordan and others (1995) have analyzed how fast non-oil exports would have to grow for MENA countries to achieve a GDP growth rate of about 5 percent a year. For some countries—Jordan, Morocco, and Tunisia—which initiated structural reforms early on, the required growth in exports would be attainable in view of their recent performance. Paradoxically, the lack of oil revenues, which meant that these countries could not delay adjustment, has led to their being in a comparatively better position than countries that enjoyed such revenues and were able to forestall reforms. For a second group of Mashreq and GCC countries, the required export growth rates would be double their historic values, but they also appear attainable provided appropriate structural reforms were adopted. But many oil producing countries would have to increase dramatically the growth rates of their non-oil exports for living standards to be maintained, let alone improved. This would require fundamental changes in economic policy, as well as a search for alternative sources of foreign exchange earnings.

The Pattern of MENA Trade

As stressed in earlier chapters, the countries of the MENA region are highly diverse, in terms of their economic and geographical size, natural resource endowments, and standards of living. These characteristics in turn have an important impact on the region’s pattern of trade, and explain to some extent the variations in the trade policy orientation of different countries in the region.

The composition of MENA trade is highly concentrated. Exports are dominated by mineral fuels, which constitute about two thirds of total exports (Chart 1), and represent more than 70 percent of total exports of the GCC countries. Manufactured goods, particularly textiles and clothing, are also important exports. Imports are dominated by manufactured goods (constituting about two thirds of total imports). The region also relies importantly on food imports, which represent close to 15 percent of total imports. In some MENA countries, food imports represent close to 50 percent of total imports.

Chart 1MENA: Composition of Trade

(In percent; 1990-94 averages)

Source: United Nations, Trade Analysis and Reporting System.

MENA’s terms of trade are volatile. The contrast with other regional groupings is particularly striking (Chart 2). Estimates indicate that over the period 1989-94, MENA’s terms of trade fluctuated 15 times more than in developing countries as a group and 30 times more than in industrial countries (El-Erian, 1996).

Chart 2MENA Region: Terms of Trade

(Annual percent changes)

Source International Monetary Fund, World Economic Outlook.

MENA is relatively dependent on the European Union market. About 30 percent of total MENA exports are directed to the European Union, and 44 percent of total MENA imports are from the European Union. Of concern in this respect, however, is the marked decline in MENA’s share in European Union trade, from 24 percent of total European Union imports in 1980 to just over 8 percent in 1994.

Intraregional trade among MENA countries is limited. Intraregional trade represents only around 8 percent of imports and exports—lower than in most other regional groupings, despite attempts over the years to promote greater integration. The limited nature of intra-MENA trade can be explained in part by the relative similarity of resource endowments among many countries in the region, the greater proximity of the Maghreb countries to Europe than to other MENA countries, continued high levels of protection, and the impact of conflicts in the region, particularly the prolonged Arab-Israeli conflict. Nevertheless, such a situation is disappointing, as most studies conclude that the levels of intraregional trade are well below the potential attainable under a more open and liberal trade strategy.

The region’s openness indicators are deteriorating. MENA’s global integration—with a total trade-to-GDP ratio of some 70 percent—is higher than in most industrial and developing countries, and is surpassed only by Asia. This figure is somewhat deceptive as it reflects in large part the sizable oil exports and basic food imports of the region. Nevertheless, the trend in openness is worrying. At a time when other regions of the world are becoming more integrated, MENA has over the years failed to keep pace with increased globalization: the trade-to-GDP ratio for MENA declined from 84 percent in 1976-80 to 70 percent in 1995. Or, looking at another indicator of openness, per capita exports in MENA have declined by 5 percent between 1990 and 1995, while they grew by 20 percent for the developing countries as a group and by 10 percent for the industrial countries over the same period.

Protection is still widespread. In general, the more open economies are the major oil exporters—the GCC—where average import customs rates are as low as 5 percent (Bahrain and the United Arab Emirates). On the other hand, the trade regimes of the non-GCC MENA countries tend to be much more restrictive—with an average customs tariff as high as 30 percent in Egypt, Jordan, Mauritania, and Tunisia, and with significant quantitative restrictions and bans in certain countries. The broadly restrictive stance of the region reflects in part the legacy of the inward-oriented policies pursued in the 1960s and 1970s, when many MENA countries adopted development strategies aimed at import substitution and self-sufficiency goals that usually involved the imposition of extensive barriers to trade (Sachs, 1996).

Progress Toward Trade Reform

Although the region as a whole is one of the most protectionist in the world, significant differences are apparent among MENA countries with respect to their willingness to adopt more outward-oriented policies over the past decade. At one extreme are those countries that have yet to embrace trade liberalization or are only now recognizing the importance of moving on this front. On the other hand, a number of them—particularly the GCC countries—have been pursuing relatively open trade regimes for a fairly extended period. In general, however, there has been a move among countries in the region toward trade liberalization, including in the framework of IMF-supported adjustment programs.

Trade liberalization has started in many MENA countries

Why Has MENA Progressed Only Slowly Toward Trade Reform?

The main reasons for the MENA region’s disappointing performance on trade reform—and toward greater global and intraregional integration—are summarized below.

  • Large revenues deriving from oil and other natural resources, as well as transfers in the form of aid, allowed many MENA countries to postpone needed reforms, including trade liberalization.

  • A number of restrictive economic factors—excessive government intervention, distorted prices, lack of transparency in the regulatory environment, and nonconvertibility of the local currency—were maintained, discouraging private investment in the tradable sectors and hampering the conduct of trade.

  • Excessive protectionism and distorted incentives were allowed to survive, leading to production structures inconsistent in some cases with the comparative advantages of the individual countries. This resulted in turn in limited complementarity in the production and trade structures among the countries in the region, and hence little intraregional trade.

  • Lack of necessary political will to bear the short-term costs involved in correcting the production structure through the liberalization of trade.

  • Formal agreements aimed at trade liberalization at the regional level have resorted to the inclusion of extensive provisions for exemptions and have lacked a clear time frame for implementation, thus making them virtually ineffectual.

  • The high level of political tension in the region has hampered trade.

Important Successes for Some Trade Reformers

Although trade liberalization has been slow in MENA, evidence suggests that trade reforms implemented by MENA countries as part of an integrated comprehensive policy package, usually in the context of an IMF-supported program and with assistance from the World Bank’s structural adjustment lending, have recorded significant achievements. What do such reform packages offer to reinforce success? Common features of these programs include the following:

  • Trade reforms are generally accompanied by the liberalization of the exchange system and greater exchange rate flexibility.

  • Emphasis is placed on encouraging financial stability, deregulation, domestic price liberalization, and, in general, measures to increase public sector efficiency and promote a favorable climate for private sector investment.

  • Confidence and credibility are enhanced, and as such help catalyze other forms of external financing and encourage private capital inflows, including foreign direct investment.

  • Conditionality, entailing specific and binding commitments to be carried out within a specified time frame, may help to pin down trade liberalization efforts.

  • The accompanying financial support can mitigate the costs of adjustment.

Trade reforms have borne fruit

MENA countries undertaking trade liberalization under IMF-supported programs have made significant progress. Evidence suggests that countries that have implemented strong trade reform packages have tended to perform better. Jordan, Morocco, and Tunisia—the bolder reformers in the region—have enjoyed higher per capita real growth and have performed better in terms of employment creation, lower inflation, and faster poverty alleviation than countries that have reformed more slowly, or are only beginning to implement outward-oriented policies (Table 1). However, in all countries with IMF-supported programs imports as a proportion to GDP have risen—in contrast to nonprogram countries—indicating the impact of both increased available financing and growth-enhancing import liberalization.

Table 1Openness and Growth
CountryImport

Tariff
Weighted

Average
Quantitative

Restrictions
Per Capita

Real GDP

Growth, 1992-95
Higher trade-to-GDP
ratios1
Jordan50–019.85 commodities4.2
Tunisia63–031.78% of domestic

production
2.1
Israel100–07.22.6
Lower trade-to-GDP
ratios
Yemen, Republic of30–513.0yes–0.1
Libya100–0yes–5.2
Iran, Islamic
Republic of225–018.0yes0.1
Sources: IMF staff estimates and Havrylyshyn (forthcoming).

The ratio of trade to GDP is one indicator of the openness of an economy; as a general rule, the higher the ratio the more open the economy.

Fiscal years 1992/93–1995/96.

Sources: IMF staff estimates and Havrylyshyn (forthcoming).

The ratio of trade to GDP is one indicator of the openness of an economy; as a general rule, the higher the ratio the more open the economy.

Fiscal years 1992/93–1995/96.

A number of conclusions can be drawn from the liberalization efforts undertaken by MENA countries under IMF-supported programs:

  • In general, MENA countries were comparatively more closed at the-outset of the reform efforts than reforming countries in other regions and have proceeded with trade liberalization at a relatively more cautious pace than reforming Latin American countries and transition economies in Eastern Europe (Calika and Corsepius, 1994).

  • The pace of trade liberalization in MENA has picked up in recent years for program countries, although performance in individual countries has varied widely.

  • Although the extent and the speed of the trade reforms were tailored to the particular circumstances of each country, measures usually encompassed replacing quantitative restrictions with tariffs to be reduced later in phases, simplifying the tariff structure, and eliminating exemptions.

  • Progress was made in correcting misaligned exchange rates and reducing impediments to exporters, including restrictions on imports needed by exporters. In all these countries the bias against trade, and particularly exportables, declined in part as a result of reduced import protection. Measures to promote non-oil exports were also implemented.

  • Progress in reducing tariffs was slower than in liberalizing quantitative restrictions, largely because most MENA countries continued to rely on international trade taxes as a source of budgetary revenue.

  • Even for trade reformers facing difficult initial macroeconomic conditions, evidence indicates that more rapid trade reform permits faster progress in macroeconomic stabilization, particularly in the fiscal area.

  • Weak macroeconomic performance and conflicts between policy reform and stabilization goals have tended to slow down trade liberalization, in part because of the erosion of public support.

  • Reversals in trade reforms, while limited, have generally reflected competitive pressures owing to appreciating real exchange rates, lagging domestic tax reforms, or political difficulties in resisting domestic pressures for protection.

Recent Multilateral Trade Initiatives

The MENA countries are at a crucial juncture in terms of their options for addressing the obstacles to trade liberalization and adjustment more generally. The impetus to global trade, and therefore to economic growth, presented by the conclusion of the Uruguay Round and the establishment of the World Trade Organization (WTO), as well as the launching of the Mediterranean Initiative by the European Union to support policy reform in many of the MENA countries, offers significant opportunities for the region. Countries in MENA must either embrace the measures necessary to overcome the past protectionist tendencies or risk being marginalized further in the world economy.

The WTO and the Uruguay Round

Uruguay Round generated significant benefits

The most recent round of trade negotiations within the framework of the General Agreement on Tariffs and Trade (GATT)—the Uruguay Round—was considerably more successful than earlier rounds in broadening the scope of trade liberalization: it extended the disciplines to agriculture and services, and covered new aspects of trade—such as trade-related property rights (TRIPs) and trade-related investment measures (TRIMs). In addition, the General Agreement on Trade in Services (GATS) represented a key step in expanding the coverage of trade liberalization to an area not covered before. Furthermore, the Round clarified and strengthened the rules with respect to a number of trade policy instruments, notably safeguards, antidumping, and subsidies and countervailing measures.

Estimates of the worldwide income-generating effects of the commitments to tariff reduction and other liberalization measures under the Round vary, with more recent studies projecting these benefits to total around US$170—190 billion a year, of which up to one half could accrue to the developing world (Martin and Winters, 1995).

More generally, the Uruguay Round is expected to bring a number of advantages to developing countries:

  • It will increase transparency and reinforce credibility in the world trading system, thus facilitating greater stability in the world economy, which in turn should promote trade and enhance growth prospects.

  • By reducing tariff and nontariff measures, greater market access for agricultural and industrial goods by developing countries will be ensured. However, the positive impact of trade liberalization will be offset to some extent by the loss of preferential access to selected markets that some countries have enjoyed.

  • Individual country commitments to liberalize trade, made in an international forum, could help to anchor policy reform, thereby enabling the authorities to resist pressures from domestic interest groups and limiting the chance of backsliding. This will also increase the likelihood that liberalization measures (as well as supporting reforms in other areas) are taken at a more accelerated pace than otherwise.

Economic Implications for MENA

The Uruguay Round incorporates progress in removing nontariff measures facing MENA exporters, especially in agriculture and textiles and clothing. However, elements of the Round could have adverse consequences for MENA, particularly in the short term. For example, the most-favored-nation (MFN) tariff cuts incorporated in the Round will reduce preference margins that some MENA countries have enjoyed with the European Union, under the Mediterranean Agreements, as well as under other preferential trade agreements (Chabrier and others, 1996).

Higher growth compensates for initial losses

A number of studies have been carried out on the impact of the Round on MENA countries (Box 2). In general, these studies conclude that there will be some important initial losses for MENA. However, these losses can be mitigated to the extent that MENA countries themselves undertake important domestic policy reforms, leading eventually to the development of more efficient productive capacity as well as a more diversified economic and trade structure (El-Naggar, 1996).

Box 2Uruguay Round: Studies of Potential Costs and Benefits for MENA

  • Harrison, Rutherford, and Tarr (1995), using a multiregional trade model, find that the impact of the Uruguay Round measures on MENA could be negative, reflecting the expected rise in food prices and the “erosion of rents” created by the Multifiber Arrangement (MFA). Over time, however, the region is expected to benefit from trade liberalization, increasing aggregate welfare by up to US$1.3 billion a year (without factoring in adjustment costs). The extent of the potential benefits will depend on the policy response of individual countries in the region, particularly their effort to open their own markets.

  • Diwan, Yang, and Wang (1995) use a computable general equilibrium model to conclude that the MENA region will experience a social welfare loss of some US$2.6 billion a year (or 0.45 percent of its 1992 GDP)—much larger in relative terms than other regions they examine. They attribute this outcome to higher food prices, greater competition in the textile and clothing sector stemming from the dismantling of the MFA, and higher prices for capital and skill-intensive manufactured goods—an important group of imports for the region. Prices for the main export of the region—energy and minerals—are expected to remain constant. The losses would be even higher if the MENA countries do not participate in European Union’s efforts to establish a trading bloc incorporating Eastern Europe, Russia, the Baltic countries, and other countries of the former Soviet Union, and Turkey. They note that the best way for MENA countries to minimize these losses is to commit to trade liberalization and much needed domestic policy reforms.

  • Yeats (1996) estimates that the Middle East could experience a net increase in exports of approximately US$800-900 million a year as a result of Uruguay Round tariff cuts—especially in agriculture and textiles and clothing. He notes that the projected overall gains are small, because of the erosion of tariff preferences Middle East countries enjoy in member countries of the Organization for Economic Cooperation and Development. He also points out that petroleum exports—the major export of the region—generally face zero or very low tariffs, and will therefore not be affected by the Round.

Ten of the 23 MENA countries have become members of the WTO and 4 countries are in the process of accession. As for the GATS, Algeria, Bahrain, Egypt, Israel, Kuwait, Morocco, and Tunisia are participants, and a number of other MENA countries are in the process of submitting commitments. Of those that have made commitments under the Uruguay Round, many MENA countries have bound tariffs at a higher rate than the level applied prior to the Round—a somewhat disappointing development (although one that is characteristic of countries in other regions). Furthermore, MENA countries have not made particularly noteworthy commitments under the GATS: the most substantial commitments were made in the tourism sector, but even these were subject to an array of qualifications and exemptions. This, despite the fact that the MENA countries stand to reap significant benefits from more open trade in services, not only in terms of greater international market access for domestic service suppliers, but—perhaps more important—through greater access by the domestic economy to efficient services, such as financial services, communication, transportation, and insurance. Such access would enhance competitiveness and productivity in other sectors of the economy and would facilitate the development of the private sector—an objective of virtually all MENA countries.

Missed opportunities for reform

In sum, the commitments made by MENA countries under the Uruguay Round are not particularly ambitious. On average, the level and degree of liberalization encompassed within their commitments are less than those of the developing countries as a group, and high average rates of protection could remain after the Round is fully implemented. In addition, some 40 percent of the countries in the region have yet to demonstrate their resolution to pursue market-opening measures by joining the WTO. The Uruguay Round has potentially large income-enhancing effects for the world, and represents an important stimulus to multilateral trade liberalization. However, if the MENA region is to reap even a proportion of those effects, it will need to use the multilateral framework to “lock in” trade liberalization in all sectors and pursue supportive structural and macroeconomic reforms.

The European Union’s Mediterranean Initiative

The economic and trade relations between the MENA countries and the European Union, their major trading partner, are being redefined in response to a number of new developments. First, the European Union itself and its role are changing, with an expansion of its membership, the signing of association agreements with Central and Eastern European countries; and a customs union with Turkey. Second, the ongoing multilateral liberalization in trade and services in the framework of the WTO and the GATS will lead to a marked erosion of the preferences that MENA countries presently enjoy in the European Union market. To compete under these new circumstances, MENA countries will not only have to rethink their trade strategy, but to pursue more far-reaching liberalization, privatization, and deregulation efforts.

The European Union has launched a new Mediterranean strategy (replacing the previous generation of agreements dating from the 1970s) that seeks to strengthen political ties and create a free-trade Euro-Mediterranean area with southern Mediterranean rim countries over 12 years.1 Agreements have recently been concluded with Israel, Morocco, and Tunisia and are currently being negotiated with Algeria, Egypt, Jordan, and Lebanon.2

A Euro-Mediterranean free trade zone

To support the needed structural reforms in the southern Mediterranean rim countries, the European Union has increased aid and technical assistance: ECU 4.7 billion in grants over 1996—99 and an equivalent amount in loans has been allocated to the MENA region for this purpose. About half of the funds are earmarked to prepare for free trade (private sector development, trading, infrastructure), with the remainder devoted to poverty alleviation, rural development, and the environment. This kind of financial assistance would help alleviate shortterm costs of implementing the agreements. Moreover, as an additional incentive to reform, individual country allocations will not be predetermined as in the past, but will be partly determined on the basis of the pace of reform, with the likelihood that larger shares will go to the fastest reformers.

The Euro-Mediterranean agreements seek to attain a number of objectives:

  • Increase and enhance the political dialogue between the partners.

  • Achieve reciprocal free trade between the MENA countries involved and the European Union in most manufactured goods.

  • Grant preferential and reciprocal access for some agricultural products at a later stage.

  • Establish conditions for the liberalization of the right of establishment and the supply of services.

  • Facilitate free capital flows.

  • Encourage southern Mediterranean rim countries to take on board a wide range of trade-related European Union regulations (customs, standards, competition, protection of intellectual property rights, and so on).

  • Increase economic, social, and cultural cooperation.

Economic Implications for Southern Mediterranean Rim Countries: Costs and Benefits

Short-term costs include substantial trade tax losses

Studies indicate that overall, the new agreements are likely to be beneficial in the long run for the MENA countries involved, although there will be costs in the short to medium term.

First, there will be substantial fiscal revenue losses, owing to the importance of trade taxes in total fiscal revenue (ranging from 2.8 percent of GDP and 13 percent of revenue to 9.5 percent of GDP and 35 percent of fiscal revenue in non-oil MENA countries except Israel) and the dominant position of the European Union in their trade.

Second, costs arising from the loss of preferential trade arrangements would be comparatively high given the share of the European Union in the trade of the southern Mediterranean rim. Losses associated with trade diversion would be minimized by liberalizing simultaneously vis-à-vis the rest of the world in the equally credible and more efficient framework of the WTO.

Finally, there will be short-term adjustment costs both for labor and capital as competition would increase in some industries and factors of production would have to be reallocated. Given the generally high unemployment rates and extensive overmanning in state-owned enterprises in southern Mediterranean rim countries, the loss of employment could create social pressures unless measures are taken to put in place an effective safety net and to finance restructuring and retraining.

However, an agreement with the European Union could entail sufficient benefits to offset the short-run costs (Hoekman and Djankov, 1995).

First, there would be opportunities for deep integration, as the European Union’s association agreements cover a range of issues going well beyond trade. Benefits would not only arise from reducing tariffs and nontariff barriers; there are additional dimensions: liberalization could extend to services; technological transfers would improve product quality; the harmonization of product quality standards would render products more marketable in the European Union; there would be increased efficiency in trading, owing to improvements in telecommunications and transport; and the harmonization of regulatory regimes and administrative requirements with the European Union would facilitate trade, promote investment, and enhance competition in domestic markets. Moreover, increased financial, technological, and technical assistance would be forthcoming, facilitating a modernization of the southern Mediterranean rim countries’ productive base.

Second, the association agreements would contribute to “lock in” reforms, anchor expectations, and enhance credibility, thus attracting more foreign direct investment. The credibility derives from the formal nature of the treaties and the availability of financial and technical assistance from the European Union to help implement the needed structural reforms. Credibility would also be enhanced by undertaking commitments going beyond minimum WTO requirements in the areas of investment, services, or increasing market access.

Structural reforms beyond trade liberalization increase benefits

Third, the agreements would require a rethinking of numerous aspects of the policy framework, since companion reforms to trade liberalization are indispensable if the liberalization is to succeed. The experience of other countries shows that those that pursue reforms more aggressively reap greater benefits.3 Reforms must be broad based and keep pace with those in other countries, otherwise it may be possible to lose not only in relative but in absolute terms. An important factor constraining policy reform in a number of MENA countries has been the absence of political support for opening up the economy and the perception that rapid liberalization might bring about political unrest, thus leading to a preference for gradual reform. But in the present global environment, reform efforts must be accelerated. Closer relations with the European Union may help overcome some of the political constraints, while providing financial assistance that would help to face the short-term adjustment costs of liberalization.

Fourth, the agreements could be a first step toward greater unilateral trade liberalization (Havrylyshyn, forthcoming). As discussed above, the welfare gains for southern Mediterranean rim countries of free trade with the European Union are substantial, but gains would be considerably larger if the liberalization were conducted with the rest of the world. To the extent that the European Union agreements form part of a strategy to liberalize trade more generally, possible welfare losses would be reduced. There are other reasons to open up more generally. Since intra-MENA trade is limited, the set of Euro-Mediterranean agreements could give rise to a “hub-and-spoke” pattern of trade—where there is an incentive for firms to set up in the European Union to profit from the free market access to all other partners, while deterring European Union firms from investing in southern Mediterranean rim countries. Only liberalization within the southern Mediterranean rim countries or liberalization on a multilateral basis could counter that risk effectively.

In sum, despite the potential benefits ensuing from the Euro-Mediterranean Initiative, important challenges have to be overcome for it to result in higher rates of growth of per capita income and exports. By itself the initiative will not solve the region’s problems—it will only offer opportunities. Most important, southern Mediterranean rim countries themselves have to take measures to minimize the transition costs. First, supportive structural reforms are essential. Second, liberalization with the rest of the world would contribute to reduce possible welfare losses. Third, the countries involved should try to enter into free trade agreements among themselves in order to avoid the hub-and-spoke structure of trade. On the other hand, it is important that sufficient external financial assistance be forthcoming, as this would enhance the political feasibility of trade liberalization and other reforms, by offsetting some of the fiscal losses and facilitating the necessary restructuring.

Policy Implications and Conclusions

Over the past decade, MENA’s growth in trade has lagged behind that of virtually all other regions of the world, the region has become less integrated into the world economy, and real per capita incomes have declined. The pursuit of inward-oriented policies, together with the decline in oil prices, accounts for this disappointing performance. The non-oil MENA economies remain among the most protected in the world—a policy stance that has led to a deterioration in productivity and has adversely affected the welfare of their populations. While the major oil economies of MENA have pursued relatively open trade policies, they remain highly dependent on the international oil market notwithstanding some diversification.

The impetus for MENA to act rapidly is in place—in the form of the multilateral and regional trade liberalization initiatives currently under way. Policymakers in the region have generally recognized the opportunities presented by the Uruguay Round and the European Union’s Mediterranean Initiative and have begun to take the steps necessary to reap the benefits.

There will, however, be costs to trade liberalization for many countries—both from the loss of preferential access to certain markets, increased exposure to international competition from other producers, and the higher prices for food imports. In addition, there are likely to be social and economic costs arising from the displacement of workers as previously protected sectors are opened to competition, and before other sectors expand to create additional employment opportunities.

Measures to reduce short-term costs of trade liberalization

The transitional costs can be minimized if complementary macroeconomic and regulatory reforms are undertaken and appropriate outward-oriented policies pursued. The conclusion of bilateral arrangements with the European Union would also help to broaden the opportunities for trade, by securing market access, anchoring reform and regulatory changes, enhancing credibility in countries’ commitment to trade liberalization, and encouraging investment. The financial assistance available from the European Union and other sources will also be important in alleviating transitional costs and in easing the resistance of domestic interest groups.

Box 3Establishing an Enabling Environment for Trade Reform

In addition to minimizing the costs, MENA countries should aim to maximize the benefits of the multilateral trade liberalization initiatives. The region’s prospects for global integration would be enhanced by a combination of outward-oriented trade strategies and measures to improve the responsiveness of their economies to new opportunities through a variety of actions:

  • Participate fully in multilateral initiatives, including by making substantive commitments to implement trade liberalization. This would lock in reform and enhance credibility of MENA’s commitment to reform, as well as increase transparency of the domestic economic and regulatory environment.

  • Pursue appropriate macroeconomic policies that foster sustainable, noninflationary growth, to ensure that the region will attract investment for the development of a more diversified productive structure and maintain the competitiveness of its successful export sectors.

  • Eliminate regulations and restrictions that inhibit the efficient allocation of resources among sectors and adopt other supportive structural reforms to increase the efficiency of the productive sectors.

  • Achieve a stable security situation within the region, which, together with the above reforms, will help to attract foreign investment and encourage the retention of domestic capital within the region.

  • Attain greater intraregional integration, by promoting free trade agreements among MENA countries, developing an investment code that conforms to international standards, and pursuing policy harmonization. Not only would such measures help to avoid the adverse impact of the hub-and-spoke structure of trade that could develop under the European Union’s Mediterranean Initiative, it would also boost merchandise trade, enhance service flows, and encourage intraregional investments.

The MENA countries have much to gain from the multilateral trade liberalization initiatives. However, to reap the benefits of such liberalization, and to avoid being marginalized, the region will need to act rapidly to adopt more outward-oriented policies and increase the flexibility of their economies through the introduction of a broad range of supportive measures (Box 3). Through these channels, MENA countries will be able to improve resource allocation, attract investment, and achieve higher productivity levels and accelerated economic growth. Success on these fronts will help governments to achieve their objectives of reducing unemployment, increasing job opportunities for new entrants to the labor market, and improving the living standards of their populations.

Rapid, broad-based policy reforms are key

Related Reading

    AxtHeinz-Jurgen“Liberalization and Cohesion: Southern Europe’s Development and Prospects Within the European Community,”International Journal of Political EconomyVol.22 (Spring1992) pp. 2340.

    CalikaNur andUweCorsepius“Trade Reforms in Fund-Supported Programs,” in International Trade Policies: The Uruguay Round and BeyondVol. IIWorld Economic and Financial Surveys (Washington: International Monetary Fund1994).

    ChabrierPaulMohamedA. El-Erian andRakiaMoalla-Fetini“Implications of the Uruguay Round for the Arab Countries: A General Analysis,”in The Uruguay Round and the Arab Countriesed. bySaidEl-Naggar (Washington: International Monetary Fund1996).

    DiwanI.C.Yang andZ.Wang“The Arab Economy, the Uruguay Round Predicament and the European Union Wild-Card” (unpublished; Washington: World Bank1995).

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The European Union’s Mediterranean strategy includes Algeria, Cyprus, Egypt, Israel, Lebanon, Malta, Morocco, the Syrian Arab Republic, Turkey, and the former Yugoslavia. This chapter considers only those countries that are part of MENA.

The European Commission and the GCC are considering a free trade area, but this appears to be conditional upon the GCC achieving a customs union.

For instance, Portugal benefited more than Greece from its integration in the European Union in terms of growth and employment, mainly because it liberalized more labor market regulations, had a freer foreign investment regime, and privatized on a much larger scale (Axt, 1992).

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