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Reform in Arab region key to attracting investment

The Arab region needs to implement urgent reforms in economics and finance which would make it more attractive to local and foreign investors. Arab countries, including Lebanon, need to increase trade capacity currently driven by the generally low productivity of the business sector and its weak competitiveness. In addition to the relative lack of trade openness, there are serious institutional impediments to economic growth.

International statistics show that nations which are more open to trade tend to be richer than nations that are less open to trade. If we rank countries by their degree of openness, the lowest quintile or the least open has an average GDP per capita of $1883. The next quintiles have consecutively an average GDP per capita of $4630, $5422, $8137, and $23938.

The Arab interregional trade in goods remains the weakest in the world or about 7.3 percent of total regional international trade (compared to 40.5 percent in North America, 15.6% in Latin America, 67.7 percent in Western Europe, 24.5 percent in Eastern Europe, the Baltics and the CIS states, 10.2 percent in Africa, and 49.9 percent in Asia). Arab countries trade very little among themselves and consequently prefer to buy or sell overseas. Trade efficiency in the region remains critically weak for many reasons, including the lack of progress in banking and insurance reforms. Additional investments in transportation and telecommunications are needed to bring the region up to international standards. Arab countries need to make all information available to investors and should start to reform public administration, especially customs. The region needs to increase the transparency of its rules and regulations so they become better understood by local and foreign investors.

All Arab countries need to liberalize their economic and financial sectors. Developing countries, including the Arab states, have higher tariffs and greater tariff escalation than developed countries and initiate more anti-dumping actions than do developed countries. Developments show that liberalization in the West would benefit the Arab region less than internal liberalization. Protectionist policies adopted in the developed world make its proclamation in favor of free trade hypocritical. The developed world needs to cooperate in lifting its protectionist policies especially in agriculture to help the WTO conclude successfully the Doha round.

Unless economic and political conditions become conducive to investment, domestic capital will continue to flow overseas and foreign capital will continue to avoid the Arab region. The brain drain will also continue from the Arab states to the West for investment and work. In order to benefit from improved market access in the developed world, governments in the Arab region should:

1. Enhance the stability and integrity of the legal systems. Without a functioning court system, investors cannot be sure that their contracts will be properly enforced.

2. Improve governance, fight inefficient bureaucracies and corruption. Arab governments are generally unaccountable to the people over whom they rule. Instead they serve sometimes the objectives of the political elite. The constitutional structures, legal system and civil society are not strong enough to require the transparency of the budgetary process. These facts lead to corruption and to embezzlement of funds by government officials. Lebanon is a strong case in this regard.

3. Deregulate to allow the private sector to grow. Facts and developments in Jordan and Egypt show that improvement in the regulatory environment can result in dramatically increasing the amount of private sector investment.

4. Invest further in infrastructure, including roads, railways, ports and airports to decrease transportation costs and encourage economic activity.

5. Implement agreements leading to deeper regional integration. Many regional trade initiatives remain little more than ambitious commitments. Arab governments should cooperate to enhance common benefits and fight common threats and dangers.

6. Abolish nontariff barriers. The region suffers from very high customs delays and deep administrative inefficiencies. Are we finally ready to face these challenges?

Beirut,02 28 2006
Louis G. Hobeika
The Daily Star
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