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Regional Trade Agreements : The road not traveled in MENA

Regional trade agreements (RTAs) have been popular in the Middle East and North Africa (MENA) region for decades. Many agreements have been signed by individual MENA countries in the last fifty years or so, including agreements with the European Union, with the United States and with subsets of the Arab countries in the region.

Indeed, a recently published report by the World Bank, "Global Economic Prospects, 2005: Trade, Regionalism and Development," shows that a typical MENA country is involved in five RTAs on average.

In recent years, two types of RTAs have become prominent in the region: a series of bilateral Association Agreements between individual MENA countries and the European Union that formalize and extend earlier preferential trade arrangements, and a Pan-Arab Free Trade Agreement (PAFTA) that includes virtually all the Arab countries of the region.

How important are RTAs for MENA? To answer this question it is necessary to look at how trade patterns have evolved in the region under a variety of RTAs to date. Four pieces of evidence are especially relevant.

First, trade among Arab countries has fluctuated at a low level for the last 20 years or so. Intra-regional trade has averaged around seven percent of total trade since 1985, rarely breaking out of a narrow band of 1 percent on either side of this average. Second, since 1985, trade between several MENA countries and the EU, typically the most prominent trading partner of these countries, has grown slowly in overall terms, though faster for manufactured goods. Third, this performance pales in comparison to that of such countries as Hungary, the Czech Republic and Poland, whose combined share of the European market (for all types of goods) jumped from 1.4 percent in 1993 to 3.1 percent in 2001 during the period in which they were preparing for accession to the EU. Fourth, economic growth in the MENA countries has been lackluster throughout the 1990s, growing at only 1.2 percent per capita per annum between 1990 and 2000.

The above evidence supports three observations. First, it matters who is included in the RTA. South-South RTAs are often among smallish economies with similar production structures and resource bases. They tend not to have a significant impact on trade and growth of the signatories. This has been the case with intra-regional agreements in the past and is likely to affect the prospects of PAFTA as well.

Note that such RTAs do not include Iran, Israel or Turkey, the three biggest economies in the immediate neighborhood. On the other hand, North-South RTAs carry the potential for more substantial impact on the economies of the smaller partner countries.

Second, it matters what is included in the RTAs. The RTAs of the MENA region, whether intra-regional or with the EU, have typically excluded trade in agriculture and services. These restrictions have constrained the overall economic impact of the agreements. One sees impact only in the area of manufactured goods and not across a broader range of economic activities.

For example, while Tunisia's share of the European market for imports of manufactured goods rose steadily from 0.15 percent to 0.25 percent between 1985 and 2002, its share of the market for agricultural goods fluctuated between 0.10 and 0.20 percent without any discernible trend. Morocco has had a similar experience.

Third, the larger objectives and processes surrounding RTAs can be of tremendous importance to the outcomes. The Accession Agreements between the EU and selected Central and Eastern European countries were broader and deeper than the Association Agreements (and earlier preferential trade arrangements) with MENA countries.

They were broader in that they encompassed free trade in manufactured goods, agriculture, services, capital and labor while the Association Agreements have so far covered only trade in manufactured goods. They were deeper in the sense that they included as preconditions for accession substantial changes in law, policy and institutional design in such areas as competition, privatization, company law, and intellectual property rights, while the Association Agreements included no firm understandings in these areas and certainly no mechanisms for implementation.

In other words, the Accession Agreements sought to create a uniform legal and policy framework among the signatories while the Association Agreements had no such common objective. It is not surprising, therefore, that the latter have not had as broad or deep an impact on MENA partner countries.

This last point deserves more elaboration. The main reason why RTAs in the MENA region have not had a substantial impact so far is because they have not been used as instruments for domestic policy reform. MENA signatories have approached these agreements from a narrow perspective, as a means to expand trade rather than as a means of economic transformation. It is the latter approach, however, that generates truly significant changes in trade patterns and volumes and, through these, ultimately, in economic fortunes.

MENA countries as a group have been slow to engage in structural reforms in such important areas as telecommunications, transport, power supply, and financial sector development. From the point of view of increasing growth and trade, therefore, the task for prospective RTAs involving the MENA region is to be more ambitious in scope and create a strong link with domestic policy reform, much as was done for Central and Eastern Europe in the context of the EU accession process. This is what must lie, for example, at the core of the proposed new European Neighborhood Policy that seeks to build on the existing Association Agreements.

Mustapha Nabli is chief economist for MENA at the World Bank in Washington D.C. He wrote this commentary for The Daily Star

Beirut,11 29 2004
Mustapha Nably
The Daily Star
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