Region gets together to develop trade ties

The MENA region has made significant gains in developing economic links, notably in investment, infrastructure and media, and the future is promising.

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The countries of the MENA region have been, for the most part, economically isolated for decades. With the exception of Arab labour remittances, which had a precipitous decline in the 1990s, there has been little economic exchange between resource-rich and resource-poor countries.

Over the past decade, however, MENA's economic landscape has been changing, giving rise to increasing hope about the region's economic integration and development. These signs have been manifested in five main factors: investments; people; trade; infrastructure; and communications and media. Arab investors have put more of their money than ever before into their countries. Indeed, Arab foreign direct investment in MENA has grown almost sixfold between 2002 and 2008. This has been a reaction to investment opportunities across the region, aided by a combination of increased demand through rapidly growing populations, unprecedented reforms, a desire to reallocate Arab money closer to home and to hedge against the uncertain environments in Europe and North America.

Despite the shift in immigration trends toward Asian labour, the number of Arab migrant workers is on the rise. The GCC's strong economic growth over the past decade, accompanied by a surge in demand for higher labour skills, has sparked rising numbers of Arab workers, especially at the semi-skilled and professional levels. In Saudi Arabia and the UAE, for example, data suggest that the number of Arab migrant workers - mainly from Egypt but also from Jordan, Syria and Lebanon - has risen by about 40 per cent over the past 10 years. This increase in intra-MENA labour migration has had an important role in distributing oil wealth to the Levant and North Africa.

Over the past several decades different circumstances within MENA created obstacles to trade. The oil-rich countries overlooked the development of trade in non-oil industries, while in other countries the lack of a wide industrial base limited the amount of tradable goods they could produce. As a result, MENA has lagged, averaging 19 per cent regional trade compared with 71 per cent in Europe and 57 per cent in Asia in 2007.

Nevertheless, signs of progress are appearing. The introduction of the GCC customs union agreement in 2003 and the Great Arab Free Trade Area accord in 2005 have helped reduce tariffs and is expected to promote further trade in the coming years. Indeed, the value of intraregional exports (excluding oil) increased by 240 per cent from 2001 to 2007. Furthermore, trade in services such as tourism, telecommunications and health care have been more active in recent years. This has been a direct result not only of structural reforms in the region, but also the strong economic expansion and tremendous liquidity that have financed key projects and infrastructure in these sectors.

Regional projects in producing and sharing electricity, transporting oil and gas as well as developing transportation links all play important roles in economic integration. In the past many such projects were mainly initiated to ensure self-sufficiency. Today, they are initiated to ensure regional efficiency. Cross-border infrastructure grids, such as power grids, gas pipelines, transport links, and telecoms networks have become more common over the past decade. The MENA leaders have found new ways of dealing with higher demand by developing enough energy capacity to facilitate economic and industrial growth and meet the needs of a growing population.

The GCC's new US$1.4 billion (Dh5.14bn) electricity grid, the Interconnection Project, is an excellent example. Similar projects are under way in the Levant countries. Regional projects in infrastructure for the oil and gas sector includes the Mashreq Gas pipeline that will link markets in Egypt, Jordan, Lebanon and Syria as well as the GCC gas pipelines such as the Dolphin Gas Pipeline project. The region's transportation systems are also more integrated now than just five years ago, particularly with respect to air transport, as a result of the steps taken to implement the "open skies" agreement by such countries as Bahrain, Jordan, Lebanon, Morocco, Oman, Qatar and the UAE.

In the less-developed road and rail transportation sector, governments are making efforts to improve and upgrade links between the MENA countries to facilitate trade. The 2001 UN Agreement on International Roads in the Arab Mashreq and the 2005 Agreement on International Railways have been implemented in several countries and promise an integrated regional transportation system. Combined with updated infrastructure for better communication and more standardised procedures, MENA's regional integration, through infrastructure, looks more promising than ever before.

The proliferation of broadcast and broadband services has broken down national barriers and helped people in the region feel part of the larger pan-Arab community. Arabsat, the region's largest satellite services provider, offers the full spectrum of broadcast, telecoms and broadband services to more than 164 million people in 21 countries. The number of pan-Arab and free-to-air GCC TV channels has grown about 45 per cent every year from 2003 to 2006. In broadcasting, the Middle East Broadcasting Corporation (MBC) is a leading international network of Arab origin: another strong indicator of the extent of regional integration on the media front. The number of Arab broadcasters increased more than sixfold between 2002 and 2008. This increase has been accompanied by a rise in related economic activity. We estimate that net advertising revenues at the end of last year reached about $425 million, a 17 per cent increase from 2004. The expansion reflects not only Arab audience's viewership of TV programmes of common interest, but also the rise in economic ties between Arab countries. In particular, companies that in the past pursued only local customers are now actively pursing Arab consumers.

Although there are still several areas - such as removing barriers to the movement of goods and services, improving the business environment, governance and accountability - where the MENA region's governments need to continue reforms to encourage further investments in their economies, there is no doubt that a significant shift has taken place that increases the momentum of change in these economies, especially over the past several years. Provided the reform momentum is sustained, the MENA economies will continue to experience closer economic integration and a better outlook for sustainable growth across the region.

Hatem Samman is director and lead economist of Booz & Company's Ideation Center