Integrating the Arab World for Sustainable Growth
At a time of severe economic challenges and deep political uncertainty, revitalizing the Arab world’s integration agenda might seem like a pipe dream. But, as other regions have shown, it is achievable, and if Arab countries want to address the challenges they face in an efficient and sustainable way, there is no alternative.
AMMAN – The Arab world has a massive natural-resource endowment and a total GDP of nearly $2.5 trillion. The region is highly diverse in its wealth distribution and levels of economic development, with pockets of exceptional prosperity existing alongside some of the world’s poorest places. The key to closing the gap – and boosting sustainable economic growth – is integration.
Efforts to achieve economic integration in the Arab world began more than 70 years ago, with the establishment of the Arab League. Formed by seven countries in 1945, the group now has 22 members (though Syria was suspended in 2011 in light of the political developments in the country.) In 1974, the Arab Investment & Export Credit Guarantee Corporation was established to promote inward foreign direct investment by providing risk insurance to Arab and non-Arab investors and lenders, and to Arab exporters.
Arab integration reached another milestone in 1998, when the Trade Facilitation and Development Agreement entered into force. In 2005, that deal was upgraded to the Greater Arab Free Trade Agreement (GAFTA), which eliminated customs duties among its 17 member countries.
Other agreements followed, including one governing investment of Arab capital in the Arab states, which was concluded in 1980 and amended in 2013, and another liberalizing trade in services in 2017. At the sub-regional level, the six-member Gulf Cooperation Council succeeded in building a fully operational customs union, with plans for a common market, monetary union, and a single currency.
Throughout this period, institutional integration facilitated coordination in a range of areas, including monetary, industrial and agricultural policies, as well as information and communications technology, and civil aviation. But, while such efforts – and GAFTA, in particular – have succeeded in boosting intra-regional trade, the free-trade area has not yet reached its full potential, and the ultimate goal of building an Arab common market and customs union remains far from realized. In fact, the region remains among the world’s least integrated.
According to the Arab Monetary Fund’s Joint Arab Economic Report 2018, intra-regional exports constituted only 11% of the Arab countries’ total exports in 2017 – a lower share than in the European Union and among the NAFTA, ASEAN, and Mercosur countries. This reflects trade costs, non-tariff barriers, weak industrial linkages, and similarities in Arab countries’ economic structure and output.
Subscribe today and get unlimited access to OnPoint, the Big Picture, the PS archive of more than 14,000 commentaries, and our annual magazine, for less than $2 a week.
But far from hastening progress on integration, many Arab governments are preoccupied with mounting domestic challenges, including decreased economic activity, widespread joblessness, and persistent poverty. Youth unemployment averages 26% in the Arab countries – the highest of any world region.
Some countries are also facing political instability, and the consequences are spilling across their borders. Jordan, for example, is under enormous economic and financial strain, owing to a massive influx of Syrian refugees, and has received insufficient financial help from the international community.
Deeper integration among Arab countries would go a long way toward enabling them to address these challenges. For example, increased flows of trade and capital would boost economic growth and job creation. To that end, Arab countries need to continue working to foster cross-border production networks, harmonize standards, strengthen digital technology infrastructure, and improve the business environment.
At the same time, Arab countries must address the mismatch between school curricula and the qualifications businesses are seeking. Though these countries have made significant progress in raising attainment levels in recent decades, graduates often lack the knowledge and skills that the labor market demands. Educational reforms are essential to achieving faster growth today and maintaining it in the future.
Finally, Arab countries need to increase investment in modern, energy-efficient transport and logistics infrastructure. Beyond ensuring environmental sustainability, this would lower trade costs, promote tourism, and facilitate business mobility, all while helping to break countries’ dependence on traditional energy sources. That is why it is imperative to build a regional electricity market, while supporting the development of a renewable-energy sector.
In the midst of the region’s prevailing challenges, revitalizing the Arab world’s economic integration agenda might seem like a pipe dream. But, as other regions have shown, it is achievable.