Regional Integration through Trade in Services

Figure 7.3. Export Outlook

the lack of properly established institutions in this regard is apparent.

The fact is that most MENA countries are labor-exporters, nonetheless labor demand from the Gulf Cooperation Council (GCC) in particular from Saudi Arabia is so high that has made the region a net importer of labor vis-à-vis the rest of the world, and this is while the region has high unemployment rates.

Two main reasons can explain such apparent paradox; first, in spite of significant bilateral flows between some countries of the region, labor markets are not integrated enough at the regional level. Second, labor importing countries of the region including the GCC tend to import mainly lower-skilled workers from Asia among which a majority are not considered skilled workers.⁵⁸¹

A general outlook of the region confirms that there are some impediments to the services trade. These include labor restrictions, overregulation, and overvaluation of exchange rate. By an econometric analysis, Diop and De Melo show that an overvalued exchange rate in the region causes to depress services sector production, especially within the resource-rich countries. Yet demand for services is very

581 Rouis, Mustapha and Tabor, Steven R. “Regional Economic Integration in the Middle East and North Africa:

Beyond Trade Reform.” The World Bank, Washington DC, 2013, p. 27.

high in the region (owing to oil wealth and Engel’s Law⁵⁸²). But a great part of this demand for services are satisfied by imports in the MENA region while domestic production of tradable services has been lowered as the result of overvalued real exchange rates as well as Dutch disease effects. Consequently, contrary to global trends; this would lower the share of services in GDP as well as the income in MENA’s resource-rich countries. According to Diop and De Melo’s econometric analysis, rents associated with natural resource abundance can partially explain the negative correlation that exists between services production and that of the per-capita income.

According to De Melo and Ugarte, with an exception of Iran and the Republic of Yemen, the real exchange rates of resource-rich countries in MENA have been mostly overvalued between 1980 and 2010 which lead to an underdeveloped manufacturing sector in this region (via Dutch disease phenomenon). In other words, when revenues are increased due to the oil exports the country’s currency will become stronger in comparison with that of other nations, thus making the country’s other exports more expensive for other countries to buy, and this makes the manufacturing sector less competitive. In such circumstances, the competitive services production will be reduced (via the Dutch disease Effects).⁵⁸³ Secondly, overregulation stifles investment and trade in services. Overall it is observed that regulatory barriers to market entry, business conduct and licensing are highly significant in MENA compared to other regions. In view of the diverse extent of General Agreement on Trade in Services (GATS);

liberalization commitments among the region’s World Trade Organization (WTO) members, the fact suggests that countries have taken different approaches to the process of international services liberalization. And further to the above facts, in case of MENA we see in particular a more restriction when it comes to financial services compared with other regions.

Thirdly, there are also restrictions on the movement of labor in the MENA region, which can be the result of labor market law in MENA. According to such laws, there is not a clear distinction between temporary and permanent labor mobility. Such restrictions include the burdensome and costliness of the procedures related to obtaining work permits and the limitations on the length of stay, also quantitative limits and sectoral bans on such work permits, workers’ educational status, job nationalization, restrictions on foreign investment, as well as restrictions on the mobility of family members.⁵⁸⁴ Because of these restrictions, most of the bilateral, regional and international agreements have aimed at liberalizing trade in

582 Engel’s Law stipulates that “as income rises, the proportion of income spent on food falls, even if actual expenditures on food rise.”

583 Rouis and Tabor (The World Bank, 2013), p. 29 and p. 37.

584 Ibid, p. 33.

goods and commodities and not at liberalization of services in general.

However, it is worth mentioning that bilateral agreements have been acting as the main instrument to foster trade in services among neighboring countries. For example, Lebanon has initiated several such bilateral agreements, including one with Iraq with the aim to further cooperation. Accordingly, Article 3 of this agreement enjoins that the parties ought to exchange expertise, trainers as well as specialists.

Lebanon and Kuwait have reached a similar agreement according to which the two parties agree to facilitate the procedure of granting entry visas to businessmen in both countries (Article 6). Likewise, there has been agreement between Lebanon and Syria for the promotion of labor mobility between the two countries. These agreements mainly encompass the exchange of expertise while facilitating visa procedures; however, they do not seem to have direct provisions dealing with the temporary movement of workers.

Another successful example of bilateral agreement in the region would be the one singed between Egypt and Jordan, by which labor migration is to be facilitated between the two countries. Accordingly the Egyptian workers would be treated the same as Jordanian workers when it comes to the labor law, insurance, or social benefits.

Key macroeconomic as well as microeconomic reforms are needed to reveal the kind of potential that the services sectors can have in the MENA region. On the macro level, overvaluation of real exchange rates ought to be avoided particularly in resource-rich countries in which rents gained from natural resources can impede the development of the services sector. Throughout the region encompassing all the countries macroeconomic reforms should take place with the aim of removing barriers to entry and business conduct while enhancing domestic and international competition in services.⁵⁸⁵ Besides, existing obstacles need to be removed on the way of regional labor movement by engaging in trade agreements and as well with mutual recognition of educational degrees and diplomas aiming at the improvement of labor resource allocation and maximizing regional growth. All of such efforts can reduce unemployment and create jobs within services sectors in the MENA region.

Much more gains for MENA countries can be obtained through regional services liberalization if it is coupled with comprehensive reforms and strategies aiming at strengthening competition while streamlining regulatory frameworks which would result in reaping benefits two to three times greater than

585 Rouis, Mustapha and Tabor, Steven R. “Regional Economic Integration in the Middle East and North Africa:

Beyond Trade Reform.” The World Bank, Washington DC, 2013, p. 36.

those achieved by way of tariff removal alone (Konan 2003).⁵⁸⁶ In particular, opening the regional services sectors would also facilitate trade in parts and components⁵⁸⁷ thus helping the emergence of regional production networks like that of the ASEAN.

Moreover, building backbone services in the cross-border infrastructure is critical in boosting productivity and international competitiveness. Hence, good quality in backbone services such as telecommunication, transport, and power are crucial, as opening such services to more competition can encourage trade.

Besides, harmonizing regulations related to services sectors may reduce production costs, promote knowledge spill-overs, and increase foreign direct investment (FDI) and thus help to expand markets.⁵⁸⁸

Similarly, Fardoust is suggesting the implementation of some major regional projects on infrastructure for energy, water, and transport both ground and air, aimed at improving links between the major countries for deepening trade integration within the MENA region and the rest of the world.⁵⁸⁹ Accordingly, doing so would increase exports, attract FDIs and speed up reforms in new areas to compete including reductions of tariff and non-tariff barriers, having access to markets in advanced economies, as well as important areas related to trade facilitation and export promotion.

OECD is particularly stressing on openness to trade and investment while following national development plans. Accordingly, sound macroeconomics and structural polices are suggested by which capacity of host economies would be strengthened leading to important benefits resulted from international trade and investment (p. 19) from enhanced economic and inclusive growth to job creation and innovation.

Trade facilitation and logistics also play important role in the regional and global integration processes.

Countries in MENA are lagging behind on logistics efficiency in comparison with countries at similar income levels such as Asia and Latin America. This has, therefore, a negative impact in taking advantage of good shipping connectivity in the Mediterranean as well as the proximity with those of the European markets.⁵⁹⁰

New strategies should emerge in the region to primarily include implementation of remedial policies and

586 Konan, Denise E. “Alternative Paths to Prosperity: Trade Liberalization in Egypt and Tunisia.” In Arab Economic Integration: Between Hope and Reality, ed. Ahmed Galal and Bernard Hoekman. Washington, DC: Brookings Institution Press, 2003.

587 Rouis and Tabor (The World Bank, 2013), p. 37.

588 Ibid. p. 39.

589 Fardoust, p. 4.

590 Rouis and Tabor (The World Bank, 2013), p. 76.

investment and the countries afflicted by internal conflicts are in immediate need to end such conflicts including Iraq, Libya, and Syria, or Yemen. On the other hand, there are instances of some middle income countries including Jordan, Morocco, and Tunisia representing more export bases with diversified production in which some trade facilitation and logistics services reforms have been implemented. They render good lessons to be followed by other countries of the region.

Also, in case of the Mediterranean region; its proximity to Europe has shown a convergence towards European regulations and border management processes i.e. the EU Association Agreement process that has been a major driver for reforms. In fact many sub-regional dynamics can complement and support national efforts in harmonizing their regulations with those of European standards. Notably, under the AMU the Maghreb countries would be able to integrate further for border management and services. For Mashreq countries, there is a “corridor-based” initiative through which trade can be facilitated. Sub-regional activities, thus, can deliver benefits towards national capacity building and reform initiatives.

And for such national capacity and reform initiatives, having experts in the field from countries including Iraq, Libya, and Syria would be of essence. As such, Libya’s focus on regional Maghreb integration can help its reconstruction further progress. For instance, activities within their customs could be re-launched on the basis of a convergence of codes, tools, and border management principles with other Maghreb countries.⁵⁹¹