Regional integration can deliver
products or components as links in a value chain, and benefit from economies of scale.
In fact, interindustry and intraindustry trade (as opposed to trade in final goods) has increased tremendously over the past half century, especially in East Asia, North America, and Western Europe.
A consequence of these trends has been the agglomeration of production in special-ized clusters that benefit from shared, spe-cialized labor markets; proximity to specific input or output markets; and learn-ing across companies, which fosters inno-vation. Trade between nearby countries increased significantly as regional produc-tion networks developed. Final demand may be global, but there are still benefits in sourcing important inputs from nearby countries. An example is the consumer technology cluster in East Asia where China has done most of the assembly, but high-tech inputs come from Japan or the Republic of Korea and some lower-tech ones from Southeast Asia.
Manufacturing, but increasingly also ser-vices, has become more about “specialized tasks” than finished products. A precondition for such cross-national production networks has been countries’ willingness to open their markets for inputs and outputs and to reduce barriers to trade in goods and services as well as to the flows of capital and labor. Not all countries that have actively pursued regional integration strategies have benefited equally from globalization—a convenient shorthand for the processes just described. But practi-cally all have raised their economic fortunes.
And where there has been the political willingness to compensate those who fell
behind, regional integration has generated the resources to do so.
The Middle East and North Africa has a long history of regional trade; a common cul-ture and language in most countries; abun-dant labor, capital, and natural resources within the region; and few geographic barri-ers. Yet while other world regions have prof-ited from pooling input and output markets across borders, the Middle East and North Africa lags on many aspects of integration.
Compared with Europe or East Asia, few of the region’s countries benefit from growth spillovers from their neighbors. The region has
“thick borders” restricting the flow of critical inputs (labor, capital, and ideas) and outputs (goods and services). It also scores poorly on integrating output markets for goods and ser-vices and is the most restrictive region when it comes to the exchange of ideas—the founda-tions of the modern economy.
This section documents the low integra-tion of the region’s countries across these four-plus-one dimensions: trade in goods, trade in services, capital flows, flow of peo-ple, and the flow of ideas. All countries that have reached high-income status allow a high degree of openness to these flows.
Trade in goods Tariffs
International borders reduce trade by an estimated 20–50 percent and increase trade costs by an average of about 40 percent (Anderson and van Wincoop 2003; Arvis et al. 2016; Coughlin and Novy 2016). Tariffs are a significant share of these costs; others arise from currency exchange and language TABLE 3 .1 City size relative to a country’s total urban population is associated with positive or negative effects on economic growth
City population
Effect on growth, by total urban population
< 4 million 4–12 million 12–30 million > 30 million
Small cities (< 0.5 million) Positive Positive Negative Negative
Medium-size cities (0.5–3 million) Negative Positive Positive Positive
Megacities (> 10 million) Negative Negative Negative Positive
Source: Frick and Rodríguez-Pose 2018.
When a country with favorable endowments and good policies grows faster, its neighbors benefit when there is a high degree of economic integration.
Growth spills over to other countries as growing areas take advantage of regional pools of workers, capital, and knowledge. Larger regional markets increase demand and let firms benefit from scale economies.
Quantifying the benefits of growth spillovers across countries
Trade integration has become deeper over time, often going beyond traditional trade policy to encompass areas such as investment, competition, and intellectual property rights protection. This makes implementation more demanding. But the “deeper” the agreement, the more a country will benefit from the growth spillovers from other members. Even with the rapid fall of global transport costs, close proximity in buyer-supplier net-works is still an advantage. Analysis of regional growth trends over the past several decades shows that from 1990 to 2015, membership in trade agreements was associated with a growth spillover of about 36 percent (Lebrand 2019). Associated with this is a spatial multi-plier of 1.56, with deep trade integration increasing the effectiveness of growth-promoting domestic policies by 56 percent.
However, analysis of regional growth trends over the past several decades shows that economic spill-overs have been strong in Europe and in Organisation for Economic Co-operation and Development (OECD) countries but largely absent in the Middle East and North Africa. Among OECD countries, where deep trade integration has been the strongest, the benefits over the past few decades have been even larger. In the Middle East and North Africa, growth rates among countries tied by weak integration agree-ments have been uncorrelated (Lebrand 2019; see also Roberts and Deichmann 2011).
Putting Sweden in the Middle East and North Africa would have cost it US$1 .375 billion
If Sweden had been subject to the lack of regional spill-overs experienced by Tunisia between 1990 and 2015, its GDP per capita in 2015 would have been 30 percent
lower (figure B3.1.1), with a cumulative GDP loss of US$1.375 billion (2010 constant U.S. dollars).
The analysis also suggests that openness by itself would not automatically raise growth significantly in the Middle East and North Africa. Simulation of eco-nomic growth trends assuming spillovers consistent with a deep regional integration agreement raises growth in some countries only moderately—and would even reduce growth in others where poor neighboring perfor-mance would impose a drag on the local economy.
Deeper integration will pull neighbors along only if domestic reforms create faster growth at least in some countries. But although deepening a regional integration agreement by itself will not raise a region’s prospects, the reform pressure that builds through more open markets and the opportunities that come with greater integration can stimulate growth.
Spillover benefits from countries to cities
Trade depth between countries allows cities to ben-efit directly from the growth of other cities. However, these spillovers between cities are absent in the Middle East and North Africa, while they are strong in the East Asia and Pacific as well as Latin America and the Caribbean (figure B3.1.2).
Most notably, East Asia and Pacific cities have experienced much larger spillovers from cities in coun-tries with deep trade agreements than have cities in the
BOx 3 .1 Economic growth can be contagious—but in the Middle East and North Africa, it is not
box continues next page 25
30 35 40 45
1990 1995 2000 2005 2010 2015
GDP per capita (constant US$, thousands)
Year Sweden, actual growth
Sweden in Middle East and North Africa
FiGURE B3 .1 .1 Sweden would be far poorer under Tunisia’s low regional economic spillovers
Source: Lebrand 2019.
and information barriers. In the Middle East and North Africa, countries’ tariffs vary con-siderably. The region’s high-income countries (that is, the GCC countries) have relatively low average tariffs, but these are still about twice those of their peers in other regions (figure 3.10). The middle- and low-income countries typically have higher tariffs as well—exceeding 10 percent in Algeria, Djibouti, the Islamic Republic of Iran, Syria, and Tunisia.
Trade agreements
As in other regions, Middle East and North Africa countries have specific agree-ments that allow some trading partners preferential market access, but those agree-ments are relatively weak. Three of these preferential trade agreements are registered with the World Trade Organization (WTO),
ARE BHR
DJI DZA
EGY
IRN ISR
JOR KWT
MARLBN OMN QAT
SAU
TUN
500 YEM 1,000 5,000 10,000 50,000
0 10 20
Tariff rate, applied, simple mean, all products (%)
GDP per capita (US$)
FiGURE 3 .10 Many Middle East and North Africa economies have higher average tariffs than their economic peers in other regions Average tariff rates in relation to per capita income, 2015
Source: World Development Indicators Database.
Note: Full country names correspond to ISO 3 country codes. No data were available for Iraq, Libya, the Syrian Arab Republic, and West Bank and Gaza.
BOx 3 .1 Economic growth can be contagious—but in the Middle East and North Africa, it is not (continued)
Middle East and North Africa. Figure B3.1.3 shows the level of city GDP per capita if Bangkok had been in the Middle East and North Africa instead of in East Asia and Pacific. Over the 2000–15 period, Bangkok
was growing quickly in per capita terms, but its GDP per capita would have been shrunk significantly in the Middle East and North Africa for lack of growth spillovers.
Note: Two regions are excluded from the analysis. The results of the regional analysis were not significant for South Asia or not of interest for comparison for Europe and Central Asia.
0
Region 0.1
0.2 0.3 0.4 0.5 0.6
All Middle East an
d
North Africa East Asia and Pacific
Sub-Saharan Africa
Latin America andthe Caribbean
Estimated spillover coefficient
FiGURE B3 .1 .2 Spatial spillovers based on deep trade agreements with neighbors, by region
Source: Lebrand 2019.
6 7 8 9 10 11 12 13
2000 2005 2010 2015
GDP per capita (constant US$, thousands)
Year Bangkok, actual growth
Bangkok in Middle East and North Africa
FiGURE B3 .1 .3 Bangkok’s per capita GDP would have shrunk had it experienced the Middle East and North Africa’s regional economic spillovers
Source: Lebrand 2019.
binding the partners within the Middle East and North Africa:
• The GCC, which includes six high-income Gulf countries
• The Pan-Arab Free Trade Area (PAFTA), which was initiated in 1997 under the umbrella of the Arab League and covers almost the entire Middle East and North Africa region
• The Common Market for Eastern and Southern Africa (COMESA), which con-nects Egypt, Libya, and Djibouti as well as 16 Sub-Saharan African countries.
The strength or depth of an agreement is determined by its comprehensiveness and the extent to which its provisions are legally enforceable. On average, the Middle East and North Africa’s intraregional agreements include 16 provisions—not too different from those in other world regions (table 3.2). They are shallower, however, as the lower number of total and core enforceable provisions shows.
“Core” provisions are those included under WTO+ as well as provisions concern-ing competition policy, investment, capital movement, and intellectual property rights.5 Among the Middle East and North Africa’s three intraregional agreements, COMESA is fairly comprehensive, with nine legally enforceable core provisions, but it covers only three Middle East and North Africa coun-tries. The GCC is also comprehensive, with
eight such provisions. However, PAFTA, which covers most of the region, is a “shal-low” agreement, with only two legally enforceable core provisions, because it focuses mostly on tariff liberalization for industrial and agricultural goods only.
The largest number of Middle East and North Africa countries’ interregional bilat-eral or multilatbilat-eral agreements are with countries of the Europe and Central Asia region—mostly with Western European countries and the EU (table 3.3). Such agree-ments with countries of East Asia and the Pacific—the most important world market in the future—tend to be relatively shallow.
TABLE 3 .2 Trade agreements are fewer and shallower in the Middle East and North Africa than in other regions
Average number of provisions in intraregional trade agreements, 2015
Region Total provisions Total enforceable Core enforceablea Number of agreements
East Asia and Pacific 18.3 14.4 11.4 32
Europe and Central Asia 14.4 12.2 8.8 85
Latin America and the Caribbean 21.7 15.3 12.7 30
Middle East and North Africa 16.0 9.7 6.3 3
North Americab 22.0 21.0 17.0 1
South Asia 4.0 2.8 2.8 4
Sub-Saharan Africa 22.2 8.4 6.9 9
Source: World Bank calculations based on Hofmann, Osnago, and Ruta 2017.
a. “Core provisions” are those included under WTO+ as well as those concerning competition policy, investment, capital movement, and intellectual property rights. Under the World Trade Organization (WTO), WTO+ provisions include areas such as customs regulations, export taxes, antidumping, countervailing measures, technical barriers to trade, and sanitary and phytosanitary standards.
b. “North America” here comprises Canada and the United States.
TABLE 3 .3 The Middle East and North Africa has few agreements with important future markets
Number of agreements and average number of core legally enforceable provisions between Middle East and North Africa countries and those in other regions, 2015
Region
Number of agreements
Average number of provisions
East Asia and Pacific 2 7.5
Europe and Central Asia 23 10.0
Latin America and the Caribbean 1 14.0
North Americaa 7 10.6
South Asia 0 0.0
Sub-Saharan Africa 2 5.5
Source: World Bank calculations based on Hofmann, Osnago, and Ruta 2017.
Note: “Core, legally enforceable” agreements are those included under WTO+ as well as those concerning competition policy, investment, capital movement, and intellectual property rights.
Under the World Trade Organization (WTO), WTO+ provisions include areas such as customs regulations, export taxes, antidumping, countervailing measures, technical barriers to trade, and sanitary and phytosanitary standards.
a. “North America” here comprises Canada and the United States.
Europe and the Americas have more compre-hensive agreements with that dynamic region.
Exports and imports
At 4.1 percent each, the Middle East and North Africa’s share of world exports and imports matches its share of global GDP almost exactly (table 3.4). The export share is largely due to a high share of raw materials exports—mostly oil and natural gas, which make up about a third of all exports.6 The shares of other product types, especially capi-tal goods exports, are relatively small.
The importance of trade is highest in the United Arab Emirates, where exports plus imports are about 140 percent of GDP, high-lighting the importance of Dubai and Abu Dhabi as global trading hubs. Trade is impor-tant in fuel-exporting countries but also in Jordan, Morocco, and Tunisia, where trade is 60–80 percent of GDP (figure 3.11).
Although the region’s overall trade levels roughly correspond to its share of the global economy, t rade — especially non f uel exports—could be significantly larger (Behar and Freund 2011; Bhattacharya and Wolde 2010; Bourdet and Persson 2014; Hoekman 2016). One study estimated that a typical Middle East and North Africa country could double to quadruple its exports given eco-nomic and geographic characteristics and assuming best-practice trade policies (Behar and Freund 2011). Imports, in contrast, are more in line with expectations.
Intraregional trade has been a key driver of trade and, in turn, of economic growth in other world regions, notably Europe and East Asia. The Middle East and North Africa’s share of total intraregional trade had been gradually increasing from the 1980s through the mid-2000s before dropping during the 2008–09 world financial crisis and only recently recovering (figure 3.12).
Trade in services
Trade in services has increased globally, commanding a substantial share of GDP, including in the Middle East and North Africa (Loungani et al. 2017). Services—such as financial and legal, telecom, and transport services—are critical intermediate inputs, and their trade can be an important mecha-nism to transfer know-how and innovations.
Access to high-quality services consequently has a strong influence on manufacturing pro-ductivity, importantly through its effect on foreign direct investment (FDI) flows (Hoekman and Shepherd 2017).
In the Middle East and North Africa, the average share of GDP from services trade has fluctuated since 1990 between about 20 percent and 25 percent (figure 3.13).
FiGURE 3 .11 Merchandise trade as a share of GDP in many Middle East and North Africa countries is quite low
Source: World Development Indicators Database.
Note: No data were available for Libya, the Syrian Arab Republic, and West Bank and Gaza.
0 20
Country
Share of GDP from total exports and imports (%)
40 60 80 100 120 140 160
United Arab Emirates BahrainDjibouti
Alger ia
Egypt, Arab Rep .
Iran, Islamic Rep .
IraqIsraelJordanKuwait
LebanonMoroccoOmanQatar Saudi Arabia
Tunisia Yemen, Rep
.
TABLE 3 .4 Trade in the Middle East and North Africa is still dependent on natural resources percent
Global share, type Exports Imports
Trade
Total 4.1 4.1
Raw materials 10.5 3.3
Intermediates 3.0 4.7
Consumer goods 3.4 3.6
Capital goods 0.9 2.9
General
GDP 4.1
Population 5.9
Source: World Bank, World Integrated Trade Solution (WITS) database.
0 10 20 30 40 50 60 70
198419851986198719881989199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013201420152016
Share of global intraregional trade, 1984–2016 (%)
East Asia and Pacific Europe and Central Asia Latin America and Caribbean
Middle East and North Africa North America South Asia
Sub-Saharan Africa
FiGURE 3 .12 Only a small share of global intraregional merchandise trade occurs within the Middle East and North Africa
Source: Derived from the World Trade Flows database, Bilateral Data files, of the Center for International Data, University of California, Davis, https://cid.econ .ucdavis.edu/Html/WTF_bilateral.html.
Note: Regions include all countries regardless of income status. “North America” comprises Canada and the United States.
0
1990 199119921993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 5
10 15 20 25 30 35 40
Share of GDP from intraregional services trade (%)
East Asia and Pacific Middle East and North Africa
Europe and Central Asia
South Asia
Latin America and Caribbean
Sub-Saharan Africa
North America
FiGURE 3 .13 As a share of GDP, the Middle East and North Africa’s intraregional service trade is small relative to the size of its economies
Source: World Development Indicators Database.
Note: The data shown are moving three-year averages of countries in each region for which numbers were reported, including high-income countries.
“North America” here comprises Canada and the United States.
Shares are highest in Lebanon (where they represent more than 50 percent of GDP) and in Jordan, Kuwait, and Qatar.
Firm-level data most clearly show that restrictions to services trade affect pro-du c t iv it y a nd ex p or t p er for m a nc e (Hoekman and Shepherd 2017).7 When countries reduced their service sector restric-tions, the performance of firms relying on such services improved. Given that such services inputs can be up to two-fifths of the gross value of manufactured exports, this is not surprising.8
Countries in the Middle East and North Africa for which data are available have, on average, larger restrictions than other world regions (table 3.5). Egypt, the Islamic Republic of Iran, and Qatar have the highest service restriction index scores, while Algeria, Morocco, and the Republic of Yemen have the lowest. The highest restrictions are in professional and transportation services.
Retail sector restrictions are the lowest but still considerably higher than in Latin America and the Caribbean or in Europe and Central Asia. Thirteen Middle East and North Africa countries are in the dataset; in seven of those countries, professional services are the most restricted sector.
Capital flows
Financial openness can generally be good for growth. It tends to reduce the cost of capital that can be invested for productive
uses, encourages financial development, pro-motes portfolio diversification, and imposes greater discipline on monetary policy.
Estimates of the economic benefits of capital liberalization range from a 1 percentage point increase in annual GDP to as much as a 14 percent permanent increase in con-sumption in the most capital-scarce coun-tries (Hoxha, Kalemli-Ozcan, and Vollrath 2013; Kose et al. 2006).9
After North America10 and Europe and Central Asia, the Middle East and North Africa region has the highest average level of financial openness, although it has retreated somewhat over the past 20 years (figure 3.14).
Openness varies by country: several GCC countries as well as Israel, Jordan, and the Republic of Yemen have open capital mar-kets, while eight other economies in the region maintain significant restrictions on capital flows.
The region’s relatively high (average) capi-tal openness does not seem to have led to cor-responding FDI inflows. Among international capital flows, FDI is arguably the most important for development. It is usually aimed at new, productive investments and also often comes with know-how for technol-ogy transfer and innovation. Yet the average net inflows of FDI relative to GDP across Middle East and North Africa countries were lower than for any other region in 2016 ( figure 3.15). After an increase in relative FDI flows in the mid-2000s, they reverted to lev-els last seen in 2000.
TABLE 3 .5 The Middle East and North Africa has higher service trade restrictions than any other region Average service trade restriction index
Restriction category
East Asia &
Pacific
Europe &
Central Asia
Latin America &
Caribbean
Middle East &
North Africa
North Americaa
South Asia
Sub-Saharan Africa
Overall 32.6 19.1 21.0 45.3 19.7 43.9 32.0
Financial 24.4 9.8 18.5 42.1 21.1 38.1 26.7
Professional 55.7 43.7 38.0 61.6 47.5 60.7 48.7
Retail 20.8 7.3 8.3 30.8 0.0 30.0 22.8
Telecommunications 34.4 8.1 20.8 44.2 25.0 45.0 38.6
Transportation 33.5 26.1 22.1 50.1 12.0 50.4 29.9
Source: Borchert, Gootiiz, and Mattoo 2013.
Note: The table displays the average index scores of countries in each region for which numbers were reported, including high-income countries.
a. “North America” here comprises Canada and the United States.
–1.0 –0.5 0 0.5 1.0 1.5
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Capital openness index
East Asia and Pacific Middle East and North Africa
Europe and Central Asia South Asia
Latin America and Caribbean Sub-Saharan Africa Years
FiGURE 3 .14 Overall, the Middle East and North Africa has a high degree of capital openness
Source: World Bank calculations from the Chinn-Ito Financial Openness Index (KAOPEN) 2016: http://web.pdx.edu/~ito/Chinn-Ito_website.htm.
Note: North America (Canada and the United States), which has the maximum value, is not shown. KAOPEN draws on the International Monetary Fund’s (IMF) Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER). It is the first principal component of four binary variables: existence of multiple exchange rates, restrictions on current account, capital account transactions, and requirement of the surrender of export proceeds.
Average share of GDP from FDI net inflows (%)
0 2 4 6 8 10 12 14 16 18
1990 1991
1992 1993
1994 1995
1996 1997
1998 1999
2000 2001
2002 2003
2004 2005
2006 2007
2008 2009
2010 2011
2012 2013
2014 2015
2016 East Asia and Pacific
Middle East and North Africa
Europe and Central Asia
South Asia
Latin America and Caribbean
Sub-Saharan Africa
North America
FiGURE 3 .15 FDi inflows to the Middle East and North Africa remain low despite the region’s relatively high capital openness
Source: World Development Indicators Database.
Note: FDI = foreign direct investment. “North America” comprises Canada and the United States.