overview of arab economies and main challenges facing them

8/3/2019 Overview of Arab Economies and Main Challenges Facing Them

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Overview of Arab Economies and main challenges facing them

Different phases of development and their features:

1. Early 1960s till mid 1980s:

Nationalization of private assets, state planning, and industrial development by protecting local marketsthrough overvaulting exchange rates that harmed the growth of tradable goods sector. Weak private sector

that living off the state. often supplying protected domestic products, Also, wealth redistribution

policies reduced demand for accountable public institutions, so nepotism or patronage determining who

gets public services or access to business opportunities and who does not.

2. Mid 1980s till early 2000s:

Start of social hardships, as oil prices collapsed in mid-1980s, Gov. Revenues felt, as a result Gov.

Expenditures on social systems and physical capital accumulation shrank, and guaranteed employment in

the public sector was no longer possible, also labor migration opportunities diminished.

Lack of growth and budget deficit prompted undertaking macroeconomic stabilization, structural reform

programs to encourage private sector as an engine for growth and employment creation. Reforms include

tax reforms, privatization, exchange rate liberalization, trade and financial liberalization. The reform

avoided most governance reform or opening of the political space. As a result, the reform effort didnt

improve investment climate, and the recovery in growth over the 1990s was weak.

AC missed out the trends of global trade integration; Arab trade is marked by both a high degree of

product as well as geographic concentration. Although the share of fuels in total exports has fallen, fuels

still constitute the most significant exports for the region.

3. Early 2000s till now:

Back on track for growth, several exogenous shocks including food, financial, Arab spring shocks.

Similarities and Differences between Arab Countries:

Differences: size, geography, level of income, natural and human resources, economic and social

structures, economic policies and institutions.

Similarities: Language, religion, water problem, climate, Oil provided the basis for rapid economic

development throughout the region not only for oil-producing economies but also for resource-poor

economies, through labor remittances, aid flows. Almost all AC adopted since the 1960s models of

development based upon state-led planning, with social policies designed for redistribution and equity.

The development challenges facing the Arab countries today are also similar: a) stagnant growth since the

decline in oil prices, all have been affected by regional conflicts and instability, either directly or through

association through deterring investment. B) Increasing unemployment as a result of shrinking labor

migration and public sector employment and a rapidly expanding labor force.


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Job creation and labor markets in the Arab region

Labor market in Arab labor exporting countries can be classified into:

a) Rural sector (consists of a sizable portion of labor force);

b) Formal urban sector (public & private); Civil service employment as a proportion of total employmentis the highest in the world (17.5% in mid 1990s), concentrated in administration not health and education

c) A large informal urban sector (mostly self-employment, high degree of wage flexibility, low

employment security, no enforcement of labor regulations), it accounts for a large fraction of labor force

ranging from 42% of non-agricultural employment in Syria to 55% in Egypt.

Unemployment: Reasons:

With the unemployment rate increasing since the mid-1980s, unemployment now averages over 15% of

the labor force, by official figures; actual unemployment is probably much higher.

Demographic curse or gift: 2/3 of the population is under the age of 30 (1/3 in Europe), making it thesecond youngest region of the world behind Sub-Saharan Africa. The Arab youth is increasingly

educated, with higher expectations than the generation before, as average level of education of increasing

from less than a year in 1960 to more than 3 years in 1985.

High population growth due to high fertility rates led to extremely high growth rates of labor force which

exceeded the equivalent in all other regions (remains above 3% compared to 2.4% in East Asia), by 2020,

the labor force in the AC will have expanded by 75%, i.e., 75 million new jobs will need to be created,

just to absorb the growing labor force.

First-time job seekers comprise 90% of all unemployed in Egypt, and 50% in Jordan and Morocco.

While Arab women have the lowest labor force participation rates in the world, their engagement in the

labor force has grown considerably. Unemployment rates average 30% higher for women than their male

counterparts. This gender gap is great in Bahrain, Syria, and Saudi Arabia.

Worker productivity, the basis for real wage growth, has increased marginally remaining far below that in

East Asia and Latin America. Also, Real wages based on TFP in most AC have correlated with the oil

boom/bust cycle, generally downward, particularly in Egypt, Jordan, and Algeria.

Open and disguised unemployment is pervasive ranging from 25 to 60% in some countries, because of

rigidities in educational systems, wage setting, and regulatory regimes due to public sector dominance.

In general, the rates of return to education in the region range from a high of almost 15 % for primary

school completion among females in the private sector in Jordan, to a low of -11% for lower secondary

school completion among females in private sector in Egypt.

In some countries the problem is structural in nature, acquiring more education increases the probability

of unemployment, In Egypt, those with secondary education or higher make up for 40% of labor force

and account for 80% of unemployed.


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Education trap: Low productivity leads to low returns to education, and low returns to education lead to

low investment in education, thus low productivity, and so on.

Education qualitative deficiencies have resulted from overly centralized management, little assessment of

performance, and promotion based on seniority rather than performance

Reasons behind the failure to realize high returns include: emphasis on access and not quality, public

employment strategies, lack of openness, failure to acquire knowledge, major in humanities and literature

rather than math and science, weak private sector development (doing business barriers and focus on non-

productive services), a slow rate of industrialization rigid labor regulations, weak SMEs development.

The relationship between openness and TFP is positive, as outward-oriented economies experience higher

TFP, due to:

First, the contact of tradethe trading technology itselfis skill-intensive.

Second, traded goods are usually of higher skill content than those produced and consumed at home, since

they must compete with foreign suppliers.

Third, the exposure to the foreign markets brings superior technologies, their importation increases the

wage premium paid to skilled labor in the trade-related activities

Weak institutional framework and governance infrastructure:

Governance challenge is to strengthen the incentives, mechanisms, and capacities for more accountable

and inclusive public institutions while fostering a larger role for civil society.

Good governance mechanisms are first steps in improving economic policies that are themselves

instruments for improving the climate and incentives for efficient growth.

Inclusiveness is to adopt laws and regulations that secure access to social services and access to basic

rights and freedoms, including participation and equality, particularly for women.

Accountability is creating mechanisms and incentives within Gov. to ensure effective functioning in the

public interest, through increasing the capacity and independence of the legislative and judicial branches.

Governance Indicators 96-08: (Accountability Participation 176/220, Pol. Stability 144, Organizational

Quality 144, Administration Efficiency 132, Anticorruption Policies 128, Rule of Law 126)


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Demographic changes in Arab region

Main features and consequences of demographic change:

High population growth (highest in the world after Sub Saharan Africa) (increasing by 80% between

2005 and 2050)

Increasing rate of labor force (doubling between 2005 and 2050)

Urbanization & Rural-urban migration: as Shultz warn that rapid population growth will affect

negatively future development in low income countries including AC through: Gov. Spending, urban

crowding, and agricultural productivity

Outside migration (situation can differ with countries as Iraq, Yemen, and West Bank and Gaza being

major emigrating countries whereas Tunisia, Algeria, and Lebanon see transition to an aging labor force,

better education, and can be transformed to immigrating countries)

Food self-sufficiency decreased

Main causes behind Demographic change:

The old development model: Nationalization of private assets, state planning, and industrial

development by protecting local markets, Weak private sector that living off the state. wealth

redistribution policies reduced demand for accountable public institutions.

The oil boom: Oil provided the basis for rapid economic development throughout the region not only

for oil-producing economies but also for resource-poor economies, through labor remittances, aid flows.

Cultural, social, and religious reasons that prohibit (birth control), and promote working for the

Government ( )

Potential migration opportunities: either to Gulf countries after the oil boom working in construction

sector or to Europe and US and Canada.

Are demographic changes a gift or a curse?

Depends on the age structure: what matters for economic growth is not the population growth rate per

se, but rather the changing age structure of population as countries pass through demographic transition

(the process of moving from pre-industrial conditions of high fertility and high mortality to the post-

industrial conditions of low fertility and low mortality: the case of high performing Asian countries)

Thus, when a large share of population is non-working, economically dependent, under the age of 15 orabove 65, economy carries demographic burden that lowers labor input per capita, reduce savings and

investment, and reduces GDP per capita growth (Asian case in 1950s and 1960s). Conversely, countries

are endowed by demographic gift when a large share of population is economically active between 15/65,

thereby raising labor input per capita, increasing savings and investment, and increase GDP per capita

growth (Asian case in 1970s and 1980s).


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MENAs economically active population grow by 2.9% in the period of 1965/1990, however the

dependent population grow by 2.4%, with low (0.05%) net demographic impact.

Depends on policies adopted: the famous economist Thomas sowell argues that unemployment and

poverty are caused by bad Gov. Policies not by overpopulation, but even if we disagree with his point of

view and see population growth as a curse in well find that most AC failed to have a unified continuous

program for reproductive health and family planning so that they can control the high levels of fertility

although the mortality levels have declined sharply due to the advancement of medicine.

Depends on expansion of specific economic sectors and related employment opportunities: most AC

are not diversified as most of them are oil or/and gas dominated and this sector is capital intensive

meaning that its expansion generates lower employment opportunities, where sectors like construction

and agriculture are labor intensive, but unfortunately the general trend of Agriculture sector in most AC is

declining (Agriculture share of GDP and Agriculture share of employment) and although construction

sector produces jobs but mainly for low skill workers and it is very vulnerable to shocks.

Depends on labor market policies: End of public sector employment/ weak private sector growth and

the mismatch between the educational system supply and labor market demand/ few emigration

opportunities to Gulf or to Europe/ absence or weak regional labor mobility.

The Current situation:

In absence of well-functioning labor markets and steady output growth, the rising working-age population

in the 1990s compounded the problem of high unemployment rates.

A potential problem of aging population in the future.


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Migration in Arab countries

Causes behind migration:

Supply related factors: high population pressure, scarcity of job opportunities, low returns on education,

high poverty levels, demonstration effect (in rural Egypt, some villages migrate as a whole to Gulf or

Europe, after that they return they invest their money in real-state and other activities raising inflation

rate) and political reasons (the case of Egypt and Tunisia)

Demand related factors: Generosity of social protection could affect choice of destination countries, e.g.

Scandinavian countries, geographical proximity which lower transaction costs (Egyptians migrate either

to Libya or to Italy, and Algerians migrate to France), cultural ties (e.g. some Muslims prefer to migrate

to Gulf rather than Europe just to be in A Muslim country to bring their children on Islam values, colonial

relationships (Marcela is an Arab city inside France), network effects (family, friends, and neighbors)

Models of migration in AC: Arab region is one of the most active regions in terms of migration (in

terms of sending and receiving)

South-North (highly educated personals mainly to Europe on a permanent base)

South-South (low and intermediate skilled workers mainly to Gulf and on a temporarily base)

Status of labor mobility in the Arab region:

In contrast to EU, there is no single regime governing labor mobility in AC as there are agreements on the

regional, sub-regional, and bilateral levels. Most of them are not binding.

For example GAFTA as a regional agreement, only provides free mutual treatment for merchandise

goods, services not included, and no mention for factors of production.

Conventions under Arab Labor Organization ALO, give the priority to nationals and then the preferenceto Arab workers through gradually substitute Arab for foreign labor when qualifications are equal, but the

non-binding character of the instrument dont provide actual free labor mobility.

GCC as a sub-regional arrangement, facilitate the movement of national labor between member countries,

but the clear shortage of labor supply of GCC as a whole reduce the effectiveness of this decision.

Bilateral agreements recognized the existence of large labor movements and the need to regulate them,

but dont provide for the complete freedom or liberalization, as it is just concerned with migrant contracts

their social security rights and old age benefits related to pension payments, subject to political tensions.

What are the factors that have promoted and what are the causes that have hindered labor mobility from

the Arab region to both EU and Gulf (education, political, economic, cultural)

Factors affecting the future of migration policies (nationalization policies of Gulf, substitution of other

non-Arab nationalities, political relations)


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Determinants of Future Arab Labor Migration Trends

1. Supply of nationals: This includes wages, productivity and degree of commitment, the greater the no of

nationals entrants in the LF, the lesser the demand for foreigners, both Arabs and non-Arabs alike.

High open Unemployment of Nationals in GCC,

Demographically, large no of nationals entering the labor market each year, so, the share of the national

labor force in the population will increase.

Oil price instability, causing frequent budget deficits which rendered the policy of hiring all nationals in the

governmental sector

The private sector could not act as a swing employer by picking up the slack because a) nationals were

reluctant to join it, and b) employers were reluctant to hire them (higher wages and inadequate skills)

A substitution strategy of foreigners with nationals is more feasible now, as the GCC region has greatly

improved educational efficiency; it is not difficult to replace nationals by Arabs and Asians.

Female participation is expected to rise due to: i) reduced fertility rates; ii) rise in education levels;

iii)uncertainty and need to additional incomes; iv) greater social recognition, if they seek employment they

will also crowd out male Arab workers since there are very few female Arabs working in the GCC.

2. Economys capacity to generate jobs: Not only is the overall growth, but also the pattern of growth.

Indicators for negative growth trends: a) lower Gov. spending on development projects versus goods and

services; b) higher Gov. wages bills; c) lower national savings; d) higher military spending.

GCC have biased structure toward non-traded goods sectors compared to the traded goods sectors, the

growth of the manufacturing sector has been quite modest, These two factors combined reveal afundamental weakness; namely, the lack of international exposure.

Greater Arab in-migration will occur if the demand is greater than the supply of national manpower and if

Arab workers, rather than Asians, match the required skills. The wage differential between Arabs and

Asians is marginalized due to the language/experience requirement.

Moderate Arab in-migrationwill take place if the demand is greater than the supply of national manpower

and the required skills are better matched by Asian workers.

Slow Arab out-migrationif the demand is less than the supply of the nationals and if the required skills are

not matched by national workers but is matched by Arabs and Asians. This is Similar to the present stage.

Moderate to substantial Arab out-migration if the demand is less than the supply of nationals and if

national workers rather than Arabs match the required skills, GCC governments induces private sector to

increase nationals employment using positive financial incentives, training and re-tooling programs.

Nationals can replace Arab workers in jobs where language requirements are readily met (e.g., teachers,

journalists, clerks and management). Asians would do likewise because they are less expensive and more

skilled in maintenance and high-tech occupations.


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The Partnership between the EU and the Southern Mediterranean countries

The Partnership between the EU and the Southern Mediterranean countries was launched with the

Barcelona Conference in 1995, to gradually establish a free trade area forindustrial goods.

Advantages & Disadvantages of EU-MED Partnership:

1. Since manufactured products from MED already have access to EU market, the agreement is a mean

for gradually allowing EU manufacturing products to enter the MED markets for free, that means loss of

customs revenues which represent a large proportion of Gov. Revenues in most of AC.

2. MED non-mineral exports as share of GDP have remained stagnant; provide a mere 1% of total EU

non-mineral imports.

3. FDI has fluctuated significantly over time and has concentrated on infrastructure sectors.

4. The Partnership doesnt support growth enhancing structural reforms that are complementary to

trade liberalization, meaning higher transition costs of trade liberalization. In the same time the agreement

offers financial and technical assistance which may reduce the transaction costs if it is well utilized.

5. Labor mobility at present is neither included in the partnership, nor on the agenda for negotiations.

Can the Barcelona framework be modified to count for migration?

Defenders against establishing program of managed migration between MED to EU:

From the EU perspective, opening the borders for workers outside the EU will put upward pressure on

the already high unemployment rates or/and reduce real wages; the EU, if opening up, will accommodate

workers from the accession countries in the CEE, rather than non-member countries.

Poor reputation of Arab migrants: previous large waves of migrants, especially from Maghreb region

(to France, Italy, Spain) and Turkey (Germany), and among whom unemployment rates are higher; high

fertility rates, continued flows of illegal migrants.

Defenders for establishing program of managed migration between MED to EU:

Migration serves to take off pressure on the labor markets in MED and provide much needed work force

in the EU countries, then more convergence in real wages, GDP/worker and GDP/capita.

Demographic developments in the EU (more aging population and possible decrease in worker/tax payer

ratio) would imply that increased migration would be highly desirable, under the prevailing pay-as-you-

go social security system.

From the perspective of replacement migration, the CEE countries have already its lion share of migration

in the start 1990s. Also, CEE have a higher per capita income than the MED countries and, following

improved living conditions at home are likely to dampen the tendency to migration.


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While the geographical proximity to the EU area will induce out migration it will also facilitate return

migration. In the same time, the lack of opportunities is pushing highly skilled labor to other regions such

as US, Canada, or Australia.

Managed migration to the EU (e.g. circular migration, readmission and other agreements signed

between Morocco and Italy and Egypt and Italy),

Theoretically, factor endowment theory suggests that trade in goods is indirectly trade in factors,

including labor. Also, increased trade is expected to lead to higher growth in poorer countries, economic

convergence, thereby reducing the incentives for migration in the rich countries. However, trade

liberalization between rich and poor countries may initially result in increased pressures for migration, if

production is polarized and if migration previously has been repressed by financial constraints.

1. It would create an immediate constituency which benefits from the partnership now.

2. Although it is limited in size, it would relieve socio-economic-political pressures in MED countries

(especially in labor markets), so this would smooth the impact of the transition costs of trade

liberalization (a double smoothing mechanism)

3. Return migrants often bring back skills, network connections, as well as (remittances).

4. Such remittances (savings) used for investment which translated directly into growth since they tend to

be used for productive investment. For example, a study of the use of international remittances by

households in rural Egypt showed that, 1. A substantial share of migrant incomes is spent on investment,

2. The propensity to invest is larger than for non-migrant households.

Return migration is ruled by push factors - worsening labor market climate in host countries but also

by pull factors increasing attractiveness of the home country investment climate

Reasons behind lack of reform in Arab countries:

While MED countries have succeeded in maintaining macroeconomic stability that comprises fiscal and

current account balances, exchange rate black market premium, and inflation rates. The scope and speed

of structural reforms (tariff rates, tax rates, PPP distortions and privatization revenues) were limited.

Absence of crisis; - availability of oil revenues and foreign aid easy money reduced the incentive to

foster economic reforms, as well as the up-front financial assistance which was intended to ease the

implementation of reforms, may instead delay them by financing an inefficient economic structure.

Political and social environment; the combination of low growth, increasing unemployment rates, and

often worsened poverty levels has rendered a tense social climate.

Political Uncertainty; has a negative impact on investment decisions in AC.


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Trade policy practices in Arab countries

Shallow integration (involves only policy reforms applied at national borders) deep integration (involves

behind the border reforms), GAFTA is a shallow preferential trade agreement as it didnt remove

nontariff barriers, also its limited to trade in merchandise while services and investment are excluded.

Trade liberalization aligns domestic and world prices, and price alignment ensures that investments are

allocated efficiently, materials are obtained from the least costly suppliers, and firms have access to the

latest technologies. But, reforming the service sector affects the economy as a whole, not just the external

sector; it removes high barriers to entry for both domestic and foreign firms; and it eliminates needless

transaction costs. Gains are highest if both reform agendas are pursued.

Status of Arab trade integration: Intraregional exports fluctuated around less than 10% of total Arab

world exports (18% without oil exports) whereas in the EU it reached 60%. However it is believed that

trade in services among AC has flourished because it was left deregulated and that any attempts that

would have been undertaken to regulate such type of trade would have impeded it.

Why Past Attempts at Arab Economic Integration AEI Failed?

- Most of Arab regional trade agreements have not been effective, and were never fully implemented,

resulting in limited intraregional trade compared with that of other regions.

- Inability to attain a positive net cost-benefit balance between political gains & economic costs.

On the political front, concerns over distribution of gains from integration across and within countries;

lack of compensation mechanisms to losers from trade reform; national sovereignty; shortage of

commitment institutions, and lack of consensus on choosing one or more states to act as regional leader.

On the economic front, High similarity in production and exports structure, mismatch between exports

and imports of AC (lack of complementarity), ideology of import substitution, high tariff protection (EU

diversified tariff structures converged and moved to a common structure whereas the tariff structures in

AC have diverted from each other over time), less hospitable investment environments, higher transaction

costs, and restrictive barriers to entry limited intraregional investment, income disparities (UAE GDP per

capita is 100 that of Sudan and Yemen, however in EU differences confined to a maximum).

On the institutional front, vagueness of rules governing trade at the borders, the lack of adequate

transport means arising from lack of demand on transport modes, that decrease transport means (a vicious

circle of weak transport policy); there are 2 scheduled flightsper weekfrom Cairo to Casablanca whereas

there exist at least 2 scheduled flightsper daybetween Cairo and different parts of Germany.

Some advocates that absence of the right institutions is the main impediment to intra-regional trade,

which includes: abuse of technical barriers to trade (TBT) and of sanitary and phytosanitary measures,

vague regulations related to rules of origin, and customs procedures.

Both the EU and AEI experiments were politically motivated, both use economic cooperation as a

mechanism for integration, proximity was another common factor. EU project was seen as a whole and as

a process, rather than as a series of separate steps. There was strong political backing for integration and a

central executive body (European Commission) to manage the process and push it forward.


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Lessons to be learned from EU:

The intended political goal largely contributed to the success of the EU, Churchill also Conrad Adenaur

promoted to the idea of United States of Europe in the 1940s.

The start of both EU and AEI was a reaction to a political threat, where in the case of the AC it was a

reaction to a threat from outside (Israel) while in the case of the EU it was a reaction to a threat from

inside (avoiding another Nazi Germany and wars between France and Germany)

AC continued adopting intergovernmental approach whereas EU shifted to the federal track by creating

supranational authorities. Moreover, AC concentrated on trade integration as an end, whereas the EU

focused on political aims using trade as a means rather than as an end.

1) The existence of supranational strong institutions which are able to secure well-functioning agreement

is a necessary condition for the success of integration, like European Commission and the European Court

of Justice. Moreover, federal institutions have the advantages of collective bargaining vis--vis third

countries; they further strengthen the autonomy of national governments vis--vis domestic groups by

relating the reasons for reforms to having to adopt common policies.

2) The adoption of political aims, backed by strong commitment, using economic tools. There was a

balance between economic losses and political benefits at all stages of European integration.

3) The pragmatic approach handling the different positions of the advocates of federalism and those of

inter-governmentalism. Management of the integration process requires not only competent human

capacity at the administrative level, but also a political vision supported by a group of public figures.

At the end EU experience is not unique. Hence, we do not advocate the adoption, for example, of the

Court of Justice, at least at this stage of integration because of the lack of professionals and judges. On the

other hand, we advocate the necessity of establishing an Arab Parliament (even if some Arab countries donot have one) as long as the members represent themselves and not their countries (the same as the

European Parliament). An Arab organization similar to the European Commission should be established

where it enjoys this supranational authority and has the power to impose its decisions on the governments.


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Challenges of Services Liberalization in the Arab Countries

On the macro level, services share as % of GDP has been increasing in developing and developed

countries where on average it has reached 70% in developed countries and 35% in developing ones. That

is why efficient service sector is becoming a cornerstone of any developmental process through:

Direct channels: its ability, when compared to agriculture and manufacturing to be the largest employer

and contributor to GDP.

Indirect channels: its role in enhancing the efficiency of production in manufacturing and agriculture,

as services count on average for 10-20 of the total production costs.

As developed countries lost comparative advantage in traditional goods (e.g. textiles, agriculture and

processed food) they were pushed to investigate the possibility of new (services and intellectual property

rights areas) where they can exercise their comparative advantage. During the Uruguay Round, developed

countries agreed to liberalize further their agriculture and textiles markets with a payoff in the form of

opening up the services sector and strengthening the intellectual property protection systems.

Change in the belief about the role of liberalization of trade in services:

1. The date of making commitments which date back to 1994 (with the exception of telecommunications

and financial services) where a number of countries have liberalized their services sectors on unilateral

basis which was not necessarily reflected in their GATS commitments. 2. The flexible nature of the

GATS which does not impose the necessity of binding commitments even though sectors are liberalized.

The case of newly acceding countries is different where the accession process to WTO had placed

pressure on them, not faced by original GATT members, to include a larger no of commitments.

Approaches for liberalizing services in PTAs;

Positive list (bottom-up) approach implies that countries liberalize all sectors and list only the sectors or

sub sectors that are not liberalized; this approach has been adopted in North America Free Trade Area.

Positive list (bottom-up) approach is the GATS style approach where countries list only the sectors or

sub sectors in which they have made commitments. Positive list ensures additional flexibility whereas

negative list ensure more transparency and wider inclusion of sectors.

Mapping of Services Liberalization in the Arab World:

On the one hand, trade in goods has so far failed to play the role as an engine for growth and integration

among AC, as intra-regional trade remained at a low 11% in 2007 and rising to 17% after excluding oil,

which means that export led strategy has failed to achieve its expected developmental goals.

On the other hand, services constitute a large share of GDP in almost all AC where the regional average

has surpassed the 50%.Moreover, ACs enjoy a revealed comparative advantage RCA in a wide array of

services, like travel and transport services in Egypt, Saudi Arabia, Bahrain and Yemen. Also growth rate

of services exports (e.g. commercial services) has surpassed its counterpart of merchandise exports.


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That is why; Regional trade in services should act as the engine for growth and integration among AC,

especially that capital and labor movements (the two main devices of services trade) are more mobile and

integrated, as well as the differences in the RCA in services enjoyed by AC.

Regarding services commitments in the context of GATS, AC varied significantly in terms of the no of

commitments made, with Jordan and KSA in the top rank, mainly due to their late accession process. But

taking into account the depth of liberalization measured by no of restrictions on market access and

national treatment countries like Egypt and Morocco will hold the top positions.

In general, within context of Doha round there was significant liberalization in some countries, by

including new sub-sectors or deepening the extent of liberalization in the already liberalized sectors.

Arab PTAs features: they are usually incorporated in comprehensive PTAs involving many aspects

besides trade in goods (e.g. investment chapters); they do not add much to the framework governing rules

in the GATS (e.g. subsidies or safeguard rules); they could have had different approaches in terms of

scheduling modalities and specific commitments (e.g. sectorial exemptions or adoption of negative list)

Prerequisites for services liberalization:

The design of PTAs is necessarily to achieve the expected results; and that the reforms undertaken need to

be accompanied by other regulatory reforms (not necessarily trade related). Finally, that the existing

economic and cultural conditions (prior to undertaking liberalization) affect the impact of liberalization.

The government procurement: AC should open up their Gov. Procurement sectors for each other at

least in the promising sectors as construction, while preserving specific thresholds to protect small

domestic enterprises. Opening up government procurement could result in displacement of national

service providers which could have a negative impact on employment. On the other hand, it could result

in more efficient ways and cost reduction impacts.

Even in the most sensitive sectors, as air transport, audiovisual, and energy services, AC engaged with the

US in PTAs have undertaken commitments, which has not been the general case in WTO. However, in

such PTAs those are GATS plus there was scheduling flexibility available such as (reservations for

existing nonconforming measures and for future measures)

MODE 4: labor mobility in PTAs: Some have provided a high degree of free movement with few specific

procedures, whereas others have provided some regulated mobility with detailed special procedures, and

finally others have provided for facilitating existing mobility only. Yet, PTAs have been successful in

facilitating highly skilled and those affiliated with intra-corporate transferees movements and it was not

much successful in facilitating temporary movement of less skilled workers. Morocco in its PTA with the

US included new categories (e.g. independent professionals, and contractual service suppliers)

None of the ACs have included GATS minus commitments in their PTAs, but they have suffered from

this aspect from their trading partners, like US PTAs with Morocco, Bahrain, and Oman.

Challenges Associated with Services Liberalization (vip)

1. Because ofEXTERNAL PRESSURE liberalization can occur without yielding benefits due to factors

like hinder-ness of competition, weak or ineffective regulation, and absence of meaningful access policy.


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This is likely to be the case with AC in two contexts: the first is related to countries in accession (e.g.

Yemen, Sudan, and Syria) which are likely to face extra demands from WTO members to open up their

service sectors regardless of their level of development and the status of their service sectors.

The second is related to the pressures exerted by large trading partners when negotiating PTAs with the

AC (e.g. the US PTA with Jordan, Morocco, Oman, and Bahrain) where the same type of demands for

opening up several new sectors/commitments which far exceeded their commitments in the GATS.

2. Investment and Labor Agreements: the existence of several bilateral and regional agreements like

Bilateral Investment Treaties (BITs) and bilateral labor agreement (between Egypt and Italy for example)

that deal with Modes 3 and 4 often entail commitments that overlap with GATS or PTAs. Lack of

coordination can entail regulatory problems. AC might not be aware when signing BITs that such

preferences should be extended to all trading partners as depicted by the GATS.

3. Different Rules under Different PTAs: the overlapping membership can result in a complex web of

rules for the purposes of administering and enforcing provisions which can raise barriers to trade against

third countries or even against members of other PTAs, also have a significant administrative cost.

Yet, overlapping regulations arising from the different approaches applied in PTAs (negative versus

positive lists, inclusion of non-party MFN) could result in a spaghetti bowl if rules and regulations are not

coordinated and managed in a proper manner by the concerned government.

Moroccos case: as it follows negative list approach with the US PTA, while it follows positive list

approach in the Arab Regional Services Agreement and the Association Agreements with the EU.

4. Lack of Government Capacity Capable of Dealing with Services Issues:AC, with few exceptions,not only lacks negotiators, but also lacks of government officials and tools able to allow Arabgovernments to understand the dynamics and interaction of services.

This is reflected in the nature of services trade policy which is often led by the ministry of trade whereasactual implementation lies with sectorial ministries (telecommunications, financial sector). Federal and

provincial tensions may further compound, and add additional coordination problems.

5. Regulatory and Administrative Reform: The differences in regulatory measures across countries

imply a de facto discrimination even though services are liberalized. To minimize this risk, governments

may encourage at least recognition of each other regulatory practices. Thus, regulatory reforms follows

liberalization can result in price increases or prevalence of anti-competitive behavior.

The benefit arising from regulatory reform and cooperation depends on how standards and regulations are

set (responding to the degree of development), enforced, and the general regulatory environment.

Specific Issues Related to Services Liberalization due to PTAs:

a) There is no tariff revenue loss, and hence no related trade diversion expected from liberalization of

trade in services that is why any move towards services liberalization (even if on regional basis) will be

welfare improving.

b) Large no of AC are already engaged in regional liberalization of services either at the negotiating phase

with EU or at the implementation phase with the US. i.e., Arab regional liberalization is a fact, not option.


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c) Arab PTAs covering services can be looked at as infant-industry argument, as South-South PTAs, in

particular, can be seen as a form of gradual liberalization. Exposure to competition first in a sheltered

regional market may help firms prepare for global competition.

d) Optimal degree of regulation: due to the economies of scale, services providers prefer to operate on

regional and not on domestic or multilateral level. This is evident in some infrastructure related services

(e.g. electricity, water), as well as a number of production services (e.g. telecommunications).

e) As the case in goods, liberalization at the multilateral level involves the presence of free riders and,

infeasibility due to the prolongation of negotiations, which is not the case of regional liberalization.

f) Regional liberalization of trade in services has positive spill-over effects on regional liberalization in

merchandise trade. First, a large component of goods is services, on average 30% of goods production is

related to services. Second, with including services, the give and take process is widened and prospects

for gaining from services even if there are losses on the goods side are better.

g) The incompleteness of the GATS structure (e.g. domestic regulations, subsidies and safe guard

mechanisms) and the uncertainty caused by such incomplete structure forces countries to adopt a regionalmore cautious approach in terms of liberalization.

h) PTAs could encourage liberalization at the multilateral level (since the pain was already undertaken),

and it could create vested interests that resist multilateral or other regional liberalization.

Challenges associated with liberalization of trade in services on a regional level:

a) The need to make PTAs commitments consistent with domestic policy, this explains part of the

reluctance of AC to negotiate PTAs, "services liberalization, perhaps even more than for goods, is less

about trade negotiations and more about good domestic policy reforms"


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Political Economy of Industrial Policy in Arab countries

Industrial policies: Are any policies or interventions which influence how industries expand.

Horizontal policies: interventions that are applied across all sectors of the economy include promotingeducation, vocational training, and R&D, building efficient public infrastructure, technology transfers.

If Gov. provides across-the-board energy subsidies (e.g., in Iran), it is a horizontal policy. However, itimpacts firms differently, providing greater benefits to energy-intensive (or energy-inefficient) firms.

Vertical policies: Interventions that are differentially applied across sectors of the economy bytargetingthe economic output of specific industries and even firms.

Vertical versus horizontal policies: (countries primarily adopt vertical rather than horizontal policies)

Industrial policy is justified by market failures that generate sub-optimal outcomes in resource allocation.Incentives and policies can also be used to compensate and correct government failures.

1. Infant industry argument: based on comparative advantage claims, protection is warranted fornewly-established firms and industries with higher production costs than competitors. Over time, newdomestic producers can reduce costs by learning by doing, and then they can attain production efficiency.Without the initial protection, however, the domestic industry will never take off.

2. Coordination problems of either upstream or downstream investments: may hinder developmentof otherwise competitive industries. Evident example is the orchid industry in Taiwan, where orchidgrowers asked investment in greenhouses which had high fixed costs and were unlikely to be undertakenby the private sector. In Egypt, the argument has been used to support investments in water/irrigationsector to support agriculture.

3.Information externalities: that may restrict a countrys capacity to determine which activities havecosts low enough to be profitable, for this reason, selective government interventions may be required as a

mean of determining a countrys areas of cost advantage. This argument has been used in thedevelopment of export promotion agencies in the Tunisian and Moroccan textile sectors.

In addition to possibly getting it wrong, vertical policy is subject to two damaging side effects: rent

seeking and corruption. Wherever the Gov. makes selective interventions of one sector or firm, there isa potential for interest groups to sway policy in their direction and utilize it for personal gain. Attemptingto deal with these government failures yields more selective policies, making industrial policies complex.

As horizontal policies are applied across the board, they can promote efficiency and competition amongall firms, industries and sectors in the economy,rather than giving a privilege to some groups.They alsotend to reduce rent-seeking incentives as well as limit corruption opportunities and increase transparencyby eliminating the need for backroom politics and promote social participation.

Also, horizontal policies reduce the problem of state capture and government failure.Finally, it adjustsmore easily to changing market conditions since its benefits are not captured by special groups.

Political Economy of Industrial Policy:

Despite criticism to the selective policy interventions, most countries maintain something of a halfway

house between free-market and vertical interventions, because of collective action and interest groups.


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1. Sweeping nationalizations of industry, trade and agriculture in the early 1960s increased the scale of

public sector and reduced the role of the private sector; the relationship between state-owned enterprises

and decision-makers allows them to influence policies more effectively;because of protection, these state

owned enterprises incurredlosses, usually covered directly from the budget or from the banking system.

2. The capture (either wholly or predominantly) of the banking and insurance sectors by the state.

Resources of the banking system were directly allocated to selected activities with quota allocations

by sectors and preferential access by public enterprises. Egypt, created industrial development banks to

provide foreign exchange loans for imported capital goods necessary for investment.

3. The choice of price controls and subsidies as a predominant mode of regulation based on the need to

protect the poor and pursue a social agenda of redistribution, these administered prices damaged the link

between prices and production costs,

4. The role of oil wealthin both oil-producing and oil-related revenues economies underwrote the

public sector as a vehicle for redistribution through employment. Additionally, the abundance of oil

revenues has given rise to interest groups, who perpetuated the use of more vertical industrial policies.

Within the predominant role of the state, these mechanisms led to an industrial policy that was bound to

be sectorial/vertical and highly preferential, thus creating an environment of winners and losers.

Do Arab countries enjoy a "policy space" for shaping an effective industrial policy?

The use of vertical industrial policy diminished in AC (due to adopting macroeconomic stabilization and

structural reform programs, after the increasing budget deficit and the macroeconomic stability), but with

less extent compared with other regions. In the area of trade protection, tariffs and non-tariff measures

have been declined slowly compared to the rapid decrease observed in regions.

In most AC, the financial system has experienced the biggest reduction in gov. intervention, throughliberalization of interest rate, giving independence to central banks, liberalizing financial institutions, and

even privatizing them, that may decrease the crowding out effect.

Subsidies were greatly reduced as part of macroeconomicstabilization program, industries cash subsidies

in particular were reduced by almost 50 percent. But, the levels of subsidies remain high.

Transition from bad vertical industrial policies toward more horizontal is proceeding slowly in AC in

comparison to other regions, due to:

The results of industrial policy have not been bad enough. As substantial oil revenues, along with

foreign aid and strategic rents, has permitted the damaging effects of such policies. Crises elsewhere -

Europe and Central Asia in the late 1980s- generated pressure for both political and economic change, as

a result, they moved from command to market economies with less state intervention.

The lack of power among interest groups, for example, private sector activity is concentrated in a small

no of large firms that have benefited from protective policies,Trade unions, were tightly controlled by the

political system, the competitive industrial export sector, which lobby for horizontal policies, is scattered

among diverse product groups.


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AC suffers from fundamental weaknesses in governance, both in terms of inclusiveness, public

accountability, and strength of civil society.

Comparative advantages are coming less from abundant natural resources or cheaper labor, and more

from technical innovations and the competitive use of knowledge.

AC are members of a number of international organizations and have signed agreements that limit the

countries capacity to use distortionary policies to promoteparticular sectors.

Internal forces of growth and employment challenges in the light of the regions demographic transition

are putting pressure to change old industrial policies.

In addition, AC is facing socio-political pressures to improve inclusiveness and accountability, as well as

to increase the transparency and contestability of public policy.

East Asia Experience:

Vision and coordination, institutional capability of the government, enhancing capability of private sector,

managing integration in the world economy, managing internal conflicts


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Growth perspectives

Why Economic Growth Has Been Weak in Arab Countries?

The gap between per capita income of most AC and that of industrial countries has widened since the

early 1990s. The growth performance of the AC has been weak by developing country standards.

Exogenous factors relation to the weak growth performance of Arab countries:

According to gravity model, it is difficult for remote economies to benefit from international trade and

FDI, because of high transactions costs related to information, monitoring and transportation between the

center and remote economies. However this is not the case in AC, for instance Tunisia might have been

benefited by its favorable location, but the same advantage did not prevent Algeria from falling back.

Although the terms of trade of various AC obviously depend on the development of oil prices which are

very volatile, the relation between terms-of-trade and growth turns out to be extremely weak, because

most of oil-exporting AC are members of OPEC whose output decisions affect oil prices significantly.

Moreover, the IMF and the WB are hardly to blame for imposing ineffective policy conditionality on AC,

if only because the leverage of international financial institutions has remained limited in the region.

All AC taken together only 5% of outstanding World Bank loans extended to all developing countries, to

the contrary, AC five top growth performers belong to the clients of international financial institutions,

measured by their outstanding debt to the IMF and WB.

However, some elements of the Washington Consensus have been less effective than widely expected in

promoting growth. For example, FDI in some AC is rather unlikely to increase per capita income growth.

As in AC with low per capita income, domestic resource mobilization appears to be more important than

attracting FDI. Even in more advanced countries such as Egypt and Tunisia, continued efforts towards

human capital formation are key to sustainable growth.

Country-specific shocks played a role, notably for relatively high growth in Sudan after discovery of oil

and the poor performance of Jordan because of embargo )( on neighboring Iraq.

Insufficient Policy Reforms

Macroeconomic stabilization indicators: annual inflation rates, % Gov. Expenditure to GDP, % gross

fixed capital formation to GDP, and average years of schooling. Trade policy related variables include the

share of imports and exports in GDP and import tariff revenues as a percent of import value. Finally,

openness to FDI is measured by FDI inflows and inward FDI stocks, both related to host countrys GDP.

Evidence suggests that the economic policies pursued by AC have been in accordance with WashingtonConsensus at least in some respects: low to medium inflation rates compared to developing countries, By

contrast, government consumption, as a share of GDP, has been higher in AC than in other developing

countries, the evidence on factor accumulation is mixed, as the share of gross fixed capital formation to

GDP has declined, in the same time that human capital formation has improved.

Trade-related indicators Import tariff revenues have dropped below 10% of import value for AC, and the

share of imports to GDP has increased and share of exports to GDP have declined.


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The ratio of inward FDI stocks to GDP has soared which is consistent with the worldwide trend towards

the liberalization of FDI regulations. However, the median of this ratio for AC has remained below the

median for other developing countries. FDI flows were small with high degree of sectorial concentration.

Economic policy failure in AC appears to be a more important reason for poor growth. Even though the

region has partly fallen into line with the Washington Consensus, various AC lag behind other developing

countries when it comes to trimming () the interventionist role of the state and integrating themselves

into the global division of labor through trade and foreign direct investment (FDI).

The relation between macroeconomic conditions, factor accumulation, trade and FDI liberalization on the

one hand and growth on the other hand remains elusive. This may be because reforms have not gone far

enough and have remained fragmentary even in AC with a relatively favorable growth performance.

Egypt has succeeded to reduce inflation and government spending, and has more than doubled average

years of schooling since 1980. It ranks poorly, even by Arab standards, with regard to import protection

and export performance. Furthermore, growth in Egypt may not sustain, considering that the countrys

position with regard to gross fixed capital formation and FDI inflows has deteriorated in recent years.

Institutional Deficiencies: bad policies are only symptoms of longer-run institutional factors, and

correcting the policies without correcting the institutions will bring little long-run benefit.

Policy-related variables and economic growth depend deeply on institutional factors shaping the incentive

structure of economic agents. Institutional development varies greatly across AC, but is less advanced

than the level of per capita income would suggest.

While the discovery of oil may result in higher growth for some time, as in Sudan, the experience of

several oil exporters in the region supports that the abundance of oil encourages rent-seeking and exerts a

negative impact on growth via its negative impact on institutional development. The call for institutional

reforms mainly applies to resource-rich countries such as Algeria, Saudi Arabia and Sudan,notwithstanding their different growth performance in the past. It may prove difficult for these countries

to overcome the natural resource curse, but the successful transformation of a country like Mexico from

an oil dependent to a highly diversified economy with more advanced institutions may show AC the way.


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FINANCIAL CRISIS

The financial crisis, which began as a liquidity crunch, that severely affect global financial markets

moved quickly to the real economy, hence transferring the global economic expansion into the deepest

global economic recession since the 1930s. Moreover, crisis has shaken confidence in the international

financial system. Fears are growing over the introduction of protectionist policies, which could disrupt

the trade flows, lead to a prolonged recession and eliminate the progress made in the trade liberalization.

AC are expected to have lost at least about US$ 2.5 trillion as a result of falling market capitalization,

bank assets, oil revenues and losses incurred by the sovereign wealth funds (SWF).

The overall picture of the impact of the crisis on AC is relatively mixed. In the GCC countries, growth is

expected to reach lower levels, because of the sharp drop in oil revenues, a sharp drop in stock market,

lower profits and disruption in the boom in the housing sector. But it is expected to remain positive,

thanks to the accumulated huge surpluses during the boom of oil prices.

In other AC, growth is estimated to be either low or negative, precipitated by factors such as lower export

earnings, the poor performance of stock markets, underperforming banking sectors, expected drops inboth Official Development Assistant ODA and FDI and the expected drop in tourism revenues.

Several GCC countries have taken steps to boost domestic demand by applying expansionary fiscal

policies; it is expected that this may lead to a decline in oil investments and may delay plans to boost oil

production capacity. Furthermore, the private sector which is highly dependent on public sector spending,

may also be negatively affected by the crisis and wait to see how Gov. weather the financial storm.

The construction sector, particularly the real estate has been hit badly by the financial crisis. This has

resulted in the return of thousands of migrant workers and has reduced the income of many families who

lost part of their savings following the sharp correction in the real estate market.

GCC Banks still well capitalized, particularly those with less exposure to sophisticated financial products,

figures indicate that non-performing loans to total loans remain below 5%, with few exceptions.

Arab stock markets went through a major correction in 2008, the Arab Monetary Fund index for stock

markets dropped by 50%, while the capitalization rate dropped by 40%. The stock markets with the worst

performance were those with a high proportion of banks and real estate firms, like Dubai and Abu Dhabi.

SWF suffered great losses (US$ 200 billion in 2008), especially those funds that invested heavily in US

stock markets, particularly in banks and insurance companies. This expected to lead to a shift in the

investment strategy of these funds by, directing more funds and investments into their own economies,

reducing their investments in paper assets and investing more in the real economy.

The expected drop in FDI inflows to the region is due to, falling oil prices, the sharp correction in the

housing sector, the slowdown in economic activity and financial problems of multinational corporations

which represent the major source of the FDI inflows. Egypt announced a fall in FDI inflows of about US$

4 billion in the second half of 2008. On the other hand, intraregional FDI, which has been around 25 % of

total FDI inflows, could increase as a result of the repatriation of investments abroad back to the region.


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The decline in external sources of development finance, together with the drop in both exports and

tourism, is expected to place pressure on the exchange rates of the currencies of the non-GCC countries,

which may complicate the economic conditions faced by these countries.

The financial crisis is expected to have a negative impact on international trade. AC, are highly open to

world, GCC registered the highest trade openness indices, owing to the high share of oil in their exports.

The geographical distribution of Arab exports indicates that 50 and 30 per cent are exported to Asian and

EU countries, respectively. The expected drop in demand from European Union and Asian countries,

particularly Japan, will therefore have a significant impact on Arab countries.

Oil revenues in the GCC countries are expected to drop dramatically in 2009. This will have a severe

impact on their investment, including investments to add to their oil production capacity. Arab oil-

importing countries will benefit from the drop in oil prices which will alleviate the pressure on their

current accounts. Moreover, intraregional trade could also benefit as some of the exports that used to be

directed to Europe and the US could be directed to other AC, that may enhance intraregional trade.

The tourism outlook in the region is mixed. Those countries which rely on international tourism receipts

from outside the region, such as Egypt, Morocco and Tunisia, are expected to be hit by the crisis. Egypt,

for example, announced a drop in reservations of about 15 % in December 2008. For those countries that

depend mainly on intraregional tourism, like Lebanon the picture is expected to be better, as many Arab

tourists may change their destinations from Europe, Asia and the United States to AC.

Workers remittances are also expected to drop, because of the freezing of huge housing projects in the

GCC will lead to the return of thousands of foreign workers and to falling remittance levels. This will

have a huge impact on those countries which depend on remittances as a source of foreign exchange.

Decreasing remittances in Egypt, Jordan, and Yemen, will increase in both unemployment and poverty.

Several countries, including Egypt, KSA and the UAE, have adopted expansionary fiscal policies to boost

domestic demand, also declared their readiness to guarantee bank deposits to restore confidence in the

banking sector. Several GCC countries have also taken steps to ease credit conditions through cutting

discount rate, or/and lowering the repo rate or/and reducing RRR.

Recommended policy options include the need to:

1. Continue to apply expansionary fiscal policies to boost domestic demand, in infrastructural projects, in

order to stop the recent slowdown and increase economic activity levels.

2. Inject liquidity to the banking sector through rescue packages, thus restoring confidence in the banking

and financial sector.

3. Monitor mergers between financial institutions and ease Government regulations to encourage private

sector to play a more active role during the crisis.

4. Formulate and implement regulatory measures to be adopted by the banking sector in the long term.

5. Develop initiatives to ease the problems and minimize speculative activities in the real estate sector,

which represents an important source of economic growth in some countries.


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6. Enhance governance standards related to good governance, transparency and accountability of SWFs.

7. Diversify the investments of SWFs, both in terms of sectors and geographical distribution, by investing

more in the real economy and targeting developing regions, notably in Africa, Asia and Latin America

South-South ties.

8. Promote intraregional investments in sectors in which many AC have a comparative advantage, such as

agriculture, clothing, textile fibers, chemical products, and services such as tourism and research and

training centers. The latter would contribute to long term growth prospects.

9. Ensure full implementation of the Greater Arab Free Trade Area (GAFTA), in terms of harmonization

of production standards; facilitation of cross-border transit; computerization of customs services;

streamlining of inspection/control methods, including service liberalization and investment flows.

10. Enhance the role of some regional institutions, such as the Arab Trade Financing Program, in order to

further facilitate trade credit;

11. Pursue more efforts to diversify Arab exports away from oil, and move towards greater specializationin products with higher added-value and a large number of trading partners.

12. Continue efforts to improve the doing business environment, in particular by enhancing good

governance and combating inconsistency in the implementation of laws.

Impact of the current flux in the region on Arab economies

MENA economies can be classified into four groups:

- Oil and/or natural gas dominated countries including the six GCC countries, and Libya.- More diversified oil and/or natural gas dominated countries including Egypt, and Syria.- Non-oil diversified economies including Morocco, Tunisia, Lebanon, and Jordan.- Oil and/or natural gas heavily dependent Countries yet have experienced domestic conflicts

and/or have low GDP per capita such as Algeria, Sudan, Iraq, and Yemen.

Although labor markets are facing different types of problems, migration and remittances constitute a

common cure to all problems. Impact of oil price fluctuations differs significantly in terms of affectingMENA countries. Financial sectors and related issues continue to be liberalized and developed, yet at

different paces.

The fundamental characteristics of the Arab economies and the degree of financial sector liberalization

and development constitute major elements in terms of their respond to any external or internal shock.


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The transmission channels of the crisis on the second and third groups of MENA countries have been

mainly through the real economy, whereas the first and the fourth group were mainly affected through the

financial and oil prices means.

What have been common among oil and non-oil Arab exporters are the problems associated with their

financial sectors: Credit squeeze, and negatively affected stock markets.

The credit squeeze is a result of two main factors, namely the relative decline in capital of some of the

banks (mainly in the Gulf) due to the losses incurred in SWFs, and secondly the burst of real estate prices

which followed the financial crisis (e.g. real estate prices lost 20-40% in the Dubai and Abu Dhabi).

In general , the ability of MENA countries to respond to the crisis hinges on a number of factors including

the risk of fiscal un-sustainability (the case of Sudan and Yemen) , relatively weak private sectors and

inflexible labor market conditions (a common factor in all AC) , high unemployment rates associated with

weak automatic stabilizers (e.g. low wages, limited employment and social security benefits), a relatively

shallow, underdeveloped financial sector (low market capitalization ratios, weak corporate bonds market).

The relatively better ability of major oil exporters to respond to different shocks is mainly due to their

enjoyment of better position in the aforementioned issues.

Does the current flux in the region have the same impact as former crises/shocks?

What are distinguishing in the case of the current turmoil in the region are the transmission mechanisms

where the real and financial sides of the economy are likely to affected and in the same direction. In the

case of the first group of MENA countries, with the exception of Libya and Algeria, GCC countries are

expected to face favorable conditions on the real and financial aspects, whereas the other MENA

countries are likely to face negative conditions regarding the real and financial aspects of their economies.

Impact of the current events on MENA economies

Regarding the set of countries which experiencing some sort of revolutions including Yemen, Syria and

Libya, their economies are likely to be drastically affected. Clear analysis of the size of losses cannot be

estimated due to the deepening of conflict happening in those countries.

Yet, it is estimated that economic losses are likely to be much higher than those experienced by Egypt and

Tunisia during their revolutions. The reasons for this judgment include the length of status of flux which

has surpassed those experienced in Egypt and Tunisia; the amount of devastation of infrastructure

(especially in Yemen and Libya); and the amount of industrial production being negatively affected.

For example, it is estimated that Egyptians working in Libya remittances contribute 1.5 billion LE. The

negative implications in the case of Tunisia are expected to be similar, though with less extent.

Hence, at least Yemen and Libya, so far will need some sort ofMarshal Plan to build their economies

including their financial systems, which have been fragile even before the revolutions started.

Other countries in the region including Morocco, Jordan, and Lebanon have been negatively affected due

to the increase in oil prices and since they are net oil importers, also the increase in Gov. Social spending


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to achieve social goals and create jobs, all this led to increasing the budget deficit. Moreover, the return of

migrants from those countries that have been working in Libya will have negative repercussions on the

balance of payments and unemployment levels. However, given the relatively limited number of migrants

from those countries in Libya, the negative impact is not significant.

Gulf countries have been slightly affected, if any.

The MENA region though dealt with as one entity should be looked differently identifying the specific

characteristics of each sub-region and country alone.

Social aspects are likely to override the governments policies in all MENA countries for the coming

years, and mainly unemployment need to be carefully considered. From an economic point of view this

implies larger public spending on social related aspects with the consequences of widening budget

deficits, and paying attention more to the quality of growth rather than the rate of growth.

Governments should start serious programs aiming at targeting the poor and vulnerable groups

Financial sectors should be subject to a strong reform measures with focus on better risk managementtechniques, diversification of risks, and enhancement of credit to non-large corporations. Remittances

should be devoted a specific policy in the case of remittances receiving countries

The development paradigm in MENA countries needs to be revisited where productive employment

should be at its core, also relate labor market needs with the output of educational system.

MENA countries lack institutions, or the institutions that exist do not function well, that is why they are

in severe need of enhancing good governance mechanisms

Lessons learnt from other countries which faced similar experience:

1. There is a need to balance social and economic aspects during transition periods. If one overrides the

other, the probability of sustaining growth becomes low.

2. The urgent and indispensable need for effective institutions and governance mechanisms that should

accompany the transition to a market economy.

3. In the case of MENA countries it should be understood that adjustment will be associated with

economic costs to serve the social interests and overcome the political obstacles. To lessen such costs,

there is a need for effective coordination of economic policies and lowering of expectations of how the

economy will respond due to the huge uncertainty prevailing.

overview of arab economies and main challenges facing them

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