How different the future could be…

In a question-and-answer response to Cash&Trade, the World Bank urged MENA to consider the benefits of trade reform

C&T: What reforms do you think need to be made across MENA to better facilitate trade?

WB: The region’s share in total world exports of non-oil goods has remained flat at around two to three per cent for more than 30 years. Despite doubling its services exports, MENA’s share in total trade services has also stagnated at around 2.8 per cent from 1990 through 2006.  The World Bank’s 2010 report, MENA Regional Economic Update: Recovering from the Crisis, reveals serious competitiveness issues and suggest that the region has missed opportunities to integrate into the world economy, increase growth, and create new productive jobs. And intra-regional trade in MENA has also failed to take off.

MENA countries have generally suffered from domestic inefficiencies: relatively high trade and investment barriers, poor trade facilitation and logistics, lack of trade services integration, and weak rules and discipline for trade and investment, including intra-regional trade agreements, according to the Deauville Report, 2013, From Political to Economic Awakening: The Path of Economic Integration. MENA countries are also not well connected to global value chains. Trade in intermediate products is growing faster than trade in finished products. Apart from the GCC, which is already a single market, little has been done to facilitate cross-border trade between neighbours and on trade corridors. Border-crossing procedures in MENA are still impediments to trade.

In this context, and based on our analyses and field work, we find that trade facilitation and logistics issues constitute important barriers to trade in MENA. The ease of moving goods internationally, which is not just about transportation, is critical to competitiveness. The reform program should include increasing efficiency of the supply chains linking domestic producers and buyers to their international partners, whether in the region or in distant markets. The trade facilitation and logistics agenda should aim to address the links between investments in hard infrastructure and the policy actions to facilitate trade flows. Policy makers should call for collective action initiatives aimed at enhancing investment climates and initiating the progressive dismantling of key obstacles to trade and investment.

C&T: What expectations, if any, do you have of the new Aid for Trade Initiative For Arab States (AFTIAS)?

WB: We welcome this Initiative, given that it aims at supporting and funding trade-related technical assistance in Arab countries. If implemented on the basis of needs assessment, it has the potential to become a useful mechanism. By definition, “aid for trade” covers trade facilitation, including support for improving ports or customs facilities, strengthening partners’ trade negotiation or regulatory capacity, or helping countries meet specific health and safety standards. And the MENA region is in high need of these reforms.

Trade costs are high mostly due to supply chain inefficiencies, especially between MENA countries themselves, which can be explained partly by a deficit in logistics performance and facilitation bottlenecks (the cost of trade between neighbours is typically twice as high among MENA countries as compared with those in Western Europe). Markets for logistics services are typically small (domestic), confined to traditional activities (trucking brokerage), protected, and do not offer high quality domestic services to traders. Logistics skills are limited in the region, with limited externalisation and value-added in logistics.

C&T: Is there anything else that individual countries (and banks and companies) can do to better facilitate trade?

WB:The majority of reforms can be put in place at country level. Each country has its own share of responsibility. Almost all countries in the MENA region have been reforming their foreign trade and domestic investment regimes to make the policy environment more conducive to fuller integration into the world economy. Some have concluded Association Agreements with the EU but these could be deepened to include services and agricultural goods. Other MENA countries have yet to join the WTO and reap the benefits of more open and predictable market access, and the protection of the multilateral trading system.

Although many countries in the MENA region are WTO members many are not. Border reforms also have to complement efforts for more global integration. In particular, the investment/business environment has to be strengthened to promote private investment from domestic and foreign sources. The package needed to achieve this objective would include the provision of adequate infrastructure services, finance, and training, supportive exchange rate policies, and elimination of administrative barriers, as well as sector-specific policies.

Financial services are one of the areas where there is a huge potential for reform. Liberalisation of trade in financial services would help the MENA countries take advantage of regional opportunities. The banks can play an important intermediary role between large capital pools in the Gulf and the countries with large current account deficits. Proceeding with necessary financial sector reforms as well as maintaining macro-financial frameworks, which are conducive to support the reform process, are essential. Financial institutions in the region provide fairly adequate payment related services such as foreign exchange and fund transfers services to support the current trade volumes. However, financial sectors lack depth and breadth across virtually all the region. The systems mainly consist of commercial banks as non-bank financial services are underdeveloped. Consequently, financial backing of trade transactions is weak.

C&T: Some experts say that more needs to be done to encourage entrepreneurship and broaden the products that could be exported through encouraging SMEs – do you agree?

WB: It is actually somewhat of a chicken-an-egg situation.  Entrepreneurs of the region need to become more innovative – and international experience in emerging economies indicates that the main drivers of innovation and new ideas are trade and foreign investment – but there also has to be a more supportive Investment climate. So there is an urgent need to move from the current vicious cycle of “closed-ness’”and lack of competition to one of openness and increased competitive pressures from trade, FDI, technology and knowledge transfer on which more dynamic entrepreneurship can be launched.

At the same time, if the right types of entrepreneurs can break out of their current low level-non-competitive equilibrium and produce more dynamic goods this could also help drive more trade and possible cross-border investment. The World Bank Group leads a number of activities and projects to support the private sector such as entrepreneurship training, micro-financing support and SME support, matching grants to support new exports either for new products or to new markets.

It is to be expected that the Gulf countries will be highly specialised in oil and gas given their natural resource endowment, and, for the smaller Gulf economies, the small size of their national populations limits the scope for an indigenous broad-based economy.  For all these countries, it is difficult for the SME sector to attract entrepreneurs given continual increases in public sector pay and numbers. While SME support programmes are one policy that could enable the building of a pool of entrepreneurs over time, there are broader market structures in the non-oil economy that could also be tackled, such as anti-competitive practices (barriers to entry, collusion) and regulatory protection of incumbents through licensing, permits and customs,. While none of these policies will give the Gulf a more diversified economy overnight, they can help tilt the non-oil economy towards a more productive composition of products and services in contrast to the current dominance of household leisure services, construction and trading companies.

C&T: Do you see any significant trade reforms being put in place this year?

WB: The Arab Spring has unfortunately slowed down the pace of trade reforms across the region as other pressing priorities have emerged and governments have reshuffled many times in a number of countries. However, we believe that trade reforms should be considered as part of the solution. These reforms would particularly benefit exporters and importers. Too often, keeping the economies closed has allowed only some favoured few domestic enterprises to thrive and cement monopoly powers. In addition, corruption has been identified as a major obstacle to investment and business, and it becomes an explosive factor in a society where the young in particular feel excluded from economic opportunities.

The World Bank Group is engaged with a number of MENA countries on the trade agenda. The programme and assistance depends on the country context and readiness for reforms. In addition, we will be increasingly working closely with private sector, academia, think tanks, the diaspora and local experts in the region to introduce a regional economic integration agenda that brings short and medium-term actions.

For example, the recent World Bank study Over the Horizon: A New Levant identifies complementary economic activities among a number of countries in the Levant that could unleash untapped potential in both investment and trade in goods and services.