Arab leaders have routinely paid lip service to the concept of regional cooperation over the years, while there has been little progress on the ground. Political differences and disagreements have been the main stumbling blocks that hindered regional cooperation in the past.
It is becoming increasingly important for countries of the region to put aside political differences for the sake of common economic interests.
The Arab countries are facing a set of challenges including weak economic growth, high unemployment rates, high internal and external debt levels, and limited export capabilities to name a few. All of these challenges require more serious cooperation among Arab countries, for the coming period is one of regional economic blocs. The countries of the region must look at the common challenges and interests that tie them together.
Despite the region’s impressive oil wealth, economic growth has lagged behind other regions of the world. The Arab countries’ combined GDP rose from $440 billion in 1980 to $650 billion in 2000, that is at an average annual rate of around 2 percent. Taking average inflation of around 3 percent for the same period suggests that real GDP growth has been marginally negative over the past two decades, compared to an average real GDP growth of 3 percent globally.
Moreover, the almost doubling of the region’s population from 140 million in 1980 to 278 million in 2000 has led to a marked decline in per capita income. For instance, per capita income in Saudi Arabia has fallen from $25,000 in 19981, equal to that of the US at the time, to $7,000 in 2000, while per capita income in the US has risen to $40, 000.
Arab countries’ efforts at regional cooperation have so far failed to produce tangible result although talks of a common market started in the 1950s. In 1998, 14 Arab countries established the Arab Free Trade Agreement (AFTA) under which tariffs will be reduced for participating members by 10 percent annually, thus establishing a free trade area by 2007. However, many policy-induced barriers have yet to be tackled and the long lists of exceptions the various Arab countries have written into their free trade agreements threaten to make the AFTA useless.
The Arab countries’ trade performance has also been lacking. In 1999, total exports from the Arab world, including oil, reached $163 billion, less than the exports of Hong Kong, which stood at $174 billion that year. The region’s non-oil non-mineral exports did not exceed $45 billion in 1999, which is less than the exports of Finland, a country with a 5.5 million population. More worrying is the low level of inter-Arab trade, which stood at around 8.6 percent of total trade in 1999 even though the AFTA has been in place for two years. The limited size of intra-Arab trade is particularly pronounced when compared to other regional groupings. For example, intra-regional trade as a share of total trade stood at 60 percent in the EU last year, 40 percent for the East Asian economies, and 37 percent for North America Free Trade Area countries.
During the Arab summit that took place in Jordan in March, eleven of the summit’s final communiques tackled inter-Arab economic cooperation issues, foremost of which was the collective support for steps taken toward establishing the Arab Free Trade Area. Arab heads of state decided to advance the target date for the AFTA to 2005 and to call for the inclusion of services in the free trade zone. However, time is running out and Arab governments have to act faster if they are to meet the challenges of globalization. Eleven of the Arab states are already members of the WTO and more are applying for membership, leaving the Arab countries in a situation whereby globalization will precede regionalization, instead of a regional economic block taking a stronghold in the global economy.
Establishing the AFTA is only the first step toward forming a strong economic bloc. Alone, an AFTA would stand in direct conflict with one of the WTO principles as it allows the Arab members to discriminate against other non-Arab WTO members in the form of higher tariff rates than those imposed on Arab members.
AFTA must therefore be followed quickly by the establishment of a custom union whereby the member countries agree on a unified custom policy toward imports from outside the union. The third step entails forming a common market, which in addition to the free flow of goods and services, allows for the free movement of the factors of production such as capital, labor and technology. The final step is the economic union, similar to that of the European Union, which involves a unified central bank and monetary policy, and a single currency.
The last couple of years have witnessed some progress in terms of regional cooperation in the Arab world with an increasing number of joint Arab projects such as the ongoing construction of a gas pipeline to supply about 12 billion cubic meters a year of Egyptian gas to Jordan, Syria and Lebanon and the regional electricity grid between Egypt, Jordan and Syria. Such regional projects will give a much needed boost to Arab cooperation and economic integration, nevertheless, more needs to be done as Arab countries realize that all of them will be better off if they succeed on establishing a viable regional economic bloc.