In the last few years Mediterranean countries have gone through important and far-reaching political transformations. Reforms started (slowly) in the late 1980s – early 1990s, when several countries on the south shore of the Mediterranean[1] undertook three major interrelated policy shifts: a) a step towards greater integration in the world economy, mainly implemented through lowering trade barriers, and reforming the exchange rate markets; b) a transition from oil-dominated economies to more diversified production and exports; and c) a move away from the public sector towards the market economy, which includes privatising companies. This unfinished agenda, and a discontent for the existing political regimes, linked to the population dynamic, a dramatic situation in the labour market and major changes in world demand after the 2008-2009 financial crisis, resulted in the Arab Spring, which has important implications for the patterns of globalisation.

The region, though increasing its pace of trade integration and reforms with respect to the past, has been lagging behind in the 2000s: it has not been fully taking part in the newly developing global production networks, nor benefited much from the potentials of developments in emerging markets. Growth and integration could also be triggered by regional integration, which started long ago, in 1957, with the Arab Economic Unity agreement[2] but is now falling short of its ambitious goals, despite the recent signing of the Pan-Arab Free Trade Agreement (PAFTA, 1998) and Agadir Agreement (signed by Egypt, Jordan, Morocco and Tunisia).

Against this backdrop, we briefly describe trade amongst Mediterranean countries, trying to assess to what extent, if any, they have managed to diversify from natural resource-based sectors towards manufacturing and/or services and whether (and how) growth potential can be enhanced. We also check if trade within the area has a specific sectoral composition. This implies a closer look at the role of natural resource abundance and macroeconomic policies in the region’s economic diversification patterns. For such an assessment it is also crucial to evaluate the impact of the real exchange rate on competitiveness (Sekkat, 2012).

Trade and Specialisation

A standard measure of trade openness (imports plus exports as a share of GDP) reported in Table 1 shows that MENA countries are more open than the world average but substantially less than East Asia.

TABLE 1 Measures of Openness, 2010

The degree of trade openness however varies substantially across countries (Table 2), even though all, excluding Algeria, have increased their openness over the last decade.

TABLE 2 Degree of Openness, Selected Countries and Years

Chart 1 shows the developments of MENA exports in the last ten years. Total exports have more than doubled, from less than 100 billion dollars to over 200, with a peak at the beginning of the financial crisis. The crisis triggered a collapse by almost 20%. Furthermore, since the crisis the EU27 has progressively lost its weight as an export destination. Exports towards the EU27 accounted for over 43% of total exports in 2003, and only 30% in 2011. The relevance of more dynamic Asian and MENA markets increased, and this was able to trigger growth. Intra MENA trade jumped from about 7 billion dollars in 2005 to almost 17 in 2011: an impressive increase of 143% in 6 years. 

CHART 1 MENA Exports to the Rest of the World, the EU and within the MENA Area

Chart 2 depicts exports of individual countries separately to the EU and other MENA countries. The diversity is significant. In 2011, Jordan and Lebanon exported within the MENA region, rather than to the EU, with more than 10% of total exports carried out with MENA countries. For Egypt, the other countries in the area have constituted a key export market, while Tunisia, on the other hand, maintains the EU as its main destination market. Over time, all countries show a decrease in the export share towards the EU, and a majority an increase in the importance of the MENA region. Egypt significantly shifted exports from the EU towards MENA countries, while for Tunisia, where the EU continues to be the predominant export destination, this was much less the case. Jordan did not reduce its export share toward the EU, but the importance of the MENA region increased significantly.

CHART 2 Share of Trade with EU and Other MENA Countries of Total Exports

Despite the recent increase, intra-MENA trade remains a small fraction (5.9% in exports, 5.1% in imports). Exports to the EU[3] are almost ten times more relevant than intra-MENA trade flows and there is an important asymmetry. Although, because of its geographical and cultural proximity, the MENA region represents a natural market for the EU, the area only accounts for 6% of total extra-EU exports. Conversely, despite the recent fall, the EU accounts for 26% of Mashreq countries’ exports and over 57% for Maghreb countries (Mati, 2013). Within the EU, Italy, France and Spain are the most important trade partners.

The relevance of more dynamic Asian and MENA markets increased, and this was able to trigger growth. Intra MENA trade jumped from about 7 billion dollars in 2005 to almost 17 in 2011: an impressive increase of 143% in 6 years

Intra-subregional trade (intra-Maghreb and intra-Mashreq) displays diverging patterns. Intra-Maghreb exports (2.5% of total Maghreb exports) are negligible, except for Tunisia. Intra-Mashreq exports are more intense, amounting to 10.4% of the total. The results of various estimated gravity models (see Diop et al, 2013 for a survey) suggest, however, that intra-MENA trade is well below its potential.

Trade patterns are largely shaped by the differences in individual countries. Most are characterised by low diversification of domestic production and exports, but only some are resource-rich. In oil-rich Algeria and Libya, the mining sector has become even bigger, in relative terms, over time, suggesting that diversification away from oil has not been achieved. In 2010, mining accounted for over 35% of GDP (up from 28% in 1990), around 85% of merchandise exports, and between 65% and 95% of government revenues. Little export diversification occurred in exports of existing processed and primary industrial products (mainly crude and refined oil) to existing destination markets in Asia, the EU, and within the area. Exports of new products occurred exclusively within the industrial sector and for resource-poor countries (Egypt, Jordan, Lebanon, Morocco, and Tunisia). Export growth was driven by primary, processed industrial goods and consumer goods and was confined to European markets. Diversifying into higher skilled manufacturing may open up more possibilities for boosting exports of new products (“extensive margin”) as opposed to exporting the same products more intensively (“intensive margin”).

CHART 3 Share of Sector in MENA Region Exports to the Rest of the World (2011), Selected Countries

Chart 3 shows that exports were still heterogeneous and somewhat dichotomised in 2011: Tunisia, Jordan, Lebanon and Egypt concentrated their exports on manufacturing products; while Algeria Iran and Yemen mostly exported fuels. Other activities appear to be marginal, even though agriculture is still relevant in Egypt. Disaggregating further, consumer and primary goods currently account for 64% of total exports (Asia 41%, Latin America 57%) while capital goods for only 6%. These patterns hold back the MENA region’s potential for trade and, indeed, MENA countries trade less with the rest of the world than could be expected.

CHART 4 Intra-Mena Trade by Sector

The picture is different if the intra-area trade is considered. A comparison of Charts 3 and 4 supports the view that trade in manufacturing is higher between similar countries, while resource-based trade is likely to occur mostly with Western countries as “north-south” trade. In six cases out of seven, fuels represent a marginal share in intra-trade. In Chart 5, manufacturing activities represent the majority of exports, while Yemen mostly concentrates its intra-area export on agriculture. Algeria seems to be an exception, as it is the only country exporting fuels to other MENA countries.

CHART 5 Export Diversity Index, Selected Countries and Years

Chart 5 suggests that MENA countries’ exports are still very concentrated^[4] and relatively dependent on few products and that not much progress has been made in the last decade. Of course there are some important differences across countries, with Tunisian and Egyptian exports becoming more similar to the rest of the world over time.

Trade in manufacturing is higher between similar countries, while resource-based trade is likely to occur mostly with Western countries as “North-South” trade

Conclusions

Uncertainty and volatility have characterised recent developments in Mediterranean countries, due partly to the low diversification of their production and exports and partly to commodity price developments. Higher diversification could trigger economies of scale and offer opportunities to reap the benefits of global integration, thereby boosting long-term growth. Also, intra-regional trade could be instrumental in enhancing diversification and growth, especially in a situation where EU demand has decreased substantially and the region may improve its future integration with emerging markets or within the area. Venables (2011) argues that the proximity of resource-rich and resource-poor countries gives an opportunity to even wealth distribution within the group of countries via regional integration. His suggestion is that resource-rich countries are more likely to experience trade diversion as they are now sourcing imports from the less efficient resource-poor partners.

But the MENA region is falling short of its ambitious goals. Regional trade integration is still low, despite trade agreements, possibly due to cumbersome clearance procedures, which are more time-consuming than in other regions, with the West Bank and Gaza, Lebanon and Algeria at the bottom of the pile. Also transport costs, which are high in the West Bank and Gaza, Lebanon and Algeria, affect the level of integration. Finally, despite significant tariff reforms,[5] tariffs (about 10% in 2011) remain high.

MENA countries should change their strategy and adopt a more export-oriented policy that favours diversification. Exports are too concentrated in primary commodities and labour-intensive manufacturing, sectors with little technology or knowledge transfer. Also, contrary to 1995, when the Barcelona Process was launched, the future for the MENA region might be brighter through regional integration, rather than integration with the EU.

Notes

[1] Countries in the area are grouped differently and in the following, unless otherwise specified, we refer to Middle East North African countries (MENA) including Algeria, Djibouti, Egypt, Jordan, Iran, Iraq, Lebanon, Libya, Morocco, Palestine territories, Syria Tunisia and Yemen. The Euro-Mediterranean Partnership includes Algeria, Egypt, Israel, Jordan, Lebanon, Libya, Morocco, Occupied Palestinian Territory, Syria, Tunisia and Turkey. Maghreb includes Algeria, Morocco, Tunisia and Libya and Mashreq includes Jordan, Lebanon, Syria and the Palestine territories. The Gulf Cooperation Countries (GCC) are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates.

[2] In 1964 Egypt, Iraq, Jordan and Syria tried to form an Arab Common Market, and in 1989 Algeria, Libya, Mauritania, Morocco and Tunisia formed the Arab Maghreb Union.

[3] Imports, not reported for reasons of space, are eight times.

[4] The diversity index, DXj = (sum |hij – hi|) / 2 where hij is the share of i in total exports of country j and hi that of the commodity in world exports, signals whether the structure of exports by product of a given country differ from the world average. It ranges from 0 to 1 and if closer to 1 it indicates a bigger difference from the world average.

[5] Most countries have lowered tariffs over the past two decades, often via trade agreements with the European Union and the United States.

References

Diop, Ndiamé; Marotta, Daniela and De Melo, Jaime (eds.).  Natural Resource Abundance, Growth, and Diversification in the Middle East and North Africa. The Effects of Natural Resources and the Role of Policies, Washington, World Bank, 2013

Mati, Amine. “Picture This: Trade, Growth and Jobs”, Finance & Development, March, IMF, 2013

Sekkat, Khalid. “Manufactured Exports and FDI in Southern Mediterranean Countries: Evolution, determinants and prospects”. MEDPRO Technical Report No. 14, April, 2012.

Venables, Anthony. “Economic Integration in Remote Resource-Rich Regions?” In: Barro R. and J. W. Lee (eds). Costs and Benefits of Economic Integration in Asia, New York: Oxford University Press, 2011.