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Tue 1 Feb 2011 02:22 PM

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Neighbourly trade

Inter-Arab trade is booming, and looks set to continue to flourish. But is more integration possible?

Neighbourly trade
Cairo, Egypt
Neighbourly trade
The recent Arab Economic Development and Social Summit in Sharm El Shaikh aims to confront pressing economic and social problems in the Arab world.
Neighbourly trade
Neighbourly trade

We are in Sharm El Sheikh, surrounded by Russian tourists and half-finished resort construction sites. Most of the restaurants you pass are ‘palaces.’

Fake palm trees and instrumental versions of ‘A Whole New World,’ a theme song from an animated Disney film about a fictional Arab city, hit you from every direction.

If you’re selling the idea of Arabia, no place tries harder.

Down the road from where Muscovites build sand castles on the Red Sea shore, the Arab world’s top finance ministers and executives are meeting in dreary conference rooms to hammer out a plan for the next five years — create a unified Arab economy that will increase trade and investment in the region, putting MENA on a par with Asia and Europe as a global economic player.

Selling Arabia, for real.

Egypt was chosen as the host of the second Arab Economic and Development Summit — the first was held in 2009 in Kuwait City, where you’re unlikely to see Speedos on the beach – because it’s a cornerstone of regional finance.

The country’s rate of trade with its MENA counterparts was $800m in 2005 and has now soared to $4bn.

Deals between Egypt and Syria alone registered $1.5bn in 2010, up from $250m in Kuwait — and it’s not even one of Egypt’s biggest trading partners. (Those would be Saudi Arabia, Jordan and Libya, which due to its physical proximity takes a huge amount of Egypt’s food exports.)

“The reason why is that we’re seeing more and more regional players and a significant surge concentrated mainly in the Gulf, Egypt and Jordan,” Rashid Mohamed Rashid, the Egyptian Minister of Trade and Acting Minister of Investment, tells Arabian Business. “Companies are now better able to market and distribute in the region. The strength of our economy will depend on our ability to integrate with our region.”

Case in point — we’re sitting in a room in the Rotana, a resort in Egypt owned by an Emirati and managed by a man from Lebanon.

Rashid sees new industries emerging in MENA, particularly in the chemical sector. They’ll help boost the regional bottom line.

“The chemical industry, particularly petrochemicals, never existed in the Arab world ten years ago,” he says. “Now construction material, engineering products are happening.”

To have economic stability, it’s always been held, you must have relative political stability. The overthrowing of Tunisia’s ruling government and rumours of similar possibilities in Egypt and Jordan — arguably the Middle East’s most unstable political climate — could make investors weary.

“The Tunisian problem is an economic one,” Rashid said. “Its stability might be a factor that prohibits investment into any country.”

“We are confronted with major political events in the Arab world,” adds Amr Moussa, the secretary general of the Arab League. When it comes to political disruption, “economic events are linked. These events have an impact on development or are caused by failure in the development process.”

Private companies have always been at the mercy of government regulation in MENA. Shares of Egyptian telecom giant Orascom dropped seven percent in one day this month after its CEO said he would likely seek arbitration against the government of North African neighbour Algeria, which says Orascom in the country owes $800m in back  taxes.

And the markets also see a direct impact from public tumoil — after two men followed the Tunisian example and self immolated in Cairo earlier in January — one fatally — the Egyptian benchmark stock index fell three percent.

Traditionally, the region has always faced problems — ongoing war in the Gulf, civil unrest over dictatorships, dependence on limited product supply (oil comes to mind) — that make would-be investors turn to China, India, and the traditional powerhouses in Europe and America.

It’s not just Western and Asian companies and high net worth individuals who are weary. Private sector investors from within MENA — who have money to burn — tend to turn their backs on their home region.

To lure them back, Arab finance needs to put an emphasis on interconnectivity — a united front instead of fractious neighbours.

“We do not want the Arab world to be behind all other regions regarding poverty alleviation and human development — there is a challenge confronting us not only in governments but societies,” he says. “We would not say that a certain government succeeded and another one failed, but that the community failed. As a whole the community should be the monitor for economic progress.”

There’s no consensus — yet — on whether turmoil in one country sets affects the import and export profits of its partners. What is clear is that it creates a hole in what aims to be a cohesive economic tapestry.

The chairman of Egypt’s General Authority for Investment, Osama Saleh, doesn’t think civil unrest in Tunisia has affected his country’s trade, despite annual transactions of $280-$300m between the North African neighbors. He and his team spent several days in Tunis last month, before the ouster of president Zine El Abidine Ben Ali. He called the deadly uprising there a civilian act.

“What’s happening is not yet reflected in terms of investment,” he says. “Their import-export partnership is a marriage, and up to now I’m seeing reports that say there’s zero effect.”

Like Rashid, he says new industry — in Tunisia’s case, the automotive parts sector – has led to more investment from that country in the last two years. Whether this will continue under the newly-installed government remains to be seen.

The need for the government and private sectors to acknowledge the symbiotic relationship between economy and politics is unshakable, and it’s not always clear that they do. We asked Saleh whether the installation of new rule in Tunisia would scare off foreign investors.

“They’ll get stabilised in a few days,” he says. “They already have a new government.”

Compare MENA to Swiss cheese — holes where there should be a cohesive whole. Its economy is porous — the poverty of Yemen and a reconstructing Iraq surrounded by the wealth of Kuwait, Qatar and Oman and the debt crunch of Dubai.

“Arab investment [from foreign bodies] has reached $20bn in past few years,” Rashid says. “The region has huge savings and regarding the output of oil it has huge, gigantic interests. And so why is this sum not invested in Arab countries? That’s because we’re not planning. We need a plan for attracting further investments in the region.”

What is needed is interconnectivity — open trade between countries, the lifting of border restrictions, collaboration in all sectors.

It’s a dream that’s a long way off — “the route is going to be very long,” Moussa says.

Rashid says Arab countries are not planning well enough for inter-MENA investment — and squandering an opportunity possibly worth billions of dollars.

The plan, he said, should start with economic collaboration — “we have to act within a collective framework.”

In 1998, the Greater Arab Free Trade Area was established to promote easier shifting of goods between countries, and to create a larger one-stop market for foreign investors.

The first and arguably biggest step towards establishing an Arab common market, it includes seventeen countries — Saudi Arabia and Bahrain to Jordan, Sudan, Egypt and Yemen. On the first day of 2005, the GAFTA countries reached a full trade liberalisation of goods, through the exemption (in full) of customs duties and charges on goods being traded between all GAFTA members except Sudan and Yemen.

It also said inter-GAFTA shipments no longer required authentication of certificates of origin and accompanying documents by embassies or consulates.

In 2009, Kuwait hosted the Arab Economic Summit, with the same goals it would later have in Sharm — working towards the development of a common market and integrated economy across MENA.

“Economic growth, social welfare and development are inextricably inter-dependent and both result from as well as lead to each other,” Mohammad Abdullah Abul Hasan, chairman of the Information Committee in charge of preparations for the event and advisor at the Al Diwan Al Amiri in Kuwait City, said at the time.

Greater investment in MENA will not happen without the help of the private sector — an intense collaboration is needed between big local business and their ruling governments, both to make it easier for those companies to invest their money — and to lure foreigners to the region.

As regards inter-Arab cooperation, GAFI’s Saleh says the private sector had become “very influential” in making collaborative MENA growth a possibility.

“They have different exposure and experience to bring to the table — you definitely cannot have economic expansion in the Arab world without them.”

Going forward, a common Arab market means a co-dependent relationship. Cooperation between government and the private sector will be imperative.

“Arab states have adopted resolutions and also we ask business people to contribute to the process of development,” Moussa said.

“What I hope for today… is the integration of CEOs and civil society organisations as well as Arab organisations,” says Egyptian trade Minister Rashid.

“All countries in the Arab world are in need of economic employment. We need employment for 40 million young people in next [eight years] and this will not be the fruit of just declarations written on paper. This cannot be easily achieved.”

He said overall development had fallen short of expectations.

“What we have achieved runs far short of what we had hoped for. Arab economic cooperation represents twelve percent [of the overall investment GDP.] In the EU it’s 60 percent and in Asia it’s 25 percent.”

Rashid adds that joblessness was a major factor tugging down the overall MENA economy. It’s also a key example of the intertwining of government stability and economic health, with a double-digit unemployment rate in Jordan currently the basis for rumors of Tunisia-inspired civil unrest.

Trade isn’t the only way to force countries to interact on an economic level. Special projects, notably inter-country transport systems, are one way to join governments.

“Feasibility studies on an inter-Arab railroad network have already been conducted through European companies,” Moussa says. “We have a half-filled cup, so to speak, so it depends on how we build progress and fill the cup to the brim. Poverty unfortunately affects most of our people, and this is [typically] a measure for progress.”

Rashid says resolutions struck at the Arab summit in Kuwait had “dealt with the subject in an objective and concrete manner” and established easy channels for inter-Arab development, including shared energy initiatives.

“We discussed unified efforts for various services and linkages in terms of electric power and energy, and we discussed all the sectors that lead to real connectivity. But it has been very slow,” he says. “It comes out of the urgent need to participate together. All Arab countries believe in membership in an Arab common market. Eventually they will discover the role of the private sector, but how do you incorporate this development in the short term?”

He says government needed the support of business and their fellow MENA officials.“The challenge is in most governments not having the material ability to do this alone — they need help and contributions.

“The [political] events around us emphasise the fact that a strong economic setup is the basis of everything — especially stability and development. Going forward, we have to emphasise the interests which will lead to fuller development if we concentrated on them.”

In the Gulf, which leads MENA in interconnectivity, a long-gestating, billion-dollar causeway between Qatar and Bahrain is back on track, eyeing a completion date of 2015. The region will also see links in the hospitality, aviation and other aspects of the transport sector as it prepares for the 2022 World Cup — to be held in Qatar but thought of by many in the GCC as a regional event, strengthening the infrastructure of both Doha and its neighbours.

The Gulf presents the biggest challenge for MENA countries looking to form new partnerships. Its countries, namely the UAE, Qatar and Bahrain, are the furthest ahead in terms of partnering with surrounding countries and luring foreign investment — Dubai and increasingly Abu Dhabi lead the Middle East in sheer scope of investment from both home and abroad.

Rashid says the top challenge going forward remained the Gulf.

“It’s a challenge because the level of competition is extremely high and [because of its] its proximity to [traders in] Asia,” he says.

The Gulf currently does business with Europe and Asia in every sector from banking to real estate, construction to fisheries. If the inter-MENA trade infrastructure was expanded, billions of those dollars could pour into other areas of the Middle East, instead of leaving the region entirely.

The oil-rich states also provide a huge market for Arab products, especially Arab expats longing for items from home — “the population is limited but their consumption is huge.”

Imports and exports are heavily slanted towards the Gulf states.

According to the Arab Monetary Fund, in 1997, Jordan’s total imports were at $4bn. By 2007 they were at $13bn. But the UAE saw $34bn in 1997 and $121bn in 2007.

MENA’s total rose to $494bn in 2007, from $146bn the decade earlier.

Going forward, Egypt hopes to expand trade with the Gulf by reducing the cost of product transport, which — with no direct sea route — can soar.

Rashid said that in order for MENA’s trade to continue to grow, there was a “long list” of improvements to be made to the trade infrastructure – starting with the opening of borders for easier access.

He says the markets for construction material and engineering products had expanded and were ripe for cross-Arab investment (Saudi Arabia being a hub for construction and real estate development) and that the food trade had become one of the brightest sectors for Arab trade.

In addition, energy products — with a new emphasis on solar energy and local power sources, and shortages in countries throughout the Arab world — could tilt the import-export balance.

In Egypt, import and export rates were nearly even, unless energy products were included — in which case the exports, to poorer neighbouring countries including Sudan and Libya, soared.

“Egypt was one of the countries keen to implement the Arab Free Trade Agreement and the outcome was very positive,” Rashid says.

For an Arab economy to be self-sufficient, it’s going to have to form new, unique trading partnerships. One such exists now between Egypt and Libya, the former stocking the latter’s cupboards — Egypt exported $1.2bn in food product in 2007, Libya just $2m.

Jordan is looking to stabilise, then diversify its one-note economy, with an unlikely partner — Qatar.

Last week, PM Samir Rifai and Qatar Holdings CEO Ahmad Mohammad Al Sayed met in Doha to discuss an investment into Jordanian’s tourism and energy industries.

Organizations to promote inter-Arab activity have long been established, and are now stepping into high gear. Over the next five years, trade in the region is expected to surge, equalling or surpassing the growth of the last decade.

The progress Arab states have made without the benefit of a fully-formed communal economic infrastructure is massive. The Arab League agitates constantly for a theme of Arab cooperation and expects growth to continue.

Meanwhile, on a hot day in Sharm El Sheikh, cars were backed up for hours along police checkpoints and outbound flights were briefly put on hold — Egyptian president Hosni Mubarak was in town to deliver the summit’s keynote. Though they were agitating for his ouster a few hours away in Cairo, he asked for integration — chances are it will happen, but whether he and current governors will be there to witness the final shift remains to be seen.