ESCWA EXPERT GROUP MEETING ON TRANSPORT AND TRADE FACILITATION DUBAI, APRIL 10, 2013 JEAN-PIERRE CHAUFFOUR LEAD ECONOMIST, WORLD BANK From Political to Economic Awakening in the Arab World: The Path of Economic Integration

Background - Trade and FDI Report In wake of Arab Spring, Deauville Summit of the G8 (April 2011) establishes a Partnership between  Deauville Partners: G8, Kuwait Qatar, Saudi Arabia, Turkey, UAE, and 9 associated international and regional financial institutions  Arab countries in transition: Egypt, Jordan, Morocco, Tunisia, and later Libya and Yemen Deauville Partnership commissions an analytical report “to provide an appropriate framework to enhance trade and FDI” 2

3 Why picking on trade and FDI?

Flat share of global exports of goods and services Source: Regional Economic Developments and Prospects, MENA, World Bank,

Limited intra-MENA integration Measured by nonoil exports Source: World Bank (staff calculations),

FDI inflows surged Source: Regional Economic Developments and Prospects, MENA, World Bank, 2011 In percent of GDP 6

Mainly in real estate and mining Source: Regional Economic Developments and Prospects, MENA, World Bank, 2011 Share of greenfield FDI inflows by sector 7

Explaining MENA’s poor trade performance 8 No lack of trade and investment reforms, per se But  Partial and narrow  De jure, de facto Hence,  Limited benefits  Captured by a few

Meanwhile, the trade agenda has changed 9

Global value chain require much deeper integration and behind the border reforms 10

From Political to Economic Awakening in the Arab world: The path of Economic Integration (world Bank, 2013) 11

The main proposal of the report 12 Objective. Expanding market opportunities while undertaking policy reforms needed to seize them, including trade facilitation measures Expected Result. Deeper integration as an anchor for “meritocratic” domestic reform, sustainable economic growth and jobs creation

Report details 4 Areas of Reform and 16 Priorities 1. Improve market access opportunities and market regulations—6 priorities 2. Boost competitiveness, diversification, and employment—4 priorities 3. Facilitate trade, mobilize trade finance and engage the diasporas—3 priorities 4. Promote inclusiveness, equity, and sustainability—3 priorities 13

Key trade facilitation issues 14 Proximity to the EU’s 500 millions consumers but “thick” borders due to trade facilitation bottlenecks Few transport corridors and border crossings (when they are opened) and above average level of physical inspections Hard infrastructure bottlenecks: quality of ports, airports, roads, railways, etc Even more costly are soft infrastructure bottlenecks: customs procedures, other border control agencies (SPS, norms and standards, etc); quality of logistics services such as trucking, warehousing, freight and forwarding

Trade Facilitation Priorities Modernize trade facilitation services by enhancing the performance of trade corridors, whether air, sea, or land, and network infrastructure for energy and telecommunications; improving markets for logistics services; increasing the efficiency of border management, including customs; and facilitating the cross-border movement of service suppliers Container dwell times in Morocco or Tunisia are about a week, compared to 4 days in Malaysia and 2.5 days in Shanghai. Trade logistics costs can be as high as 26 percent of the product price for Jordanian potatoes and 15 percent for Egyptian garments 24

Two short term recommendations 16 Pursue the modernization of customs, including through computerization and staff training for efficiently controlling violations Upgrade the quality of logistics service providers in air and maritime and freight forwarding, including by rationalizing and simplifying regulations and increasing competition in a range of service providers, notably truckers and brokers

Two medium term recommendations 17 Automate the operations of all border agencies through single windows to better coordinate and accelerate communication among agencies Improve subregional trade corridors and regional trade facilitation frameworks, including agreement on transit regimes to facilitate movements from origin to destination along several borders (building on the TIR convention), and coordinate policies and regulatory changes as well as transport and border crossing infrastructure in key transport corridors

Emulating Turkey Since anchoring domestic reforms in a comprehensive integration process, Turkey has created 3 million new jobs 35

Thank you 34

1. Market access and regulations Priority #1 Improve market access for agricultural products, upgrade sanitary and phytosanitary standards As a significant benefit, Morocco could expect to export an additional 58,700 tons of tomatoes and 13,600 tons of olive oil per year once agriculture agreement recently signed with EU enters into force 14

1. Market access and regulations Priority #2 Reduce MFN tariffs on manufactured goods; streamline unnecessary nontariff measures to reduce trade compliance costs, red tape, and discretion; and upgrade industrial norms and standards, testing, and certification procedures There is much scope for expanding trade in goods in the region. Excluding petroleum exports, the MENA region, with over 400 million people, exports roughly the same amount as Switzerland 15

1. Market access and regulations Priority #3 Enable services trade to move up the value chain by fostering services liberalization and regulatory reforms, improving regional connectivity and cooperation, and encouraging the presence of global services providers A study conducted in India estimated that a one- standard-deviation increase in the aggregate index of services liberalization resulted in a productivity increase of 11.7 percent for domestic firms and 13.2 percent for foreign enterprises 16

1. Market access and regulations Priority #4 Promote solar energy exports, including through a multilateral agreement on concentrated solar power; upgrade and expand infrastructure to increase electricity capacity and synchronize power grids; and open up access to national transmission systems The development of concentrated solar power equipment in the five Partnership countries alone could eventually create more than 80,000 jobs 17

1. Market access and regulations Priority #5 Formulate labor mobility strategy and open dialogue on mutually-beneficial increase in labor mobility through mobility schemes Canada’s Seasonal Agricultural Workers Program builds on bilateral agreements to bring about 20,000 workers from Mexico, Central America, and the Caribbean annually to do seasonal work on Canadian farms for up to eight months 18

1. Market access and regulations Priority #6 Promote regulatory convergence of norms and standards, especially competition policy, government procurement, and other trade- and FDI-enhancing reforms In Morocco where government spends about 15 percent of its national income on goods and services, a 10 percent saving on procurement contracts is equivalent to 1.5 percent of GDP—an amount that often exceeds the total amount of aid received 19

2. Competitiveness, diversification Priority #1 Strengthen FDI regime by phasing out de jure and de facto restrictions on foreign equity participation in most economic sectors; simplifying and rationalizing investment regimes; easing access to production factors (industrial land, foreign exchange, and expatriate workers); completing privatization programs in a transparent and competitive manner Reforms in the telecommunications sector in Jordan in the mid-2000s generated 25,000 jobs 20

2. Competitiveness, diversification Priority #2 Improve the domestic business climate by fostering competition and limiting opportunities for rent seeking; building strong rule-bound market institutions to reduce discretion and opacity; facilitate entry but also exit (bankruptcy); and promoting institutional dialogue among stakeholders on the design, implementation, and evaluation of policies Barriers to the process of “creative destruction” in Partnership countries are enormous. Average age of firms in MENA is almost 10 years older than in East Asia or Eastern Europe. 21

2. Competitiveness, diversification Priority #3 Strengthen economic governance by fighting corruption, discretion, and the uneven implementation of policies; building citizen voice, government accountability, and robust checks and balances; strengthening the rule of law and establish level playing field; and promoting transparency through freedom of information Jordan is the first MENA country that is a member of the Open Government Partnership, which includes 53 countries from around the world. Tunisia has taken significant steps since the revolution. 22

2. Competitiveness, diversification Priority #4 Foster the four pillars of a knowledge economy by harnessing more technological spillovers from existing and future FDI; launching an overhaul of education systems; developing knowledge and innovation strategies; and further diffusing information and communication technologies Romania, which competes with Morocco in offshoring, has nine times the international bandwidth capacity per capita 23

3. Trade facilitation, trade finance Priority #2 Improve access to affordable trade finance and related insurance and guarantee products for SMEs, including Islamic finance; build the technical capacity of both SMEs and financial institutions in the management of trade finance; and develop new inter-firm finance products, such as factoring Only 20 percent of SMEs in MENA have a loan or line of credit, a significantly lower share than in all other regions except Sub-Saharan Africa 25

3. Trade facilitation, trade finance Priority #3 Harness the diaspora. Mobilize remittances, technology and skills transfer, and investment of workers abroad The intra-regional movement of people dwarfs the movement of goods in the Arab world. Diaspora remittances sent to Jordan and Egypt from other Arab countries are 40 to 190 percent higher than trade revenues between these and other Arab countries 26

4. Inclusiveness, sustainability Priority #1 Target social policies to help the most vulnerable people manage trade- and FDI-related shocks, address the needs of the unemployed during transition periods, and retrain workers in sectors that lose as a result of integration In Jordan, the poor receive only 11 percent of total government subsidies 27

4. Inclusiveness, sustainability Priority #2 Develop regional policies to connect lagging and remote regions to urban centers, build up human capital in lagging regions, promote internal trade, and help poor people in these areas connect to the places where opportunities are concentrated In Morocco and Tunisia, only about 40 percent of the population lives within two kilometers of an all- weather road 28

4. Inclusiveness, sustainability Priority #3 Promote common societal policies in trade and investment rules, including in the areas of women’s rights, labor rights, and other human rights Female labor force participation rates in Egypt, Jordan, and Morocco are about half that of Indonesia 29

What could Deauville Partners do? The EU could deepen its trade relationships with Egypt, Jordan, Morocco, and Tunisia with the effective implementation of the proposed deep and comprehensive FTAs (DCFTAs). In a coordinated and coherent approach, and on the basis of its growing political and economic influence in the region, Turkey could similarly deepen its existing Association Agreements. The GCC could strengthen its relationship with Egypt and Tunisia (Jordan and Morocco have been officially invited to join the GCC), in the framework of a deepened cooperation with the Agadir agreement. The USA could (a) increase the value of its existing agreements with Jordan and Morocco, and (b) invite Tunisia and, once the appropriate circumstances are in place, Egypt to enter into FTAs. 31

Credibility through 6 early actions 1. Agriculture. Improve market access, particularly for fruits, vegetables, and olive oil, including abolition of quotas, reference prices, and seasonal restrictions 2. Manufacturing. Negotiate mutual recognition agreements on conformity of industrial products in key sectors, such as mechanical and electric industries and construction materials 3. Services. Negotiate specific sectoral commitments on labor mobility, for services professionals as part of Mode 4 on the movement of persons 4. Energy. Negotiate a multilateral agreement on solar energy imports from the MENA 5. Migration. Launch labor mobility partnerships or similar mobility schemes, especially for less-skilled workers, including visa facilitation 6. Intra-Arab integration. Adopt and implement flexible rules of origin in preferential trade agreements, including an EU regional convention on preferential Pan-Euro-Mediterranean rules of origin 32

What must Deauville Partnership countries (Egypt, Jordan, Tunisia, Morocco, Libya) do? Parallel implementation of complementary domestic policies as part of a comprehensive reform agenda to improve competitiveness – critical to take advantage from enhanced market access Put in place institutional mechanisms to negotiate, implement, and evaluate the process of regulatory and policy convergence 33

The difficult political economy of openness Skepticism about the value and integrity of the private sector, and the merits of trade and FDI:  Recent opening did not generate all the advertised benefits— ”crony capitalism”  Benefits have been captured by a well connected few  Concerns about income and wealth inequalities  Managing expectations – population expects a better life now! In particular, among two groups:  Vested interests that benefited from privileges  Groups that have an ideological resistance to economic integration 11