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Natural Resources: a key challenge in regional integration of the Middle East and North Africa region

The slow progress of regional integration efforts in the Middle East and North Africa (MENA) region could be explained by the reluctance of resource-rich countries to deepen trade agreements which hurt them.
By Julien Gourdon, Céline Carrère, Marcelo Olarreaga
 Post, May 22, 2012

Regional integration is reshaping the world and the Middle East and North Africa region has implemented several regional trade agreements those last fifteen years. However the Pan-Arab Free Trade Area (PAFTA) and other regional trade agreements (e.g., Agadir Agreement, GCC) do not appear to have created significant intra-regional trade.
Several reasons could explain this low trade integration. It could be the result of poor production complementarities. Indeed, within Agadir or GCC agreements countries have similar resource endowments, production capabilities, and export structure. They may find it difficult to use regional integration as a means to establish patterns of specialisation and diversification. However, in PAFTA –grouping resource-rich and resource-poor countries– it is precisely the difference in resource endowment that could impede trade integration.

Unequal natural resources endowment:  a challenge for regional integration
Many studies tried to elucidate the link between resource abundance and regional integration. The World Trade Report (WTO, 2010) details how many integration schemes in the developing world disintegrated in the seventies, when the oil price shocks accentuated the dichotomy between those which were commodity net importers –and had to bear a rising import bill– and those who were net exporters. Natural resources are often viewed as a natural and strategic capital stock which should be at the exclusive disposal for national purposes and not be opened to access for member countries in an integration scheme. Hence, as Fouquin et al (2006) stressed it out, such conduct could be a curse for deep integration which requires some asymmetric burden-sharing between rich and poor countries and perhaps even an inter-country redistribution of income.
A recent theoretical study by Venables (2011) brought an additional explanation. It suggests that when resource-rich and resource-poor countries give preferences to each other, the resource-rich country is very likely to suffer from trade diversion. Indeed, resource-rich countries in the south tend to have a relatively concentrated production bundle limiting their capacity to export non-resource-intensive goods to preferential partners. On the other hand, non-resource-abundant countries will tend to have a more diversified production bundle and the regional agreement may then offer the possibility to diversify their exports. Trade agreements would then tend to be trade creating in the resource-poor countries, but may be trade diverting in resource-rich partners. Indeed, the preferential access granted to the resource-poor country exporters will allow its producers to export labour-intensive products at a higher price to the resource-rich partner, helping the former diversify their export basket, and perhaps break into global manufacturing production chains. These gains will be made at the cost of resource-rich partners.

Regional integration in MENA
Regional integration schemes among Middle East and North African countries provide an ideal case study to systematically test for the importance of trade diversion in agreements involving resource-rich and poor members. The PAFTA is particularly interesting as it involves eight resource-poor countries and twelve resource-rich countries according to the World Bank’s classification. Other agreements such as the Gulf Cooperation Council (GCC) only involve resource-rich countries, and AGADIR only resource-poor countries. Thus the same forces behind trade diversion are not at play. PAFTA is also one of the well-functioning trade agreements in MENA.
A recent CEPII Working Paper found strong evidence of increases in intra-regional trade in PAFTA and in other agreements signed between MENA countries and partners in the rest of the world, such as Euromed. However, evidence of trade diversion was only found in PAFTA. Moreover, within PAFTA only resource-rich countries experienced trade diversion benefitting resource-poor countries. This is consistent with Venables’ (2011) prediction. The authors, Carrère et al., measure the heterogeneity in the extent of trade-diversion within PAFTA by the percentage change in imports from the rest of the world (trade diversion when negative) due to the implementation of PAFTA as a function of the pre-PAFTA concentration of exports. Note that countries with the highest level of export concentration are all resource-rich countries. These countries experienced the highest levels of trade diversion with an average decline above 20 percent in imports from the rest of the world.
Putting together the results suggest that the main beneficiaries from PAFTA were resource-poor countries that experience only trade creation and benefit from the trade diversion of resource rich-countries at the expenses of the rest of the world. This means that PAFTA has helped redistribute income from resource-rich countries to resource-poor countries within PAFTA. It also explains why resource-rich countries may be reluctant to deepen further this type of agreements. Indeed, there are certainly more efficient means of redistributing income to resource-poor countries in the region than through trade diversion. However non-economic objectives, such as the reinforcement of the resource-rich country hegemonic power, could be one reason why resource-rich countries will enter this type of agreements.
Hence, while further intra-regional trade integration is an important avenue for enhancing diversification of resource-poor MENA countries, resource-rich countries have no strong incentive for further preferential regional integration from a purely economic standpoint. Future discussions of regional trade agreements should take this into account. In this context, trade liberalization on an MFN basis may be the best option to further global integration.

Reference :
"Regional Integration and Natural Resources: who benefits? Evidence from MENA"CEPII Working Paper n°2012-09, by Julien Gourdon, Celine Carrere et Marcelo Olarreaga, May 2012.

Trade & Globalization  | Environment & Natural Resources 
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