Middle East Dilemma: Chapter 10

Michael C. Hudson (ed.)

1999

10. Inter–Arab Economic Relations During the Twentieth Century:
World Market vs. Regional Market?
Roger Owen

The historical arguments used to explain the Arab world’s low level of economic integration are well known. They usually begin by pointing to its division into separate units as a result of its incorporation into the world market in the nineteenth century via a process of expanding trade followed by other financial and commercial linkages. These arguments then point to how these divisions were solidified during the colonial period as a result of the creation of new state frontiers and British and French attempts to monopolize the economic relations between themselves and their mandates, protectorates, or colonies. After this, independence is seen to have encouraged efforts to reintegrate the Arab economies through such mechanisms as a free trade area and a common market. However, such attempts did little to promote interregional trade, for both economic and political reasons. Finally, the oil price explosion of the early 1970s provided another and more powerful set of complementarities which are exploited through the development of mechanisms for the exchange of labor for capital (Sayigh 1983).

All this is largely true and I have no quarrel with most of it. Nevertheless, there is some advantage in returning to these arguments at regular intervals in order to see how they have stood the test of time. Like all generalizations, they are open to criticisms as to detail. They may also hide some interesting insights that closer examination could bring to light. Just as important, they may still have something to say about the situation now facing the Arab world in which the end of the Cold War, the Middle East peace process, and accelerated movement toward a new global economic order have created challenges and opportunities that demand serious attention at both the state and the regional level.

I will begin by reviewing some of the historical data with particular reference to such important topics as the absolute level of intra–Arab trade and the relationship between trade and trade agreements. I will then go on to see if the lessons of the past have anything new to tell us about the economic options now facing Arab policymakers at the very end of the twentieth century.

The History: Trade, Economic Division, and Colonialism

The integration of the Arab East into the world market in the nineteenth century had a number of important effects. First, as is well known, it led to a process of uneven regional development in which certain parts of the region began to specialize in the production of crops for export to Europe and North America while others continued to concentrate on preexisting patterns of production and exchange. The most obvious examples of the first type were Egypt, whose economy increasingly came to depend on the international sale of long staple cotton, Mount Lebanon with its concentration on the spinning of locally produced silk, Palestine with its focus on citrus fruits, and the Ottoman provinces of Basra, Baghdad, and Mosul with their growing exports of dates, wool, and barley. This left just the interior of some Syrian provinces subject to older patterns of trade, and even there the economy participated in regular export booms, for example, those for cereals in the 1850s and again in the latter part of the century.

With the increase in exports came the establishment of complex mechanisms for providing the necessary credit, processing, and transport. These involved the creation of banks, the building of ginning plants and storage facilities, and the construction of new rail and other transport networks, all leading to the coastal ports. The result was the growth of what economists have called "export sectors," enclaves that existed physically in the Middle East but were also integrally related to the European economy. By and large, there was a close connection between the major sources of credit required to finance this process and the markets to which Middle Eastern products were then sent. Thus, British merchants and bankers dominated the export sectors in Egypt and Iran, and their French counterparts dominated those of Mount Lebanon.

Several writers have used the existence of such sectors to make the argument that, over time, they came to constitute spheres of European influence that anticipated the division of the Arab East during World War I and so the creation of the separate British– and French–dominated states shortly thereafter (Khalidi 1980). This is certainly a compelling argument. Similar arguments have been put forward to link Britain’s growing economic interest in Egypt with its occupation of that country in 1882, but the subject remains a controversial one among historians and theorists of imperialism (Owen 1976; Hopkins 1986).

The creation of the new Arab state system under foreign control had two major economic consequences. On the one hand, it cemented the relationship between the local economy and a particular metropolis. On the other, it began a process of creating barriers to intraregional economic exchange, many of which remain to this day. As far as the first point is concerned, the British and French made every effort to monopolize economic relations with their mandates and protectorates, linking their currencies, acting as sole providers of credit, and trying to ensure that all major contracts for public works and public utilities were awarded to their own nationals. Incorporation into the Franc and Sterling Areas during the 1930s served much the same purpose. Similar constraints were then built into the treaties governing post–independence relations, for example with Iraq in 1931 and Egypt in 1936, to be further reinforced by the military control exercised over the region by British forces during World War II.

Equally important were the barriers which the creation of separate national economies placed in the way of inter–Arab exchange. These included not just the use of tariffs to protect local markets, particularly during the depressed economic conditions of the 1930s, but also the creation of a whole gamut of associated differences—different educational and legal systems, different forms of taxation, different types of business and professional associations—which drove further powerful wedges between the various Arab states. This was underpinned by the establishment of locally powerful financial, commercial, and industrial sectors with strong links with the colonial economic order and with the structure of resource allocation which it had engendered. A good example of this are the Egyptian business empires identified by Vitalis—those like the Abbud, Misr and Cattaui/Suares groups—which vied with one another for the monopoly profits to be obtained by dominating different sections of the domestic market (Vitalis 1990, 291–315). Much the same logic still obtained after their nationalization in the late 1950s and early 1960s when what were often unchanged management teams strove to maintain their position of dominance within a highly protected national economy.

Nevertheless, just what the impact of all this was on inter–Arab economic relations has not been the subject of any very precise study. We know something of the macro situation but much less about the individual countries and individual flows of goods, labor, and capital. In these circumstances I must content myself with stressing two of the more obvious points. The first begins with the observation that while the Egyptian economy was the most closely connected with those of Western Europe, the United States, and, increasingly, Japan, it was still large enough to play a significant role in inter–Arab trade as well. Thus, if we look simply at the direction of trade expressed in proportional terms, we find that only 5 percent of Egyptian trade was with the rest of the Arab world in the 1920s compared with a third of that of Syria/Lebanon (Musrey 1969, 15–16). Looked at in quantitative terms, however, the picture appears quite different. The huge size of the Egyptian economy and its much larger volume of trade meant that it still remained a very important partner for its eastern Arab neighbors, until they too began to introduce significant levels of tariff protection in the 1930s on both industrial and agricultural goods. Restricted access to the Egyptian market was of particular importance for Syria/Lebanon whose exports to Egypt fell from 700,000 Egyptian pounds (£E) in the 1920s to only £E200,000 in the late 1930s and for Palestine/Trans–Jordan whose exports fell from 400,000 Palestinian pounds (£P) to £P200,000 during the same period (Musrey 1969, 22–23).

The second point concerns Syria/Lebanon, which remained at the center of what was virtually a free trade area including Palestine and Trans–Jordan until 1939. Over time, its trade with neighbors assumed further importance when new roads built during the Mandate period greatly improved communications with Jerusalem, Amman, and Baghdad. Syria/Lebanon was thus able to play an important role as an entrepôt, a fact vividly underlined by the political power wielded by its truckers and merchants (many of whom went on strike in 1933 in a partially successful effort to prevent a rise in import duties that they believed would harm their own business) (Shimizu 1986). Thus, a third of Syria’s exports went to its Arab neighbors in the 1920s while such trade became even more important in the 1930s as access to the increasingly protected Egyptian market became ever more difficult (Musrey 1969, 26–28).

The situation of declining inter–Arab trade was then briefly reversed during World War II as a result of the efforts of Britain and the United States to manage the whole Middle Eastern economy (the Arab countries of the Mashriq plus Iran, Ethiopia, and Cyprus) as a single unit. Using the Middle East Supply Center (MESC), created in Cairo in April 1941, as their principal agent they managed to save scarce shipping space by reducing imports into the region from their prewar level of 5.5 million tons to just 1.5 million tons in 1944, while encouraging a sharp rise in local production and trade to make up the gap (MESC 1945). In this sense the war acted as a vast form of protection—a point later emphasized by André Gunder Frank—cutting off the Middle East from competition from the world economy while, at the same time, greatly increasing the domestic market via the presence of large armies of Allied troops (1969).

The result was a huge increase in intraregional trade from which Palestine and Iraq seem to have benefited the most. In the case of Palestine, whose proportion of exports going to Middle Eastern markets rose from 10 percent in 1939 to 75 percent in 1942 and 60 percent in 1944, its most important asset was its (mainly Jewish) industrial base which was much more developed and diversified than anything else to be found in the Middle East (Government of Palestine 1946–47). Meanwhile, Iraq’s increased exports were based mainly on the passage of its oil through the new transdesert pipelines to the refineries at Tripoli and Haifa on the Mediterranean coast. Here were complementarities that were easily possible to exploit, given overall British and American control.

Nevertheless, Alfred Musrey is rightly skeptical about the longer–term impact of the war in promoting intra–Arab trade, seeing it as no more than a good opportunity for most Arab countries to develop their own productive facilities behind still formidable tariff barriers (1969, 34–37). The reestablishment of the Arab boycott of Jewish industry in 1946, followed by the expulsion of most of Palestine’s Arab population and the creation of the state of Israel, then effectively removed the Palestinian economy from the positive role it could well have played in schemes to rebuild the wartime pattern of economic exchange. Meanwhile, British attempts to use the achievements of the MESC as a basis for postwar regional cooperation soon came to nothing in the face of both U.S. and Arab suspicion.

Independence: State vs. Regional Development Before the Oil Era

One of the essential ingredients of almost all the local nationalist struggles against foreign control was a critique of colonial economic management. Beginning in Egypt before World War I, Arab spokesmen increasingly accused Britain and France of encouraging the export of just a few agricultural exports, hindering industry, and expending far too tiny a proportion of the revenue on education and welfare. Thus Habib Bourguiba, writing to the French Under Secretary of State for Foreign Affairs in 1936, spoke of France’s creation of great economic inequalities in Tunisia, of the ruin of the fellah, and of a customs policy that had put Tunisian workmen at the mercy of certain French, Italian, and Czech capitalists (Bourguiba 1936). Similar criticisms were voiced in Syria and Egypt. This in turn began to provide the basis of a program of industrialization and economic development supported, after World War II, by the introduction of the powerful new notions of planning, technical assistance, and development.

An equally important feature of the Arab critique of colonialism was, of course, its attack on the divisions between the new states symbolized by their "artificial boundaries." It was thus natural to believe that, in the post–independence period, the Arab League should provide a mechanism for reintegrating the region, economically as well as politically. Another influence came from the efforts of the United Nations to promote regional cooperation and, later, from the 1957 creation of the European Common Market.

Arab attempts to create a multilateral framework for greater regional economic integration are generally seen as proceeding in two stages (Diab 1963, chs. 1 and 2; Musrey 1969, chs. 5 and 6). The first, or free–trade, stage began at the 1950 meeting of the League’s Economic Council with the ratification of the Treaty for Joint Defense and Economic Cooperation by the ministers of Egypt, Jordan, Lebanon, Syria, Saudi Arabia, and (North) Yemen. This placed a major emphasis on tariff reductions and on measures to facilitate the free movement of people and capital. It was followed in 1953 by the Convention for Facilitating Trade and Regulating Transit, which represented an agreement to abolish tariffs on agricultural products and minerals between League members. Efforts to remove existing barriers to the trade in manufactured goods were not successful, however. Some states, like Iraq, insisted on being able to protect their own industry, while others, like Saudi Arabia and Yemen, insisted that they had to raise a substantial part of their public revenues from duties on imported goods.

The next stage, the attempt to create an Arab Common Market, began in the late 1950s. New conditions had been created by Arab solidarity with Egypt during its struggle against the Anglo–French and Israeli attack on the Suez Canal as well as by the successful launch of the European Economic Community. The 1958 meeting of the Arab League’s Economic Council reached an agreement in principle, and was followed in 1962 by the joint declaration of five states—Egypt, Jordan, Morocco, Syria, and Kuwait—to commit themselves to move towards both unified economic policies and unified economic legislation. Finally, in August 1964, representatives of all five states signed the treaty to establish the Arab Common Market on January 1, 1965, with an agreement to a staged abolition of all duties and quantitative restrictions between them by January 1974. This treaty was then officially ratified by all states except Kuwait.

In any event, movement toward reducing tariffs and restrictions proved extremely difficult. During four rounds of discussions each partner produced lengthy lists of goods it wished to exempt from tariff reduction while only minimal progress was made on quantitative restrictions. There was similar lack of progress toward the creation of a common external tariff until, in 1971, the whole notion was officially abandoned. What was left of the arrangement reverted to a putative free trade area (Sayigh 1983, 151).

It has seemed easy to demonstrate, statistically, that the impact of both schemes on inter–Arab trade was negligible. This is Muhammad Diab’s conclusion after his detailed study of the impact of both multilateral and bilateral agreements between the Arab states from 1951 to 1960 (Diab 1963, ch. 4). Yusif Sayigh has made the same point about both the 1950s and 1960s noting that inter–Arab trade never became more than a tenth of the Arab total (1983, 149). The argument then moves quickly on to why this should have been so. As far as the literature is concerned, there are two favored culprits. One is the similar economic structures of the Arab states concerned and thus the lack of economic complementarities to exploit by way of greater trade. The other is the obvious lack of political will.

There is clearly much truth in this. Once Kuwait withdrew from the attempt to create a common market, the project was left with members that produced roughly the same range of agricultural goods and aspired to produce roughly the same range of manufactured ones as well. We may also note that similarly ambitious schemes for institutionalizing regional economic cooperation failed in many other parts of the non–European world at this same time, for example in North Africa and in Latin America, for exactly the same reasons (Robana 1978; Finch 1982). Nevertheless, once again, this is not quite the whole story. I will mention just two important qualifications.

First, most post–independence Arab regimes behaved no differently from the vast bulk of their Third World compatriots: they based their strategies for rapid economic development on a version of Import–Substituting Industrialization (ISI), that is, the production of a relatively simple range of previously imported manufactured goods for sale in a protected local market. Looked at in historical perspective, the attractions of such a model must have had something to do with the apparent success of the Soviet Union’s drive for rapid industrialization, and something to do with the lessons drawn from colonial economic policy, which was to have barred development by discouraging industry and emphasizing the export of a few agricultural goods. If we add that the ISI strategy could also be recommended as a way of protecting newly independent countries from the rigors of a fiercely competitive world market, with its disturbing movements in the price of primary commodities and its powerful multinational corporations, we can appreciate its apparent advantages for unconfident, uncertain regimes that were already moving toward political strategies of containment and control.

The implications of such a strategy for trade are important. Exports receive low priority, foreign exchange is scarce, and what little there is must be reserved for essential imports of capital goods and raw materials. In addition, for the Arabs, as in most other cases, periodic balance–of–payments crises lead to reduced convertibility for the local currency and an increasing number of controls that, on occasion, leave them with no option but to try to obtain what they need by barter. Meanwhile, the people chosen to manage the increasingly state–owned industries possess few skills or incentives to market their goods abroad. In these circumstances, freer regional trade would become practical only when the industrial base is strong and diverse, and flexible enough to survive, and even prosper, in the competitive conditions of the outside world.

In the Arab context there were only two exceptions to this argument in the 1950s and 1960s: Lebanon, whose tiny domestic market and general free trade orientation encouraged the growth of manufacturing for export, and the oil–rich shaykhdoms of the Gulf, whose one–asset economies also required them to be able to buy where it was cheapest and sell where their oil would obtain the highest price. Both represent economic success stories, at least in their early decades. Whether this success was bought at acceptable social or political cost is more debatable.

Elsewhere, in both the Maghrib and the Mashriq, attempts to create Arab Common Markets during the high tide of ISI during the 1960s quickly foundered on the unwillingness of any regime to surrender control over its own economic policies or access to its own domestic markets. This was the lesson in the Arab East. It was also the lesson of the attempts to form a Maghrib Union which began with the establishment of a Permanent Consultative Council in Tunis in 1966, charged with promoting greater regional integration. In spite of the considerable effort put into identifying industries that might benefit from the creation of a North African market no substantial progress could be achieved. Individual states were too committed to their own programs of industrialization through import substitution. They were also worried that multinationals might establish plants in another member state of the union and use this as a springboard from which to penetrate their own markets. And in the case of Algeria, with the greatest commitment to centralized planning and control, there was the additional difficulty posed by the existence of state trading organizations with monopolies over the import of many strategic foreign products (Robana 1978).

The second qualification concerns the relationship between commercial treaties and economic reality. It can certainly be argued that the emphasis usually placed on the need to create Arab institutions like a free trade area or a common market tends to direct attention away from the trade flows that already exist and from the real barriers to their increase. In other words, if you have trade you may not need treaties, and if you have treaties they may not necessarily increase trade.

With this in mind we can return to an examination of the actual flows of inter–Arab commerce in the 1950s and 1960s without condemning them in advance as too small. Diab’s averages for the 1950s for trade between Egypt, Iraq, Jordan, Lebanon, Saudi Arabia, and Syria allow one to make a number of points (Diab 1963, app. D). First, there was a continuum in terms of the importance of intraregional trade: Syria was the largest in terms of absolute value and Jordan was the largest in proportion of trade with its Arab neighbors. To give just a few examples, 95 percent of Jordanian exports went to its Arab neighbors at the beginning of the 1950s and 47 percent in 1960, while the average for Syria over the whole decade was 37 percent of exports and that for Iraq between 15 and 20 percent. At the other end of the scale was Egypt with only 1.1 percent of its exports sold to its Arab partners in 1951, rising to 5.8 percent in 1960, but mostly as a result of the creation of the United Arab Republic with Syria. Second, Diab’s figures show that primary products took a huge share of this trade, with only small amounts coming from textiles and, in the case of Lebanon, simple manufactured products made from (often imported) asbestos, aluminum, wood, and iron, mostly for building. Third, in global terms, the proportion of intra–Arab to total trade was growing over the whole decade.

Later, in the 1960s, the attempt to create an Arab Common Market coincided with the establishment of tightly controlled, planned economies in Syria and Iraq, as well as a worsening of political relations between these two states which reduced their mutual trade to a trickle (Musrey 1969, 113). Hence the main area of intraregional trade continued to be that of Syria/Lebanon/Jordan, with growing links to the Gulf. In addition, as Musrey notes, there was a sudden spurt of trade between Egypt and Iraq that he attributes to the moves to harmonize their economic structures as a prelude to political union (1969, 114). The situation was then changed completely, first by the destruction and disruptions caused by the 1967 war and then by the progressive rise in the price of oil during the early 1970s.

Integration vs. Disintegration in the Oil Era

The impact of the oil price rise and the huge revenues of the 1970s on the Arab economy has been discussed so often that I will simply mention what seem to me the most salient points. The first is its stimulus to a huge increase in the flows of capital and labor between states, though much less to an increase in trade. The second is that only a small part of these new flows were regulated by any of the new Arab banks, funds, and development agencies that mushroomed at this time. With the possible exception of some of the Egyptian labor making its way to Iraq in the early 1980s, Arab workers moved from one part of the region to the other in an unplanned and purely private fashion. As for capital, only a small part of it was channeled through the 237 joint ventures as Sayigh has noted (1983, 149–50). He has also pointed out that the one attempt at an overall plan—the Strategy for Joint Arab Economic Action discussed at the 11th Arab Summit in Amman in November 1980—was first watered down and then never properly implemented (159–64). Thus most movements and transfers were unplanned, unpredictable, and subject to the political interests of the separate states concerned.

The basic shortcomings of pan–Arab economic institutions were also highlighted by the move toward smaller subregional groupings like the Gulf Cooperation Council (GCC), the Maghrib Union, and the short–lived Arab Cooperation Council created in the late 1980s among Egypt, Iraq, Jordan, and Yemen. Of these, the economic component of the GCC was not only the most ambitious but also the only one to survive for more than a few years. It projected the formation of a genuine common market, with a common external tariff and common internal laws and regulations to be established somewhere around the year 2000. We may also note that these putative arrangements were based solidly on the prior existence of a significant amount of trade among the member states of the council.

The results of this situation can be illustrated using figures provided by members of some of the various Arab organizations—as well as individual Arab economists—who remained committed to the idea of further economic integration. On the one hand, the proportion of intra–Arab to total Arab trade, though growing during the 1980s, remained small, particularly if compared with other regions of the non–European world. As Muhammad Abu al–Khail, the Saudi Minister of Finance and National Economy, noted in his address to the Arab Economic Council in 1987, only 5.2 percent of total Arab exports in 1980 and 6.6 percent in 1984 were sent to another Arab country. And even here, as he noted, the absolute values involved were declining as a result of the falling price of oil. Thus, inter–Arab exports were worth $12 billion in 1980 but only $8.4 billion in 1984 (Quoted in CAABU 1987). On the other hand, a huge proportion of what little intra–Arab trade that did take place at this time was among the Gulf oil producers themselves (Riorden et al. 1995).

Other processes were at work to reinforce this pattern. One was the debt crisis that hit a number of Arab countries during the 1980s as a result of falling oil prices. This was particularly severe in states like Egypt and Jordan, which relied heavily on money from Arab aid and from the remittances sent home by their migrant workers in the Gulf. In the short run these crises had the effect of shrinking domestic markets while directing the attention of each regime toward programs of economic stabilization, and then structural adjustment, to the exclusion of almost all else. A second process was the exacerbation of intra–Arab political divisions as a result of the second Gulf War, notably the widening gap among the Gulf states and their western Arab neighbors, as well as between the GCC states themselves. The result was not only a significant reduction in capital flows from the Gulf to countries like Jordan, Yemen and, of course, Iraq but also a further blow to the prospects for intra–Arab cooperation and the revival of moribund institutions like the Arab League.

Nevertheless, the situation was not entirely without hope. Looking at these same developments from a somewhat longer time perspective, it is also possible to argue that they might have paved the way for the removal of some of the existing barriers to increased Arab integration over time. For one thing, there is the way in which the debt crisis encouraged a general movement toward deregulation, the reduction of tariffs and a greater emphasis on production for export. For another, the difficulties involved in trying to revive the Maghrib Union at the end of the 1980s—notably the international isolation of Libya followed by the political crisis in Algeria—as well as the lack of further progress toward the creation of a GCC Common Market may have made it easier for some states to contemplate exchanging their arrangements for participation in some wider Arab economic framework. It is to considerations of this kind that I now turn.

Present and the Future: the Pull of Rival Economic Architecture

The 1990s have seen the emergence of two new, and possibly rival, schemes for the economic organization of the Middle East and North Africa. The first is the plan for a Euro–Mediterranean free trade area put forward by the European Union (EU). This consists of two related sets of initiatives. One is the upgrading, as well as the mutual harmonization, of the existing agreements between the EU and individual southern Mediterranean states. By the beginning of 1996 the Europeans had signed new treaties with Israel, Morocco, and Tunisia while negotiations were underway with Egypt, Jordan, Lebanon, and the Palestinian National Authority (PNA). The second more general scheme unveiled in Barcelona in November 1995 to establish a Euro–Mediterranean free trade area in manufactured goods no later than the year 2010. Signatories included the members of the EU as well as Turkey, Israel, Cyprus, and Malta, the Arab states of Mauritania, Morocco, Tunisia, Egypt, Jordan, Syria, and Lebanon, and the PNA.

As far as these Arab states are concerned the EU’s initiative has several obvious disadvantages. It promises no greater preferential access to the European market than most of them already possessed as a result of earlier agreements, yet it commits them to opening up their own markets to what will obviously be intense international competition. It does nothing to lower present EU barriers to either their migrant workers or their agricultural exports. And it commits them to negotiating the necessary treaties with Europe on a bilateral basis, and so without support from their regional or subregional allies.

Nevertheless, all the southern Mediterranean states that attended the Barcelona conference signed the initial treaty, either because they saw no alternative to the new arrangements or because they anticipated particular advantages such as European financial and technical assistance to upgrade key industries in order to prepare them for the coming international competition. It has also been argued that such states might hope to benefit from the fact that their signature alone will provide extra confidence for potential foreign investors in that it commits them to a fixed timetable of reforms from which it will be very difficult to withdraw without incurring huge penalties from the EU (Economic Research Forum 1995). To this we might add that many of the same commitments—for example to reduce tariffs or to introduce new regulations governing protection of intellectual property—are more or less the same as those which most have already agreed to under the Uruguay Round and as part of their membership in the new World Trade Organization (WTO).

Two other features of the Euro–Mediterranean Agreement are also significant from an Arab point of view. One is the built–in incentives toward freer trade among the southern Mediterranean states themselves, notably the promise of better access to the European market for goods produced jointly with other members. Turkey and Israel have already taken advantage of the provision in early 1996 by signing a treaty agreeing to eliminate all trade barriers between them by the year 2000. Among other things this will allow Israeli firms to produce textiles in Turkey and then receive preferential treatment from the European market. The second feature is that the scheme leaves room for both Algeria and Libya to join once their present political difficulties are over.

The second recent initiative stems directly from the Arab–Israeli peace process and involves a plan for a region–wide free–trade area as a way of underpinning the political agreements once they are finally in place. However, this scheme faces a number of serious problems in the years ahead. It is almost wholly dependent on the establishment of a satisfactory peace. It also lacks an institutional mechanism that could be used to guide it to fruition. All that existed as of 1996 was the machinery provided by the annual Middle East business conferences (i.e., those held in Casablanca in 1994 and Amman in 1995) to be supplemented, so its sponsors hope, by the work of the Middle East Development Bank being set up in Cairo. Furthermore, the scheme continues to excite a great deal of suspicion; many Arabs see it as an essentially political project designed to end the boycotts and to ease Israel’s integration into the Arab world. Hence, although it looks as though both Jordan and the new Palestinian state must inevitably become founding members of whatever free trade area may eventually be created, other regimes like the Egyptian will probably continue to reach agreements with Israel on a project–by–project basis rather than under some larger, institutionalized umbrella. In this way they can take advantage of the various geographical economies of scale involved in the creation of joint transport, electric, and gas facilities without committing themselves to a full–scale economic and political partnership.

The existence of the two schemes provides Arab policymakers with any number of difficult choices for the future. This can be demonstrated by listing the various options that confront them. There are the three Middle East–specific subregional schemes already on the table: the Gulf Cooperation Council, the Maghrib Union, and the peace process formula of Israel plus some or all of the Arab states. There is the Euro–Mediterranean free trade area for those eligible to participate. And there are the options of either not joining any scheme at all or belonging to a global organization like the WTO or of joining two at once, as Israel, Jordan, and the PNA seem presently disposed to do. In addition, there is the possibility of reviving a specifically Arab scheme, a subject to which I will return below.

To make matters still more complicated, Arab policy makers have to plan their strategies on the basis of very incomplete information. Work on various economic models designed to provide data about regional trade flows and how they might best be augmented came to an end in the late 1980s and has only just been restarted (See comments in al–Kawaz and Limam 1996). Furthermore, few regimes feel comfortable permitting the kind of informed public discussion that would provide valuable evidence concerning the potential impact of particular commercial policies on particular domestic interests. In addition, most Arab regimes are only just beginning to grapple with the need to create the new institutional and legal frameworks required not just by their own programs of domestic liberalization but also by the international commitments they have already made to the WTO or the EU. In these circumstances, the definition of national economic goals and the creation of mechanisms by which to pursue them in an effective fashion become not just a difficult set of political problems but one of the great challenges facing the Arab states as they position themselves to enter the twenty–first century.

Whether Arab regimes, faced with all these new problems developing will also have the time and the energy to think creatively about developing new inter–Arab economic structures remains an open question. For some the notion may have been made redundant: they are committed to one of the existing schemes to the extent that there is no going back. For some of the others, like the Syrians and the Egyptians, however, it is still a pressing subject for discussion and debate. What lessons can possibly be learned from past intra–Arab schemes, and past failures?

The first lesson is the importance of attending to changed international circumstances. Whatever freedom of action the newly independent Arab states may have had in the 1950s and 1960s, policymaking is now constrained by the existence of other regional and subregional schemes and by the trend embodied in institutions like the WTO toward the establishment of global trading practices. It follows that no new project for Arab economic integration is likely to succeed unless it embodies those same principles which are central to good international commercial practice. By the same token it seems unlikely that such a project could take the form of a common market or customs union which provided preferential treatment simply for its own members.

Second, it is vital that any new Arab project contain a clear economic rationale. Politically inspired schemes have failed in the past and will no doubt fail again. What is required is a proper examination of the present complementarities that await exploitation as well those that may be reasonably expected to emerge as Arab economies, particularly their manufacturing sectors, grow and develop over time.

Third, it is important that the planning of such a project involve public discussion and the identification of those interests that might either profit from it or be harmed by it. Not only have past schemes suffered from a general lack of public support—even of public awareness—they have also failed to identify those groups which would profit directly from them and so have a good reason to help see them through. Too often intra–Arab projects have been perceived by the public as designed to give advantage to just one political regime or just one set of economic actors when what is really required is a plan from which all–or nearly all–would clearly gain.

Given present constraints it would seem that the countries most interested in a new Arab project—and those that would expect to derive most immediate benefit—would be Egypt, Syria, and Lebanon. But, if its planners were wise, they would also design it in such a way that other neighboring states, notably Iraq and Libya, could attach themselves in the future. Could this be achieved, the grouping would contain economies with the mix of resources to provide the basis for greatly increased exchange. Nevertheless, such a partnership would act only as a pole of attraction for new Arab members once it proved its worth. This is the fundamental challenge that states seeking to revive regional economic integration must inevitably face.

Gone are the days when regional groupings could be seen as mechanisms for protecting developing economies from the hostile movements of the world economy outside. Globalism is here to stay and Arab countries will have to find their major markets and major sources of capital investment outside the Middle East itself. What they can aspire to, however, is a replication of the situation that existed in the nineteenth century, when regional economic exchange expanded in tandem with the growing commerce of the outside world.

References

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Diab, Muhammad A. Inter–Arab Cooperation 1951–1960. Beirut: Economic Research Institute, American University of Beirut, 1963.

The Economic Research Forum. "Trade with Europe" section at Second Annual Conference, Istanbul, September 16–18, 1995. In ERF Forum, 2:4 (December 1995), 7–8.

Finch, M.H.J. "The Latin American Free Trade Association." In Ali M. El–Agraa, ed. International Economic Integration. London: Macmillan, 1982.

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