“These are the true challenges facing the Middle East... Assad’s political future, and doctrinal disputes are of decidedly lesser long-term importance to the region than the unmet need for quality education, job skills, advanced technologies, and sustainable development.” These were the words Jeffery Sachs used to conclude his article on “A New Century for the Middle East” published in project syndicate in December 2015. In this article, Sachs aimed to address a recurring question regarding why countries in the Middle East were of governing themselves. Interestingly, Sachs found it ironic that Western countries, who had been responsible for compromising the region’s independence through their interventions over the past century, where the ones asking such a question. Sachs suggested a few solutions to this conundrum, primarily urging the United States to cease CIA’s covert operations in the region, respect the nations’ independence, and fully comply with the Security Council’s decrees regarding the necessity for military interventions in conflict zones.

Human Development as a Source of Prosperity

Quality education is only attainable within a package of good living conditions and human well-being. These aspects are reasonably captured by the Human Development Index (HDI), which was created by the UNDP to emphasize that people and their capabilities should be the ultimate criteria for assessing a country’s development, rather than economic growth alone. The HDI comprises three dimensions: long and healthy life, knowledge and a decent standard of living.   

For the year 2021, the average HDI for 18 MENA counties, ranging between 0 and 1was 0.734 points. The United Arab Emirates had the highest value at 0.929 points, while Yemen had the lowest value at 0.455 points. Globally, based on 184 countries, the HDI for the same year was 0.723 points. Switzerland had the highest value at 0.962 points, while South Africa had the lowest value at 0.385 points. Therefore, MENA countries are positioned close to the world average and even slightly higher, thanks to the high values recorded by the GCC countries, led by the UAE.

According to Stephen P. Heymann (via an IMF publication) MENA countries may have the opportunity to choose a path for human resource development that mirrors the best attributes of their wealthier OECD counterparts. However, the real problems of human resource development in MENA countries lie in the intra-sectoral details rather than the aggregate levels of investments. Intra-sectoral priorities vary widely, thus affecting the ability to increase returns on investments in human development.

For example, in MENA countries, primary education may represent one-third of a country's education budget. For instance, Morocco spends about 14% more on an elementary school student than it spends on a student in tertiary education, while Jordan spends about 12% more and Tunisia 8% more. By comparison, in Japan, per-pupil expenditures are roughly equal between primary and tertiary education. In several OECD countries, the average per-student spend in tertiary education is at least double the average per-student spend in primary, secondary, and post-secondary non-tertiary education. This suggests that investment in human capital in MENA countries at the base is both weak and imbalanced in relation to other parts of the sector.

Sustainable Growth: Is It Possible?

World Bank economists forecast that growth in the Middle East and North Africa (MENA) will slow down to 3% in 2023 after growing at a rate of 5.8% in 2022. The region's GDP per capita growth, which provides a more accurate measure of poverty, is expected to decline to 1.6% from 4.4% in 2022. In 2022, the region also witnessed a dramatic rise in inflation rates, particularly in countries that experienced currency depreciations. Almost all countries in MENA saw an increase in year-on-year food inflation, with 14 out of 16 countries having higher food inflation than headline inflation (for example, Egypt experienced food inflation surpassing 90% year on year).

Sustained high economic growth is necessary for MENA to address its unemployment problem, create jobs for the large numbers about to enter the labour market, and improve its social indicators. High and sustainable growth rates are considered crucial for the inclusive development envisioned in the region. Achieving sustainable growth rates requires economic diversification, especially in the case of MENA countries. Fluctuating oil prices, undervalued natural resources, and the mainstream shift toward energy transition pose challenges to economies reliant on a single product, such as oil and raw material exporters. Vertical and horizontal integration offer a better pathway to the future.

MENA is clearly an unintegrated region, both in terms of the extent of economic interactions within the region and the absence of an effective framework or institutions responsible for formulating and implementing rules and policies to influence, regulate, and supervise economic relations.

In a paper published in 1996, Stanley Fischer and Mohamed Elarian observed that geography and common culture define the MENA region. They confirmed the wide diversity of factor endowments within the region, particularly in terms of labour and natural resources, as well as differences in the extent of economic diversification. Much of the trade within the region is based on this diversity, with oil being the primary traded commodity and labour being the main traded factor. Closer regional integration is unlikely to result in significant trade diversion for these commodities but should promote greater merchandise trade in other goods. Beyond its impact on merchandise trade, regional integration would facilitate service flows and intra-regional investments. MENA residents hold a significant portion of their portfolios outside the region, with estimates in the mid-nineties ranging from US$350 billion to US$600 billion. With appropriate economic policies in recipient countries, even a small reallocation of portfolios toward regional activities would make a substantial difference in the region's investable resource base.

Possible Forms of Regional Economic Arrangements

Regional economic arrangements can take on various forms, including:

1.     Preferential trading arrangements: These involve regional trading partners enjoying more favorable trading conditions, such as lower tariffs, compared to other countries.

2.     Free trade area (FTA): In an FTA, trade within the area is not subjected to taxation, but external tariffs on third parties may vary among member countries.

3.     Customs union: In a customs union, a common external tariff is applied. It generally entails all members treating conditions of trade with non-regional economic partners in a similar fashion.

4.     Common market: In a common market, trade in goods and capital flows freely within the region. Market conditions, including standards, are made uniform so that producers in one country face no non-market restrictions when selling in other countries within the common market. Restrictions on labor flows are also limited.

5.     Economic union: In an economic union, members eventually share a single currency. The concept of national residency is eliminated in all economic relations through two key principles: mutual recognition and minimum harmonization.

6.     Leading regional project for economic integration: This entails following the steps of the European Union's foundation, which originated from the establishment of The European Coal and Steel Community (ECSC).

The 2023 Arab League summit in Jeddah places emphasis on the increasing importance of economic aspects, taking a leading role in Arab discussions. Specific mega projects, such as the NEOM project by the Red Sea, are seen as potential drivers for regional integration. Arab states appear eager to take synchronized actions to address key regional economic crises, including Lebanon's default, Egypt's debt, Libya, Iraq, and Syria's reconstruction, and the damages caused by Sudan's civil war. Tough political compromises are being made to prioritize economic goals for the first time.

Impediments to Regional Integration between MENA Countries

Trade and integration within the MENA region and with the rest of the world will play a critical role in reducing poverty, empowering the poor, and fostering economic growth in the post-COVID era, as highlighted in the World Bank's latest regional economic update.

According to the report, MENA's integration, both within the region and with the rest of the world, was underperforming even before the pandemic. This can be attributed to several factors. Economically, poor logistics performance, inefficient customs procedures, high infrastructure costs, inadequate legal frameworks for investments, and divergent regulations have resulted in high trade costs and non-tariff barriers to trade. Political obstacles have also hindered regional cooperation, while the impact of conflicts and violence has impeded trade and deterred economic growth for an extended period.

Impediments to integration go beyond regional conflicts and external interference. Although average tariffs in the region have decreased, they still remain high compared to East Asia, the Americas, and Europe. Non-tariff measures pose even greater barriers to trade. Challenges in logistics and the business environment hinder MENA's integration into regional and global value chains. High transport costs and technical barriers further hinder progress, and despite improvements in the Gulf and elsewhere, logistics infrastructure lags behind, particularly in reducing cross-border trading costs. Additionally, the lack of common standards and bureaucratic red tape contribute to the challenges. Overlaying these issues are protectionist and inward-looking economies, with incumbents in both the public and private sectors safeguarding "their" markets, which limits market contestability and prevents greater openness to the outside world.

Despite some improvements in recent years, the MENA region still lags behind in terms of access to credit, with lower rates compared to any other region globally. Trading across borders is expensive and time-consuming, with an average cost of US$442 and 53 hours required to comply with border requirements for exporting. This is three times more expensive and four times longer than the averages in high-income economies. MENA also remains one of the most restrictive regions regarding trade in services.

Global Economic Transformation as an Incentive for Integration

It is evident that the world is currently undergoing significant economic transformations that will have a structural impact on various economic variables. Factors such as the regression of globalization, restrictions on labour movement, the challenges of climate change, China's shift towards a new growth model focused more on domestic markets rather than exports, and central banks' recognition of the risks associated with quantitative easing and its negative impact on market mechanisms... all of these factors contribute to a long-term crisis on the supply side. They will reduce the availability of cheap money and zero interest rates for a certain period while also raising inflation targets. It is important to note that the crises resulting from the Russian-Ukrainian war and the COVID-19 pandemic are likely to continue impacting the global economy in the short term, at the very least.

These exceptional structural transformations necessitate the implementation of specific measures, including the exploration of all possible forms of economic regional arrangements.