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4 Trade Policies in Industrial Countries and Their Impact on Arab Countries : Foreign and Intratrade Policies of Arab Countries:
Margaret R. Kelly and Bernhard Fritz-Krockow
Developments in the 1980s and Current Prospects
The Importance of External Environment for Arab Countries
III. Arab Countries’ Economic Structure and Domestic Policies
Export Structure and Performance
IV. Industrial Countries’ Trade and Trade-Related Policies
Mahmoud Sakbani 1
The External Environment and the Arab Countries
Macroeconomic and Trade Policies of Arab Countries in the 1980s
Evaluation of Impact of Industrial Country Trade Policies on Arab Countries
Real Trade and GDP Growth, 1960–90
Arab Regions: Real GDP and Export Growth, 1983–90
Arab Regions: Terms of Trade, 1980–90
The trade and trade-related policies of industrial countries mainly affect developing countries, including Arab countries, in three ways.1 First, policies that restrict access to industrial countries’ markets limit the ability of developing countries to produce and export on the basis of their comparative advantage. Second, and related to the first, protection in industrial countries affects the level and pattern of investment worldwide; by locking resources into inefficient uses, protection reduces potential output in both industrial and developing countries. Even when a particular country does not currently face restrictions in sectors in which it has a comparative advantage, the possibility that they could be imposed if the country became a major supplier may discourage investment. Where economic agents do not anticipate such an intensification of restrictions, investment may yield less than its expected rate of return. Third, if developing countries choose to compete in industrial countries by establishing production facilities in those markets, the conditions attached to foreign investment in industrial countries, such as local content requirements, may affect the ability of foreign firms to compete with domestic firms.
Of course, the trade policies of industrial countries are not the only, or perhaps even the major, influence on the economic performance of Arab countries. Of critical importance also are external economic factors beyond the trade policies of trading partners; natural resource endowments and demographic and climatic conditions; and the domestic economic policies pursued by the countries concerned and, more broadly, the nature of their institutions. The importance of a country’s own policies is clearly demonstrated by the superior performance of the dynamic Asian economies over the 1980s and, more recently, the performance of some developing countries in the Western Hemisphere that have undertaken major macroeconomic and structural reforms, including in the trade area.
It is difficult to disentangle the effects of these various factors on economic performance, and this paper does not attempt to do so. Its main aim is to identify the specific trade and trade-related policies of industrial countries that are particularly relevant to Arab countries (see Section IV). To provide some perspective, the paper also discusses the external economic environment in which Arab countries’ economic policies have been implemented over the 1980s (Section II); and provides details on the economic structure and domestic policies of Arab countries that had an important impact on their economic performance in the 1980s (Section III). Some conclusions are presented in Section V.
The 1981–82 recession was followed by a long economic expansion and a further integration of the world economy through trade (Chart 1) and foreign investment. For 1983–90, the growth of output expanded on average by 3½ percent a year in both industrial and developing countries. The growth of world trade exceeded output by 50 percent over the 1980s, an outcome that was more in line with historical trends than the relationship that prevailed during the period of oil price increases when the growth of trade volumes exceeded output by only 25 percent. Economic performance varied among countries, however. Among the developing countries, the Asian countries experienced the highest rates of growth in output and exports, and the Middle East and Arab countries the lowest. The performance of Arab countries is discussed in more detail below.
Chart 1.Real Trade and GDP Growth, 1960–90
Sources: General Agreement on Tariffs and Trade; and International Monetary Fund, World Economic Outlook.
The post-recession period also witnessed a rapid expansion of foreign direct investment (FDI). Between 1983 and 1989, outward foreign investment by the five major industrial countries (France, Germany, Japan, the United Kingdom, and the United States) expanded at an annual rate of nearly 30 percent, or three times faster than merchandise trade flows. Relative to the rate of growth of real GDP, this was about twice the rate that would have been expected, based on historical experience, and reflected institutional and structural factors, including the deregulation and liberalization of financial markets, shifts in comparative advantage, technological advances in international communication and transportation, and efforts to circumvent protection in major world markets. Overall, the developing countries did not share equally in the expansion of FDI, and their share of FDI flows declined. The industrial countries were both the primary source and destination of FDI, and a growing proportion of that investment was related to the service sector.
The increased integration of the world economy through trade and the globalization of investment and production increase the potential for specialization and for the growth of world welfare, but it also means that the economic policies and performance of countries have become more intertwined. Industrial countries’ policies and prospects continue to have a major impact on developing countries because of their large weight in world output and because they account for about two thirds of developing country exports (Appendix Table A1). But the developing countries have also become increasingly important in the world market. While increased integration is beneficial to global welfare, it requires the ability to adapt to ongoing structural changes in the world economy. Resistance to such adjustment partly explains the resort to protectionist trade policies in industrial countries as well as attempts to control the operation of foreign companies. Since such protection tends to be concentrated in labor-intensive sectors and in agriculture—sectors in which many developing countries have a comparative advantage—it has a correspondingly larger impact on developing countries.
During the 1980s the average rate of growth in output and export volumes in Arab countries fell short of that in many other developing countries (see Chart 1). Economic performance varied among Arab countries, however. Diversified exporters outperformed both oil exporters and commodity exporters (Chart 2).2 These developments reflect to some extent the differential impact of the external environment on Arab countries compared with other developing countries and on different groups of Arab countries. They also reflect factors unique to the Arab countries such as their own factor endowments and economic policies.
Chart 2.Arab Regions: Real GDP and Export Growth, 1983–90
1Algeria, Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
2Egypt, Jordan, Morocco, Syria, and Tunisia.
3Mauritania, Somalia, and Sudan.
The period of economic expansion in the industrial countries following the 1981–82 recession had a positive impact on Arab countries’ exports. The strength of this impact varied according to both the importance of industrial country markets for each particular Arab country (Appendix Table A2) and the income elasticity of demand, which is relatively low for products exported by oil exporters and commodity exporters. For those Arab countries that largely trade with European countries, the growth of output and exports was somewhat curtailed by the less buoyant conditions in Europe than in the United States or Japan during this period. For the oil producing countries, exports were also dampened by oil conservation measures in industrial countries, which significantly reduced the amount of oil consumption relative to GDP, and by the expansion of alternative supplies. Of course, part of that conservation effort was a response to previous increases in the relative price of oil.
While the expansion in the industrial world had a positive impact on the economic performance of the Arab countries, movements in the terms of trade adversely affected most Arab countries (Chart 3 and Appendix Table A3). Export unit values for oil exporting Arab countries have fluctuated widely in the past, but registered a sharp decline during the 1980s, with the largest decline occurring from the mid-1980s. As a result, the terms of trade for oil exporting Arab countries declined by almost 40 percent between 1980 and 1990. Except for Sudan, the terms of trade also declined for all diversified exporters and commodity exporters in the same period because of the price declines in primary sector products. Among these countries, the deterioration was largest in Egypt and Syria, which depend on oil for 60 percent and 50 percent of their export receipts, respectively.
Chart 3.Arab Regions: Terms of Trade, 1980–90
1See footnotes to Chart 2.
Interest rates on global capital markets have declined since the early 1980s. For those oil exporting Arab countries whose financial assets abroad exceed external debt, this has meant a reduction in investment income. For other Arab countries whose foreign debt exceeds foreign assets, the reduction in interest rates has eased their debt service burden somewhat.
The economic performance of Arab countries has also been influenced by their natural resource endowments, demographic and climatic conditions, military conflicts, and their own domestic policies. In most Arab countries a population explosion is under way, which is expected to result in a doubling of the population (currently more than 200 million) in less than 25 years.3 In the oil producing countries, the capacity to employ an increasing population is limited by the capital-intensive nature of oil production and the skilled labor (and hence high wages) required for downstream refinery and petrochemical industries. In addition, scarce water resources and a limited supply of arable land hamper efficient agricultural production, and the relatively high cost of domestic labor limits the scope to employ the growing population in labor-intensive manufacturing and service industries. Oil production and exports are vulnerable to fluctuations in international prices and growth in trading partners. Foreign investment is an option to reduce the vulnerability of these economies to external shocks, but FDI does not create significant employment in the capital exporting country; emigration is an option but has political limits.
Scarcity of water and arable land limits the potential for agricultural production in a number of other Arab countries. Even countries with a greater abundance of arable land are susceptible to frequent droughts. Emigration to higher-income oil producing Arab countries has been an option for lower-income countries, but such emigration (and the resulting remittances) also has limits and is vulnerable to the shifts in the demand for labor, including those caused by conflicts in the area. For the lower-income countries, however, diversification into labor-intensive manufacturing and services is an option.
To examine the impact of their economic structure and domestic policies on economic performance, the Arab countries are categorized into oil exporters, diversified exporters, and exporters of a few non-oil commodities.
The oil exporters comprise Algeria, Bahrain, Kuwait, the Socialist People’s Libyan Arab Jamahiriya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. These countries derive 80 percent or more of their export earnings from exports of hydrocarbons and have the highest per capita incomes among the Arab countries, ranging in 1989 from $18,430 for the United Arab Emirates to $2,230 for Algeria. Most of these countries have had only moderate success in diversifying their production and export structures. Diversification has usually been oriented toward petrochemical or energy-intensive industries, but some diversification into trade-related services has occurred4 (Appendix Tables A3 and A4).
The diversified exporters comprise Egypt, Jordan, Morocco, the Syrian Arab Republic, and Tunisia. These countries constitute the group of Arab middle-income countries, with per capita incomes ranging in 1989 from $1,640 for Jordan to $640 for Egypt, and they derive less than two thirds of their export earnings from their two main export product groups. While these countries have a wider-based production and export structure than the oil exporting countries, on average they still derive 53 percent of their export earnings from the two main export product groups. Non-oil exports include cotton, fresh and processed fruits and vegetables, fertilizer, textiles, clothing, and other manufactures. Tourism is an important source of earnings in countries such as Egypt, Morocco, and Tunisia. Inflows of remittances are another important source of earnings for these countries, a large share of which comes from countries other than countries of the Gulf Cooperation Council (GCC) (Appendix Tables A3 and A4).
The commodity exporters derive two thirds or more of their export earnings from the export of one or two commodities. This group comprises Mauritania, Somalia, and Sudan, which export iron ore and fish, cotton and cattle, and cattle and bananas, respectively. They also constitute the group of Arab low-income countries, with per capita incomes in 1989 ranging from $500 in Mauritania to $170 in Somalia. These countries have had little success in diversifying their production and export structures (Appendix Tables A3 and A4).
Significant differences exist among Arab countries with respect to their economic policies. Except for Algeria and Libya, most of the oil exporting countries maintain open trade and payments systems (Appendix Tables A5 and A6).5 They have relatively low tariffs and do not impose significant barriers to international trade, except for some selective import licensing and some quantitative export restrictions to guarantee a sufficient domestic supply of certain basic goods. However, some of these countries protect their agricultural and petrochemical sectors through domestic subsidies and other support policies. With no payment restrictions on current or capital transactions, these countries are relatively well placed to attract foreign investment and, if it is profitable, to reduce their vulnerability to exogenous shocks by investing abroad. A disincentive to non-oil exports in these countries is created by the “Dutch disease”—the relative overvaluation of the currency with respect to the competitiveness of non-oil sectors of the economy.6 Greater export diversification could be expected if they seize the opportunity provided by “dynamic” comparative advantage. Over time, the cumulative effects of investment change a country’s factor endowments, for example, more capital relative to labor, and more human capital (which could result from increased investment in education) relative to less skilled labor may change the products in which these countries have a comparative advantage.
Domestic economic policies have been a major impediment to exports of other Arab countries. In a number of these countries resource allocation is distorted by controls on prices, imports, exports, and foreign exchange. These policies are sometimes an attempt to deal with balance of payments difficulties resulting from expansionary financial policies. Traditional exports and the emergence of a more diversified export structure have been discouraged by inward-oriented policies, including overvalued and multiple exchange rates, import and export restrictions, and the maintenance of extensive government regulations and intervention in supply, production, and marketing (Appendix Table A6). In addition, Algeria and Libya, and all the diversified and commodity exporters impose payments restrictions on current and capital transactions (Appendix Table A5).
Government regulations in several Arab countries have been directed toward ensuring domestic availability of inputs and attaining self-sufficiency in certain agricultural products or industrial inputs.7 These regulations are enforced by parastatal production and trading monopolies and seasonal or permanent export restrictions. In most Arab countries, governments have reserved certain traditional export activities to state enterprises; these sometimes take the form of trading monopolies and sometimes production monopolies.8 These restrictions distort the allocation of resources and create entry barriers for potential exporters.9
Arab countries have also imposed various restrictions on inward foreign direct investment and other capital transactions. Together with the increased state participation in production and trade, this has led to foreign capital entering a country in the form of loans to the public sector rather than foreign direct investment. Given the relatively low efficiency of resource use in the public sector, these policies have tended to exacerbate foreign exchange problems in the form of debt accumulation and debt service problems (Appendix Tables A7 and A8).
Most of the diversified exporters have begun to liberalize their trade systems, although mostly by reducing government control rather than by moving toward a more neutral incentive structure. The paper by Thalwitz and Havrylyshyn (Chapter 3) suggests that this liberalization is partly responsible for increased non-oil exports, including manufacturing exports, during the 1980s. The move toward more outward-oriented policies, together with the more diversified structure of these economies would appear to explain in part the relatively better performance of these countries compared with other Arab countries during the 1980s.
Industrial countries protect both their industrial and agricultural sectors through a variety of border and nonborder measures. The specific types of measures used to protect industry are summarized in Table 1, and the main agricultural support measures are summarized in Table 2. The impact of these policies on developing countries has been examined in two sets of papers prepared by the IMF and the World Bank.10 These papers have found that protective measures used by industrial countries tend to affect the exports of developing countries disproportionately, but that among developing countries, exports of the newly industrialized economies are most directly affected. This section attempts to identify the extent to which these policies of industrial countries affect Arab countries. In addition to specific impediments to trade erected by industrial countries, the economic embargo imposed by the United States on Libya since 1986 has prevented access to the U.S. market by Libya for its exports and restricts Libya’s access to U.S. technology and investment.11
Table 1.Industrial Policies
Subsidies Tariffs
Cash transfers Peaks1
Research and development funding Escalation2
Tax concessions Import quotas
Loan guarantees and insurance Voluntary export restraints (VERs)3
Subsidized credits
Capital grants Tariff quotas4
Regional aids Discretionary and nondiscretionary import licensing
National product standards
Commodity-specific indirect taxation Countervailing and antidumping investigations and duties5
Source: Reproduced from Development Committee, Pamphlet No. 20 (1989), p. 6.
1 High tariffs on selected products in a structure with otherwise low tariff rates.
2 Progressively higher tariffs within a product category as the level of processing and value added increases.
3 Bilaterally agreed measures to restrain export, such as orderly marketing arrangements and export management rules. VERs can be government-to-government, government-toindustry, or industry-to-industry arrangements. The distinction between different forms of VER is largely legal and terminological and has little if any bearing on their economic impact.
4 Higher tariffs after a specified level of imports is reached.
5 Duties equivalent to subsidy and dumping margins, respectively, on imported products.
Table 2.Summary of Main Agricultural Support Policies1
1. Market price support
Restricts the quantities or increases the price of commodities entering domestic market. Requires border measures, which are often supplemented by domestic measures and by diverting excess production to world market using export subsidies.
Import prohibitions and quotas, voluntary export restraints (VERs), tariff quotas, tariffs, variable levies (e.g., European Community (EC)), state trading arrangements (e.g., Japan), and unsubstantiated sanitary and phytosanitary standards. Export subsidies (e.g., export restitution in EC, and Export Enhancement Program and marketing loans in the United States).
Market intervention purchases: Commodity Credit Corporation (CCC) inventory and loan operations—United States; Common Agricultural Policy (CAP) intervention purchases—EC. Livestock Industry Promotion Corporation (LIPC) operations—japan.
Supply control policies: set asides—United States and EC; land division programs—Japan; production quotas—United States, EC, and Japan.
2. Direct income support
Raises price and/or income received by producer without affecting domestic selling price. The most common are those related to production levels; see (a) below.
(a) Production subsidies
Commonly called deficiency payments, which are generally the difference between a target or guide price and the market price—United States, EC, and Japan.
(b) Income support or payments under supply reduction programs.
(c) Income support unrelated to production, regional, and welfare payments.
Includes subsidies that reduce cost of inputs, including credit, or of marketing products, or income tax exemptions; as well as government spending on infrastructure and research and development.
1 Reproduced from Development Committee, Development Issues: Presentations to the 41st Meeting of the Development Committee, Pamphlet No. 27 (Washington, April 30, 1991), p. 69.
Industrial countries use a variety of measures to protect their industrial sectors. These measures include tariff peaks, tariff escalation, voluntary export restraints (VERs), the use of countervailing duties (CVDs) and antidumping duties (ADDs), and domestic subsidies.12 Sectors affected by these measures include textiles and clothing (tariff peaks and tariff escalation, VERs and other nontariff restrictions), steel (VERs, subsidies, ADDs, and CVDs), leather products and footwear (tariff peaks and escalation, VERs and other nontariff barriers), petrochemicals (tariff escalation and ADDs), machine tools and electronic products (VERs and ADDs), and coal (domestic subsidies and nontariff measures).13 This section examines the extent to which tariff peaks and escalation and nontariff measures affect Arab countries’ exports.14
About 50 percent of world trade in textiles and clothing is managed under various bilateral restraints concluded under the Multifibre Arrangement (MFA), which limits access to industrial country markets. The coverage and restrictiveness of restraints in this sector have been increased since the first VER was negotiated between the United States and Japan in the 1950s (Table 3). Textiles and clothing are also subject to tariff peaks and escalation in industrial countries. These restrictions impede the expansion in output and exports of efficient producers, tend to divert production and trade from restrained exporters to unrestrained exporters, maintain access levels for less efficient producers, and tend to increase world market prices above what they would be without such restrictions. Among Arab countries, Morocco, Egypt, Jordan, Syria, Tunisia, and the United Arab Emirates produce textiles and clothing. Egypt’s exports to the United States are covered by the MFA, the exports of both Morocco and Tunisia to the EC are covered by VERs, and the United Arab Emirates’ exports to both the United States and Canada are covered by VERs. In some cases the use of quantitative limits under VERs is low, implying that such restrictions are not, at this stage, a binding constraint.
Table 3.Textiles and Clothing: Nontariff Barriers to Trade
1957–62 Japanese VER with United States Restricted export of cotton, textiles, and apparel.
1961 “Short-term agreement” (STA) (19 countries) Importing country allowed to impose a quota unilaterally if exporting country does not provide an acceptable proposal of VER.
1962–73 “Long-term agreement” (LTA) (19 countries) Renewal of STA plus restrictions on cotton textiles must be compatible with annual export growth of at least 5 percent for each exporting country.
1971 Japan, Hong Kong, Taiwan Province of China, and Republic of Korea voluntarily restrain their exports to United States Combined restrictions from LTA and additional country-specific VERs restrict U.S. imports from a total of 37 countries.
1974–77 MFA I Bilateral agreements; more fibers subject to restraints; 6 percent annual export growth is allowed.
1978–81 MFA II Further restrictions and entry of European countries into the agreement,
1982–86 MFA III New restrictions with unilateral quotas allowed in some cases.
1986–91 MFA IV Agreement expanded to include silk blends and vegetable fibers.
Source: Linda Goldberg and Janusz Ordover, Obstacles to Trade and Competition (Paris: Organization for Economic Cooperation and Development, forthcoming 1992).
Currently about one third of world trade in steel is managed by various voluntary restraint arrangements. Requests for antidumping and countervailing duties are also frequent and subsidies are provided by some countries. Slightly more than 50 percent of the steel imports of industrial countries are subject to nontariff barriers. VERs cover imports into the United States from 19 countries and the EC, although most of these restraints are not binding.15 The EC currently has VERs covering imports mainly from Eastern Europe and Brazil. Other EC imports are subject to a floor price mechanism; imports below the floor price can trigger antidumping action.16 In the EC, subsidies in the steel sector are permitted only for restructuring to reduce capacity; while operating subsidies are prohibited and the Commission is enforcing EC competition policy more strictly as part of the EC 1992 program, some member states continue to provide such subsidies. In addition, regional subsidies, which are permitted under EC competition rules, may indirectly protect the EC steel industry.
Among Arab countries, Algeria, Egypt, Morocco, Qatar, and Saudi Arabia produce and export steel products. These exporters have by and large not been subject to nontariff measures in industrial countries. In 1988, the EC applied antidumping duties of 25 percent to imports from Algeria and Morocco; exports of wire rods from Egypt were investigated for dumping in 1990. Imports of specialized steel products from Saudi Arabia have been subject to countervailing duties of 3 percent in the United States since 1985.
In the petrochemical industry, tariff escalation is the major barrier faced by Arab countries (Table 4). In the past, petrochemical products have been targeted by antidumping duties in industrial countries.17 Three of the cases during the 1980s involved exports from Arab countries—Kuwait, Libya, and Saudi Arabia: following an investigation of seven exporters to the EC market, Kuwait, along with five other exporting countries, agreed to a minimum price undertaking on urea exports to the EC; Saudi Arabia and Libya did not agree to the price undertaking, and an antidumping duty of 46 percent was imposed on EC imports from Saudi Arabia and a slightly lower duty on imports from Libya. 18 In June 1991, the European Court of Justice ruled that these duties should be annulled on the grounds that the defendants were denied access to information, which deprived them of a fair trial.
Table 4.Most-Favored-Nation Tariff Rates in EC, Japan, and United States for Selected Petrochemicals, 1988(In percent)
Ethylene, propylene butylene, and butadine Primary …1 5.8 …
Methanol Primary 13.0 4.9 18.0
Toluene and benzene Primary … 3.7 …
Acetic acid Secondary 16.8 3.0 1.8
Butanols Secondary 6.6 10.5 8.8
Diethylene glycol Secondary 8.0 7.2 12.3
Monoethylene glycol Secondary 13.0 12.0 12.0
Polupropylene Secondary 12.5 17.02 12.5
Styrene Secondary 6.8 8.0 7.4
ABS plastics Tertiary 12.5 4.6 9.43
Ethyl acetate Tertiary 11.5 5.6 3.7
Polyvinyl acetate Tertiary 12.0 5.8 4.0
Polyvinyl chloride (PVC) Tertiary 12.5 4.6 10.1
Vinyl acetate Tertiary 11.5 5.6 3.8
Source: Commission of the European Communities.
1 Zero or insignificant.
2 Approximate. The rate is ¥32 a kilogram.
3 Approximate. The rate is $0.7 a kilogram.
Partly in response to actual and potential access barriers in industrial countries, some petrochemical producers have diversified into offshore refining and distribution facilities. Such diversification provides a secure outlet to oil producers for some or all of their output and a hedge against protectionist measures on refined and petrochemical products in importing countries. In addition, it provides a hedge against fluctuating prices.19
Industrial countries support their agricultural sectors (including fisheries and livestock) through various border and nonborder measures. Market price support schemes comprise about 80 percent of the total support provided. These schemes are supplemented by extensive border measures (quantitative restrictions, variable import levies, and import control by state trading entities) and by domestic measures (intervention purchases and supply control measures). Intervention purchases remove production from the domestic market, which is often exported later with export subsidies. Direct income supports and sanitary and phytosanitary standards in some cases also protect agriculture.
In 1990, support measures in countries of the Organization for Economic Cooperation and Development (OECD) amounted to some 2.0 percent of their GDP, ranging from 0.2 percent in Australia and New Zealand and to 4.1 percent in Norway (Table 5). The producer subsidy equivalent (PSE) of these measures ranged from low levels in Australia and New Zealand to extremely high levels in Japan, the Nordic countries, and Switzerland (Table 6).20 In general, the countries with the highest supports tend to be the least efficient producers.
Table 5.Support Measures Associated with Agricultural Policies(In percent of GDP)
Sources: Organization for Economic Cooperation and Development, Agricultural Policies, Markets and Trade: Monitoring and Outlook (Paris: OECD), various issues; and International Monetary Fund, International Financial Statistics (Washington: IMF), various issues.
2 Total transfers of OECD countries divided by GDP of OECD.
Table 6.Net Producer Subsidy Equivalents1
Norway … … 76 76 76 75 71
Source: Organization for Economic Cooperation and Development, Agricultural Policies, Markets and Trade: Monitoring Outlook (Paris: OECD), various issues.
1 See footnote 20 in text.
3 EC-10 prior to 1986. The net PSE for EC-10 in 1986 was 52 percent.
The agricultural policies of industrial countries result in reduced access for agricultural exporters to industrial countries’ and third-country markets and lower world market prices. The precise impact of these measures on particular countries depends on the structure and size of the agricultural sector and on whether the country is an actual (or potential) net exporter or a net importer of agricultural and food products. Among the Arab countries, most of the diversified exporters and commodity exporters produce and export agricultural fisheries or livestock products. With few exceptions, the oil exporting Arab countries do not have the potential to produce and export agricultural products efficiently.21 As net food importers, the oil exporting Arab countries tend to benefit from the agricultural policies of industrial countries owing to lower world prices. The diversified exporters’ access to industrial country markets in some products is restricted, and they receive lower world prices for some of their exports owing to the policies of industrial countries. For example, Morocco faces restrictions in the EC on fresh fruit and vegetables and Tunisia on oranges, potatoes, dates, and olive oil; Egypt faces tariff quotas in the EC on onions; and Jordan faces restrictions on citrus fruit. Algeria, which is classified as an oil exporter, and Tunisia face restrictions on wine exports. The commodity exporters export only limited agricultural products to industrial countries (Somalia exports bananas to Italy) and do not face any tariff or nontariff barriers on their agricultural trade except for some health and sanitary regulations. Somalia and Sudan export cattle primarily to other Arab countries, which also have health and phytosanitary regulations that may affect these exports.
Studies on the impact of agricultural trade liberalization by industrial countries show that the agricultural trade balance of the non-oil exporting Middle East and North African countries (which mainly include the Arab countries classified as diversified and commodity exporters) would improve. Egypt would stand to experience a particularly significant improvement in its agricultural trade balance provided it removed the far-reaching distortions in its own economy and passed through the increase in world market prices to domestic producers. The agricultural trade balance of oil exporting countries in the Middle East and North Africa would deteriorate owing to higher world prices.22 Part of this deterioration might be offset, because higher growth related to the reallocation of resources in industrial countries as a result of liberalizing agricultural policies would likely increase the demand for goods and services produced by oil exporting countries. More generally, a substantial reduction in agricultural subsidies in industrial countries would alleviate the potential ex ante global savings shortage and pressures on world interest rates, with positive effects on investment and growth prospects in non-oil Arab countries.
Most Arab countries benefit from the Generalized System of Preferences (GSP) provided by industrial countries to developing countries in the form of reduced or zero tariffs (Tables 7 and 8). The lower-income countries (Mauritania, Somalia, and Sudan) benefit from additional preferential treatment as least developed countries and, in the case of the EC, by their status as ACP (African, Caribbean, and Pacific) countries under the Lomé Convention. Close to 100 percent of imports from ACP countries enter the EC duty free, and only a limited number of products face quantitative restrictions. Additional preferential treatment is also provided by the EC to Maghreb (Algeria, Morocco, and Tunisia) and Mashreq (Syria, Jordan, and Egypt) countries, but “sensitive” products tend to be subject to quantitative restrictions (which vary with seasons) and minimum prices.23
Table 7.Trade Preferences for Arab Countries
Algeria x x x
Bahrain x 2 x x
Mauritania x x x x x
Morocco x x x x
Somalia x x x x x
Sudan x x x x x
Syrian Arab Republic x x x x
Tunisia x x x x
1 Japan has no mechanism by which countries can be removed from the list of GSP recipient countries.
2 Was removed in 1968; will be granted GSP status shortly.
Table 8.Trade Preference Hierarchy of Arab Countries1
ACP, Least Developed, GSP Mauritania, Somalia, Sudan
Maghreb, GSP Algeria, Morocco, Tunisia
Mashreq, GSP Egypt, Jordan, Syria
GSP Bahrain, Libya, Oman, Qatar, Saudi Arabia,
1 Based on the number of tariff lines benefiting from tariff concessions or absence of quantitative restrictions. The hierarchy does not necessarily reflect the relevance of the concessions for the Arab countries.
Under most GSP schemes, “sensitive” items such as textiles, clothing, and footwear are excluded, whereas others, such as petro-chemicals, receive only limited coverage.24 The coverage of agricultural products is selective and concessions normally consist of duty reductions rather than exemptions.25 In some countries, developing countries are graduated out of GSP schemes on certain products if their per capita income exceeds specified limits (for example, the United States and New Zealand) and/or their share of specific sector imports in the preference-giving country exceeds specified percentages (for example, the EC).
The preferential treatment received by Arab countries in the EC is reflected in their trade patterns. Diversified Arab exporters, which receive the largest preferences, ship half of their exports to the EC, against one fourth for other Arab countries. These countries would probably lose from an extension of EC preferential treatment to other non-Arab countries or a Uruguay Round agreement. Some Arab countries also benefit from financial and technical assistance not available to GSP countries. The ACP, Maghreb, and Mashreq agreements provide funds for trade financing and financial and technical cooperation. The agreements also provide incentives to promote investment.
While Arab countries benefit from preferential access to industrial country markets, the preferential arrangements among industrial countries, such as those among EC and EFTA members and the U.S.-Canada Free Trade Agreement, often outweigh preferences extended by industrial countries to developing countries.
The relatively poor performance of output and exports of Arab countries during the 1980s, compared with other developing countries, reflects a combination of factors: external economic developments, their natural resource endowments and demographic and climatic conditions, and their own domestic economic policies. Although actual and potential access barriers to industrial countries affected the economic performance of Arab countries, they do not appear to be the major factor in their relatively poor performance. The Arab countries most directly affected by industrial countries’ trade policies appear to be those that are actual or potential net exporters of agricultural products and exporters of textiles and clothing. The paper by Mamdouh (Chapter 5) examines the potential for the Uruguay Round to reduce or eliminate restrictions currently faced by Arab countries in industrial countries.
Future prospects for Arab countries depend not only on industrial countries’ trade policies but also more generally on their economic performance as well as that of the non-oil developing countries, and on the domestic policies of Arab countries. The World Economic Outlook (WEO) of October 1991 indicates that the growth of output and exports is expected to decline in both industrial and developing countries in 1991 but to strengthen somewhat (except in Eastern Europe and the former U.S.S.R.) in 1992, reflecting the end of uncertainties in the Middle East, the decline in oil prices, and sharply lower interest rates in some countries. For the medium term, the prospect for a continuing expansion of output (and low inflation) in industrial countries is dependent on the adoption of appropriate policies. Such policies involve a resumption of fiscal consolidation and further action on the structural front to reduce distortions and improve efficiency, particularly in the areas of labor markets and international trade.
A successful conclusion to the Uruguay Round and other multilateral trade negotiations in progress would have a sizable impact on Arab countries. It would provide increased and more secure access to foreign markets in both goods and services. For oil exporting countries that are likely to have net outflows of FDI and to export financial services, a successful outcome to the negotiations on trade-related investment measures (TRIMS) and financial services is of particular importance to ensure that barriers in these areas do not impede the official allocation of capital. In addition, a reduction in tariff and nontariff barriers by industrial countries and other major importing countries would provide a one-time boost to growth in these countries with flow-on effects for most Arab countries.26 To the extent that industrial countries’ restrictive trade policies have limited growth in non-oil developing countries, the successful conclusion of the Uruguay Round would provide a basis for stronger growth in both industrial and non-oil developing countries. A broad-based recovery in the non-oil world would provide new opportunities for foreign direct investment from oil exporting Arab countries.
The positive consequences of freer trade and renewed growth in the world economy will depend on the domestic policies of the Arab countries, the area over which the Arab countries have the greatest control. In oil exporting countries, the oil sector is one of the few sectors that has a comparative advantage at present exchange rates. The maintenance of open trade and payments systems and cautious financial policies should generate surpluses in those countries that can be invested abroad. Over time, the cumulative effects of investment, including in human capital, may change the products in which these countries have a comparative advantage and provide the foundation for increased growth and a more diversified export base. For the diversified exporters, the liberalization of trade and payments and other structural reforms already under way, and associated macroeconomic and exchange rate policies would best support further efficient diversification of exports of goods and services and hence sustainable growth. The commodity exporters will need to eliminate or liberalize major domestic policy distortions to benefit from the positive effects of increased world growth and trade. High-population countries need to ensure that they provide an attractive climate for foreign investment. In addition to sound domestic policies, the elimination of trade-related investment measures in these countries and the protection of intellectual property rights would do much to foster such investment. These countries do not need to await the conclusion of the Uruguay Round to address these areas and to implement sound fiscal, monetary, and financial policies.
Table A1.Trade Shares by Country and Region, 1980, 1985, and 1989
Country Exports in
Industrial Countries 68.7 61.4 62.4 31.2 24.1 22.5 67.6 69.7 73.0
United States 19.6 21.6 22.6 48.6 33.5 37.7 23.1 31.3 25.2
Japan 13.8 13.0 12.3 65.4 57.6 49.8 9.1 10.4 14.8
European Community (EC) 29.2 22.3 22.2 24.4 18.1 15.1 26.9 19.9 24.8
Other industrial 6.1 4.6 5.3 15.7 10.2 11.6 8.4 8.0 8.1
Developing Countries2 25.5 32.8 32.9 31.9 34.1 34.1 22.4 21.4 18.5
High-income oil exporters 8.5 8.9 5.0 23.5 28.4 22.1 2.7 2.9 1.9
Other developing 17.0 23.9 28.0 33.2 34.9 35.6 19.6 18.4 16.6
Others3 5.8 5.8 4.7 30.2 19.3 18.6 10.1 9.0 8.6
Average 31.3 26.2 25.0
Sources: Trade: United Nations Trade Matrix System; International Monetary Fund, Direction of Trade. GDP: World Bank, International Economics Department.
1 Shares based on trade and GDP measures in current U.S. dollars.
2 Excluding nonmember and nonreporting countries (World Bank definition).
3 Bulgaria, Czechoslovakia, former German Democratic Republic, and former U.S.S.R.
Table A2.Arab Countries: Export Shares by Region, 1990(In percent)
Algeria 88.8 21.0 1.2 63.2 3.4 11.2
Bahrain 23.8 6.4 12.3 2.5 2.6 76.21
Kuwait 54.7 7.4 20.2 26.0 1.1 45.3
Libya 89.5 — — 84.7 4.8 10.5
Oman 50.1 5.7 35.0 3.5 5.9 49.9
Qatar 64.8 1.6 60.4 2.3 0.5 35.2
Saudi Arabia 63.3 24.0 19.0 17.7 2.6 36.7
United Arab Emirates2 48.6 3.6 34.7 7.8 2.5 51.4
Egypt 67.7 8.1 2.2 54.6 2.8 32.3
Jordan 6.4 0.6 2.1 3.6 0.1 93.63
Morocco 77.3 2.2 4.6 66.9 3.6 22.7
Syrian Arab Republic 38.0 1.1 0.1 34.7 2.1 62.0
Tunisia 79.3 1.0 0.3 77.2 0.8 20.7
Mauritania 77.6 4.5 22.3 50.8 — 22.4
Somalia 42.3 — 0.3 38.3 3.7 57.7
Sudan 46.9 2.7 5.9 37.3 1.0 53.1
1 Bahrain exports a relatively high percentage of manufactured goods to neighboring countries, in particular, Saudi Arabia.
2 Including re-exports.
3 Jordan’s main export markets are Asia and Eastern Europe for fertilizers and minerals and Arab countries for fruits and vegetables. Also includes re-exports.
Table A3.Arab Countries: Export Indicators
Average Export Value Growth
(U.S. dollars, 1985–90)
Algeria 95 96 oil — −16.7 25.0 −4.8
Bahrain … … oil — −9.0 42.3 0.5
Kuwait 90 92 oil — −10.3 −3. 4 −6.0
Libya 99 100 oil — −20.6 —3 −7.7
Oman 95 97 oil — −13.5 1.1 −7.7
Qatar 81 88 oil — −17.7 17.0 −7.1
Saudi Arabia 83 87 oil — −8.0 40.1 −6.4
United Arab Emirates 78 80 oil re-exports −11.2 14.0 −3.6
Egypt 41 63 oil cotton −8. 2 64.8 −2.0
Jordan — 40 phosphates fertilizer 7.1 2.9 −0.6
Morocco — 51 phosphates citrus fruit −7. 3 16.7 −2.5
Syrian Arab Republic 51 70 oil textiles −11.3 26.3 −12.8
Tunisia 20 40 oil fertilizer −9.1 28.6 −0.6
Mauritania — 97 fish iron ore −4.7 —3 1.4
Somalia4 — 74 cattle bananas −24.0 −9.6 −1.7
Sudan5 — 66 cotton cattle 12.0 10.4 2.4
Sources: National authorities; IMF staff estimates.
1 Oil exports include refined products.
2 Less than 5 percent of total exports for all oil exporters except United Arab Emirates.
3 Less than 3 percent of total exports.
4 1986–88.
5 1984/85–1987/88, fiscal-year basis.
Table A4.Arab Countries: Basic Indicators
1989 GNP
Algeria 2,230 1.4 9.1 −3.3 0.6
Bahrain 6,6101 0.92 −1.0 −5.3 −5.7
Kuwait 16,150 … 1.0 … 24.5
Libya 5,310 −3.1 0.2 −14.7 −1.7
Oman 5,220 −4.1 −6.6 −4.8 −0.7
Qatar 14,5003 0.64 3.3 −15.0 0.3
Saudi Arabia 6,020 0.2 −1.3 −19.9 …
United Arab Emirates 18,430 −5.5 4.0 −10.9 15.6
Egypt 640 5.4 19.0 −18.9 −10.4
Jordan 1,640 −0.1 1.9 −12.5 −4.5
Morocco 880 4.8 4.9 −6.15 −3.0
Syrian Arab Republic 980 2.4 31.8 −4.6 −0.3
Tunisia 1,260 2.9 7.4 −4.2 −3.7
Mauritania 500 3.2 9.4 −2.1 −10.1
Somalia 170 3.0 48.8 −9.4 −11.5
Sudan6 330 −0.1 34.7 −13.3 −9.2
Sources: World Bank, World Development Report, 1991; national authorities; and IMF staff estimates.
2 Average 1985–88.
3 1988.
4 Non-oil GDP.
5 In percent of GNP.
6 1984/85–1988/89, fiscal-year basis.
Table A5.Arab Countries: Summary Features of Exchange and Trade System as of December 31, 1990
Saudi United Arab
Acceptance of Article status
Article VIII x x x x x x
Article XIV x x x x x x x x x x
Exchange rate determined on the basis of
A peg x x x x x x x x
Limited flexibility with respect to single currency x x x x
More flexible arrangements:
Adjusted according to set of indicators
Other managed floating x x x x
Separate exchange rate(s) for some or all capital transactions and/or some or all invisibles x x x
More than one rate for imports x x x x
More than one rate for exports x x x
Import rate(s) different from export rates x x x x
Payment arrears x x x x
Bilateral payments arrangements x x x x x x
Restrictions on payments for current transactions x x x x x x x x x x
Restrictions on payments for capital transactions x x x x x x x x x x
Cost-related import restrictions
Import surcharges x x x x x x
Advance import deposits x x x x x x
Surrender or repatriation requirement for export proceeds x x x x x x x x x x
Source: International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions, 1991.
Table A6.Arab Countries: Trade Restrictions
Algeria x x x x x x
Libya x x x x x x
Egypt x x x x x
Morocco x x x x x
Syrian Arab Republic x x x x x x x
Tunisia x x x x x
1 Does not include import restrictions for health, cultural, or political reasons.
Table A7.Arab Countries: Capital Transactions and Debt Indicators
Net Foreign Investment,1
1985–89 Average
Foreign Debt Outstanding
End–19892
Debt Service Due,
Net Investment Income,4
Foreign Reserves in
Months of Imports,5
(In percent of exports)3
End–1989
Algeria — 37.5 59.7 −21.7 1.1
Bahrain −0.116 … … 0.36 5.4
Kuwait −2.40 … — 76.7 4.6
Libya … … — 2.6 8.9
Oman 1.32 32.8 10.86 −2.66 28.0
Qatar … … … … …
Saudi Arabia 8.476 … — 44.86 7.6
United Arab Emirates — … … … …
Egypt 1.93 56.6 32.7 −17.8 0.2
Jordan 0.506 67.6 29.06 −18.06 2.5
Morocco 0.21 84.5 43.1 −30.4 1.2
Syrian Arab Republic … … 21.5 −14.9 0.8
Tunisia 1.11 56.0 24.2 −22.2 2.3
Mauritania … … 25.6 −19.2 1.6
Somalia −0.256 … 25.1 −11.2 0.5
Sudan −0.026 … 27.5 −24.5 …
1 Comprises inbound and outbound capital transactions between enterprises and investors, reflecting a lasting interest on the part of the investors.
2 Excluding net credit from the IMF.
3 Exports of goods and services.
4 Covers income derived from the ownership of foreign financial assets, excluding the portfolio investor’s portion of the earnings of incorporated enterprises that are not formally distributed.
5 Includes monetary gold, SDRs, reserve position in the Fund, use of Fund credit, and claims on nonresidents available to the central authorities.
6 1985–87 average.
Table A8.Arab Countries: Debt Reschedulings, 1979–91
Egypt 1987,1991
Jordan 1989 1989
Morocco 1983,1985,1987,1988,1990 1990
Mauritania 1985, 1986, 1987, 1989
Somalia 1985, 1987
Sudan 1979, 1982, 1983, 1984 1981, 1984, 1985
Source: Paris Club agreed minutes, bank debt restructuring agreements.
Mahmoud Sakbani1
The topic assigned to me to discuss is the impact of industrial countries’ trade policies and trade-related policies on Arab countries. We have the paper prepared by Margaret Kelly and Bernhard Fritz-Krockow of the IMF as the basis for this discussion.
Let me start first by congratulating the authors on their thoughtful and well-conceived paper. I profited from their analyses and data. I do not find any major disagreement with the thrust of their paper, though I would put emphasis on different points, and I believe thereby that I could bring a wider perspective to the discussions. In this respect, I noted with interest that out of the whole text of the paper, about half was devoted to a review of the economies of the Arab countries and their macroeconomic and trade policies. In other words, half focused on the general topic of what are appropriate or normatively sound economic policies for the Arab countries, and only half on the impact of industrial country trade and trade-related policies on the Arab countries.
I subscribe to an implicit change of emphasis as I think that the static analysis of the impact of such policies on the Arab countries is of little relevance—for reasons I will dwell upon later. Perhaps it is more important to try to gauge the probable impact of the trade policies of industrialized countries on a future diversified structure of Arab exports and imports, that is, the impact on the Arab countries once they have progressed somewhat in their development. To do this, we have to draw on the comparative experience of other developing countries. On the other hand, raising the question of what macro and trade policies are normatively advisable for the Arab countries is both interesting and appropriate, because in my view the reasons for Arab nonperformance are largely the type of internal economic policies followed and their interaction with the prevailing sociopolitical factors. I will follow the Kelly/Fritz-Krockow sequence by first discussing the macroeconomic and trade policies of the Arab countries and then reverting to their impact. Obviously, the Arab countries, vulnerable to the external environment as they are, cannot be discussed without referring to the development environment of the 1980s, and I will therefore begin my remarks with this topic.
As the authors observe, the 1980s were characterized by a long economic expansion in the industrial countries, an increase in investment flows and in market integration, and a shift of income-trade relationships to ranges compatible with historical experience. However, I would like to add the following points to what the authors said:
The distribution of growth among industrial countries was uneven, with the United States and Japan accounting for the major part of growth. Moreover, by historical standards, growth of 3.5 percent is below the levels of the previous three decades.
The 1980s was a period of uneven performance by the developing countries, including the Arab countries. While the countries of East Asia and the Association of South East Asian Nations (ASEAN) registered remarkable performances, the rest of Asia and all of Latin America and Africa performed poorly.
The remarkable growth of total foreign direct investment (FDI) in the 1980s masks an unremarkable, uneven incidence in the destination of such investment. Only 14 percent of the FDI of industrial countries went to developing countries; and of these, the ASEAN and East Asian countries account for the bulk of it. Moreover, and as I will discuss below, there was a negative net flow of funds to many developing country regions.
The 1980s are characterized above all by the problem of debt and the decline in the terms of trade of developing countries. More than anything else, the poor performance of the Arab countries and other developing countries can be traced to these two factors.
I would have liked the authors to have gone into these aspects and to have drawn the appropriate conclusions. For my part, a study of the external environment leads me to the following conclusions:
The macroeconomic policies of the industrial countries did not seem to attempt to ameliorate the external environment of development.
The lending of the IMF and the World Bank Group also did not attempt to address this aspect; the vulnerability of the balance of payments of most developing countries, including the Arab countries, was not addressed by deliberate anticyclical provisions. Rather, the dominant view was to push structural reforms in each country separately. In other words, no attempt was made by the funding institutions to form a pattern of international adjustment worldwide.
Investment funds went primarily to industrial countries. An abnormal aspect of this is the extent to which the U.S. deficit was financed from the rest of the world. If one were to superimpose on that the capital flight from developing to developed countries, one would have to say that the 1980s were characterized by large net saving by developing countries, that is, developing country savings exceeded investment for most of the decade, a situation contrary to what it should be.
Among the Arab countries, the largest share of investment flows went outside the region, and less than $70 billion was channeled to other Arab countries from all sources in all forms from 1973 to 1980. Furthermore, the capacity of Arab surplus countries to give aid and to invest externally deteriorated at the same rate as the losses they suffered in their terms of trade.
Several observations should be made about the general economic policies of Arab countries in the 1980s. First, the dominant role assigned to the public sector not only in controlling the so-called commanding heights of the economy but in dominating the distribution of GNP on the revenue side has tied economic performance to the wisdom and effectiveness of public sector activities. On the latter, I need not qualify the evidence: the facts speak for themselves. On the former, with few exceptions, there seems to have been no effective effort to diversify the Arab economies, promote sound agricultural policies, institute industrial policies to target certain export-oriented sectors, and in some countries, even invest in human capital. In the political and sociological conditions of most Arab countries, the public sector has served, in addition to its conventional functions, extra-economic purposes: supporting a beneficiary class, providing employment to diffuse political pressures, shouldering massive armament burdens, and running public sector deficits without any market accountability.
The Arab countries have also failed, as a group, to promote conditions for secure, productive, and attractive intra-Arab investment. Whatever the reasons for this, the result has been dependence on foreign financial investments, rampant debt by those with weak balance of payments positions, and rather weak economic performance with wide gaps opening up in many countries.
A related point is the status of regional and interregional cooperation in the economic policies of the Arab countries. It seems that the poor performance of the Arab countries individually and collectively reflects, among other things, a neglect of genuine regional cooperation. This is manifest in the very low share (7 percent) of intra-Arab trade in their total trade. Neither the endowment factor nor the similarity of production structures explains this fact. If one examines the patterns of imports and exports of the Arab countries with nonregional trading partners, one has to conclude that considerable room exists for creation of intraregional trade. This is not unique to Arab countries: other developing countries share this weak interlinkage of trade and finance, and explanations are easy to find. There are major tariff restrictions among Arab countries, numerous problems of transportation, lack of information on potential partners and products, general underdevelopment of the marketing network, scarcity—at least until recently—of financing for trade and of suitable monetary and clearing arrangements, and, above all, a lack of political will to pursue agreements to facilitate trade or to implement those agreements already signed. There is no escape from the circumstances of the world economy, and from the need for economic cooperation among developing countries (ECDC). And as one observes the increased trade and exchange, especially intraindustry trade, among developed countries, one has to conclude that something is amiss in this aspect of Arab country policies.
Because of the underdeveloped state of most Arab financial markets and the restrictive regulations, the scope of fiscal and monetary policy actions as well as microeconomic policies have proved limited. Moreover, because monetary policy in the Arab countries is typically tied to fiscal policies—and more precisely, to public finance—financial inefficiencies have added to the many problems of the banking system.
Turning to trade policies, I agree with the classification of the Arab countries proposed by the authors. On that basis I would make the following remarks. First, for the open economies (the oil exporters, except Algeria and Libya), a policy of import substitution should have been a part of their economic strategies with provisions for phasing out protectionism. The authors seem to support the line that export orientation is the only valid model that has proved itself in successful developing countries. There is no conclusive evidence for this view. The successful examples of Asian newly industrialized countries have important import substitution elements in their experience, and the poor examples in Latin America are attributable, at least in part, to the impact of debt, capital flight, and the deterioration in the terms of trade. Moreover, I can think of no sound economic argument for a categorical judgment against import substitution, as an initial phase, for countries with undiversified economic bases. Certainly, most of the oil exporters have undiversified economies. I do not, however, want anyone to jump to the conclusion that I am advocating import substitution. Quite the opposite; I am advocating a strategy of encouraging some industries to import substitutes while influencing certain dynamic industries capable of large-scale production to move into exportables. Resources should be allowed to move freely among the various sectors. Moreover, one should not lose sight of the historical fact that import substitution, while necessary to anchor the economy at some point in time, has built-in limitations in its range, in its scope, in its technological possibilities, and in its usefulness. In a word, one ought to think of a whole spectrum of activities including, under safeguards, import substitution.
Second, the exploitation of dynamic comparative advantages in such countries is hampered by their small populations, limited markets, dependence on foreign skilled labor, and severe limits to their natural endowments. While the authors’ comments are acceptable in principle, their relevance to these countries in the near future is arguable.
Third, among the relatively diversified exporters, Morocco, Jordan, and Tunisia have aimed their trade policies toward export diversification, but their development emphasis has been placed on promoting certain nontradables such as tourism, and on developing agricultural exports that benefit from preferential access to the European Community (EC) in the context of its Mediterranean policies. Hence, they have not yet reached a stage of overall diversification that permits clear judgment. Syria and Iraq, on the other hand, have been victims of a dominant public sector, massive economic regulations, inward orientation, and crushing armament efforts. No economy could endure such shackles without serious problems or boast good performance without the benefit of special circumstances. Egypt, which has sought diversification, has had to grapple with its enormous debt ($48 billion before the crisis in the Middle East), population pressures, and still slow and massive government procedures and regulations.
Two of the countries in the third category, Sudan and Somalia, have had protracted civil wars, and another is a less developed country.
Fourth, private investment in the Arab countries has generally eschewed industrial investment in favor of real estate and commercial services. This means that the productive base of the economies has remained too limited for trade policies to have had scope for effectiveness.
Fifth, the authors rightly and aptly observe that in many Arab countries, the government policies of intervention, overregulation, and inward orientation have skewed direct foreign capital toward public sector lending or direct support. Indeed, most of the bilateral aid given by the Arab surplus countries has gone to support the public budget, with the result that foreign capital has had a negligible impact on the productive base of the Arab economies.
Sixth, I have difficulty with the bland statement about opening up all markets as a viable strategy for the Arab countries. Two issues are involved: the first pertains to the problem of asymmetry in the response of demand and supply to opening up. This would lead, if not carefully managed, to balance of payments disequilibria. The second pertains to the sequence of reforms. The experience of Chile, for example, shows that liberalization and reforms should have careful sequencing, starting with macroeconomic reforms, then micro and trade reforms, and only finally opening up financial markets.
This topic is of limited scope for the Arab countries. Close to 80 percent of Arab exports are in oil and oil derivatives, products of low price elasticity but significant income elasticity, on which industrial country trade policies have shown little impact. Until the Arab countries have diversified exports, with a large share of manufactures in exports, the whole matter will remain of rather limited interest.
For the agricultural exporters such as Tunisia, Morocco, and, recently, Egypt, the main destination is the EC countries, which have protected agriculture. Japan and the United States are unimportant destinations for the agricultural products of the Arab countries. The EC has granted preferential access for these countries to its markets. The important question in this regard is whether such protocols will erode after 1992, and whether newcomers to the EC from Eastern Europe, for example, will be given the same advantages. I will deal with this matter later.
The trade and commercial policies of the industrial countries toward the Arab region are multilayered. It would help to divide these industrial countries into three groups: the EC, the United States, and Japan. The most important export destination and import source for the Arab countries is the EC. Japan and the United States are important for the Gulf Cooperation Council (GCC) countries, but much less so for the rest.
EC trade and trade-related policies pass through three filters: first, there is the CAP, that is, the Caribbean, Africa, and Pacific treatment articulated in the various Lomé Conventions that cover 4 Arab countries. Second, there are the preferential access protocols of the EC granted to 12 Mediterranean countries, of which 9 are Arab countries. Third, the remainder are covered by the Generalized System of Preferences (GSP) system subject to quotas, ceilings, and local injury clauses. The least developed among the Arab countries are also beneficiaries of the provisions of the UNCTAD Paris Conference for Least Developed Countries. Japan and the United States follow the same approach as the EC in the use of the GSP and nontariff restrictions.
The GSP coverage, which is exclusively subject to unilateral decision, is constrained by nontariff measures: voluntary export restraints, variable import levies, anti-dumping provisions, orderly market arrangements, basic price systems, and so on. The data base of UNCTAD was used to depict the extent of the measures imposed, the ratio of trade covered, and the frequency of coverage, as well as for the total. Leaving aside agriculture, it is clear from these computations that textiles, steel, and shoes and other leather goods, that is, the bulk of Arab country non-oil, nonagricultural exports, are restricted by the trade policies of the industrial countries, that is, the policies of the EC, Japan, and the United States, which account for the majority of Arab exports and imports. Since agriculture is heavily protected in the EC and Japan, the trade policies of the industrial countries have a negative impact on the Arab countries in all but the oil trade. I do not set much store by the statement that some food importers have benefited from these policies; the regional dynamic impact of these policies is on the whole negative. It remains true that because the scale of Arab non-oil exports is modest and their diversity limited, the estimated losses are not large. But one should not lose sight of the potential impact, as the Arab countries may in future find themselves in a position similar to that of the East Asian countries at present. Nontariff barriers will then bite with the same intensity observed with respect to the manufactured exports of those countries.
Industrial country trade policies have affected several new subsectors of particular relevance to some Arab countries, that is, steel, petrochemicals, and air transport. The steel exports of Saudi Arabia, Qatar, Egypt, Morocco, and Algeria are affected. For petrochemicals, the speed with which the EC imposed trade measures should elicit high praise from all those with protectionist hearts. In these cases, the Community used anti-dumping—its protectionist workhorse—to raise the barriers. For the air transport sector, the nontariffs take the form of environmental standards. This will be quite important in access to the EC.
Two other aspects of industrial country trade and trade-related policies should be raised. The first concerns the indirect effect of trade policies, specifically their impact on foreign direct investment, and the technological content of trade. This aspect was touched upon but not treated by the authors. The second concerns the impact of industrial country groupings on the Arab countries, in particular the impact of the post-1992 European Community and the North American free trade area (NAFTA) on the Arab countries. As custom unions and free trade zones, respectively, these groups will affect Arab country trade directly and indirectly. This aspect was not touched on in the paper. Its importance warrants, however, brief consideration.
Basically, the European Community after 1992 and the NAFTA will generate trade creation and trade diversion. While the first effect, which accrues from increased efficiency and income multipliers, is positive, the second, which accrues from increased competitiveness and access gains relative to third parties, is negative. Three scenarios of growth of EC income were constructed at 2.5, 5, and 10 percent increases in the growth of the GNP trend. The Commission of the European Communities’ estimates of the overall income elasticity agree more or less with estimates made by economists such as S.G. Jones and others and with our own estimates. Using the data for all developing countries for 1979–87, the overall income elasticity was estimated at 3.5. That is, every one-point increase in the growth rate would result in a 3.5 increase in imports. This implies that the gross trade creation effect would be 17.5 percent in the middle scenario of 5 percent growth, the scenario with the highest likelihood. But this of course should be modified by the diversion effects.
According to the estimates of the EC Commission, the diversion effect will be highest in some classes of manufactures, and lowest in food and primary commodities. Although under the growth assumptions of the Commission (4.5–7.0 percent), manufactures should increase by 10 percent in the medium term, the subsectoral impact will differ depending on the product. The most significant trade diversion is estimated to be in metal manufactures. This is followed by chemicals, office machinery, textiles, and other labor-intensive manufactures. The statistical picture seems to indicate that Arab exports of food, oil, and other energy products (not oil derivatives) would not suffer important diversion effects. On the other hand, chemicals, steel, and textiles would be affected negatively, although the order of impact is in descending order. However, it is more interesting to investigate the impact of subsectoral manufactures at the Standard International Trade Classification (SITC) two-digit level. It is all the more so, since agriculture will continue to be protected under the EC system. On this score some suggested orders of magnitude can be gleaned from recent econometric work. Griffith- Jones and Alizadeh, for example, calculated these subsectoral impacts. They found that they differ widely. Specifically, office and data equipment revealed a very high import income elasticity of 13.5, whereas electrical machinery boasted 7.7 and clothing only 2.5. In between, textiles, and manufactures of metal and leather recorded 2.5, 3.4, and 3.5, respectively. Motor vehicles, rubber, chemicals, and furniture occupied a middle range of 5.7, 5.9, 4.6, and 4.9, respectively.
On the basis of some econometric models it seems that Arab exports to the European Community, except for oil and agriculture, would stand to gain little under certain assumptions. However, the gains are significant in oil and would depend on the evolution of preferences for Arab countries and on protectionism in agriculture. These results also indicate an uneven distribution of benefits, with the bulk of the gain going to Arab oil exporters.
Nonetheless, the results clearly show that if the Arab countries can diversify their exports to certain branches of manufactures such as data processing and office equipment, paper and paperboard, electrical machinery, and motor vehicles, that is, to products of high technical content, they stand a good chance of benefiting from completion of the integrated market. The indirect effects of the EC and the NAFTA will be on private direct investment and bilateral and multilateral official flows. The budget constraints of the United States and the EC countries will force choices in aid and lending destinations between the internal uses of such funds and the external uses. In view of the political factors involved—ensuring that communism does not return and avoiding political instability in Eastern Europe—it is likely that bilateral official aid will accord Eastern Europe first preference. Similarly, the limited resources of the international funding organizations and their control by the main industrial countries will require rationing among the competing demands and will probably result in at least diverting some funds to Eastern Europe. Because of the interest of Arab surplus countries in foreign investment, the Arab recipient countries will not necessarily attract Arab investors. Consequently, these countries will have to forge with Arab surplus countries some cooperative arrangements to redirect net Arab savings to the Arab region. In such schemes, the Arab recipient countries will have to address effectively the interests and concerns of the investors.
One last point is the potential impact of the entry of East European countries into the EC or of their being granted preferential treatment. This impact can be estimated only over the medium term and inferred basically from the degree of substitution of their products for Arab products as well as the nature of their endowment. It would be an educated guess that in agriculture, textiles, chemicals, and leather goods they will be competitors with the Arab countries. In manufactures, they will have the advantage, especially in products of high technical content. But most of all, they will be favored by investment flows because of their excellent human capital and the political considerations involved in ensuring that they do not return to communism. For these reasons, the Arab countries, like all other developing countries, will likely fare only second best.
1The Arab countries covered in this paper are the members of the Arab Monetary Fund, except for Iraq and the Republic of Yemen (formerly the Yemen Arab Republic and the People’s Democratic Republic of Yemen), which are excluded owing to changes in their status as countries and/or the lack of sufficient and reliable quantitative and qualitative information.
2The countries classified as diversified exporters, commodity exporters, and oil exporters are listed in Chart 2 and discussed further in Section III.
3See “A Survey of the Arab World,” The Economist, Vol. 315, May 12, 1990, p. 54.
4The United Arab Emirates have built a significant re-export industry and diversified into petrochemicals, while Saudi Arabia, Kuwait, Libya, and Qatar have reduced their dependency on crude oil exports somewhat by downstream diversification into steel (Saudi Arabia and Qatar), petrochemicals (Saudi Arabia, Kuwait, and Libya), and chemicals (Qatar).
5Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates have accepted the obligations under Article VIII of the Fund’s Articles of Agreement.
6In a Ricardian world a lack of export diversification and the Dutch disease is not a problem; each country is always better off if it produces the product in which it has a comparative advantage. Concerns about fluctuations in income and a desire to minimize risk are the main reason that export diversification might be pursued.
7For example, various oil exporting countries attempt to attain self-sufficiency in basic foodstuffs, while Egypt restricts cotton exports and pays below world market prices to producers to subsidize cotton for domestic manufacturers.
8Monopolies apply to almost all principal exports of Arab countries, such as hydrocarbons from oil exporting countries and minerals from Morocco, Mauritania, and Jordan. They are also maintained in the oil sector, mainly for national security and fiscal revenue purposes.
9Algeria is an example of a country that has reversed export diversification partly as a result of government regulations. In the 1960s, it was a major exporter of agricultural products, but by 1988 agricultural exports comprised only 0.35 percent of total exports. Algeria’s experience may also be explained by the Dutch disease phenomenon; with the oil booms of the 1970s, the expanding resource sector led to a contraction of the manufacturing sector through a loss of “competitiveness” caused by the appreciation of the real exchange rate.
10The Impact of the Industrial Policies of Developed Countries on Developing Countries, Prepared by the staffs of the World Bank and the International Monetary Fund for the Development Committee, Development Committee Pamphlet No. 20 (Washington, March 1989); and “The Effect of Industrial Countries’ Trade, Agricultural, and Industrial Policies on Developing Countries,” in Development Issues: Presentations to the 41st Meeting of the Development Committee, Development Committee Pamphlet No. 27 (Washington, April 30, 1991), pp. 56–77.
11Iraq has been subject to an embargo since August 1990.
12While CVDs and ADDs are intended as a remedy against “unfair” trading practices of other countries (such as subsidies and dumping), they are often used to harass foreign exporters and to protect domestic producers from “fair” competition.
13Protection of the coal sector in Germany and Spain (through domestic subsidies and quantitative import restrictions) may affect Arab countries’ oil exports.
14In addition to measures described below, Egypt, Saudi Arabia, and the United Arab Emirates have been targeted under the “Special 301” of the U.S. 1988 Trade Bill for violation of intellectual property rights.
15The United States initially imposed VERs in 1984 in the wake of a huge number of requests for countervailing duties lodged by the iron and steel industry. In 1989 when the VERs were to expire, President Bush announced the U.S. steel liberalization program; this involved extension of the VERs with 19 individual countries to March 1992 and the initiation of multilateral negotiations to prohibit most subsidies, eliminate or reduce tariffs, and establish a dispute settlement mechanism. The U.S. Administration has indicated that the VERs will not be renewed even if agreement on the International Steel Consensus has not been reached.
16The EC is involved in the International Steel Consensus negotiations with the United States and several other countries.
17During 1980–84 there were 21 antidumping cases in the United States and 77 in the EC. As the industry underwent restructuring in these countries the number of antidumping cases dropped to 20 during 1985–87. More recently, in January 1991, Australia levied provisional antidumping duties of 11 percent on imports of low-density polyethylene (LDPE) from Qatar.
18These duties covered 11 percent of Saudi Arabia’s 1986 exports of petrochemicals to the EC. The price undertaking given by Kuwait covered 46 percent of its petrochemical exports to the EC.
19Crude oil prices normally fall (and rise) more rapidly than prices of refined and petrochemical products. Thus, when oil prices, and therefore petrochemical feed-stocks (oil and natural gas) are low, offshore production and distribution investments are relatively profitable, particularly since the cost of transporting oil is relatively low compared with the cost of transporting petrochemicals.
20The producer subsidy equivalent (PSE) of support policies is the transfer that would be needed to replace these policies and leave the producer no worse off. PSEs are expressed in net terms for some products (such as beef), as the costs of their inputs are inflated because of other support policies, and this effect is netted out.
21Saudi Arabia produces and exports wheat using fossil water pumped from under the desert, which will eventually run out; farmers currently receive several times the world market price for wheat. Algeria previously exported significant quantities of agricultural products including wheat.
22See, for example, studies reported in Agricultural Trait Liberalization: Implications for Developing Countries, ed. by Ian Goldin and Odin Knudsen (Paris: Organization tor Economic Cooperation and Development, 1990), p. 173.
23The GCC countries, which comprise Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, are currently involved in negotiating a free trade agreement with the EC, which would affect their market access in petrochemicals, in particular.
24The GSP schemes of the EC, Japan, and the United States differ in country and product coverage. For example, refined oil products such as gasoline and jet fuel oil enter the EC duty free, as do most first-stage processing products based on oil or natural gas. About 5 percent of the EC’s annual consumption of other petrochemicals is imported. Most of these imports enter duty free under free trade or preferential agreements with countries of the European Free Trade Association (EFTA) or the Mediterranean; part of the remainder is imported from the GCC countries, subject to GSP ceilings or tariff quotas or to MFN tariff rates. Japan’s GSP scheme, by contrast, does not include refined oil products or petroleum gases, but for many petrochemical products such as methanol about 10 percent of imports of each product is distributed on a first-come, first-served basis. The U.S. scheme excludes members of the Organization of Petroleum Exporting Countries (OPEC) (except for Ecuador, Indonesia, and Venezuela) and countries with more than a specified per capita income. Petrochemicals, however, are generally included and are given duty-free access subject to certain product graduation requirements.
25The EC’s GSP scheme covers 23 agricultural products, including 8 products subject to variable levies under the Common Agricultural Policy (CAP); for the latter the preference takes a 50 percent reduction in the variable levy, within overall quotas.
26For example, results reported in the October 1990 WEO suggest that the elimination of all tariff and nontariff barriers by industrial countries could raise both exports and imports of these countries by at least 5 percent; a 50 percent reduction in such barriers in the United States, the EC, and the Asia-Pacific region would raise GDP in these three regions by 5 percent.
1The views expressed in this paper are personal, and should not be interpreted as those of the United Conference on Trade and Development (UNCTAD).