**The lack of trade integration is as much a cause as a consequence of the region’s economic difficulties.** Low trade integration could be the result of poor production complementarities and other exogenous factors. Indeed, a number of Arab countries have similar resource endowments, production capabilities, and export structure. They may find it difficult to use regional integration as a means to establish patterns of specialization and diversification. The lack of intra-regional trade is also to some degree policy driven. As recently analyzed, public sector governance and participation, accountability and transparency, and rents and privileges remain key impediments to private sector development in the region.<sup>10</sup> The very same causes also impede the region’s capacity to export. Without improved rule of law, participation, and governance, trading across borders is difficult and trade cannot sustainably flourish. In turn, the lack of integration and exposure to new technologies, innovation, and ideas hamper more rapid progress in the region and help explain many economic and social shortcomings:  poor resources utilization, insufficient human capital, gender inequality, high unemployment, oversized governments, unfavorable investment climate, limited foreign investment, and eventually lackluster private sector performance.<sup>11</sup>

**Historical experiences of successful regional integration offer avenues for the Arab world.** Gains from regional integration could be very significant, as recently demonstrated by the performance of countries in Central and Eastern Europe and East Asia. Whether Arab countries refer to the centralized EU model of integration or the decentralized ASEAN model, they have much to learn from these successful models of regional economic integration (Akhtar 2009). Yet, worldwide there are very few regional cooperative institutions that function effectively due to the common unwillingness of governments to share sovereignty and the weakness of national and regional administrative capacities. Strong political will and solid institutions are therefore key to success. Strengthening and making regional Arab institutions, including the General Secretariat of the League of Arab States, more effective and efficient would be an important step toward promoting intra-regional cooperation (see below).

**The Arab world needs to invent its own model of integration based on its circumstances and conditions.** While regional integration can be a significant driver of a country’s better overall performance, as in the case of Central Europe and Eastern Europe or South East Asia, it can also be the reverse: in Central Asia autocratic and corrupt regimes may reinforce each other with poor governance and limited economic reform. The Arab world’s approach to regional integration should be anchored on the region’s evolving realities and circumstances—including the current political and social upheavals in many Arab countries for more voice and representation, economic opportunities, and openness more generally.

> 10 <u>From Privilege to Competition: Unlocking Private-Led Growth, (2009) MENA development Report, World Bank.</u>

> 11 <u>Arab Human Development Report 2002, UNDP and Arab World Competitiveness Report 2005, World Economic</u> Forum.

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