metadata: authors: 0: author: DeRosa, Dean A.
count: Middle East and North Africa
docna: 0: docna: Agricultural trade and rural development in
            the Middle East and North Africa: recent developments and prospects
docty: Policy Research Working Paper
subtopic: Climate Change and Agriculture,Crops and Crop Management Systems,Fertilizers,Livestock and Animal Husbandry,International Trade and Trade Rules,Energy and Mining,Trade and Multilateral Issues
teratopic: Agriculture
abstracts: cdata!: Despite petroleum's prominence in
            the Middle East and North Africa (MENA), agriculture remains
            important to most to the region's economies.  And more
            robust and more dynamic agricultural growth could
            significantly boost sustainable economic growth and rural
            development in those countries.  An appropriate avenue for
            improving agricultural growth is to expand agricultural
            exports in MENA countries with appreciable-to-large
            agricultural sectors and comparative advantage in cereal
            grains, agricultural raw materials, fruits and vegetables,
            and many categories of livestock and dairy products.  But
            high levels of protection in many MENA countries, especially
            for manufactures and some food products, contribute to
            overvalued exchange rates and a significant bias against
            agriculture.  Trade liberalization and other economic
            reforms to promote agriculture and improve rural welfare in
            MENA might be pursued through regional economic cooperation,
            but should be guided as much as possible by the principles
            of "open regionalism" - under which trade
            concessions negotiated between regional trading partners
            could be extended unconditionally to all trading partners,
            including trading partners outside the region.
repnme: repnme: Agricultural trade and rural development in
            the Middle East and North Africa: recent developments and prospects
display_title: Agricultural trade and rural
            development in the Middle East and North Africa: recent
            developments and prospects
listing_relative_url: /research/1997/02/694959/agricultural-trade-rural-development-middle-east-north-africa-recent-developments-prospects
topicv3: Intraregional Trade m1326248 1175,Trade m1326924 698,Fertilizers m1327354 175,Iron m1503514 2931,Livestock m1504490 4024
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Agriculture
origu: International Trade Division
no_of_pages: 54
model_extractions: > POLICY RESEARCH WORKING PAPER 1732

# **Summary** findings

**Despite petroleum's** prominence in the Middle East and **North** Africa (MENA), agriculture remains important to most of the region's economies. And more robust and more dynamic agriculrural growth could significaiitly boost sustainable economic growth and rural development in those countries,

An appropriate avenue for inmproving agricultural growth is to expand agricultural exports in MENA countries with appreciable-to-large agricultural sectors and comparative advantage in cereal grains, agricultural raw materials, fruits **and** vegerables, and many categories of livestock and dairy products.

But high levels **of** protection in many MENA countries, especially for manufiactures and .omc food products, contribtute to overvalued excharige raites arid a significant bias against agriculture.

1Trarie liberalization and other eCOoniM!L retorros to prormote agriculture and iinprovc rurai wrlfaie in MEN:.A mnight be pursued throuigh regional economnic cooperation, but shiould he gutded as much as poswirble by the principles of i,)pen rcgionalhsn" ---- und(er whicb trade concessions oiegotiated between r.2gional trading partners wouild be extended unconditionally to all trading partners, mcluding trading partniers outside the region.

- This paper a product of the International Trade Division, International Econom iics Departimient -- \as presented to I he Fourth Annual World Bank Conference on Environmentally Sustainable Development, "Ru. al Well-Being: From Vision to Action," September 2 5-27, 1996, Washington, DC. Copies of this paper are ax ailable free fronr the World Banlk, 1818 H Street NW, Washington, DC 204.33. Please contact Jennifer Ngaine, room _NS-)56,_ telephone 202-4 i _3-7959,_ fax 2(2522-1159, Internet addrcss jngaine@0worldbank.org. February 1997. (45 pages'

> _The Policy Research Working Paper Series disseminates the findings of uwork in progress to encourage the exchange :)f ideas -a.uK' development issuies. An objective of the series is to get the findings out quickly, even if the pres, ntations are Ic sthan fuicb prlishk .t. 1'e_

> _papers carry the names of the authors and should be cited accordingly. Thi findings, interpretations, and conclusions expressed si this_ I _paper are entirely those of the authors. They do not necessarily represent the vieu' of the wl, rld Bank. Its I xecutive Lrtos,)r ., the countries they represent._

Produced by the Policy Research I)issemination 1enter
**AGRICULTURAL TRADE AND RURAL DEVELOPMENT** IN **THE MIDDLE EAST AND NORTH AFRICA**

# **Recent Developments and Prospects**

Dean A. DeRosa ADR International, Ltd. 200 Park Avenue, Suite 202 Falls Church, Virginia 22046 U.S.A. Tel/fax: 702 532-8510 Internet: 102712.1300@CompuServe.Com Paper presented to the Fourth Annual World Bank Conference on Environmentally Sustainable Development on "Rural Well-Being: From Vision to Action," September 25-27, 1996, Washington, D.C. The findings, interpretations, and conclusions expressed in this paper are solely those of the author. They do not represent the views of the World Bank, its executive directors, or the countries they represent. Helpful comments by John M. Underwood and Inder K. Sud, among other conference participants, are gratefully acknowledged.
# **Contents**

||Page|
|---|---|
|1. Agriculture and Rural Development|1|
|The MENA Economies|1|
|Agriculture and Economywide Policies in Economic Development|2|
|2. Production, Trade and Comparative Advantage|6|
|Agricultural Production|6|
|Foreign Trade|8|
|Exports|9|
|Imports|10|
|Revealed Comparative Advantage|10|
|International Trade|11|
|Intraregional Trade|12|
|3. Trade Regimes and the Bias against Agriculture|13|
|Multilateral Trade Liberalization|13|
|Protection in MENA|15|
|Regional Cooperation|17|
|Past and Present|17|
|Economic Considerations|20|
|4. Summary and Concluding Remarks|23|
|References|26|
|Tables and Appendix|31|

Tables and Appendix
1. **Agriculture and Rural Development**

# **The MENA Economies**

Situated at important crossroads between Africa, Asia, and Europe, the countries of the Middle East and North Africa (MENA) forn one of the largest groups of developing countries in the world economy,' Also, with the initiation in recent years of a peace process between Israel and its Arab neighbors the region has increasingly moved to the foreground of the world economy, as private businessmen and public officials in the region have begun to look more earnestly to the region's potential for enjoying higher sustained growth and greater economic development.<sup>2</sup> Although MENA includes a number of oil-rich countries such as Saudi Arabia, Kuwait, Qatar, and United Arab Emirates, it comprises mainly middle-income developing countries whose per capita income levels and economic performance, including in regard to indicators of social welfare, fall appreciably below the mean levels of countries in other regions at similar rungs of the development ladder globally (Tables 1 and 2). Moreover, the circumstances and lackluster economic performnance of the populous low-to-lower-middle-income countries in MENA -- Iraq, Syria, and Yemen in the Middle East, and Egypt, Morocco, and Sudan in North Africa -- are the subject of considerable international concern, including as measured by large shipments of international food aid to some prominent MENA countries.<sup>3</sup> ' The countries comprising MENA are indicated in the tables accompanying this section. In the main, the countries are those specified in the World Bank's _World Development Report_ series, with the addition of four countries: Cyprus and Turkey in the Middle East, and Mauritania and Sudan in North Africa.

2 Fischer et al. (1993), for instance, estimate that reduced military expenditures in the Middle East would release productive resources amounting to about 10 percent of GDP per annum and yield an increase in economic growth of 1-to-2 percentage points in the countries of the region. See also Fishelson (1989) and Fischer (1993).

3 In 1993, Egypt received international food aid shipments of cereals amounting to nearly 500 thousand mctric tons, followed by Jordan, Morocco, and Sudan with shipments of between 200 and 250 thousand tons each. See FAO (1994).
2 Notwithstanding the prominence of petroleum in the region, agriculture remains important to most economies in MENA. Agricultural and rural populations still account for 40-to-60 percent of inhabitants in the MENA countries and for a substantial share of aggregate employment, belying the often much lower recorded share of agriculture in gross domestic output.<sup>4</sup> Thus, the livelihood and social welfare of the largest segments of the populations of the MENA countries<sup>are still</sup> deeply rooted in agriculture and the rural economy. And<sup>as a consequence, like in most less</sup> developed countries worldwide, agriculture and rural development have<sup>potentially significant --</sup> and mutually reinforcing -- roles to play in achieving higher sustained<sup>growth and economic</sup> development in MENA.

For the last decade or more, however, many MENA countries<sup>have failed to achieve</sup> positive growth on a per capita basis (Table 2). This observation<sup>applies particularly to such</sup> populous countries as Iran and Syria in the Middle East<sup>and Algeria in North Africa.5</sup> Although agricultural growth has widely kept pace with general economic<sup>growth in MENA, agriculture in</sup> less developed countries must grow by 2-to-3 percentage points above<sup>the rate of population</sup> growth in order to contribute significantly to not only national<sup>economic growth but also rural</sup> development and welfare. By this rule of thumb, the lackluster<sup>performance of the MENA</sup> economies is discernibly mirrored in the less than robust performance<sup>of the agricultural sector.</sup>

# Agriculture and Economywide Policies in Economic Development<sup>6</sup>

That agriculture can contribute significantly to the transition of many<sup>if not most less</sup>

> 4 The share of agriculture in low-income and middle-income<sup>developing countries is often biased</sup> downward by the economic policy related repression of prices for<sup>agricultural commodities in these</sup> countries. Thus, the contribution of agriculture to total employment<sup>in such countries is frequently a more</sup> reliable indicator of the economic importance of agriculture<sup>to the national economy.</sup>

> 5 It is likely that the availability of reliable data on economic growth during<sup>1980-93 for more countries in</sup> MENA would reveal that additional countries in the Middle East and<sup>North Africa experienced negative</sup> per capita growth rates during the last decade.

6 The subsection draws heavily on Bautista and DeRosa (1996).
3 developed countries to higher levels of growth and economic development is a pertinent and insightful theme developed by, among others, Johnston and Mellor (1961), Mellor (1966; 1995), and Johnston and Kilby (1975)7. More specifically, this theme contends that sustained industrial development and economic growth in low-to-middle-income countries requires policies for economic developmen **t** hat yield incentives for efficient expansion of not only industry but also agriculture and the rural sector, despite the expected long-term decline in the relative importance of agriculture in growing economies.

Increases in agricultural output stimulate the demand for industrial inputs such as fertilizer and farm equipment ("backward linkage") as well as expand the supply of agricultural goods used as inputs to nonagricultural production ("forward linkage"). Agricultural crop and livestock production is generally characterized by a "weak" backward linkage and "medium-strong" forward linkage (Hirschman 1958:110).

Agricultural growth, however, also raises the real income of farm households and hence their demand not only for food and other agricultural products but also, and likely more so, for industrial goods and services. For instance, Mellor and Lele (1973) and, more recently Ranis, Stewart, and Reyes (1989), show that such "consumption linkage" effects are critical to the influence of agricultural growth on the overall growth performance of the rural and national economy. In particular, a wider sharing of agricultural income growth among rural households leads to a greater incremental consumption demand for the labor-intensive products of rural industries. Rural industry growth in turn provides "additional impetus for further increases in agricultural productivity, leading to a mutually supportive cycle of agricultural and industrial growth" (Ranis and Stewart 1987: 140).

7 Also see Johnson (1995) for a general discussion of the appropriate role of government in agriculture and rural development in more developed countries as well as less developed countries. For a recent analysis of the strategic impacts on growth and other economic variables that improved agricultural
4 Beyond the reinforcing effects on industrialization and economic growth, broadly based agricultural growth has significant "spillover" effects that go to the heart of improving social welfare as part of the development process. Because poor households in most low-income countries reside mainly in rural areas, economic development strategies that recognize the importance of ensuring agricultural and rural development along with industrialization offer the promise of reducing poverty directly and, more generally, the disparity of access in rural areas relative to urban areas to social services, such as education and health-care. Such development strategies can also be expected to increase access to many privately-provided services, such as banking and retailing of consumer goods, in rural areas.

Particularly inhibiting greater contribution by agriculture to sustained economic growth and rural development are inappropriate economic regimes governing trade and macroeconomic policies, or so-called economywide policies, in many less developed countries. These regimes have given rise to what has been termed the "bias against agriculture."<sup>8</sup> As most often manifest in importsubstitution policies and pursuit of inflationary monetary and fiscal policies (under fixed exchange rates), these regimes tend to distort the real exchange rate between nontraded and traded goods and, consequently, to distort price incentives against agriculture, with the frequent objective of promoting more rapid industrialization. This causes agriculture and other exportable goods sectors, including the small-scale rural enterprise sector, to be smaller and less internationally competitive than otherwise, and accordingly causes exports of agricultural and other labor-intensive goods to be lower than they would be under more neutral and open policy regimes. As emphasized by Bautista and Valdes (1993), the bias against agriculture also causes the purchasing power of rural populations to be lower than otherwise, adding to the demand-side constraint on economic growth in performance would have in Egypt under economic policy reforms, see John Mellor Associates et al. (1995).

a See Krueger, Schiff, and Valdes (1988, 1992) and Bautista and Valdes (1993) for in-depth case studies involving a wide range of countries, including selected countries in MENA.
5 less developed countries.

In sum, more even-handed policies towards agriculture and the rural sector, associated with greater equality of access to economic opportunities, physical infrastructure, and social-service facilities in rural areas,<sup>9</sup> should be expected to result in greater agricultural and rural incomes, increasing the effective demand for manufactured producer and consumer goods. Such policies might also be expected to promote rural small-scale industries that can meet part of the industrial needs of agriculture while also significantly adding to the employment of the rural labor force. Finally, increased national food security (achieved through either increased domestic production of food staples or increased food imports financed by higher export earnings) and reduced pace of urbanization represent two additional social benefits of more neutral government policies in less developed countries.

Greater dynamism in agriculture led by expanded trade is required to achieve higher sustained economic growth and greater rural development in MENA. The remainder of this paper explores this issue in three sections. Section 2 considers the current commodity structure of agricultural production and trade in MENA, and investigates the comparative advantage in agriculture of the countries in the region revealed in profiles of their recent international and intraregional exports. Section 3 then considers the policy environment in which the MENA countries must look to imnproving their agricultural and trade performnance, emphasizing especially the structure of protection in MENA countries that gives rise to the bias against agriculture in the region. Finally, Section 4 summarizes the conclusions of the paper and provides some final remarks on the importance of agricultural trade for increasing rural development and welfare in the Middle East and North Africa.

> 9 The importance of physical and social infrastructure for agricultural growth and rural development in low-income countries is reviewed recently by Ahmed and Donovan (1992). In the context of MENA, among the most important aspects of the social infrastructure to the region, in addition to individual countries, is the efficient development and utilization of limited water resources. See, for instance, World
6

# **2. Production, Trade and Comparative Advantage**

# **Agricultural Production**

Agriculture in MENA has a long recorded history, rivaling that of Western Civilization. In fact, the region is the center of origin of the cultivation of wheat, barley, lentils, and chickpeas, and the domestication of sheep and goats. Though fertile areas are found in MENA along the Euphrates, Nile, and other rivers and tributaries, the region is characterized by low and erratic rainfall, limited arable land, some of the world's largest and harshest deserts, and limited water resources for irrigation (Nordblom, Goodchild, and Shomo 1995). Along with the preferences of inhabitants for a Mediterranean diet rich in cereal starches and olive oil (Spiller 1991), the physical characteristics of the region go along ways toward determining the composition of MENA agricultural production and trade.

Table 3 provides an overview of agricultural production in MENA during 19 90 -92 .'° In the aggregate, agricultural production in the region, about 230 million tons, is comparable to that in Southeast Asia (262 million tons), Sub-Saharan Africa (270 million tons), and the Southern Cone of Latin America (302 million tons). However, it amounts to only a small share (5 percent) of world output, and is dwarfed by agricultural production in China, South Asia, and the major industrial countries. The largest agricultural producing countries in MENA are Turkey, Iran, Syria, and Iraq in the Middle East and Egypt, Morocco, and Sudan in North Africa.

Three-quarters of agricultural production in MENA is devoted to two product categories: cereals (38 percent) and fruits and vegetables (38 percent). Meat and dairy products -- chiefly milk Bank (1995b).

10 The discussion here focuses solely output volumes of major crops and other agricultural products, including meats and dairy productc. Important considerations for the utilization of arable lands and pastures, production yields, and production input requirements are beyond the scope of the present analysis. For more in-depth review of agriculture and farm systems in the Middle East and North Africa, see, for instance, Nordblom, Goodchild, and Shomo (1995). See also Khaldi (1984).
7 (9 percent) and poultry (1 percent) - account for about 12 percent of total output, followed by roots and tubers (6 percent) and sugar (2 percent)."1 Wheat is the dominant cereal crop. Barley is the second largest cereal crop in the region, and, in fact, it is produced in larger quantities in MENA than all other developing regions combined. In a similar vein, fruits and vegetables, which tend to be relatively high-valued products, command a larger share of total agricultural output in MENA than in all other regions of the world.

For each commodity group, the largest quantities produced by individual MENA countries are highlighted using bold typeset in Table 3. Typically, the seven largest agricultural producing countries are also the largest producers in each commodity group. For instance, Iran is among the top one-third MENA countries producing meat and dairy products, wheat and other cereals, fruits and vegetables, and so forth. W.aat is more noteworthy that three smaller agricultural producing countries stand out among the major producers in certain commodities groups. First, Israel is amnong the top MENA producers of fruits and vegetables (2,975 million tons). Second, Saudi Arabia is among the top producers of cereals (4,501 million tons) and especially wheat (3,894 million tons). And third, Algeria is among the top producers of meat and dairy products (1,570 million tons), wheat (1,422 million tons), and barley (1,350 million tons).

The composition of agricultural production varies appreciably from country to country, for fundamental climatic and geographic reasons. In several small-size Middle East countries along the eastern shores of the Mediterranean (Israel, Jordan, and Lebanon), production of fruits and vegetables tends to "dominate" production of cereals, whereas the distribution of production between the two categories of agricultural products tends to be more balanced in most other MENA countries. Also, production of irrigation-intensive crops, such as rice and sugar, is limited l Among other major agricultural crops and products are pulses (2 percent), cotton and sunflower seeds (1 percent), and natural fibers and other agricultural raw materials (1 percent).
8 to three countries with prime access to the waters of the<sup>Euphrates and Nile: Iran, Turkey, and</sup> Egypt.

Finally, it should be emphasized that agricultural production<sup>in MENA is concentrated</sup> mainly in staple foods and some higher-valued food<sup>crops (i.e., fruits and vegetables).</sup> Comparatively little production of agricultural raw materials,<sup>such as natural fibers and animal</sup> hides and skins, takes place.

# **Foreign Trade**

The merchandise trade of Middle East and North Africa countries amounts<sup>to between 15</sup> percent (based on exports) and 18 percent (based on imports)<sup>of GDP (see Table 1). This</sup> compares favorably to the "openness" of other middle-income developing<sup>countries but not to the</sup> openness of the fast-growing middle-income developing countries<sup>of East Asia, whose trade is</sup> estimated at about 25 percent of GDP. During 1992-94, merchandise<sup>exports of the MENA</sup> countries averaged about $180 billion, while merchandise imports<sup>averaged about $183 billion</sup> (Table 4)12 Agricultural products account for a large share of the merchandise<sup>exports of several</sup> MENA countries: Cyprus (32 percent), Lebanon and Turkey (about<sup>25 percent), and Jordan and</sup> Syria (about 20 percent) in the Middle East and Sudan (95<sup>percent), Mauritania (49 percent), and</sup> Morocco (28 percent) in North Africa. They account for<sup>a large share of the merchandise imports</sup> of a somewhat different group of MENA countries in the<sup>two subregions: Iraq (65 percent), Yemen</sup> (30 percent), and Jordan, Lebanon, and Oman (20-to-25<sup>percent), and Algeria (33 percent) and</sup> Egypt, Mauritania, and Sudan (about 24 percent).

12 Both international and intraregional exports and imports of individual MENA countries in agricultural and other products during 1992-94 are reported in the Appendix.
9

# **EXDortS**

The exports of most MENA countries are dominated by mineral fuels (i.e., crude petroleum) and manufactures. Mineral fuels account for 65 percent of total MENA exports, while manufactures account for just over 25 percent. Indeed, no country in the Middle East and only Mauritania and Sudan in North Africa are predominantly agricultural-exporting countries.<sup>13</sup> The agricultural exports of the MENA countries reflect the structure of the region's agricultural production considered previously. The largest single product category is fruits and vegetables (3 percent of merchandise exports), followed by wheat and other cereal grains (1 percent) and agricultural raw materials (1 percent). The largest exporters of fruits and vegetables include Iran, Israel, and Turkey in the Middle East and Egypt and Morocco in North Africa. With respect to cereals, Saudi Arabia and Turkey are the predominant exporters in the first subregion, and Egypt and Sudan are the predominant exporters in the second subregion.

Notwithstanding the limited significance of agricultural products in MENA exports, agricultural products enjoy a somewhat higher profile in MENA exports to the European Union (14 percent of merchandise exports) -- MENA's largest trading partner, developing Europe and Central Asia (25 percent), and the MENA region itself (22 percent). With regard to intraregional trade, intra-MENA trade accounts for 30 percent of MENA exports of agricultural products to all regions and for exceptionally high proportions of total MENA exports of some prominent categories of agricultural products: barley (96 percent); rice (88 percent); livestock, meats, and dairy products (87 percent); and cereals (47 percent).

**13** The World Bank (1995a) classifies Egypt, Sudan, and Yemen as service exporting countries owing to the large number of overseas "remittance" workers in the Middle East and elsewhere from the three countries. As classified by the Bank, diversified exporters include Bahrain, Kuwait, Morocco, Syria, Tunisia, and Turkey; manufactured exporters include Israel and Lebanon; and petroleum exporters include all other MENA countries.
10

## ImDorts

Manufactured products, principally from the European Union and other major industrial countries, comprise three-quarters of MENA merchandise imports. The largest share of imported agricultural products consists of food products (10 percent of MENA merchandise imports), including not only cereals (4 percent) but also higher value-added products such as livestock and dairy products (3 percent) and fruits and vegetables (1 percent). Agricultural raw materials are also among the largest categories of agricultural products in MENA imports (2 percent).

MENA imports of agricultural products by country appear determined to a large extent by such fundamental factors as per capita income levels and population. For instance, particularly large volumes of livestock, meats, and dairy products are imported by higher-income countries such as Saudi Arabia, Israel, and United Arab Emirates and by particularly populous countries such as Iran and Egypt. Also, large international food aid recipients such as Egypt, Morocco, and Jordan appear to import exceptionally large amounts of wheat and other cereals. Finally, countries with relatively large manufacturing sectors, such as Israel, Turkey, Egypt, and Morocco, are among the largest importers of natural fibers and other agricultural raw materials used to produce textiles and other material manufactures.

MENA imports of agricultural products originate from mainly the major industrial countries (about 50 percent). Intraregional trade accounts for only about 10 percent of total agricultural imports. Remarkably, however, intraregional trade in MENA accounts for nearly 50 percent of all fruits and vegetables imported by the countries in the region.

# **Revealed Comparative Advantage**

The comnmodity patterns of MENA international and intraregional trade can be employed to examine the "revealed" comparative advantage (RCA) of the Middle East and North Africa countries. The RCA indicator employed here is one commonly specified in applied analyses of
11 international trade relations (e.g., Balassa 1979). It relates the importance of each MENA country as a supplier of agricultural and other products to the world market (and alternatively to markets in MENA) relative to all competing exporting countries. In symbols, the indicator is computed as

# _International Trade:_

RCAj(i,w) [Xj(i,w)/ TX(i,w)) / [Xj(w,w)/TX(w,w)], (1) and

# _Intraregional Trade:_

# RCAj(i,m) = [Xj(i,m)/ TX(i,m)] / [Xj(w,m)/TX(w,m)I,

(2) where Xj(i,.) represents exports of commodity j by country i to the world (w) or MENA (m), Xj(w,.) represents exports of commodity j by the world (that is, exports of the commodity by all competing producers) to the same two markets, and TX(i,.) and TX(w,.) represent total exports of all commodities by country i and the world, respectively. Broadly speaking, RCA values greater than unity indicate comparative advantage, and RCA values less than unity indicate comparative disadvantage. 1 4

# International Trade

The exceptional comparative advantage in crude petroleum of the majority of countries in the Middle East and North Africa is apparent in the computed RCA statistics in Table 5. Although many MENA countries export substantial amounts of manufactured products, comparative 14 RCA values reflect not only fundamental factors such as natural resource endowments but also tradedistorting factors, such as foreign and domestic protection and also foreign and domestic subsidies to production and trade. Thus, for example, the RCA values computed for MENA trade in agriculture will reflect trade-distorting farm policies in the major industrial countries and the MENA countries themselves, including pricing of scarce water resources for irrigation and other agricultural uses at below their financial cost, let alone their opportunity cost, in many MENA countries (World Bank 1995b).
12 advantage in a wide range of manufactures appears significant for only one MENA country, Israel. The comparative advantage of other MENA countries in manufactures is typically in products requiring mainly unskilled labor, such as clothing and other apparel. With respect to this important category of trade in manufactures for many less developed countries, several MENA countries are identified as competitive producers of "light" manufactures: Cyprus, Lebanon, and Turkey in the Middle East and Egypt, Morocco, and Tunisia in North Africa.

The comparative disadvantage of the MENA countries in agriculture stands in contrast to their strong comparative advantage in crude petroleum. The one important exception is fruits and vegetables. With the exception of Iraq and Kuwait in the Middle East and Algeria and Libya in North Africa, most MENA countries exhibit strong comparative advantage in fruits and vegetables.

Individual MENA countries also exhibit substantial comparative advantage in selected agricultural categories and products. Jordan, Syria, and Sudan evidence international competitiveness in livestock, meats, and dairy products. Similarly, Saudi Arabia and Turkey are revealed to be competitive exporters of wheat; Jordan and particularly Egypt of rice; Cyprus, Syria, Turkey, and Tunisia of barley; Cyprus, Lebanon, Turkey, Egypt, and Sudan of sugar; and Syria, Egypt, and Sudan of agricultural raw materials.

# **Intrare2ional Trade**

The intraregional RCA statistics gauge the competitiveness of the MENA countries as exporters to one another. As might be expected, the competitiveness of the MENA countries as suppliers of not only crude petroleum but also light manufactures is reduced, reflecting the similarity of mineral fuel deposits and labor resources in most MENA countries. Of greater interest here is the evidence that the MENA countries have appreciable intraregional comparative advantage in agriculture, led in particular by strong comparative advantage in livestock, meats, and dairy products, and fruits and vegetables. This may reflect not only some sharp differences in
13 agricultural resources and production capabilities between the MENA countries but also natural barriers to trade with countries outside MENA, including transportation and handling costs, and general or possibly religious preferences of consumers for regional varieties of agricultural products.'<sup>5</sup> In sum, under current economic and other circumstances the comparative advantage of most countries in the Middle East and North Africa differs depending upon whether their exports are destined for world markets or markets in neighboring countries.<sup>16</sup>

# **3.** Trade Regimes and the Bias against **Agriculture**

# Multilateral Trade Liberalization

The previous section demonstrated that although agriculture in MENA is not broadly competitive in international markets, particular subsectors of agriculture in many MENA countries are competitive, both internationally and intraregionally. Under such circumstances, improvement of the international terms of trade for agriculture resulting from the milestone, albeit modest, Uruguay Round agreement on agriculture should be expected to benefit the agricultural and rural economies of the MENA countries that have sizable agricultural sectors and rural populations.'<sup>7</sup>

**'5** DeRosa (1995b) finds similar differences between computed international and intraregional values of revealed comparative advantage for the MENA countries during 1987-89. Moreover, he finds that the differences between the two sets of RCA values are statistically significant for most MENA countries, based on the results of a rank correlation analysis.

**16** While this finding holds possible implications for the formulation of policies governing the multilateral versus regional relations of MENA countries, it does not provide guidance to the relative benefits of pursuing one set of economic relations over the other. DeRosa (1995b) provides an exploratory investigation of the relative benefits of expanding intraregional versus international trade in staple food commodities. Other recent studies have investigated the merits of closer economic relations between MENA countries and the European Union, with limited focus on the economic impacts on agricultural production and trade. See, for instance, Rutherford, Rutstrom, and Tarr (1993), Brown, Deardorff, and Stern (1995), and Harrison, Rutherford, and Tarr (1996).

**17** At the same time, higher prices for food commodities should be expected to place a burden on foodimporting countries in MENA. However, the impacts of the Uruguay Round agreement on agriculture must be weighed against the impacts of other aspects of the overall Uruguay Round agreement, many of which are generally expected to be positive for less developed countries. For example, many developing countries, including in MENA, might realize higher export earnings from the multilateral liberalization of trade in non-food agricultural sectors and manufacturing sectors such as textiles and apparel. For an overview of the Uruguay Round agreement and its implications for agriculture and other sectors in less developed countries, see Martin and Winters (1996) and Hathaway and Ingco (1996).
14 Two recent studies have attempted to assess the broad implications of the Uruguay Round agreement for the Middle East and North Africa countries. The first, a partial equilibrium analysis by Yeats (1996), estimates that the liberalization of trade regimes in the European Union, Japan, and United States under the agreement will expand Middle East exports by $800 million annually. Unfortunately, the study does not indicate the magnitude of the underlying impacts on agricultural production and exports by Middle East countries.

The second study is a compendium devoted to the implications of the Uruguay Round for Arab countries, edited by El-Naggar (1996). It includes an analysis by Goldin and Kherallah (1996) focused specifically on the Uruguay Round's impacts on agriculture in MENA. Unfortunately, the analysis provides little by way of quantitative estimates of the expected impacts on agricultural production or trade. Nonetheless, it usefully relates econometric estimates of the impacts of the Uruguay Round agreement on international prices of agricultural products to the principal agricultural exports of eight MENA countries classified as oil exporters (Algeria and Saudi Arabia), diversified exporters (Egypt, Morocco, Tunisia, Jordan and Syria), and primary commodity exporters (Sudan). The findings point to potential gains to agricultural producers in several of the countries considered, especially producers of fruits and vegetables and natural fibers but also producers of vegetable oils, meats, and grains (except rice). However, in interpreting their findings Goldin and Kherallah emphasize that, to be realized, the expected gains for MENA agriculture must be accompanied by reforms to economywide trade and macroeconomic policies in order to ensure that the higher international prices for agricultural products are received by farmers.'<sup>8</sup> s More generally, the total gains from the Uruguay Round to individual MENA countries will be bounded by the extent of their own commitments to trade liberalization under the Uruguay Round agreement. Notably in this regard, only 10 MENA countries are members of the World Trade Organization and are signatories to the Final Act of the Uruguay Round: Bahrain, Egypt, Kuwait, Israel, Mauritania, Morocco, Qatar, Tunisia, Turkey, and the United Arab Emirates. See Zarrouk (1996).
15

# Protection in MENA

The last point brings to the fore the issue of the repression of agriculture in MENA by inappropriate economywide policies. Despite the importance of agriculture and, more generally, the rural economy in the region, protection from imports of manufactures and other products remains high in many countries **in** the Middle East and North Africa, contributing significantly to overvaluation of the real exchange rate (the relative price of nontraded goods to traded goods), and thereby to repression of domestic relative prices in subsectors of agriculture in MENA that are internationally competitive.

Table 6 indicates the magnitude of protection during the last decade in the MENA countries for which data on import tariffs and nontariff barriers (NTBs) are available.'<sup>9</sup> The data on tariffs reveal the combined magnitude of ad valorem customs duties and other fiscal charges on imports (so-called para-tariffs). The NTB data, on the other hand, indicate the percentage of national tariff schedule lines in each product category affected by quantitative restrictions and other nontariff barriers, as compiled by the U.N. Conference on Trade and Development (UNCTAD) for its inventory of trade control measures in industrial and developing countries (UNCTAD 1994).

The most open countries in MENA are the high-income Persian Gulf countries (Kuwait and Saudia Arabia), with average tariff rates not exceeding about 10 percent and average NTB rates not exceeding about 5 percent. Most other countries in the region are inward-looking, with average tariff rates widely exceeding 20 percent and average NTB rates widely exceeding 30 percent. This is true of low-income countries such as Egypt and Sudan, but also middle-income countries such as Algeria, Iran, and Turkey. The high nontariff barriers are particularly costly in economic terms

> '9 The discussion here focuses on protection in output markets for agricultural and other products. Although protection for production inputs is also important, estimates of effective rates of protection are beyond the scope of the present analysis. Notably however, computed effective rates of protection are often highly correlated with nominal rates of protection.
16 because, unlike ad valorem tariffs, nontariff barriers limit the extent to which the price system allocates resources among alternative uses. They also tend to be associated with discretionary administered systems for authorizing imports that encourage "socially unproductive" rent-seeking activities.'o Finally, it should be noted that such extensive reliance on administered protection is similar mainly to the broad enforcement of NTBs at high frequency rates in the low-income countries of South Asia and Sub-Saharan Africa (Erzan et al. 1989; DeRosa 1992). In the more open trade regimes of East Asia, administered protection is enforced much more selectively and at much lower average frequency rates (e.g., DeRosa 1988, 1995a).

The MENA countries tend to enforce higher rates of protection for manufactures, especially light manufactures comprising the category of other manufactures in Table 5, than for traditionally internationally-competitive subsectors of agriculture such as agricultural raw materials. This structure of protection is a fundamental determinant of the bias against agriculture, distorting domestic price incentives in favor of shifting resources to production of nontraded goods and import-competing manufactures.

The MENA countries also tend to enforce high rates of protection for food, frequently by administered protection measures that include state trading. This protection reflects national concerns for food security, and it is often enforced in conjunction with direct controls on domestic food prices.<sup>2</sup> ' However, efforts to achieve food security and especially food self-sufficiency drain resources from more intemationally competitive subsectors of agriculture. Considerations for comparative advantage suggest that expanded production and exports in the intemationally competitive subsectors of not only agriculture but also industry and other natural resource-based sectors would increase national food security more than protection of inefficient domestic food 20 On the economics of rent-seeking and so-called directly unproductive profit-seeking activities, see Tullock (1967, 1980), Krueger (1974), and Bhagwati (1982).
17 producers, by providing foreign exchange earnings for increased imports of food at lower domestic resource cost.

Finally, it is noteworthy that some MENA countries, such as Algeria and Tunisia, have significantly reformed their trade regimes during the last decade, succeeding particularly in reducing their average levels of administered protection. These reforms should be expected to improve export performance. To the extent, however, that the trade regimes of these and other MENA countries continue to protect manufacturing and other subsectors favored by the government and domestic special interests, a significant bias against agriculture will remain and continue to inhibit the potential of agriculture to contribute more significantly to domestic output and exports.

# **Regional Cooperation**

With the commencement of a peace process in the Middle East between the Arab countries and Israel, renewed interest in the implications of closer economic relations has swept the greater MENA region and has spawned a series of regional economic summits, with the most recent summit held in Cairo, Egypt in November 1996 (Table 7),22

# Past **and Present**

Among Arab countries, economic cooperation efforts have a history dating back to the Alexandria Protocol of 1945, which established the League of Arab States. A number of formal agreements have been signed to foster closer economic relations, but with little lasting success (Lakhoua 1993). Today, among the most active organizations devoted to expanding trade and

> 21 Food products in Table 6 include processed foods as well as food primary commodities. Thus, the high rates of protection for food in Table 6 reflect protection for domestic food processing industries in addition to protection for domestic cultivation of food crops.

> 22 The first MENA economic summit was held in Casablanca, Morocco in 1994, and the second in Amman, Jordan in 1995.
18 other economic relations among Arab countries are the Council of Arab Economic Unity (CAEU) and the Cooperation Council for the Arab States of the Gulf (GCC).3 Both organizations have the objective of establishing customs unions, with accommodations for expanded preferential trade in agricultural as well as manufactured products. Indeed, the Arab Common Market formed in 1965 by several CAEU countries (Egypt, Iraq, Jordan, Syria, and Yemen) and the Unified Economic Agreement ratified in 1981 by the GCC countries specifically prescribe the liberalization of customs duties on trade in agriculture, including animal products.24 Bilateral trading arrangements also feature prominently in the history of intra-MENA trade relations. As indicated in Table 7, Jordan, Lebanon, Syria, and several North African countries (especially Morocco and Tunisia) have established a number of bilateral trading accords over the last two decades.

Whether tariff and nontariff barriers to intraregional trade have been substantially lowered in MENA under the various accords for regional and bilateral economic cooperation is problematical. Although tariff concessions may have been widely exchanged, it is likely that nontariff barriers in MENA have continued to be enforced against imports from all countries. Therefore, although framework agreements and other pacts for closer econormic relations among Arab countries in the Middle East and North Africa have been adopted, effective implementation of these agreements may be far from a reality today -- not unlike the early experiences with regional economic cooperation schemes among developing countries in other regions.2 5 23 At this writing, comparative **l** y ittle is known by the author abou **t** he two other organizations in MENA for regional economi **c** ooperation included in Table 7, the Economic Cooperation Organization and the Arab Maghreb Union.

24 In 1970, the League of Arab States established the Arab Organization for Agricultural Development, with headquarters in Khartoum. The objectives of the organization, to which more than 15 Arab states belong, include increasing intra-regional trade in agricultural products among Arab countries (UIA 1987). **25** See, among others, Langhammer and Hiemenz (1990) and de Melo and Panagariya (1993).
19 The new process of MENA economic sumnmits may eventually succeed in overcoming this situation, for instance, by eventually establishing a MENA free trade area.<sup>26</sup> Indeed, the process is the only regional economic "arrangement" that includes not only Israel but also a large number of countries from both the Middle East and North Africa. It also has the strong political endorsement and financial backing of the international community, including Russia and the United States.

Finally, some MENA countries are also currently negotiating, or have concluded, so-called partnership agreements with the European Union (EU) under the EU's Mediterranean free trade initiative.<sup>27</sup> These agreements offer the MENA countries expanded preferential access to markets in the European Union, though not significant expansion of MENA agricultural exports restricted by the EU's Common Agricultural Policy (CAP) before January 1, 2000, in exchange for both reciprocal trade concessions and general economic policy reforms by the MENA countries. The first EU partnership agreement was signed by Tunisia in July 1995, followed by Morocco in October 1995, and in January 1996 Turkey entered into a comprehensive custom union agreement with the European Union.<sup>28</sup> Other MENA countries that have begun the process of entering into EU partnership agreements include Egypt, Jordan, and Lebanon.

Against the background of the "hub-and-spoke" design of the EU partnership agreements, a MENA free trade area might be viewed as necessary to ensure that incentives for not only expanded trade but also expanded investment are distributed efficiently between the MENA countries and the European Union. A MENA free trade area might also be viewed as a means of 26 Fischer (1993) sets out an early vision of the forms that economic cooperation in MENA could take to promote greater flows of trade, capital, and labor throughout the region, including the possible establishment of a regional development bank and the necessary involvement in planning cooperation efforts of both private business leaders and govermment officials. A similar vision is set forth in the Casablanca Declaration, the official communique of the 1994 MENA economic summit. 27 See Hoekman and Djankov (1996).

28 For overview and quantitative analyses of these agreements, see Rutherford, Rutstrom, and Tarr (1993), Page and Underwood (1996), Brown, Deardorff and Stern (1996), Harrison, Rutherford, and Taff (1996), and Togan (1996). A compendium of studies analyzing the macroeconomic and sectoral implications<sup>of a</sup> EU partnership agreement for Egypt, among other MENA countries, is presented in Galal and Hoekman (1996).
20 maintaining the focus of MENA countries on their mutual economic interests, amid competing incentives for expanding relations with developing countries outside of the region -- e.g., the increasing interest of Iran and Turkey **in** expanding their economic relations with Pakistan and the newly independent countries in Central Asia (see Table 7).

# **Economic Considerations**

While inclusion of considerations for agriculture in the establishment of any future MENA economic cooperation schemes seems secure,<sup>29</sup> the extent of the benefits that would derive to the sector from such schemes are less certain.

Of _fundamental importance for_ determining the implications of regional trading arrangements for both agriculture and national economic welfare is the underlying complementarity of natural and accumulated resources, including human capital, among the countries forming a free trade area. If preferential trading arrangements result in little or no improvement in the terms of trade facing agriculture in the region, then it is unlikely that the regional arrangements will substantially overcome distortions to domestic price incentives against agriculture arising from protection and other inappropriate economywide policies. A particular danger is that where countries are very similar in their (relative) resource endowments, national import substitution policies to promote industrialization or protect favored industries will essentially be replaced by regional import substitution policies that succeed in liberalizing trade between neighboring countries but result in increased protection against imports from the world's most efficient producers.

Regional trade liberalization among less developed countries most often takes the form of reduced barriers to intraregional trade in manufactures. To the extent that policy-based disincentives to agriculture have their origins mainly in industrial protection, such trade
21 liberalization would be a positive step. Greater economic integration of neighboring lower-income countries would tend to lower the domestic termns of trade for industrial products, as the output of manufactures in the region operating at high unit costs is gradually supplanted by output of manufactures in the region operating at lower unit costs. This eventuality should also be expected to release productive resources to internationally competitive subsectors of agriculture and industry, as the domestic terms of trade of these subsectors improve vis-a-vis those of importcompeting sectors.

The more difficult question is whether the expected improvement in the domestic terms of trade of the competitive sectors in agriculture will be sufficient to eradicate or substantially reduce the bias against agriculture. Beyond the prospect of some rationalization of industrial output and possibly agricultural output with the region,<sup>30</sup> the likelihood of substantial relative price adjustments is limited where the resource endowments of the less developed countries forming the free trade area are mainly competitive rather than complementary.

Ultimately, the extent to which regional trading arrangements might be counted upon to reduce the bias against agriculture is an empirical question. No quantitative studies of this issue have been undertaken for the MENA region. A recent study of the issue by DeRosa (1995a, 1996) for the new free trade area among the Association of Southeast Asian Nations (ASEAN) uses a computable general equilibrium model to trace the adjustment of key variables determining the extent of the bias against agriculture, including the real exchange rate and other relative prices. The study finds that the expected gains to agriculture and national welfare under the ASEAN Free 29 The agenda of the recent MENA economic summits have prominently included sessions on enhancing the role of agriculture in MENA, including as a priority sector for expanded growth of exports in order to promote general economic growth and rural development. See WEF (1994, 1995, 1996). 30 As discussed previously in this section, in addition to protecting industry many developing countries also protect production of staple food commodities and processed foods. In doing so, govermments distort price incentives for subsectors of agriculture that have considerable comparative advantage. Reducing high rates of protection then can lead to expansion of intraindustry trade as well as interindustry trade favoring internationally competitive subsectors of agriculture.
22 Trade Area are modest. General trade liberalization following the most-favored-nation principle underlying the General Agreement on Tariffs and Trade and the new World Trade Organization, on the other hand, generally yields significant gains for both agriculture and national welfare because it substantially expands ASEAN trade with the major industrial countries (the principal trading partners of ASEAN), whose natural and accumulated resources are highly complementary to the abundance of labor, tropical land, and other natural resources found in the countries of Southeast Asia.

These results suggest that agriculture might be expected to benefit in some measure from regional economic cooperation in MENA, including under schemes that would emphasize greater regional cooperation for infrastructure development, management of water resources, or other aspects of "deeper" economic integration (Lawrence 1996). However, with respect to goods markets alone, trade liberalization in MENA that encompasses trade with the European Union and the region's other principal trading partners is likely to hold the promise of substantially larger and dependably significant gains to MENA agriculture and surrounding rural economies. Moreover, this conclusion is likely to hold regardless whether the European Union or other major trading partners offer any reciprocal trade concessions, including reforms to the CAP or other tradedistorting farm policies in the major industrial countries. Essentially, so long as there is some pricesensitivity to international markets for the agricultural products and other goods exported by the MENA countries, effective reduction of the protection in these countries that gives rise to the bias against agriculture should be expected to reduce the overvaluation of real exchange rates in MENA, reallocate resources to more efficient uses in internationally competitive subsectors of agriculture and industry in the region, and stimulate greater agricultural production and exports from the region to international markets wherever they may be found abroad.
23

# **4. Summary and Concluding Remarks**

Along with achieving higher sustainable growth and greater national economic development, accelerated rural development remains a major objective of most countries in the Middle East and North Africa, to provide not only disadvantaged groups but also other inhabitants of rural areas in MENA with higher living standards and more equitable access to the private and public services found in urban areas.

Agriculture is the nucleus of productive activities in the rural economy of most countries in MENA. Moreover, agriculture still accounts for an appreciable-to-large share of domestic output and especially employment in both the low-income countries and middle-income countries of the region. Under such circumstances, agriculture can be expected to contribute significantly to achieving higher sustainable growth and greater economic development in general and to achieving greater economic development and welfare in rural areas in particular, as predicted in economic theory and recorded in the experiences of developing countries in other regions.<sup>3</sup> ' Indeed, that agricultural growth has failed to surpass population growth by desirable margins of 2-to-3 percentage points during the last decade in many if not most less developed countries in MENA indicates that more dynamic and robust growth of agriculture can contribute significantly to achieving development goals in the region for both the national and rural economies of MENA countries.

Expanding agricultural trade by MENA countries is an appropriate and natural avenue for pursuing more dynamic and robust performance in agriculture, involving likely adjustments within as well as outside the sector as considerations for comparative advantage are increasingly called upon to allocate arable land, labor, water, and other resources, including financial and physical capital, to more efficient uses. Indeed, some MENA countries might face higher rather than lower
24 bills for their imports of cereals and other food staples. These countries, however, might also realize higher foreign exchange earnings from expanded exports of other agricultural products, such as livestock, fruits and vegetables, or agricultural raw materials, or from expanded exports of internationally competitive manufactures.

High levels of protection in MENA, particularly for manufactures and some food products, provide a clear indication that a substantial "bias against agriculture" exists in many countries in the Middle East and North Africa. Improvement of the global trading environment for agriculture, through adherence to the Uruguay Round agreement on agriculture in the nearer term and possible further reforms to farm policies in the European Union and other major industrial countries in the longer term, will expand world demand for MENA agricultural exports. However, reforms to trade and other economywide policies in the MENA countries themselves to eliminate the bias against agriculture and to establish more neutral or even-handed public policies toward agriculture would result in equal if not much larger gains in MENA agricultural production and trade.

Trade liberalization and other economic policy reforms in MENA to promote agriculture and rural development might be pursued through regional cooperation in MENA, as envisioned by the Arab organizations for economic cooperation and the new, more inclusive, process of MENA economnic summits. Considerations for comparative advantage, however, suggest that agricultural trade and rural development would be served best by thoroughgoing trade liberalization in MENA on a nondiscriminatory basis. This would ensure that the region's trade relations would be expanded with its largest trading partners and that import-substitution policies inhibiting greater agricultural production and trade in the region would be curbed most effectively. Unilateral trade liberalization following the most-favored-nation principle underlying the World Trade Organization is one important avenue for achieving such thoroughgoing trade liberalization. However, pursuit of

> 31 See, for instance, Mellor _(1995)_ and Bautista and DeRosa (1996).
25 "open regionalism" in MENA, following the example of the Asia-Pacific Economic Cooperation (APEC) Forum, is another avenue for achieving largely the same end.<sup>32</sup> Pursuit of open regionalism to achieve nondiscriminatory trade liberalization in MENA and, more fundamentally, higher sustainable growth and greater rural development would also have the advantage of prominently preserving the ongoing process of regional dialogues on economic policies and the promulgation of regional economic accords that is expected by all parties concerned to yield substantial political as well as economic dividends for the countries in the greater MENA region.

**32** Under open regionalism, trade concessions negotiated between regional trading partners would be extended on an unconditional basis to all trading partners, including trading partners outside the region. On open regionalism in East Asia and the still uncertain degree of conditionality to be observed in the "nondiscriminatory" free trade area envisioned for the APEC region, see, for instance, Drysdale and Gamaut (1993) and APEC (1994). On forms of regional economic cooperation in other developing areas, see de Melo and Panagariya (1993).