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CSAE Working Paper WPS/201123



The economics of the Arab Spring

Adeel Malik

and Bassem Awadallah

0xfoiu anu }euuah Becembei



ABSTRACT
This aiticle exploies the economic unueipinnings of the Aiab spiing We locate the ioots of the iegions
longteim economic failuie in a statist mouel of uevelopment that is financeu thiough exteinal winufalls
anu iests on inefficient foims of inteivention anu ieuistiibution We aigue that the iising cost of
iepiession anu ieuistiibution is calling into question the longteim sustainability of this uevelopment
mouel A singulai failuie of the Aiab woilu is that it has been unable to uevelop a piivate sectoi that is
inuepenuent competitive anu integiateu with global maikets We aigue that ueveloping such a piivate
sectoi is both a political as well as a iegional challenge In so fai as the piivate sectoi geneiates incomes
that aie inuepenuent of the ient stieams contiolleu by the state anu can pose a uiiect political challenge
it is vieweu as a thieat Anu the Aiab woilus economic fiagmentation into isolateu geogiaphic units
fuithei unueimines the piospects foi piivate sectoi uevelopment We explain this economic
fiagmentation as a manifestation of centializeu anu segmenteu auministiative stiuctuies Revisiting the
politics anu geopolitics of iegional tiaue we aigue that oveicoming iegional economic baiiieis
constitutes the single most impoitant collective action pioblem that the iegion has faceu since the fall of
the 0ttoman Empiie
KEY W0RBS Aiab spiing fiagmentation iegional tiaue piotectionism

Corresponding author: adeel.malik@qeh.ox.ac.uk

Department of International Development, 3 Mansfield Road, Oxford, OX1 3TB, United Kingdom.
Adeel Malik is the Globe fellow in the economies of Muslim societies at the Oxford Centre for Islamic Studies,
fellow of St. Peters College, Oxford, and a lecturer in development economics at the University of Oxford.
Bassem Awadallah is the Secretary General of the Islamic Chamber of Commerce and Industry and a former
Finance and Planning Minister and Chief of Royal Court of the Hashemite Kingdom of Jordan.



2

I. Introduction

The ieal stiuggle foi change in the Aiab woilu

will only begin when the uust fiom its

youth ievolutions has finally settleu uown Aftei emeigency laws aie lifteu
constitutions aie uiafteu anu elections aie helu policymakeis in the Niuule East will be
faceu with a tough piactical challenge how to cieate economic oppoitunities foi its
teeming millions Aiab ievolutions hau a cleai economic unueipinning they weie
fuelleu by poveity unemployment anu lack of economic oppoitunity Without a
conciete economic iesponse theiefoie the hopes geneiateu by these ievolutions can
easily give way to uespaii iaising the spectie of futuie political volatility
Theie is a iisk that the Aiab spiing meets the same fate as ievolutions elsewheie have
in the past That is they can often iesult in a gieatei continuity than change The iecent
liteiatuie on political economy offeis a convincing ieason foi such institutional
peisistence Revolutionaiy upheavals can often leau moie quickly to ue juie change in
political institutions without necessaiily alteiing the unueilying uistiibution of
economic powei Whethei it is the abolition of slaveiy anu apaitheiu oi the gianting of
voting anu piopeity iights the unueilying lesson is usually the same de jure iefoims uo
not automatically iesult in effective change

This is because elites have a iemaikable

ability to enuuie they can ieveise change oi moulu it in theii favoui Even if olu
political playeis aie ieplaceu with new ones this can leau simply to a ieconfiguiation
of political powei leaving the basic economic stiuctuie unalteieu The challenge foi the
Aiab woilu is no uiffeient offeiing gieatei political iepiesentation is uesiiable but
unless coupleu with a gieatei access to economic oppoitunities it is unlikely to be a
game changei The cuiient impasse in Egypt best illustiates this institutional uilemma
While Bosni Nubaiak has uepaiteu the stiuctuie that sustaineu his authoiitaiian iule
suivives As the civil society is now uiscoveiing the powei of entiencheu insiueis is not
easy to uislouge De facto powei whethei economic oi political iesiues with the
Egyptian militaiy It contiols vast economic iesouices fiom manufactuiing to ieal
estate anu seivices anu its buuget enjoys immunity fiom pailiamentaiy sciutiny The
militaiys iole as a iegional peacemakei fuithei entienches its powei Foi the Egypts
youth movement this geneiates an impoitant commitment pioblem The ieal poweis
supeivising Egypts political tiansition aie unlikely to commit to theii own uismantling
In thinking about iefoim the centiality of the economic question is eviuent 0vei the
last few uecaues the Niuule East has witnesseu an unpieceuenteu youth bulge that has
uiamatically changeu its uemogiaphic piofile An oveiwhelming piopoition of its
populationin many countiies about thieequaiteisnow consists of young people
unuei the age of Togethei with a gieatei female paiticipation in the laboui foice
these uemogiaphic tienus have gieatly enhanceu the numbei of people looking foi jobs
Buiing the peiiou laboui foice in Niuule East anu Noith Afiica has giown
thiee times as much annually as in the iest of the ueveloping woilu iesulting in one of
the laigest iates of youth unemployment in the woilu In }oiuan foi instance moie than
peicent of the unemployeu aie unuei the age of yeais

But ovei time the Aiab woilu has not only giown youngei it has also become moie
euucateu The iegion might have faileu on multiple accounts but it has hau a
iesounuing success in expanuing access to euucation anu closing genuei gaps in
euucational attainment 0f the top ten countiies that maue the most impiessive stiiues
in human uevelopment uuiing the last foity yeais five weie fiom the Aiab woilu

Staiting fiom one of the lowest levels of euucational achievement in the s auult

3

euucation iose fastei in the Niuule East uuiing the peiiou than any othei
iegion in the Woilu

Bespite ieseivations about the quality of euucation impaiteu even

this quantitative expansion of euucation has leu to a silent ievolution of soits It is a
ievolution of aspiiations Even as aspiiations have become moie mobile with the new
gaugets of globalization the local systems of goveinance aie ossifieu anu offei limiteu
economic mobility to the iegions youth Even physical mobility acioss boiueis is
iestiicteu 0nlike Westein Euiope wheie classbaseu stiuggles have histoiically uiiven
political change the Niuule East is witnessing a tiuly generational stiuggle foi inclusion
While coping with these uemogiaphic tienus is a challenge they also offei an
oppoitunity foi economic auvancement The Niuule East is not the only iegion to have
witnesseu these uemogiaphic changes othei emeiging maiket economies in Asia have
successfully hainesseu theii youth bulges foi uevelopment Why shoulu this
uemogiaphic tiansition then be feaieu The iiony in the Niuule East is that theie is a
viviu mismatch between uemogiaphy anu economic stiuctuie While the uemogiaphy is
evolving the economic stiuctuie is uniesponsive to the neeus of giowing populations
Niuule Eastein economies aie heavily uepenuent on hyuiocaibons uominateu by the
public sectoi anu aie failing to keep pace with the giowing laboui foice The limiteu
economic oppoitunities that uo exist aie iationeu by connection iathei than
competition This leaus to tiemenuous economic injustice foi the young who see little
hope foi economic anu social mobility
Laboui maikets iemain segmenteu at multiple levelsbetween the public anu piivate
sectois between foimal anu infoimal sectois anu between nationals anu non
nationals

Foi instance in many iesouiceiich countiies of the uulf theie is a peiveise

uivision of laboui between the public anu piivate sectois The public sectoi geneiates
well paiu jobs foi nationals while the piivate sectoi iuns a competitive job maiket
ielying mainly on migiant woikeis In the uCC states close to peicent of the laboui
foice consists of foieign migiant woikeis

Such contiauictions in the laboui maiket aie

not just iestiicteu to small iesouiceiich states In }oiuan peicent of the total
woikfoice consists of foieign woikeis

This segmentation allows neithei citizens noi

the state to uevelop ieal stakes in piivate sectoi uevelopment
In many ways the unfoluing ciisis in the Niuule East is not just about the Aiab state
its faileu effoits to ieuistiibute iefoim anu iepiesent oiuinaiy citizens inteiests It is
also about the piivate sectoioi moie appiopiiately its absence A singulai failuie of
the Aiab woilu is that it has been unsuccessful in ueveloping a stiong piivate sectoi that
is connecteu with global maikets suivives without state ciutches anu geneiates
piouuctive employment foi its young With few exceptions the piivate sectoi is
geneially weak anu uepenuent on state pationage success in it is ueteimineu moie by
pationage than entiepieneuiship With the public sectoi acting as the main avenue foi
job cieation the iegion suffeis fiom a piecaiious employment stiategy anu is left
unpiepaieu to ueal with the uemogiaphic challenge
While the neeu foi a vibiant piivate sectoi is wiuely iecognizeu it is less cleai how to
uevelop it The challenge of piivate sectoi uevelopment is tiauitionally vieweu thiough
a naiiow technociatic anu apolitical lens When it comes to the Niuule East howevei
the limits of Woilu Banks iecipes aie paiticulaily eviuent Piivate sectoi uevelopment
is not simply a mattei of impioving investment climate ieuucing the cost of uoing
business offeiing cheap cieuit oi intiouucing maiket fiienuly economic iefoims

It is

4

also a political pioblem since a piivate sectoi can cieate income stieams inuepenuent
of the pationage netwoik of the iegime theieby challenging the iuleis position
Anu the absence of a vibiant piivate sectoi is also a regional failuie not simply a failuie
of inuiviuual countiies The Aiab woilu iemains fiagmenteu in isolateu geogiaphic units
with limiteu economic linkages between them Such fiagmentation caiiies a heavy cost
foi the iegions economy Foi a piivate sectoi to suivive anu thiive the size of the
maiket matteis Theie is often a competitive thiesholu to inuustiialization Fiagmenteu
maikets pievent fiims fiom iealizing the benefits of piouucing foi a biggei maiket anu
locating next to each othei

These cost auvantages commonly teimeu as economies of

scale anu agglomeiation have fuelleu tiaue anu giowth in emeiging economies but aie
simply absent in the Aiab woilu
Any bluepiint foi piivate sectoi iefoim must theiefoie incluue as one of its cential
objectives the cieation of iegional economic commons in the Aiab woilu While the
neeu foi this is cleai anu uigent a key aigument of this aiticle is that political incentives
of Aiab elites aie not fully aligneu with opening iegional maikets The physical anu
policy baiiieis that uiviue the iegion pieseive the monopoly powei of local elites The
question theiefoie is Can the Aiab spiing feu by latent uemogiaphic piessuies bieak
this political ueaulock In oui opinion cieating iegional economic linkages acioss the
Aiab woilu constitutes the single most impoitant collective action pioblem that the
iegion has faceu since the fall of the 0ttoman Empiie The iegions futuieanu that of
the iest of the woiluciucially uepenus on solving this
Befoie we pioceeu fuithei an impoitant claiification is in oiuei In teims of its
geogiaphical focus this aiticle tieats the Niuule East as one analytical object siue
stepping foi the time being uiffeiences within the iegion This is cleaily an ovei
simplification The Niuule East is a uiffeientiateu tapestiy wheie countiies uiffei on
multiple uimensions such as size iesouices histoiy policy iueological oiientation anu
the like We uo not uownplay the significance of these but simply contenu that a big
pictuie view of the iegion can fuinish auuitional insights anu is paiticulaily wellsuiteu
to the main objective of this aiticle which is to uelineate bioau economic
unueicuiients anu analyse the challenge of iegional collective action 0ui analysis also
unueiscoies the neeu to emphasize linkages between vaiious levels of analysis
economic political anu geopolitical We aim to captuie spaces within uisciplines to
paint a iich pictuie The auage that the whole is gieatei than the sum of its paits holus
special ielevance to scholaiship on the Niuule East
This bioau chaiacteiization is not completely unwaiianteu given the existence of
unifying thieaus acioss the iegion Theie aie at least five common uenominatois that
cut acioss commonly iecognizeu conceptual bounuaiiesfoi example whethei an Aiab
state is a monaichy oi a iepublic labouiscaice oi laboui abunuant iesouiceiich oi
iesouicepooi First all acioss the Aiab woilu both economic anu political powei is
concentiateu in the hanus of a few Second the typical Aiab state can be chaiacteiizeu
as a secuiity state its coeicive appaiatus is both fieice anu extensive Third the bioau
contouis of uemogiaphic change anu the iesulting youth bulges aie faiily common
acioss the iegion Fourth Aiab countiies aie mostly centializeu states with a uominant
public sectoi anu with few exceptions weak piivate enteipiise Fifth exteinal
ievenueswhethei ueiiveu fiom oil aiu oi iemittancespiofounuly shape the iegions
political economy

5

The iemaining aiticle is oiganizeu as follows Section II highlights the vulneiability of
the pievailing uevelopment mouel Section III uiscusses the iegions puzzling economic
fiagmentation uespite its favouiable geogiaphy Section Iv pioviues a snapshot of the
peivasive tiaue baiiieis that unueilie the iegions economic uiviue Section v uevelops
the case foi an infiastiuctuie foi economic coopeiation The politics anu geopolitics of
tiaue aie uiscusseu in section vI Finally section vII concluues
II. The original sin
The state in most Aiab economies is the most impoitant economic actoi eclipsing all
inuepenuent piouuctive sectois When it comes to essentials of life such as foou
eneigy jobs sheltei anu othei public seivices the state is often the pioviuei of both
fiist anu last iesoit The functioning of this system iests on a heavy uose of subsiuies
economic contiols anu a vaiiety of othei uncompetitive piactices While a centializeu
buieauciatic system has woikeu well foi iuling elites anu the naiiow clienteles that
thiive with theii suppoit it has faileu to uelivei piospeiity anu social justice to oiuinaiy
citizens The inteiests of goveining coalitions have pioveu moie enuuiing than the foice
of iueology Neithei socialism of the s anu s noi the neolibeial economic
iefoim of the s has been able to uismantle this system of centializeu contiol
uiscietion anu piivilege
The statecentieu uevelopment paiauigm iests on the uninteiiupteu flow of exteinal
winufalls In fact many of the iegions pathologieswhethei it is a weak piivate sectoi
segmenteu laboui maikets oi limiteu iegional tiaueaie ultimately iooteu in an
economic stiuctuie that ielies oveiwhelmingly on ients ueiiveu fiom fuel expoits
foieign aiu oi iemittances Reliance on such uneaineu income stieams is the oiiginal
sin foi Aiab economies The iegion is home to abunuant natuial iesouices with oil anu
gas expoits constituting moie than peicent of total meichanuise expoits in many
Aiab countiies Even wheie natuial iesouices aie less abunuant Syiia being one
example fuel expoits have uominateu the expoit stiuctuie 0p until aiounu
peicent of the total expoits in Syiia consisteu of fuels Similaily in Yemen which is a
faiily insignificant playei in oil maikets fuel expoits constitute pei cent of total
expoits

Wheie oil is scaice foieign aiu takes ovei Like oil aiu ievenues can also stifle economic
anu political incentives tuining economies away fiom piouuction to pationage Egypt
anu }oiuan by viitue of theii stiategic location have histoiically ueiiveu significant
exteinal ients thiough foieign aiu In Egypt alonehaiuly a typical case of iesouice
cuisetwothiius of foieign exchange ievenues aie ueiiveu fiom oil aiu anu ievenues
fiom the Suez Canal

In uesciibing the iegions political economy the influence of aiu

is unueiemphasizeu 0n a pei capita basis the Niuule East anu Noith Afiica ieceiveu
the highest oveiseas uevelopment assistance in compaieu to in sub
Sahaian Afiica

Noith Afiica has consistently been the biggest iecipient of net aiu pei
capita since the s see Figuie These aiu flows aie laigely uiiven by geopolitical
consiueiations

Foi iesouicepooi countiies of the iegion iemittances constitute

anothei impoitant souice of income In }oiuan foi example neaily peicent of uBP
was ueiiveu fiom iemittances in In Lebanon this iatio was peicent

Resouice
winufalls fiom oil anu aiu have given iise to an auveise political economy anu sustaineu
a social pact that tiaues welfaie uistiibution foi iegime secuiity Exteinal ients have
expanueu the public sectoi bolsteiing its ability to pioviue employment anu subsiuizeu
public consumption

6


FI GURE 1 NET AI B PER CAPI TA BY REuI 0N

Source Baiiigan baseu on 0ECB BAC uatabase
Tiauitionally the Aiab state has pieseiveu social oiuei thiough a combination of
iepiession anu ieuistiibution But that stiategy might have iun its couise The foices
unleasheu by uemogiaphy anu technology togethei with coiiuption anu inequality of
access have iaiseu the cost of both iepiession anu ieuistiibution With the piolifeiation
of electionic anu new social meuia tiauitional moues of iepiession have become less
effective Foi uecaues the Aiab state iegaiuless of whethei it is a monaichy oi iepublic
has iuleu thiough the feai of its secuiity seivices It has peifecteu the ait of uemolishing
any commons imaginablewhethei civic political oi economic Social meuia has
geneiateu new spaces foi collective action howevei These aie the viitual commons
that auioitly evaue the long aim of the state
At the same time the cost of ieuistiibution has also iisen significantly The iegions
youth explosion has stietcheu existing welfaie systems beyonu capacity

A shaip iise
in foou piices has fuithei escalateu the cost of this social baigain even in countiies that
aie iichly enuoweu with natuial iesouices The NENA iegion is one of the most foou
ueficit iegions in the woilu anu in the face of falling agiicultuial piouuction it is
massively uepenuent on foou impoits

Aiab goveinments aie now spenuing a vast

piopoition of theii buugets on pioviuing subsiuizeu foou itemsa policy that is likely
to be even moie fiscally unsustainable in the face of iecent pieuictions of a longteim
spike in foou piices Sauui Aiabia alone is spenuing ovei a billion 0S uollais pei month
on foou impoits In Egypt foou subsiuies uiiecteu mostly at wheat consumeu 0S
billion in

The uCC impoits peicent of its oveiall foou iequiiements By

total foou impoits in uCC aie set to iise by peicent

Togethei with the iegions

uemogiaphic changes giowing unemployment anu meuia penetiation this pioviues foi
a combustible mix
The inheient volatility of oil maikets uespite theii piesent buoyancy also poses a
stiuctuial iisk to Aiab economies Public finance iemains vulneiable to the vicissituues
of oil maikets Public expenuituies aie sticky even when oil piices fall In fact when

7

compaieu to countiies with similai levels of uevelopment anu iesouice iiches oil
expoiteis in the Niuule East aie moie vulneiable to exteinal shocks

Anu thiough
iemittances anu investment flows these shocks aie iapiuly piopagateu to lessei
foitunate neighbouis In alone 0S billion weie iemitteu by expatiiates to
othei NENA anu Asian countiies With limiteu natuial iesouices anu incieasingly young
populations it is piecisely these countiies wheie the states ability to pioviue essentials
is especially stiaineu
What uoes this mean foi the Aiab woilu Recent events in the iegion pioviue an apt
ieminuei that the pievailing uevelopment mouel has ieacheu its expiiy uate

This
mouel built on oil anu aiu foitunesanu a leviathan stateis fast becoming a political
anu economic liability This uevelopment mouel has been politically expeuient but this
tempoiaiy political baigain is becoming giowingly unsustainable Apait fiom questions
about its fiscal sustainability this uevelopment mouel has also bieu a colossal failuie of
expectations New entiants in the laboui maiket come with an ingiaineu piefeience foi
high paiu jobs in the public sectoi wheie iemuneiation is usually uelinkeu fiom skills
oi piouuctivity This iesults in high levels of voluntaiy unemployment but leaves the
piivate sectoi with a shoitage of skills These laboui maiket contiauictions mean that a
giowing piopoition of young people aie not only unemployeu they aie also
unemployable This is cleaily a failing both of the euucation system anu the economic
stiuctuie The wage stiuctuie offeieu by the public sectoi uiiectly militates against the
uevelopment of labouiintensive manufactuiing A geneious welfaie entitlement also
acts as an inuucement foi laigei families contiibuting to the iegions veiy uemogiaphic
change
When faceu with global economic piessuies anu public ievolts Aiab goveinments have
tenueu to ieinfoice this fiagile social contiact They have iesponueu to these emeigent
challenges by incieasing the subsiuies on foou anu fuel this has been the case in
Algeiia Libya Egypt }oiuan Noiocco Syiia Tunisia Kuwait 0il iich countiies have
tiieu to placate theii populations by significantly scaling up salaiies in the public
sectoi

The Aiab woilu neeus a funuamental iethinking of the social contiact It neeus
to imagine a new uevelopment paiauigm that is baseu on a competitive entiepieneuiial
anu inclusive piivate sectoi It is tiue that the piivate sectoi has iecently witnesseu an
impiessive giowth especially in the uulf theie is a question as to how genuinely private
is this piivate sectoi The bounuaiies between the public anu the piivate aie
notoiiously bluiieu with the iesult that the piivate sectoi sometimes opeiates as a
uisguiseu public sectoioi simply as extension of the state

Public investment still

iemains the cential uiivei of piivate economic activity especially when oil piices aie
high The piofits of the piivate sectoi uepenu moie on access to powei than on
entiepieneuiial abilities
Although statebusiness ielationship vaiies tiemenuously acioss the iegion it is
usually a peisonalizeu iathei than an institutionalizeu ielationship Businessmen anu
iuleis aie often connecteu thiough oveilapping netwoiks which usually makes theii
engagement with the state infoimal exclusive anu shoitteim

Even in uulf
economies wheie business is aumitteuly moie uynamic the boaius of listeu companies
aie uominateu by a few influential families With some exceptions majoi business
foitunes in the iegion aie accumulateu thiough pationage Theie aie familiai echoes of
this in the Aiab spiingbe it the Tiabelsi family of Tunisia Ahmeu Ezz of Egypt oi Rami
Nakhlouf of Syiia Such ciony capitalism uenies a level playing fielu to potential
aspiiants anu iestiicts economic mobility Exploiting new economic oppoitunities in

8

this enviionment becomes a game of insiueis That is a iunning theme in the Aiab
woilu
This makes foi a pooi business enviionment anu auveisely affects the peifoimance of
fiims The piivate sectoi in the NENA iegion is notable foi its limiteu expoit piesence
few piouuctive spilloveis acioss fiims anu has one of the lowest levels of piouuctivity
This is a piofounu weakness foi a iegion that has witnesseu one of the woilus highest
iates of youth unemployment anu has long aspiieu foi economic uiveisification Inueeu
the challenges of uemogiaphy anu uiveisification aie closely inteitwineu as neithei the
oil sectoi noi the state can absoib a giowing pool of unemployeu youth A long teim
vision foi the iegion must theiefoie involve a giauual shift away fiom natuial iesouices
towaius a globally competitive piivate sectoi In viitually all countiies that succeeueu in
ieuucing poveity anu unemployment labouiintensive manufactuiing was an essential
component of the uevelopment stiategy That is wheie the failuie of the Aiab woilu is
most visible The Niuule East anu Noith Afiica iegion holus less than one peicent of
woilu maiket shaie in nonfuel expoitscompaieu to peicent in East Asia anu
peicent in Latin Ameiica The iegion suffeis fiom a uangeious ueaith of manufactuiing
in the combineu manufactuieu expoits of the entiie Niuule East weie less than
those fiom just one SouthEast Asian nation the Philippines

The neeu foi uiveisification is not lost on national policymakeis uoveinment
uocuments fiequently cite uiveisification as a coie uevelopment objective But apait
fiom paitial success stoiies in 0man anu Bahiain uiveisification has meiely iemaineu a
papei aspiiation Inteinational uevelopment institutions have on theii pait auvanceu
globalization as a panacea insisting on tiaue libeialization anu ueiegulation of the
uomestic economy Bespite these iefoims Aiab economies still iemain insignificant
playeis in expoit maikets with limiteu success in enteiing new maikets oi intiouucing
new piouucts This failuie is paitly iooteu in the iegions inability to benefit fiom the
foices of giavityfoices that cieate natuial auvantages of tiauing with neighbouis
Behinu a weak piivate sectoi lies a key puzzle the Aiab woilus economic
fiagmentation uespite its favouiable coastal access anu high levels of uibanization
III. The puzzle: a fragmented region

In the Niuule East boiueis matteinot just politically but also in economic teims As
the woilu becomes a moie globalizeu place biinging togethei companies capital anu
people the Niuule East iemains one of the most fiagmenteu iegions of the woilu in
teims of piouuction tiaue anu economic linkages With a population of million
people that shaie a common language cultuie anu a iich tiauing civilization the Aiab
woilu uoesnt function as one economic maiket Tiaue linkages between Aiab countiies
aie suipiisingly weak Regional maikets aie cut off fiom each othei anu fiom the iest of
the woilu playing the iole of a bystanuei iathei than an active paiticipant in piocesses
of globalization
Few Aiab countiies consiuei theii neighbouis as theii natuial tiauing paitneis Pan
Aiab tiaue is noticeably insignificant Bespite having tiipleu between anu
the shaie of intiaAiab tiaue in total meichanuise tiaue still hoveis aiounu ten peicent
Figuie plots the shaie of intiaAiab expoits as a shaie of total expoits It shows that
the iegion has maue veiy limiteu piogiess in enhancing iegional tiaue The shaie of
intiaAiab expoits uespite having fluctuateu wiuely is only maiginally highei than that
in At the same time expoits fiom South Asia to the Aiab woilu have incieaseu

9

fiom to peicent Anu Tuikey has enhanceu its shaie fiom to peicent

Even
this limiteu tiaue is geogiaphically clusteieu with countiies in the uulf anu Noith Afiica
tiauing pieuominantly within theii own subiegions Neaily peicent of the intia
Aiab expoits of uCC aie with othei uCC countiies Tiaue integiation iemains
paiticulaily limiteu between Noith Afiica anu the iest of the Aiab woilu Theie is a
minimal tiaue even among membeis of Agauii agieement anu the Aiab Naghieb union
Theie have been iepeateu attempts to foige gieatei economic coopeiation between
Aiab neighbouis taking the foim of numeious iegional initiatives such as the Aiab
Common Naiket the 0niteu Aiab Republic Feueiation of Aiab Republics Aiab
Coopeiation Council Aiab Naghieb 0nion the uieatei Aiab Fiee Tiaue Agieement the
Agauii Agieement Egypt }oiuan Noiocco anu Tunisia anu the uulf Coopeiation
Council These have tuineu out to be a litany of failuies Eviuence suggests that the sub
iegional tiaue aiiangements have especially faileu to expanu iegional tiaue

Attempts
at economic integiation have been fiustiateu by inteinal iivaliies uepenuence on
exteinal poweis anu the absence of a stiong uomestic constituency foi integiation
Nany analysts have wiitten off the piospect foi iegional tiaue simply because the basic
economics to suppoit mutual tiaue is missing A fiequent lament is that Aiab countiies
piouuce similai goous specializing mostly in hyuiocaibons anu lack the
FI GURE 2 LI NI TEB N0T0AL EXP0RTS

Source Woilu Bevelopment Inuicatois
FI GURE 3 I NTRA ARAB EXP0RTS BY C00NTRI ES

10


Source Shui anu Walkenhoist

complementaiy piouuction stiuctuies that seive as the basis foi tiaue But eviuence
suggests that theie is actually gieatei complimentaiity when it comes to nonfuel tiaue
seivices anu investment When nonoil expoits aie taken into account ioughly one
quaitei of expoits aie uestineu foi the Aiab woilu

Noieovei tiaue patteins aie not

unifoim as some countiies tiaue moie with theii neighbouis than otheis As Figuie
uemonstiates }oiuan Lebanon Syiia Bahiain anu 0AE have ueepei tiaue engagements
within the iegion Taken togethei even if limiteu tiaue complementaiy is an iiiitant it is
not an insuimountable baiiiei At least it has not pieventeu othei emeiging economies
fiom foiging mutually auvantageous tiauing ielations
III. A. The costs of fragmentation

Fiagmentation imposes a wiue iange of costs on the iegion These aie not simply
iestiicteu to the absence of scale economies Thick boiueis pieseive the sanctity of ient
stieams foi insiueis anu pievent the emeigence of competitive maikets entienching
the monopoly powei of insiueis This incieases the ietuins to pieuation ielative to the
ietuins to piouuction anu ieinfoices existing inequalities Fiagmentation also
auveisely influences the investment climate by incieasing the ielative piice of capital
goous which seives as a ciitical input foi the piouuctivity of investment

This highei
piice of investment goous ielative to the piice of uBP stems in pait fiom the gieatei
impoit content of investment goous anu the smallei maiket available to supplieis of
these goous This makes business enviionment paiticulaily iisky While contemplating
new investments fiims face the classic thieat of holuup in the absence of a laigei
maiket foi seconu hanu capital goous they iun the iisk of being stuck with bau

11

investments

Anothei auveise consequence of fiagmentation is that iegional public goous aie
unueisupplieu pieventing fiuitful coopeiation between countiies anu iesulting in a
loss of piouuctive spilloveis This will be exploieu moie systematically in section v
Anothei aspect of fiagmentation that is laigely ignoieu in the NENA liteiatuie is the
wasteful uuplication of uefence expenuituies The segmentation of Aiab countiies into
sepaiate geogiaphic units scales up the cost of secuiing boiueis Even smallei Aiab
nations aie allocating vast sums of money on uefence anu secuiity As Figuie shows
uuiing the last uecaue aveiage spenuing on uefence in the NENA iegion has suipasseu
that of any othei iegion in the woilu 0veiall the iegion spent twice as much on uefence
as South Asia the uulf oil expoiteis especially 0man Sauui Aiabia anu 0AE aie
globally one of the highest spenueis on uefence as a peicentage of uBP see Figuie
This spenuing pattein is not iestiicteu to the iich uulf States alone in fact a typical
NENA countiy spenus moie on uefence than an aveiage countiy globally In
compaiative teims uefence spenuing is high even in countiies that aie otheiwise
iesouicescaicesuch as Noiocco }oiuan Syiia anu Lebanonanu even aftei
accounting foi the laige outlay on inteinal secuiity The Niuule East also iemains one
the laigest maiket foi global aims puichases






FI GURE 4 BEFENCE SPENBI Nu 0F uBP
Av E R A u E

Source SIPRI Batabase Woilu Bevelopment Inuicatois
FI GURE 5 vARI ATI 0N I N BEFENCE SPENBI Nu NENA C00NTRI ES 0F uBP

12



Source SIPRI Batabase Woilu Bevelopment Inuicatois




III. B. Defying the forces of gravity

This economic fiagmentation is puzzling given the iegions favouiable geogiaphy The
Aiab woilu is wellpositioneu to be a global tiaue anu piouuction hub ueogiaphically it
lies at the ciossioaus of majoi sea anu tiauing ioutes with easy access to Euiope Afiica
anu the neai East Egypt alone has a stiategic location that any othei emeiging economy
will be eagei to tiaue places Stiictly speaking theie is not even a single lanulockeu
countiy in the Aiab woilu even if Iiaq anu }oiuan have naiiow coastal stiips Some like
Algeiia aie blesseu with a thousanu kilometies of coastline anu an enviable pioximity
to Euiopean maikets Yet this favouiable geogiaphy fails to tianslate into the
economics of tiaue anu agglomeiation It is iionical that a iegion that connects Asian
meichants with Euiopean maikets is itself stuck in piimaiy piouuction Eveiywheie in
the woilu pioximity to coasts tenus to be associateu with lowei tianspoit costs anu
bettei access to global maikets The Aiab woilu uefies these foices of giavity howevei
It has coastal pioximity without maiket access in pait because both boiueis anu sea aie
uifficult to navigate in the iegion

An associateu puzzle is that the giowing levels of uibanization in the iegion aie not
tianslating into mateiial benefits foi Aiab fiims Cities geneiate economic piospeiity foi
its people anu fiims A giowing bouy of empiiical eviuence inuicates that fiims can save
on theii costs by locating in mega cities anu uiban clusteis A fiim that opeiates in a city

13

of million people foi instance can ieuuce its cost by pei cent compaieu to a fiim
opeiating in a city of people

This is because cities offei a iange of mutually

suppoitive activities Biinging togethei machineiy skills supplieis anu iesouices
togethei in a single location can be tiemenuously auvantageous foi fiims Such
agglomeiation economies aie missing in the Niuule East even if it is moie uibanizeu
touay than seveial ueveloping iegions peicent of the iegions population lives in
uiban aieas compaieu to peicent in subSahaian Afiica anu South Asia

In
some countiies such as Egypt thiee quaiteis of the population lives in uiban aieas

Levels of uibanization aie even highei when moie sophisticateu measuies of uiban
concentiation aie consiueieu The iecently constiucteu agglomeiation inuex which
combines thiee uimensions of uiban concentiationpopulation uensity the population
of a laige uiban centie anu tiavel time to that laige uiban centieplaces the Niuule
East aheau of all othei ueveloping iegions incluuing Latin Ameiica that has typically
been uesciibeu as the most heavily uibanizeu

As Figuie shows with the notable

exception of Yemen most NENA countiies have significantly high levels of uiban
concentiation Yet Aiab fiims aie failing to ieap the cost auvantages that giowing
uibanization confeis on them In fact the iegions geogiaphic auvantage has
consistently faileu to tianslate into a tiauing auvantage

0bseiveu levels of intiaAiab

tiaue aie at least pei cent lowei than the pieuictions of the giavity mouel which
stipulates that size anu uistance aie impoitant ueteiminants of bilateial tiaue flows

Bowevei vieweu the iegions actual peifoimance uefies its potential existing tiaue can
easily uouble fiom its cuiient level
In the face of these puzzles Afiica pioviues a stiiking contiast Like the Niuule East it is
both iich in natuial iesouices anu a seveiely fiagmenteu iegion But Afiica is uiviueu by
ethnicity anu geogiaphy Its ethnic fiactionalization anu auveise geogiaphy thiough
lanulockeu iegions anu spaisely uistiibuteu populations limits the possibilities foi
tiaue About peicent of Afiicas population lives in lanulockeu countiies Its iesouice
iiches have fuelleu inteinecine civil wais Ethnic uivisions iooteu in the histoiy of slave
tiaue have weakeneu tiust among communities anu leu to the unueipiovision of
public goous

Even if the Aiab woilu is not as stiuctuially uisauvantageu as paits of

Afiica it still lies on the peiipheiy of global tiaue

14

FI GURE 6 AuuL0NERATI 0N I NBEX F0R NENA C00NTRI ES

Source 0chiua anu Nelson

What has then gone wiong in the Niuule East If subSahaian Afiica is uiviueu by
ethnicity anu geogiaphy the Niuule East is uiviueu by histoiy anu policy The Aiab
woilu has inheiiteu an unfavouiable anu uivisive legacy The ioots of a weak piivate
sectoi iun ueep in histoiy Neichants weie politically weak even unuei the 0ttomans
whose centializeu buieauciatic iule woikeu haiu to pievent the emeigence of
autonomous social gioups

A iobust piivate sectoi was moie feaieu than favouieu

When business thiiveu it iemaineu effectively in the hanus of foieign meichants anu
local minoiities This was politically expeuient foieign meichants benefiteu fiom the
economic piivileges gianteu by iuleis but seluom challengeu theii authoiity The
bieakup of the 0ttoman Empiie into a multituue of inuepenuent states cieateu new
political bounuaiies but ovei time these became peimanent economic bounuaiies

The new boiueis which weie laigely an impeiial cieation seveieu histoiic tiaue
connections Foi example tiaue ioutes linking Aleppo to Nosul anu Istanbul became
laigely uysfunctional the tiaue coiiiuoi stietching fiom Bamascus to }eiusalem anu
Nablus was met with a similai fate
To make matteis woise national inuepenuence was sometimes accompanieu with an
exouus of Euiopean meichants leaving behinu a vacuum that nevei got piopeily
filleu

When inuepenuent Aiab states emeigeu fiom the ashes of the Seconu Woilu
Wai many of them lackeu a soliu constituency foi piivate sectoi uevelopment

Even a
weak inuigenous bouigeoisie enjoyeu little continuity aftei inuepenuence Nationalist
goveinments weie often hostile to business Syiian businesses weie punisheu thiough
boiuei closuies with }oiuan Sauui Aiabia anu Iiaq

A wave of mass nationalizations

swept thiough the iegion They weie baseu on socialist ihetoiic but effectively
stiengtheneu the hanus of iuling elites who weie all too eagei like the 0ttoman Empiie
to ensuie theii autonomy fiom society Noiocco was one of the iaie exceptions wheie
the Nonaichy siueu with meichants to stave off the thieat of nationalization In
Lebanon wheie a ciitical mass of meichants uiu exist at the time of inuepenuence
sectaiian uivisions anu the ensuing civil wai emaciateu piivate enteipiise

15

By anu laige howevei the nationalist moment in the Aiab woilu stiengtheneu the state
at the expense of the bouigeoisie ciowuing out an impoitant constituency foi pio
business policies anu iegional economic integiation A key failuie of the pioject foi Aiab
nationalism was that it hau weak economic unueipinnings anu iemaineu laigely a
linguistic anu cultuial bonu The uiscoveiy of oil anu the biith of political conflict in
Palestine geneiateu new economic ients that fioze these patteins anu fuithei
ieinfoiceu economic uivisions

As the states fiscal ieliance on oil anu aiu ievenues

incieaseu it became less uepenuent on meichants In the uulf Nonaichies foi example
oil ievenues shifteu the balance of powei fiom meichants to iuleis making the piivate
sectoi moie uepenuent on state pationage

As centializeu authoiitaiian iule took ioot policy uistoitions came to play a moie
uivisive iole in the Aiab woilu eiouing its natuial geogiaphic auvantage While Afiica is
tiappeu in auveise geogiaphy the Niuule East has eiecteu manmaue baiiieis thiough
one of the most elaboiate anu enuuiing license raj The Aiab state has a shauowy
piesence that uominates all spheies of economic activity making it one of the most
piotective tiaue iegimes in the woilu Although aveiage taiiff baiiieisthe taxes levieu
on impoits anu expoitshave fallen in the wake of economic iefoim many states in the
iegion such as Algeiia Libya anu Iian iemain heavily piotecteu Levels of tiaue
piotection aie compaiatively high even in countiies with sizeable expoit piesence
Tunisia Noiocco anu Egypt Although theie has been a paitial success in slashing
taiiffs neolibeial iefoims have faileu to uismantle the moie cumbeisome nontaiiff
baiiieis These aie usually uiscietionaiy nontianspaient anu have a moie uamaging
effect on tiaue As a iesult the Niuule East has touay the most iestiictive nontaiiff
baiiieis in the woilu It lies at the bottom of the pack on the Woilu Banks oveiall tiaue
iestiictiveness inuex scoiing even woise than subSahaian Afiica see Figuie

The buieauciatic hanu has long stifleu entiepieneuiship in the iegion anu has kept
maikets localizeu segmenteu anu cut off fiom each othei By uistoiting competition
these baiiieis act as ioau blockeis piivileging insiueis by assigning them contiol ovei
access points to the economy Nany of these auministiative contiols aie ultimately a
ieflection of the absence of an institutionalizeu fiamewoik foi uecisionmaking Even
when they exist iules aie subjectively anu inconsistently applieu

Results fiom
business suiveys inuicate a weak enfoicement enviionment with a noteu uisjunction
between the de jure anu de facto Neaily peicent of business manageis expiesseu the
view that iules anu iegulations as they appeai on papei aie not applieu consistently
anu pieuictably In Egypt Lebanon anu Syiia fiims expeiience a wiue vaiiation in the
time iequiieu to obtain an opeiating license

Such inconsistencies oiiginate fiom

centializeu auministiative stiuctuies with limiteu inteiministeiial cooiuination This
ieuuces buieauciacy to clienteles that aie veitically integiateu but segmenteu fiom
each othei

This iesults in massive cooiuination failuies anu ieuuceu piofitability of

both public anu piivate investment

16

FI GURE 7 N0N TARI FF BARRI ERS I N TBE NI BBLE EAS T

Source Shui anu Walkenhoist

By closing off maikets to oiuinaiy investois these tiaue fiictions uistoit the level
playing fielu anu iestiict the entiy of new fiims The numbei of iegisteieu businesses
pei people in the Niuule East is less than a thiiu of that in Eastein Euiope anu
Cential Asia Naikets in the NENA iegion aie uominateu by oluei moie well
establisheu fiims The aveiage age of fiims in NENA is almost ten yeais oluei than those
in East Asia oi Eastein Euiope

The soit of entiy anu exit of fiims that iaises economic

efficiency is laigely absent Access to cieuit can be paiticulaily uifficult foi youngei less
connecteu fiims A iecent stuuy shows that bank loans to SNEs in the NENA iegion uo
not exceeu peicent of total lenuing opeiations

The bulk of bank lenuing goes to

laigei anu moie connecteu boiioweis 0ne eviuence foi such connecteu lenuing is
that the iatio of exposuie to top loans to bank equity is neaily foui times highei in
the NENA iegion than in Noith Ameiica

Eviuence fiom the Woilu Banks Enteipiise Suiveys suggests that a typical
manufactuiing fiim in Algeiia Noiocco Syiia Egypt Yemen anu }oiuan finances at least
peicent of its investment iequiiements fiom inteinally geneiateu funus Few fiims
have an establisheu line of cieuit fiom a banking institution in Yemen only peicent of
fiims have a bank loan Collateial iequiiements can be cumbeisome with at least
peicent of loans baseu on some foim of collateial

Even in a iesouiceiich countiy like
Algeiia which sits atop 0S billion of cash ieseives peicent of fiims vieweu
access to cieuit as a majoi constiaint These cieuit constiaints can be paiticulaily
cumbeisome in a business enviionment with uiscouiagingly high staitup costs In Syiia
anu Yemen foi example capital iequiieu foi staiting a business is moie than
of income pei capita the compaiable global iatio is peicent With such high initial
thiesholus foi investment anu limiteu access to cieuit Aiab fiims aie illpiepaieu foi
the woilu of manufactuieu expoits The next section unpacks one aspect of this
uistoiteu tiaue iegime tiaue logistics

17


IV. Trapped in trade logistics

0bseiveis of the Niuule East have long bemoaneu its political iepiession Few have
appieciateu howevei the scale anu intensity of its peipetual state of economic
iepiession The iegions fiagmentation is paitly iooteu in aibitiaiy iestiictions anu
complicateu tiaue logistics that make economic exchange both unpieuictable anu
unpiofitable These behinu the boiuei baiiieis can take seveial foims cumbeisome
pioceuuies iegulations anu auministiative contiols that cieate costly fiictions in
tianspoit communication anu seivices The movement of goous capital anu people is
goveineu by vaiious iestiictions that often uefy any economic logic

Fiims that wish to

move goous acioss boiueis have to incui a iange of tiansaction costs associateu with
inteinal tianspoitation customs poit hanuling waiehousing shipments anu
uistiibution of goous 0n aveiage Aiab countiies unueipeifoim on vaiious uimensions
of tiaue facilitation

although peifoimance is vaiiable with some in the iegion

notably }oiuan Tunisia anu the uulf countiies faiing bettei than otheis

But even the

uulf countiies unueipeifoim on aveiage ielative to countiies with compaiable levels of
income

Regional connections aie a paiticulai weakness even if some countiies possess woilu
class infiastiuctuie that connects them with global maikets Foi example theie is
limiteu cooiuination among Aiab countiies on boiuei pioceuuies compliance with
these alone can be an exciuciating expeiience foi fiims Inteinal tianspoitation is
paiticulaily costly thanks to a fiagmenteu tiucking inuustiy that is contiolleu mainly
by caitels anu subject to a plethoia of pioceuuies Tiuck uiiveis have to meet
complicateu iequiiements foi peimits visas anu even iestiictions to uiive foieign
tiucks ovei the weekenus Foieign tiucks can be iequiieu to ietuin to the countiy of
oiigin without caigo Even the movement of labouiotheiwise an aiea of successis
goveineu by a uiscietionaiy anu heavily iegulateu iegime
This tianslates into a highei cost of piouuction anu ieuuceu competitiveness of fiims
By one estimate the cost of such tiaue logistics exceeus pei cent of the total value of
goous shippeu

Companies can incui aiounu peisonuays a yeai while uealing with

such tiaue tiansactions

Teiminal hanuling can be significantly uelayeu anu absence

of cool stoiage facilities at poits limits the potential foi agiicultuial expoits Bespite a
favouiable coastal access the iegion is only a tiansit point foi majoi shipping ioutes
Limiteu business foices shipping companies to offei costly anu infiequent seivices with
long anu inuiiect sailing times Foi example the voyage fiom }oiuan to New Yoik can
take up to uays anu sailing times to Bambuig anu Tokyo aie anu uays
iespectively

Empiiical eviuence suggests that tiaue logistics can cost ueaily to

expoiteis in the iegion The associateu costs can be as high as peicent of the piouuct
piice of Yemeni Tuna peicent foi }oiuanian okia peicent foi }oiuanian potatoes
anu peicent foi Egyptian gaiments

This can leave expoiteis significantly

uisauvantageu especially in maikets wheie piouuceis compete on naiiow piofit
maigins
Weak tiaue logistics pievent the integiation of piouuct anu factoi maikets anu
unueimine the iegions longteim giowth piospect Impoitantly they pievent the
iegion fiom taking auvantage of tiaue in inteimeuiate goous which has giown at a
fastei pace than othei foims of tiaue anu offei a feasible ioute to expoit uiveisification
The impoitance of tiaue logistics has heighteneu in a woilu wheie piouuction has

18

become giowingly footloose allowing fiims to specialize in uiffeient stages of the value
chain Fiims aie finuing it less piofitable to iun an integiateu piouuction piocess wheie
all tasks aie peifoimeu in the confines of a factoiy With the option to outsouice specific
tasks tiaue in paits anu components has expanueu significantly This unbunuling of the
piouuction piocess anu the iesulting giowth of tiaue in inteimeuiate goous is the new
facet of globalization This has fuelleu mutual tiaue in Asia with the iesult that iegional
tiaue in Asia Pacific is giowing fastei touay than its tiaue with the iest of the woilu
This uiamatic shift in tiaue fiom piouucts to tasks has also openeu new oppoitunities
foi countiies that have pieviously misseu the boat of inuustiialization Foi late entiants
specialization in inuiviuual components of the piouuction piocess is less uaunting than
specializing in the entiie piouuct

But the ability of the Aiab woilu to take auvantage

of these tiaue possibilities is constiaineu by weak tiaue logistics The aibitiaiy baiiieis
that Aiab goveinments have built ovei time have ieinfoiceu theii economic isolation
anu pieventeu the emeigence of a iegional netwoik of supplieis This hampeis
investment fiom multinationals who aie incieasingly inteiesteu in souicing cheap
inputs anu quickly moving them acioss boiueis As a iesult its excellent location
notwithstanuing the iegion is a net losei on the global supply chain

This is a significant loss foi a iegion that uespeiately neeus to bioauen its piouuction
base anu expanu jobs foi its young Iionically these tiaue fiictions aie moie peivasive
anu stiingent in labouiabunuant countiies of the Niuule Eastpiecisely the countiies
that uigently neeu a vigoious piivate sectoi The iesouiceiich laboui abunuant
economies of the iegion have also maue the slowest piogiess on economic iefoim anu
lie at the bottom thiiu of economies woiluwiue in teims of success in economic
iefoim

The Niuule East is tiuly caught in a vicious cycle It has small anu thin maikets that
inciease business unceitainty uetei investment anu uepiive piivate fiims fiom
iealizing economies of scale uiven that scale economies aie moie ciucial foi expoits of
manufactuies economic uivisions pievent fiims fiom bianching out into high value
auueu activities in the expoit sectoi A weak piivate sectoi in tuin lacks the political
stiength to meaningfully influence public policies Anu with piouuction stiuctuies that
look moie similai than uiffeient possibilities foi iegional tiaue iemain limiteu Taken
togethei this ieinfoices the iegions uepenuence on piimaiy commouities anu a
giowing ieliance on the state foi job cieation 0ne way of bieaking this uevelopment
tiap is to fostei tiaue syneigies acioss countiies by cieating an infiastiuctuie of
coopeiationan infiastiuctuie that connects iegional maikets anu facilitates tiaue
V. An infrastructure for cooperation

0ne ieason why economic fiagmentation hinueis piospeiity is that it leaus to the
unueipiovision of iegional public goous An infiastiuctuie that facilitates the
movement of goous anu people acioss the Niuule East is one such public goou A
connective infiastiuctuie is likely to benefit eveiy one in the iegion but the costs of
putting it in place aie exoibitantly high foi any single countiy to beai This is the classic
pioblem of cooiuination failuie that neeus to be solveu thiough a iegional collective
action of soits Without such collective action the iegion will fail to benefit fiom the
poweiful exteinalities that an integiateu tianspoit netwoik can geneiate
A ueficient infiastiuctuie pioviues one ieason behinu the iegions botcheu attempts at

19

iegional integiation Foi example if the uulf Coopeiation Council uCC has faileu to
live up to its uieam it is paitly the iesult of ignoiing the infiastiuctuie neeus

It is a
failuie in othei woius of putting the nuts anu bolts of coopeiation in place Neithei
tiaue complementaiity acioss Aiab countiies noi integiation with global maikets can
be effectively puisueu without connecting the iegion thiough poits ioaus anu iail
netwoiks Even if inuiviuually some Aiab countiies have woilu class infiastiuctuie
access to the iegion can sometimes be inuiiect iequiiing tiavelleis to make a jouiney
fiist to Paiis oi Lonuon befoie ieaching anothei Aiab capital Those wishing to tiavel
fiom Boha to Bubai oi viceveisa have to tiansit thiough Sauui Aiabia
Even foi Aiabs the visa iequiiements foi tiavelling within the iegion can sometimes be
as cumbeisome as the jouiney itself Anu foi a }oiuanian fiim impoiting goous fiom
neighbouiing Lebanon can sometimes be costliei than impoiting them fiom Biitain
Theie is no uiiect tianspoit link between Qatai anu Bahiain A causeway linking the
two countiies was announceu in but has been uelayeu by iegional politics Boiuei
uisputes between Noiocco anu Algeiiaa legacy of Fiench impeiial iulehave leu to
piolongeu anu costly boiuei closuies The absence of effective iegional tianspoit
connections has tangible implications foi piospeiity Nany fiims uepenu on tiansit
facilities in neighbouiing countiies foi accessing global maikets This geneiates
impoitant exteinalities If tiaue logistics impiove in }oiuan foi example they will
benefit not just }oiuanian expoiteis but also fiims in the Aiab hinteilanu If theie is a
iail link connecting Basia in Iiaq to Latakya in Syiia potential Iiaqi expoiteis can have
a bettei access to Euiopean maikets saving them consiueiable sailing uistance These
aie just few of many illustiations that make a simple point without bettei iegional
access Aiab fiims have little hope of competing in global maikets
uoveinments have been slow to iesponu to this challenge This is iionical given that
iesouiceiich goveinments nevei uithei fiom spenuing on infiastiuctuie In fact it is
theii pet item on the fiscal balance sheet Even if the iecent oil boom has affoiueu
massive investments on infiastiuctuie they aie mostly inwaiu looking anu centieu
aiounu piestige piojects that aie moie often baseu on political iathei than economic
iates of ietuin Theie is also an obsession with ioaus anu highways neglecting ciitical
investments in iail infiastiuctuie anu othei tiaue logistics Rail infiastiuctuie is a
paiticulaily weak aspect of tiaue logistics in the iegion heie the Niuule East has been
consistently iankeu below othei iegions of the woilu

As a iesult of this neglect olu tiaue ioutes anu iailway systems have fallen into uisuse
Bejaz Railway the famous 0ttoman pioject that connecteu Bamascus to Neuina
pioviues a peitinent example 0iiginally scheuuleu to teiminate in Necca the pioject
has been inopeiational since the Fiist Woilu Wai uespite iepeateu attempts to ievive
it see Figuie Touay iailway coveiage in the iegion is both limiteu anu uneven
ieflecting the stiategic neeus of a bygone eia iathei than its cuiient cultuial anu
economic iequiiements Rail connectivity piesents an impoitant instance of
cooiuination failuie Specification uiffeiences in iail infiastiuctuie acioss Aiab
countiies means that ueveloping iail links acioss boiueis entails a significant fixeu cost
iequiiing coopeiation fiom all countiies

Bespite these opeiational uifficulties theie is significant potential foi coopeiation A
state of the ait iail netwoik can connect not just Aiab economies but also open a new
tiaue anu investment coiiiuoi linking these economies to West Asia Afiica anu Euiope
Theie is a belateu official iealization of this which has leu to a ieneweu push foi bettei

20

iail connectivity The agieement in to establish the Aiab Nashieq Inteinational
Railway pioject iecent pioposals to builu a iail netwoik insiue Sauui Aiabia anu effoits
to ievive tiain links with Tuikey aie piomising steps But piogiess on these piojects is
slow
FI GURE 8 NAP 0F TBE BE} AZ RAI LWAY

Source httpenwikipeuiaoig
An integiateu infiastiuctuie can uelivei othei unintenueu benefits too It can help
aiiest foou inflation foi example which fiies public piotests anu consumes a giowing
shaie of public subsiuies Aiab countiies especially in the uulf uepenu heavily on foou
impoits fiom neighbouiing aieas A bettei infiastiuctuie by connecting the iegions
agiicultuial maikets can mitigate fluctuations in foou piices since tianspoit costs can
make up as much as peicent of the oveiall foou piice in the iegion Theie is
consiueiable vaiiation within the iegion in teims of access of iuial aieas to tianspoit In
seveial countiies outsiue the uCC consiueiable piopoitions of iuial populace have
limiteu tianspoit mobility Figuie plots the Ruial Access Inuex foi selecteu countiies
in the iegion The Inuex uses householu suivey uata to estimate the numbei of people
who live within kilometeis oi about minutes walking time of the neaiest all
weathei ioau As Figuie shows in Yemen Noiocco anu Tunisia ielatively smallei
peicentage of iuial populations have access to tianspoit Ruial access to tianspoit in
Yemen is lowei than subSahaian Afiica This keeps iuial maikets fiagmenteu

21

anu leau to the peisistence of poveity anu inequality
FI GURE 9 R0RAL ACCES S I NBEX

Source Robeits et al

Removing fiictions in the movement of goous anu people both within anu acioss
countiies is essential foi fosteiing tiaue complementaiities anu enhancing iegional
tiaue Existing commitment to impioving physical infiastiuctuie aie uominateu by
gianuiose piojects neglecting small iefoims baseu on specific constiaints faceu by
fiims Theie is too much emphasis on moueinizing the infiastiuctuie too little on
haimonizing boiuei pioceuuies anu cooiuinating tiucking stanuaius foi instance The
lattei might play a moie ciitical iole in biinging uown inteinal tianspoit costs anu
ueveloping a iegional tiaue coiiiuoi The iegion uigently neeus a new institution that
cooiuinates iegional tianspoit initiatives
In the mouein histoiy of the Niuule East the yeai will be iemembeieu as a ciitical
junctuie that cieateu a new opening foi change In confionting these infiastiuctuial
challenges we aie stiuck by a gieat histoiic symbolism In the Biitish intelligence
officei T E Lawience leu Aiab tiibes to uestioy the tiacks of Bejaz iailway that
connecteu Aiabia to 0ttoman cities Then it was a stiategic militaiy impeiative to cut
off the enemy supply ioutes About a centuiy latei it is now a stiategic economic
impeiative to ievive these communication links
VI. Can demography change the political calculus?

It is cleai fiom the pieceuing uiscussion that these ielatively invisible tiaue baiiieis aie
uivisive anu impose a heavy cost on Aiab economies Bismantling these baiiieis can
entail significant benefits Eviuence suggests that the welfaie gains fiom eliminating
nontaiiff baiiieis is at least tiiple the benefits fiom conventional tiaue iefoims that
excluue tiaue facilitation

Why have these economic uivisions enuuieu foi so long

then anu why have iefoims been so painfully slow The answei it seems lies in the
natuie of political incentives If the Niuule East has collectively faileu to tackle these

22

constiaints it is not uue to the shoitage of iesouices but a ueaith of political will The
extensive tiaue iestiictions that the iegion has built up ovei time aie not simply
pioceuuial baiiieis but also political baiiieis This inteiplay between economics anu
politics is cential to unueistanuing why these tiaue fiictions have been both peivasive
anu peisistent
The iegions aibitiaiy tiaue iegime seives a vital political function by allocating
monopoly iights to insiueis anu by channelling ients to favouieu gioups it cements the
powei of iuleis These institutional iigiuities push woikeis anu fiims into the uomain of
the infoimal sectoi which is now both wiuespieau anu sizeable in seveial Aiab states
Some of the iegions ielatively iesouicescaice countiies have a sizeable black economy
which ianges fiom peicent of uBP in }oiuan to peicent in Noiocco see Figuie

Even fuel enuoweu economies like Algeiia not shown in the giaph have a
thiiving paiallel maiket In many countiies links between the black economy anu state
institutions such as the militaiy anu secuiity foices can be muiky Becaues of
centializeu contiol has iestiicteu economic auvantage to those wellentiencheu in the
system closing off maikets to oiuinaiy investois who aie willing to compete on equal
teims but aie uenieu a level playing fielu All acioss the Aiab woilu a thin layei of the
population uominates the economy contiolling eveiything fiom banks businesses to
telecom This has eiecteu a pyiamiu of piivilege built aiounu a small numbei of laige
fiims at the top anu a laige numbei of small anu infoimal fiims at the bottom The iesult
is gieatei economic polaiization anu limiteu economic mobility
FI GURE 10 SI ZE 0F TBE I NF0RNAL EC0N0NY 0F uBP
SELECTEB NENA C00NTRI ES

Source INF
It is paitly foi this politics of policy that shaking off the buieauciatic stiangleholu has
pioven so uifficult uespite an eia of neolibeial economic iefoim Economic iefoims
have been uneven hesitant anu incomplete

Although economic iefoims have not

been a unifoim failuie they have faileu to uismantle the states heavyhanueu
iegulation

Refoims have not been accompanieu with a qualitative shift in uecision

23

making policy is still guiueu by uiscietion iathei than iules As a iesult the investment
iesponse to iefoims has been weakei a meie two peicentage points of uBP compaieu
with to peicentage points of uBP in Asia Eastein Euiope anu Latin Ameiica Neo
libeial iefoims have neithei levelleu the playing fielu noi uiamatically tilteu the balance
of economic powei in the favoui of those systematically excluueu fiom the system As a
iesult iathei than cieating a legitimate constituency foi the piivate sectoi iefoims
have simply stiengtheneu businesses that aie embeuueu with those in powei vieweu
in this light policy iefoims have simply been a vehicle foi a ieconfiguiation of political
poweia means foi shoiing up iegime powei iathei than uispeising it among social
gioups

The failuie of iefoims is thus ultimately iooteu in the failuie to iemove the
ieal constiaints to giowth which aie mainly institutional in natuie
The Aiab woilu is faceu with not just a vicious uevelopment cycle It is also tiappeu in
an auveise political equilibiium sustaineu by iuling elites who might view a piivate
sectoi opeiating outsiue theii spheie of influence as a possible thieat This is easy to
unueistanu When the piivate sectoi competes foi piofits thiough manufactuiing anu
tiaue it is likely to geneiate miuule class incomes that can ultimately pose a challenge
to centializeu authoiitaiian iule Regional tiaue is thus feaieu because it can uisplace
the incumbent auvantage of insiueis who have long monopolizeu economic
oppoitunity Theiein lay the uifficulty of change even as iegional coopeiation is welfaie
enhancing theie aie few stakeholueis foi it by contiast the statusquo is fieicely
uefenueu by a small cohesive anu welloiganizeu elite That is why manmaue baiiieis
aie sometimes as uifficult to uismantle as geogiaphic baiiieis to tiaue
The piimacy of politics is unueiscoieu by contiasting the limiteu piogiess on tiaue
integiation with that of flouiishing iegional linkages in finance While tiaue opening has
been iesisteu Aiab countiies have become moie financially connecteu thiough giowing
ciossboiuei investment flows The iegions oil expoiteis have become an impoitant
souice of foieign capital foi theii ielatively pooiei neighbouis Inwaiu FBI in seveial
iesouicescaice anu labouiabunuant countiies of the iegion has ciosseu peicent of
uBP In this iatio exceeueu peicent of uBP in }oiuan

These inwaiu
investments weie piimaiily uiiven by the giowth of the seivices sectoi piincipally
telecommunications touiism meuical anu financial seivices Apait fiom the gieatei
complementaiity in the seivices sectoi these giowing financial linkages also stem fiom
the fact that the politics of financial integiation has pioven to be ielatively less
complicateu than the politics of tiaue

Regional financial opening has been politically

moie palatable since the libeialization of banking anu telecommunicationsthat has
been the mainstay of economic iefoimshas conveniently seiveu as a souice foi
luciative contiacts anu licenses foi insiueis
0ne ieason why this political economy of piotectionism has enuuieu foi so long in the
Niuule East has to uo with the absence of a stiong constituency championing foi gieatei
economic access Business associations aie weak stiatifieu anu politically embeuueu
seiving piimaiily as a means to secuie naiiow inteiests than to win concessions foi the
wiuei business community They have iaiely acteu as effective moues of aiticulating the
conceins of smallei anu unueipiivilegeu fiims The manufactuiing sectoi as a whole
has limiteu lobbying powei anu the key beneficiaiies of iefoimunemployeu youth
anu young fiimsaie not collectively oiganizeu to push foi meaningful iefoims In
othei paits of the woilu tiaue integiation is often a mattei of necessitya stiategy foi

24

economic suivival not just giowth In the Aiab woilu howevei ients fiom oil anu aiu
have engenueieu a sense of autonomy fiom integiation
If the uomestic constituency foi iefoims is lacking so is the exteinal agency foi
changing the statusquo Even when globalization was unavoiuable Aiab economies
have integiateu veitically with global stiuctuies of tiaue anu finance while keeping
hoiizontal linkages between iegional economies weak anu unueiuevelopeu see Figuie
The 0S E0 anu othei emeiging economies have piefeiieu to foige bilateial tiaue
pacts with inuiviuual NENA countiies Washington has actively puisueu bilateial tiaue
agieements with }oiuan Lebanon anu Noiocco anu inuiviuual uCC States

Theie is a
plethoia of similai tiaue initiatives between the E0 anu Noith Afiican countiies The
bilateial tiaue pacts aie often negotiateu in a topuown fashion without effective input
fiom local inuustiies oi business associations All of this has happeneu while hoiizontal
linkages between Aiab economies have iemaineu minimal Economies of the Niuule
East aie essentially oiganizeu in a honeycomb stiuctuie wheie inuiviuual cells aie
insulateu fiom each othei but connecteu to the outsiue woilu
Attempts at global anu iegional tiaue integiation neeu not be mutually exclusive
especially if iegional tiaue uoes not uisciiminate against tiaue with countiies outsiue
the iegion Both can be simultaneously puisueu to the iegions benefit Eviuence
suggests that tiaue with the E0 biings welfaie gains

while at the same time theie is

also consiueiable untappeu potential foi iegional tiaue between NENA countiies

Bowevei the iegions veitical tiaue engagement with the 0S anu E0 shoulu not
neutialize attempts at iegional integiation

Piefeiiing to insist on bilateial ielations

foieign poweis have sometimes vieweu iegional pacts with inuiffeience oi at woist
with suspicion

In fact iegional integiation in NENA is cuiiously omitteu fiom the

emeiging foieign policy uiscouise of majoi poweis This is a notable omission anu
FI GURE 11 REuI 0NAL TRABE AuREENENTS

Source Woilu Bank

25

contiasts shaiply with iecent Ameiican effoits to mainstieam iegional tiaue in South
Asia thiough a ievival of the olu Silk Roau in the AfPak iegion While connecting
iegional maikets is fast becoming a coineistone of 0S foieign policy in South Asia a
similai uevelopment vision foi the Niuule East is noticeably absent fiom the policy
hoiizon
Regional integiation has not been foicefully pusheu by inteinational financial
institutions eithei While ieseaich conuucteu unuei the auspices of the INF anu the
Woilu Bank has uocumenteu inauequate patteins of iegional tiaue anu iuentifieu
unueilying baiiieis it has stoppeu shoit of tuining iegional tiaue into a majoi plank of
its policy auvice This ieluctance is illustiateu by extiacts fiom two iepoits publisheu
iespectively by the Funu anu the Bank Both auvocate a questionable pieceuence of
global integiation ovei iegional tiaue
Rathei than set as theii fiist economic policy piioiity the goal of iegional integiation
NENA countiies shoulu focus on uomestic policy iefoims anu the associateu piocess of
gieatei integiation into the woilu economy

ElEiian anu Fischei
A iecent Woilu Bank iepoit emphasizes a similai sequence
It seems auvisable foi NENA policy makeis to focus fiist on how to maintain anu
stiengthen theii countiies competitiveness in the global maiket anu only then ask what
contiibution iegional integiation can make towaiu achieving this enu Shui anu
Walkenhoist
This emphasis on globalization as a piioiity policy objective can be misplaceu foi
seveial ieasons Assuming that tiaue baiiieis seive political constituencies uismantling
them foi global tiaue aie no moie politically expeuient than iegional libeialization In
fact the opposite might be aigueu if maiket opening is a concession then it may be
easiei to accoiu this selectively anu giauually at the iegional level Foi globalization to
succeeu it is impoitant that countiies make a full use of the scale economies ieuuce
theii uepenuence on piimaiy commouities anu ensuie gieatei maiket competition
Regional tiaue integiation can facilitate all these In fact without actively contesteu
iegional maikets tiaue libeialization will not be complete
Regional tiaue integiation can also geneiate moie poweiful economies of scale These
scale economies aie not just iestiicteu to fiims but acciue moie wiuely to inuustiies
anu ultimately the economy as a whole 0ne example of these bioauei scale economies
is in the piovision of iegional public goousin tianspoit anu communication
infiastiuctuie foi instance Regionalization of tiaue will also facilitate ueepei tiaue
integiation that goes beyonu a meie ieuuction of taiiff baiiieis anu helps to uismantle
the moie cumbeisome nontaiiff baiiieis By peimitting bettei cooiuination anu
haimonization of policies iegional tiaue facilitation can significantly impiove the
investment climate Noie impoitantly iegional tiaue is integial to effoits towaius
economic uiveisification The iegion has little hope of uiveisifying when fiims face high
tiansaction costs to expoiting Fiagmenteu maikets also ueny scale economies to fiims
To the extent that scale economies aie moie impoitant foi manufactuieu expoits a
meie insistence on global integiation without compiehensive tiaue libeialization at the
iegional level can keep the Niuule East lockeu in piimaiy expoit stiuctuies

26


Thick economic boiueis can also uisauvantage Aiab countiies in intiainuustiy tiaue
which given the iegions similai factoi enuowments anu piouuction stiuctuies offeis a
piomising avenue foi economic uiveisification With its euucateu population high levels
of uibanization anu favouiable access to coasts the Niuule East is paiticulaily suiteu foi
tiaue in tasks But the tiaue in inteimeuiate goous ielies moie heavily on soft economic
boiueis anu the piesence of iegional piouuction linkages inuustiial clusteis anu
efficient tiaue logistics Putting in place these soft technologies of inuustiialization
iequiies a wellcooiuinateu iegional uevelopment policy A iegional collective action is
also necessaiy foi uesigning an effective inuustiial policy that fosteis tiaue
complementaiity acioss the iegion To summaiize stiongei linkages between Aiab
economies can geneiate uynamic gains that can in tuin seive as the spiingboaiu foi a
moie piouuctive engagement with the foices of globalization Rathei than tieating them
as sepaiate policy objectives theie is a stiong case foi emphasizing the mutually
ieinfoicing chaiactei of globalization anu iegional tiaue facilitation
The politics anu geopolitics of tiaue integiation aie complicateu The Aiab woilus
lopsiueu patteins of integiation have woikeu well foi both iegional elites anu
inteinational stakeholueis A fiagmenteu iegion cements the powei of insiueis anu
pievents the emeigence of autonomous social gioups In geopolitical teims it fosteis
the iegions uepenuence on exteinal poweis The Aiab ievolutions offei an oppoitunity
to iethink this statusquo A ciitical question is whethei these youth upiisings can altei
the incentives anu piefeiences of uecisionmakeis both at home anu abioau In othei
woius can the Aiab spiing change the political calculus that has pieventeu economic
coopeiation thus fai The iegion is often uniteu when it comes to uealing with secuiity
challenges The unanimous iesponse by the Aiab League on enfoicing a nofly zone in
Libya is a piime example But can the iegion act collectively to save the economic futuie
of its people The question of iegional integiation is not just a fancy Euiopean iueal to
emulate it is also a mattei of human secuiityof pioviuing oppoitunities foi economic
anu social mobility
The Niuule East is passing thiough a uefining moment containing in it the seeus foi
much cieative uestiuction Repeateuly in histoiy when faceu with an existential thieat
elites have suiienueieu theii piivileges anu extenueu iights to commoneis The Aiab
ievolts of offei piecisely such oppoitunity to spui change If theie is one key
stiategic concession that the iegions elites can collectively offei to the Aiab woilu it is
by cieating iegional economic commons foi its people By integiating iegional maikets
Aiab iuleis can offei the best foim of ieuistiibution to pooiei neighbouis anu the most
potent economic hanuout to theii peoplebettei than uoling out billions of uollais in
subsiuies that keep economies anu aspiiations aitificially alive
In confionting the iegions uevelopment challenges geogiaphy will play a pivotal iole It
piesents oppoitunities foi both change as well as statusquo The iegion is massively
favouieu by its geogiaphy of tiaue anu investment uiven its supeiioi access to coasts
maikets anu iesouices the Niuule East is natuially pieuisposeu towaius tiaue anu
competitive piouuction This can be an agent foi change At the same time the
geogiaphy of iesouices anu conflict can be a ietiogiessive influence since it geneiates
ients that establish the piimacy of pationage ovei piouuction The futuie of the iegion
hinges on how policymakeis giapple with this clash of geogiaphies Can they hainess
theii natuial geogiaphic stiengths to builu a futuie baseu on tiaue anu piouuction oi

27

uo they fall back on the geogiaphy of ients anu pationage
VII. Conclusion: an open access order

The Aiab woilu lies at the cusp of a new eia It is witnessing an unpieceuenteu
uemogiaphic tiansition iesulting in one of the laigest youth cohoits in its histoiy This
is to quote Taiek Youssefs piophetic expiession the geneiation in waitinga
geneiation waiting foi jobs anu justice The futuie of the Niuule East ciucially uepenus
on whethei it can conveit this youthful tiansition into a piouuctive tiansition This
iequiies Aiab iuleis to conceue not just political space but also gieatei economic
access 0nless accompanieu with a uistiibution of economic powei political iefoim
alone will not be sufficient Boiiowing the conceptual foimulation of Bouglass Noith
what the Aiab woilu neeus touay is an open access oiuei

The Aiab state has

typically cieateu ients by iestiicting access to economic oppoitunities to a uominant
coalition anu useu these ients to sustain oiuei
Thiough centializeu economic contiol anu iestiictive economic baiiieis Aiab
goveinments have eiecteu a system of economic apaitheiu that systematically excluues
people anu fiims at the maigins Although the Niuule East has mouest levels of
measuieu inequality by global compaiisons its cential challenge is the inequality of
access Eveiywheie in the iegion theie aie stiong auvantages of incumbency To cieate
an open access oiuei a new goveinance paiauigm neeus to be imagineu that biings
people fiom the maigins to the mainstieam offeiing them lauueis foi economic
mobilitylauueis that aie uefineu by meiit anu competition iathei than wasita oi
connections This iequiies that economic iewaius aie uistiibuteu thiough achievement
iathei than asciiption anu that elite piivileges aie tiansfoimeu into univeisal iights
Nuch of this hinges on whethei piivate economic activity can take ioot anu leau to the
piolifeiation of new social gioups that ultimately iesult in a gieatei uispeision of
powei Aiab economies have long been gieaseu thiough ievenues fiom oil aiu anu
iemittances Theie is now a neeu to geneiate alteinative ievenue stieams thiough tiaue
anu piivate sectoi uevelopment that can ieplace pationage with piouuction But it is
inauspicious to talk about the necessity of economic iefoim at a time when the iegions
political climate is ueciueuly antibusiness The piivate sectoi is at once the most
despised as well as the most desirable aspect of iefoim Business in the Aiab woilu is
often comfoitably embeuueu within the state with the iesult that it invokes images of
ciony capitalism At the same time an estimateu million jobs neeu to be cieateu in
the NENA iegion ovei the next uecaue oi so

This employment challenge cannot be

auuiesseu without a stiong piivate sectoi Anu without a stiong piivate sectoi the
human capital gains that the Aiab woilu has achieveu ovei time cannot be tianslateu
into soliu piouuctivity gains
An inuepenuent business sectoi will also seive a vital political function it can geneiate
a miuule class that can seive as a poweiful constituency foi political iefoim A iobust
piivate sectoi is thus both an economic anu political impeiative But this iequiies a
iauically uiffeient business life It iequiies a piivate sectoi that is open competitive anu
can opeiate outsiue the ioyal ciicle This can be achieveu thiough a genuine infitah
economic opening that uismantles entiy baiiieis ieplaces piivilege with competition
anu ensuies a uecentializeu anu iulesbaseu fiamewoik foi uecisionmaking vieweu in
this light the stiuggle foi a new Niuule East will be won oi lost in the piivate sectoi

28

The iegions ueep economic uivisions act as a key hinuiance to piivate sectoi
uevelopment Fiagmentation incieases the ietuins to pieuation pieseives the unequal
uistiibution of economic oppoitunity anu eniiches elites at the expense of oiuinaiy
fiims anu citizens 0pening economic access is theiefoie iesisteu because it can
uissipate the ients that sustain the stability of iuling coalitions While the iegion lacks a
soliu constituency foi piivate commeice the uemogiaphic anu political upheavals
acioss the Aiab woilu have cieateu a new opening foi change Bemogiaphy poses a
common challenge to Aiab goveinments it also ueseives a common iesponse thiough
an opening of iegional maikets Regional economic coopeiation which has long
ieceiveu ihetoiical suppoit assumes a new uigency in this context

The iegion
uigently neeus a new logic of economic integiation baseu on a bioauei uiscouise on
secuiity that tianscenus beyonu naiiow shoitteim conceins of iegime secuiity anu
attenus to the longteim challenges of human secuiity

Connecting iegional maikets is

also an essential step towaius effectively competing in global maikets
But the iegions economic fiagmentation is paitly a manifestation of inteinally
segmenteu auministiative stiuctuies uoveinance systems in the Niuule East aie highly
centializeu that often function thiough veitical clienteles that aie unconnecteu fiom
each othei This biings us to a funuamental iiony that has piofounu consequences foi
uevelopment as the Niuule East has become moie centializeu it has also become moie
fiagmenteu The iegions centializeu anu segmenteu auministiative stiuctuies have
iestiicteu economic access anu pieventeu the uiffusion of economic ients thiough
entiepieneuiship anu tiaue Impoitantly a segmenteu state appaiatus has pieventeu
the emeigence of a business class that has uiiect stakes in moie open iegional maikets
This has given iise to massive cooiuination failuies with the iesult that Aiab
goveinments anu fiims touay aie paiticulaily ueficient in captuiing positive
exteinalities anu piouuctive spilloveis In this milieu public effoit anu iesouices aie
uuplicateu anu complimentaiy activities aie ignoieu Anu the patiimonial ties between
fiims anu the state become stiongei than theii piouuctive linkages with othei fiims

This cieates an inhospitable enviionment foi tiaue specialization anu competitive
piouuction
This centializeu buieauciatic iule has a long histoiical lineage uating back to the
0ttoman iule The 0ttoman Empiie anu its successoi Aiab states have been paiticulaily
efficient at piomoting anu guaiuing theii autonomy fiom society But in this quest foi
absolutist contiol buieauciacy has been tuineu into an iiiitant foi the giowth of
bouigeoisie anu iegional economic integiation

Nonolithic systems aie uesigneu to

pieseive haimony than to inuuce change This geneiates a funuamental contiauiction
with the giowth of piivate enteipiise which uemanus open economic access flexibility
anu an ability to auapt anu innovate A centializeu system is theiefoie anathema to
entiepieneuiship anu innovation At key moments of histoiy the Aiab state has
attempteu to institute iefoims in vaiious guises but these have mostly enueu up
centializing powei iathei than uispeising it Whethei it is the Tanzimat iefoims unuei
0ttoman iule nationalization of the s oi neolibeial economic iefoims of the
s they have all seiveu as vehicles foi iefuibishing the states powei The key
question in this iegaiu is whethei iefoims will once again be a centiipetal oi a
centiifugal foice This is the tiue ciucible of the Aiab Spiing

29

Acknowledgements
Special thanks aie uue to Tony venables who pioviueu the initial inspiiation foi this aiticle The authois
also wish to thank Nohammau Talib Fawaz ueiges Fiancis Robinson Richaiu Nakepeace Eugene Rogan
Richaiu Auty Taiek Yousef Natteo Legienzi Nichael Buuson Baiius Wojcik Feiuinanu Eibl anu
paiticipants of the panel uiscussions at NY0 Abu Bhabi St Antonys College 0xfoiu Bonn 0niveisity anu
the Inteinational Book Faii in Algieis foi helpful feeuback

1
The Arab world is broadly defined to include the Arab nations of the Middle East and North Africa.
2
Daron Acemoglu and James Robinson, 2008, The persistence and change of institutions in the Americas,
Southern Economic Journal, 282299. Also see: James Robinson, 2010, Elites and institutional Persistence,
WIDER Working Paper 2010/85, Helsinki.
3
Al Manar, 2010, Employment and Unemployment Survey: Number of Employed Jordanians 200009. Amman,
Jordan.
4
Francisco R. Rodriguez and E. Samman, 2010, The North African Miracle,
http://hdr.undp.org/en/humandev/letstalkhd/201011b/ (Also, see, the Human Development Report 2010,
Oxford University Press).
5
Tarek M. Yousef, 2004, Development, growth and policy reform in the Middle East and North Africa since
1950, Journal of Economic Perspectives, 18(3), 91116.
6
The World Bank, 2004, Unlocking the Employment Potential in the Middle East and North Africa: Toward a
New Social Contract, Washington, D.C.
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A. Kapiszewski, 2006, Arab Versus Asian Migrant Workers in the GCC Countries, UN/POP/EGM/2006/02.
8
Sahar Taghdisi Rad, 2011, Jordans paradox of growth without employment, Development Viewpoint 65,
SOAS, University of London.
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The World Bank, 2005, World Development Report: A Better Investment Climate For Everyone, New York:
Oxford University Press.
10
United Nations Industrial Development Organization, 2009, Industrial Development Report 2009, Vienna.
11
World Development Indicators (available at: http://data.worldbank.org/datacatalog).
12
The importance of Suez Canal can be gauged from the fact that around 8 percent of the global seaborne
trade passes through it. It generated US$ 4.8 billion in revenues in 2010 alone.
13
World Development Indicators (available at: http://data.worldbank.org/datacatalog).
14
Jane Harrigan, 2011, The political economy of aid flows to North Africa, WIDER Working Paper 2011/72,
World Institute of Development Economics Research, Helsinki, Finland.
15
The World Bank, 2011, World Development Indicators 2011, Washington D.C.
16
There may also be a feedback from the states redistributive system to demographics, as generous state
provision may act as an incentive for a larger family size.
17
The region imports 50 percent of its food calorie consumption.
18
Annia Ciezadlo, 2011, Let them eat bread: How food subsidies prevent (and provoke revolutions in the
Middle East? Foreign Affairs, March 23 2011.
19
http://gitm.kcorp.net/index.php?id=579569&news_type=Economy&lang=en
20
Silvana Tenreyro and Miklos Koren, 2010, Volatility, diversification and development in the Gulf
Cooperation Countries, Kuwait Programme Working Paper, London School of Economics and Political Science.
21
For key features of this development model, see, Tarek M. Yousef, 2004, Development, growth and policy
reform in the Middle East and North Africa since 1950, Journal of Economic Perspectives, 18(3), 91116.
22
Clemens Breisinger, Olivier Ecker and Perrihan AlRiffai, 2011, Economics of the Arab awakening: From
revolution to transformation and food security. IFPRI Note, Washington, D.C.
23
This is evident in Saudi Arabia, for example, where there are considerable government shares in large
business conglomerates.
24
Giacomo Luciani and Steffen Hertog, 2010, Has Arab business ever been, or will it be, a player for reform?,
Arab Reform Initiative Policy Paper 1.
25
Marcus Noland and Howard Pack, 2009, The Arab Economies in a Changing World, Washington: Peterson
Institute for International Economics.
26
World Development Indicators 2010.
27
Nugent and Yousef (2005).

30


28
Ibid, chapter 10 (Lulu Shui and Peter Walkenhorst: Regional integration: Status, developments and
challenges) .
29
Jos R. LpezClix, Peter Walkenhorst, and Ndiam Diop, (eds.),2010, Trade Competitiveness in Middle East
and North Africa: Policies for Export Diversification. World Bank, Washington, D.C. (chapter 10)
30
Francisco Caselli and James Feyrer, 2007, The marginal product of capital, Quarterly Journal of Economics,
May Issue, 535568.
31
Paul Collier and Anthony Venables, 2010, Trade and economic performance: Does Africas fragmentation
matter?, In Justin Yifu Lin and Boris Pleskovic, (eds.), 2010, People, Politics and Globalization Annual World
Bank Conference on Development Economics, The World Bank, Washington, D.C.
32
United Nations Industrial Development Organization, 2009, Industrial Development Report 2009, Vienna.
33
World Development Indicators, 2010.
34
The Economist, 2010, Special Report on Egypt, July 1723 Issues, London.
35
The agglomeration index for the MENA region is 67.5% compared to 62% in Latin America and Caribbean.
For more details please see, Hirotsugu Uchida and Andrew Nelson, 2008, Agglomeration Index: Towards a
new measure of urban concentration, Background paper for the World Development Report 2009, The World
Bank, Washington, D.C.
36
Jeffrey B. Nugent and Tarik Yousef, 2005, Does MENA defy gravity? How MENA has performed in its
intraregional, EU and other trade?, EUI Working Paper 2005/26, European University Institute, Florence.
37
Hassan AlAtrash and Tarik Yousef, 2000, IntraArab trade: Is it too little? IMF Working Paper 10,
International Monetary Fund, Washington, D.C.
38
Nathan Nunn, 2008, The long term effects of Africa's slave trades, Quarterly Journal of Economics, 123 (1),
139176.
39
Hirotsugu Uchida and Andrew Nelson, 2008, Agglomeration Index: Towards a new measure of urban
concentration, Background paper for the World Development Report 2009, The World Bank, Washington, D.C.
40
An alternative explanation relates to the inhibiting role of Islamic law. See, for example, Timur Kuran, 2010,
The Long Divergence: How Islamic Law Held Back the Middle East, Princeton University Press.
41
The regions fragmentation, together with the intensity of conflict, also increases military spending by
individual states.
42
Malik (2011); Clement Moore Henry and Robert Springborg, 2010, Globalization and the Politics of
Development in the Middle East, Cambridge, Cambridge University Press.
43
The important exceptions in this regard are Morocco, Syria and Lebanon, which had sizeable merchant
communities.
44
Nazih N. Ayubi, 1995, Overstating the Arab State, London: I. B. Tauris.
45
Adeel Malik, 2011, Explaining Middle Easts political economy: Why history matters?, forthcoming as QEH
Working Paper, University of Oxford.
46
Jill Chrystal, 1990, Oil and Politics: Rulers and Merchants in Kuwait and Qatar. Cambridge: Cambridge
University Press.
47
This index corresponds to the uniform tariff that if imposed on all imports from partner countries would
leave overall imports unchanged, see Jose et al. (2010).
48
The World Bank, 1999, From Privilege to Competition: Unlocking PrivateLed Growth in the Middle East and
North Africa, Washington, D.C.
49
International Monetary Fund, 2011, Regional Economic Outlook: Middle East and Central Asia. Washington,
D.C.: IMF.
50
Steffen Hertog, 2010, Oil and the State in Saudi Arabia, Princeton: Princeton University Press.
51
Ibid, chapter 10 (Lulu Shui and Peter Walkenhorst: Regional integration: Status, developments and
challenges) .
52
The World Bank, 1999, From Privilege to Competition: Unlocking PrivateLed Growth in the Middle East and
North Africa, Washington, D.C.
53
Roberto Rocha, Subika Farazi, Rania Khouri, and Douglas Pearce, 2010, The status of bank lending to SMEs
in Middle East and North Africa, World Bank Report, The World Bank, Washington, D.C.
54
International Monetary Fund, 2011, Regional Economic Outlook: Middle East and Central Asia. Washington,
D.C.: IMF.
55
http://www.enterprisesurveys.org/
56
Many countries continue to place stringent restrictions on currency convertibility. This is the case in Algeria,
for example, which has a significant cushion of foreign reserves against a possible run on the currency.

31


57
Hoekman, Bernard and Alessandro Nicita, 2008, Trade policy, trade costs and Developing country trade,
World Bank Policy Research Working Paper 4797, Washington, D.C.
58
There has been a significant progress on maritime transshipment.
59
The World Bank, 2011, Connecting to Compete 2010: Trade Logistics in the Global Economy, available at:
www.worldbank.org/lpi
60
J. Zarrouk, 2003, A survey of barriers to trade and investment in Arab countries, In A. Galal and B.
Hoekman (eds.), Arab Economic Integration: Between Hope and Reality. Washington, D.C.: Brookings
Institution Press.
61
. Zarrouk, 2003, A survey of barriers to trade and investment in Arab countries, In A. Galal and B. Hoekman
(eds.), Arab Economic Integration: Between Hope and Reality. Washington, D.C.: Brookings Institution Press.
62
Julia Devlin and Peter Yee, 2005, Trade logistics in developing countries: The Case of the Middle East and
North Africa, The World Economy, 435456.
63
Julia Devlin and Peter Yee, 2005, Trade logistics in developing countries: The Case of the Middle East and
North Africa, The World Economy, 435456.
64
United Nations Industrial Development Organization, 2009, Industrial Development Report 2009, Oxford
University Press, Oxford.
65
Tunisia is a partial exception, since its exports of parts and components have significantly expanded in recent
years.
66
The World Bank, 2008, MENA Economic Developments and Prospects 2008: Regional Integration for Global
Competitiveness, Washington, D.C.
67
Examples of other failed projects are the Federation of Arab Republics and the Arab Cooperation Council.
68
The World Bank, 2011, Logistics Performance Index: Arab World,
http://siteresources.worldbank.org/INTTLF/Resources/515003
1276029788910/LPI_Booklet_MENA_Feb2010.pdf
69
Mourhaf Sabouni, 1997, Arab Railways past and present, Japan Railway & Transport Review, 12, 2225.
70
Peter Roberts, Shyam KC, and Cordula Rastogi, 2006, Rural Access Index: A key development indicator,
Transport Papers (TP10), World Bank, Washington, D.C.
71
Allen Denis, 2006, The impact of regional trade agreements and trade facilitation in the Middle East and
North Africa region, World Bank Policy Research Working Paper 3837, The World Bank, Washington, D.C.
72
International Monetary Fund, 2011, Regional Economic Outlook: Middle East and Central Asia. Washington,
D.C.
73
Tarek M. Yousef, 2004, Development, growth and policy reform in the Middle East and North Africa since
1950, Journal of Economic Perspectives, 18(3), 91116.
74
The record of economic reform is mixed in the MENA region. Morocco, Tunisia, Jordan and Egypt were some
of the early reformers in the region. Reform was partially successful in Egypt; in Tunisia and morocco it led to a
revival of FDI.
75
http://www.mcgill.ca/files/icames/Boom_Bust2.pdf
76
Jordan, Tunisia, Morocco, Lebanon and Egypt have been the prime beneficiaries of these foreign capital
flows. For further details, see Lulu and Peter Walkenhorst, 2010, Regional Integration: Status, Developments,
and Challenges, In ShuiJos R. LpezClix, Peter Walkenhorst, and Ndiam Diop, (eds.), Trade
Competitiveness in Middle East and North Africa: Policies for Export Diversification. World Bank, Washington,
D.C. (chapter 10).
77
Changing geopolitical circumstances in the wake of 9/11 attacks, liberalization of the financial sector and
the recent oil boom have all played a helpful part.
78
Recently, the United States, when faced with the difficulty of negotiating an FTA, has pushed instead for a
Trade and Investment Cooperation Agreement with the GCC.
79
For evidence on welfare gains from trade with the EU, see, Allen Dennis, 2006, The impact of regional trade
agreements and trade facilitation in the Middle East and North Africa region, World Bank Policy Research
Working Paper 3837, World Bank, Washington, D.C.
80
In particular, trade between MENA countries can generate significant dynamic gains.
81
The US trade agreements with the Gulf countries are sometimes viewed as disruptive for GCC trade. There
have been concerns among large GCC countries about the entry of US goods into the GCC via Bahrain. For
further details, please see, Fred Lawson, 2011, Geopolitical complications of US Free Trade Agreements with
Gulf Arab Countries, In Matteo Legrenzi and Basma Momani (eds.), Shifting GeoEconomic Power of the Gulf,
London: AshGate Publishing.

32


82
Michael Hudson, 1998, Middle East Dilemma: The Politics and Economics of Integration, I. B. Tauris, London.
83
Rather than set as their first economic policy priority the goal of regional integration, MENA countries
should focus on domestic policy reforms and the associated process of greater integration into the world
economy. In Mohammad A. ElErian and Stanley Fischer, 1996, Is MENA a region? The scope for regional
integration, IMF Working Paper 30, International Monetary Fund, Washington, D.C.
84
Douglass C. North, John Joseph Wallis and Barry R. Weingast, 2009, Violence and Social Orders Interpreting
Recorded Human History During the Last Four Hundred Years. Cambridge: Cambridge University Press.
http://blogs.worldbank.org/governance/thearabspringalimitedaccessordersperspective
85
The World Bank, 2003, Unlocking the Employment Potential of the Middle East and North Africa: Toward a
New Social Contract. Washington, D.C.
86
In this regard, the proposed accession of Jordan and Morocco to the GCC is a welcome step, but the driving
incentive for this should be the integration of markets rather than monarchies.
87
Kristian Coates Ulrichsen, 2010, Internal and External Security in the Arab Gulf States, Middle East Policy,
available at: http://www.mepc.org/journal/middleeastpolicyarchives/internalandexternalsecurityarab
gulfstates
88
Mustafa K. Nabli et al., 2006, The political economy of Industrial policy in the Middle East and North Africa,
The World Bank, Washington, D.C.
89
For a further illustration of this point, see the discussion in chapter 4, Nazih N. Ayubi, 2001, Overstating the
Arab State: Politics and Society in the Middle East, London, I. B. Tauris.