88950 OVER THE HORIZON A NEW LEVANT Report No. 86946-IQ OVER THE HORIZON: A NEW LEVANT March 2014 Poverty Reduction and Economic Management Department (MNSPR) Middle East and North Africa Region Document of the World Bank © 2014 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202–473–1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Di- rectors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denomi- nations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202–522–2422; e-mail: pubrights@worldbank.org. Cover image © The Bridgeman Art Library Ltd. Used with the permission of The Bridgeman Art Library Ltd. Further permission required for reuse. TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS ................................................................................................................... XI ACKNOWLEDGEMENTS .................................................................................................................................... XV EXECUTIVE SUMMARY .................................................................................................................................... XVII INTRODUCTION ....................................................................................................................................................1 1. ECONOMIC COMPLEMENTARITIES ..............................................................................................................3 2. EXPANDING ECONOMIC TIES IN THE LEVANT: WHO BENEFITS AND BY HOW MUCH ........................47 3. TRADE AND INVESTMENT REGIMES ..........................................................................................................61 4. TRADE IN SERVICES ...................................................................................................................................109 5. THE ROLE OF THE FINANCIAL SECTOR IN ECONOMIC INTEGRATION OF THE LEVANT...................125 6. REGIONAL INTEGRATION OF ENERGY SYSTEMS IN THE LEVANT ........................................................139 7. IMPROVING CONNECTIVITY: THE ROLE OF ICT AND TRANSPORT SERVICES .....................................159 8. RECOVERING AND REFORMING THE TOURISM SECTOR IN THE LEVANT ...........................................179 9. BARRIERS TO DEEPER REGIONAL INTEGRATION IN THE LEVANT ........................................................189 10. REGIONAL TRADE AGREEMENTS AND THE SUGGESTED DESIGN OF THE LEVANT ECONOMIC ZONE .........................................................................................................209 ANNEXES...........................................................................................................................................................223 Annex 1: Methodology for Gravity Trade Model .......................................................................................224 Annex 2: Gravity Model: Actual Bilateral Exports versus Potential Outcomes ..........................................226 Annex 3: Methodologies for Revealed Comparative Advantages, Export Sophistication, and Product Space .............................................................................................................................228 Annex 4: Methodology for Product Space Analysis ...................................................................................230 iii iv Over the Horizon: a New Levant Annex 5: Technology Classifications and Export Shares of Different Product Categories.........................231 Annex 6: Turkey: 749 Products Exported in Total (left), Syria: 621 Products Exported in Total (middle), Jordan: 512 Products Exported in Total (right) ...........................................................................232 Annex 7: Egypt: 723 Products Exported in Total (left), Lebanon: 711 Products Exported in Total (middle), Tunisia: 671 Products Exported in Total (right)....................................................233 Annex 8: Iran: 740 Products Exported in Total (left), Iraq: 453 Products Exported in Total (middle), Libya: 595 Products Exported in Total (right) ......................................................234 Annex 9: Regional and Industry Aggregation ............................................................................................235 Annex 10: Data Sources for Tariff Duties in Iraq, Jordan, Lebanon, Syria, and Turkey ................................236 Annex 11: Data Sources for Tariff Duties in Egypt, Tunisia, Morocco, Yemen, and Palestinian Territories ..238 Annex 12: Data Sources for Tariff Duties in the GCC Economies, European Union, Algeria, and Libya .....240 Annex 13: Turkey’s Tariff Protection by Source and Product ........................................................................241 Annex 14: Egypt’s Tariff Protection by Source and Product .........................................................................242 Annex 15: Lebanon’s Tariff Protection by Source and Product ....................................................................243 Annex 16: Jordan’s Tariff Protection by Source and Product .......................................................................244 Annex 17: Syrian Arab Republic’s Tariff Protection by Source and Product.................................................245 Annex 18: Iraq’s Tariff Protection by Source and Product ............................................................................246 Annex 19: Protection in GTAP 8 Database and in the MENA-specific GTAP 8 Database ...........................247 Annex 20: Change in Turkey’s Export Volumes (US$ million) .......................................................................249 Annex 21: Change in Egypt’s Export Volumes (US$ million) ........................................................................250 Annex 22: Change in Jordan’s Export Volumes (US$ million) ......................................................................251 Annex 23: Change in Lebanon’s Export Volumes (US$ million)....................................................................252 Annex 24: Change in Syria’s Export Volumes (US$ million) ..........................................................................253 Annex 25: Change in Iraq’s Export Volumes (US$ million) ...........................................................................254 Annex 26: Global Competitiveness Index ....................................................................................................255 Annex 27: Indicators of Trade Policy Environment .......................................................................................256 Annex 28: Ease of Doing Business Ranking 2011–2012 ...............................................................................257 Annex 29: Performing a Trade-related Regulatory Audit in Services: Why and How?.................................258 Annex 30: Gravity Equation for Bilateral Passenger Flows Using Country Level Air Traffic Data ................262 Annex 31: Turkey’s Exposure to NTMs .........................................................................................................264 Annex 32: Iraq’s Exposure to NTMs ..............................................................................................................265 Annex 33: Jordan’s Exposure of NTMs.........................................................................................................266 Annex 34: Lebanon’s Exposure to NTMs......................................................................................................267 Annex 35: Syria’s Exposure to NTMs ............................................................................................................268 Annex 36: Egypt’s Exposure to NTMs ..........................................................................................................269 Annex 37: Tunisia’s Exposure to NTMs .........................................................................................................270 Annex 38: Libya’s Exposure to NTMs ...........................................................................................................271 Annex 39: Iran’s Exposure to NTMs .............................................................................................................272 Annex 40: Evolution of the Agricultural Trade Costs with Reference Countries ..........................................273 Annex 41: Evolution of the Agricultural Trade Costs with Maghreb Countries ...........................................274 Table of Contents v Annex 42: Evolution of the Agricultural Trade Costs with the Middle East Countries.................................275 Annex 43: Bilateral Trade Costs for Turkey and Selected Partners: Total Trade in 2009 .............................276 Annex 44: Logistics Performance at the Country Level ................................................................................277 REFERENCES .....................................................................................................................................................279 LIST OF TABLES Table 1: Annual GDP Growth in MENA and Turkey ......................................................................................4 Table 2: Intra-Group Trade ............................................................................................................................5 Table 3: Product Composition of Exports .....................................................................................................9 Table 4: FDI Inflows 2003–2010 ..................................................................................................................12 Table 5: Trade Complementarity Index in 2010 ..........................................................................................15 Table 6: Trade Complementarity Index in 2001 ..........................................................................................15 Table 7: Benchmarking Bilateral Trade Relationships .................................................................................17 Table 8: Export Performance (RCA) Across Aggregate Categories and Countries ....................................18 Table 9: RCA Growth for Selected 4-digit Products ...................................................................................21 Table 10 Syria Export Growth with and without Iraq by Sector (in percent) 2005–2008.............................23 Table 11: Change in Bilateral Export Volumes Due to Removal of Tariffs on Agricultural Goods and Processed Food ......................................................................................................................51 Table 12: Change in Output by Sector Due to Removal of Tariffs on Agricultural Goods and Processed Food ......................................................................................................................52 Table 13: Welfare Effects of Reforms Associated with Deeper Integration in the Levant ............................53 Table 14: Change in Bilateral Export Volumes Due to Reductions in the Restrictiveness of NTMs in the Levant ..................................................................................................................................54 Table 15: Impact of Reform in Transport on Bilateral Export Volumes .........................................................57 Table 16: Productivity Growth Associated with Services Liberalization in the Levant ..................................60 Table 17: Global Competitiveness Index 2011–2013 ...................................................................................62 Table 18: Summary of Policy Recommendations ..........................................................................................64 Table 19: Examples of Turkey’s Trade Frictions Impacting MENA Partners .................................................69 Table 20: Turkey Foreign Direct Investment .................................................................................................73 Table 21: Sectoral Composition of Turkey’s FDI Outflow US$ millions.........................................................73 Table 22: Geographic Distribution of Turkey’s FDI Outflows US$ millions ...................................................74 Table 23: Syria Foreign Direct Investment ....................................................................................................23 Table 24: Examples of Jordan’s Trade Frictions Impacting Turkey/MENA Partners .....................................85 Table 25: Jordan Foreign Direct Investment .................................................................................................88 Table 26: Lebanon Foreign Direct Investment ..............................................................................................94 Table 27: Iraq Foreign Direct Investment ....................................................................................................100 Table 28: Egypt’s WTO Tariff Commitments and Applied MFN Import Tariffs ...........................................102 Table 29: Examples of Egypt’s Trade Frictions Impacting Turkey/MENA Partners.....................................103 Table 30: Israel’s WTO Tariff Commitments and Applied MFN Import Tariffs ............................................105 vi Over the Horizon: a New Levant Table 31: Examples of Israel’s Trade Frictions Impacting Turkey/MENA Partners ......................................106 Table 32: Net Remittance Flows 2000–2011 (US$ millions) ........................................................................112 Table 33: Share of Services in Total Trade (%, 2000–2010) .........................................................................113 Table 34: Composition of Services Trade in Selected MENA Economies 2005–2011 ................................114 Table 35: Revealed Comparative Advantages in Service Exports (2010) ...................................................118 Table 36: Gravity Model of Trade in Services..............................................................................................119 Table 37: Comparative Picture of Financial Liberalization in the Region....................................................127 Table 38: Some Measures of Access to Financial Services .........................................................................132 Table 39: Cross-Border Presence of Regional Financial Institutions ...........................................................133 Table 40: Capacity to Expand Regionally ...................................................................................................136 Table 41: Estimated Potential Revenue of Banking Services for Trade Flows in the Region ......................138 Table 42: Historical and Forecast Electricity Demand in Mashreq Countries .............................................141 Table 43: Key Data on the Power Sector in Mashreq (2010) ......................................................................142 Table 44: Basic Details of the Power Sector of Libya and Tunisia ...............................................................142 Table 45: Basic Details of the Power Sector of Turkey and Iran .................................................................143 Table 46: Regional Interconnections ...........................................................................................................143 Table 47: Historical and Forecast Gas Consumption in Mashreq Countries (bcm).....................................147 Table 48: Basic Data on the Gas Sector of Mashreq Countries 2010 .........................................................147 Table 49: Gas Data for Libya and Tunisia (2010) (bcm) ...............................................................................148 Table 50: Gas Sector Projections for Tunisia and Libya (bcm) ....................................................................149 Table 51: Gas Sector Data for Iran and Turkey (2010) (bcm) ......................................................................149 Table 52: Estimated Price for Egyptian Gas (US $ /MMBTU in 2009 Prices) ..............................................154 Table 53: Estimated Price for Egyptian Power (US cents/kWh in 2009 Prices)...........................................155 Table 54: Proposed List of Power Sector Investments to Support Increased Regional Trade....................157 Table 55: Proposed List of Gas Sector Investments to Support Increased Regional Trade........................158 Table 56: Key Telecommunication Statistics, Eastern Mediterranean Region 2013 ...................................161 Table 57: ICT Goods and Services Exports (% of goods/services exports, BoP), 2008–2011 ....................161 Table 58: Revealed Comparative Advantage in ICT Goods and Services Export ......................................162 Table 59: Investment in Telecom Sector Infrastructure with Private Participation ......................................162 Table 60: Competition for International Submarine Cable Connectivity ....................................................167 Table 61: International Scheduled Air Passenger Traffic .............................................................................172 Table 62: Origin Destination Traffic 2005 and 2010 ...................................................................................173 Table 63: Outbound Passenger Traffic from Turkey ....................................................................................174 Table 64: Inbound Traffic to Turkey .............................................................................................................174 Table 65: GATS Commitments in the Tourism Sector .................................................................................184 Table 66: Plurilateral (P) and Bilateral (B) Trade Agreements .....................................................................185 Table 67: Conditional Logistics Performance ..............................................................................................202 Table 68: Relative Performance of the Levant Countries in Six Components of the LPI ............................203 Table 69: Logistics Performance and Shipping Connectivity ......................................................................203 Table of Contents vii Table 70: Selected Indicators and World Rankings 2012 ............................................................................206 Table 71: Corruption Perception Index 2012 ..............................................................................................207 Table 72: Preferential Trade Agreements in MENA ....................................................................................211 Table 73: Trade Policy under PAFTA, Turkey-MENA FTAs and Potential Goals of a Levant Economic Zone .........................................................................................................211 Table 74: Weighted Average AVE Estimates of NTMs by Country and Product ........................................219 LIST OF FIGURES Figure 1: Number of 4-digit Products with RCA in 2007/09 (left), Share 20 Largest Products in Total Exports 2007/09 (right) .........................................................................................................11 Figure 2: Percentage of Firms Exporting (left), Percentage of firms’ Sales Obtained from SEports (right) .......................................................................................................................11 Figure 3: Percentage of Inputs Imported .....................................................................................................12 Figure 4: Inflows of FDI as a ASare of GDP in 2000s versus 1990s (left) and FDI inflows (in US$ millions) 2006–2010 (right) ..........................................................................................................................13 Figure 5: Share of FDI Inflows by Sector 2003–2010....................................................................................13 Figure 6: EXPY for Selected MENA (left) and East Asian (right) Countries (in US$, PPP) ............................24 Figure 7: EXPY versus GDP Per Capita.........................................................................................................24 Figure 8: Share of High, Medium, and Low Technology Manufacturing Products with an RCA in 2007/09 ......................................................................................................................................25 Figure 9: Turkey Product Space 2007/09......................................................................................................26 Figure 10: Turkey Product Space RCAs 2007/09 ............................................................................................27 Figure 11: China (left) and Brazil (right) Product Spaces 2007/09 ..................................................................28 Figure 12: Turkey Product Space: Dynamic Representation Changes 1992/94–2007/09 ..............................29 Figure 13: Syria Product Space RCAs 2007/09...............................................................................................30 Figure 14: Egypt Product Space RCAs 2007/09 .............................................................................................31 Figure 15: Syria Product Space Dynamic Representation Changes 2000/02–2007/09 (left) and 1992/94–2007/09 (right) ................................................................................................................33 Figure 16: Egypt Product Space Dynamic Representation Changes 2000/02–2007/09 (left) and 1992/94–2007/09 (right) ................................................................................................................33 Figure 17: Thailand (left) and Malaysia (right) Product Space RCAs 2007/09 ................................................34 Figure 18: Product Space Syria (left) and Egypt (center) 2007/09, Turkey (right) 1992–94 ...........................35 Figure 19: Product Space Turkey 2007/09......................................................................................................36 Figure 20: Jordan Product Space 2007/09 .....................................................................................................37 Figure 21: Lebanon Product Space 2007/09 ..................................................................................................21 Figure 22: Chile (left) and Croatia (right) Product Space 2007/09 .................................................................39 Figure 23: Jordan Product Space Dynamic Representation Changes 2000/02–2007/09 (left) and 1992/94–2007/09 (right) ................................................................................................................40 Figure 24: Lebanon Product Space Dynamic Representation Changes 2000/02–2007/09 ...........................41 Figure 25: Iraq Product Space 2007/09 ..........................................................................................................42 Figure 26: Iraq Product Space Dynamic Representation Changes 1992/94–2007/09 ...................................43 viii Over the Horizon: a New Levant Figure 27: Iran Product Space 1992/94–2007/09 ...........................................................................................43 Figure 28: Norway Product Space 2007/09....................................................................................................44 Figure 29: Tunisia Product Space 2007/09 ......................................................................................................45 Figure 30: Portugal Product Space RCAs 2007/09.........................................................................................46 Figure 31: Tunisia Product Space Dynamic Representation Changes, 2007/09.............................................46 Figure 32: Welfare Effects from Transport Reform .........................................................................................59 Figure 33: Turkey’s Imports of Synthetc Yarn from Selected Source Countries .............................................69 Figure 34: Turkey’s Imports of Cotton Yarn from Selected Source Countries ................................................70 Figure 35: Turkey’s Imports of Polyethylene Terephthalate (PET) from Selected Source Countries ..............71 Figure 36: Jordan’s Imports of Steel Rebar from Selected Source Countries ................................................86 Figure 37: Jordan’s Imports of Ceramic Tiles from Selected Source Countries .............................................86 Figure 38: Jordan’s Imports of Cement from Selected Source Countries ......................................................87 Figure 39: Egypt’s Imports of Steel Rebar from Selected Source Countries ...............................................103 Figure 40: Egypt’s Imports of Cotton Yarn and Textile Products from Selected Source Countries .............104 Figure 41: Israel’s Imports of Steel Rebar from Selected Source Countries.................................................107 Figure 42: Israel’s Imports of Stretch Film Rolls from Selected Source Countries .......................................107 Figure 43: Israel’s Imports of Glass Wool and Rock Wool from Selected Source Countries.........................108 Figure 44: Israel’s Imports of Cement from Selected Source Countries ......................................................108 Figure 45: Share of Services in GDP (%, 2007) .............................................................................................111 Figure 46: Share of Services in Total Employment (%, 2008) ........................................................................111 Figure 47: Comparative Snapshot of Trade in Services (US$ billion, 2010) .................................................112 Figure 48: Overall Services Trade Restrictiveness Index ..............................................................................119 Figure 49: Services Trade Restrictiveness Index (Mode 1: Cross-Border Supply) All Sectors ......................120 Figure 50: Services Trade Restrictiveness Index (Mode 3: Commercial Presence) All Sectors ....................120 Figure 51: Services Trade Restrictiveness Index (Mode 4: Movements of Natural Persons) All Sectors .....121 Figure 52: Situating “Mashreq+” in the World: STRI by Regional Groupings All Sectors and Modes of Supply .........................................................................................................................123 Figure 53: Lending Spreads (in percentage points) .....................................................................................127 Figure 54: M2/GDP .......................................................................................................................................128 Figure 55: Comparative Financial Sector Aggregates (in terms of regional share)......................................128 Figure 56: Total Domestic Credit vs. Total Private Sector Credit .................................................................129 Figure 57: Numbers of Financial Institutions (end of 2011)..........................................................................130 Figure 58: Numbers of Commercial Banks (end of 2011) ............................................................................130 Figure 59: Owenership Structures of Banking Systems (end of 2011) ..........................................................131 Figure 60: Market Shares of Top Banks (end of 2011) ..................................................................................131 Figure 61: Mashreq Power Generation by Type of Fuel (%) .........................................................................142 Figure 62: The Exsiting and Proposed Power Interconnections...................................................................145 Figure 63: Existing Pipelines in the Region ..................................................................................................149 Figure 64: Existing and Proposed Gas Pipelines and LNG Terminals ..........................................................151 Figure 65: GBI Terrestrial Fiber Optic Cable Link .........................................................................................167 Table of Contents ix Figure 66: JADI Terrestrial Fiber Optic Cable Link .......................................................................................168 Figure 67: International Tourists Arrivals 2003–2011 ....................................................................................180 Figure 68: International Tourism Receipts (current US$) ..............................................................................181 Figure 69: Travel and Tourism Direct Contribution to GDP (US$ billion) .....................................................181 Figure 70: Travel Services as a Share of Services Exports, 2005–2011 ........................................................181 Figure 71: Travel and Tourism Direct Contribution to Employment (‘000) ...................................................182 Figure 72: Impact of the Arab Spring on Tourism Flows ...............................................................................182 Figure 73: Air Transport, Passengers Carried 2003–2011 .............................................................................183 Figure 74: NTMs by Country and Sector ......................................................................................................193 Figure 75: Frequency Index and Coverage Ratio of NTMs ..........................................................................194 Figure 76: Turkey Frequency Index...............................................................................................................195 Figure 77: Turkey Coverage Ratio ................................................................................................................195 Figure 78: Iraq Frequency Index....................................................................................................................196 Figure 79: Iraq Coverage Ratio.....................................................................................................................196 Figure 80: Jordan Frequency Index ..............................................................................................................196 Figure 81: Jordan Coverage Ration ..............................................................................................................197 Figure 82: Lebanon Frequency Index ...........................................................................................................197 Figure 83: Lebanon Coverage Ratio .............................................................................................................197 Figure 84: Syria Frequency Index ..................................................................................................................197 Figure 85: Syria Coverage Ration ..................................................................................................................198 Figure 86: Egypt Frequency Index................................................................................................................198 Figure 87: Egypt Coverage Ratio .................................................................................................................198 Figure 88: Tunisia Frequency Index ..............................................................................................................199 Figure 89: Tunisia Coverage Ratio ................................................................................................................199 Figure 90: Libya Frequency Index .................................................................................................................199 Figure 91: Libya Coverage Ratio ..................................................................................................................199 Figure 92: Iran Frequency Index ...................................................................................................................200 Figure 93: Iran Coverage Ratio .....................................................................................................................200 LIST OF BOXES Box 1: International Communications Costs in the Levant .....................................................................161 Box 2: Euro-Mediterranean Partnership ................................................................................................214 ABBREVIATIONS AND ACRONYMS AAs Association Agreements DCFTA Deep and Comprehensive Free Trade ACAC Arab Civil Aviation Commission Agreements AGP Arab Gas Pipeline DFID Department for International AGROMAP Agro Market Access Program Development ALI Air Liberalization Index DPR Diversified Payments Rights AMU Arab Maghreb Union ECA Europe and Central Asia ASEAN Association of South-East Asian EDPA Export Development and Promotion Nations Agency ASEZA Aqaba Special Economic Zone EEC European Economic Community Authority EFSA Egyptian Financial Sector Authority ASYCUDA Automated System for Customs EFTA European Free Trade Association Data ENP European Neighborhood Policy ATFP Arab Trade Financing Program EPZ Export Processing Zone AVEs Ad-Valorem Equivalents EU European Union BIST Borsa Istanbul FDI Foreign Direct Investment BPO Business Process Outsourcing FTAs Free Trade Agreements BRSA Banking Regulatory and Supervisory FTZs Free Trade Zones Agency (Turkey) GAFTA Greater Arab Free Trade Agreement CE Conformite Europeene GATS General Agreement on Trade in CGE Computable General Equilibrium Services COLIBAC Council Libanais d’Accreditation GATT General Agreement on Tariffs and COMESA Common Market for Eastern and Trade Southern Africa GCC Gulf Cooperation Council COSQC Central Organization for Standardization GDP Gross Domestic Product and Quality Control GFTO General Foreign Trade CPA Coalition Provisional Authority Organization xi xii Over the Horizon: a New Levant GOFZ General Organization for Free MNE Multinational Enterprise Zones MoET Ministry of Economy and Trade GTAP Global Trade Analysis Project NAFTA North American Free Trade IA Investment Agreements Agreement IAC Investment Advisory Council NBFI Non-Bank Financial Institution ICAO International Civil Aviation NGOs Non-Government Organizations Organization NIC National Investment Commission ICSID International Center for Settlement of NIIC National Integrated Industries Investment Disputes Services ICT Information and Communication NPL Non-Performing Loan Technology NSSF National Social Security Fund IDAL Investment and Development Agency of NTMs Non-Tariff Measures Lebanon OECD Organization for Economic Cooperation IPZ Investment Projects by Zone and Development ISO International Organization for OIZ Organized Industrial Zone Standardization OLS Ordinary Least Squares IT Information Technology PAFTA Pan-Arab Free Trade Agreement JFDA Jordan Food and Drug PATH Product Distance Administration PET Polyethylene Terephthalate JIB Jordan Investment Board PP Primary Products JIEC Jordan Industrial Estates Corporation PPP Purchasing Power Parity JISM Jordan Institute for Standards and PRODY Average Productivity Content Metrology PSD Private Sector Development JTFTA Jordan-Turkey Free Trade PTAs Preferential Trade Agreements Agreement QIZs Qualifying Industrial Zones KOSGEB Small and Medium Enterprises R&D Research and Development (Turkey) RCA Revealed Comparative Advantage LAFTA Latin American Free Trade RE Renewable Energy Association ROA Return on Assets LAS League of Arab States SAPTA South Asian Association for Regional LBF Levant Business Forum Cooperation LFTZ Levant Free Trade Zone SASMO Syrian Arab Standards and Metrology LIBNOR Lebanese Standards Institution Organization LNG Liquefied Natural Gas SCT Special Consumption Tax MEDA Mediterranean Assembly SEBC Syria Enterprise and Business MENA Middle East and North Africa Center MFN Most Favored Nation SIA Syrian Investment Agency MIGA Multilateral Investment Guarantee SIC Supreme Investment Council Agency SIDA Swedish International Development MIM Ministry of Industry and Minerals Agency MIT Ministry of Industry and Trade SMEs Small and Medium Enterprises ABBREVIATIONS AND ACRONYMS xiii SPS Sanitary and Phytosanitary UNIDO United Nations Industrial Development STR Services Trade Restrictions Organization TBT Technical Barriers to Trade USAID U.S. Agency for International TDZ Technology Development Zone Development TIKA Turkish International Cooperation and VAT Value Added Tax Development Agency WBES World Bank Enterprise Survey TRI Tariff Restrictiveness Index WBG West Bank and Gaza TSE Turkish Standards Institution WITS World Integrated Trade Solution TTB Temporary Trade Barrier WTO World Trade Organization TURKAK Turkish Accreditation Agency YOIKK The Coordination Council for UNCTAD United Nations Conference on Trade and the Improvement of Investment Development Environment UNDP United Nations Development Program Vice President: Inger Andersen Country Director: Ferid Belhaj Sector Director: Manuela V. Ferro Sector Manager: Bernard G. Funck Task Team Leader: Sibel Kulaksiz ACKNOWLEDGEMENTS T his report was written by a team led by Sibel Kulaksiz (Task Team Leader and Senior Economist) and composed of Marc Schiffbauer (Economist), Hania Sahnoun (Consultant), Fahrettin Yagci (Con- sultant), Aaditya Mattoo (Research Manager), Elena Ianchovichina (Lead Economist), Maros Ivanic (Research Economist), Claire Hollweg (ET Consultant), Daria Taglioni (Senior Trade Economist), Ana Paula Cusolito (Trade Economist), Jean Francois Arvis (Senior Transport Economist), Olivier Cattaneo (Consultant), Carlo Maria Rossotto (Lead ICT Specialist), Joulan Abdul Khalek (Junior Professional Associate), Alexan- dra Liaplina (Consultant), V.K. Krishnaswamy (Consultant), Ahmet Soylemezoglu (Consultant), José-Dan- iel Reyes (Trade Economist), Russell Hillberry (Senior Economist), Chad Bown (Senior Economist), Caglar Ozden (Senior Economist), Eshrat Waris (Consultant), Pierre Sauvé (Director for External Programs and Aca- demic Partnerships, World Trade Institute), Anirudh Shingal (Senior Research Fellow, World Trade Institute), and Anca Cristea (Assistant Professor of Economics, University of Oregon). The report benefited from comments by peer review- Chambers of Commerce (FEDCOC), Jordan Cham- ers Jorge Araujo (Lead Economist), Mona Haddad (Sec- ber of Commerce, Levant Business Union (Lebanon), tor Manager), and Tony Ghorayeb (Secretary General of Foreign Economic Relations Board of Turkey (DEIK), Levant Business Union). Substantial contribution and Union of Chambers and Commodity Exchanges of Tur- feedback were received from Kamer Karakurum Ozdemir key (TOBB), Turkish Industry & Business Association (Senior Economist), Marina Wes (Lead Economist), (TUSIAD), Independent Industrialists’ and Business Shantayanan Devarajan (Chief Economist), Jean-Pierre Association of Turkey (MUSIAD), and Turkish-Syrian Chauffour (Lead Economist), Mariem Malouche (Se- Business Council. In addition, excellent collaboration nior Economist), Hossein Razavi (Consultant), Husam with the Economic Policy Research Foundation of Tur- Beides (Lead Energy Specialist), and Nancy Claire Ben- key (TEPAV) is gratefully acknowledged. jamin (Senior Economist). The report was prepared under the overall guidance The team is grateful for excellent partnership from and supervision of Ferid Belhaj (Country Director), Governments of Lebanon, Egypt, Turkey, Jordan, Iraq, Manuela Ferro (Sector Director), and Bernard Funck and the Palestinian Territories, and as well as private (Sector Manager). sector representatives from Federation of Egyptian xv EXECUTIVE SUMMARY C omplementarities between Egypt, Turkey, Jordan, Lebanon, Iraq, Syria, and the Palestinian Territo- ries are significant, pointing at substantial potential welfare gains from increased trade and invest- ments and economic integration. This group of seven countries, defined as the “New Levant” for the purposes of this study, appears to be well positioned to benefit from dynamic gains of integration given the geographical proximity to major markets. Furthermore, similarities in stages of economic development, resources endowment, or factor costs generate high potential to benefit from competitiveness and comple- mentarities. The volume and structure of trade and investment flows among the New Levant countries indi- cate that there are large untapped potentials for deeper and wider integration in the sub-region. This report discusses how to tap these large potentials for mutual benefit. Economic integration is one key means to benefit relations and political barriers to reform could go beyond from regional opportunities. Most of the countries in the current turmoil. This means turning to second- or the sub-region have some common challenges, including: third-best reform scenarios, which are reachable in the (i) limited diversification of production and exports, (ii) short-term in competitive sectors where public and pri- weak regional and global economic integration through vate sectors in the region are willing to act together for trade and investment, and (iii) large youth unemploy- the welfare benefit of the people. ment. Coordination among the Levant countries could A critical need to reduce regional uncertainty and help address common economic and social development revive investment and economic activity within the issues. Despite some progress toward economic integra- region—and thereby increase macroeconomic stabil- tion, albeit with political disruptions, there exists the po- ity—provides strong motivation. Governments in the tential for great benefit from further collaboration. An region are aware that there is an opportunity cost of not economic zone is an ultimate outcome for the medium to benefiting from untapped potentials. Although ongoing long term, but in the short term—given the current po- political and security issues in the sub-region have weak- litical situation—tangible results can be reached through ened integration efforts, the New Levant countries, both sub-regional cooperation in specific areas. Economic in- individually and collectively, have a clear interest in deep- tegration is the first-best scenario, but, the current po- ening economic and regulatory ties within the region, es- litical situation could further hurt the overall economic pecially in view of the security dividends implicit in closer xvii xviii Over the Horizon: a New Levant cooperation on the economic front. The Arab countries intermediate goods from the region. Egypt and Iraq are already have a trade agreement among themselves but well placed to attract capital investments from Turkey through deeper integration with Turkey and the rest of due to competitive labor costs. The gains from capital Europe, these countries can better integrate into global investments can be particularly high if domestic and in- and regional value chains that exploit their comparative ternational firms cooperate in joint ventures. advantage and take advantage of preferential treatment. However, despite growth in goods trade, Egypt and Increased trade and investment flows among the Turkey are still under-trading in the region relative to Levant countries can help promote growth and struc- fundamentals suggesting an untapped potential for both tural change in the region, thereby paving the way for countries to deepen their trade integration. The gravity the most efficient use of the region’s resources, value trade model developed for this report suggests a signifi- addition, human capital, and diffusion of technology. cant untapped potential for Egypt and Turkey to deepen Trading partners can benefit from complementarities their trade integration in the region. For both countries, and competitiveness through regional trade integration. actual realized trade flows are lower than predicted by As Turkey, Lebanon, or Jordan climb up the ladder of trade fundamentals in the model, which is an indication their dynamic comparative advantage, more labor-in- of under-trading. Regional bilateral exports to these two tensive industries can potentially move to lower wage countries are also less than what is expected given their countries such as Syria and Egypt. These developments economic structures. In fact, Jordan, Lebanon, and Tunisia have already started in the textile and garments sector, in are under-exporting to both countries. Also, another inter- particular in Syria before the start of the 2011 upheavals. esting finding is that Egypt does not over-trade with any Conversely, higher wage countries such as Lebanon and regional partner. In contrast, the results show that Jordan Jordan can benefit from technology spillovers from Turk- and Iraq are over-trading (both in exports and imports), ish investors in exchange for providing access to regional and Iran and Iraq are over-exporting to Turkey. market and distribution networks. In addition to Egypt-Turkey prospects, there are Egypt and Turkey are potential growth poles for significant economic complementarities and trade and the sub-region with possible spillover effects investment potentials among other Levant countries Egypt and Turkey are poised to form substantial Intra-group trade among Egypt, Jordan, Lebanon, growth poles for a more open economic space in the Syria, Iraq, and Turkey has increased substantially sub-region. During the last decade, Egypt has expe- in the past 10 years.1 Primary trends in regional trade rienced a promising rise of trade in goods with Turkey flows show that intra-group trade among these countries and other regional partners. Egypt provides an import- increased seven-fold from US$4.2 billion in 2000/02 ant connection to Arab markets, especially while con- (three year average) to US$29.7 billion in 2008/10. flict continues in Syria. At the same time, Turkey pro- This significant increase in intra-group trade partly re- vides a large and geographically close potential market flects the improvement in the policy environment so far. for Arab countries’ goods and services. Turkey is a suc- Regional trade flows have responded positively to previ- cessful example of combining trade liberalization with ous liberalizations of trade regimes. Export growth took economic reforms to generate robust economic growth place both on the intensive margin (exporting more of and development. All countries can benefit from ex- the same product) and extensive margin (exporting new ploiting economic complementarities in the sub-region products) as indicated by both increased value and num- through specialization in their most productive sectors, ber of products exported by all countries. Turkey had integrating further in foreign direct investment (FDI) and value chains, and importing low-cost consumer and 1 Data on the Palestinian Territories are not available. EXECUTIVE SUMMARY xix the largest increase in intra-group trade both in terms of 2003 and 2010 except for Turkish FDI flows into Iraq. value (over 13-fold) and number of products (six-fold) But, it is important to note that GCC will remain as a from 2000–02 to 2008–10. In terms of value increase, potential source of capital to the entire Levant region. Lebanon ranks second at about 11-fold, Syria ranks third The potential for intra-group trade has increased at over eight-fold, Iraq ranks fourth at three-fold, and since 2001 and has reached levels comparable to re- Jordan ranks fifth at over two-fold. gions that have a history of successful multilateral Despite this high growth, there is still significant trade agreements. To assess how well the export structure untapped potential in terms of bilateral trade flows in of one country matches the import structure of trading the Levant. The combined share of Turkish exports to partner, trade complementarity indices are estimated at Jordan, Lebanon, Syria, and Iraq accounted, on average, the aggregate level. The results show that, in particular, for only 6.6 percent of total Turkish exports in 2008/10. the prospects of Levant countries to increase exports to Likewise, exports of Mashreq countries to other Arab Iraq and Turkey improved substantially. The increase in countries, including the Gulf, are much more signifi- the export potentials to Turkey reflects that these coun- cant than exports destined for Turkey; Lebanon has the tries’ manufacturing exports tended to diversify into highest share of exports destined for Turkey at 4.2 per- products that Turkey imports. The substantial increase cent, exceeding the value of Lebanese export destined in export potential to Iraq reflects the stark increase in for Iraq or Jordan. But there are substantial differences the number of goods that Iraq imports since the second even among the Arab countries. The high bilateral export Gulf war. The analysis also shows that Jordan and Leba- shares between Syria and Lebanon, respectively, as well non have a relatively good potential to export to Iran and as the high share of Syrian or Jordanian exports to Iraq Libya. The potential to export to Tunisia increased for stand out; in contrast, bilateral trade between Jordan and almost all countries. The findings show that trade com- Lebanon is still relatively limited. plementarities among Levant countries are relatively high Similar to potential in higher regional trade flows, and comparable to index levels among countries that his- there is a great opportunity for expansion of foreign di- torically formed successful regional trade agreements. The rect investments. FDI inflows are currently concentrated six founding members of the European Economic Com- in real estate, construction, tourism, and oil sectors. The munity (EEC) had an average trade complementarity in- Gulf Cooperation Council (GCC) countries were by far dex of 53 when they signed the agreement; the free trade the most important investors into Arab countries. Total area between Canada and the U.S. had a founding value investments from the GCC between 2003 and 2010 rep- of 64. The index for the Eastern enlargement (Bulgaria, resented 75 percent of total FDI inflows for Lebanon, Hungary, Poland, Czech Republic, and Slovak Republic) 69 percent for Jordan, 61 percent for Syria, 59 percent of the European Union (EU) was 61. As a comparison, for Egypt, and 46 percent for Iraq. FDI from GCC coun- Turkey, Egypt, Jordan, Lebanon, Syria, and Iraq are rela- tries into Turkey accounted for nine percent of Turkey’s tively well positioned for a regional trade agreement with total FDI inflows. In the oil importing countries with trade complementarity indices of 40–50 on average. strong GCC links, such as Lebanon and Jordan, the share of FDI in GDP increased considerably. For instance, the The structure and specialization of countries’ share of FDI in total gross fixed investment is high by exports baskets are changing international comparisons in Jordan and Lebanon where The Levant countries are specializing in different it was over 40 percent on average between 2005 and products within traditional as well as modern man- 2010, compared to 10 percent in Syria. Regional FDI ufacturing industries. Revealed comparative advan- flows within the Levant remained relatively low between tages (RCA) show that apart from Iraq, recent export xx Over the Horizon: a New Levant performances reveal a diversification from traditional The overall degree of export sophistication in Arab sectors towards new, potentially higher value added countries has shown some progress over the last decade, sectors in all Levant countries. Nevertheless, traditional however the performance is weak. The export baskets of sectors (i.e., food, textiles, garments and footwear, and Jordan, Lebanon, Syria, and Egypt have slowly started to mineral goods) are still dominant in the sub-region. become somewhat more sophisticated. However, com- There appears to be direct competition for regional and pared to exporters in Turkey and fast-growing East Asian world markets shares in traditional export sectors among countries, Arab firms show only weak export diversifica- Lebanon, Turkey, Jordan, Syria, and Egypt. Product lev- tion towards higher productivity products. el export performances suggest a pattern whereby re- gional manufacturing for several products in traditional There are potentials for firms in the Levant to industries shifted from Lebanon and Jordan to Egypt diversify into higher value added industries and to a lesser degree Syria between 2000 and 2010. In through economic complementarities contrast, Turkey maintained strong export performanc- Country-specific diversification potentials complement es in predominately traditional products and industries, each other. The product space analysis presents potential and even expanded its share in world markets in some economic complementarities in more detail at the industry cases. Egypt experienced strong export growth in pre- and product level. Turkey is the most diversified country dominantly low technology industries. Nevertheless, in terms of manufacturing in the region as well as a po- the industry level export data also suggests potential for tentially large source of demand, foreign investment, or increased intra-regional trade, in part for manufactur- productivity (technology) spillovers. Products manufac- ing sectors that have a higher potential for productivity. tured in the relatively lower wage countries—Egypt and Jordan maintained a strong export performance Syria—experienced a strong increase in competitiveness in several chemical products including medicaments. in similar industries, with the potential to benefit strongly Jordan is successfully exporting medicaments; these are from more trade and investment integration with Turkey. mostly generic drugs with relatively lower profit mar- In particular, there are large potential gains from knowl- gins but recently the pharmaceutical firms in Jordan are edge and technology spillovers through integrated produc- attempting to move up the value chain by developing tion chains with Turkish manufacturers; the latter could, patents. Between 2005 and 2009, Jordanian firms faced in turn, benefit from low local wage costs and duty- and increasing regional competition from low cost generic quota-free access to Arab markets. Jordanian and Lebanese drugs produced in Syria. Jordan has an RCA exporting exports were already fairly diversified in the 1990s, in par- pharmaceuticals. Turkey is a large potential market for ticular in core manufacturing industry clusters, but diver- Jordanian pharmaceuticals, which are already exported sification has stagnated since. Both countries must special- to Lebanon.2 ize in higher value-added manufacturing niches to escape regional and international cost competition in traditional However, the overall degree of export export sectors. Nevertheless, in manufacturing industries sophistication has not moved significantly there are significant potential gains from trade and invest- towards higher value goods in terms of ment integration between Jordan, Lebanon, and Turkey. knowledge or technology content Iraq has the least diversified export basket; it is highly con- centrated in petroleum products. Tunisia’s export structure 2 However, there exists a domestic Turkish pharmaceutical indus- is more diversified than Egypt’s or Syria’s, while its man- try, which primarily targets the domestic market and appears to be de facto protected by non-tariff barriers from Jordanian ufacturing exports focus on the European market where products. Tunisia will potentially compete with Turkey. EXECUTIVE SUMMARY xxi Significant economic complementarities and Turkey, reforms will either have no effect or, in the case of trade and investment potentials in the sub- services liberalization, will have a small negative impact on region will provide welfare benefits for all aggregate exports. Services liberalization in Turkey’s trade countries involved with Levant partners is expected to affect the construction The benefits of expanding economic ties in the Levant sector. The productivity boost expected in construction will be significant for all countries in the sub-region. will stimulate domestic activity in Turkey, but not exports. To assess the medium-term economic effects of reforms In the other Levant countries, the impact on aggregate aimed at deepening of trade relations in the sub-region, exports will be positive under all scenarios, but the magni- a computable general equilibrium (CGE) model is de- tude of the effect will be sizable only in the case of services veloped for the purposes of this study and consideration liberalization. Agricultural liberalization and improved is given to four scenarios emphasizing different aspects transport logistics will boost bilateral exports of farm and of trade relations among Egypt, Iraq, Jordan, Lebanon, processed food products among Levant countries. Re- Syria and Turkey:3 (i) the removal of tariffs on agricul- ducing the restrictiveness of NTMs will increase exports tural goods and processed food; (ii) reducing the restric- of farm, petroleum, resource-based, and metal products tiveness of non-tariff measures (NTMs); (iii) liberalizing from Turkey, manufactures from Jordan and Lebanon, transport services in the zone, resulting in reduced trade and crude oil, petroleum, and manufactures from Syria. transport costs; and (iv) services trade liberalization with- Services liberalization will improve the supply response in the zone. As it becomes established, the benefits of es- and encourage services exports from Jordan, Lebanon, tablishing a zone will increase with the deepening of the and Syria. The effect on Iraq’s exports will be negligible. commitments. In all cases, the trade effects for some sec- tors are expected to be sizable. Levant countries are esti- There is high potential in the Levant to mated to gain in welfare terms under all policy scenarios. integrate further through services trade, and Potential welfare gains accrue to all countries un- liberalization in the services sector is critical der the scenarios of deepening economic integration, for all countries to benefit from potential but the impacts on aggregate welfare and export vol- welfare gains The centrality of services to the economic structure of umes of reforms are estimated to be larger in the case the Levant region offers a compelling motivation for of services liberalization. The welfare gains from ser- devising a cooperation agenda aimed at facilitating vices liberalization will represent the lion’s share of all expanded services trade and the adoption of compe- gains associated with the four reform scenarios. With a tition-enhancing regulatory regimes. There is a clear cumulative welfare increase of US$12 billion (11 percent preponderance of the service sector in the Levant in both increase in welfare), Egypt is expected to benefit the most aggregate output and employment terms. During the last in absolute terms, while Iraq will likely gain the most in decade, services exports exhibited the fastest growth in relative terms as its welfare rises by almost 17 percent or Jordan, Lebanon, and Syria. Jordan and Lebanon have US$2.5 billion, followed by Syria (11.6 percent increase), large services sectors and show strong export perfor- Jordan (6.5 percent increase), and Lebanon (3.3 percent mance. Services trade in the Levant has been dominat- increase). Turkey will garner close to US$10 billion, ed by travel, transport, and other services but exports which due to its large size translate into a 1.7 percent of communication, financial, and insurance services increase in per capita income. Nearly all of these gains are a result of deeper integration through services trade. The impact on exports varies by country, sector, and 3 The model excludes the Palestinian Territories because of lack of reform instrument, and is sizable for some sectors. In data. xxii Over the Horizon: a New Levant witnessed more rapid change over the last decade. Pros- a deeper regional integration in the services trade, the pects of competitiveness are also favorable. The Levant Levant countries should make significant cooperation countries have revealed comparative advantages in at and liberalization efforts. As measured in this report, in- least one services sector. Egypt, Iraq, Jordan, Lebanon, tra-regional integration of services markets will be (net) Syria, Turkey, and the Palestinian Territories have a com- welfare-improving for all Levant countries. While lib- parative advantage in the export of travel services. In eralization of services offers direct benefits much like it addition, transport services stand out as a sector where does for goods trade, the policy literature suggests that Egypt, Jordan, and Turkey possess a revealed compara- more pervasive systemic benefits are likely to stem from tive advantage in exporting. Besides travel services, Leb- the positive impact of services liberalization on manufac- anon has comparative advantages in the financial sector, turing productivity. The benefits from services liberaliza- along with construction and computer services exports. tion for the Levant countries will certainly be larger than However, Levant countries are not benefiting fully those deriving from goods trade liberalization. These is- from regional opportunities because of restrictiveness sues need to command greater attention among regional of services trade policies. Egypt stands out for the high policy makers. level of restrictiveness of its applied regulatory regimes in Throughout the Middle East and North Africa services. Lebanon has the highest level of restrictiveness (MENA) region, policy makers confront a number of in cross-border supply. All Levant countries have highly common challenges calling for collective action ini- restrictive regulatory regimes governing the temporary tiatives and the supply of regional public goods able mobility of services providers. The sub-region is charac- to tackle the region’s most pressing needs. Several such terized by the paucity of mutual recognition initiatives challenges appear amenable to service-centric responses aimed at facilitating the mobility of skilled professionals. and policy reforms including the need to promote great- Egypt and Turkey stand out for the high level of restric- er market integration across a range of service industries tiveness of their applied regulatory regimes in movement through efforts aimed at enhancing investment climates of natural persons. When compared globally in services and initiating the progressive dismantling of key obsta- regulation, the sub-region ranks among the world’s most cles to trade and investment in services. In the services restricted in services trade, with an aggregate level of re- realm, cooperation in the Levant entails the possibility strictiveness across all sectors and modes of supply. of preferential negotiations with the Gulf Cooperation A major issue emerging from the restrictiveness of Council (GCC) and an intensification of efforts under services regimes in the Levant concerns the preference existing regional agreements. Expanded service exports of governmental authorities to retain a considerable are most likely to arise from higher quality regulatory en- degree of policy autonomy and regulatory discretion. vironments. For this to occur, Levant governments must Even in areas that are free of explicit restrictions, de strive to improve the quality of regulatory institutions jure openness may not always imply or translate into a and endow them with adequate resources and requisite commensurate degree of de facto openness. Across dif- competencies. ferent sectors, the allocation of new operating licenses remains unduly discretionary in many countries. A key Liberalization of trade in financial services reform issue is therefore how regulatory discretion can would help Levant countries take advantage be reconciled with the need to have clear rules for service of regional opportunities providers. An analysis of financial services trade in the sub-region There is a clear need for greater multilateral ef- reveals that Lebanese and Jordanian financial institu- forts towards services liberalization in the region. For tions have the potential to grow further. Development EXECUTIVE SUMMARY xxiii of cross-border financial services activities exhibits a There is a clear need to focus on the energy rather more asymmetric picture than that of merchan- sector to stimulate private sector growth and dise trade activities between Turkey and MENA region to benefit more from regional economic countries. There are eight fully licensed MENA-origin opportunities banks now operating in Turkey. These banks are head- The demand for energy, especially in the electricity sec- quartered in Lebanon, Jordan, Libya, and the GCC. tor, is high in the region; however there are bottlenecks It is especially noteworthy that Lebanese and Jordani- in expanding the capacity of electricity generation. A an financial institutions are the most active in region- range of electricity interconnection infrastructure exists al activities. The activities of these banks demonstrate among the grids of Mashreq countries (Iraq, Syria, Leb- trade-in-services opportunities from increased regional anon, Jordan, Egypt, and the Palestinian Territories), economic activity for those economies of the region that Maghreb countries (Libya and Tunisia) and outlying have relatively less natural resource endowment. These countries (Turkey and Iran). Tunisia (along with Alge- banks also play important intermediary role between ria and Morocco) is interconnected to the European grid the large capital pool in the Gulf area and the biggest and operates synchronously with them. The Mashreq economy of the region, which has a considerable current countries and Turkey have been trading electricity for account deficit. All of these observations reveal substan- over a decade and a half, though the volume of trade is tial and multi-dimensional benefits accruing to all sides far below the potential. The main bottleneck is a shortage from enhanced economic linkages between Turkey and of power in most of the Mashreq countries and the in- MENA region. ability to add capacities based on gas, which, during the Proceeding with necessary financial sector reforms past decade has become scarce and much higher priced as well as maintaining of macro-financial frameworks than before. Rapidly rising electricity and gas demand which are conducive to support the reform process is in Egypt has rendered the only two existing regional gas essential. Financial institutions of the region provide pipelines (the Arab gas pipeline and Arish-Ashkelon gas fairly adequate payment related services such as foreign pipeline), practically unutilized. exchange and fund transfers services to support the cur- The Mashreq countries need to compete in the in- rent trade volumes. However, financial sectors lack depth ternational market place for gas. The sub-region needs and breadth virtually all across the region. The systems additional transmission lines to relieve local bottlenecks mainly consist of commercial banks because non-bank for cross border flows and also it needs to sharply im- financial services are underdeveloped. Consequently, fi- prove its ability to operate the grids synchronously in a nancial backing of trade transactions is weak. The lack of sustained fashion through upgrades of grid codes and reg- cross-border financial intelligence services and effective ulatory arrangements. Gas trade infrastructure, by way contract enforcement mechanisms also render proper of liquefied natural gas (LNG) import terminals exist in risk assessment very difficult, if not impossible. Thus, Turkey, are being constructed/pursued in Jordan, Egypt, provisioning of cross-border trade credit becomes scarce Lebanon, and Syria, and are planned in Iraq. These will as well. It should also be noted that financial prices in support the growth of LNG trade. The Mashreq region many countries are hardly market determined. Although has large gas reserves, and 94 percent of these reserves are the mechanisms employed to set these prices provide in two countries, Iraq and Egypt. However, both Egypt some sort of stability, the possibility and/or probabili- and Iraq face significant constraints in expanding their ty of relatively large discrete movements in key financial gas production capacity to meet the demand. For Egypt prices bring about another element of risk for financial the constraint is the size of its gas reserves, and for Iraq market participants. the constraint is its implementation capacity. Iraq has the xxiv Over the Horizon: a New Levant potential to develop as a major supplier of pipeline gas. A benchmarks in terms of trade performance have inter- positive development is the discovery of offshore gas for national communications prices that are up to ten times Lebanon. It is estimated that the technically recoverable cheaper compared to some of the Levant countries. Tur- hydrocarbon reserves in the Levant basin region covering key is the leader in the region, with international com- 83,000 sq.km in the Eastern Mediterranean (Lebanon, munications charges about 11 times cheaper than Tuni- Israel, Cyprus, Turkey, Egypt, and Syria have territorial sia. A reform path similar to the one followed by Turkey stakes in this region) at around 1,689 million barrels of in telecommunications is a condition for higher trade oil and 122.4 tcf (3.5tcm) of gas. Significant natural gas development and integration in the sub-region. IT is an discoveries have been made in the offshore areas of Israel enabler of complex supply chain integration. The region (especially in the Leviathan field), and in 2010 a U.S. can benefit from enhanced business process outsourcing hydrocarbon exploring company confirmed the com- that apply specifically to the textile and automobile man- mercial viability of the gas deposits. Lebanon planned ufacturing industries if appropriate reform is introduced to divide its offshore area into blocks and carry out in- in the telecom and broadband sector. ternational rounds of biddings to award exploration and Government policies are needed to enhance invest- production contracts. ment in telecom infrastructure and to reduce prices. A low-cost, high-speed Internet infrastructure is import- Connectivity can be improved through ICT ant to facilitate integration. There is a great potential to and transport services be realized from enhanced interconnectivity among the There are complementarities to be realized from trade Levant countries. To reach this goal, countries in the in information technology (IT) services in addition to sub-region need to strengthen competitiveness in tele- the benefits of enhanced information and communi- communications, following the examples of Jordan and cations technology (ICT) services as an enabling plat- Turkey. The removal of existing entry barriers would cre- form for trade in other sectors. There is a large oppor- ate a favorable environment for regional and sub-region- tunity for telecommunications services trade. In some of al investment in broadband infrastructure. This would the Levant countries, FDI in telecommunications has translate in a rapid decline of the price of international represented up to 40 to 50 percent of all FDI in the past communications. Lebanon could take the opportunity few years. Also, there is a strong opportunity for the mo- to move to 3G and 4G services. The migration to broad- bile app and software markets to grow beyond national band in a liberalized environment will be an essential borders and create greater value added at a regional lev- priority for the Levant region, but will involve the man- el, benefiting from larger economy of scales. However, agement of a political and economic transition. the region is lagging behind the world in crowdsourcing, Current air passenger traffic levels in the region which could otherwise have a great potential for job cre- are low, however higher growth rates have been ob- ation through ICT-enabled trade of professional services. served in recent years in selected regional markets, There is limited scope for trade in hardware, or to devel- suggesting that fast growth is possible. Indeed, air pas- op a hardware industry for export purposes. senger markets in the Middle East are changing rap- In addition to being an important sector of the idly. Turkey, which aspires to serve the region as a hub, economy, ICT, and broadband in particular, is a pow- has seen rapid growth in air passenger traffic, within the erful enabler of trade development. Wallsten (2007) region and with the rest of the world. Turkey is in fact estimates that a 10 percent increase in broadband pen- already emerging as a de facto hub with striking increases etration is associated with an increase in exports by over in traffic in recent years with all countries in the region, 4 percent. Countries traditionally identified as superior including Iran. This growth has occurred despite the fact EXECUTIVE SUMMARY xxv that Turkey still has more restrictive bilateral air services the amount of spending per tourist, and diversifying the agreements with many countries of the region than those origin of the tourists. Possible sub-regional cooperation countries have with each other. Turkey is not a member could focus on different themes, such as infrastructure of the plurilateral arrangement that governs air passenger and transport, regulation of the hospitality sector (norms, traffic between most of the Arab states: the Inter-Arab quality), ease of transit and movement of people (visas, Freedom of the Air Programme of the Arab Civil Avia- open sky agreements), and training. A regional tourism tion Commission (ACAC). Instead, World Trade Orga- cluster could make use of the tourism complementari- nization (WTO) measures suggest that Turkey’s bilateral ties and promote tourism in the region. The promotion passenger traffic arrangements with these countries are of complementarities would help to develop the diverse quite restrictive. Moreover, the ACAC agreement seems tourism offers that are sought after by the new genera- to not have lived up to its potential and has been less tion of tourists. liberal in practice than its formal terms would suggest. There is a need for reforms in the tourism sector es- More liberal policies are associated with more pecially after the Arab Spring disruptions. The tourism passenger traffic, but this relationship is substantially sector in the Levant took a sharp hit as a consequence weaker in plurilateral arrangements like the ACAC. of the Arab Spring and economic instability in Europe. A gravity model was estimated for the purposes of this Between 2010 and 2011, tourist arrivals decreased by work analyzing the links between bilateral traffic and 32.4 percent in Egypt, and Syria’s tourism sector’s con- policy while controlling for other determinants of traffic. tribution to Gross Domestic Product (GDP) declined by A set of empirical models of air passenger traffic was used US$1 billion. To recover from the crisis and to benefit in order to better understand the relationship between more from complementarities, efforts are needed at the air transport policy and international traffic. WTO in- sub-regional level. The facilitation and growth of the dex measures of policy commitments in both bilateral tourism sector in the Levant requires the removal of ob- and plurilateral air services agreements were used, and stacles. This includes tourism services, but also a range measures were related to International Civil Aviation of other services critical to tourism, such as transport, Organization (ICAO) data on air passenger traffic. The energy, ICT, or financial services. While most countries results suggest that there are significant gains (in terms of have unilaterally removed obstacles to trade in the tour- higher likelihood of direct flights and the magnitude of ism sector, there remain a number of restrictions on all passenger traffic) to be had from establishing and fully modes of tourism services supply. Domestic reforms implementing a regional open skies agreement. alone will not suffice to increase the countries’ competi- tiveness in the tourism sector. Tourism should be part of Tourism services should be part of regional the regional trade agreements’ priorities for action and trade arrangements to recover and reform the adequate instances should be put in place to promote it. sector In tourism services, beyond the already existing links, Trade in services and foreign direct there is a case for further integration in the sub-region investments require mobility of the skilled and the promotion of complementarities to develop labor for a deeper economic integration a more complete tourism offer. Coordination among The Levant countries have highly restrictive regulatory the Levant countries can improve competitiveness and regimes governing the temporary mobility of services increase the attractiveness of the sub-region by provid- providers. There is strong evidence showing that labor ing a wider range of tourism offerings and packages and market restrictions are imposing a much greater bur- contribute to boosting tourism receipts by increasing den on the global economy than the remaining trade xxvi Over the Horizon: a New Levant restrictions. The gains from integration—in goods, Labor mobility should be managed within a re- capital and people—are based on harnessing econom- gional framework where the sending and receiving ic advantage from differences in endowments. While countries coordinate their policies and actions so that General Agreement on Trade in Services (GATS) Mode efficiency gains are maximized for all parties involved 4 suppliers are typically subjected worldwide to the most while the potential distortions and disruptions are min- acute regulatory hurdles, the level of restrictiveness in the imized. Regional cooperation helps in creating opportu- Levant countries attests to a region of highly fragment- nities for better-managed cross-border labor movement. ed labor markets, weak employment performance, and Coordination is crucial to construct a viable legal frame- high unemployment (particularly among skilled youth), work which will achieve multiple objectives: (i) help to reflecting in turn a structural mismatch between labor prevent concerns about undocumented migration which market needs and the supply of skills emanating from is one of the main sources of political opposition in Eu- tertiary educational institutions throughout much of the rope to any relaxation of migration restrictions, (ii) lead region. The Levant, like MENA more broadly, is charac- to stronger protection of the migrants’ rights, including terized by the paucity of mutual recognition initiatives social protection and pensions; and (iii) lower all trans- aimed at facilitating the mobility of skilled professionals. actions and implementation costs required to establish Egypt and Turkey stand out for the high level of restric- and maintain labor mobility agreements which can be tiveness of their applied regulatory regimes in movement significant if done unilaterally. Despite the technical and of natural persons. For a deeper regional integration in conceptual limitations of the GATS Mode 4, it remains the services trade, the Levant countries should make sig- the only collective action response to labor migration nificant cooperation and liberalization efforts on labor governance issues. It is therefore worth preserving and mobility issues. empowering this mechanism; one way to do so would Demographic forces provide “arbitrage” opportu- be to move the focus towards “contract-based” move- nities for the Levant where skilled labor can move as ment of service suppliers rather than employment-based part of services trade or FDI skills-transfer to facili- movement. The advantage of contract-based movement tate economic integration. The Mediterranean area is in is that it would help make temporariness more credible a critical stage in terms of regional integration of labor as contracts would be time bound and between firms; markets. Many countries in Europe are facing rapidly in addition it would allow workers to be hired based on aging populations that will be accompanied by shrink- competence and performance. ing labor forces in the next decade. Even though most of them have entered their own demographic transitions There are significant barriers to trade in with declining fertility rates, most countries of Southern the Levant, not allowing countries to reach and Eastern Mediterranean still have relatively young their potentials and to benefit from regional and educated populations who are facing bleak labor economic opportunities market prospects. These current diverging patterns are With global economic liberalization and reduction of creating unique welfare enhancing “arbitrage” opportu- tariff protection, the potential for non-tariff measures nities for the region where skilled labor can move as part to act as trade barriers has increased in the last decade. of services trade or FDI skills-transfer to facilitate eco- NTMs are policy measures and do not have necessarily nomic integration. Given the geographic proximity and a trade protectionist intent, and can be introduced to historical migration trends, there are potential demo- achieve other policy objectives such as to preserve human graphic benefits of increased mobility between Europe health or the environment. In fact, NTMs can promote and within the Levant. trade by providing consumers with information, limiting EXECUTIVE SUMMARY xxvii transaction costs, facilitating comparison and reducing Syria’s food sector affecting 78.2 percent of the product uncertainty. Therefore, not all NTMs are barriers, and lines; while TBT is relevant in the chemicals sector cor- the challenge with NTMs is to make them the least responding to 73.1 percent of the product lines. The im- trade restrictive while achieving other important policy pact of NTMs in Lebanon is very low. The effect of SPS objectives. in Lebanon’s food sector is below the average for the re- NTMs may have the potential to create market ac- gion, 11.7 percent. TBT is mainly imposed in chemicals cess barriers especially for companies from developing (24.4 percent), and textiles and footwear (30.9 percent). markets. For instance, compliance with the technical re- Among the trading partners, the sub-region’s ex- quirement of destination countries can necessitate invest- ports are highly exposed to NTMs in China and the ment in production facilities, in design, and in packaging EU. The Levant countries’ exports to the European of the final product. Demonstration of compliance with Union are primarily affected by TBTs. The coverage ratio the technical requirements often calls for certification ranges from 77.1 percent of exports from Jordan to al- either because exporting countries do not have interna- most 100 percent of exports from Iraq, Syria, and Egypt. tionally recognized certification bodies and laboratories Among the trading partners, almost all of sub-region’s or because the destination countries do not recognize exports to China are subject to many forms of NTMs. international certificates. Pre-shipment inspection and 100 percent of the exports from Turkey to China are af- other formalities are frequently associated with time de- fected by regulations such as SPS, TBT, price and quan- lays that can be substantial in developing countries due titative controls, and anti-competitive regulations. The to lack of infrastructure and qualified personnel. The pri- exposure of Turkish exports to TBT in Europe is also vate sector often complains about the related procedures, high accounting for 87 percent of the exported products. delays, cost, and corruption. Suppliers of fresh vegetables The impact of NTMs on Egypt’s exports to Lebanon is and fruits are particularly vulnerable since the shelf life of negligible; but TBTs have a large effect on Egypt’s trade their product is very limited. with the EU. Charges, taxes, and other para-tariff regula- Most of the NTMs in the MENA region material- tions, as well as pre-shipment inspection in Tunisia affect ize in the form of sanitary and phytosanitary measures 43 percent of Egypt’s trade flows. More than 90 percent or technical barriers to trade depending on the sector. of Syria’s exports flowing into the EU, Egypt, and China The first type of regulation is important in the food are vulnerable to TBT regulations. Charges, taxes, and sector, affecting 60.5 percent of the product lines that para-tariff measures impact 46 percent of Jordan’s ex- belong to this category. The impact of technical barriers ports to Egypt. to trade (TBT) ranges from15.1 percent of the product Dealing with market access barriers such as NTMs lines in the food industry, and 49 percent in the chemical is not an easy task. There are, however, certain policies sector. In addition, pre-shipment inspection is important that countries can implement to help deal with this is- in the food sector affecting 30 percent of the product sue. First, countries can follow an offensive strategy to lines. Egypt’s NTM pattern resembles the average of the improve market access through bilateral negotiations fo- region. Sanitary and phytosanitary (SPS) measures affect cused on particular products or sectors. This can consist 72.1 percent of the product lines in the food category. of mutual recognition of standards and certifications or However, the relevance of TBT is higher in Egypt than preferential treatment. Under mutual recognition, each the average of MENA, ranging from 54.7 percent of the government has sovereignty over its own technical reg- product lines in the food industry to 99.1 percent in the ulations but a limited ability to project those policies base metal category. Syria’s NTM structure reveals high onto its trading partners. Third, countries can choose regulations in food and chemicals. SPS is important in the standards of their trading partners on products for xxviii Over the Horizon: a New Levant which there is a huge market potential. However, this states. Together with inefficient trucking industries, the may impose additional costs to local producers that are associated transit regime causes significant impediment not exporting to the countries whose standards were to sub-regional integration and to the improvement of adopted. It is important to involve the private sector in trade competitiveness. Although there is some develop- order to identify areas where negotiations can lead to fa- ment in customs modernization in the sub-region, dif- vorable outcomes for developing countries. In addition, ferences in customs reform targets of individual coun- since many of problems are related to implementation at tries, depending on whether control or implementation the border, a trade facilitation agenda aimed at speeding techniques are influenced by EU practices or not, might up the clearance process and avoiding duplication of re- create a problem for cross-border harmonization in the quirements can also help to reduce NTMs. Levant. Apart from the GCC, which is already a single The MENA region suffers from high trade costs market, little has been done to facilitate cross-border mostly due to supply chain inefficiencies and weak trade trade between neighbors and along trade corridors. facilitation framework, including transport services The Levant countries are particularly weak in lo- and customs procedures. A way to assess the integration gistics performance for customs, infrastructure, and the of countries is to refer to trade costs. Trade costs represent ability to track and trace consignments. An empirical the price wedge between domestic consumption and trade investigation of World Bank indicators of logistics per- with another country. Bilateral trade costs capture the ob- formance suggests that countries in the region have sub- vious impact of distance but also the effect of the “thick- par logistics systems, but they do not lag too far behind ness” of the border of each of the countries: trade facilita- expected levels of performance. A cross-country model of tion, trade policy, connectivity, and logistics. The cost of logistics performance for the Levant region suggests that, trade between neighbors is typically twice as high among on a 5-point scale, the sub-region lags expected logistics MENA countries as compared with those in Western Eu- performance by 0.25 points. This average level of un- rope. Trade costs are consistently higher for agricultural derperformance obscures some important heterogeneity, products. On the other hand, Turkey has had a declining however. Iraq has logistics performance measures that lie trend of its trade costs with its partners, reflecting the in- well below the model prediction. Egypt also lags signifi- creased competitiveness of Turkish economy. Turkey has cantly, but not to the same degree. A more detailed as- its lowest costs with EU countries and Israel. However, sessment of the logistics performance measures indicates trade costs with Arab countries, even adjusting for dis- that the sub-region is especially weak in three of six cat- tance, are typically 80–100 percent higher, including with egories of logistics performance: customs, infrastructure, the nearby Arab countries in Western Asia. and the ability to track and trace consignments. Egypt Trade facilitation and logistics issues constitute and Iraq underperform across most all areas of logistics important barriers to deeper integration of countries performance. Tracking and tracing is an area of weakness at a sub-regional level. These factors affect the compet- in almost every country in the sub-region. Lebanon is itiveness of the Levant countries. The major issues are unusual in that it scores well above the model prediction deficits in logistics performance and facilitation bottle- in one sub-category—logistics competence. More broad- necks. Infrastructure is a less significant issue in the re- ly it appears that Lebanon outperforms its peer countries gion compared with constraints related to trade processes in that category. and the low quality of logistics services. In addition, the transit traffic has been especially affected by the absence Although current regional trade agreements of active cross-border cooperation, resulting in very heavy generated some positive impacts, they were and delay-prone control systems at borders between Arab unable to remove obstacles EXECUTIVE SUMMARY xxix In addition to their bilateral free trade agreements implementation capacity of the signatories or lack of en- (FTAs), the countries in the sub-region participate in a forcement and implementation mechanisms accompa- number of regional integration arrangements. Turkey’s nying the agreements. In particular, with the exception role is important in current dynamics. Furthermore, of Pan-Arab Free Trade Agreement (PAFTA) and Aga- the EU is an important partner affecting the overall dir, existing regional agreements cover essentially trade picture and the potential incentives. Turkey joined the in industrial goods and target elimination of tariffs as EU Customs Union in 1996. Egypt, Jordan and Leb- binding legal commitments.4 As a result, the agreements anon concluded Association Agreements (AA) with the have led to “shallow” integration. Exclusion of services EU in 2001, 2002 and 2006, respectively, as part of the and agriculture from integration undermined the trade Euro-Mediterranean (Euro-Med) Partnership. Syria ini- promotion effects of tariff reductions. Furthermore, the tialed an AA with the EU in 2008, but has not yet rati- complementary behind-the-border reforms regarding fied it. With 12 other Arab countries Jordan, Lebanon, the business environment and investment climate were Egypt, and Iraq participate in the Pan-Arab Free Trade not included in the agreements as legally binding con- Area (PAFTA), entered into force in 1998. Jordan, with straints—an important design flaw that adversely affect- Egypt, Algeria, and Morocco established the Agadir Free ed improvement of competitiveness particularly in the Trade Area as part of the Euro-Med Partnership, which less developed countries. became effective in 2007. Also, Turkey, Syria, Jordan, and Lebanon initiated negotiations to establish the Le- An economic zone is an ultimate outcome for vant Free Trade Zone (LFTZ) in 2010. The negotiations the medium to long term, depending on the were suspended after political disruption in Syria. outcomes of the ongoing political upheaval Despite slow progress in implementation, trade When the political conditions permit, the “New Le- agreements have generated some positive impacts for vant” countries have the potential to move forward regional trade. Most of the preferential trade agree- towards a deeper regional integration. If political and ments (PTAs) within MENA included negotiations to security situations are normalized in the medium to long reduce the restrictive impact of NTMs on trade. Some term, Turkey, Jordan, Lebanon, Syria, Iraq, Egypt, and MENA countries have made considerable progress to- the Palestinian Territories could start discussing a poten- wards this goal. The decline in NTMs has been most tial economic zone—a sub-group that is likely to form dramatic for agricultural products. Considering the great a deeper integration based on large economic potentials dependence of MENA countries on imported food and discussed in this report. A key requirement for success- the increase in food prices over the past decade, this is a ful regional integration in a variable geometry environ- positive development. ment is the consistency of the integration policies ad- However, the sub-region has yet to reap the full opted by the sub-groups. A variable geometry approach benefits of existing regional arrangements. There is is preferred in strengthening regional integration, which scope for additional regional liberalization of trade pol- allows sub-groups to move faster than the whole group icies. Despite steady advances made in liberalization of or move to a deeper form depending on country-specific trade in goods, the achievements remain significantly be- low potential. Apart from Turkey, the Levant countries 4 Association Agreements (AAs), PAFTA, and Agadir include addi- have failed to take full advantage of the network of trade tional negotiations on elimination of NTMs pertaining to techni- agreements with both the EU and among themselves. In cal standards, SPS, and trade facilitation as well as gradual liberal- ization of agriculture and services, competition policy, government some cases this is due to the design of the agreements procurement, investment, and capacity building. However, prog- (shallow agreements). Others are explained by the weak ress on these negotiations has been very limited. xxx Over the Horizon: a New Levant conditions. All countries (except for Iraq) are members improved market access. Substantial improvement in the of the Med12. Therefore, the Levant initiative could be complementary behind-the-border policies and harmo- part of the Barcelona process. It is important to find a nization of the business and investment climate will be solution to include Iraq to this potential zone as a pref- necessary to take full advantage of better market access. erential partner to increase the benefits of deeper eco- Closer collaboration in these areas in the context of the nomic integration in the sub-region. Currently, the EU broader Barcelona Process is essential. Improvement of Customs Union membership does not allow Turkey to the behind-the-border policies is particularly important establish a FTA with Iraq because it is not a Euro-Med for Syria, Jordan, and Lebanon to be able to raise their member. competitiveness. In the long-term, a Levant Economic Zone could The Levant countries should take unilateral mea- consolidate the bilateral FTAs that Egypt, Lebanon, sures to remove barriers to trade. Deepening and wid- Jordan, and Syria have with Turkey, and improve ening of integration will require improvement in the market access for Turkey and Iraq to each other’s econ- trade regime and trade facilitation in each country. The omies. Egypt, Lebanon, Jordan, and Syria already have countries will need to undertake reforms unilaterally to bilateral FTAs with Turkey and, as members of PAFTA, remove trade barriers, especially customs procedures and benefit from free trade in goods amongst MENA coun- NTMs. In a few particular sectors NTMs are signifi- tries. If political commitment is strong, opportunities ex- cantly more restrictive on imports from Turkey than on ist to realize economic benefits by moving from “shallow” imports from other sources. This is the case for Turkey’s bilateral FTAs to “deep and comprehensive” integration exports of coal products to Tunisia, primary agriculture within a common economic zone. If it is designed well to Jordan and Syria, and resource-based manufactures to and implemented effectively, the “New Levant” could Egypt and Syria. Unilateral reforms and liberalization of play an important role in realizing the Euro-Med objec- selected sectors in the short-term can feed into overall tive of a deep and comprehensive FTA between the EU long-term integration agenda. and the Med12. It would also replace the bilateral FTAs The reforms associated with the formation of the among the Levant partners. Reforms can be anchored in Levant Economic Zone could promote domestic re- trade agreements to help governments implement long- form. Formulating clear rules and putting an effective term plans. implementation mechanism in place will be essential for the success of the “New Levant” as a sub-regional inte- However, even in the short-term, Levant gration zone. The Levant countries should review a wide- countries could benefit from sub-regional range of policy weaknesses in member economies that cooperation in specific areas through public- could obstruct a strong supply response. For example, private sector partnership countries will need to improve national and cross-coun- The reform process should start with improving the try infrastructure, implementation capacity in partner existing agreements with parallel behind-the-border countries, as well as harmonize business and investment policy measures. A deeper economic zone in the Le- climate rules and regulations. Particular emphasis should vant will improve access of the signatories to each other’s be placed on advancing private sector development in market. However, this may not be sufficient to expand the sub-region. In this content, the zone could be used as trade, diversify production, and accelerate growth in an engine for domestic reform. the member states. A wide-range of policy weaknesses There are lessons to be learned for MENA countries and supply-side constraints in the member economies that have not yet signed FTAs with major partners, or inhibit competitiveness and a strong supply response to who are not yet in the WTO system. While their trade EXECUTIVE SUMMARY xxxi policies are not triggered with pressure to “adjust,” these Eventually, the transformational nature of success- countries frequently have export sectors that are affected ful regional integrations provides expected benefits to by policy changes elsewhere. For example, the trade pol- countries in terms of growth, employment, and diversi- icy changes are impacting significant exports of steel re- fication. Almost all fast-growing countries, i.e., countries bar, ceramic tiles, blankets, and cotton and synthetic yarn which have grown at average annual rates of seven percent from Syria; cement, ceramic tiles, and steel rebar from or more for at least 25 years, integrated into the global the Palestinian Territories; and blankets, cotton textile economy during their high growth periods through in- products, and ceramic tiles from Lebanon. Governments creased trade and foreign direct investment. Integration that undertake reforms to the trade regime almost inevi- into global value chains is likely to have contributed to tably face some pushback from domestic industries that high sustainable productivity growth in these countries struggle to adjust to new conditions of competition. For based on a continuous process of international knowl- non-WTO member economies in the region, renewed edge and technology flows channeled through trade, effort should be placed on making the reforms neces- FDI, or international migration. For instance, Turkey’s sary to complete the WTO accession process. Trading GDP growth amounted to, on average, six percent per partners do not guarantee most-favored-nation (MFN) year from 2002 to 2011 when the country benefited from treatment to non-members; furthermore, non-members FDI from EU countries as well as trade integration into do not have access to the highly effective arbitration and European value chains. A number of empirical studies dispute settlement procedures of the WTO system to demonstrate the importance of international trade flows protect their market access interests abroad. The initia- to explain technology spillovers and productivity growth. tion of the WTO accession process can benefit countries’ Moreover, Baldwin and Forslid (2000) argue that trade trade performance while triggering deeper integration. liberalization improves the incentives to invest in new While WTO member economies may have lower technologies through competition and better financial applied tariffs than WTO non-members in a num- intermediation. Thus, trade integration provides mech- ber of instances, there is still much trade liberaliza- anisms for international technology diffusion and can be tion work to be done even among the WTO member a pivotal ingredient for economic development, in par- countries in MENA. For example, Tunisia has bound ticular, when paired with economic behind-the-border relatively few of its tariffs, and Egypt’s tariff bindings policy reforms making domestic firms more competitive continue to be extremely high. Because economies like and domestic markets more attractive. Egypt, Jordan, and Tunisia also have relatively high MFN applied tariffs, their implementation of preferen- The private sector in the Levant is taking the tial tariff commitments through FTAs with Turkey and lead in implementing short-term actions and other major economies runs the risk of leading to trade long-term economic integration agenda in diversion. One important way to address this concern is partnership with the public sector to continue to lower MFN applied import tariffs and to take on additional commitments to lower WTO import 5 Estevadeordal, Freund and Ornelas (2008) present evidence to tariff bindings.5 As a general rule, the economies that are suggest that this may have been a strategy adopted by a number of economies in Latin America after their regional integration efforts members in the WTO not only are relatively more open, led to adoption of a number of preferential trade agreements in but because there is also some external, multilateral over- the 1990s. After the adoption of FTAs, which would have oth- sight and agreed-upon surveillance over their trade poli- erwise resulted in large tariff preference margins, such economies subsequently lowered applied MFN tariffs toward imports from cies through the WTO’s Trade Policy Review Body, and nonmembers in order to minimize the likelihood of costly trade WTO committees and reporting requirements. diversion. xxxii Over the Horizon: a New Levant There is a clear interest from private sector represen- in the region for the common purpose of advancement tatives in the region to take the leadership role for ad- of economic integration of the sub-region. The World dressing common challenges in the region. “The New Bank is working closely with private sector and govern- Levant Initiative” could provide a platform to private sec- ments in the region to introduce a regional economic tor champions in the region to identify constraints that integration agenda with an aim to implement short- and impede regional economic activities especially related to medium-term actions. International and bilateral devel- trade flows, labor and capital mobility, and offer solu- opment partners will be able to assist Levant countries in tions and actions through debate and discussion as well implementing trade reforms either through facilitating as consultation with authorities in their own countries. the dialogue by bringing together the stakeholders, or This initiative could activate a “Levant Private Sector providing technical assistance and policy recommenda- Network” that institutionalizes a regional private sector tions and supporting implementation by providing fi- lobbying group that brings together private sector firms nance and mobilizing resources. INTRODUCTION W ith a combined population of 224 million, land area of 2.4 million km2, and nominal GDP of US$1,408 billion, complemented with its proximity to major markets, and access to transpor- tation corridors, the “New Levant” countries (Egypt, Jordan, Lebanon, Turkey, Iraq, Syria, and the Palestinian Territories) have significant economic importance in the region. This sub-region presents opportunities and potential for a successful regional integration. Although trade in goods and services has been expanding and investment flows have been growing, the potential for deeper and wider integration has not been fully realized, notwithstanding the progress that has been made. There is a great potential to change the economic dynamics in the region through trade integration, if designed well and implemented effectively. Deepening and widening integration in the region would benefit all countries in terms of diversi- fying trade, strengthening FDI and technology transfers, improving competitiveness, and securing economic and political stability in the region. In addition to the “core” countries listed above, linkages between other countries in the region are also considered in specific sectors including Tunisia, Libya, Israel, and Iran that make up the “outer circle” countries. This study identifies the areas of economic comple- and addresses the following key policy questions: mentarities among the New Levant countries, assessing (i) What are the economic complementarities among untapped potentials in investment and trade in goods the Levant countries in the region, in specific terms? To and services. The work is aligned with the four prior- what extent do the countries take advantage of the com- ity areas identified in the World Bank’s Trade Strategy: plementarities? (ii) Who benefits from potential deeper (1) trade competitiveness and diversification; (2) trade integration, and by how much? (iii) What are the barriers facilitation, transport logistics, and trade finance; (3) sup- to deeper regional integration? What are the policies to port for market access and international trade coopera- remove these barriers? (iv) Could an economic zone be tion; and (4) managing shocks and promoting greater an answer, and under which circumstances? inclusion. Guided by this strategy, the report discusses Analytical work was complemented with policy that complementarities in the sub-region are significant, dialogue with governments and qualitative interviews pointing at substantial potential welfare gains from in- with private sector representatives on the ground. The creased trade and investments and economic integration, task team undertook major technical and consultative 1 2 Over the Horizon: a New Levant missions to Turkey, Jordan, Lebanon, Egypt, and Iraq Palestinian Territories (where data is available) in Chap- in participation with World Bank management, country ter 1. The analysis goes beyond the aggregate level in or- economists from Europe and Central Asia (ECA) and der to examine the scope for regional trade and invest- MENA regions, and consultants. High-level meetings ment in particular industries or products. Building on an were held with government officials and initial findings analysis of economic complementarities and trade and were presented. Also, technical teams met with chambers investment potentials in the sub-region, Chapter 2 ana- and private sector representatives, and held focus group lyzes the economic implications of a deeper regional inte- meetings, particularly in services trade areas. gration. A CGE model examines four scenarios empha- The expected outcome is a well-defined policy and sizing different aspects of trade relations among possible implementation road map, on which a broad consensus members of a new economic integration zone. Chapter is reached among all governments in the Levant. De- 3 reviews and compares the trade and investment re- spite the political disruptions, the Levant countries have gimes of the Levant countries with a view to identifying an interest in deepening economic regulatory ties within the areas of reforms needed to harmonize their policies the region, and these efforts are currently driven by the in order to improve competitiveness collectively and in- private sector. The private sector is proactive in the Levant crease trade and investment flows among them. and is increasingly taking a leadership role in the region’s Chapter 4 reviews the services sectors and levels of welfare improvement. Their strategic motivation is that regulatory restrictiveness in the context of efforts at re- within the region deeper economic integration could in- gional and global integration of Levant economies. The crease welfare gains for all countries involved and pave chapter identifies existing and potential barriers to in- the way for stability. Although creation of a well-func- tegrating services markets of the sample countries with- tioning economic zone is a long-term goal, because of the in the Levant region, and advances a number of policy current political and security situation short-term actions recommendations centered on the promotion of closer can be delivered in specific sectors that have the potential regulatory ties in services markets and expanded trade to improve regional prosperity. These chambers of com- in services. Chapter 5–8 focus on five sectors for an in- merce in the Levant are leading the agenda, and acting in depth analysis (financial services, energy, ICT and air close collaboration with their governments. transport, and tourism) discussing how liberalization of The main counterparts for this work are Ministries services trade under the framework of deeper regional of Economy, Trade, or Finance in the Levant countries. economic integration would help countries take advan- These ministries have participated in the conduct of this tage of the regional opportunities, including an overview work. The audience for this work is senior policy makers for trade in services in the sub-region. and technical staff at these ministries along with other Chapter 9 analyzes barriers to deeper regional inte- key government entities, private sector representatives, gration in the Levant, focusing on non-tariff measures, international partners, think tanks, and World Bank staff. trade facilitation, and logistics issues, and proposes poli- The report is organized as follows. The report be- cies to remove these barriers. Finally, Chapter 10 reviews gins by providing an analytical basis for the evaluation of the current regional agreements, identifies the weaknesses potential bilateral economic complementarities between and proposes recommendations for a possible economic Jordan, Lebanon, Syria, Iraq, Egypt, Turkey, and the zone in the medium to long term. ECONOMIC 1 COMPLEMENTARITIES T his chapter provides an analytical basis to evaluate potential bilateral economic complementarities between Jordan, Lebanon, Syria, Iraq, Egypt, Turkey, and the Palestinian Territories (where data is available). The core of the analysis is extended to include the following outer circle countries: Iran, Libya, and Tunisia. The key hypothesis to be verified in this chapter is that these countries do not take suf- ficient advantage of the region’s economic complementarities, meaning that regional trade and investment is below potential. The analysis goes beyond the aggregate level in order to examine the scope for regional trade and investment in particular industries or products. The analyses of aggregate and industry or product between 2000 and 2011 was considerably higher level trade patterns and specializations focus on identi- than the world average of 2.7 percent. Table 1 tracks fying the potential for trade in the region as a whole, as the annual growth of GDP in Turkey and the MENA well as in particular sectors. The chapter first focuses on economies over the 2000–2011 period. The data reveal an analysis of aggregate trade flows to quantify the po- significant volatility in GDP growth across the sub-re- tential for trade in the region. Then it reviews the disag- gion, especially in Iraq and Palestinian Territories. Even gregate structure and specialization of trade in detail for for the remaining economies, GDP growth fluctuated all countries. In turn, industry and product specializa- between –6 and +13 percent during 2000–05, with rela- tions are contrasted between countries in order to identi- tively greater stability thereafter. The MENA region as a fy sectors with the highest potential for trade. whole experienced average growth of 4.5 percent during this period, with Iran and Jordan experiencing higher The Levant countries experienced relatively growth than the MENA average; Iraq, Tunisia and Pales- high economic growth during the last decade. tinian Territories falling considerably short. Apart from With the exception of Iraq and the Palestinian Terri- Iraq and the Palestinian Territories, the average annual tories, the average growth in GDP among the Levant growth in individual countries of the Levant was higher countries (Egypt, Jordan, Lebanon, Syria, Turkey) than the world average. 3 4 Over the Horizon: a New Levant Table 1 Annual GDP Growth in MENA and Turkey (%, 2000–2011) Country/ Region 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Average Egypt 5.4 3.5 2.4 3.2 4.1 4.5 6.8 7.1 7.2 4.7 5.1 1.8 4.6 Iran 5.1 3.7 7.5 7.1 5.1 4.6 5.9 7.8 2.3 1.8 n.a. n.a. 5.1 Iraq –4.3 –6.6 –7.8 –41.3 46.5 –0.7 6.2 1.5 9.5 4.2 0.8 9.9 1.5 Jordan 4.2 5.3 5.8 4.2 8.6 8.1 8.1 8.2 7.2 5.5 2.3 2.6 5.8 Libya 3.7 –4.3 –1.3 13.0 4.4 9.9 5.9 6.0 3.8 2.1 n.a. n.a. 4.3 Lebanon 1.3 4.0 3.4 3.2 7.5 1.0 0.6 7.5 9.3 8.5 7.0 3.0 4.7 Syria 2.7 5.2 5.9 0.6 6.9 6.2 5.0 5.7 4.5 6.0 3.2 n.a. 4.7 Tunisia 4.3 4.8 1.7 5.5 6.0 4.0 5.7 6.3 4.5 3.1 3.0 –1.8 3.9 Turkey 6.8 –5.7 6.2 5.3 9.4 8.4 6.9 4.7 0.7 –4.8 9.2 8.5 4.6 WB/Gaza –5.6 –14.8 –10.1 6.1 6.2 6.3 n.a. n.a. n.a. n.a. n.a. n.a. –2.0 Algeria 2.2 2.6 4.7 6.9 5.2 5.1 2.0 3.0 2.4 2.4 3.3 2.5 3.5 Morocco 1.6 7.6 3.3 6.3 4.8 3.0 7.8 2.7 5.6 4.8 3.7 4.5 4.6 Yemen 6.2 3.8 3.9 3.7 4.0 5.6 3.2 3.3 3.6 3.9 7.7 –10.5 3.2 MENA 5.4 1.7 2.1 5.1 6.6 5.3 5.9 5.1 4.9 1.8 4.5 5.2 4.5 Mashreq+ 2.6 0.7 2.0 1.8 9.1 5.1 5.3 5.3 5.0 3.5 4.5 2.3 3.7 World 4.2 1.7 2.0 2.7 4.0 3.5 4.0 3.9 1.3 –2.2 4.3 2.7 2.7 Source: World Bank, World Development Indicators. Intra-group trade has increased substantially thus an increase in the value of oil. Because of disrup- during the last decade, in terms of the value tion in production, Iraq has been relying increasingly and the number of products. But, despite this on imports from its neighbors, explaining the substan- high growth, there is still untapped potential tial increase in exports to Iraq from all members of the in the region. group, particularly Turkey and Syria. With the addition Intra-group trade between Egypt, Jordan, Lebanon, of Iran, Libya and Tunisia, intra-group trade increased Syria, Iraq, and Turkey increased 7-fold from US$ 5.7-fold from US$6,181 million in 2000/02 (three year 4,225 million in 2000/02 (three year average) to US$ average) to US$35,121 million in 2008/10, accounting 29,713 million in 2008/10.6 The increase in sub-re- for a share in total exports from all countries in the re- gional trade was not only due to a higher intensive mar- gion of 10.7 percent. In particular, Iran and Tunisia in- gin but also to a higher extensive margin: the number of creased their exports to Turkey significantly, albeit from products traded within this group increased more than low levels. four-fold from US$93.9 million to US$406 million in Intra-group trade is particularly important for the same period. Table 2 shows that the increase was Syria, Jordan, Lebanon, and Iraq. Table 2 shows that broad based; that is, each member of the group man- Syria’s exports to the region accounted for almost half aged to increase the number of products exported to of its total exports in 2008/10 whereby Iraq alone ab- all other members with the exception of the number sorbed more than one-third of Syrian exports. Regional of Iraqi goods exported to Turkey and Jordan, which declined slightly. In the case of Iraq, the increase in ex- ports primarily originates from higher oil prices and 6 Data for the Palestinian Territories are not available. ECONOMIC COMPLEMENTARITIES 5 Table 2 Intra-Group Trade Export value Share in total exports Trade (US$ million) (percent) Number of products Balance Exporter Partner 2000/02 2008/10 2000/02 2008/10 2000/02 2008/10 Turkey Group 1,458 14,419 4.60 12.41 5,445 Syria 244 1,462 0.77 1.26 137 434 1,182 Jordan 112 496 0.35 0.43 176 302 529 Lebanon 167 656 0.53 0.57 133 314 390 Iraq 0 5,026 0.00 4.33 563 4,682 Iran 310 2,366 0.98 2.04 160 551 –4,601 Egypt 375 2,098 1.18 1.81 228 448 1,324 Libya 109 1,602 0.34 1.38 83 432 1,507 Tunisia 141 713 0.45 0.61 111 292 433 Syria Group 899 6,193 15.17 47.34 811 Turkey 459 494 7.75 3.77 23 104 –1,427 Jordan 63 311 1.07 2.38 31 153 80 Lebanon 283 256 4.78 1.95 38 146 66 Iraq 0 4,485 0.00 34.28 271 3,779 Iran 11 19 0.19 0.15 1 19 –1,052 Egypt 39 298 0.67 2.28 26 97 –577 Libya 31 318 0.53 2.43 13 78 –29 Tunisia 11 11 0.19 0.08 3 36 –28 Jordan Group 593 1,474 28.00 25.67 –387 Turkey 16 38 0.76 0.66 12 34 –502 Syria 44 228 2.09 3.97 36 118 –138 Lebanon 44 166 2.06 2.90 41 80 87 Iraq 426 859 20.14 14.97 21 211 680 Iran 8 9 0.40 0.15 4 7 –3 Egypt 22 106 1.04 1.84 33 83 –570 Libya 25 40 1.20 0.70 21 34 47 Tunisia 6 28 0.30 0.49 11 21 14 Lebanon Group 169 999 18.47 26.76 –719 Turkey 28 181 3.10 4.84 14 30 –453 Syria 28 223 3.10 5.98 46 144 –119 Jordan 37 109 4.03 2.93 61 145 –124 Iraq 29 269 3.17 7.20 23 142 264 Iran 14 63 1.51 1.69 1 18 2 Egypt 22 134 2.41 3.60 41 93 –229 Libya 6 11 0.67 0.28 12 8 –42 Tunisia 4 8 0.47 0.23 3 13 –18 (continued on next page) 6 Over the Horizon: a New Levant Table 2 Intra-Group Trade Export value Share in total exports Trade (US$ million) (percent) Number of products Balance Exporter Partner 2000/02 2008/10 2000/02 2008/10 2000/02 2008/10 Iraq Group 670 2,084 5.73 4.47 –11,240 Turkey 0 1,099 0.00 2.36 16 20 –5,409 Syria 0 773 0.00 1.66 20 8 –4,325 Jordan 642 143 5.50 0.31 3 3 –792 Lebanon 1 6 0.01 0.01 3 4 –291 Iran 12 55 0.10 0.12 29 18 38 Egypt 1 9 0.01 0.02 5 2 –456 Libya 0 0 0.00 0.00 0 Tunisia 14 0 0.12 0.00 1 –5 Iran Group 829 6,869 3.39 7.04 3,938 Turkey 781 5,834 3.20 5.98 60 144 3,144 Syria 0 943 0.00 0.97 10 81 951 Jordan 10 8 0.04 0.01 11 19 1 Lebanon 27 36 0.11 0.04 16 19 –39 Iraq 0 0 0.00 0.00 78 360 –42 Egypt 7 34 0.03 0.03 10 24 –19 Libya 0 0 0.00 0.00 7 9 0 Tunisia 4 14 0.02 0.01 7 7 –58 Egypt Group 437 4,544 8.63 17.57 2,166 Turkey 94 828 1.86 3.20 32 184 –874 Syria 55 740 1.08 2.86 41 194 462 Jordan 54 796 1.06 3.08 31 207 615 Lebanon 68 467 1.35 1.80 51 165 433 Iraq 77 383 1.53 1.48 22 126 414 Iran 7 96 0.14 0.37 3 36 96 Libya 56 1,006 1.11 3.89 63 267 874 Tunisia 25 229 0.50 0.89 21 147 146 Libya Group 1,085 1,664 9.60 3.60 –3,200 Turkey 724 353 6.40 0.76 12 18 –1,739 Syria 22 315 0.20 0.68 3 6 –37 Jordan 1 1 0.01 0.00 1 3 –51 Lebanon 10 35 0.08 0.08 3 2 36 Iraq 0 0 0.00 0.00 1 0 Iran 0 0 0.00 0.00 0 Egypt 47 244 0.41 0.53 20 32 –1,025 Tunisia 281 716 2.49 1.55 23 16 –385 (continued on next page) ECONOMIC COMPLEMENTARITIES 7 Table 2 Intra-Group Trade (continued) Export value Share in total exports Trade (US$ million) (percent) Number of products Balance Exporter Partner 2000/02 2008/10 2000/02 2008/10 2000/02 2008/10 Tunisia Group 479 1,419 7.45 8.89 –404 Turkey 59 244 0.91 1.53 14 32 –530 Syria 5 25 0.08 0.16 5 8 24 Jordan 6 14 0.10 0.09 5 24 –17 Lebanon 5 15 0.08 0.09 9 21 15 Iraq 66 5 1.02 0.03 20 9 5 Iran 45 142 0.71 0.89 3 5 50 Egypt 31 90 0.48 0.57 19 48 –174 Libya 262 883 4.07 5.53 176 250 223 Total Intra-group 6,181 35,121 1.78 10.69 Source: UN COMTRADE (United Nations Commodity Trade Statistics) Database, IMF Direction of Trade. exports accounted for one-fourth of total Jordanian and despite this recent trend, however, trade in the region is Lebanese exports. The export shares of Iraq, Libya, and still predominantly resource based. Turkey’s performance Iran to the region are relatively low due to their high is explained by its higher competitiveness compared to share of crude oil exports to the rest of the world. Tur- the other countries. Compared to the other countries in key and Tunisia’s manufacturing exports focus on the EU the sub-region, Turkey has made a higher degree of im- market. Nevertheless, Turkey’s share of exports to the ex- provement in both its trade policies and behind-the-bor- tended group of MENA countries increased significantly der policy environment—both needed for enhancing to 12.4 percent in 2008/10 while Tunisia’s increased to competitiveness. 8.9 percent. Despite high growth, there is still significant un- All countries benefitted from higher intra-group tapped potential in terms of bilateral trade flows be- exports, but to varying degrees. Turkey had the largest tween Turkey and the Mashreq countries. The com- increase in intra-group exports both in terms of value bined share of Turkish exports to Jordan, Lebanon, Syria, (over 13-fold) and number of products (six-fold) be- and Iraq accounted, on average, for only 6.6 percent of tween 2000/02 and 2008/10. In contrast, export values total Turkish exports in 2008/10. Likewise, exports of increased approximately 11-fold in Lebanon, 10-fold in Mashreq countries to other Arab countries, including Egypt, eight-fold in Syria and Iran, three-fold in Tunisia the Gulf, are much more significant than exports des- and Iraq, and two-fold in Jordan and Libya. The increase tined for Turkey; Lebanon has the highest share of ex- in the number of exported products by Turkey, Syria, as ports destined for Turkey at 4.2 percent, exceeding the well as Egypt and to a lesser degree also Lebanon and value of Lebanese export destined for Iraq or Jordan. But Jordan to the region between 2000/02 and 2008/10 is there are substantial differences even among the Mashreq striking. It reflects a trend in the diversification of re- countries. The high bilateral export shares between Syria gional trade from raw agricultural and mining products and Lebanon, respectively, as well as the high share of into other manufacturing sectors as reported in Table 2; Syrian or Jordanian exports to Iraq stand out; in contrast, 8 Over the Horizon: a New Levant bilateral trade between Jordan and Lebanon is still rela- are highly concentrated in Iraq, Iran, and Libya due to tively limited. the high share of petroleum in total exports. The other countries are in between, whereby, somewhat surprising- The product composition of intra-group ly, the degree of diversification of Jordanian exports in trade reveals that exports are predominantly 2007/09 appears to be comparable or even slightly lower resource based. Turkey has a relatively well- than the ones of resource rich Egypt or Syria according diversified economy. to these approximate measures. Despite a recent trend towards trade in other manu- A relatively large number of firms in the region are facturing goods, exports in the sub-region are still pre- reliant on trade; the share of firms importing inter- dominantly resource based, including several raw agri- mediate goods is particularly high in Lebanon, Syr- cultural and mining products as well as processed textiles, ia, and Jordan. Figure 2 (left) indicates that the share food, base metal, and chemical products. Table 3 reports of firms exporting is 59 percent in Syria, 44 percent in the five products with the largest bilateral export shares Lebanon, and 25 percent in Jordan and Egypt, respec- among all countries in the group, respectively. Many tively.8 Similarly, revenues from exports appear to be im- of these products are related to mining, agricultural, or portant for a relatively large share of firms in the region. base metal products: i.e., petroleum, cement, phosphate, For instance, the share of sales obtained from exports is inorganic acids, food and beverages, vegetables, cotton, 27 percent in Syria (Figure 2, right); only Malaysia and steel bar, or iron and steel (tubes, plates, and pipes). More Thailand have comparably high shares among the select- sophisticated intermediate or final goods are primari- ed emerging economies. The share of sales obtained from ly imported by Iraq from all other countries including exports is 18 percent in Lebanon, 14 percent in Jordan, household refrigerators, insulated wire and cable, medica- and 10 percent in Egypt, which are still relatively high. ments, and metal tanks. Moreover, Turkey exports several Moreover, a large number of firms in Lebanon, Syria, intermediate base metal products to Mashreq countries and Jordan are importing inputs (Figure 3): the share including metal tanks, seamed tubes, or steel railroad ma- of imported inputs exceeds 50 percent among surveyed terial as well as motor vehicles to Egypt. In turn, Mashreq firms in these three countries. countries and Turkey predominantly trade processed tex- tile (cotton yarn, synthetic yarn, and woven fabrics), food Similar to potential in higher regional (beverages, dried legumes, and food preparations), and, trade flows, there is a great opportunity for chemical products (fertilizers, inorganic acids, medica- expansion of foreign direct investments. ments, and organic detergents) with each other. Currently, the composition of FDI inflows Turkey has the most diversified manufacturing is concentrated in real estate, construction, tourism, and oil sectors. base in the region followed by Lebanon, Egypt, and In all Levant countries, foreign direct investment Tunisia. Figure 1 illustrates the total number of export- (FDI) increased markedly between the 1990s and the ed products in which each country had a revealed com- 2000s, however, only Lebanon and Jordan achieved parative advantage (RCA) in 2009 as well as the share high shares of FDI in GDP (above 10 percent) by in- of the 20 largest export items in total exports.7 It shows ternational standards. The FDI takeoff in the region that Turkey’s export base is the most diversified in this group: Turkey had an RCA in exporting 226 manufac- 7 turing products (out of 749 total exported products) in The derivation of the indicator is provided in Annex 3. 8 The information is obtained from the World Bank Enterprise Sur- 2009 while the largest 20 export products accounted veys (WBES) for different years between 2006 and 2008. The data for only 40 percent of total export. In contrast, exports are not available for Iraq, Iran, Libya, and Tunisia. ECONOMIC COMPLEMENTARITIES 9 Table 3 Product Composition of Exports Partners Largest five export items (percent of total export to the partner country, SITC 4-digit), 2010 Turkey exporting to Syria Cement (12.3), electric energy (6.2), iron prod (3.6), wheat (3.2), iron/steel railroad material (2.4) Jordan Seamed tubes (19.0), seamed pipes (7.5), manufactured tobacco (4.2), metal tanks (3.4), wooden boxes (2.5) Lebanon Hot-form steel bar (14.2), fresh fish (3.4), cigarettes (3.0), jewelry (3.0), plated steel (2.8) Iraq Hot-form steel bar (5.4), flour of wheat (5.1), cement (4.6), insulated wire (3.7), seamed tubes (3.1) Iran Semi-fin iron<25% (6.3), fiberboard (4.9), hot-form steel bar (4.7), motor vehicle parts (4.1), woven syn fil yarn (2.9) Egypt Hot-form steel bar (14.8), cement (4.8), semi-fin iron>25% (4.3), motor vehicles (4.0), semi-fin iron<25% (3.8) Libya Hot-form steel bar (12.0), iron structures (6.7), cement (5.2), insulated wire (3.1), semi-fin iron<25% (3.0) Tunisia Woven cotton (9.4), motor vehicles (9.1), semi-fin iron<25% (6.7), cigarettes (3.3%), knitted fabrics (3.2) Syria exporting to Turkey Petroleum (38.2), raw cotton (13.4), cotton yarn (9.0), syn fil yarn (4.0), woven cotton fab (3.6) Jordan Milk/cream (8.6), raw sugars (8.0), petroleum (6.9), nuts (5.5), oil cake by-products (4.0) Lebanon Petroleum (30.9), natural phosphates (11.9), vegetables (5.2), organic detergents (5.1), cheese (4.2) Iraq Organic detergents (12.2), eggs in shell (5.7), fruits (5.3), beverages (4.6), cereals (4.0) Iran Olive oil (35.8), amino resins (21.7), textile bags (4.2), mattresses (3.2), motor veh parts (2.8) Egypt Cotton yarn (23.1), petroleum (18.7), apples (9.2), raw cotton (5.8), dried legumes (4.2) Libya Electrical transformers (12.1), plastic footwear (6.4), manmade fab (5.6), insulated wire (4.7), footwear (4.7) Tunisia Women’s coats (17.8), spices (17.7), woven syn fil yarn fab (15.1), raw cotton (8.3), food proc machines (7.3) Jordan exporting to Turkey Nat phosphate (20.5), inorganic acids (17.0), manufactured tobacco (12.8), alcoholic beverages (8.4), beer (8.3) Syria Vegetables (23.4), tomatoes (14.4), metal tanks (8.2), fruits (6.2), paper board (2.8) Lebanon Gold (35.8), medicaments (17.4), metal tanks (9.1), vegetables (4.2), paper cut (2.9) Iraq Insulated wire (7.6), metal tanks (7.5), medicaments (6.5), tomatoes (5.5), food preparations (4.4) Iran Potassic fertilizer (28.5), flourides (24.3), chemical fertilizers (17.4), manufactured tobacco (9.6), paper cut (8.4) Egypt Potassic fertilizer (19.8), medicaments (14.5), paper products (7.2), chemical fertilizers (6.2), corrug paper (5.9) Libya Medicaments (39.9), indust wadding (11.8), electrical transformers (10.0), chemical products (7.2), potassic fertilizer (3.8) Tunisia Medicaments (31.6), plastic foil (12.5), chemical fertilizers (9.0), nitrates (6.2), organic chemicals (5.6) Lebanon exporting to Turkey Scrap cast iron (64.8), inorganic acids (16.5), ferrous waste (7.8), edible nuts (2.1), iron/steel articles (1.1) Syria Cement (15.3), banana (7.2), paper products (4.4), sugar conf (3.7), durum wheat (3.6) Jordan Food preparations (4.3), paper products (4.1), furniture (3.7), beef preparations (3.2), paper cartons (2.8) Iraq Book/pamphlet (16.1), dom refrigerator (14.1), electric generators (9.7), hair care prep (3.1), insulated wire (3.0) Iran Phosphat fertilizer (81.8), veg flour (2.8), insulated wire (2.2), artics cu/ni/al/pb/zn/sn (1.8), conveyor (1.6) Egypt Office equip parts (24.2), electron circuits (15.6), digital processing units (11.4), apples (6.4), inorganic acids (4.3) Libya Book/pamphlet (58.2), women suit (9.3), women dress (8.0), motor veh parts (6.0), machinery minerals (2.9) Tunisia Lead alloys (15.8), iron structures (12.3), book/pamphlet (11.3), veg flour (9.4), organic detergents (8.2) Iraq exporting to Turkey Petroleum (96.2), gold (2.8), alkyl-benzene (0.3), plastic waste (0.1), bovine (0.1) Syria Alkyl-benzene (70.6), color for glass (18.3), fresh fruit (3.7), sheep skin (1.9), sulfur (1.5) Jordan Petroleum (91.3), alkyl-benzene (8.2), ferrous waste (0.4), carpets (0.0), sulfur exc (0.0) Lebanon Alky-benzene (64.6), fresh fruit (17.8), fresh jams (12.5), animal materials (3.7), polyethylene (0.8) Iran Metal waste (41.7), aluminum (29.2), organo-sulfur (4.5), tires new for busses (4.3), tires new for cars (2.6) Egypt Fruits (53.5), bovine hide (41.8), animal materials (2.3), cotton yarn (1.0), bovine whole hides (0.8) Libya Tunisia Passenger motor vehicles excluding buses (100) (continued on next page) 10 Over the Horizon: a New Levant Table 3 Product Composition of Exports Partners Largest five export items (percent of total export to the partner country, SITC 4-digit), 2010 Iran exporting to Turkey Petroleum (81.4), copper (5.2), polyethylene (3.8), propylene (1.3), polycarbonates (1.2) Syria Insulated wire (27.7), gas turbines (11.8), copper wire (7.8), milk/cream (7.5), motor vehicle bodies (5.0) Jordan Colled rolled steel-4 (15.7), grapes (7.5), iron ore (6.7), cellulose (6.6), petroleum jelly/waxes (6.5) Lebanon Nuts (54.2), carpets (15.1), food preparations (6.5), crustaceans frozen (4.2), yeasts/baking powders (3.4) Iraq Passenger motor vehicles (7.9), cements (7.5), apples (7.0), vegetables (5.9), non-refract bricks (5.5) Egypt Acyclic alcohols (29.2), nuts (19.0), polyethylene (18.5), grapes (7.8), quartz (3.7) Libya Taps/cocks/valves (37.7), grapes (19.4), nucleic acids (11.2), medicaments (7.5), wine/cords/cables (4.0) Tunisia Passenger motor vehicles (46.3), polyethylene (25.1), nuts (13.6), grapes (2.9), figs (1.9) Egypt exporting to Turkey Alkyl-benzene (9.8), carbon (7.9), cotton yarn (7.4), nitrogenous fertilizers (6.9), polyvinyl chloride (5.8) Syria Natural gas (15.6), copper plate (13.7), rice (13.7), insulated wire (4.7), non-refract bricks (3.1) Jordan Natural gas (28.9), electrical energy (7.1), gold (6.1), copper plate (4/8), inorg bases (4.1) Lebanon Electrical energy (10.9), natural gas (9.9), copper plate (9.7), gold (7.8), non-refract bricks (5.7) Iraq Artics cu/ni/al/pb/zn/sn (11.6), cheese (10.8), cheese processed (9.5), medicaments (7.8), plastic articles (4.2) Iran Citrus fruit (43.7), hot coil bar ir/st (26.6), tobacco (12.5), kitchen glassware (7.6), furniture (1.3) Libya Rice (13.7), insulated wire (10.1), non-refract bricks (6.4), copper plate (5.5), quarried stone (3.3) Tunisia Vegetable materials (10.9), Iron structures (5.9), dried legumes (.31), other ferro alloys (2.7), furniture (2.6) Libya exporting to Turkey Polyethylene (27.6), acyclic alcohols (25.5), hydrocarbon gas (16.3), iron granule (13.8), nitrogenous fertilizers (10.6) Syria Liquefied butane (64.9), sulfur (18.2), nitrogenous fertilizers (14.5), rice (1.6), sheep skin (0.2) Jordan Nitrogenous fertilizers (59.1), fruit juices (17.0), book/pamphlet (13.4), non-refract bricks (4.5), homogenized food (3.3) Lebanon Liquefied butane (97.4), liquefied propane (2.5), fruits (0.1), builders wood materials (0.0), seeds (0.0) Iraq Iran Milk/cream (20.7), medicaments (10.5), grapes (8.6), vitamins (8.1), taps/cocks/valves (7.4) Egypt Liquefied butane (40.5), iron granule (26.6), acyclic hydrocarbons (17.7), flat rolled steel (3.5), polyethylene (3.0) Tunisia Petroleum (82.4), liquefied butane (4.7), flat rolled steel (4.0), polyethylene (3.1), polyvinyl chloride (1.6) Tunisia exporting to Turkey Chemical fertilizers (70.2), inorganic acids (7.5), phosphates (4.3), insulated wire (2.8), fruits (2.4) Syria Phosphates (85.5), fish (6.4), springs and leaves (2.2), batteries (1.5), non-refract bricks (0.8) Jordan Phosphates (17.2), motor vehicle parts (11.9), metal waste (10.8), olive oil (7.6), batteries (5.1) Lebanon Olive oil (36.5), non-refract bricks (9.3), quarried stone slabs (11.3), chemical fertilizers (8.6), margarines (6.4) Iraq Electric switching (36.9), insulated wire (20.6), non-refract bricks (17.9), electric lamps (4.7), food preparations (2.7) Iran Phosphatic fertilizer (96.4), motor vehicle parts (1.2), phosphates (1.0), iron wire (0.5), olive oil (0.3) Egypt Phosphates (41.9), iron wire (7.7), flourides (6.8), olive oil (5.5), bulk paper (5.2) Libya Paper products (10.2), cements (6.7), iron structures (5.2), chemical fertilizers (4.6), non-refract bricks (3.5) Source: UN COMTRADE Database. was apparent after 2002, and in most cases increases in Jordan, Egypt, and Lebanon where it was over 40 per- FDI flows happened from a low base (Figure 4). In the cent on average between 2005 and 2010,9 compared oil importing countries with strong GCC links, such as with 10 percent in Syria. Lebanon and Jordan, the share of FDI in GDP increased considerably. For instance, the share of FDI in total gross 9 The share of FDI in investment is high in Egypt also due to the fixed investment is high by international comparisons in relatively low private domestic investment rate. ECONOMIC COMPLEMENTARITIES 11 Figure 1 Number of 4-digit Products with RCA in 2007/09 (left), Share 20 Largest Products in Total Exports 2007/09 (right) 250 100% 100% 100% 95% 226 90% 200 80% 68% 71% 166 70% 64% 150 140 60% 56% 57% 131 106 106 50% 42% 100 40% 30% 50 45 20% 14 7 10% 0 0% Turkey Lebanon Tunisia Syria Jordan Egypt Iran Libya Iraq Turkey Lebanon Egypt Tunisia Syria Jordan Iran Libya Iraq Source: UN COMTRADE Database. Figure 2 Percentage of Firms Exporting (left), Percentage of Firms’ Sales Obtained from Exports (right) IDN 4 IDN 2 CHL 16 BRA 2 BRA 18 CHL 2 VNM 21 EGY 10 JOR 25 VNM 12 EGY 25 JOR 14 TUR 37 TUR 17 LBN 44 LBN 18 SYR 59 THA 27 MYS 60 SYR 27 THA 76 MYS 35 0% 20% 40% 60% 80% 0% 10% 20% 30% Source: World Bank Enterprise Surveys (WBES), years ranging from 2006 (Jordan) to 2008 (Syria). Intra-region FDI flows between the Mashreq coun- of the world; FDI inflows from other Mashreq countries tries and Turkey were relatively low between 2003 and or Turkey accounted, on average, for less than one per- 2010 except for FDI flows into Iraq. Table 4 reports the cent of total FDI investments into Jordan, Lebanon, and total bilateral FDI flows in the region including green- Turkey. This suggests that there remains a great potential field and expansion projects between 2003 and 2010. for expansion. Iraq received the highest FDI share from While bilateral investment has experienced rapid growth this group of countries accounting for 15 percent of total in recent years, it remained at very low levels compared FDI inflows; the largest regional investor into Iraq was to the FDI inflows each country received from the rest Lebanon whose investments into the country exceeded 12 Over the Horizon: a New Levant Figure 3 Percentage of Inputs Imported from Turkey; the share of Turkish FDI in Iran’s total FDI inflows, however, still accounted for only three per- 70 63 cent. Syria received the bulk of its FDI from Iran (three 60 51 percent or US$1.5 billion) and Turkey (1.8 percent or 50 50 US$914 million). Overall, Lebanon was the largest in- 40 40 40 vestor among these countries with investments focusing 30 30 25 on Iraq and Egypt. 22 22 20 The Gulf Cooperation Council countries (GCC) 11 10 were by far the most important investor into Mashreq 2 0 countries. Total investments from the GCC between LBN SYR JOR CHL VNM MYS EGY BRA TUR THA IDN 2003 and 2010 represented 75 percent of total FDI in- Source: World Bank Enterprise Surveys (WBES), years ranging from 2006 (Jordan) to flows for Lebanon, 69 percent for Jordan, 61 percent for 2008 (Syria). Syria, 59 percent for Egypt, and 46 percent for Iraq. FDI from GCC countries into Turkey and Iran still account- investments from every other country 10-fold. Almost ed for nine percent of Turkey’s total FDI inflows and all FDI inflows into Iran from these countries originated 5.5 percent of Iran’s, respectively. Table 4 FDI Inflows 2003–2010 Egypt Iran Iraq Jordan Lebanon Syria Turkey GCC (in millions of US$) Egypt 21 596 55 253 5,279 Iran 55 37 1,550 43 Iraq 48 18 20 82 Jordan 226 441 37 2 904 Lebanon 1,890 5,750 68 332 1,323 Syria 40 48 Turkey 135 1,360 494 44 24 914 1,369 GCC 64,698 2,526 23,008 18,875 9,316 31,828 8,415 87,986 Total FDI 110,000 45,900 50,200 27,300 12,500 52,200 93,300 421,130 (in percent of total FDI) Egypt 0.04 119 0.20 0.49 1.25 Iran 0.05 103 0.30 2.97 0.20 0.01 Iraq 0.17 0.14 0.02 0.02 Jordan 0.21 0.88 0.07 0.00 0.21 Lebanon 1.72 11.47 0.25 0.64 0.31 Syria — 0.04 0.01 Turkey 0.12 2.97 0.98 0.16 0.19 1.75 0.33 GCC 59.01 5.49 45.87 69.18 74.77 61.00 9.02 20.89 Source: FDI markets. Note: Greenfield and Expansion invstments. fDi Markets tracks all new projects and expansions of exisiting investments. Join ventures are only included where they lead to a new physical (Greenfield) operation. Mergers and Acquisitions (M&A) and other equity investments are not tracked. ECONOMIC COMPLEMENTARITIES 13 Figure 4 Inflows of FDI as a Share of GDP in 2000s versus 1990s (left) and FDI Inflows (in US$ millions) 2006–2010 (right) 14 12 2005 2006 2007 2008 2009 2010 10 Iraq 515 383 972 1,856 1,452 1,426 8 Jordan 1,984 3,544 2,622 2,829 2,430 1,704 Lebanon 3,321 3,132 3,376 4,333 4,804 4,955 6 Syria 583 659 1,242 1,467 1,434 1,381 4 Turkey 10,031 20,185 22,047 19,504 8,411 9,071 2 Iran 3,136 1,647 1,670 1,615 3,016 3,617 0 Egypt 5,376 10,043 11,578 9,495 6,712 6,386 –2 Bahrain Yemen Kuwait Algeria Iran Syria Morocco Tunisia Oman Egypt Qatar Iraq Libya Saudi Arabia UAE Djibouti Jordan Lebanon FDI, 1990s FDI, 2000s Source: World Bank MENA Economic Development and Prospects, Investing for Growth and Jobs, based on United Nations Conference on Trade and Development (UNCTAD) data. The composition of total FDI inflows into Mashreq real estate sector in these countries relativizes the impor- countries is strongly concentrated in real estate, con- tance for economic development since capital accumu- struction, tourism, and oil sectors. Figure 5 disaggre- lation in this sector typically has very limited scope for gates FDI flows into the main economic sectors. Invest- technology or knowledge spillovers, expanding produc- ments into the real estate sector, primarily from GCC tion capacities, or generating employment effects beyond countries, accounted for more than half of FDI inflows construction periods. Moreover, the hotels and tourism into Egypt, Jordan, and Iraq as well as more than 30 per- sector in Syria and Lebanon received large foreign in- cent into Lebanon. The high share of FDI flows into the vestments that accounted for more than 40 percent of Figure 5 Share of FDI Inflows by Sector, 2003–2010 60 50 40 30 20 10 0 Syria Egypt Iran Iraq Jordan Lebanon Turkey China Brazil Indonesia India Mining Real Estate Hotels & Tourism IT & Communications Financial & other services Chemicals & Machinery Source: FDI markets database. 14 Over the Horizon: a New Levant total FDI into both countries. While the potential for based on trade complementarity indices and an esti- foreign technology spillovers is limited in this sector, in- mated gravity trade model. The trade complementar- vestments typically create domestic employment oppor- ity index measures how well the export structure of tunities, in particular for unskilled labor. For instance, one country (or group of countries) matches the im- 60 percent of the estimated value of greenfield projects port structure of another country. The (static) index is and expansions of existing investments targeted real es- based on bilateral exports and imports at the four-digit tate and hotels and tourism in Syria while only seven product level for all six countries. These are aggregated percent were directed at chemicals and machinery, fi- to a single index for each country pair. The index num- nancial and other services, or IT and communication. ber varies between zero and 100; the higher the index Similarly, in Jordan, Lebanon, Iraq, and Egypt real estate number, the higher is the potential for that country’s and hotels and tourism accounted for more than 50 per- trade with the other country. The cross-country grav- cent of total FDI inflows. The share stands at around ity model allows assessment of the level of bilateral 20 percent for Turkey for these sectors. Another sector trade between pairs of countries relative to their trade receiving significant FDI inflows was mining; its share potential. The computation of bilateral trade poten- reached 70 percent in Iran and 40 percent in Turkey. tials underlies a regression model estimating the im- In contrast, FDI inflows into China, Brazil, Indonesia, pact of structural determinants on bilateral exports and India were concentrated in manufacturing or high between 2006 and 2008. The structural determinants technology services, which typically have high potential for each pair of countries together with the estimated for spillovers in terms of technologies, production ca- regression coefficients are used to compute the bilat- pacities, and also employment. In most Mashreq coun- eral trade potentials. The methodology is described in tries, FDI into these sectors was almost negligible. The detail in the Annex 1. The empirical framework makes exceptions were foreign investments into the chemical it possible to categorize bilateral exports as over-trad- and other manufacturing sectors in Turkey and Jordan. ing or under-trading, depending on the comparison FDI in chemicals accounted for about 18 percent of between realized bilateral export values and the mod- FDI inflows in both countries while other manufactur- el’s predictions. ing received about 18 percent of total FDI in Turkey and The trade complementarity index suggests that 10 percent in Jordan. For Jordan and Egypt, it should the potential for intra-regional trade between the be noted that a significant amount of FDI in manufac- Mashreq countries and Turkey has increased since turing is geared towards textile and garments located 2001; specifically, the prospects of all countries to in- in Qualifying Industrial Zones (QIZs) with duty and crease exports to Iraq and Turkey improved substantially. quota free exporting arrangements to the U.S. However, Table 5 and Table 6 summarize the bilateral trade poten- foreign investment into QIZs has been reported to have tials among the six countries in 2010 and 2001 report- very low linkages with the domestic suppliers. ing the pairwise trade complementarity indices between them. Trade complementarity indices measuring the ex- Given the characteristics and trends in port potentials of almost all countries to Turkey and Iraq bilateral trade and investment flows, where increased by around 10 and 30 points, respectively. The are the trade potentials in the sub-region and increase in the export potentials to Turkey reflects that what are potential mutual benefits from intra- these countries’ manufacturing exports tended to diver- regional trade integration? sify into products that Turkey imports. The substan- This study assesses the potential to increase trade tial increase in the export potential in relation to Iraq in the region at the aggregate level. The analysis is reflects the stark increase in the number of goods that ECONOMIC COMPLEMENTARITIES 15 Table 5 Trade Complementarity Index in 2010 Imports Turkey Syria Jordan Lebanon Iraq Egypt Iran Libya Tunisia Turkey 49 32 29 82 36 29 29 34 Syria 53 39 38 81 40 28 33 39 Jordan 53 96 32 82 42 55 52 39 Lebanon 54 96 43 82 44 60 56 45 Iraq 56 93 41 37 46 57 60 41 Egypt 44 49 34 29 81 30 30 35 Iran 48 49 33 30 82 35 29 36 Libya 54 55 35 30 81 39 32 36 Tunisia 49 51 35 29 83 39 28 30 Source: UN COMTRADE Database. Note: Index varies from 0 to 100; exporters in rows, importers in columns; i.e., Turkey’s export potential (TC) to Iraq is 82 while Iraq’s export potential to Turkey is 56. More than 5 index point better in ‘blue,’ worse in ‘red.’ Table 6 Trade Complementarity Index in 2001 Imports Turkey Syria Jordan Lebanon Iraq Egypt Iran Libya Tunisia Turkey 53 42 33 54 50 24 30 Syria 44 45 40 97 46 58 31 Jordan 43 49 31 53 42 15 27 Lebanon 47 48 46 52 48 19 32 Iraq 39 90 45 35 52 59 29 Egypt 39 52 41 32 54 20 30 Iran 37 53 38 27 54 43 26 Libya 43 53 38 30 54 41 15 36 Tunisia 40 85 44 31 98 43 56 Source: UN COMTRADE Database. Note: Index varies from 0 to 100; exporters in rows, importers in columns; i.e., Turkey’s export potential (TC) to Iraq is 54 while Iraq’s export potential to Turkey is 39. Iraq imports since the second Gulf war; it is expected to trade complementarity indices. The potential to export somewhat decline over time once domestic production to Tunisia increased for almost all countries, albeit from in Iraq picks up again. The potential to export to Syria relatively low levels. Finally, it should be noted that bi- significantly increased for Jordan and Lebanon between lateral trade complementarities are generally expected to 2001 and 2010, in part reflecting the increased diversi- have increased since 2010 (apart from Syria due to the fication of the Syrian economy. The export potential to impact of the ongoing conflict) due to recent bilateral Lebanon remained almost constant during this period free agreements (FTAs) between Jordan, Lebanon, and while the potential of exporting to Jordan and Egypt Turkey; these are expected to further increase bilateral declined somewhat for a few countries according to the trade which would lead to a better match between these 16 Over the Horizon: a New Levant countries’ export and import baskets (and hence higher of the gravity trade model indicate that the estimated indices).10 potential trade volumes predicted by structural trade de- The indicators suggest that trade complementari- terminants between countries in the region are close to ties among Mashreq countries and Turkey are relative- the realized intra-regional trade values.11 However, the ly high and comparable to index levels among countries results also suggest a significant untapped potential for that historically have formed successful regional trade Egypt and Turkey to deepen their trade integration in the agreements. The six founding members of the EEC had region. For both countries actual realized trade flows are an average trade complementarity index of 53 when lower than predicted by trade fundamentals in the mod- they signed the agreement; the free trade area between el, which is an indication of under-trading. In fact, Jor- Canada and the U.S. had a founding value of 64. The dan, Lebanon, and Tunisia are under-exporting to both index for the Eastern enlargement (Bulgaria, Hungary, countries. Moreover, Egypt does not over-trade with any Poland, Czech Republic, and Slovak Republic) of the EU regional partner. The results indicate the existence of amounted to 61. In contrast, regional trade agreements trade barriers affecting entry and expansion in the large that have been cancelled afterwards had much lower Egyptian and Turkish markets. Investigating the source values: the index was 22 for Latin American Free Trade of these barriers and whether they are aimed at regional Association (LAFTA) and 7 for the Andean pact (Boliv- partners is crucial to identify the determinants of the lack ia, Colombia, Ecuador, Peru, and Venezuela). According of deeper regional integration in the sub-region. One of to the trade complementarity indices, Turkey, Syria, and the chapters in this study addresses this issue. Iraq were relatively well positioned for a regional trade agreement in 2010 (the bilateral indices always exceed Beyond the aggregates, which industries and 53 apart from Turkey’s export potential to Syria). The products stimulated individual countries’ bilateral indices vary from 29 and 54 for Jordan, Leba- export performances? What are the industries non, Egypt, and Tunisia (excluding the export potential and products in these countries that benefitted from regional trade integration or started of these countries to Iraq). In addition, the indicators to face more intense regional cross border suggest that Jordan and Lebanon have a relatively good competition? potential to export to Iran and Libya. Finally, it is im- In the following, we measure the structure and special- portant to note that the index is static in the sense that it ization of countries’ exports baskets in the region by does not capture dynamic gains from trade due to tech- analyzing the trend in recent export performances at nology transfers and foreign investments. the industry and product level. The export performance Egypt and Turkey are under-trading in the region is measured by (the growth rate in) RCAs. The RCA relative to fundamentals suggesting an untapped po- measures a product’s export share in a country relative to tential for both countries to deepen their trade integra- the product’s world export share. A value larger than one tion. The gravity model analysis assesses the level of bi- lateral trade between Egypt, Iran, Iraq, Jordan, Lebanon, Syria, Tunisia, and Turkey with respect to its potential, 10 The reduction in tariffs due to the bilateral FTAs is expected to based on a cross-country gravity model of international lead to more trade among these countries. An increase in trade between two countries typically implies an increase in the bilateral trade. The methodology of the gravity trade model is pre- trade complementarity index between them as the export structure sented in Annex 1. Annex 2 shows the predicted versus of one country better matches the import structure of the other actual trade patterns between each country’s exports and country. 11 The results show, however, that Jordan and Iraq are over-trading all other 181 countries in the sample. Table 7 presents (both in exports and imports), and Iran and Iraq are over-export- the main results of the gravity trade model. The findings ing to Turkey. ECONOMIC COMPLEMENTARITIES 17 Table 7 Benchmarking Bilateral Trade Relationships (Averages, 2009–2011) Egypt Iran Iraq Jordan Lebanon Libya Syria Tunisia Turkey Egypt 0.99 1.02 0.96 0.92* 1.07 0.97 1.00 0.93* Iran 0.92* — 0.96 0.95 — 1.29* 1.10 1.07* Iraq 0.87* 1.10 1.16* 0.90 — 1.30* 0.68* 1.08* Jordan 0.89* 1.03 1.15* 0.92 1.18* 0.90* 1.11 0.91* Lebanon 0.90* 1.03 1.10* 0.89* 1.00 0.82* 0.94* 0.93* Libya 1.07 — — 1.02 1.15 1.53* 1.12* 1.05 Syria 0.95 1.11* 1.26* 0.91* 0.81* 1.38* 1.01 0.92 Tunisia 0.93* 1.22* 1.04 0.99 0.94 1.03 1.02 0.94* Turkey 0.94 1.02 1.04 0.95 0.92* 1.00 0.94* 0.97 Source: UN COMTRADE Database, authors’ calculations. Note: Each cell represents the log of realized bilateral exports as a share of the log of potential bilateral exports. Exporters are in rows and importers in columns. A ratio larger (smaller) than one indicates that the exporter over-trades (under-trades) with the importer. Over-trading trade relationships are colored in green whereas under-trading relationships are colored in red. Statistically significant trade relationships at 10 percent are marked with a star. indicates that the country has an RCA in this product Tunisia experienced strong export growth in office and since the share of the product in the country’s export bas- telecom equipment. ket exceeds the product’s share in world exports. Hence, Nevertheless, traditional sectors (i.e., food, tex- RCAs measure export performances base on outcomes tiles, garments and footwear, mineral goods) are still that must be taken into account when interpreting the dominant in these countries. The export baskets of results in the presence of producer subsidies that can be a Syria, Egypt, Jordan, Lebanon, Tunisia as well as Turkey significant factor in the agricultural sector.12 are still concentrated in predominantly low productivity Recent export performances reveal a diversifica- industries such as agricultural and mineral products, tex- tion from traditional sectors towards new, potentially tiles and garments, fertilizers, stone, glass and ceramics, higher productivity sectors (i.e., electrical appliances) base metals, or furniture and miscellaneous manufactur- to different degrees in all countries apart from Iraq, ing products. Apart from Tunisia, all six countries have Iran, and Libya. Table 8 compares the evolution of an RCA in exporting vegetable products, processed food, RCAs at the industry level in the region from 2005 to garments and footwear, or fertilizers. Tunisia successfully 2009.13 The electrical appliances sector (i.e., household and industrial refrigerators, air conditioning machines, 12 or electrical heaters) grew strongly in Turkey, Syria, Jor- In the absence of major production distortions (i.e., large govern- ment subsidies), a RCA>1 implies that the endowment structure dan, and Egypt from 2005–2009. Tunisia already had of a country is favorable to produce the good. If the production an RCA in the industry while Turkey was close to gain- of a good is subsidized, however, the good’s domestic export share ing one. Likewise, Turkey already successfully exported also reflects the level of subsidies. For instance, farmers of specif- ic “strategic” agricultural crops (i.e., cotton, wheat, or sugar beet) transport equipment in 2005 and further augmented its benefit from government producer subsidies in Syria. Thus, the relative export share in world markets for this industry interpretation of the RCA levels for these products has to be re- between 2005 and 2009. Moreover, Syria, Jordan, Egypt, garded with caution. 13 The underlying export data are based on 2-digit SITC product and Tunisia raised their relative export shares in industrial classifications that are aggregated to 23 industries; thereafter, the machinery, albeit from a very low level in 2005. Finally, RCAs are computed for each industry. 18 Table 8 Export Performance (RCA) across Aggregate Categories and Countries Turkey Syria Lebanon Jordan Egypt Tunisia Iran Iraq Libya Annual Annual Annual Annual Annual Annual Annual Annual Annual growth growth growth growth growth growth growth growth growth Industry description 05 09 05–09 05 09 05–09 05 09 05–09 05 09 05–09 05 09 05–09 05 09 05–09 05 09 05–09 05 09 05–09 05 09 05–09 Animal products 0.23 0.33 9% 1.80 2.66 10% 0.32 0.38 4% 0.89 0.94 1% 0.28 0.90 34% 0.82 0.59 8% 0.12 0.07 –12% 0.00 0.00 –10% 0.02 0.01 –27% Vegetable products 2.81 1.98 –8% 2.14 4.19 18% 2.74 1.80 –10% 2.96 3.06 1% 2.96 3.31 3% 1.24 0.94 –7% 0.79 0.43 –14% 0.09 0.09 1% 0.00 0.00 31% Organic oils and fats 1.38 0.73 –15% 4.16 1.73 –20% 1.86 0.93 –16% 7.00 0.30 –55% 0.57 1.23 21% 10.82 6.00 –14% 0.08 0.04 –18% 0.00 0.01 0.00 –33% Processed food 1.14 1.00 –3% 1.20 2.34 18% 3.44 2.02 –12% 1.54 1.35 –3% 0.67 1.03 12% 1.15 0.77 –10% 0.12 0.13 3% 0.01 0.00 –30% 0.00 0.00 –11% Mineral products 0.28 0.30 1% 4.60 2.36 –15% 0.62 0.30 –17% 0.07 0.09 7% 3.90 1.78 –18% 0.86 0.82 –1% 5.97 5.41 –2% 6.71 6.07 –2% 6.53 5.95 –2% Over the Horizon: a New Levant Hide and leather 0.58 0.56 –1% 0.88 1.13 7% 1.68 0.71 –19% 0.50 0.48 –1% 0.82 1.57 21% 4.71 5.00 2% 0.48 0.52 2% 0.08 0.06 –7% 0.06 0.06 1% Wood products 0.42 0.62 10% 0.06 0.20 37% 1.31 1.34 0% 0.28 0.37 7% 0.09 0.18 19% 0.32 0.36 3% 000 0.01 8% 0.00 0.00 24% 0.00 0.00 –23% Paper products 0.48 0.71 10% 0.14 0.40 31% 2.42 2.36 –1% 1.01 2.02 19% 0.31 0.79 26% 0.85 0.95 4% 0.01 0.01 –8% 0.00 0.00 –34% 0.00 0.00 24% Textiles 3.93 3.44 –3% 2.69 4.05 11% 0.65 0.61 –1% 0.27 0.27 0% 2.09 2.70 7% 1.31 1.30 0% 0.53 0.24 –18% 0.02 0.01 –20% 0.00 0.00 9% Garments & footwear 4.58 3.30 –8% 0.74 1.75 24% 1.08 0.67 –11% 8.00 4.61 –13% 0.54 1.54 30% 8.62 6.41 –7% 0.01 0.01 –16% 0.00 0.00 59% 0.00 0.00 –40% Rubber & Plastics 0.77 0.90 4% 0.21 0.50 23% 0.61 0.66 2% 0.35 0.18 –15% 0.90 0.63 –8% 0.33 0.32 –1% 0.13 0.60 47% 0.00 0.00 –35% 0.08 0.08 1% Fertilizers 1.55 1.65 2% 2.34 2.70 4% 6.26 4.16 –10% 37.7 41.1 2% 4.64 14.3 32% 9.65 9.08 –2% 1.18 1.44 5% 0.13 0.01 –55% 0.94 0.81 –3% Chemical products 0.28 0.28 1% 0.28 0.56 19% 0.72 0.46 –10% 1.87 1.75 –2% 0.30 0.66 22% 0.59 0.54 –2% 0.25 0.44 15% 0.01 0.02 6% 0.15 0.11 –6% Stone, ceramic, glass 1.71 2.09 5% 0.23 0.62 28% 5.04 4.89 –1% 0.54 0.56 1% 2.39 2.15 –3% 0.87 1.26 10% 0.11 0.12 1% 0.00 0.00 –41% 0.00 0.00 95% Base metals 1.69 2.02 5% 0.18 0.31 14% 0.80 0.66 –5% 0.45 0.90 19% 1.21 1.28 1% 0.34 0.69 19% 0.37 0.24 –10% 0.01 0.00 –34% 0.11 0.07 –13% Furniture, plumbing 1.45 1.55 2% 0.14 0.12 –3% 2.05 1.82 –3% 0.67 0.52 –6% 0.58 1.13 18% 0.57 0.44 –6% 0.02 0.01 –19% 0.00 0.00 –3% 0.00 0.00 –23% Transport equipment 1.27 1.40 2% 0.01 0.02 10% 0.10 0.14 10% 0.07 0.02 –26% 0.04 0.06 13% 0.22 0.27 5% 0.03 0.04 7% 0.00 0.00 18% 0.00 0.00 35% Industrial machinery 0.57 0.64 3% 0.04 0.08 21% 1.07 0.82 –6% 0.12 0.19 11% 0.05 0.11 23% 0.20 0.37 17% 0.03 0.04 11% 0.00 0.00 3% 0.00 0.00 –5% Office & telecom equ. 0.48 0.25 –15% 0.00 0.00 68% 0.19 0.29 11% 0.08 0.01 –37% 0.02 0.02 6% 0.11 0.45 41% 0.01 0.00 –19% 0.00 0.00 19% 0.00 0.00 37% Electrical appliances 0.58 0.86 10% 0.08 0.42 50% 0.55 0.57 1% 0.29 0.48 14% 0.03 0.36 85% 1.61 1.98 5% 0.01 0.02 16% 0.00 0.00 13% 0.00 0.00 –16% Scientific & 0.09 0.12 7% 0.00 0.01 39% 0.26 0.21 –5% 0.00 0.01 10% 0.01 0.10 83% 0.56 0.49 –3% 0.02 0.02 –7% 0.00 0.00 11% 0.00 0.01 56% photo app. Miscellaneous manuf. 0.92 0.84 –2% 0.18 0.47 28% 2.53 2.27 –3% 1.77 1.22 –9% 0.13 0.40 34% 0.46 0.71 12% 0.04 0.02 –12% 0.00 0.00 12% 0.01 0.00 –9% Coins & gold 0.53 4.42 70% 18.0 23.3 7% 0.04 2.25 168% 0.40 3.61 73% 0.10 0.01 –43% 0.90 0.25 –28% 1.83 0.60 1.86 33% Source: UN COMTRADE Database. Note: “blue”: good performers (RCA>1 in 2005 and not declining), “red”: declining industries (RCA deteriorated <–5% annually, “green”: potential rising stars (RCA-growth>5% annually and RCA<1 in 2005 and RCA>0.4 in 2009). RCA calcula- tion is based on mirrored imports data for Iraq and Iran. ECONOMIC COMPLEMENTARITIES 19 exports organic oils and fats while it lost its RCA in veg- In particular, Lebanon lost competitiveness in etable products and processed food in 2009. Similarly, manufacturing exports across various industries while Turkey and Egypt have an RCA in exporting base met- Syria and Egypt experienced strong export growth in al products (iron and steel bars, pipes, and plates) while predominantly low technology industries. Lebanon‘s Jordan, Syria, and Tunisia’s exports in the base metal in- export share in world markets declined in 16 out of dustry grew strongly from 2005 to 2009. 23 industries. Only the relative export shares of coins Iraq, Iran, and Libya have the least diversified ex- and gold and transport equipment grew by more than port baskets: exports are highly concentrated in petro- five percent annually. In contrast, Lebanon lost compet- leum products. Table 8 shows that these three countries’ itiveness in exporting vegetable products, organic oils, exports are centered in mineral (petroleum) products. processed food, hide and leather, garments and footwear, Iraqi and Libyan exports in any other industry (apart fertilizers, and industrial machinery where it lost its RCA. from coin and gold) are negligible. In contrast, Iran’s In contrast, Syria and Egypt had average annual growth export basket is more diversified. Iran developed some rates above five percent in their relative export shares of export successes in industries related to petroleum such animal products, processed food, hide and leather, wood as petrochemicals, rubber and plastics, as well as fertiliz- and paper products, textiles and garments, or miscella- ers (for which it has an RCA). Moreover, it still exported neous manufacturing products between 2005 and 2009. notable volumes of vegetables, textiles, or stone, ceramic, Moreover both countries gained RCAs in exporting hide and glass products even though exports in these indus- and leather and garments and footwear while Egypt also tries declined between 2005 and 2009. gained an RCA exporting furniture. There appears to be direct competition for region- However, the degree of direct competition varies al and world markets shares in these traditional ex- among the six countries as primary export destinations port sectors among Lebanon, Turkey, Jordan, Syria, are in some cases segmented, in particular for Turkey Egypt, and Tunisia. Table 8 suggests a regional shift in and Tunisia relative to the Mashreq countries whereby export and hence production structures. Each of these Egypt might be an intermediate case. For instance, Egypt six countries except Egypt lost shares in world markets and Jordan directly compete in exporting garments to exporting organic oils and fats; Egypt gained an RCA the U.S. as both countries benefit from duty and quo- in the industry in between 2005 and 2009. In contrast, ta exemptions in QIZs for exports to the U.S. market. Lebanon and Jordan lost their RCA in this industry in In contrast, Turkey and Tunisia’s garment exports focus the same period. Likewise, Lebanon lost an RCA in on EU markets while garment exports from Syrian and hide and leathers between 2005 and 2009 while Syria Lebanese primarily target other Arab countries. Similar- and Egypt gained an RCA for the same period. Turkey, ly, agricultural and food products from Syria, Jordan, Tunisia, and Lebanon lost market shares in vegetable and Lebanon predominantly target other Arab countries products while Syria and Egypt expanded their market including Gulf countries, while Turkish and Tunisian ex- shares. Likewise, Turkey, Tunisia, Lebanon, and Jordan ports in these industries target EU markets, which often lost market shares exporting garments and footwear require meeting higher quality standards. Moreover, agri- while Syria and Egypt gained an RCA in the industry cultural products have been exempted in recent free trade between 2005 and 2009. Moreover, Turkey has already agreements between Turkey and Mashreq countries. In an RCA in exporting base metals while the sector is ris- contrast, all six countries apart from Tunisia appear to ing in Jordan and Syria; in contrast, exports in paper target the fast-growing Iraqi market, for instance, in ex- and wood products or electrical appliances are rising in porting base metals products or electrical appliances (i.e., Egypt, along with Turkey, Tunisia, Jordan, and Syria. electric wire), which are absorbed by growing Iraqi oil 20 Over the Horizon: a New Levant investments. In this regards, Iraq’s strong market growth products in the following industries with high potential (from low levels) and high import dependency secured for intra-regional economic complementarities: (pro- strong export growth rates to Iraq in various industries cessed) food, chemicals, electrical appliances, and indus- from all of these countries so far. trial machinery. Moreover, product level complementar- The industry level export data also suggests po- ities are further analyzed in this report. tential for increased intra-regional trade, in part in Product level export performances in the food sec- potentially higher productivity manufacturing sectors. tor show that Egypt’s and to a lesser degree also Syria’s For instance, Jordan has an RCA exporting chemicals, (regional) competitiveness in many products increased in particular pharmaceuticals. The corresponding relative between 2005 and 2009 while Jordan’s declined; nev- exports shares are significantly smaller in all other coun- ertheless, the country performances depend substantial- tries despite recent growth in Egypt and Syria. Jordanian ly on the individual product reflecting country specific exports of inorganic chemicals derived from domestic product specializations. Table 9 highlights products in phosphate and potash industries to Turkey accounted the selected industries with significant positive or neg- for 16.3 percent of Jordanian exports to Turkey in 2010. ative relative export growth (RCA) performances in at Turkey is also a large potential market for Jordanian least one country in the region between 2005 and 2009. pharmaceuticals, which are already successfully export- The disaggregated results conceal substantial variations ed to Lebanon.14 Likewise, animal products (i.e., frozen in export performances of products across countries. For meat) are a successful and growing export industry in instance, Egypt, Syria, and Jordan increased their export Syria and to some degree also Egypt. Both countries are share of poultry meat in world markets by averages of relatively well placed to satisfy higher regional demand 79, 201, and 42 percent (respectively) annually between due to rising income levels.15 Wood products are a sig- 2005 and 2009 while relative export shares declined by nificant and rising export sector primarily in Turkey and an average 20 percent annually in Lebanon in the same Lebanon given both countries’ climatic and topographic period. Similarly, Egypt increased its average annual rela- characteristics while the export share of the related paper tive growth in exporting macaroni and spaghetti by over industry has been rising in all six countries. Similarly, ex- 400 percent potentially at the expense of Lebanese and ports of electrical appliances have risen strongly in all six Jordanian producers in the regions whose export shares countries partly reflecting higher intra-regional demand in world markets declined substantially in the same pe- (i.e., from Iraq) with rising income levels or higher de- riod. Likewise, Egypt’s export share in world markets in mand from EU countries (in the case of Turkey and to margarine doubled (albeit from a low level) while Turk- some extent also Tunisia). Furthermore, Turkey already ish exports of margarine declined by 18 percent annually exports several more sophisticated intermediate goods and Lebanese and Syrian exports collapsed almost entire- in transport equipment or industrial machinery to the ly. Moreover, the exports of wheat flour appear to have region, such as railroad material of iron and steel, metal shifted from Syria to Jordan while regional citrus fruit tanks, or agricultural machinery. In turn, all countries exports have shifted from Jordan to Syria and possibly significantly increased their exports of electric insulated to Tunisia. wire and cable to Iraq due to a high and increasing de- mand by the oil sector. A detailed determination of po- tential complementarities in specific products requires, 14 However, there exists a domestic Turkish pharmaceutical industry however, a more detailed analysis of product level export that primarily targets the domestic market and appears to be de facto protected by non-tariff barriers from Jordanian products. performances. Therefore, Table 8 presents the export per- 15 Consumers typically substitute calorie intakes of crops with meat formances of all of these six countries for selected 4-digit when per capita income levels rise. Table 9 RCA Growth for Selected 4-digit Products Turkey Syria Lebanon Jordan Egypt Tunisia SITC Products 2009 gr SITC Products 2009 gr SITC Products 2009 gr SITC Products 2009 gr SITC Products 2009 gr SITC Products 2009 gr Food 114 Poultry dead 0.96 27% 114 Poultry dead 0.57 201% 114 Poultry dead 0.07 –20% 114 Poultry dead 3.60 42% 114 Poultry dead 0.30 79% 114 Poultry dead 0.04 114% 224 Milk, cream pr. 0.07 –9% 224 Milk, cream pr 3.56 83% 224 Milk, cream pr 0.21 –2% 224 Milk, cream pr 5.19 –20% 224 Milk, cream pr 0.19 20% 224 Milk, cream pr 251 Eggs in shell 4.54 29% 251 Eggs in shell 120 217% 251 Eggs in shell 3.70 –5% 251 Eggs in shell 9.55 10% 251 Eggs in shell 0.02 –74% 251 Eggs in shell 411 Durum wheat 1.06 –25% 411 Durum wheat 0.14 –75% 411 Durum wheat 2.61 122% 411 Durum wheat 0.87 411 Durum wheat 0.28 117% 411 Durum wheat 0.00 564 Flours of veg. 5.68 –14% 564 Flours of veg. 0.76 –21% 564 Flours of veg. 18.3 142% 564 Flours of veg. 1.64 8% 564 Flours of veg. 9.37 121% 564 Flours of veg. 0.69 95% 460 Wheat flour 17.0 –8% 460 Wheat flour 0.01 –78% 460 Wheat flour 2.08 –16% 460 Wheat flour 1.35 156% 460 Wheat flour 2.96 3% 460 Wheat flour 2.31 –28% 470 Cereal flours 1.81 21% 470 Cereal flours 1.17 3% 470 Cereal flours 0.85 5% 470 Cereal flours 0.08 –46% 470 Cereal flours 0.79 –29% 470 Cereal flours 0.21 –53% 483 Macaroni, spag. 4.23 5% 483 Macaroni, spag. 0.18 6% 483 Macaroni, spag. 4.14 –23% 483 Macaroni, spag. 0.15 –20% 483 Macaroni, spag. 4.18 462% 483 Macaroni, spag. 13.4 1% 572 Other citrus 17.0 1% 572 Other citrus 22.4 99% 572 Other citrus 5.29 –8% 572 Other citrus 2.20 –26% 572 Other citrus 5.79 17% 572 Other citrus 0.60 72% fruit fruit fruit fruit fruit fruit 576 Figs, fr o dried 68.8 –3% 576 Figs, fr o dried 28.3 4% 576 Figs, fr o dried 0.86 –9% 576 Figs, fr o dried 0.05 –59% 576 Figs, fr o dried 0.30 26% 576 Figs, fr o dried 0.03 117% 615 Molasses 0.00 51% 615 Molasses 3.75 143% 615 Molasses 0.12 –8% 615 Molasses 0.00 615 Molasses 12.0 –39% 615 Molasses 914 Margarine 2.31 –18% 914 Margarine 0.02 –32% 914 Margarine 0.19 63% 914 Margarine 0.01 –86% 914 Margarine 0.28 120% 914 Margarine 9.65 7% Chemicals 5221 Chemical ele. 0.05 11% 5221 Chemical ele. 0.04 0.04 5221 Chemical ele. 0.06 –24% 5221 Chemical ele. 1.39 –8% 5221 Chemical ele. 6.63 144% 5221 Chemical ele. 0.06 –7% 5312 Bleaching ag. 0.91 28% 5312 Bleaching ag. 0.81 0.81 5312 Bleaching ag. 0.39 5% 5312 Bleaching ag. 0.00 –72% 5312 Bleaching ag. 0.46 121% 5312 Bleaching ag. 0.09 5417 Medicaments 0.15 –4% 5417 Medicaments 0.96 0.96 5417 Medicaments 0.17 –5% 5417 Medicaments 3.12 –1% 5417 Medicaments 0.35 6% 5417 Medicaments 0.07 14% 5543 Polishes, cream 3.93 1% 5543 Polishes, cream 7.53 7.53 5543 Polishes, cream 8.04 36% 5543 Polishes, cream 1.86 10% 5543 Polishes, cream 0.07 –46% 5543 Polishes, cream 0.02 –16% 5541 Soap 6.76 –1% 5541 Soap 1.64 1.64 5541 Soap 3.26 –26% 5541 Soap 7.16 –17% 5541 Soap 5.21 12% 5541 Soap 0.18 –33% 5622 Fertilizer phos. 0.01 38% 5622 Fertilizer phos. 0.31 0.31 5622 Fertilizer phos. 197 –11% 5622 Fertilizer phos. 143 235 5622 Fertilizer phos. 14.5 –16% 5622 Fertilizer phos. 187 –2% 5821 Phenoplasts 1.42 14% 5821 Phenoplasts 1.00 1.00 5821 Phenoplasts 1.64 24% 5821 Phenoplasts 0.23 5% 5821 Phenoplasts 1.12 57% 5821 Phenoplasts 0.70 6% 5914 Disinfection pr. 0.21 –21% 5914 Disinfection pr. 0.31 0.31 5914 Disinfection pr. 0.77 –35% 5914 Disinfection pr. 4.46 13% 5914 Disinfection pr. 0.40 84% 5914 Disinfection pr. 0.15 100% Machinery, Transport, Electrical Appliances & Equipment 7131 Aircraft engine 0.03 31% 7131 Aircraft engine 0.06 7131 Aircraft engine 39.9 265% 7131 Aircraft engine 13.1 50% 7131 Aircraft engine 7131 Aircraft engine 0.00 7219 Agric. mach. 0.93 11% 7219 Agric. mach. 1.17 104% 7219 Agric. mach. 0.01 –49% 7219 Agric. mach. 0.26 –23% 7219 Agric. mach. 0.16 65% 7219 Agric. mach. 0.18 –25% 7415 Air condition 1.12 14% 7415 Air condition 0.08 48% 7415 Air condition 0.95 12% 7415 Air condition 3.49 5% 7415 Air condition 1.57 130% 7415 Air condition 0.89 38% 7711 Transformers 3.86 10% 7711 Transformers 1.49 342% 7711 Transformers 0.40 –44% 7711 Transformers 0.48 38% 7711 Transformers 0.22 152% 7711 Transformers 0.95 –34% 7731 Electric wire 2.52 9% 7731 Electric wire 4.52 102% 7731 Electric wire 2.18 –5% 7731 Electric wire 4.40 30% 7731 Electric wire 3.40 203% 7731 Electric wire 13.1 9% 7752 Refrigerator hh 7.81 –1% 7752 Refrigerator hh 2.65 –7% 7752 Refrigerator hh 10.5 14% 7752 Refrigerator hh 1.04 –7% 7752 Refrigerator hh 1.29 53% 7752 Refrigerator hh 0.23 –16% 7758 Elec-thermic ap 2.34 8% 7758 Elec-thermic ap 0.05 20% 7758 Elec-thermic ap 0.27 10% 7758 Elec-thermic ap 0.30 –21% 7758 Elec-thermic ap 0.97 165% 7758 Elec-thermic ap 0.21 –3% 7831 Busses 10.1 –1% 7831 Busses 0.00 –61% 7831 Busses 0.09 22% 7831 Busses 1.34 –32% 7831 Busses 2.94 41% 7831 Busses 0.08 –46% 7928 Aircraft, equip 0.37 304% 7928 Aircraft, equip 0.00 7928 Aircraft, equip 0.00 7928 Aircraft, equip 0.06 –65% 7928 Aircraft, equip 0.06 7928 Aircraft, equip Source: UN COMTRADE Database. Note: “blue”: rising product (RCA-growth>40% annually 2005–2009 and RCA>0.1 in 2009), “red”: declining (RCA-growth>40% annually 2005–2009). ECONOMIC COMPLEMENTARITIES 21 22 Over the Horizon: a New Levant Jordan maintained a strong export performance In addition to aircraft equipment Jordan also lost com- in several chemical products including medicaments petitiveness in exporting public-service type passenger while Egypt and to a lesser degree also Syria gained motor vehicles (buses), electro-thermic appliances, and export shares in several lower technology chemical machinery for agriculture. Lebanon and Tunisia lost ex- products between 2005 and 2009. Table 9 reports eight port shares in electrical transformers and machinery for chemical products that are produced and exported in the agriculture. In contrast, Egypt and to a lesser degree also region. Jordan has RCAs in six of these eight chemicals. Syria increased their export growth (from low levels) In particular, Jordan is successfully exporting medica- across the board in these medium or higher technology ments; these are mostly generic drugs with relatively low- products. er profit margins but recently the pharmaceutical firms About 20 percent of Syria’s strong overall export in Jordan are attempting to move up the value chain by growth performance can be explained by the strong developing patents (the pharmaceutical sector in Jordan rebound of exports to Iraq. Table 2 reports that the is discussed subsequently). Between 2005 and 2009, Jor- share of exports to Iraq in total Syrian exports increased danian firms faced increasing regional competition from from 0 in 2000/02 to 34 percent in 2008/10 (based low cost generic drugs (medicaments) produced in Syria. on Iraq’s import data). Part of this increase reflects the Exports of medicaments are minor in Turkey, Lebanon, normalization of the (official) bilateral trade relations and Egypt. Soap as well as polishes and cream are tradi- between both countries that had been distorted by the tional regional (low technology) chemical products; all Iraq war and international sanctions. However, the Syr- Mashreq countries and Turkey had an RCA in 2009 in ian export potential to Iraq might decline in the com- both products (apart from Egypt for polishes and cream). ing years once Iraq’s own production capacity starts However, relative export shares declined by about 20 per- to pick up again. Thus, how important was the Iraqi cent annually for soap in Jordan and Lebanon (as well as market after all, or in other words, how sustainable was 33 percent in Tunisia) and by 46 percent for polishes and Syria’s export performance? In a world excluding Iraq, cream in Egypt suggesting a loss in regional competitive- Syria’s export would have grown by an annual average ness in these cost competitive chemicals. In contrast, the of 22 instead of 27 percent between 2005 and 2008 other countries managed to maintain their high shares in (Table 10). In this regard, exports to Iraq explained world markets. approximately 20 percent of the export growth for Egypt and Syria experienced growing export this period. However, Iraq’s imports from Syria were shares, albeit from low levels, in several medium tech- concentrated in three industries: 99 percent of Syria’s nology products in the industrial machinery, transport exports of beverages and tobacco, 50 percent of me- equipment, and electrical appliances industries while dicaments, and 59 percent of machinery and transport export performances were mixed in Jordan, Lebanon, equipment were destined for the Iraqi market in 2008. and Tunisia in these industries. Table 9 shows that In particular, 78 percent of exported electric wire cables Turkey maintains high export shares in several products and 50 percent of exported household refrigerators, the in these potentially higher productivity industries and two main Syrian exports in the machinery and trans- increased its export shares in aircraft equipment albeit port equipment sector, were exported to Iraq. At the from relatively low levels. In contrast, exports of aircraft same time, however, several machinery and transport equipment collapsed in Jordan and are negligible in the equipment recorded strong export growth to the rest other countries. Jordan gained shares in world markets of the world excluding Iraq from including motor and in exporting electrical transformers, and insulated elec- engine parts, air conditioning machines, or electrical trical wire and cable (due to a high demand from Iraq). transformers. Thus, the Iraq factor played a significant ECONOMIC COMPLEMENTARITIES 23 Table 10 Syria Export Growth with and without Iraq by Sector (in percent) 2005–2008 Product Export growth (including Iraq) Export growth (excluding iraq) Food and live animals 32.7 24.1 Beverages and tobacco 95.1 –14.0 Crude materials, inedible, except fuel 21.5 21.2 Mineral fuels, lubricants and related materials 7.9 8.3 Animal and vegetable oils and fats 13.8 13.8 Chemicals and related products 44.1 55.1 Manufactured goods classified chiefly by material 63.2 61.4 Machinery and transport equipment 72.8 58.8 Miscellaneous manufactured articles 48.3 47.6 Commodities and transactions not elsewhere classified 54.6 54.2 Total 26.7 21.7 Source: UN COMTRADE Database. role but only explains a limited part of Syria’s export sophistication of their export baskets towards performance from 2005 to 2009.16 higher value added goods in terms of Overall, the product level export performanc- knowledge or technology content? es suggest a pattern whereby regional manufactur- The overall degree of export sophistication has not ing for several products in these industries between changed significantly among Mashreq countries since 2005 and 2009 shifted from Lebanon and Jordan to 1980, apart from some recent progress over the last de- Egypt and (to a lesser degree) Syria, respectively. In cade. Several recent contributions (Hausmann, Hwang, contrast, Turkey predominantly maintained strong ex- and Rodrik (2007); Krishna and Maloney (2011) and port performances in these products and industries and others) provide empirical evidence that countries export- even expanded its share in world markets in some cas- ing higher productivity goods grow faster. This analysis es. Taken as a whole, the results in Table 8 and Table follows the methodology of Hausmann et al. (2007) 9 suggest several products and industries in Turkey and who derive indexes ranking traded goods as well as coun- Mashreq countries with a high potential to benefit from tries’ export baskets in terms of their implied produc- regional trade integration or more exposure to regional tivity content (EXPY). The productivity content of ex- cross-border competition. Moreover, the disaggregated ports stagnated in all Mashreq countries until the late product level data show that to some degree different 1990s. In particular, Iraq’s exports sophistication over countries are specializing into different products within the last decades reflects the productivity content of oil traditional as well as modern manufacturing industries. exports, which constantly accounted for over 90 percent This chapter illustrates export growth performances in of Iraqi exports over the last 30 years (hence the EXPY world markets for all existing 775 four-digit SITC prod- for Libya and Iran resemble Iraq’s). Over the last decade, ucts through the lens of a product space analysis for all however, the export baskets of Jordan, Lebanon, Syria, countries. Tunisia, and Egypt slowly started to become somewhat Given these product specializations, 16 It might also indicate that Syrian goods became more competitive which countries managed to increase the given the stark competition for Iraq’s market. 24 Over the Horizon: a New Levant Figure 6 EXPY for Selected MENA (left) and East Asian Countries (right) (in US$, PPP)å 18000 18000 Malaysia 17000 Thailand 16000 Egypt 16000 Iraq 15000 14000 Lebanon 14000 Turkey 13000 12000 12000 11000 10000 10000 Jordan 9000 Tunisia Syria 8000 8000 Jordan 7000 Vietnam 6000 6000 1980 1984 1988 1992 1996 2000 2004 2008 1980 1984 1988 1992 1996 2000 2004 2008 Source: UN COMTRADE Database. more sophisticated.17 In particular, the EXPY for Egypt Compared to exporters in Turkey and fast-grow- jumped up in 2005 due to the sharp increase in exports ing East Asian countries, firms in Mashreq countries of natural gas in this year. That is, the export share of nat- show only weak export diversification towards higher ural gas in Egypt in 2004 accounted for only two percent productivity products. Figure 6 illustrates the evolution but jumped to 25 percent in 2005 due to the opening of the EXPY for Jordan, Turkey, and the fast-growing of the Arab gas pipeline which allowed the country to East Asian comparator countries. The stagnation of Mid- export natural gas to Jordan, Syria, Lebanon, and Israel. dle Eastern and North African countries’ export sophisti- As natural gas has a very high EXPY (it is mostly ex- cation is particularly striking compared to the evolution ported by rich countries) the sophistication of Egypt’s of the index in Malaysia, Thailand, Vietnam, or Turkey. export basket (measured in this way) increased eight-fold For instance, Malaysia had a comparable EXPY to Jor- in 2005. dan in the early 1980s but its export sophistication index exceeded Jordan’s (as well as the index for Lebanon, Syr- ia, and Iraq) by almost 50 percent in 2004. Thailand or Figure 7 EXPY versus GDP per capita Vietnam’s export sophistication index started well below 10.0 Jordan’s but exceeded the EXPY of the Jordanian export CHN THA MYS basket in 1985 and 2005, respectively. Moreover, Figure EGY TUR 9.5 LBN VNM SYR TUN 7 graphs the scatter plot of (the log of ) the EXPY and JOR 9.0 MAR GDP per capita (constant 2005 US$) in 2008 of most countries of the world. Figure 6 highlights the position 8.5 of Mashreq countries, Turkey, and the selected East Asian comparators between these two dimensions. It shows 8.0 that the degree of export sophistication of the export 7.5 6 7 8 9 10 11 Inpcgdp 2005 17 It is possible that the EXPY is lagging for MENA countries sim- ply because many of these countries are concentrating in services, Source: UN COMTRADE Database. which are not captured in the EXPY calculation. ECONOMIC COMPLEMENTARITIES 25 baskets of the Mashreq countries, Tunisia, or Turkey is Figure 8 Share of High, Medium, and Low Technology consistent with their GDP per capita levels (stage of de- Manufacturing Products with an RCA in 2007/09 (percent of total) velopment). Again, this contrasts with the fast-growing East Asian countries that show higher levels of export 70% sophistication in 2008 than the levels predicted by their 60% GDP per capita. 50% Another way of examining the export sophistica- 40% tion of countries in the region is to classify their ex- 30% ported products into different technology categories 20% as suggested by Lall (2000). Looking at exports where a 10% country has an RCA in 2007/09, primary and agricultur- 0% KOR MYS THA CHN ROM HRV BRA LBN TUR PRT JOR TUN SYR MAR EGY al products (classified as PP and RB1) account for about Medium and High technology products 40 percent of these exports in Egypt, Jordan, Lebanon, Low-Technology (other than garment, textile and footwear) Tunisia, and Syria. This compares to less than 30 percent for Thailand, Turkey, and Croatia. Textiles and garments, which are classified as lower technology products (LT1), account for more than 30 percent of the export basket for Syria whereas Thailand’s share stands at 12 percent benchmark as well as a potentially large source of de- and Malaysia’s at four percent. mand, foreign investment, or productivity (technology) spillovers. Second, products manufactured in Egypt and What are new, potentially higher value Syria experienced a strong increase in competitiveness added industries or products that firms in in similar industries potentially challenging more estab- the individual countries are well positioned lished exporters in the Arab region. Third, Jordanian and to diversify into in coming years? How Lebanese exports were already fairly diversified in the do these country-specific diversification 1990s, in particular in core manufacturing industry clus- trends complement each other? Which ters, but stagnated since. Fourth, Iraq, Iran, and Libya firm characteristics explain recent export have the least diversified export baskets: both countries’ successes? exports are highly concentrated in petroleum products. Regional trade complementarities analysis through the Fifth, Tunisia export structure does not seem to fit the lens of the product space suggests a particular group- Mashreq country groups given its focus on the European ing of countries with related production specializa- market and its more diversified export basket relative to tions in the region. The product space analysis provides Syria and Egypt. In this section, we present a detailed an understanding of current and potential future eco- product space analysis for each group of countries. The nomic complementarities in more detail at the indus- try and product level. The methodology of the product 18 The categories are: PP Primary Products; RB1: Resource-Based space analysis is presented in Annex 4. The product space Products (agriculture); RB2: Resource Based Products (oth- er); LT1: Low-Technology (textile, garment, footwear); LT2: is computed for the following periods: 1992–1994, Low-Technology (other); MT1: Medium-Technology (automotive 2000–2002, and 2007–2009.19 The analysis suggests a products); MT2: Medium-Technology (chemicals & basic met- particular grouping of countries with related production als); MT3: Medium-Technology (engineering products); HT1: High-Technology (electronics); HT2: High-Technology (other). specializations in the region. First, Turkey is the most 19 Average export data over three years is used in order to minimize diversified country in the region providing a regional the impact of yearly outliers, i.e., due to re-exports. 26 Over the Horizon: a New Levant Figure 9 Turkey Product Space 2007/09 analysis is supplemented with firm and industry specific product in total world exports. Products in which a information for each country. Throughout the analysis country has a revealed comparative advantage (RCA) production, complementarities between the countries are depicted as “black squares.”20 Distances between in the region are highlighted. In addition, several com- each of the 775 products (nodes or squares) represent parator countries from other regions are incorporated to the relatedness between these goods’ production pro- provide insightful benchmarks. cesses or technologies. For instance, with higher tech- The product space reveals the existence of a nology content, Figure 9 shows that Turkey has a re- densely connected industrial core of products and vealed comparative advantage manufacturing jerseys, several peripheral clusters, i.e., garments, textiles, pullovers, twinsets, and cardigans (8451). Turkey also or electronics with higher technology content. Fig- ure 9 illustrates the product space for Turkey based 20 on average export data from 2007/09. Each of the Apart from the country specific RCAs (black squares), the basic representation of the product space is identical for all countries as 775 nodes represents a single 4-digit product class. The the measure of distance between products is computed based on size of each node represents the export share of that the relative exports shares (and GDP) of all countries. ECONOMIC COMPLEMENTARITIES 27 Figure 10 Turkey Product Space RCAs 2007/09 has an RCA for manufacturing trousers, and breeches. the products where Turkey has a revealed comparative (8423). The distance between these two garment prod- advantage. Turkey is specialized in exporting several ucts is very small (see Figure 9) suggesting that it is manufacturing products in the core of the product space; relatively straightforward for firms in Turkey to special- these include vehicles, machinery, electrical appliances ize in either product (or other products in the garment (white goods), and some plastic products: i.e., motor cluster). However, the distance between jerseys (8451) parts, internal combustion engines, textile and weaving and electronic microcircuits (7764) is large (Figure 9) machinery, or acrylic polymers. It also has RCA in ar- since the latter requires an entirely different set of tech- ticles or iron and steel, base metals (springs and pipes), nologies, human capital, and processes. In fact, Turkey aluminum alloys, squares and packing containers, office does not have an RCA in electronic microcircuits (or supplies, or processed food products (i.e., sugar confec- other electronic products) implying that Turkish firms tionery) which are all close to the core of the product have not acquired the necessary adequate production space. In particular, 38 percent of Turkey’s exports to Eu- technology or processes. At the country level, it sug- rope in 2010 were machinery and transport equipment.21 gests that being specialized in garments will not facili- Nevertheless, traditional lower value added prod- tate the development of an electronics cluster. ucts such as garments and textiles or food products still account for a large share of Turkey’s revealed compar- The variety of manufacturing products in the ative advantages. For instance, six garments and textiles densely connected core of the product space products are in the top 20 products exported where un- reflects Turkey’s recent economic progress dergarments made of cotton account for 2.4 percent of and successful integration into European total exports. production chains. Turkey is climbing up the ladder of its dynamic com- parative advantage. Figure 10 illustrates the product 21 Machinery and transport equipment is the largest import category space for Turkey for 2007–2009 exclusively highlighting for Europe (29.5 percent of total imports from the world). 28 Over the Horizon: a New Levant Figure 11 China (left) and Brazil (right) Product Spaces 2007/09 The comparison with China shows that despite (of 10 percent or higher) since 1992/94 and are repre- impressive structural transformation over the past sented by a yellow pentagon. Figure 12 (right side) only 20 years, Turkey still has room, given its stage of devel- depicts the emerging product category, highlighting the opment, to further specialize in manufacturing prod- increased specialization in more capital-intensive man- ucts in the industrial core in addition to electrical appli- ufacturing products after Turkey’s Customs Union with ances or car parts. Figure 11 illustrates the product space the EU, which became effective in 1996. for China and Brazil in 2007/09. All three countries de- Success stories of Turkish manufacturers in electri- veloped several export successes in the industrial core of cal appliances or car parts exemplify Turkey’s success- the product space. However, only China managed to also ful integration into European and world production specialize in the electronics cluster. chains over the last decade. For instance, Beko, a Turk- Turkey gained revealed comparative advantage in ish manufacturer of domestic appliances (e.g., refriger- numerous products in the densely connected core of the ators, dishwashers, washing machines) and consumer product space over the last 20 years; these also include electronics (e.g., television sets), has become a well-estab- to some extent higher value added product classes. lished brand in EU countries. In 2004, Beko purchased Figure 12 shows the dynamic representation of Turkey’s the German television set manufacturer Grundig and re- product space between 1992/94 and 2007/09. We distin- named the company in Grundig Elektronik A.Ş. in 2008. guish between four different categories of products. First, In 2005, Beko and its Turkish rival brand Vestel account- “classics” refer to products that have RCA in 1992/94 as ed for more than half of all TV sets manufactured in Eu- well as 2007/09 and are represented by a “blue triangle.” rope. These firms also managed to develop higher value Second, “disappearances” reflect an RCA in 1992/94 but added brands. Innovations of Turkish producers include, not in 2007/09 and are represented by a red square. Third, for example, a Turkish coffee machine and a washing “emerging” shows RCA in 2007/09 but not 1992/94 are machine removing pet hair. Moreover, Turkey benefitted represented by a green diamond. Finally, “marginals” re- from FDI in passenger motorcars. Most multinational flect products where Turkey has not yet acquired an RCA enterprises (MNEs) produce in Turkey to export to the (0.51 in both periods; “Disappearances” (red squares): RCA>1 in 1992/04 and RCA<1 in 2007/09; “Emerging” (green diamonds): RCA<1 in 1992/04 and RCA>1 in 2007/09; “Marginals” (yellow pentagons): 0.520% between 1992/94 and 2007/09. commercial vehicles; Hyundai, Toyota, Renault, and the expiration of the Multi-Fiber Agreement in 2005, Honda transport vehicles; or MAN, Mercedes, and Isu- Turkey remains a major exporter in the industry. zu buses. Most importantly, Turkey managed to devel- Looking forward, one would expect that the cur- op a domestic car parts industry supplying intermediate rent trend of manufacturing products closer to the goods ranging from tires to motor parts to MNEs. densely connected core at the expense of peripheral The government actively supported the devel- products would continue. Hence, Turkey may lose its opment of car parts clusters by promoting joint ven- RCA in some garments, food, and base metal products tures between foreign and domestic producers helping possibly to neighboring Mashreq countries or South and Turkish firms to bridge initial technology gaps. Once East Asian countries as domestic wages rise. At the same domestic producers managed to satisfy MNEs’ quality time, the analysis suggests that Turkey is well positioned standards in Turkey, they also started to successfully ex- to strengthen its exports in industrial machinery. For in- port since obtaining a quality accreditation from MNEs stance, machinery tools, filtering and purifying machin- in Turkey (e.g., Ford) automatically guarantees the ac- ery, electric switches are selected products where Turkey creditation to sell to all other production facilities of that experienced strong export growth over the last decade MNE around the world. and is close to achieving an RCA. At the same time, the While several traditional lower value added prod- product space analysis would not suggest that Turkey ucts in the periphery of the product space disappeared diversifies into electronics or substantially expands its over the last 20 years, Turkey maintained its RCA in chemical sector in the coming years. garments and textiles as well as selected base metal and food products. Most of the disappearing products Egypt and Syria are gaining regional are in base metals and food industries: i.e., wheat, sponge competitiveness iron and steel granules, tea, fixed vegetable oils, or frozen Both countries gained regional competitiveness until vegetables have all lost RCA over the period. Despite in- 2010 and appeared to be well positioned to further creased international cost competition in garments after increase regional market shares in manufacturing 30 Over the Horizon: a New Levant exports despite remaining challenges in both coun- 110 products in Egypt, and 106 products in Jordan. Fig- tries’ business environment. The analysis revealed that ure 15 illustrates that Syria’s export successes span several Egypt and Syria experienced strong export growth be- peripheral product classes including petroleum, fruit and tween 2005 and 2009 in several, often lower, technolo- vegetable products, or garments and textiles. The cluster gy-manufacturing industries (Table 8 and Table 9). That of successful exporters in textile and garments implies is, both countries were in similar positions, albeit Syria further diversification potential within these industries. at an earlier stage, to further benefit from regional trade In contrast, it appears more difficult for Syrian firms to and investments. This section analyzes the structure and diversify into core industries (i.e., industrial machinery or evolution of product level export performances in more chemicals) given that the economy is specialized only in detail in order to assess the opportunities of a post-revo- a few related products. Nevertheless, Syria gained RCA lution Egypt and a potentially post-crisis (i.e., civil war) in a few more sophisticated products in the core of the Syria to further benefit from regional trade and foreign product space at the end of the past decade including elec- investments. Notably, the analysis shows that Egypt and tric wire cables, household refrigerators, articles of iron Syria’s export specialization in 2007/09 strongly resem- and steel, or plastics products (polymerization). For in- bled Turkey’s specialization 15 years ago. stance, the significant export growth in electric wire cables The product space for Syria shows that by 2007/09, and electrical transformers primarily originated from the its economy was reasonably well diversified, primarily creation of an industrial facility by the Egyptian firm El specialized in weakly connected peripheral products, and Sewedy Electric. It started producing electrical wire cables started exporting a few new manufacturing products in in Syria in 2005. In 2007, the installation of an additional the core of the product space (Figure 13). Despite its de- facility for transformers was inaugurated. El Sewedy Elec- pendence on oil exports, Syria had RCA in 131 four-dig- tric exports from Syria mainly to the Levant and the Gulf. it products in 2007/09 accounting for 67 percent of It appears that the reform initiatives in the 2000s overall exports, compared to 140 products in Tunisia, contributed to higher export growth driven by private Figure 13 Syria Product Space RCAs 2007/09 ECONOMIC COMPLEMENTARITIES 31 investments in non-traditional manufacturing indus- products. Likewise it successfully exports fruits, vege- tries. The last decade has been a transition period based tables, processed food, and several base metal products on more market-oriented policies resulting in structural such as structures and parts of iron, sheets and plates of change in the Syrian economy. The process of economic different mineral materials, or articles of iron and steel, transition has been achieved through gradual market-ori- glass, or nickel, copper and aluminum. The successful ented reforms since the early 2000s, which gained further exports close to the industrial core of the product space momentum since 2005. Significant reform initiatives contain goods from different industries including a few towards liberalizing the economy had been introduced, higher technology goods such as public-service type pas- most importantly, the removal of barriers to trade and senger motor vehicles or industrial refrigerators. financial development. The non-oil sector had become Egyptian garment exports have faced strong com- the engine of growth. Its share in total output accounted petition from Asian producers, but the creation of for nearly 90 percent in 2009. Likewise, private sector QIZs under an agreement with the U.S. and Israel since exports accounted to 93 percent of total exports in 2008. 2005 has provided the country with duty-free access Egypt has RCAs mostly in weakly connected periph- to the U.S. market. About 12,000 firms of 10 or more eral clusters (oil and gas, garments, food products, and employees operate in Egypt’s garment and textile sector, base metals) but also exports a few products in the dense- employing about one million workers, supplying the do- ly connected core (Figure 14). Mining is Egypt’s largest mestic and foreign markets. Egyptian, Turkish, Europe- export sector. Petroleum gases and other gases account- an, and Chinese firms dominate the industry. Most firms ed for 18 percent of Egyptian exports in 2007/09 while are of medium to large size with a strong public sector crude oil account for an additional 9.2 percent. In par- presence in spinning and weaving. ticular, the export of petroleum gases surged in 2005 af- The dynamic representation of the product space ter the opening of the Arab gas pipeline in 2003. Egypt illustrates Syria’s remarkable export performance also has RCA in exporting several garments and textile over the last decade. Figure 15 provides a comparison Figure 14 Egypt Product Space RCAs 2007/09 32 Over the Horizon: a New Levant between the developments from 2000/02 to 2007/09 boxes, and bags and other packing containers since. (left graph) and from 1992/94 to 2007/09 (right graph). This development suggests that Syrian firms diversified It reveals that Syria had experienced a decade of stag- from producing sugar confectionary to related upstream nation in export diversification in the 1990s: almost all products like bakery products and chocolates on the one new export successes over the last 20 years emerged over hand, as well as to related downstream products like box- the last decade. Syria even lost RCA in a few garments es and bags and other packing containers (i.e., packag- and textile products since 1992/94. In fact, there existed ing the chocolates and sugar confectionary) on the other only a few Syrian export successes close to the core of hand. Similarly, Syria systematically increased its export the product space in 2000/02, namely sugar confection- volumes in industrial refrigerators and finally gained an ery, writing block and envelopes, and polishes for foot- RCA in 2009. This trend suggests that exporters diversi- wear. Syria gained an RCA in 78 new products22 between fied from household refrigerators, in which Syria already 2000/02 and 2007/09. In contrast, Figure 15 reveals that had an RCA in 2005, to higher value added industrial Syrian firms generated a number of export successes in refrigerators over time. Reportedly, a major Syrian pro- products located more connected to the core over the ducer of household refrigerators left the country in the last decade. In particular, Figure 15 reports the number 1980s but re-located back to Damascus in early 2000s of classics, disappearing, emerging, and marginals prod- due to a more business friendly climate. ucts as well as the corresponding product’s technology Another rising sector in Syria was chemicals, in classification, productivity content, and product distance particular, medicaments and washing and clean- (PATH).23 Syria maintained its RCA in the 48 products ing preparations. The export of chemicals and relat- (classics) between 2000/02 and 2007/09. The average ed products grew by an average of 50 percent between productivity content (PRODY) of classic products corre- 2005 and 2008. The export growth was mainly driven sponded to the GDP of a lower middle-income country by exports of medicaments and washing and cleaning (US$8,416 per capita in PPP). Syria had 15 disappearing preparations (other than soap). Moreover, Syria’s phar- products between 2000/02 and 2007/09 (four resource maceutical industry is predominantly private and has the based products, seven primary, and two low tech). In largest number of pharmaceutical companies in the Arab contrast, 78 products emerged during the same period world: there are 63 firms in the industry including ten (11 primary, 20 resource based, 34 low tech, and 13 me- large exporting firms. Exports of pharmaceuticals record- dium tech products). The average PATH (134) is high- ed an average annual growth rate of 32 percent between er than the PATH for classics or disappearing implying 2000 and 2010 whereby most exports of medicaments that Syria’s opportunities to diversify into new products were destined for the Iraq, Lebanon, and African coun- increased. Moreover, the average PRODY of emerging tries. While Syria imported over 82 percent of its phar- products exceeds the one of classics or disappearing con- maceutical requirements 20 years ago, it ranked second firming the trend towards diversification into higher val- among Arab countries after Egypt in covering domestic ue added products. A few selected examples illustrate Syria’s prog- 22 ress over the last decade. For instance, Syria had RCAs Number of emerging products. 23 PATH or product distance is a measure of the distance between in sugar confectionary and jams and marmalades in any two products within the product space matrix. Calculating 2000/02. Figures 13 show that Syria developed RCAs PATH gives an indication as to whether any given product is lo- in several related products bringing its export specializa- cated in a particularly dense or sparsely part of the product space: if the PATH is short, factors of production, skills or technologies tion closer to the core of the product space: the country can be more easily deployed from one product to another. See Ap- gained RCAs in preserved bakery products, chocolate, pendix for a formal definition of PATH. ECONOMIC COMPLEMENTARITIES 33 Figure 15 Syria Product Space Dynamic Representation Changes 2000/02–2007/09 (left) and 1992/94–2007/09 (right) demand in 2009; it also ranked second in exports among (MT3), and in one in automotive parts. The positive Arab countries (after Jordan).24 structural change has been counteracted, however, by a In Egypt, the number of emerging products in- creased strongly between 2000/02 and 20007/09. 24 Syria’s pharmaceutical exports amounted to US$245 million in Egypt acquired an RCA in 74 new products over the 2009, slightly higher than Egypt’s. Jordan exported US$500 mil- period and diversified into a few new products in the in- lion worth of pharmaceuticals, which is equivalent to Turkey’s dustrial core of the product space. Figure 16 reveals that export sales in 2009. As a comparison, Germany’s export sales of medicinal and pharmaceutical products amounted to US$64 Egypt gained competitiveness in ten chemical or base billion in 2009 covering 15 percent of total world medicinal and metal products (MT2), in four engineering products pharmaceuticals exports. Figure 16 Egypt Product Space Dynamic Representation Changes 2000/02–2007/09 (left) and 1992/94–2007/09 (right) 34 Over the Horizon: a New Levant Figure 17 Thailand (left) and Malaysia (right) Product Space RCAs 2007/09 decline in Egypt’s relative export share in world markets space building up, for instance, domestic electronics in a few higher productivity products in the core of the or car parts (from tires to motors) clusters (Figure 17, product space: pharmaceutical goods other than medica- left graph). Likewise, Malaysia (Figure 17, right graph), ments and motors and generators. Similarly, Egypt lost which is also an oil exporter successfully developed man- RCAs in seven out of 15 4-digit products in the garment ufacturing clusters in the industrial core. cluster since 2000/02 (gaining RCAs in three garment To a large extent, Syria and Egypt’s export struc- products over the same period). Egypt also lost its RCA tures in 2007/09 resembled Turkey’s 15–20 years ago. in the sizable four-digit product class of synthetic wo- Figure 18 compares the product space for Syria and ven fabrics since over the last decade. Overall, Figure Egypt in 2007/09 with Turkey in 1992/94. It reveals 16 highlights that the majority of products exported by that apart from a few more exports successes in Egypt Egypt remained primary products (PP), resource based in base metal and food products and differences in the (RB1, RB2), or textile and garments (LT1). few core manufacturing products, Syria’s and Egypt’s Looking forward, there were a few products in core production specialization in 2007/09 was very similar. manufacturing clusters, primarily chemicals, in which Moreover, apart from oil and a few different products Egypt experienced strong export growth over the last in the core (mainly tires, motor vehicles, and television decade and are close to achieving an RCA. These in- receivers), Syria and Egypt developed an RCA in many of clude other polymerization, polyvinyl acetate, perfumery, the same products and industries as Turkey 15 years ago. cosmetics and toilet preparations, or aminoplasts. Egyp- These include garments and textiles, base metals, vege- tian firms might continue to increase their market shares tables and fruits, food processing, and paper products. in world exports in chemical products in the future. Even within industries, these are often exactly the same Despite the progress in Egypt and Syria, a com- 4-digit product classes, i.e., trousers and breeches, under parison with East Asian countries exemplifies that the garments, fruit juices, sugar confectionery, chocolate, process of structural transformation was been moving (yarn of ) synthetic fibers, insulated electrical wire and significantly slower. Thailand has specialized in several cable, household refrigerators, and domestic-type electric (higher value added) products in the core of the products heating. Turkey has maintained its RCA in many of these ECONOMIC COMPLEMENTARITIES 35 Figure 18 Product Space Syria (left) and Egypt (center) 2007/09, Turkey 1992/94 (right) products until the present, suggesting that it potentially core of the product space over the past 15 years. These faces significant competition from producers in a lower might include, among others, perfumery, cosmetics, and wage costs Egypt and potentially post-crisis Syria. toilet articles; coloring preparations (used in ceramic and Egypt and Syria’s resemblance with Turkey’s pro- glass) and acrylic polymers; chairs, other seats, and parts; duction (export) structure 15–20 years ago suggests locksmiths’ wares, safes, and strong rooms; agricultural that both countries can benefit significantly from deep- machinery; textile and weaving machinery; machinery er integration with Turkey. The resemblance of these for sorting, screening, and separating, road tractors and economies implies a large potential for technology trans- semi-trailer; motor parts, internal combustion engines, fers from (typically more advanced) Turkish to Egyptian and passenger motor cars for transport. Turkey’s product or Syrian firms. Moreover, given the potential wage cost space for 2007–2009 is shown in Figure 19. advantage, firms in Egypt or post-crisis Syria should be able to increase their export share in labor-intensive prod- Jordan and Lebanon: pressure to specialize in ucts relative to Turkey if they manage to catch up in terms higher technology niches of technologies and efficiency. Once the quasi civil war is The exports of both countries were already fairly di- overcome and Syria enters a phase of political transition, versified in the 1990s but have stagnated since; both the revival of the bilateral FTA with Turkey would allow countries must specialize in higher value added manu- Syrian firms to indirectly increase their exports to the EU facturing niches to escape regional and international cost via Turkey (if Syria signs the EU association agreement). competition in traditional export sectors. While Jordan’s Moreover, Turkish firms can benefit from lower wage manufacturing structure hardly changed over the last costs in Egypt and Syria through FDI, which further 15 years, Lebanon lost competitiveness in manufacturing increases the potential for technology spillovers. The re- exports across various industries. Both countries might semblance with Turkey 15 years ago provides information face higher competition for regional markets from Egyp- externalities, as firms in Egypt or Syria might consider tian or post-crisis Syrian manufacturers. entering or expanding into new product categories for The Jordanian economy is reasonably well diver- which Turkey had generated export successes close to the sified with a strong export performance in chemicals, 36 Over the Horizon: a New Levant Figure 19 Product Space Turkey 2007/09 jobs (and estimated additional 6,000 indirect jobs) in 2012. The export base includes a diversified range of medicines and dosage forms such as solids, semi-solids, liquids, or aerosols. Most of the pharmaceutical exports are, however, lower value added generic products reflect- ing that about 80 percent of these exports are destined for other Arab countries (mostly Saudi Arabia and Al- geria). In particular, about 90 percent of total revenues in the Jordanian pharmaceutical sector were generated by branded generics in 2007 implying that competition from lower cost producers will intensify. At the same time, there have been a few recent successes in develop- ing patents for new products by larger Jordanian firms. Thus, investment in research and development will play a key role for the future success of these firms to move up the global value chain into branded and patented bio- garments, (processed) food, and a few other manufac- pharmaceuticals or “biosimilars” which would generate turing products. Jordan’s share of exports in GDP aver- new jobs for skilled labor. However, the pharmaceuti- aged about 50 percent over the last decade, which is high cal sector appears to be only weakly linked to domestic for a developing country; it compares to 51 percent in suppliers: 90 percent of all chemicals used as inputs in Bulgaria, 42 percent in Croatia, and 39 percent in Chile the sector are imported. Only HIKMA Pharmaceuti- between 2000 and 2009.25 Jordan’s major RCAs include cals has a small spin-off producing chemicals (not active garments, food products, base metals (iron or aluminum pharmaceutical materials though). Reportedly, the main products), and selected products in the densely con- reasons are the high requested quality standards, small nected core, mainly chemicals (medicaments, varnishes, economies of scale relative to East Asian suppliers (i.e., and soap) and some machinery and electrical applianc- India), as well as relatively low transportation costs for es products (Figure 20). As in Syria, the Arab market chemicals. Similarly, other less sophisticated inputs such is Jordan’s major export market. It accounted for over as glass containers or packaging material are also often 40 percent of Jordanian exports in 2010 (17 percent to imported instead of being supplied domestically. Iraq alone), followed by the U.S. (19 percent, mostly Most exports of machinery and appliances orig- garments) and India (18 percent, i.e., fertilizers). While inate from a very few large and old internationally Jordan is a member of the WTO, it is nevertheless al- competitive companies. The following products ac- lowed to exempt firms from taxes on profits from exports counted for the majority (60 percent) of exports in until 2015. This tax exemption has been granted to sev- machinery and appliances industries in 2010: air condi- eral key industries (e.g., pharmaceuticals, ICT services, tioning machines (17 percent), refrigerators (household or air-conditioning machines) but not all sectors. and industrial, 14 percent), internal combustion engines The chemical sector appears to be the most promis- (11 percent), automatic data processing machines (six ing manufacturing sector to develop new (higher value percent), machinery parts (five percent), household added) products. The pharmaceuticals industry is the most promising sub-sector; it includes 17 registered typ- 25 See Jordan Development Policy Review (DPR), 2012, World ically big companies, which provided about 6,000 direct Bank. ECONOMIC COMPLEMENTARITIES 37 Figure 20 Jordan Product Space 2007/09 washing machines (four percent), and machinery for buildings, steel structures, transport vehicles (trailers, sorting, screening, and separating (four percent). Most low-beds, tippers, and tankers), petrochemical complex- exports of machinery and appliances originate from a es, or oil storage tanks. Moreover, the Mohammad Abu few large companies. For instance, Jordan has an RCA Haltam Group and the Alhafez Group started as trading in air conditioning machines and industrial refrigerators companies but switched towards manufacturing wash- (cooling rooms) primarily due to Petra Engineering In- ing machines, household refrigerators, or colored and dustries, which started to manufacture lower value-add- LCD television sets in the 1980s and 1990s in coop- ed household air conditioning machines for regional eration with foreign manufacturers or developing inde- markets in the 1970s. The initial success in the industry pendent barns (i.e., General Deluxe). Both firms obtain generated internal funds that the company reinvested substantial shares of their sales and profits from exports to move up the value chain, escaping competition from to other Arab countries.26 In the machinery parts indus- Chinese, Turkish, and recently Syrian low cost produc- try, PALCO Control started its operation in 1995 and ers. In the meantime, the company has over 2,000 em- specialized in the field of automation including products ployees (about 800 engineers) and specialized in high such a patented lift controller system, firearms shoot- value added industrial cooling systems (i.e., equipping ing fields, or scoreboards for basketball. In printing and research laboratories in the U.S. or EU). Likewise, Jor- packaging, the German manufacturer German firm dan’s RCA in public-service passenger motor vehicles Saueressig started producing specialized printing forms originates primarily from Elba House which manu- and printing plates in Jordan including a joint venture facturers buses (since 1992) and ambulance vehicles (since 1999) in Jordan in accordance with the required 26 However, a major producer entered the industry in 2008 as Na- specifications of different types of chassis (i.e., Mer- tional Integrated Industries Complex (NIIC), which was estab- cedes, MAN, Toyota). The company initially obtained lished by three major investors and operates factories producing air conditioners, washing machines, refrigerators, plastic and poly- the necessary expertise from the German manufactur- styrene plants, or warehouses. NIIC is further entitled to produce er Auwaerter. Elba House also produces prefabricated and import electric home appliances of Daewoo. 38 Over the Horizon: a New Levant Figure 21 Lebanon Product Space, 2007/09 with a major traditional Jordanian printing and packag- Lebanese exporters benefit from close connections ing producer. Finally, Steel Fabrication Co. and Ashour with the Lebanese Diaspora abroad (i.e., in the EU, Industrial and Trading Co. export machinery for sort- U.S., Brazil, or Australia) though external demand, ing, screening, and separating including machinery for know-how, or marketing and distribution systems. In mixing sand, iron and steel plates rolls, hangars, iron particular, the food industry benefits from the external bridges, steel structures, flammable liquid tanks, and demand of Lebanese living abroad for domestic prod- prefabricated buildings. ucts. Moreover, exporters often have wide-ranging mar- Lebanon has an RCA in exporting several prod- keting and distribution in foreign countries through ties ucts in the industrial core of the product space but with the Lebanese Diaspora and traders. In this regard, does not appear to be specialized in a particular in- Lebanon is also regarded as a pilot market for consum- dustrial cluster. Apart from food products, Lebanon er tastes. For instance, a Turkish glass manufacturer re- had RCAs in a few products in the garments and textile cently acquired a Lebanese producer to benefit from its clusters, a few base metal, paper, wood, (i.e., furniture), worldwide marketing and distribution system. and chemical products as well as a few higher value add- A comparison of Jordan or Lebanon with Cro- ed industrial machinery (i.e., industrial refrigerators, atia or Chile exemplifies two different paths for the electric motors and generators, or internal combus- countries’ manufacturing sectors, both of which might tion piston engines). At 43 products, Lebanon had the lead to higher income level. Figure 22 illustrates the highest share of medium and high technology exported product spaces of Chile and Croatia; both are chosen as goods (26 percent of total products with an RCA) in the comparator countries for Jordan based on their size and region including Turkey. Lebanon’s main export product openness. Both countries serve as a benchmark for Leba- remains gold, which accounted for 15 percent of total non and Jordan given that their average GDP per capita exports. Accordingly, gold and diamonds are imported, (in US$) was two to three times higher than Jordan’s processed, and re-exported partly as jewelry (Figure 21). in the last decade. Both countries show very different ECONOMIC COMPLEMENTARITIES 39 Figure 22 Chile (left) and Croatia (right) Product Spaces 2007/09 development paths. Chile specialized in products that electronics. The latter can potentially also provide posi- are typically not in the core of the product space (food tive spillovers for ICT service exports. processing and mining) while Croatia specialized in Jordan’s export performance in (higher value add- densely connected manufacturing clusters (chemicals, ed) manufacturing products in the core of the prod- base metals, industrial machinery, or garments). Chile uct space stagnated over the last 15–20 years. Figure is a good example that countries can advance from low 23 (left graph) shows that Jordan had already devel- to (higher) middle income countries without a strong oped an RCA in 2000/02 for most export successes in manufacturing base in the core of the product space. the core of the product space (classics). Even over the However, Chile’s growth benefitted from efficient re- last 15–20 years (right graph), only a few new products distribution and trickle-down effects from high mining emerged in the core (i.e., polyvinyl acetate, newspapers revenues, partly fueled by a commodity boom. More- and journals, other office supply, or chemical fertilizers). over, the analysis does not account for (export successes) What is more, Jordan appears to have lost RCAs in be- in services, which became important in Chile. A com- tween 2000/02 and 2007/09 in several industries: it lost parison between Lebanon, Jordan, and Croatia shows RCAs in about 11 products28 that were closely connect- that the Mashreq countries’ manufacturing sectors were ed to the dense part of the product space.29 In addition, lagging substantially despite similar access EU markets. Figure 23 (left graph) highlights that there are only a few Top EXPY contributors27 for Croatia have an average PRODY of US$26,662, reflecting primarily engineer- 27 Where PRODY>1.5*EXPY. 28 ing products (MT3) and electronics (HT1) as well as Alkyds and other polyesters, other pumps for liquids & liquid, bodies for the motor vehicles, manufactures of mineral materials, other high tech goods (HT2). Whereas Jordan’s average structures & parts of iron, converters, ladles, ingot molds and cel- at US$20,000 and are mostly products in the chemicals lulose acetates, slag wool, rock wool and similar min, sanitary ware and base metals categories (MT2) or low technology for indoor use, bars & rods, of iron/steel; hollow, wire rod of iron or steel. products other than textiles and garments. In particu- 29 These results are consistent with the findings of the Jordan DPR lar, Croatia specialized in higher value added products (2012) that the contribution of the exports of new products to ag- in industrial machinery, chemicals, and recently also gregate export growth has been low (10 percent from 2000–2010). 40 Over the Horizon: a New Levant Figure 23 Jordan Product Space Dynamic Representation Changes 2000/02–2007/09 (left) and 1992/94–2007/09 (right) products close to the core in which Jordan experienced value chain, for instance, from “cut and make” to devel- strong export growth over the last decade and is close to oping their own brands through sharper focus on design. achieving an RCA: machinery parts, gauze and cloth of The dynamic illustration of the product space re- iron and steel, quicklime, or steam boilers. These trends veals that Lebanon diversified into a few new prod- show that Jordanian firms and potential entrepreneurs ucts in the industrial core of the product space over the are struggling to develop new manufacturing products.30 last ten years; at the same time, however, it lost RCAs Jordan’s performance in exporting garment prod- in several products in the core and the garments cluster. ucts was mixed reflecting to some extent pressure Figure 24 (right graph) only depicts the emerging prod- from increased international cost competition in the ucts, highlighting that Lebanon developed RCAs in sev- sector. The garments and textiles sector provides about eral industrial machinery products including industrial 55,000 direct jobs in Jordan, however, the majority refrigerators and equipment, electric motors and gener- (about 69 percent) are foreign laborers. Moreover, most ators, machinery tools, or filtering machinery for liquids. firms (about 50 firms out of 90) in the sector are foreign Lebanon primarily lost RCAs in garments and several and benefit from the Jordanian special economic zones agricultural products, which would be consistent with a that allow exporting to the U.S. free of duties and quo- structural transformation towards industrial manufactur- tas under certain conditions (i.e., 14 percent value added ing. In contrast, Lebanon has gained competitiveness in content from Israel / WBG). It is becoming increasing- a few ICT related products but has not maintained its ly difficult for firms in the garments sector to face the full rigors of increased competition from lower labor 30 cost countries. For instance, the Jordan Diversified Pay- These findings are consistent with the Jordan DPR (2012). In between 2000 and 2005, The DPR documents a general shift in ments Rights (DPR) (2012) reveals that Jordan strug- intensive margins (exports of existing products) from low and me- gles to compete on price with low cost producers like dium-low technology industries (apparels or edible vegetables) to Egypt in the garment sector, but it is not yet able to reach medium-high technology industries (fertilizers or pharmaceutical products). However, it finds that the only significant new exports the quality levels of Tunisian and Moroccan exporters. from 2005–2010 were iron and aluminum products, which are Hence, firms are required to add value by moving up the medium-low technology products shipped to regional markets. ECONOMIC COMPLEMENTARITIES 41 Figure 24 Lebanon Product Space Dynamic Representation Changes 2000/02–2007/09 RCA in electrical transformers. Export growth for elec- result, firms have been pushed to diversify into potential- trical transformers has been contracting by an average of ly higher value manufacturing niches or to relocate their 20 percent per year suggesting that Lebanon is not able to production. Niches for lower value-added industries can compete with countries like China or Turkey. While Tu- include products with high transport costs (i.e., glass nisia maintained its RCA over the period, export growth bottles, water tanks) or products that are specific to the has also been contracting at about the same pace as Leba- Arab market or consumer taste. For instance, electrical non. Only Morocco and Syria recorded significant export motors and generators or internal combustion engines growth for that product suggesting the relocation of pro- are often produced or assembled by several small pro- duction lines to these countries by multinationals.31 ducers, i.e., by recycling and repairing older generators, Lebanese manufacturers have been facing high and then exported to Iraq or Africa. Moreover, Arabic utility and labor costs challenging their competitive- content printing (i.e., textbooks, newspapers) provides ness and pushing producers to diversify into (poten- a niche for many SMEs in the printing and paper in- tially higher value) manufacturing niches or to relo- dustry, which has a longstanding tradition in Lebanon.32 cate their production facilities. The manufacturing sector in Lebanon faces several severe constraints such 31 Countries with a classic RCA in electrical transformers (SITC as inefficient bureaucracies and red tape, limited access 7711) are China, Croatia, Indonesia, South Korea, Portugal, Viet- to long-term finance, or high costs of utilities such as nam, Turkey and Tunisia. It is a disappearing export for countries such as Lebanon, Malaysia, and Thailand. Countries that have water and electricity. To be specific, the number of and seen a high export growth over the past decade but have not yet costs resultant from power outages are among the highest gained a RCA are Morocco and Syria. 32 in the region. This undermines the competitiveness of Furniture is another industry with a long tradition in Lebanon benefitting from a niche by specializing into products custom- manufacturers located in Lebanon relative to competi- ized for Arab market. The industry consists of several small SMEs tors in the region. Moreover, the relatively high cost of that are often second or third generation family businesses based (well educated) domestic labor impedes export success in Tripoli. Specialization in traditional furniture customized for Arab market limits the business size and exporting opportunities. in labor-intensive light manufacturing sectors (such as Despite some potential most firms have not diversified into higher footwear, garments, and iron and metal products). As a value added products. 42 Over the Horizon: a New Levant Figure 25 Iraq Product Space 2007/09 However, several paper and printing manufacturers also 1977 and also developed engineering and contracting started to specialize in higher value added activities such services. The ISO 9001 quality standard certificate has as security printing, recycling, or specialized packaging been granted to Matelec in 1996. Over the last decades, and design. new production facilities have been added for the manu- A few selected examples demonstrate the trend in facturing branch in lower wage or energy cost countries Lebanese manufacturing to diversify into higher val- such as Saudi Arabia, Jordan, Egypt (1999), or Algeria ue manufacturing niches or to relocate production (2007). Similarly, the Lebanese manufacturer Concord, facilities. The Lebanese company, Inkript, which was which is one of the largest producers of white goods (re- founded in 1973 as a family business, has recently been frigerators, freezers, washing machines, and microwaves) transformed from traditional printing to higher value in MENA employing over 2,500 persons, opened pro- added security printing products such as smart-cards, duction facilities in Syria and Saudi Arabia. identification and payments solutions (i.e., credit cards, Despite the high domestic cost of utilities, red tape, checks, and drafts), security documents, lottery tickets, or protected domestic markets, many exporters in Leb- or elections turnkey projects. Inkript exports to govern- anon successfully compete in international markets. mental agencies as well as telecom and financial sectors It is estimated that most exporters in Lebanon obtain a in the Middle East, Africa, and West Asia, securing about significant portion of their sales and profits from exports 100 direct employees and about 300 indirect employees. given the small size of the domestic market. For instance, Moreover, Lebanon lost an RCA (disappearing product) the various SMEs in the paper and printing industry are in exporting high value added electrical transformers, ap- estimated to obtain more than half of their sales from parently because production facilities have been progres- exports. According to the World Bank Enterprise Sur- sively relocated to countries with lower wages or lower vey, on average, 44 percent of firms in Lebanon export costs of electricity. That is, Matelec is a major Lebanese (Figure 2). The share of sales obtained from exports ac- manufacturer of high value added electrical transformers counts, on average, for 18 percent. Likewise, 63 percent employing about 250 persons and successfully exporting of inputs and supplies for Lebanese firm covered in the to EU markets. It started manufacturing in Lebanon in survey are of foreign origin. The relatively high share of ECONOMIC COMPLEMENTARITIES 43 Figure 26 Iraq Product Space Dynamic Figure 27 Iran Product Space 1992/94–2007/09 Representation Changes 1992/94–2007/09 sales that are profits obtained from exports suggests that few products in peripheral clusters. These include other these manufacturing firms are successfully competing in mineral products (i.e., petroleum jelly and mineral wax- international markets despite the high domestic cost of es, copper and copper alloys), food products (i.e., animal utilities or labor. and vegetable oils), and a few chemical products (poly- carboxylic acids or polyethylene) See Figure 27. Iraq and Iran are concentrated in petroleum The product space of Norway or Malaysia exempli- products fy that it is possible to develop a strong manufacturing The predominance of oil in Iraq largely explains the export base in the core of the product space despite a country’s lagging export performance. Figure 25 illus- dependence on natural resources. The product space trates the product space for Iraq for 2007–2009 exclu- for Norway, which is also a major oil intensive exporter, sively highlighting the products where Iraq has a revealed shows a small but high value added manufacturing base comparative advantage: seven RCAs compared to 12 in apart from its oil and gas, shipping, and fishing indus- 1992/94 (Figure 26). The product space for 1992/94 re- tries (Figure 28). Many of the products in the core are veals that Iraq mainly exported crude oil and refined oil machinery and transport equipment, chemicals as well as products which the country has lost over the years with professional, scientific and controlling instruments and degrading oil infrastructure and increased domestic de- apparatus. Thus, Norway has mainly developed RCAs mand. Due to sanctions and conflict, Iraq’s industrial in sophisticated products that are used in upstream in- base has scarcely developed over the past 20 years, re- dustries related to its main natural resources (i.e., oil, vealing the complete absence of manufacturing products wood, or fishery). In particular, most of the goods in in the densely connected core. Crude oil accounted for machinery and transport equipment are goods related 98.8 percent of total exports over the 2007/09 timeframe. to the oil extraction industry and shipping industry. For Iranian export structure is highly concentrated; instance, Norway exports construction and mining ma- crude oil accounted for 83.6 percent of Iran’s exports chinery (7234), earth moving machinery parts (7239), in 2007/09. Apart from crude oil Iran has an RCA in a hoists for raising vehicles, and winches and capstans 44 Over the Horizon: a New Levant Figure 28 Norway Product Space 2007/09 machinery used in the oil industry (i.e., hand tools or machinery tools for working metal) might be promising industries for Iraqi producers. Moreover, the develop- ment path for Norway might also indicate that diversi- fying from crude oil into plastic is rather difficult despite their relatedness along the supply chain. In contrast, plas- tic products are often manufactured in countries with a strong industrial manufacturing base, such as Germany. This might suggest that the demand for plastics is driv- ing the comparative advantage of its production location since plastic products are used as an input in many in- dustries. Market access and low transport costs to other manufacturing industries using plastic products appears to be much more important than geographical distance to the producers of the major input, crude oil. Tunisia managed to significantly improve its (7442), metered liquid pumps (7421). Norway also ex- export performance over the past 20 years ports paper articles as well as a number of worked iron Tunisia successfully exports several products (about and steel products such as structures (6911) and worked 20 products at the 4 digit level) close to the densely aluminum. In addition, it has RCAs in professional, sci- connected core of the product space and in the elec- entific and controlling instruments and apparatus such tronics cluster.33 Figure 29 illustrates the product space as fluid gauges and instruments (8743), navigation/ for 2007/09 exclusively highlighting the products where survey instruments (i.e., compasses; other navigational Tunisia had an RCA: 140 products; this compares to instruments and appliances; surveying (including pho- 116 products in 1992/94 and 132 in 2000/02. togrammetric surveying), hydrographic, oceanographic, Yet, Tunisia remains a major exporter of gar- hydrological, meteorological, or geophysical instruments ments, textiles, processed food as well as oil and in- and appliances; rangefinders, (8741) as well as measur- organic chemicals in primary forms. Eight products ing, controlling, and scientific instruments (8745). Nor- accounting for 21.3 percent of total exports in the top way also developed RCAs in two chemical product class- 20 exports are in the garments industry; petroleum re- es but has not developed RCAs in plastics. mains the number one export with 13.35 percent of total The Norway product space suggests that Iraq may exports (price effect) (Table 3). Despite the expiration be able to develop into higher value added products of the Multi Fiber Agreement in 2005 and increased in- related to upstream sectors (i.e., industrial machinery, ternational cost competition in the sector, Tunisia did apparatus and equipment used in the oil sector) rath- er than downstream sectors (i.e., plastics or chemicals). 33 These include non-metallic mineral manufactures, articles of plas- The product space shows that Norway has taken full ad- tics, plastics in non-primary form, telecommunications and sound vantage of its initial endowment by developing in higher recording equipment, office machines and automatic data-process- value added manufacturing products related to it. Given ing machines, office and stationary supplies, textile and leather machinery, iron and steel manufacturing and other metal manu- Iraq’s current human capital endowment and income facturing as well as electrical machinery, apparatus and appliances level, light manufacturing or less sophisticated industrial and electrical parts. ECONOMIC COMPLEMENTARITIES 45 Figure 29 Tunisia Product Space 2007–09 not lose comparative advantage in garment and textile three times higher than Tunisia’s over the last decade. products over the past ten years. This suggests that the Moreover, Tunisia’s manufacturing structure is similar to Free Trade Zones (FTZs), where most garment and tex- that of Portugal (i.e., garments and textiles, base metals, tile firms operate, offer sufficient incentives for firms to food products, machinery). The comparison shows that remain competitive. However, increased competition in Tunisia’s manufacturing sector is significantly less devel- term of quality or costs from countries like Romania, oped in the densely connected core. Likewise, compar- Turkey and Asian countries like Bangladesh may change isons with Turkey, Thailand, or Croatia reveal that the the outlook for those sectors in the medium term. In process of structural transformation in Tunisia is slow fact, many firms in the garments sector operating in the moving. As compared to these peers, Tunisia is strug- FTZs are foreign and hence might relocate quickly once gling to gain significant export shares in world markets costs structures change. In particular, 83 percent out of in the industrial core, which includes higher productivity the 2,100 firms in the Tunisian textiles and garments products within electronics, chemicals, or industrial ma- sector are exporting; 46 percent of the exporting firms chinery clusters. are partially or fully foreign owned including 365 French Although Tunisia has not developed many new ex- firms, 206 Italian, 121 Belgian, and 106 German. The port successes in the industrial core, several new prod- industry employs about 200,000 workers. ucts emerged in the industrial machinery or electronics While the product space might suggest that Tuni- clusters. The dynamic illustration of the product space sia is on its way to further transform its economy from shows that it gained RCAs in eleven product categories garments and textiles to new manufacturing products, close to the densely connected core or the electronics clus- a comparison with Portugal or Turkey shows a signifi- ter over the last decade (Figure 31); emerging products cant lag. Figure 30 shows the product space for Portugal; between 2000/02 and 2007/09 highlighted as green di- a comparator country for Tunisia based on its size and amonds. These are mainly in manufactures of metals as access to EU markets. Portugal constitutes a benchmark well as iron and steel manufacturing (i.e., articles of iron given that the average GDP per capita (in US$) has been or steel, other sheets and plates, of iron or steel, structures 46 Over the Horizon: a New Levant Figure 30 Portugal Product Space RCAs 2007/09 Tunisia had an RCA in four classic products (blue trian- gles) in the electronics cluster and in electrical components close to the core in 2000/02 and gained five additional RCAs connected to that by 2007/09 (i.e., calculating ma- chines and cash registers, electrical lines for telephonic, other electrical machinery and equipment, television re- ceivers, tin alloys, as well as off-line data processing equip- ment). Moreover, Tunisia has gained competitiveness in four high tech goods prior to 2000/02 and managed to acquire RCAs in six additional goods over the decade. For example, it is now successfully exporting two types of television receivers. However, some of these successes appear to be driven by the country offshore sector where foreign firms often benefit from provided incentives (i.e., tax breaks) and linkage to the domestic onshore economy is often very weak. For instance, of the 92 firms operat- ing in the electronic sector, 82 are exclusively exporting. and parts of structures; irons), or construction materials. Furthermore, Tunisia is the second largest manufacturer In addition, Tunisian firms gained revealed comparative of car parts in Africa after South Africa whereby it has advantage in exporting fabrics of glass fiber. Likewise, become a major supplier for European car manufacturers. Figure 31 Tunisia Product Space Dynamic Representation Changes, 2000/02–2007/09 EXPANDING ECONOMIC 2 TIES IN THE LEVANT: WHO BENEFITS AND BY HOW MUCH B uilding on an analysis of economic complementarities and trade and investment potentials in the sub-region, this chapter analyzes the economic implications of a deeper regional integration. A CGE model is developed for the purposes of this study and consideration is given to four scenarios emphasizing different aspects of trade relations among possible members of an economic integration zone, including Egypt, Iraq, Jordan, Lebanon, Syria and Turkey:34 (i) the removal of tariffs on agricultural goods and processed food; (ii) reducing the restrictiveness of non-tariff measures; (iii) liberalizing transport services in the zone, resulting in reduced import and export transport costs; and (iv) services trade liberalization within the zone. As it transcends, the benefits of establishing a zone US$2.5 billion, followed by Syria (11.6 percent increase), between Turkey, Egypt, Jordan, Lebanon, Iraq, and Jordan (6.5 percent increase), and Lebanon (3.3 percent Syria will increase with the deepening of the commit- increase). Turkey will garner close to US$10 billion, ments. The effects of services liberalization are estimated which due to its large size translates into just a 1.7 per- to be sizable, but the impact of other trade-related reforms cent increase in per capita income. Nearly all of these on aggregate incomes and exports will be small. With a gains are a result of deeper integration through services cumulative welfare increase of US$12 billion (11 percent as reforms boost the supply response, real wages, and increase in welfare), Egypt is expected to benefit the most in absolute terms, while Iraq will likely gain the most in 34 The Palestinian Territories are not included in the CGE model be- relative terms as its welfare rises by almost 17 percent or cause of lack of data. 47 48 Over the Horizon: a New Levant encourage domestic demand, investment, and exports of The results obtained with the model are indicative of me- services. The impact on exports varies by country, sector, dium term outcomes as factor inputs are perfectly mobile and reform instrument, and is sizable for some sectors. In across sectors and returns adjust to changes in economic Turkey, reforms will either have no effect, or in the case conditions. of services liberalization, will have a small negative im- The model takes into account the role of intersec- pact on aggregate exports. In the other Levant countries, toral factor mobility and overall resource constraints the impact on aggregate exports will be positive under all in determining sectoral output supply. Product differ- scenarios, but the magnitude of the effect will be sizable entiation between imported and domestic goods and only in the case of services liberalization. Agricultural among imports from different regions allow for two-way liberalization and improved transport logistics will boost trade in each product category, depending on the ease bilateral exports of farm and food products among the of substitution between products from different regions. New Levant countries. Reducing the restrictiveness of The model includes the explicit treatment of internation- NTMs will likely have a particularly pronounced effect al trade and transport margins, a “global” bank mediating on exports of petroleum, resource-based, and other man- between world savings and investment, and a consumer ufactures from Turkey, food and chemicals from Egypt, demand system designed to capture differential price and metals and resource-based manufactures from Jordan, income responsiveness across countries. The accounting chemicals, resource-based manufactures, and other man- relationships and behavioral linkages constrain outcomes ufactures from Lebanon, and farm, oil, petroleum, and in ways not possible with partial equilibrium models. chemical goods from Syria. The effect on Iraq’s exports This study makes a contribution by extending the will be negligible. GTAP 8 database beyond the 129 regions. Data for Turkey and all developing MENA countries were re- tained individually in the GTAP 8 Database, including Methodology, Data, and Simulation Egypt, Morocco, Tunisia, and Iran. Regional and indus- Design try aggregations are presented in Annex 9. Kuwait, Qa- tar, Bahrain, Saudi Arabia, UAE, and Oman were aggre- For the purposes of this study, a standard Global Trade gated into a GCC composite group. Lebanon, Jordan, Analysis Project (GTAP) model and a modified version Syria, Iraq, and the Palestinian Territories were separated of the GTAP database was used to analyze the poten- from rest of Western Asia, and Algeria and Libya from tial economic effects of a deeper economic integration rest of North Africa. Based on their importance for the in the region. The model, documented comprehensively MENA region, 57 sectors were aggregated into 22 sec- in Hertel (1997), is a multi-country, multi-sector CGE tors. The resulting MENA specific database contains framework, well suited for a quantitative investigation of 26 countries; among which are the twelve MENA low the ex-ante, medium-term impacts of trade agreements. and middle-income economies—Algeria, Egypt, Iran, The model depicts firms that produce for domestic and Iraq, Jordan, Lebanon, Libya, Morocco, Syria, Tunisia, export markets, using constant-returns-to-scale technol- Yemen, and Palestinian Territories, as well as an oil-rich ogy, and factor and intermediate inputs. Intermediate and high-income GCC aggregate.35 products are either produced domestically or imported from foreign markets, and substitute imperfectly, fol- 35 The separation of the MENA economies was based on (i) data on lowing the Armington structure. Land, physical capital, the following six components of GDP—agriculture, hunting, for- estry, fishing (ISIC A-B), mining, manufacturing, utilities (ISIC skilled and unskilled labor, and in some sectors a natural C-E), construction (ISIC-F), transport, storage and communica- resource factor are used as factor inputs in production. tion (ISIC I), wholesale, retail trade, restaurants and hotels (ISIC EXPANDING ECONOMIC TIES IN THE LEVANT: WHO BENEFITS AND BY HOW MUCH 49 Modifications were done on the database to get The detailed data on bilateral tariff lines were the right country and product groups for the purpos- aggregated into weighted average rates for the twen- es of this study. Using data sources presented in Annex ty-two sectors using bilateral import data from WITS 10–12, all entries were split in the rest of Western Asia for 2007.36 Whenever such data were not available, im- and the rest of North Africa, the split values were as- ports were inferred from exports for 2007 or from World signed to the newly created economies, and all entries Integrated Trade Solution (WITS) data for 2008. The were removed for the two composite regions from the updated tariffs reflect the PAFTA agreement, the bilater- GTAP database. In this step, each entry was split using al Association Agreements with the EU, and the bilateral the most thematically relevant external source. For ex- FTAs with Turkey. The updated tariff rates, presented ample, all consumption and production values were split by country, product, and source in Annex 13 through using sectoral GDP shares, values of exports and imports 18, differ substantially from the ones available in GTAP using trade data, and duties using tariff information. Ex- 8 database, especially those of Jordan, Iraq, Lebanon, port shares were used to split further the production and and Syria (Annex 19). Since GTAP tariffs for the new- consumption information into the final set of industries, ly created regions do not correspond to the actual trade shown in Annex 9. In order to retain the internal con- profile of individual countries in the composite, the new sistency of the GTAP database, the required accounting tariff rates differ from the GTAP ones both because of relationships were imposed on the split database using differences in the tariff lines and trade composition. In iterative proportional fitting. The zero profit conditions the cases of Egypt and Turkey, with a few exceptions, the and all accounting relationships were enforced at each tariff information in GTAP 8 Database represents accu- iteration. The procedure was repeated until the database rately existing preferences. was balanced and consistent with all external targets. Data on food and energy subsidies were incorpo- Another important modification was the imple- rated into the database. The subsidies are prevalent in mentation of Euro-Med, PAFTA, and bilateral prefer- many of the MENA countries. Data on subsidies were ences in the GTAP data. The information was obtained incorporated as a consumption subsidy, benefiting con- on bilateral preferences at the most disaggregate product sumers, and an input subsidy, benefiting firms in all sec- level from a variety of sources, including MFN and non- tors in a uniform manner. MFN rates from WTO data, country tariff data, and in the case of the European Union, from Eurostat (Annex 10–12). Bilateral rates among PAFTA members were set Scenarios and Simulation Results at zero to reflect free trade in agricultural goods and man- ufactures. Whenever bilateral country tariff information The newly constructed database is used to test four sce- and non-MFN rates from WTO sources were not avail- narios. The economic impacts of a possible economic able, reciprocity was assumed and the rates extended by integration zone are analyzed for six countries: Egypt, the bilateral partner were applied. In the absence of such Iraq, Jordan, Lebanon, Syria and Turkey. Consideration rates, the MFN WTO rates were applied. Duties on im- is given to four scenarios: (i) removal of tariffs on trade in ports from countries outside the MENA region were left unchanged whenever the importing country was part of G-H), and other activities (ISIC J-P), obtained from the UN Sta- the GTAP database. In the cases when the country in- tistics Division data on sectoral GDP composition for 2007; (ii) formation had to be created from a composite region, bilateral trade value data from WITS; and (iii) bilateral tariff data from a medley of sources, presented in Annex 8–10. WTO MFN rates were applied or country information 36 This year was chosen in order to match the benchmark year of the was used. GTAP 8 Database. 50 Over the Horizon: a New Levant agricultural goods and processed foods among six coun- these countries will jump by a factor of 6.3 in Jordan and tries;37 (ii) reducing the restrictiveness of NTMs among 2 in the other Levant countries (Table 11). The smaller these countries;38 (iii) liberalization of the transport sec- increase in the cases of Iraq, Syria, Lebanon, and Egypt tor in this zone, resulting in reduced import and export can be explained with the fact that these countries have transport costs to and from six countries;39 and (iv) ser- much lower tariffs on imported food from Turkey than vices liberalization within the zone.40 Results of the sim- Jordan (Annexes 13 through 18). ulations for four scenarios follow. Bilateral trade patterns in the New Levant are expected to change, with Egypt, Jordan, and Syria ex- porting more agricultural and food products to Turkey, Scenario 1: Liberalizing Agricultural and and less of these products to other Levant countries. Food Trade in the New Levant As Turkey gains access to agricultural and food markets within the Levant, competition will intensify and Tur- The removal of tariffs on agricultural goods and pro- key might displace Egypt, Jordan, Lebanon, and Syria in cessed food will stimulate trade in these products the long term. Turkey’s exports of agricultural and food within the New Levant Zone. The major effect will products to other Levant countries will increase, without come from the removal of tariffs on bilateral trade be- a significant effect on Turkey’s exports to other destina- tween Turkey and other Levant countries in these prod- tions in and outside the Levant zone. uct categories. The volume of Turkey’s exports of pri- Overall, the integration of agricultural and food mary agricultural goods to other countries is expected markets through tariff removal is estimated to have a to increase to various degrees, depending on the size of tariffs in the destination markets. Tariffs are lowest in 37 In the model, for the scenario of tariff removal on trade in agricul- Egypt, where the volume of Turkey’s exports is expect- tural goods and processed foods, lost tariff revenue was replaced by ed to increase by just six percent. Turkish agricultural increasing consumption taxes so as to keep the tax revenue con- exports to Lebanon, where agricultural tariffs average stant as a share of income. 38 Since NTMs add friction to trade relations, the reduction in the four percent, are expected to increase by 20 percent, trade restrictive power of NTMs is modeled as an efficiency im- and around 40 percent in the cases of Jordan, Syria, provement. In the cases of Egypt, Lebanon, Jordan, Iraq, and Syr- and Iraq. Exports of agricultural goods from Jordan to ia, the productivity shocks are equivalent to cuts in ad-valorem equivalents (AVEs) of NTMs by product to not more than 10 per- Turkey are expected to increase by a factor of 14, be- cent. Since the AVEs for many products are less than 10 percent, cause of the removal of extremely high tariffs on a few there will be gains in market access for only some categories of agricultural products such as watermelons. The increase products. This is particularly the case for Iraq. In the absence of information on Turkey, a uniform three percent reduction in AVEs of exports from Iraq, Syria, and Egypt is estimated to of NTMs was assumed for all products. be sizable, but more modest than Jordan’s due to low- 39 In this study, we assume transport cost reductions to be a result of er tariffs on agricultural exports from these countries productivity improvements in the process of shipping goods with- in the New Levant zone. to Turkey. Lebanese agricultural exports face very low 40 World Bank’s Services Trade Restrictions (STR) database is used tariffs in Turkey so the boost to their exports will be to estimate the size of the productivity shocks. Trade liberalization marginal. is assumed to bring down the service trade restrictiveness index in the Levant countries to the minimum of the corresponding The volume increase of food trade between Turkey index in the Euro-Med area. Sectoral index is available only for and the other Levant countries is expected to be dra- financial services and insurance, communications, trade, transpor- matic. The post-reform volume of food exports to Tur- tation, and other business services. In the case of construction and tourism, the overall service restrictiveness index is used, and in the key from Egypt, Syria, Lebanon, and Iraq will be several case of Syria, data were not available so the average STRI for the times the pre-reform levels, while exports from Turkey to MENA region was assigned. EXPANDING ECONOMIC TIES IN THE LEVANT: WHO BENEFITS AND BY HOW MUCH 51 Table 11 Change in Bilateral Export Volumes Due to Removal of Tariffs on Agricultural Goods and Processed Food (percent) Agricultural Goods Turkey Egypt Jordan Lebanon Syria Iraq Turkey 6 42 20 35 39 Egypt 26 –2 –2 –2 –5 Jordan 1,283 2 –2 –2 –5 Lebanon 1 2 –1 0 –5 Syria 51 2 –1 0 –3 Iraq 77 10 0 2 3 Processed Food Turkey Egypt Jordan Lebanon Syria Iraq Turkey 67 530 73 88 104 Egypt 505 –11 –3 –4 –18 Jordan 12 2 –1 –1 –17 Lebanon 108 1 –11 –2 –19 Syria 182 1 –10 –2 –17 Iraq 92 5 –10 0 0 very small impact on aggregate exports from the New Iraq with negative implications for wages, which in turn Levant zone. The volume of Turkey’s exports will ex- will lower slightly production costs and prices of most pand by US$233 million, which is the largest absolute products. In Turkey and Egypt, the expansion of agri- expansion in the group in dollar terms, but represents a culture and food processing is expected to increase de- negligible increase in Turkey’s total exports (Annex 20). mand for land, capital, and labor, and therefore produc- Iraq and Jordan’s exports are expected to grow by about tion costs and export prices. The rise in production costs half a percent or US$57 million and US$61 million, translates into higher export prices and stronger terms respectively (Annex 25 and Annex 22). The percent- of trade. age changes in volumes in all other cases are negligible, With changes in per capita income of about while the dollar amounts vary, with Egypt’s exports in- 0.1 percent or less (Table 13), the welfare effects of the creasing by US$51 million (Annex 21), Lebanon’s by agricultural and food liberalization reform will be US$11 million (Annex 23), and Syria’s by US$12 mil- negligible. For Turkey, the greatest welfare gain of the lion (Annex 24). reform will come from terms-of-trade improvements Agricultural output is expected to increase in all (US$36.5 million), linked to strengthened export prices. Levant countries other than Iraq, but food production Egypt is also expected to gain mainly from improving will expand only in Turkey and Egypt (Table 12) as its terms of trade (US$67 million). Unlike Turkey and these two countries benefit from relatively large tariff Egypt, which will gain US$79 million and US$113 mil- cuts in each other’s food markets. Competition from lion, Lebanon and Syria will incur small welfare losses, Turkey results in contraction of processed food produc- driven by terms-of-trade declines as export prices decline. tion in the other Levant countries. Consequently, de- Despite terms-of-trade losses, Jordan and Iraq will have mand for labor will fall in Jordan, Lebanon, Syria, and positive welfare gains because of the beneficial allocative 52 Over the Horizon: a New Levant Table 12 Change in Output by Sector Due to Removal of Tariffs on Agricultural Goods and Processed Food (percent) Turkey Egypt Jordan Lebanon Syria Iraq Primary Agriculture 0.0 0.2 1.0 0.0 0.1 –0.4 Processed food 0.3 1.6 –1.7 –0.3 –0.8 –6.1 Gas extraction & distribution –0.3 –0.3 0.3 0.1 0.0 0.2 Oil extraction 0.0 –0.1 0.1 0.0 0.0 0.1 Other manual resources 0.0 –0.1 0.1 0.0 0.0 0.0 Petroleum and coal 0.0 –0.1 0.1 0.0 0.0 0.1 Electricity 0.0 0.0 0.1 0.0 0.0 0.1 Chemicals and metallurgy –0.1 –0.3 0.3 0.1 0.1 0.3 Textiles and apparel –0.1 –0.3 0.6 0.2 0.3 0.7 Resource based manufacturers 0.0 –0.1 0.4 0.2 0.1 0.6 Equipment and vehicles –0.1 –0.1 0.4 0.2 0.0 0.5 Metal products –0.1 –0.2 0.5 0.1 0.1 0.6 Other manufactures 0.0 –0.2 0.3 0.1 0.0 0.3 Construction 0.0 0.1 –01 0.0 –0.1 –0.6 Transport 0.0 –0.4 0.2 0.1 0.1 0.4 Trade 0.0 0.0 –0.1 0.0 0.0 –0.1 Communications 0.0 –0.2 0.4 0.0 0.1 0.7 FIRE 0.0 0.0 0.1 0.0 0.0 0.2 Government services 0.0 0.0 0.1 0.0 0.0 0.2 Business services 0.0 –0.3 0.6 0.1 0.2 1.1 Tourism and other services 0.0 –0.1 0.2 0.0 0.0 0.2 GDP 0.0 0.0 0.1 0.0 0.0 0.1 Note: “FIRE” stands for finance, insurance, and real estate sectors. efficiency effects associated with the removal of import goods from the Levant countries by reducing non-tariff tariffs on agricultural and farm products. barriers. In turn, Turkey’s Levant partners might be will- The possible Levant economic zone will have neg- ing to reciprocate by reducing non-tariff barriers on trade ligible trade diversion effects. Turkey, Jordan, Lebanon, with Turkey and other Levant countries. Such a form of and Syria incur welfare losses of less than US$1 million trade liberalization is envisioned in a scenario that re- from changes in import prices, while Iraq and Egypt reg- duces AVEs of NTMs by three percent for all products ister welfare gains of less than US$.5 million. imported by Turkey from the Levant and lowers them to no more than 10 percent in Egypt, Jordan, Lebanon, Syria, and Iraq for bilateral trade flows within the New Scenario 2: Reducing NTMs’ Restrictiveness Levant zone. By reducing the restrictiveness of NTMs in the Turkey will not be in a position to negotiate tariff Levant, Egypt will have an opportunity to increase cuts on manufactured products because of its Customs exports of a broad range of products to Turkey, Union with the EU, but there will be no restrictions and resource-based, chemical, and other manufac- on its ability to open up its markets to manufactured tures to Syria (Table 14). Jordan will likely scale up EXPANDING ECONOMIC TIES IN THE LEVANT: WHO BENEFITS AND BY HOW MUCH 53 Table 13 Welfare Effects of Reforms Associated with Deeper Integration in the Levant (US$ million) Agricultural Reducing AVEs Improving Services Cumulative liberalization of NTMs transport logistics liberalization welfare Turkey 79 179 389 9154 9802 0.01% 0.03% 0.07% 1.61% 1.72% Egypt 113 119 103 11665 11999 0.10% 0.11% 0.09% 10.59% 10.89% Jordan 3 15 11 1035 1064 0.02% 0.09% 0.07% 6.33% 6.51% Lebanon –5% 140 64 543 743 –0.02% 0.61% 0.28% 2.38% 3.25% Syria –4% 237 99 2992 3323 –0.02% 0.82% 0.34% 10.40% 11.55% Iraq 2 14 177 2354 2546 0.01% 0.9% 1.15% 15.37% 16.63% its agricultural, food, and manufactured exports to other manufactures to Egypt. Exports of metal products Turkey, agricultural, resource-based, and equipment from Turkey to Syria are expected to increase by 51 per- exports to Egypt, petroleum exports to Lebanon, and cent and those of resource-based manufactures are ex- manufactured exports to Syria. Lebanon’s exports to pected to more than double. Turkey and Syria will expand in a wide range of prod- Despite the significant effects on the exports of ucts, and so will its exports of agricultural products to some products, overall exports from the New Levant Egypt, resource-based goods to Egypt and Jordan, met- group will grow little in volume terms. Turkey’s exports al products to Jordan, and other manufactures to Iraq. are expected to expand by US$406 million or 0.3 per- Syria and Iraq will likely increase exports of a broad cent (Annex 20), largely reflecting a boost to exports range of goods to Turkey, exports of agricultural com- of petroleum, resource-based and other manufactures, modities, resource-based manufactures, and equipment and agricultural products. Egypt’s exports will grow and vehicles to Egypt, exports of petroleum products by 0.1 percent or US$40 million, boosted by growth to Lebanon, and resource-based manufactures to each in exports of chemicals and processed food (Annex other’s markets. Iraq will also scale up its exports of ag- 21). Syria’s exports will increase by US$54 million or ricultural and resource-based products and manufac- 0.3 percent (Annex 24), reflecting a boost in exports of tures to Jordan. crude oil, petroleum and chemicals, but also a broad This reform will bring a big boost to Turkey’s ex- based increase of exports of agricultural and manufac- ports as well. Exports of petroleum and coal products tured goods. Exports from Lebanon will increase by to Lebanon and Syria, exports of other manufactures US$29 million or 0.5 percent, mainly driven by an in- to Egypt, and exports of agricultural commodities, re- crease in exports of chemicals, resource-based and other source-based manufactures, equipment, vehicles, and manufactures (Annex 23). Jordan’s exports will likely machinery, and metal products to Syria will increase advance by US$14 million or 0.2 percent, helped by ex- (Table 14). The results suggest that increases will range port expansion in metals and resource-based industries from 45 percent in the case of equipment, vehicles, and (Annex 22). Iraq’s export gains in this scenario are neg- machinery to Syria to above 1092 percent in the case of ligible (Annex 25). 54 Table 14 Change in Bilateral Export Volumes Due to Reductions in the Restrictiveness of NTMs in the Levant (percent) Exports from Turkey to: Exports from Egypt to: Exports from Jordan to: Egypt Jordan Lebanon Syria Iraq Turkey Jordan Lebanon Syria Iraq Turkey Egypt Lebanon Syria Iraq Primary Agriculture 0.1 20.4 2.3 238.5 1.3 11.8 –0.4 1.5 –0.6 0.1 50.9 26.8 1.8 9.3 0.0 Processed food 5.7 0.4 1.9 –1.2 0.3 31.6 0.0 1.1 25.7 –0.1 12.8 –0.2 1.1 4.1 –0.2 Gas extraction & 0.0 0.0 0.0 0.0 0.0 110.4 –3.6 1.4 –2.8 –10.7 0.0 0.0 0.0 0.0 0.0 distribution Oil extraction 0.0 0.0 0.0 0.0 0.0 23.6 –0.2 –7.3 –0.8 –2.1 0.0 0.0 0.0 0.0 0.0 Other manual resources 0.2 0.0 2.0 0.7 0.5 5.5 –0.3 1.6 0.2 0.1 0.0 0.3 2.5 0.8 0.7 Over the Horizon: a New Levant Petroleum and coal 0.9 0.9 222.7 222.1 0.9 9.4 –0.2 –12.8 33.1 –0.4 0.0 –0.2 155.6 –8.6 –0.3 Electricity 0.0 0.8 –5.1 –2.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Chemicals and metallurgy 0.2 0.1 0.5 –2.5 –16.4 18.6 –0.7 –0.3 58.4 –1.6 22.9 –0.1 0.1 –6.4 4.3 Textiles and apparel 0.3 –0.2 0.7 –0.7 0.0 19.5 –1.1 –0.4 –1.7 –1.1 28.6 0.1 0.6 37.3 –0.3 Resource based 21.4 –2.2 0.7 119.1 –1.4 18.9 –1.1 0.4 127.3 –8.7 19.5 13.4 0.7 61.2 –7.0 manufacturers Equipment and vehicles –0.4 –0.1 0.5 44.5 20.2 22.7 –0.3 0.3 8.1 –0.2 21.8 17.0 0.2 20.1 –0.5 Metal products 18.1 –0.1 0.4 51.0 –1.4 22.1 –1.1 –0.6 –18.6 –2.3 21.0 –1.0 0.0 120.9 8.3 Other manufactures 1092.1 –0.1 –0.1 –14.0 20.2 21.3 –0.5 –0.5 89.1 –4.3 21.3 –14.5 –0.3 219.7 2.4 Construction 0.1 0.1 2.0 2.1 0.2 –0.6 –0.5 1.9 2.0 –0.5 –0.2 –0.1 2.0 2.2 0.0 Transport 0.0 0.1 0.0 0.8 0.0 –0.6 –0.7 –0.9 0.2 –0.7 –0.3 –0.4 –0.5 0.5 –0.4 Trade 0.2 0.1 2.1 1.3 0.0 –0.8 –0.8 1.6 0.8 –0.8 –0.5 –0.4 2.1 1.2 –0.4 Communications 0.0 0.0 1.7 1.4 –0.1 –1.3 –1.6 1.5 1.0 –1.5 –0.6 –0.5 2.0 1.6 –0.6 FIRE 0.2 0.0 2.3 1.4 –0.1 –1.3 –1.9 2.1 0.8 –1.8 –0.5 –0.2 2.5 1.4 –0.6 Public services –0.1 0.0 1.6 1.3 0.0 –0.5 –0.4 1.0 0.7 –0.5 –0.4 –0.3 1.2 0.9 –0.3 Other Business services 0.1 –0.2 0.9 0.5 –0.1 –1.3 –1.1 0.4 –0.1 –1.2 –0.6 –0.2 0.8 0.3 –0.6 Tourism and other –0.1 –0.2 0.9 0.4 –0.2 –0.8 –0.9 0.3 –0.3 –0.9 –0.4 –0.4 0.8 0.2 –0.4 services (continued on next page) Table 14 Change in Bilateral Export Volumes Due to Reductions in the Restrictiveness of NTMs in the Levant (continued) (percent) Exports from Lebanon to: Exports from Syria to: Exports from Iraq to: Turkey Egypt Jordan Syria Iraq Turkey Egypt Jordan Lebanon Iraq Turkey Egypt Jordan Lebanon Syria Primary Agriculture 7.8 22.7 –3.1 7.6 –3.1 9.1 19.8 –2.8 –1.1 –2.5 16.1 69.6 91.9 1.6 11.8 Processed food 13.7 –2.6 –2.1 1.4 –2.1 16.8 –2.2 –1.8 –0.8 –1.7 20.1 –0.2 –0.1 1.8 6.1 Gas extraction & 0.0 0.0 0.0 0.0 0.0 47.2 0.0 0.0 0.0 0.0 33.7 –0.2 0.1 2.2 1.3 distribution Oil extraction 0.0 0.0 0.0 0.0 0.0 41.4 1.0 1.0 –6.7 –0.4 34.6 –0.7 –0.4 –8.3 –4.7 Other manual resources 5.1 –0.6 –0.8 –0.2 –0.5 5.2 0.0 –0.2 1.7 0.3 5.7 –0.2 –0.4 1.3 0.1 Petroleum and coal 17.2 4.1 3.9 –6.3 4.2 9.9 0.4 0.4 159.8 0.3 9.6 –0.2 –0.1 164.4 –12.5 Electricity 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Chemicals and metallurgy 21.6 3.5 3.2 –2.9 5.1 29.1 2.6 2.3 2.6 3.1 22.3 1.5 –0.2 0.2 –10.7 Textiles and apparel 20.6 –1.8 –2.2 40.0 –2.2 19.0 –1.1 –1.5 –0.7 –1.4 38.5 2.1 –0.3 0.5 35.5 Resource based 18.4 12.6 33.9 60.0 2.5 19.6 13.7 1.9 1.3 13.8 23.6 18.5 593.8 1.7 93.8 manufacturers Equipment and vehicles 19.9 14.7 –1.9 17.8 –2.3 28.0 16.2 –0.7 –0.1 –0.7 25.1 34.1 –0.3 1.4 25.5 Metal products 20.7 –1.5 6.6 115.2 –1.9 22.6 –0.2 0.2 0.7 –0.7 28.1 –1.0 –0.4 0.2 606.4 Other manufactures 32.9 –9.8 11.8 267.6 118.7 29.6 –9.5 5.9 5.8 3.9 26.2 –18.5 23.5 0.0 247.9 Construction –1.8 –2.5 –1.8 –0.2 –2.1 –0.5 –0.4 –0.3 2.4 –0.2 0.0 0.3 0.3 3.3 3.4 Transport 1.8 2.6 3.0 3.3 2.6 –0.4 –0.5 –0.4 –0.6 –0.4 –0.3 –0.3 –0.2 –0.4 0.8 Trade –2.3 –4.2 –2.9 –1.6 –2.4 –2.3 –4.1 –2.8 –0.9 –2.3 –0.4 0.1 0.0 3.5 2.1 Communications –3.4 –4.7 –4.5 –2.5 –4.3 –3.5 –4.8 –4.6 –1.7 –4.4 –0.6 –0.4 –0.5 3.7 3.0 FIRE –2.6 –3.8 –4.2 –2.1 –3.8 –2.7 –3.7 –4.2 –0.5 –3.9 –0.4 0.0 –0.4 4.0 2.3 Public services –2.8 –3.0 –2.8 –1.8 –3.1 –1.7 –1.8 –1.7 –0.3 –1.9 –0.2 –0.1 0.0 1.2 1.0 Other Business services –3.9 –3.1 –3.1 –2.6 –3.5 –3.0 –2.3 –2.5 –1.1 –2.7 –0.5 0.0 –0.5 1.3 0.7 Tourism and other –1.6 –2.4 –1.9 –1.5 –1.9 –0.5 –0.5 –0.5 0.6 –0.5 –0.2 –0.1 –0.2 1.3 0.5 services EXPANDING ECONOMIC TIES IN THE LEVANT: WHO BENEFITS AND BY HOW MUCH 55 56 Over the Horizon: a New Levant Since NTMs are most restrictive in Syria, its wel- and vehicles. Exports from Turkey to its Levant part- fare gain of US$237 million or about 0.8 percent ners will grow by about US$722 million, sixty percent in per capita terms is the largest among the Levant of this increase will come from increases of exports to countries. Lebanon follows closely with gains in per Iraq (US$455 million) (Table 15), and will stem main- capita terms of 0.6 percent (Table 13). These gains will ly from an expansion of petroleum, chemicals, and stem mostly from cost reductions associated with the manufactured exports. Egypt’s exports to the Levant removal of some NTMs on petroleum products. Jor- will likely increase by US$335 million, with half of the dan, Iraq, and Egypt will also benefit in this reform increase coming from an expansion of exports to Tur- scenario, but their gains are relatively small in per cap- key and another third to Syria, and a boost to exports ita terms. The gains are expected to be small because of chemicals, natural gas, and processed foods. Jordan’s in nearly all cases the initial AVEs of NTMs are be- exports to other Levant countries will rise by only about low 10 percent so these countries make significant new US$0.8 million, as Jordan’s exports shift away from concessions in just a few sectors. Turkey makes minor Iraq and towards Turkey and Syria. Lebanon’s exports improvements in access in a sector-neutral way and are expected to increase by US$39 million, with the benefits mostly from improved market access in other majority of the increase coming from increased agricul- Levant countries. Its welfare gain under this reform sce- tural commodities and manufactured exports to Syr- nario is therefore small. ia. Syria’s exports to other Levant countries will rise by about US$121 million. Most of the increase is associat- ed with increased exports of crude oil and chemicals to Scenario 3: Liberalizing Transport Services Turkey. Finally, Iraq’s exports to the Levant expand by US$398 billion, largely due to an expansion of crude Efficiency improvements in the transport sectors of the oil exports to Syria, and to some extent, to an increase Levant countries are expected to lower trade-related of exports of agricultural and manufactured products transport costs within the sub-region and result in to Egypt and Turkey. In all countries except Syria, the an economic expansion. All six countries will benefit increase in aggregate exports will be negligible (Annex- from transport services liberalization due to efficiency es 20 through 25). gains associated with lower transport costs, and in the The spillover effect to the rest of the world will be case of net oil importers, due to positive terms-of-trade small and occur mainly through its impact on global effects. The gain to Turkey will be largest in absolute energy prices, which will decline as the Levant coun- terms (US$389 million), but small in per capita terms tries consume less energy. Net energy importing coun- (0.07 percent) (Table 15). Iraq and Syria will gain about tries will gain while net energy exporting countries will US$177 and US$99 million, respectively. For Iraq this lose as demand for energy products moderates (Figure gain is considerable in per capita terms and represents 32). The biggest beneficiary in absolute terms is the a welfare improvement of slightly more than one per- EU, which gains about US$450 million, followed by cent of GDP. Lebanon will gain US$64 million (0.3 per- Turkey and the U.S. cent), while Egypt and Jordan will gain US$103 and The MENA countries have higher bilateral trade US$11 million, respectively. costs than their EU neighbors (Shepherd and Dennis Transport services liberalization is especially 2011). A closer look at the different dimensions of trans- favorable to trade in products with high transport port costs suggests that MENA countries score relatively margins, such as agricultural commodities, chem- high in terms of connectivity, but relatively low in terms icals and resource-based products, and equipment of facilitation and logistics. The high connectivity score Table 15 Impact of Reform in Transport on Bilateral Export Volumes (2007 US$ million) Exports from Turkey to: Exports from Egypt to: Exports from Jordan to: Egypt Jordan Lebanon Syria Iraq Turkey Jordan Lebanon Syria Iraq Turkey Egypt Lebanon Syria Iraq Primary Agriculture 2.3 0.4 1.6 0.2 25.5 2.1 –0.1 5.6 9.2 0.3 3.5 0.0 2.4 9.6 –1.0 Processed food 1.4 0.4 1.8 1.1 103.6 28.2 0.3 4.3 17.2 –0.1 0.2 0.0 0.9 2.3 –10.3 Gas extraction & 0.0 0.0 0.0 0.0 0.0 80.3 4.2 0.0 0.2 0.4 0.0 0.0 0.0 0.0 0.0 distribution Oil extraction 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other manual resources 0.9 0.2 0.4 4.8 0.7 1.8 0.0 0.2 –0.2 0.8 0.3 0.0 0.1 0.2 0.5 Petroleum and coal 1.2 2.8 54.6 92.1 4.6 6.3 0.0 3.1 –0.1 0.0 0.6 0.0 –0.1 0.0 0.0 Electricity 0.0 0.0 0.0 –0.1 0.7 0.0 –0.1 0.0 –0.1 0.0 0.0 0.0 0.0 0.0 0.0 Chemicals and metallurgy 27.6 1.9 9.3 15.1 128.6 45.1 –0.1 41.7 66.6 –0.4 5.0 –0.7 0.5 4.7 –18.1 Textiles and apparel 7.5 1.6 3.2 1.4 18.0 4.6 0.0 0.3 1.3 0.1 2.4 –0.2 0.6 0.8 0.7 Resource based 2.4 1.3 0.4 1.2 30.4 1.3 0.1 1.3 1.9 0.0 0.1 0.0 0.4 3.0 –5.7 manufacturers Equipment and vehicles 10.3 0.8 0.8 6.8 105.0 1.4 0.4 0.6 3.8 0.2 0.2 0.0 0.7 3.8 –0.2 Metal products 6.2 1.0 0.2 0.1 36.3 0.4 0.0 0.3 0.6 0.2 0.0 0.0 0.1 0.8 –7.7 Other manufactures 1.2 0.1 0.1 0.0 1.4 0.0 0.0 0.0 0.2 0.1 0.0 0.0 0.0 0.1 0.1 Construction 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Transport 0.0 0.0 0.1 0.0 0.2 –0.1 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.1 Trade 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Communications 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 FIRE 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Public services –0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other Business services 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Tourism and other services 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total 60.9 10.3 72.5 122.7 455.2 171.3 4.4 57.4 100.6 1.7 12.3 –0.9 5.6 25.3 –41.5 (continued on next page) EXPANDING ECONOMIC TIES IN THE LEVANT: WHO BENEFITS AND BY HOW MUCH 57 58 Table 15 Impact of Reform in Transport on Bilateral Export Volumes (continued) (2007 US$ million) Exports from Lebanon to: Exports from Syria to: Exports from Iraq to: Turkey Egypt Jordan Syria Iraq Turkey Egypt Jordan Lebanon Iraq Turkey Egypt Jordan Lebanon Syria Primary Agriculture 0.2 2.0 1.8 4.0 4.9 0.5 –1.9 1.4 1.8 –2.4 3.0 20.2 1.8 0.6 5.8 Processed food 0.3 0.7 0.8 3.4 –0.5 1.0 1.2 0.7 1.7 –9.5 1.3 6.4 0.4 1.5 2.3 Gas extraction & 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 distribution Oil extraction 0.0 0.0 0.0 0.0 0.0 90.9 0.0 0.2 0.2 0.1 31.3 0.0 0.1 0.0 200.5 Other manual resources 0.6 0.0 0.0 0.2 0.4 1.2 0.1 0.1 0.3 0.4 1.6 0.0 0.0 0.0 –0.1 Over the Horizon: a New Levant Petroleum and coal 1.4 0.0 0.0 0.1 0.2 5.1 0.0 0.1 0.1 0.5 1.2 0.0 0.0 0.0 4.0 Electricity 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Chemicals and metallurgy 0.5 0.1 1.4 6.3 –3.7 15.8 8.6 3.0 4.4 –8.4 10.8 35.1 1.2 0.7 9.1 Textiles and apparel 1.2 3.3 0.2 1.0 0.3 2.2 –3.3 1.0 0.6 0.0 7.1 29.2 0.5 0.0 0.2 Resource based 0.2 –0.1 0.2 3.3 –1.3 0.9 0.4 0.8 1.0 –3.9 1.3 1.5 2.6 1.0 2.6 manufacturers Equipment and vehicles 0.2 0.1 0.5 4.1 –0.6 1.3 1.0 1.0 0.8 0.3 0.9 4.2 1.3 1.2 0.2 Metal products 0.0 0.1 0.1 0.3 –0.8 0.2 0.3 0.3 0.4 –2.5 0.2 0.5 0.4 0.3 3.6 Other manufactures 0.1 0.1 0.0 0.3 0.4 0.2 0.2 0.0 0.0 0.3 0.2 0.3 0.0 0.0 0.2 Construction 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Transport 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.1 –0.1 –0.1 0.0 0.0 0.0 Trade 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Communications 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 FIRE 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Public services –0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other Business services 0.0 –0.1 0.0 0.0 0.0 0.0 –0.1 0.0 0.0 0.0 –0.1 –0.2 0.0 0.0 0.0 Tourism and other services 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total 4.7 6.2 5 23 –0.7 119.2 6.5 8.8 11.3 –24.9 58.7 96.9 8.4 5.4 228.5 EXPANDING ECONOMIC TIES IN THE LEVANT: WHO BENEFITS AND BY HOW MUCH 59 Figure 32 Welfare Effects from Transport Reform and lower production costs as well as the costs of im- (2007 US$ millions) porting services from countries within the Levant. The EU27 results, however, differ by country because of the differ- Turkey USA ential impact of the productivity improvements. Turkey Iraq is already a productivity leader in most services sectors Japan Egypt so any further productivity gains will affect relatively Syria NIEs few sectors (Table 16). Thus, its welfare gain is expected Lebanon China to be relatively small in per capita terms (1.7 percent) India (Table 16). Iraq will gain US$2.3 billion and its welfare Other Asia Jordan gain will be largest in per capita terms (15.4 percent) Morocco Tunisia due to the fact that Iraq’s service sectors are among the Yemen Algeria most inefficient in the zone, meaning that reforms will Libya Other Europe bring about considerable savings. Syria and Egypt are Iran expected to accumulate welfare gains of US$3.0 billion LAC Other OECD and US$11.7 billion respectively (each equivalent to a SSA Russia 10.5 percent increase in per capita welfare), while Jordan GCC and Lebanon will gain US$1 billion (6.3 percent) and –550 –350 –150 50 250 450 US$543 million (2.4 percent), respectively. The largest productivity gains for Turkey are ex- pected to occur in construction, where Lebanon is considered the regional leader, and in trade in busi- can be attributed to the fact that port and shipping den- ness services, where Jordan is the regional leader. As sity is high in the Mediterranean and around the Arabic productivity improves in construction, and to a much Peninsula. Among MENA countries, Egypt and Mo- lesser extent, in other service sectors (see Table 16), con- rocco stand out with their major and successful trans- struction activity will expand and the price of construc- shipment activities, while Tunisia lags behind because of tion services will decline. To the extent that construction delayed decisions on new port investments.41 Still, the services are used as intermediate inputs into other sec- connectivity ranking overstates the de facto intraregion- tors, there will be a broad-based expansion of economic al connectivity because of the lack of hub port develop- activity and investment in Turkey. Since real returns to ment in the southern Mediterranean. labor and capital will rise, domestic demand and demand for exports in the Levant zone will be lifted, driving up prices of goods made in Turkey and export prices, but Scenario 4: Services Trade Liberalization lowering demand for Turkish exports in the rest of the world (Annex 20). The opening up of the service sectors to competition The opening up of the services sectors of Egypt, Jor- within the New Levant zone will result in sizable dan, Lebanon, Syria, and Iraq to greater competition welfare gains in all countries. This reform is expected to improve the efficiency of service companies engaged 41 According to the World Bank Doing Business database, in the in cross-border trade and is modeled as a productivity case of exporting a container, the lowest cost country in MENA is Morocco, while in the case of importing a container, Egypt is shock that lowers the effective prices of imported ser- the lowest cost country, while Jordan is the lowest cost land-locked vices. Competition is expected to boost productivity country. 60 Over the Horizon: a New Levant Table 16 Productivity Growth Associated with Services Liberalization in the Levant (percent) Turkey Jordan Lebanon Egypt Iraq Syria Import- Value- Import- Value- Import- Value- Import- Value- Import- Value- Import- Value- augmenting added augmenting added augmenting added augmenting added augmenting added augmenting added Construction 0.0 12.9 9.3 29.7 9.3 0.0 27.3 55.5 9.3 75.7 9.3 68.5 Trasnport 0.0 0.0 26.8 25.8 26.3 20.1 16.1 35.7 17.8 71.6 17.8 37.1 Trade 0.0 4.4 25.0 21.8 25.0 0.0 50.0 21.6 17.9 62.5 17.9 19.6 Communication 0.0 0.0 25.0 25.8 25.0 20.1 25.0 35.7 26.8 71.6 26.8 37.1 FIRE 0.0 0.0 39.0 19.3 39.0 8.1 39.05 31.5 31.3 53.2 31.3 38.3 Business Services 15.9 0.0 0.0 19.3 7.9 8.1 10.7 31.5 1.9 53.2 1.9 38.3 Tourism & Other Services 0.0 4.4 9.3 21.8 9.3 0.0 27.3 21.6 9.3 62.5 9.3 19.6 and investment within the Levant zone will improve 42 It is assumed that as a result of the reforms, services sectors’ value the productivity of services, and lift real wages and added per employee in the Levant zone would start converging to returns to land and capital in these countries.42 This the highest value added per worker in the group. The convergence reform is expected to boost investment and economic would be gradual and complete convergence is not expected with- in a 20-year period (all government-related services are excluded activity in the services sectors and induce a shift of re- from the analysis). Since the simulation results are representative of sources into services. In Egypt, Iraq, and Syria, there will what is likely to happen in a three to five year timeframe, the pro- be a broad-based boost to economic activity, affecting ductivity shocks required for complete convergence over a 20-year period are first computed and annualized, and then cumulated to agriculture, food processing, chemical, and manufactur- represent the productivity growth expected in the span of three ing industries, while reliance on crude oil exports and years. production is expected to decline slightly. TRADE AND INVESTMENT 3 REGIMES T rade and investment are the two primary channels that countries in the region could use to aid fur- ther integration and take advantage of their complementarities. This chapter reviews and compares the trade and investment regimes of Turkey, Jordan, Lebanon, Iraq, Syria, Egypt, and the Palestinian Territories with a view to identify the areas of reforms needed to harmonize their policies in order to im- prove competitiveness collectively and increase trade and investment flows among them. These countries demonstrate high potential to integrate faster as a sub-group. Because the trade and investment regimes and the degree of competitiveness vary widely among the countries, a free trade arrangement in the region would benefit relatively more the competitive ones unless the others undertake the reforms identified in this chapter and enhance their competitiveness. It is essential therefore to stress the point that these reforms are preconditions for a mutually beneficial regional economic integration. The chapter provides detailed recom- mendations for improvement of the trade and investment regimes. It is also important to note that improving and Overview of Policy Recommendations harmonizing trade and investment regimes are neces- sary but not sufficient for improving competitiveness The level of development, structure of the economy, on a sustained basis. Complementary behind-the-bor- institutional capacity, policy stance, and competi- der reforms must be implemented. In particular, the in- tiveness vary widely among the countries in the Le- vestment/business environment must be strengthened to vant. Turkey is prominent in the sub-region in almost promote private investment by both local and foreign all categories of economic indicators. It also has a broad investors. The policy package to achieve this objective production structure and a diverse export base in terms would include the provision of adequate infrastructure of both products and trading partners. Turkey is bet- services, finance, and training, a supportive exchange ter integrated into the global and regional economies. rate policy, and elimination of administrative barriers, It became a member of the WTO in 1951 and joined as well as sector-specific policies directly affecting the the EU Customs Union in 1996. It also has 16 bilateral sub-sectors with latent comparative advantage. FTAs and is in the process negotiation of scores of new 61 62 Over the Horizon: a New Levant ones. The Customs Union with the EU, in particular, from the recent political turmoil that has engulfed much helped substantially by facilitating the alignment of of the region. Turkey’s legal and institutional system and the policy Jordan and Lebanon cannot rely on their small environment to the EU’s. domestic markets for sustained growth. They need to Being in transition from an efficiency-driven pursue export-oriented strategies and take advantage to an innovation-driven stage of development, Tur- of the regional opportunities. Liberalization of trade key will need to continue implementing efficiency in services is particularly important for both countries enhancing policies for productivity and quality im- in regional integration agreements. However, they will provement through supporting investment in new need to focus on different reform agenda to advance their technology particularly in the small and medium enter- competitiveness. prise (SME) sector and enhancing standards manage- Jordan has well-developed trade and investment ment, while focusing increasingly more on innovation regimes thanks to the substantial technical assistance and product diversification by promoting research and it received in the context of WTO accession, the As- development both at the company and academic level sociation Agreement (AA) with the EU, and the FTA and attracting FDI. A more competitive exchange rate with the U.S. Improvement in competitiveness will policy is also a key factor in maintaining the export therefore depend largely on (i) effective implementation momentum. of the trade regime, and (ii) the improvement of its be- Given its size, level of development, and insti- hind-the-border policies—high tax incidence, high cost tutional capacity Turkey could serve as one of the of transport and utilities, administrative hurdles, chronic growth poles for the sub-region through opening its water shortage, energy deficiency, low domestic savings, large market to the goods and services produced by the and a complex incentive system. group, investing in the region, and providing technical The trade regime in Lebanon, in contrast, leaves assistance in a range of areas including institutional ca- much to be desired. As detailed later in this chapter, Leb- pacity building. In return, deeper and wider integration anon does not have a clear trade policy and institutional with its neighbors benefits Turkey in terms of diversify- capacity to diversify its export base beyond a few services ing its trade and securing economic and political stabil- sectors. Its doing business ranking (104) is also lower com- ity in the region. pared to Jordan (96). This is explained largely by political Among the Levant countries, only one econo- fragmentation in policy-making in the country. Lebanon my—Turkey—ranks among the world’s 50 most com- should therefore focus on improving both its trade regime petitive economies. A measure of the Levant region’s eco- and capacity and behind-the-border policies. nomic heterogeneity can be gleaned from the contrasting performance of the country sample with regard to overall competitiveness levels as measured by the Global Com- Table 17 Global Competitiveness Index 2011–2013a petitiveness Index (GCI). The latest GCI results (Table Ranking 2011–2012 Ranking 2012–2013 Δ 17) depict a region where Turkey’s performance over Egypt 94 107 –13 the 2011–13 period shows a significant improvement, Jordan 71 64 –7 notching up a remarkable gain of 16 places in world Lebanon 89 91 +2 rankings. Lebanon ranks 91st out of the 144 countries Turkey 59 43 +16 surveyed. Egypt and Jordan lost competitiveness suggest- Syria 98 ing the influence of some of the negative economic con- Source: World Economic Forum. sequences and deteriorating investment climates arising a Sample size: 144 countries. TRADE AND INVESTMENT REGIMES 63 In Syria and Iraq, the oil sector plays a key role. Turkey: Trade and Investment Regimes Syria has taken important steps since the mid-1990s to diversify its production and export base, and enhance pri- In the past 30 years, Turkey has substantially strength- vate sector orientation of its economy. However, there is ened export orientation of its economy by improving its still a long way to establish a sustainable business-friendly trade regime and complementary behind-the-border pol- policy environment to enable private-sector driven ex- icies including macroeconomic and sectoral policies and port-oriented growth. This calls for substantial improve- broader business environment. The customs union with ment both in the trade regime and behind-the-border the EU, which entered into force on January 1, 1996, policies. Once the situation normalizes the recommen- accelerated the transition from import substitution to ex- dations made in this report would be useful to restore port promotion. It facilitated the alignment of Turkey’s and strengthen the regional trade and investment ties legal and institutional system and the policy environ- in order to take advantage of opportunities exist in the ment to the EU’s and the locking in of its reforms. As neighboring countries. Iraq’s economy is heavily depen- a result, Turkey has now a more diverse and competitive dent on (i) oil production and exports, (ii) public sector export base in many subsectors compared to other coun- for employment creation, and (iii) imports of products tries in the region. for which Iraq has latent comparative advantage. The Exports have responded well to policy improvements main objective should be to reduce these dependencies with an annual average growth rate of about 10 percent by stimulating private investment in non-oil activities in current dollars in the past 30 years. The composition where Iraq has comparative advantage. Initially, emphasis of exports—both products and trading partners has would be on replacing imports with domestic production also changed significantly. The government intends to to establish a diverse production base. This would follow maintain this momentum. It set a target of total exports an export promotion strategy to diversify exports away of US$500 billion in 202343 (from US$143 billion in from oil. The present policy environment including trade 2011) together with improving the quality and sophis- policies is not adequate to achieve these objectives. There- tication of the exported products and reducing the im- fore, significant efforts should be made to improve the port content of exports. Given the less favorable global behind-the-border policies and trade regime in parallel. environment in the future, this aggressive growth target Policy recommendations should be complemented can be achieved only by a substantial increase in Tur- with behind-the-border reforms. Table 18 summariz- key’s share in world trade. This, in turn requires (i) sig- es the main recommendations for improving only the nificant enhancement of both the price and non-price trade and investment regimes of Syria, Jordan, Lebanon, competitiveness of Turkish products through improve- and Iraq. The analysis and recommendations do not ment in the quality and sophistication of exportables, cover trade in services because it is taken up in another and (ii) further diversification of exports by products and chapter. The importance of complementarity between trading partners. It also requires new investment and a trade and behind-the-border policies in determining marked increase in national savings from its current level competitiveness is well illustrated by a comparison of of 15 percent. One should also consider the potential Jordan and Turkey. In doing business indicators, Jordan conflict among the objectives. For example, improving ranks higher than Turkey in the Trading Across Borders quality and sophistication of exports may require an ini- sub-indicator—58 versus 80. This is more than offset by tially high level of imports. ranking in other indicators, which reflect the impact of behind-the-border policies. As a result, Turkey’s overall doing business ranking is 71 compared to Jordan’s 96. 43 The 100th year of the foundation of the Republic of Turkey. 64 Over the Horizon: a New Levant Table 18 Summary of Policy Recommendations Syria Jordan Lebanon Iraq Tariffs and Other Charges Reduce the number of tariff bands to 3 or Reduce the number of bands to 3–4 and Implement the new tariff schedule as 4 and eliminate the nuisance taxes. the maximum rate to a more moderate soon as possible to support domestic Replace numerous other taxes and level. Consolidate the remaining fees and production after reducing the non-zero charges with VAT, excise, and a small charges and bring them conformity into bands to 3–4 and after improving the number of services rendered by customs WTO rules. customs administration. Non-Tariff Measures Review the remaining NTMs, identify the Enact the Law on International Trade Rescind the new Ministry of Trade ones with largest impact, and prepare and Licensing to eliminate ministerial Directive on resumption of import and a program for gradual elimination or discretion in non-automatic licensing export licensing. selective tariffs. to avoid its use of vested interest and exclusive agency licensing. Ensure conformity with the WTO rules. Customs Administration Continue reforms with emphasis Speed up the custom clearances by Implement the EU Twinning Program Prepare and implement a comprehensive on implementation of modern risk increasing the share of goods going as soon as possible to modernize the reform and modernization program management, automation of business through the green channel significantly customs administration in order to focused on adoption of international processes, introduction of one-stop shops from the current 20 percent. One way improve efficiency, reduce delays, and standards and investment in infrastructure at the borders operationalization of the to achieve this objective is to increase ensure good governance. with particular attention to the selection anti-corruption unit, and training of staff. the number of mutual recognition of an automated customs system and agreements. capacity building in all aspects of a modern customs administration. Technical assistance will be needed to prepare and implement this program. Standards and Conformity Assessment Infrastructure Accelerate implementation of the Quality Amend the Standards and Metrology Seek further technical assistance to Prepare and implement a comprehensive Management Program financed under EU Law to incorporate provisions for market continue reforming the standards modernization program, which would technical assistance. surveillance. Significantly improve the infrastructure. In particular, adopt the include: separation of standards setting, institutional and skill capacity for market National Quality Policy, operationalize conformity assessment and certification, surveillance. Enact the Accreditation Qualeba and COLIBAC.b and measurement and calibration Law and establish an independent functions; investment in infrastructure Accreditation Agency. and capacity building; encouragement of private laboratories; and arrangement of mutual recognition programs. Technical assistance will be needed to prepare and implement this program. Export Incentives Amend the Customs Law to extend Improve the institutional and skill Prepare an Export Growth and Prepare an Export Development Strategy, drawback to all imports used in capacity of the Enterprise Development Diversification Strategy as a policy develop an export assistance and production of exports. Also, include tariff Corporation. guide, set up an Export Promotion incentive system, and set up an Export and tax exemption option and bonded Agency, establish an effective duty and Promotion Agency to implement the warehousing in the Law. tax drawback system permitted by the strategy. Incentives would include a Put in place an effective implementation Customs Law. duty/tax drawback and credit guarantee mechanism and ensure that refunds are schemes. Institutional assistance paid in a timely manner. program would include collection and dissemination of information, organization of buyer-seller meetings and trade fairs, preparation of manuals, and provision of services such as business incubation, market research, and consultation. (continued on next page) TRADE AND INVESTMENT REGIMES 65 Table 18 Summary of Policy Recommendations (continued) Syria Jordan Lebanon Iraq Free Zones Amend the free zone legislation to do Separate the operational and regulatory Transfer the management of the free Transfer the management of the free the following: Apply tax exemptions roles of the Free Zones Corporation. zones to the private sector. zones to private sector to separate the to a limited period rather than for the This could be done by transferring the Establish industrial parks and clusters, regulatory and operational role of the life of the investment, lift restriction management of public free zones to and introduce single-factory EPZ scheme Free Zones Authority, set up industrial on purchases from local market to the private sector and designating the to expand the industrial base and exports. parks with good infrastructure facilities strengthen backward linkages, transfer Free Zones Corporation as a regulatory to encourage formation of clusters, and management of free zones to private authority. introduce single-factory export processing sector under management contracts. Introduce the single-factory EPZ scheme. zones scheme. Include EPZ and single-factory EPZ concept in the Customs Law to encourage export activities in the Industrial Cities. Trade Finance Improve book-keeping and accounting Increase the size of Kafalat’s financial In the context of broader financial sector practices in the private sector for resources and capacity to provide reforms introduce dedicated credit for transparent financial statements to technical assistance to SMEs in areas exporters or loan guarantee schemes and facilitate accurate risk assessment by the such as loan application, project trade insurance system to ease access to banks, enhance credit information system preparation, financial management. credit and reduce risks. and risk assessment skills in the banking sector, introduce credit guarantee and loan registry systems. Institutional Capacity and Policy Coordination Set up a secretariat for the Higher Set up a high level Export Council chaired Set up an Export Sub-Committee in the Export Council housed in EDPA to by the Prime Minister and composed of Economic Committee of the Council of ensure that the Council has adequate concerned ministries and representatives Ministers to guide the trade policies, data and information to carry out its of the private sector to effectively monitor implementation, and better responsibilities. Conduct a needs coordinate and guide export policies. coordinate policy formulation and assessment to identify the skill and implementation. Ensure participation of institutional needs and develop a program the representatives of the private sector to improve implementation and analytical in the Export Sub-Committee. Encourage capacity of the MoET, EDPA and other exporters to form an Exporters Association concerned agencies. Seek technical as an advocacy body. assistance to implement the program. Trade Agreements Ratify the Association Agreement with the Meet the remaining requirements Finalize Iraq’s Goods Offer and Services EU. Accelerate negotiations with the WTO (mainly enactment of various laws and Offer and submit to the WTO in order to for accession. regulations) to conclude WTO accession accelerate accession negotiations. process, and ratify the FTA with Turkey as soon as possible. Investment Regime Eliminate the remaining restrictions on FDI Consolidate different investment incentive Improve the capacity of Investment and Continue implementation of the reforms particularly on ownership. Seek technical schemes under one single scheme for Development Agency of Lebanon to recommended by the “Iraq Investment assistance to improve capacity of Syrian simplicity and clarity. provide a wider set of services to the Climate Assessment.” Investment Agency. Operationalize the investors, and operationalize its one-stop one-stop shop facility. shop arrangements. Note: a Lebanese Accreditation Body. b QUALEB is a EU funded project formally established in 2004 at the Ministry of Economy and Trade of Lebanon. QUALEB’s overall mission is to provide extensive support and advice to strengthen quality management, capabilities and infrastructure in Lebanon. 66 Over the Horizon: a New Levant Turkey’s Trade Regime44 impose product requirements and specifications on im- ported and domestically produced goods, including re- Policies Directly Affecting Imports quirements related to health and safety, environmental Import duties and other charges. Turkey uses the 2007 HS aspects, and labeling. Turkey has made significant prog- coding system with 16,448 tariff lines at the 12-digit lev- ress in this regard. The regime Turkey has set up since el. The average applied MFN tariff on industrial goods, 1996 for Technical Regulations and Standardization for which is common with the EU, is 4.1 percent. However, Foreign Trade is revised annually in the light of progress the average applied MFN tariff for all products amounts in the transposition of EU legislation into Turkey’s legal to 12.2 percent, because of a high average tariff of system. Turkey has so far transposed around 82 percent 47.9 percent for agricultural products. The tariff peaks of the EU directives into Turkey’s technical regulations. are also higher in the agricultural sector—over 100 per- They cover about 70 percent of manufactured goods im- cent for meat and dairy products. Duty-free items rep- ported into Turkey. resent 23.2 percent of all tariff lines, and 98.3 percent Turkey has set up two national TBT Enquiry Points; of tariff lines carry ad valorem rates. Other charges in- the Directorate General of Product Safety and Inspec- clude a Mass Housing Fund levy on imported fish and tion (under the Ministry of Economy) for technical reg- fish products and various fees for the customs-related ulations and conformity assessment procedures, and the services. Turkish Standards Institution (TSE) for standards. The A value-added tax (VAT) on goods and many ser- General Directorate maintains a website to facilitate ac- vices applied at the general rate of 18 percent (and the re- cess to TBT notifications. The TSE develops and imple- duced rates of eight and one percent on some products) ments standards for products produced in and imported and a special consumption tax (SCT) on oil products, to Turkey. It is a full member of ISO and other interna- motor vehicles, alcoholic beverages, tobacco products, tional and European standards institutions. At present, and various luxury goods (that vary from one to 84 per- Turkey has 33,097 standards, all of which are voluntary. cent), are levied equally on domestically produced and For the SPS measures, the national Enquiry Point and imported products. Notification Authority is the General Directorate of Non-tariff measures. Turkey prohibits importation Food and Control of the Ministry of Food, Agriculture of 10 items by broad product category for health, safe- and Livestock. ty, public moral, and environmental reasons consistent Turkey introduced a new Product Safety System in with the international rules.45 Licensing is not required 2010 to facilitate electronic risk-based import and ex- for imports except for various products for national se- port control of goods. Turkey’s conformity assessment curity and safety reasons as well as securing after-sale procedures vary according to whether the product services and maintaining adequate stock of spare parts is covered by transposed EU Directives, and the risk and accessories.46 The certificates for most of these prod- level of the product. All products covered by the EU ucts are issued by the Ministry of Science, Industry and Technology. 44 Standards and conformity assessment infrastructure. This section draws partly on “Turkey Trade Policy Review (2012),” World Trade Organization, WT/TPR/259. The Customs Union with the EU necessitated the adop- 45 Narcotics, ozone depleting substances, chemical weapons, mea- tion of EU’s technical barriers to trade (TBT) and sani- surement instruments not conforming to Turkish norms, arms tary and pytosanitary (SPS) regulations and conformity and ammunitions, gambling instruments, spawn of silk-worm, soil, leaf, and natural manure. assessment procedures to eliminate all technical barriers 46 Telecom equipment, some home appliances, motor vehicles, fer- to trade with the EU. The TBT and SPS regulations tilizer, oil, and gas. TRADE AND INVESTMENT REGIMES 67 Directives must carry the Conformite Europeene (CE) dried figs, and some hazelnuts, are subject to compulsory mark obtained from accredited institutions in the origin quality control. “Control certificates” for these products country or in Turkey. Other products must meet the re- indicate conformity with established standards. The re- quirements of the relevant Turkish TBT and SPS regu- gional branches of the Ministry of Economy issue the lations for market access depending on the risk level of certificates. the product. Suppliers’ declaration of conformity assess- Export incentives and promotion. Exports of 16 ag- ment is sufficient in most cases. In others (particularly ricultural products are eligible for export subsidies.50 foodstuff, agricultural products, pharmaceutical prod- This program is financed from the Support and Price ucts, drugs, cosmetics, detergents, forestry materials), Stabilization Fund. Also, exporters benefit from duty “control certificates” must be obtained from authorized and tax concessions under the inward processing and Turkish Ministries. bonded warehousing schemes. Duty and tax reim- The Turkish Accreditation Agency (TURKAK) is bursements are made generally in a timely manner. Ex- responsible for accrediting domestic and foreign con- ports are exempted from VAT and SCT. Exporters are formity assessment bodies and ensuring that they car- allowed to deduct duty and tax drawback from their ry out laboratory, certification, and inspection services tax obligations. in accordance with international standards. Turkey has Turkey has 11 government assistance programs for about 5,000 accredited public and private laboratories promoting exports, some of which target SMEs, rang- and 120 accredited certification bodies. ing from technical assistance and advisory services to All imported or domestically produced products are exporting companies to market research and promo- subject to market surveillance activities carried out by tion of Turkish trademarks. The Ministry of Economy, 10 public authorities.47 The Market Surveillance Board Turkish Exporters Union, Small and Medium Enterpris- in the Ministry of Economy coordinates these activities es Organization (KOSGEB), and Turkish Technology and prepares annual reports on the outcome. Development Foundation administer these programs.51 In the WTO TBT Committee, four cases of con- Additional support is provided through a wide range cern have been raised against Turkey related to the lack of SME assistance program including small industry of transparency in development and implementation of estates, organized industrial zones, technology develop- measures, incomplete and untimely notification to the ment zones and other financial assistance and technical WTO, and insufficient time provided to adapt to rel- assistance programs implemented by KOSGEB. Since evant requirements.48 Notwithstanding the significant 1962, Turkey has established over 100 small industry progress made, further improvement is necessary for full alignment with the EU and international norms. 47 The Ministries of Science, Industry and Technology; Customs Policies Directly Affecting Exports and Trade; Labor and Social Security; Health; Food, Agriculture and Livestock; and Environment and Urban Planning; Maritime Export restrictions. Turkey applies export taxes on raw Affairs; and the Regulatory Authorities for Energy, Tobacco and skins, and both shelled and unshelled hazelnuts. The Alcohol, and for Information and Communication Technology. 48 revenue is earmarked for the Support and Price Stabi- Turkey Trade Policy Review (2012) 49 Including wild animals; tobacco seeds and seedlings; plants of ol- lization Fund. Turkey prohibits exports of 12 items, ive, fig, seedless sultanas, and hazelnuts; and wood. mostly agricultural products, for environment, health 50 Cut flowers, frozen vegetables, dried vegetables, frozen fruit, pastes and cultural reasons.49 Export of some 150 agricultural and preserves, honey, homogenized fruit preparation, fruit juice, prepared fish, poultry, meat, eggs, chocolate, biscuits, olive oil, and products (at HS 12-digit level) including citrus fruit, macaroni. apples, groundnuts, certain edible oils, dried apricots, 51 Turkey Trade Policy Review (2012) 68 Over the Horizon: a New Levant estates, 93 organized industrial zones, and 43 technology and services from Turkey. Its financial support amounts development zones. Companies operating in these zones to seven to eight percent of total Turkish exports. benefit a variety of financial incentives including subsi- The Bank can extend credit for short-term oper- dized rent and concessional tax rates. ational support (including pre-shipment activities) or Free zones. Turkey has 19 free zones operating under longer-term investment activities, allocated through the the Free Zones Law (1985) and Free Zones Regulation commercial banks in Turkey or directly by the Exim- (1993). A free zone may be developed and operated by bank. Importers in the client countries purchasing Turk- the public or private sector, or by the two sectors in ish goods and services are also financed under a sovereign partnership. Investors in the zones may construct their guarantee or a reputable bank guarantee in favor of the own premises within the free zones, but office space, Turk Eximbank. workshops and warehouses are also available for rent. The operating licenses for the companies in the zones Issues vary from 15 to 45 years depending on the type of Turkey has faced substantial adjustment pressures re- operation. cently associated with increased international integra- Financial benefits available to free-zone companies tion. First, more than half of its exports and imports include exemption from payment of customs duties and are tied to the European Union market with which it fees, exemption from corporate and income tax, and has had a common external tariff through the customs VAT. These benefits apply to the exported part of the union since 1995. Thus recent weak growth in Europe products produced or processed in the free zones. Sales due to the economic recession and ongoing EU debt cri- into the domestic market are subject to Turkey’s MFN sis has significantly impacted its exports, as has a recent import regime including the payment of import duties wave of new FTAs that the EU has negotiated with third and taxes. countries (i.e., Mexico, South Africa, South Korea) that Companies operating in the free zones are active in are competitors in the EU market and to which Turkish a wide range of areas including high-tech products— producers are losing tariff preference margins. Second, manufacturing or assembling. The free zones in Turkey Turkey’s relatively low MFN tariffs (due to the EU cus- have not been successful in attracting FDI. Only 20 per- toms union) imply it is relatively open to imports from cent of the 2,500 companies operating in the free zones third countries. Third, Turkey has also recently signed a are foreign companies. This is explained partly by the se- number of FTAs with MENA countries, and for most lection of the location of the zones, which is determined of them Turkey has already implemented its part of the mainly on the basis of political or regional development liberalization bargain thus giving the trading partner free objectives. Export orientation of the zones is also weak. trade access to the Turkish market. The combination of More than half of the products produced or processed in these factors have contributed to the fact that Turkey is the zones are sold in the domestic market. The govern- now one of the heaviest users of temporary trade barriers ment is planning to re-organize the free zone system in (TTBs) globally. a way to be more effective and consistent with the EU In a number of instances, Turkish government pol- regulations. icymakers’ use of import-restricting TTBs has direct Export finance. The Turk Eximbank, a state-owned implications for partners in the MENA region. Table bank established in 1987, operates a number of export 19 provides information on three case studies. credit, guarantee, and insurance schemes to support The first example is a request that Turkey’s domes- Turkish exporters, outward investors, and foreign con- tic yarn producers made in 2012 for the Turkish gov- tractors to help increase and diversify exports of goods ernment to initiate an antidumping investigation on TRADE AND INVESTMENT REGIMES 69 Table 19 Examples of Turkey’s Trade Frictions Impacting MENA Partners Examples of MENA Year of TTB Affected bilateral trade Product: trade policy Trading Partner(s) Affected† policy action (estimate)* 1. Synthetic yarn: Antidumping on imports from Egypt, Egypt (-) 2012 $56m Malaysia, Pakistan, Thailand and Vietnam Syria (+) $6m Iran (+) $600k Tunisia (+) $320k 2. Cotton yarn: Safeguard on imports Egypt (+) 2008 $66m Syria (+) (extended $58m Lebanon (+) in 2011) $170k 3. Polyethylene terephthalate (PET): safeguard on imports Iran (-) 2011 $104m Notes: Compiled by the author from the Temporary Trade Barriers Database matched to trade data available from UN COMTRADE Database via WITS. †Expected positive (+), negative (–) or uncertain (?) outcome for the listed exporter, given the likely way that the new TTB import restriction would be applied and whether the exporter would be excluded or exempted. *Estimates of bilateral imports of the affected products taken at the 6-digit HS level. synthetic and man-made yarn from Egypt, Malaysia, Figure 33 Turkey’s Imports of Synthetic Yarn from Pakistan, Thailand and Vietnam. Total imports in those Selected Source Countries (US$ millions) product categories had increased from US$431 million in 2009 to US$737 million in 2011. Figure 33 indicates 60 that Egypt had become a major supplier of such products 50 to the Turkish market, having doubled its exports during 40 that same period from US$28 million to US$56 mil- 30 lion. These are also important products for Egypt; in 20 2012 they formed roughly four percent of total bilateral 10 goods exports to Turkey. 0 However, part of the reason that Egypt had grown 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 into a such a major supplier of these yarns for the Turk- From Egypt From Syria ish market is because of trade diversion related to the new “preference” it had received due to other major sup- Source: UN COMTRADE Database. pliers of these products—specifically China, India, and Indonesia—all being subject to an earlier Turkish anti- Exporters in Syria, and to a lesser extent Iran and dumping case that resulted in import restrictions being Tunisia, may be able to learn from this experience.52 As imposed in 2009; these import restrictions were still in Figure 33 also indicates, Syria is similar to Egypt in that effect in 2012. By the time of the initiation of the earlier it has also experienced a period of increasing exports of antidumping case on the same products in 2009, each these yarn products to Turkey, growing from US$2.4 mil- of these countries had annual exports in these products lion in 2009 to US$6.1 million in 2011. Syria’s export- to Turkey of US$100-$200 million. With their market ers enjoyed some preferential access beginning with the access curtailed by Turkey’s sudden use of antidumping 2009 antidumping case and they now stand to have even in 2009, other exporters—in this case Egypt, Malaysia, Pakistan, Thailand and Vietnam—that were not subject to those import restrictions filled the gap and increased 52 In recent years for these product categories, Iran had as much as their exports to Turkey until they too became subject to US$600,000 in annual exports to Turkey and Tunisia had as much Turkey’s new import restrictions under antidumping. as US$320,000 in annual exports to Turkey. 70 Over the Horizon: a New Levant greater preferred access to the Turkish market, ceteris pa- Figure 34 Turkey’s Imports of Cotton Yarn from ribus, if Turkey were to impose additional antidumping Selected Source Countries (US$ millions) import restrictions on Egypt and the other four countries currently under investigation. On the other hand, if ex- 70 ports from Syria grow too fast to fill the gap left by these 60 other exporting countries, Syria could be the next in line 50 for any new Turkish antidumping import restrictions on 40 synthetic yarn. 30 The second example for Turkey is its 2008 cotton 20 yarn safeguard. Overall, Turkey’s total imports of cot- 10 ton yarn more than doubled from 2005 to 2007 from 0 US$266 million to US$555 million. The major foreign 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 sources of Turkey’s cotton yarn imports were India and From Egypt From Syria Uzbekistan, each with over US$100m in exports in 2007, followed by Pakistan, Turkmenistan, and then Source: UN COMTRADE Database. Egypt and Syria. The rules of the WTO’s Agreement on Safeguards indicate that when countries like Turkey ap- ply a new safeguard import restriction, it is supposed to dispute against the Turkish safeguard in 2012 that led exempt from the application of the import restriction the Turkey to end the safeguard and restore more nondis- de minimus producers in developing countries; these are criminatory treatment (for Egypt and Syria in relation defined as exporters that have less than three percent of to other countries); this may lead to a new period of the import market and collectively less than nine per- adjustment for Syria’s and Egypt’s cotton producers and cent of the market. In this instance it appears that Tur- exporters as they now face more competitive conditions key designated both Egypt’s and Syria’s exporters as de in the Turkish market. minimus developing country suppliers, thus exempting Turkey’s third example is a 2012 safeguard investi- them from the applied import restrictions and giving gation on imports of polyethylene terephthalate (PET). them additional preferential access to the Turkish market This is another product that Turkey has subjected to sub- beginning in 2009.53 stantial TTB policy activity during the recent period of As Figure 34 indicates, both Egypt and Syria in- increased international integration. In particular, in Jan- creased their exports of cotton yarn to Turkey sub- uary 2011, Turkey removed a set antidumping import re- stantially during the years 2009–2012 during which strictions on PET from seven countries (India, Thailand, the safeguard was imposed on competitors and during South Korea, Malaysia, Indonesia, China, and Taiwan, which the two countries enjoyed additional preferential China) that it had imposed and which had been in ef- access to the Turkish market.54 Indeed, by 2010, cot- fect since 2006. As Figure 35 indicates, the antidumping ton yarn had become one of the most important export 53 goods for these countries to the Turkish market—cot- While Egypt was explicitly listed as a de minimus supplier in the report published on the case by the WTO Committee on ton yarn exports made up 4.5 percent of Egypt’s and Safeguards, Syria was left off the list. However, given Syria’s 8.9 percent of Syria’s total bilateral goods exports to export response this may have been a typographical omission Turkey. However, it is also important to note that this and the safeguard was probably not enforced against imports from Syria. preference period for Syria and Egypt to the Turkish 54 While not shown on the figure, Lebanon also had up to market has now ended. India brought a formal WTO US$170,000 in annual exports to Turkey in these products. TRADE AND INVESTMENT REGIMES 71 case did little to slow Turkey’s overall import growth in Figure 35 Turkey’s Imports of Polyethylene PET. By 2011, total PET imports were US$413 million, Terephthalate (PET) from Selected Source Countries more than double their 2006 levels. What had happened (US$ millions) in the period after the antidumping import restrictions were imposed is that Turkish consumers simply switched 450 400 to alternative foreign suppliers that were not subject to 350 the antidumping measures. 300 Figure 35 also indicates that by 2011, countries such 250 as Iran and Pakistan—i.e., countries that the trade data 200 records as having zero exports of PET to Turkey as re- 150 cently as 2004—had expanded exports substantially, 100 50 collectively providing 50 percent of the Turkish PET 0 import market. This continued pressure from imports 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 despite the imposed antidumping import restrictions led Total From Iran From Pakistan Turkey in March 2011 to initiate a new TTB investiga- tion on the same, 12-digit tariff line product code for Source: UN COMTRADE Database. PET as were part of the original antidumping investiga- tion in 2006, this time under its safeguards law. Turkey subsequently applied new safeguard import restrictions The Coordination Council for the Improvement on these products from sources including Iran and Paki- of Investment Environment (YOIKK) identifies the re- stan by September 2011. For Iran, PET exports are one maining barriers to private investment and formulates of its important, nonoil exports—they constitute rough- policies to remove them. The YOIKK is composed of ly one percent of total bilateral exports to Turkey in 2011 all concerned government agencies and business associ- and were ranked by value as the fifth largest 6-digit Har- ations.55 It is chaired by the Minister of Economy and monized System product category. meets every three months. It works through 10 techni- cal committees, which are composed of all public and private stakeholders.56 The General Directorate of Im- Turkey’s Investment Regime plementation of Incentives and Foreign Direct Invest- ment of the Ministry of Economy serves as the Secretar- The legal investment environment in Turkey is defined iat of the YOIKK and has the primary responsibility for by the Investment Law (2001), the Foreign Direct Invest- ment Law (2003), and the legislation passed in 2003 to ensure that the registration of investment is complet- 55 The Union of Chambers and Commodity Exchanges of Turkey ed in one day and the number of required documents (TOBB), Turkish Exporters Association (TIM), Turkish Industri- is reduced. In terms of the administrative structure the alists and Businessmen’ Association (TUSIAD), International In- Investment Advisory Council of Turkey (IAC) is the vestors Association (YASED). 56 These committees are: Company Transactions and Corporate highest body. It is an international platform established Governance; Employment; Input Supply Strategies (GITES) and to receive recommendations of international institutions Sectoral Licenses; Investment Location, Environment and Zon- including the World Bank and the IMF, and executives ing Permits; Taxes and Incentives; Foreign Trade and Customs; Intellectual Property Rights and R&D; Legislation on Invest- of the main local and multinational companies. The ment Climate and Legislative Procedures; Access to Finance; and Prime Minister chairs the IAC, which meets annually. Infrastructure. 72 Over the Horizon: a New Levant implementing the investment policy in coordination of GDP in 2007 (Table 20). After a steep decline in with other concerned agencies and issuing licenses.57 2009 and 2010 due to the global financial crisis, the in- The Turkish investment regime does not discriminate flows are estimated at about US$15 billion in 2011. About against FDI. If established under the Turkish Commercial two-thirds of the FDI inflows are in the services sector, Code, all foreign companies have the same rights as Turk- financial intermediation in particular. The share of manu- ish companies. Their rights include: national treatment, facturing is about 20 percent. Over two-thirds of inward transfer of proceeds, right to expatriate staff, and access to FDI originate from the EU, followed by the Gulf States. international arbitration. Foreign companies may operate According to UNCTAD’s inward FDI Potential Index and in almost all sectors with 100 percent equity. Restrictions Performance Index, Turkey was ranked 80 and 102 among apply in real estate, media, transport, and business ser- 141 countries (the 141st is the lowest in ranking), perform- vices. In some sectors (broadcasting, aviation, maritime ing significantly below its potential (Table 20).61 transportation), the share of foreign companies cannot ex- FDI outflows. Turkey has become an important re- ceed 49/50 percent. Special permission is needed in some gional capital exporter. Starting from US$0.9 billion others (finance, accounting, fishing, petroleum, mining, in 2000, the FDI outflows reached US$2.5 billion in electricity, and education). Permission from the Council 2008 before falling to US$1.6 and US$1.7 billion in of Ministers is needed for foreigners to purchase land areas 2009 and 2010, respectively (Table 21). Sectoral compo- between 2.5 and 30 hectares. Foreigners may not purchase sition has changed significantly. While the share of min- land exceeding 30 hectares. According to the OECD FDI ing and manufacturing fell from an average of 39.5 and regulatory restrictiveness index Turkey’s overall score 34.8 percent in 2002–06 to 9.3 and 27.9 percent in (0.072) is below the OECD average (0.095),58 Note that 2007–11, respectively, the share of services increased the index does not take account of the implementation from 25.4 to 59.0 percent in the same period (Table 21). results. In fact, licensing procedures are lengthy—e.g., The combined share of financial intermediation and tele- 25 different procedures are needed to build a warehouse.59 communication sectors amounted to over an average of Turkey has Investment Agreements in place with 40 percent in the 2007–11 period. 73 countries, and is a member of Multilateral Investment Guarantee Agency (MIGA) and International Center for 57 Turkey’s investment promotion website is selected by the IFC the Settlement of Investment Disputes (ICSID). Turkey also best practice website in the Europe and Central Asia Region in terms of quality of design and navigation. See, “Global Investment joined the Convention on the Recognition and Enforce- Promotion Best Practices,” IFC 2012. ment of Foreign Arbitral Awards and the European Con- 58 The index captures equity restrictions, screening and prior approval, vention on International Commercial Arbitration. and measures regarding foreign key personnel). It varies from 0 to 1 (1 being the most restrictive). See Turkey Trade Policy Review (2012). Investment incentives, which apply equally to local 59 Turkey Trade Policy Review (2012) and foreign companies, include customs duty and VAT 60 For details see www.invest.gov.tr. For the recent investment pack- exemptions, concessional tax and interest rates, and land age announced in June 2012, see www.economy.gov.tr. 61 The Performance Index measures the extent to which host coun- allocation. The type and the size of incentives depend on tries receive inward FDI, and ranks countries by the amount of the location (six regions), size, and the strategic impor- FDI they receive relative to their economic size. It is calculated as tance of the investment project.60 the ratio of a country’s share in global FDI inflows to its share in global GDP. A value greater than one indicates that the country FDI inflows. Turkey’s FDI inflows have increased sig- receives more FDI than its relative economic size. The Potential nificantly in the past decade—from about US$1 billion in Index measures the extent to which host countries receive inward 2000 to a peak of US$22 billion in 2007, partly due to FDI, and ranks countries by the amount of FDI they receive rel- ative to their potential. It is calculated as a simple average of the privatization of public enterprises. FDI inflows amounted values of 12 variables. It is normalized to yield a score between zero to 17.1 percent of gross fixed investment and 3.8 percent and one (for the highest). TRADE AND INVESTMENT REGIMES 73 Table 20 Turkey Foreign Direct Investment 2000 2005 2006 2007 2008 2009 2010 Flow, US$ million Inflow 982 10,031 20,185 22,047 19,504 8.411 9,071 Outflow 870 1,064 924 2,106 2,549 1,553 1,780 Stock, US$ million Inflow 19,209 71,305 95,077 154,022 80,231 143,663 181,590 Outflow 3,668 8,315 8,866 12,210 17,846 22,338 23,802 FDI/Gross Fixed Investment, percent 1.8 9.9 17.1 15. 13.4 8.1 6.6 FDI/GDP, percent 0.4 2.1 3.8 3.4 2.7 1.4 1.2 Inward FDI Ranking (out of 141) Performance Index 126 89 71 91 94 102 108 Potential Index 72 68 72 73 75 80 na Source: UNCTAD WIR 2011. Table 21 Sectoral Composition of Turkey’s FDI Outflow US$ millions 2002–06 2007–11 Value Percent Value Percent Agriculture 1 0.0 18 0.8 Mining 1,694 39.5 1,056 9.3 Electricity, Gas 14 0.3 354 3.1 Manufacturing 1,495 34.8 3,175 27.9 Food, beverages, tobacco products 326 7.6 1,015 8.9 Textile, textile products 680 15.8 244 2.1 Coal, oil refining 52 1.2 366 3.2 Chemicals 22 0.5 239 2.1 Non-metallic mineral products 120 2.8 143 1.3 Metal and metal products 18 0.4 162 1.4 Machinery and equipment 99 2.3 544 4.8 Electrical equipment 79 1.8 236 2.1 Services 1,090 25.4 6,728 59.0 Construction 91 2.1 643 5.6 Wholesale and retail commerce 183 3.8 115 1.0 Transportation, telecommunications 272 6.3 1,846 16.2 Financial intermediation 392 9.1 2,785 24.4 Real estate, business services 10 0.2 1,072 9.4 Community and personal services 122 2.8 145 1.3 Total 4,294 100.0 11,399 100.0 Source: The Central Bank, Turkey. 74 Over the Horizon: a New Levant Table 22 Geographic Distribution of Turkey’s FDI Outflows US$ millions 2002–06 2007–11 Value Percent Value Percent Europe 2,288 53.3 7,780 68.3 Germany 762 17.8 426 3.7 Austria 20 0.5 182 1.6 Belgium 10 0.2 232 2.0 Belarus 0 0.0 200 1.8 Bosnia-Herzagovina 17 0.4 121 1.1 France 23 0.5 557 4.9 Holland 961 22.4 2,180 19.1 GreatBritain 68 1.6 188 1.7 Ireland 11 0.3 231 2.0 Luxembourg 60 1.4 615 5.4 Malta 5 0.1 1.079 9.5 Russia 30 0.7 392 4.4 Switzerland 53 1.2 556 4.9 Caucasus and Central Asia 1,661 39.5 1,657 14.5 Azarbeijan 1,584 36.9 1,361 11.9 Georgia 26 0.6 51 0.5 Kazakhistan 38 0.9 228 2.0 Middle East and North Africa 72 0.9 915 8.0 Bahrain 16 0.4 154 1.4 Egypt 7 0.2 104 1.0 Iran 13 0.3 147 1.3 Iraq 0 0.0 84 0.7 Jordan 1 0.0 3 0.0 Lebanon 4 0.1 17 0.2 Syria 1 0.0 17 0.2 Americas 220 5.1 800 7.0 USA 218 5.1 763 6.7 Asia 8 0.2 198 1.7 China 6 0.1 44 0.4 India 0 0.0 78 0.7 Pakistan 0 0.0 52 0.5 Africa 2 0.1 47 0.4 Oceania 30 0.7 2 0.0 Australia 30 0.7 2 0.0 Source: The CentralBank, Turkey. TRADE AND INVESTMENT REGIMES 75 The country composition of the FDI outflows also Syria: Trade and Investment Regimes changed in an important way. Table 22 summarizes these changes. The share of Azerbaijan fell from an average of Syria has made progress, particularly since 1995, in 36.9 percent in 2002–06 to 11.9 percent in 2007–11. gradually replacing its four-decade-old administratively This is accompanied by an increase in the share of Eu- controlled economy with a social market economy. The rope and the Middle East and North Africa, from 53.3 to thrust of the reforms has been to clear up the politi- 68.3 percent and from 0.9 to 8.0 percent, respectively, in cal and institutional impediments in the transition to a the same period. Within Europe, Turkish FDI was heavi- market economy led by the private sector while avoid- ly concentrated in Germany (17.8 percent) and Holland ing social disruption. The reform efforts have focused (22.4 percent) in 2002–06. It became more diversified in mainly in the financial, fiscal and trade areas. The trade 2007–11 as the share of Germany and Holland fell while reforms included: reduction of tariffs and some NTMs, the share of others increased, particularly Malta, France, introduction of UNCTAD’s Automated System for Luxemburg, Switzerland, Ireland, and Belgium. Customs Data (ASYCUDA) to streamline customs The importance of the Middle East and North Africa procedures, creation of an Export Promotion Agency, is increasing as a destination of Turkish FDI outflows. application for WTO membership, negotiation for an The larger beneficiaries are Bahrain (1.4 percent), Iran Association Agreement with the EU, and signing a FTA (1.3), Egypt (1.0), and Iraq (0.7). With 0.2 percent each, with Turkey. the share of Syria and Lebanon is small. The share of The structure of production and exports has changed Jordan is negligible. These countries will need to more significantly in 2000s, displaying a greater degree of ex- actively promote Turkish FDI in their economies. port diversification in terms of both product type as well as geographic destination. Notwithstanding the progress made, the Syrian Turkey: Policy Recommendations economy is facing a daunting challenge arising from declining oil production and exports. This would result Turkey has improved its trade regime and behind-the-bor- in a major balance of payments and fiscal shock because der policies in a significant way, and now has a more com- of a large loss of foreign exchange receipts and govern- petitive economic structure compared to the other coun- ment revenue from oil. The appropriate response to this tries in the region. And, it has been reaping the benefits of challenge is expansion and diversification of production improved policies in terms of a dynamic export sector and and exports away from oil to be able to offset the loss of a higher growth rate of its GDP. However, there is room foreign exchange and broaden the revenue base of the for improvement. Improvement is necessary especially government. To realize this objective, Syria had started to meet its ambitious target of reaching an export level of reforming the trade regime and taking complementary US$500 billion in 2023. The objective of the follow up re- measures in other policy areas to create an environment forms will need to be further diversifying its exports in terms conducive to diversifying production and exports away of new markets (Asia, Africa, Latin America), new products from the oil sector. (with higher skill and technology content), and new export- The reform efforts have been seriously disrupted by ers (with emphasis on SMEs) in addition to improving the the ongoing political unrests. As the political situation quality of the products currently exported. This report does stabilizes, Syria has to do much more to deepen the on- not go into the details of concrete policy recommendations going reforms to enhance the export orientation of the for Turkey because a parallel report is being prepared in the economy. This section reviews the current trade regime ECA region on Turkey’s trade regime. and makes recommendations for improvement. 76 Over the Horizon: a New Levant Syria’s Trade Regime62 significantly (from 14 percent to about 30 percent). They will need to be reviewed and recommendations made to Policies Directly Affecting Imports eliminate their distortionary effects (either by conversion Import duties and other charges: Syria has significantly re- into tariffs or elimination). In considering their elimina- duced import duties in the past few years. The current tion, the revenue effect of these measures and compen- simple average MFN rate is 14 percent (19 percent for satory revenue enhancing policies will also need to be agriculture and 12 percent for non-agriculture), slightly considered. higher than the average of developing countries over- Non-tariff measures. The range and number of all, but broadly in line with the region. The MFN duty NTMs have been reduced significantly in the second system still has 11 non-zero tariff bands (1, 3, 5, 7, 10, half of 2000s. In particular, quotas affecting non-pref- 15, 20, 30, 40, 50, 60) with high dispersion, and a large erential trade have been eliminated, and the number of number of lines with “nuisance” rates.63 products on the negative list has been significantly re- The measures necessary to rationalize the import duced (though still remaining very high). The remaining duty system would include reduction of the maximum NTMs include: non-automatic licensing, the public mo- rate and the number of bands and their dispersion, and nopoly in imports and exports in a number of products, elimination of the nuisance rates. These measures are and a negative list. necessary to reduce the anti-export bias that presently The Ministry of Economy and Trade (MoET) grants exists in the duty system.64 The revenue implications of import licenses for each shipment. In order for the the proposed changes also need to be explored. MoET to grant the licenses for some products pre-ap- Syria currently has 54 different border taxes in ad- proval from the line ministries and other concerned dition to 11 tariff bands. Not all the 54 are applicable agencies is required. For these products, customs inspec- for a given product or shipment. This disaggregates into tions are also done by the line ministries, which involve, about four to five per product and five to six per dec- in some cases, inspection of the whole shipment. There is laration. These charges vary from one customs post to a proposal being prepared by the MoET for transferring another introducing a significant degree of arbitrariness the responsibility of pre-approval and inspections from in implementation. The largest of these charges are mu- the line ministries to a single national body to ensure nicipal tax and pre-import tax. The municipal tax, which consistency and eliminate delays. is calculated as a percentage of a number of other taxes The General Foreign Trade Organization (GFTO) and the value of the imports, is collected at the border is responsible for all public sector imports and some of by each municipal administration. The pre-import tax is levied on all imports (two to four percent) except those 62 This section draws on two earlier World Bank reports: “Trade Re- items that carry a one percent tariff rate. These nontariff forms and Export Diversification in Syria: A Diagnostic Review” charges amount to as much as 50 percent or more of (2009), and “Improving Export Incentives and the Free Zones Sys- tem in Syria” (2010). all revenues collected at the border. Over 90 percent of 63 “Nuisance” rates are those rates of five percent or less. Generally, non-tariff revenue comes from municipal and pre-im- the cost of collecting these tariffs is higher than the revenue col- port taxes. lected. Of the 3,330 tariff lines, fully 1,703 lines (51.1 percent) are either at or below the five percent ad valorem rate. Many of the remaining charges are inefficient, com- 64 An import duty on a product increases its price in the domestic ing to as little as one SYP. In addition to complicating the market compared to its price in the international markets, making import regime and increasing the administrative costs, production for domestic market more profitable compared to pro- duction for exports, and shifting resources from export-oriented these charges are also discriminatory (since they are lev- sectors to import-substitution sectors. Therefore, an import duty is ied on imports only) and increase nominal protection considered a tax on exports. TRADE AND INVESTMENT REGIMES 77 the products on the negative list. The private sector can administration. A time-release study that would identify import some of the products on the negative list through the remaining bottlenecks from the arrival of a shipment GFTO. The GFTO charges a two percent commission to its clearance would be useful to develop the follow-up for these imports. There are plans to scale back the scope program. of products under the GFTO monopoly. Exports of cot- Standards and conformity assessment infrastructure. ton, sugar beet, wheat, and tobacco are under the mo- Since 1974, the Syrian Arab Standards and Metrology nopoly of the public enterprises responsible for purchas- Organization (SASMO) has dominated the standards ing these products from the farmers. infrastructure in Syria. It is the main government body The negative list acts as a strict quantitative restric- responsible for standard setting, testing, conformity as- tion on imports. There is considerable uncertainty about sessment, and certification. the number of products on the negative list.65 In the Syria needs to meet the required quality and safety case of four-digit level products on the list, it is not clear standards in the major markets, particularly in the EU whether all six- and eight-digit level products under that and the Gulf States, to be a successful exporter. The mar- category are included. While items on the negative list ket has been recently opened to private sector. There ex- are gradually removed, the uncertainty creates a signifi- ist now a number of private laboratories. An important cant degree of discretion in interpretation of the negative initiative is the EU’s Quality Management Program, un- list. In addition, the enforcement of the list is left to cus- der which the government intends to restructure Syria’s toms inspectors, who apply arbitrary procedures with re- standards infrastructure and management. The program spect to clearance of goods on the negative list, based on has three main components: (i) raising awareness of the their knowledge and the receipt of informal payments. importance of quality and safety standards and introduc- Work needs to be undertaken to identify the NTMs ing the main issues and procedures, (ii) conducting need with the highest impact, and a systematic program for assessments for all laboratories to identify the equipment their explicit tariffication, and/or eventual elimination and skill needs, providing technical assistance to meet needs to be prepared. these needs, and (iii) improving the policy and regulato- Customs administration. Under the EU, UNCTAD ry framework along with institutional arrangements in and United Nations Development Program (UNDP) order to clearly define the roles of the private and public assistance, some progress has been made to improve effi- sectors, and effectively manage the standards infrastruc- ciency in customs administration. According to the Cus- ture. The implementation of the program, which has toms Authority the number of signatures required for been slow, is now suspended because of the socio-politi- import clearance was reduced from 15 to four to seven cal unrest in the country. for most products. Presently, custom posts in the four major regions (out of 20) are computerized and electron- Policies Directly Affecting Exports ically linked using ASYCUDA II. Complaints are com- Export restrictions. Non-automatic licensing also applies mon about delays in clearance of shipments (for exam- to exports. Negative list exists for exports too, but there ple, clearance takes 28 days for cement) and corruption. is not clarity about the number of products on the list as This is partly because risk profiles are not prepared. There it changes frequently depending on the domestic mar- is also a significant degree of discretion in the screening ket conditions. Some of the products are included in process. An anti-corruption unit was set up in the Cus- toms Authority, but it is not fully operational. A follow 65 The current negative list includes blends of cotton and cotton up program is needed to identify the remaining weak- yarn, and agricultural and agro-processed products such as citrus nesses and take remedial actions to improve customs fruit and olive oil. 78 Over the Horizon: a New Levant the negative list because of health, security, and environ- and other installations from the GOFZ or construct mental reasons, but others aim to ensure stable domestic their own buildings in the free zones under a land lease prices. contract. Export incentives. Syria’s Customs Law (2006) pro- In terms of incentives, all activities in the free zones vides for a number of incentive schemes to promote are exempt from all import duties and taxes as well as exports. They include a duty and tax drawback scheme, all domestic taxes and charges if the processed products bonded warehousing arrangements, and a free zones are exported. Companies operating in the free zones also system. benefit from subsidized land and utilities. In case of com- Duty and tax drawback system. Syrian Customs Law mercial activities, imported products in the original or provides for total or partial reimbursement of the duties modified form could be sold in the domestic market. All and other taxes paid for importation of some raw mate- duties, taxes, and charges must be paid for any portion rials and intermediate inputs if they are used in the pro- of sales that are domestic. The industrial activities are duction of exports; however, it does not provide for an expected to be export-oriented. Companies engaged in exemption option. The Customs Law leaves the issuance industrial operations in the free zones are allowed to sell a of guidelines for implementation of the drawback policy percentage of their production—a maximum of 25 per- to the Customs Administration in consultation with the cent of their export total—in the domestic market. MoET. These guidelines have not yet been issued and the Syria has eight free zones developed and managed by drawback policy has not been implemented. the GOFZ: Adra Free Zone (developed in 1974), Tartous Bonded warehousing. The Customs Law distinguishes Free Zone (1974), Damascus Free Zone (1975), Damas- between four types of bonded warehouses based on the cus International Airport Free Zone (1975), Aleppo Free type of processing undertaken before the products are Zone (1975), Lattakia Free Zone (1978), Lattakia Free exported. These are: real warehouses (for re-packaging Port (2003), Al Yarobia Free Zone (2008). The free zone and distribution), special warehouses (for maintenance in Dar’a is a joint venture managed with Jordan. work), artificial warehouses (for duty-free sales), and in- Despite substantial fiscal and financial incentives, dustrial warehouses (for minor manufacturing). To date, the performance of free zones is disappointing in terms no license has been issued for these warehouses. This is of employment creation and foreign exchange earnings. explained mainly by the fact that the specified activities The existing structure of the free zones is primarily fo- in this scheme are undertaken in the free zones. cused on commercial/trading as opposed to manufactur- Free zones: The General Organization for Free Zones ing activity, with currently 99 percent of the value of all (GOFZ) was established in 1971 to set up and operate goods movement falling in the commercial category. A free zones under the MoET. The Investment Law of Free significant share of commercial transactions in the free Zones, enacted in 1972 and revised in 2003, defines the zones involves importation of cars for either re-exporting operational rules of free zones. or sale in the domestic market. Only seven percent of the This law allows nine categories of activities in the companies in these zones are foreign companies, despite free zones.66 To date, licenses have been issued by the very attractive incentives. Less than a third of their pro- GOFZ only for commercial and industrial activities.67 duction is exported. Employment in free zones has fallen The private sector is permitted to develop and manage free zones under the supervision of the GOFZ and the 66 They are: commercial, industrial, banking, hotel and restaurant, Customs Administration, but so far there has not been information centers, informatics, cargo services, health services, other services. much interest from the private sector. Private companies 67 Damascus Free Zone has companies with licenses for transporta- operating in the free zones either lease the warehouses tion and catering activities. TRADE AND INVESTMENT REGIMES 79 significantly since 2006 with Syria’s participation in the and implementation is diffused among various ministries Greater Arab Free Trade Agreement (GAFTA). and departments. Each ministry or department’s interest A key weakness of the Free Zones System is that is different. The MoET focuses on expansion of trade. the value of raw material and semi-finished goods the The interest of the Ministry of Finance is more on rev- Free Zone companies can purchase from the local mar- enue generation. Other ministries take a more protective ket is limited to SYP 500,000. This policy seriously re- stance for the sectors for which they are responsible. For strains backward linkages of the companies in the Free example, line ministries can introduce non-tariff barriers Zones and the integration of these companies with the without consultation with the MoET (i.e., introduction local economy. The objective should be to encourage of pre-approval and inspection of whole shipment). purchases from the local economy to increase indirect The institutional responsibilities in formulating and employment. implementing trade policy need to be reviewed and a Export credit. Syria does not have an export-import high level coordination mechanism which includes all bank and dedicated credit line for trade activities. All concerned ministries, agencies and the private sector banks, public and private, are available to finance trade. be set up. There are plans to institute a ministerial-level The state-run Commercial Bank of Syria is the main Higher Export Council to set overall direction for ex- institution financing trade. It is unclear to what extent ports in a coordinated way. It will comprise concerned firms face trade-financing constraints, and how access to ministries and the representatives of the private sector trade credit may be affected by the global financial crisis. and placed in the Deputy Prime Minister’s office. The There are efforts to establish a loan guarantee scheme to Export Development and Promotion Agency (EDPA) support SMEs’ investment programs, but no initiative ex- and the Exporters’ Union will assist the Higher Export ists to ensure timely credit at affordable prices to traders. Council. An apparent weakness of the planned structure is that it leaves out the import side of trade where the Institutional Support and Policy Coordination need for coordination is equally, if not more, important. Export promotion activities are very weak. An Export Capacity for policy analysis both inside and outside Development and Promotion Agency (EDPA) was es- government is weak. To meet immediate needs, engag- tablished in 2008 under the MoET, but it is not yet fully ing short-term consultants and commissioning analytical operational. The Syria Enterprise and Business Center work under donor programs usually fills the gap. A needs (SEBC), created by EU assistance to support the gov- assessment should be conducted to identify the skill gaps ernment’s SME program, also performs some export and institutional needs to develop a capacity building promotional activities. These include providing export program. consultancy and diagnostic services to Syrian companies, identifying regional and European markets for exporters, Industrial Cities in Syria preparing user-friendly manuals, and organizing buy- Syria has established four industrial cities since 1999 as er-seller meetings. Substantial technical assistance needs part of its industrialization program. They are modern, to be mobilized to build EDPA’s technical capacity in integrated, industrial and residential estates equipped order to turn it into an effective organization. The EU, with all necessary infrastructure, business, social, and ed- under its Trade Enhancement Program, has allocated ucational services. They can play an important role in funds to support EDPA, and UNDP also has programs diversification of exports if complemented with the right to support it. export incentive measures. Policy coordination among ministries and agencies is The industrial cities are constructed close to the major also very weak. The responsibility of trade policy making transportation networks in the main governorates; Aleppo 80 Over the Horizon: a New Levant (Sheikh Najjar), Homs (Hasia), Damascus (Adra), and Decree 9 (2007) for creation of the Syrian Investment Deir Ezzor (Deir Ezzor). They operate under the Minis- Agency (SIA).69 Regarding the institutional structure try of Local Administration. As of November 2009, the the Supreme Investment Council (SIC) is the highest supporting infrastructure in all industrial cities, with the authority. SIC is a policy making body chaired by the exception of Deir Ezzor, has been largely completed and President and composed of several ministers and SIA’s almost half of the area allocated for industry has been sold chairperson. It meets twice a year, lays out investment to 6,946 companies (of which 221 are foreign companies). policy, and issues policies and regulations. The private About 61 percent of these companies are constructing sector is not represented in SIC. their factories, and 18 percent have started production.68 SIA implements the investment policy determined A key advantage of setting up a factory in an industrial by the SIC and issues investment licenses. Its activities city is the subsidized land. Companies can buy or lease also include cooperation arrangements with other coun- plots at very reasonable prices. One-stop facility is provid- tries, promotion of Syria as an investment destination, ed to the investors in the industrial cities to set up their preparation of investor guidelines and investment maps, businesses, construct their factories and get their utilities and development of a website. Its general manager, connected very quickly. Also, companies in the cities are which has the position of a deputy-minister, is appointed allowed to clear their imports at their factories. by a decree. Its board includes the representatives of the The land allocated to the industrial cities is divided Chambers of Commerce, Industry, and Agriculture. It into industrial, residential, management, and green ar- meets at least twice a week. It is affiliated to the Prime eas, and service centers and main streets. The industrial Ministry. Decree 9 of 2007 also established a one-stop areas are subdivided into zones according to the type and shop in SIA to streamline a large number of licenses size of industries and whether these industries are pollut- needed to start an investment project. It is not fully oper- ing or not. Infrastructure services include: transportation ational. UNDP provides technical assistance to improve (including railroads), power, telecommunication, waste- implementation capacity of SIA. water and sewage system, and industrial and drinking Investment incentives include exemption from im- water. The industrial cities also include residential build- port duties and exemption from other local taxes for five ings for employees, recreational facilities, medical cen- to seven years. SIC determines the scope and the level of ters, schools, banks and post offices, and shopping areas. incentives. Industrial cities provide a good opportunity to at- Syria has Investment Agreements (IA) with 16 coun- tract export-oriented investment. To realize this oppor- tries, and is currently negotiating with 24 additional tunity the concept of single-factory export processing countries. It is a member of Multilateral Investment zones (EPZs) should be included in the Customs Law to Guarantee Agency (MIGA) and the International Center attract local and foreign investment in export-oriented for Settlement of Investment Disputes (ICSID). subsectors in industrial cities. Converting sections of in- Decree 8 (2007) allows foreign companies access to dustrial cities into EPZs should also be considered. land and repatriation of profits. Decision on land own- ership and leasing is with SIC. While companies are al- lowed repatriate 100 percent of their profits, individuals Syria’s Investment Regime 68 The main legislation defining the Syrian investment For detailed information about the industrial cities, visit the follow- ing websites: www.aic.org.sy, www.a-ic.org, www.eng.ic-homs.sy. regime includes the Investment Law (1991), Decree 8 69 For details see, www.investinsyria.org, and www.syrianinvestment- (2007) for investment promotion and incentives, and map.org. TRADE AND INVESTMENT REGIMES 81 can transfer only 50 percent of their earnings. The De- eliminate the nuisance taxes. Replace the numerous cree decreased the number of restricted sectors for FDI. other taxes and charges with VAT, excise, and a small The restricted sector list includes air and rail transport, number of fees for the eligible services rendered by landline telephones, oil refineries, power generation and the customs administration. distribution, port operation, and mineral water. There „ Non-tariff measures. Review the remaining NTMs, are also limitations on the foreign ownership. identify the ones with largest impact, and pre- The FDI inflows have increased significantly after pare a program for gradual elimination or selective the 2007 FDI legislation reaching US$1.4 billion before tariffication. the political unrest in 2011—over 10 percent of gross „ Customs administration. Continue implementation of fixed investment (Table 23). Most of the FDI came from reforms with emphasis on implementation of mod- the Gulf countries in the banking, trade, real estate, and ern risk management techniques, moving away from mining sectors. Over two-thirds of the FDI are located in physical controls; automation of business processes the Damascus and Aleppo areas. to reduce the room for discretion; introduction of one-stop shops at the borders; full operationalization of the anti-corruption unit; and training of staff. Syria: Policy Recommendations „ Standards infrastructure. Accelerate implementation of the Quality Management Program financed un- Under the current political conditions one would not ex- der EU technical assistance. pect to these recommendations would be implemented. „ Export incentives. Amend the Customs Law to ex- However, they should be implemented as soon as the sit- tend drawback to all imports used in production uation is stabilized to maintain the momentum created of exports. Also, include a tariff and tax exemption by the earlier reforms. option and bonded warehousing in the Law. Seek technical assistance for putting in place an effective „ Tariffs and other charges. Reduce the number tariff implementation mechanism and ensure that refunds bands to three or four, lower the maximum rate, and are paid in a timely manner. Table 23 Syria Foreign Direct Investment 2000 2005 2006 2007 2008 2009 2010 Flow, US$ million Inflow 270 583 659 1,242 1,467 1,434 1,381 Outflow 44 80 –11 2 2 –3 0 Stock, US$ million Inflow 1,244 2,532 3,191 4,433 5,900 7,334 na Outflow 107 428 417 419 421 418 418 FDI/Gross Fixed Investment, percent 8.0 8.9 9.2 15.1 16.7 14.8 12.2 FDI/GDP, percent 1.4 2.1 2.0 3.1 2.8 2.7 2.3 Inward FDI ranking (out of 141) Performance index 98 91 105 94 88 69 70 Potential index 74 94 98 104 104 103 na Source: UNCTAD WIR 2011. 82 Over the Horizon: a New Levant „ Free zones. Amend the free zone legislation to do Jordan: Trade and Investment Regimes the following: Apply tax exemptions to a limited period rather than for the life of the investment, Jordan became a member of the WTO in 2000, signed a lift restriction on purchases from local market to FTA with the United States in 2001, and concluded an strengthen backward linkages, transfer management Association Agreement with the EU in 2002. With the of free zones to private sector under management technical assistance it received under these arrangements, contracts. Jordan has improved its trade regime significantly; the „ Export processing zones. Include EPZ and single-fac- legal system modernized, customs procedures simpli- tory EPZ concepts in the Customs Law and prepare fied, the quality infrastructure reformed, the level of and secondary legislation to define the forms and oper- variation in import duties reduced, and quantitative re- ational rules of the EPZ system. Developing new strictions eliminated. Jordan is one of the few developing fenced area EPZs is not a priority for Syria at this countries that has made substantial commitments under stage because Syria already has industrial estates (in- GATS, covering a wide range of services, and negotiating dustrial cities) with excellent infrastructure facilities. accession to the Plurilateral Agreement on Government Emphasis should be on promotion of single-factory Procurement. Jordan also signed a number of free trade EPZs to attract local and foreign investment in ex- agreements including one with Turkey. port-oriented subsectors in Industrial Cities. Con- As a result, Jordan’s trade regime is superior to most verting sections of industrial cities into EPZs should of the countries in the region including Lebanon and also be considered. Syria, in terms of the legal and institutional framework, „ Trade finance. Improve bookkeeping and accounting and policy environment affecting exports. It has now a practices in the private sector for transparent finan- broad based export sector. Further expansion and diversi- cial statements to facilitate accurate risk assessment fication of exports depends largely on (i) effective imple- by the banks, enhance credit information system mentation of the trade regime, and (ii) the improvement and risk assessment skills in the banking sector, in- of its behind-the-border policies—high tax incidence, troduce credit guarantee and loan registry systems. high cost of transport and utilities, administrative hur- „ Institutional capacity and coordination. Set up s sec- dles, chronic water shortage, energy deficiency, low do- retariat for the Higher Export Council housed in mestic savings, and a complex incentive system. EDPA to ensure that the Council has adequate data Jordanian economy is dominated by services. Ser- and information to carry out its responsibilities. vices amount to approximately two-thirds of the GDP. Conduct a needs assessment to identify the skill and Jordan also receives significant workers’ remittances institutional needs and develop a program to im- from Jordanians working particularly in the Gulf region. prove implementation and analytical capacity of the Therefore, the services sector and trade constitute signifi- MoET, EDPA and other concerned agencies. Seek cant importance. However, the focus of this section is on technical assistance to implement the program. trade policies affecting trade in goods. „ Trade agreements. Ratify the Association Agreement with the EU. Accelerate negotiations with the WTO for accession. Jordan’s Trade Regime „ Investment regime. Eliminate the remaining restric- tions on FDI particularly on ownership. Seek tech- Policies Directly Affecting imports nical assistance to improve capacity of SIA. Opera- Import duties and other charges. Jordan’s applied MFN tionalize the one-stop-shop facility. tariffs are generally within the range of 0–30 percent TRADE AND INVESTMENT REGIMES 83 with four non-zero bands (5, 10, 20, and 30 percent).70 the authorities. Only about 20 percent of consignments Exceptions are animal feed (40 percent), tobacco and to- go through the green channel. Jordan also implements a bacco substitutes (70–100 percent), and alcoholic drinks Golden List program under which post-clearance audits (180 percent). The average rate was 10.9 percent in 2008 are conducted in collaboration with the private sector. (17.1 percent for agricultural products and 9.9 percent To improve efficiency the share of imports going through for non-agricultural products).71 Almost all tariff lines the green channel must be increased. carry ad valorem duties: only seven agricultural lines Standards and conformity assessment infrastruc- at the 9-digit level have compound rates. A few other ture. The Jordan Institute for Standards and Metrology charges are applied mainly for the customs services ren- (JISM) is the national standardization agency to issue dered. Part of these charges is earmarked for improving and regulate technical standards dealing with the features the customs infrastructure and living conditions for the of the products or their related production methods and customs officers. management systems, packaging and labeling require- A general sales tax of 16 percent and a special tax ments, and testing methods of various products. It is the levied on a few products (cement, cars, tobacco and alco- WTO TBT enquiry point. Other institutions such as holic products, mobile phones) are applied equally to the Ministry of Environment, Ministry of Agriculture, Jor- domestically produced and imported goods. dan Food and Drug Administration, Ministry of Health, Non-tariff measures. All imports are subject to licens- and Telecommunication Regulatory Authority are also ing. The Ministry of Industry and Trade (MIT) and other authorized to issue and regulate standards. The JISM concerned ministries and departments issue such licens- and the other agencies noted above are responsible for es.72 Automatic licenses, issued within a week, are for ad- implementing the previously described risk-based border ministrative and statistical purposes. Non-automatic li- inspection system. censes are used for a limited number of products (plastic Jordan’s standards system has been significantly im- waste, khat, coral, chromium, toy guns, and holy water) proved in the process of the WTO accession. A large for the protection of health, safety, the environment, and number of mandatory standards have been replaced by public order and morals. Non-automatic licenses, issued voluntary standards. The current Standards and Metrol- within 15 days, can specify the import quantity during ogy Law is being amended to incorporate provisions for the period of validity. Jordan maintains prohibition and market surveillance. This will allow a reduction of the control on trade of a small list of goods for TBT/SPS JISM’s border inspections and replacement of them with (technical, safety, environmental, and health), moral and domestic market inspections. religious reasons, or under international conventions to The Jordanian accreditation system of conformi- which Jordan is a signatory. ty assessment, which fulfills the requirements of the Customs procedures: There are 40 customs centers. Customs procedures have been computerized using 70 Some essential food products (i.e., meat, fish and poultry) are ex- UNCTAD’s Automated System for Customs Data (ASY- empted from import duties. CUDA) with a risk-based inspection system that catego- 71 The following four public companies are exempted from the pay- rizes shipments into three levels of risks: low risk (green), ment of import duties: Jordan Petroleum Refinery, Arab Bridge Maritime Company, Arab Potash Company, Jordanian Electric moderate risk (yellow), and high risk (red). Goods in Power Company, Irbid District Electricity Company, and Arab the green channel are inspected for documentation only. Company for Manufacturing White Cement 72 Goods assigned to the yellow and red channels are inspect- An “importer card” is required for all imports; failure to present the card results in a 2.5 percent penalty. The Trade Directorate of ed for TBT and SPS requirements. Clearance of goods in the MIT issues the cards in the same day at no cost. They carry a all three channels takes place within a day according to special number and file that facilitates customs clearance. 84 Over the Horizon: a New Levant International Organization for Standardization (ISO) to the authorities, reimbursements take about a month. norms, currently operates under the JISM. Under this Jordan also maintains a temporary admission scheme un- system, 31 public and private laboratories (only for test- der which companies producing for exports are granted ing, calibration, and medical laboratories) have been duty exemptions for imports. accredited. The scope of accreditation will need to be Free zones. Exports are also promoted through free expanded to include inspection and certification bodies. zones and qualifying industrial zones (QIZs). Jordan A draft Accreditation Law is under consideration for es- has five public and 24 private free zones. The public free tablishing an independent accreditation agency. zones are developed and managed by the Free Zones The Ministry of Agriculture is responsible for issuing Corporation—a financially and administratively inde- standards for safety and quality of the food and drugs pendent body managed by a Board of Directors chaired (SPS measures). It also acts as the Enquiry Point for SPS by the Minister of Finance. Private free zones are devel- measures. The Jordan Food and Drug Administration oped and managed by private companies under the su- (JFDA) regulate the SPS measures. pervision of the Free Zones Corporation. Free zones are Jordan has mutual recognition agreements for TBT open to foreign and local companies. and SPS for only quarantine services for live animals The Aqaba Special Economic Zone, the largest zone with a few countries.73 Increasing the number of mutual in Jordan, has free zone status and an investment re- recognition agreements for all imports will help to in- gime of its own. It is governed by the Aqaba Special crease the number of products going through the green Economic Zone Authority (ASEZA)—an autonomous channel and reduce the administrative costs. authority with legal, regulatory, and administrative re- Policies Directly Affecting Exports sponsibilities within the zone. The priority activity in Export restrictions. Exporters need a certificate of reg- this zone is services, particularly tourism, trade, and lo- istration issued by the Exporters Registry at the MIT. gistics services. Most exports are subject to automatic licensing. Jordan is The companies operating within the free zones are introducing non-automatic licensing for dual use prod- granted various incentives including exemption from ucts. Jordan levies export duties and fees on scrap metal import duties and other charges and income tax for the and mining and quarrying products. Also, the Ministry segment of production exported. Products sold in the of Agriculture collets fees on exported agricultural prod- domestic market are subject to normal import formal- ucts charged for services rendered such as inspection, and ities including the payment of import duties and taxes. quarantine. Export prohibition on a small list of prod- The Free Zone Corporation issues certificates of origin ucts is imposed for health, security, environmental, and for exports of goods processed or produced in the free public moral reasons. zones with a local content of at least 40 percent. Export incentives. Most export subsidies were elimi- Free zones in Jordan are dominated by commercial nated during the WTO accession process. The main re- activities serving the transit trade and the local market. maining subsidy is the exemption from income tax on Over one-third of the products processed in free zones profits generated from exports of certain products (tex- are sold in the domestic market. tiles, chemical products, pharmaceuticals, fertilizer, jew- QIZs are designated industrial parks in Jordan and elry, and metals), which must be phased out by 2015 ac- Israel from which goods can be exported duty-free and cording to the agreement with the WTO. quota-free to the United States. To be eligible, the local Jordan implements a duty drawback scheme that al- lows refunds of import duties and other taxes paid on 73 Australia, New Zealand, Kuwait, Syria, Lebanon, Egypt, Algeria, imported inputs in the production of exports. According Morocco, Sudan, and Yemen. TRADE AND INVESTMENT REGIMES 85 content should be at least 35 percent with diagonal ac- initiated more safeguard investigations than Jordan. In cumulation among Jordan, Israel, Palestinian Territories, a number of instances, Jordan’s government policymak- and the United States. There are 13 industrial parks in ers’ use of import-restricting temporary trade barriers Jordan that have been approved as QIZs by the United (TTBs) has had direct implications for partners in the States. The textile and clothing industry in particular has MENA region. Table 24 provides information on three benefited from the QIZ initiative. About three-quarters case studies that the subsequent analysis examines in of Jordan’s exports to the United States come from the more detail. QIZs. Textiles and clothing constitutes over 80 percent Jordan’s first example is a safeguard investigation of these exports. that began in April 2012 over steel reinforcing bar, a The Free Zones Corporation manages the public free product that these case studies reveal as facing adjust- zones and regulates the private ones, indicating conflict ment pressure in a number of MENA markets. Jordan’s of interest. It is advisable to separate these two functions, imports of steel rebar increased almost ten-fold between which could be done by transferring the management of 2008 and 2011, from US$14 million to US$110 mil- public free zones to the private sector and turning the lion. The two largest foreign suppliers to Jordan during Free Zones Corporation into a Regulatory Authority. this period were Ukraine and United Arab Emirates; Export finance. Jordan does not have a dedicat- there was an US$80 million increase in imports during ed credit scheme for exporters, but has a loan guaran- this period from these two countries alone. Neverthe- tee scheme implemented by the Jordan Loan Guaran- less, as Figure 36 reveals, Jordan’s imports from Turkey tee Corporation, which serves exporters too. However, ($14 million) and Syria ($12 million) also increased the Jordan Enterprise Development Corporation serves substantially in 2011. as the local agent for the export finance and guarantee Of ultimate interest in this particular example is schemes of the Islamic Development Bank and the Ex- whether and how Jordan would impose any new import port Credit Guarantee Schemes of the Inter-Arab Invest- restrictions on steel rebar at the end of the safeguard in- ment Guarantee Corporation. vestigation. As Figure 36 indicates, Jordan also has some imports of steel rebar from MENA economies such as Issues Egypt, in addition to Turkey and Syria. If Jordan were Jordan is one of the WTO’s most frequent users of to apply the safeguard but exempt these economies safeguards; as of 2012, only India and Indonesia had from its application, a result is that they would receive Table 24 Examples of Jordan’s Trade Frictions Impacting Turkey/MENA Partners Examples of MENA Trading Affected bilateral trade Product: trade policy Partner(s) Affected† Year of TTB policy action (estimate)* 1. Steel rebar: safeguard investigation Syria (?) 2012 $13.4m Turkey (?) $14.1m Egypt (?) $2.3m Palestinian Territories (?) $400k 2. Ceramic tiles: safeguard investigations Egypt (-) 2002, 2007, 2008 $7.5m Syria (-) $2.2m Turkey (+) $400k 3. White cement: safeguard investigation Egypt (-) 2008 $2.5m Notes: Compiled by the author from the Temporary Trade Barriers Database matched to trade data available from UN COMTRADE Database via WITS. †Expected positive (+), negative (-) or uncertain (?) outcome for the listed exporter, given the likely way that the new TTB import restriction would be applied and whether the exporter would be excluded or exempted. *Estimates of bilateral imports of the affected products taken at the 6-digit HS level. 86 Over the Horizon: a New Levant Figure 36 Jordan’s Imports of Steel Rebar from Figure 37 Jordan’s Imports of Ceramic Tiles from Selected Source Countries Selected Source Countries (US$ millions) (US$ millions) 16 18 14 16 12 14 10 12 10 8 8 6 6 4 4 2 2 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011 From Turkey From Syria From Egypt Total From Syria From Egypt From Turkey Source: UN COMTRADE Database. Source: UN COMTRADE Database. an implicit preference to the import market. This could its total bilateral goods exports to Jordan. Syria’s ceram- create incentives to increase imports of steel rebar from ic tile exports were more than US$2 million in 2011, such economies. roughly 0.5 percent of its total bilateral goods exports The second Jordanian example involves imports of to Jordan. ceramic tiles for which the most recent safeguard in- Jordan applied the safeguard against imports from vestigation was initiated in 2008. Jordan’s ceramic tiles Egypt and Syria, but the safeguard did exempt imports industry has a relatively long history of requesting that from most other MENA economies, including Turkey, its government initiate TTB investigations. First was Libya, Lebanon, Palestinian Territories, Tunisia, Iran, a safeguard investigation in 2002 that was ultimately and Iraq. Of these potential exporting economies, only withdrawn without the imposition of new import re- Turkey, Palestinian Territories and Lebanon have recent strictions. In 2006, Jordan initiated an antidumping in- years in which they have recorded non-zero exports of vestigation on imports of ceramic tiles from Egypt that ceramic tiles to Jordan and thus likely have the short- was subsequently withdrawn. The government initiated run capacity to take advantage of the implicit preference a new safeguard investigation in 2007 that was with- granted by the safeguard exemption. drawn, before the government initiated a safeguard in- Jordan’s third example is the 2008 safeguard investi- vestigation in November 2008. This last investigation gation on white cement. The investigation was terminat- resulted in the imposition of new import restrictions in ed in 2009 without the imposition of new import restric- March 2010. tions, nevertheless, this example provides an important As Figure 37 indicates, Jordan’s imports of ceramic case study for the region. First, as Figure 38 indicates, tiles have increased steadily during this period—from Jordan’s imports of this product had increased signifi- US$4.5 million in 2003 to nearly US$15 million by cantly, nearly tripling from US$900,000 in 2005 to over 2010. Egypt, Italy and Syria are the top three suppli- US$2.6 million in 2008 by the onset of the investiga- ers, respectively, to Jordan’s market—Egypt’s exports in tion. Second, Jordan’s cement import market was highly 2010 were US$7.5 million and roughly one percent of concentrated, with over 95 percent of imports in recent TRADE AND INVESTMENT REGIMES 87 Figure 38 Jordan’s Imports of Cement from Selected (in the short run) and suffer losses, provided they can Source Countries cover their variable costs; nevertheless, such pricing be- (US$ millions) havior satisfies one of the legal definitions of “dumping” 3.0 under the WTO rules and can therefore result in new 2.5 import restrictions. 2.0 The price of cement is also strongly pro-cyclical since 1.5 demand is oriented to the construction industry. Further- more, because cement is so heavy and costly to transport, 1.0 trade is frequently limited by geographic distance. This 0.5 can also affect industry concentration in the sense that it 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 can be easier for domestic interests to organize politically and petition the government to initiate an investigation, Total From Egypt relative to other domestic industries that may be less geo- Source: UN COMTRADE Database. graphically concentrated. Altogether, cement is one industry for which, like steel rebar, the MENA region might expect a number years deriving from Egypt; thus any future new import of future TTB investigations as economies liberalize, restrictions would likely have a significant impact on import tariffs fall, and there is additional international Egypt.74 trade. Despite the fact that this particular investigation did not result in new import restrictions, Jordan’s ce- ment safeguard investigation provides an important Jordan’s Investment Regime case study for a number of other reasons. First, cement is a traded product that is commonly subject to tem- The Jordan Investment Board (JIB) serves as Jordan’s in- porary trade barriers, frequently under the antidump- vestment promotion agency. It is a government organi- ing policy. As another example from the region, Israel zation chaired by the Minister of MIT. It implements initiated an antidumping investigation against Portland government’s policy to stimulate domestic and foreign cement imports from Turkey and Jordan in 2001 that investment in cooperation with the private sector. JIB resulted in new import restrictions that Israel only com- has a one-stop-shop facility. pletely removed in 2007. Cement has also been featured Investment incentives are provided under the In- in many antidumping cases around the world, includ- vestment Promotion Law of 1995 and its amendment ing Central American economies; even the U.S. had a in 2000. Under the Investment Promotion Law, Jor- high-profile set of antidumping import restrictions on dan is divided into zones A, B, and C based on the cement imposed on imports from its North American level of development. Zone C, being the least devel- Free Trade Agreement (NAFTA) partner Mexico from oped area, receives the highest incentives. Incentives 1990–2009. include exemptions from import duties, sales tax, and More generally, cement has been a frequent target for antidumping because it is a capital intensive, high 74 Jordan also initiated a 2010 safeguard investigation on imports fixed-cost industry in a market with substantial price of clinker (a related product used in cement and construction). Jordan’s imports from Saudi Arabia—which has 99 percent of the fluctuations. In these sorts of markets, firms may find it Jordanian import market for this product—surged from US$13 in their long-run interest to price below average total cost million in 2009 to US$60 million in 2010. 88 Over the Horizon: a New Levant Table 25 Jordan Foreign Direct Investment 2000 2005 2006 2007 2008 2009 2010 Flow, US$ million Inflow 913 1,984 3,544 2,622 2,829 2,430 1,704 Outflow 9 163 –138 48 13 72 28 Stock, US$ million Inflow 3,135 13,229 12,713 16,058 16,320 18,705 n.a. Outflow 44 450 312 360 382 455 483 FDI/Gross Fixed Investment, percent 51.1 51.5 92.5 55.8 45.2 37.6 25.0 FDI/GDP, percent 10.8 15.8 22.7 14.8 12.5 9.7 6.2 Inward FDI ranking (out of 141) Performance 9 8 5 11 12 13 31 Potential 67 63 62 66 72 71 n.a. Source: UNCTAD WIR 2011. some fees and charges for a certain period of time, and Jordan has signed bilateral investment agreements with preferential income and social services taxes based on 43 countries. the zone in which investment is made.75 Sectors eligible FDI investment increased significantly in the second for incentives include: agriculture, industry, railroads, half of 2000s constituting an average of 51 percent of call centers, maritime transport, hospitals, hotels, and gross fixed investment and 13 percent of GDP during distribution services for water, gas, and petroleum 2006–2010 (Table 25). The country ranking of UNC- derivatives. TAD Inward FDI Performance/Potential Indexes show Jordan has five industrial estates built and managed that Jordan is attracting FDI above its potential. For ex- by the Jordan Industrial Estate Corporation (JIEC, a ample, in 2010 ranking in performance was 13, substan- semi-governmental company), and two development tially higher than the ranking in potential (71). This is areas (Mafraq and Irbid) with their own management an indication of inadequate behind-the-border policies arrangements. Investment in these locations also ben- adversely affecting investment—as noted, investment efits from Incentives that are similar to those provided climate indicators are used in calculation of inward FDI under the Investment Promotion Law. There are about potential index. 500 companies operating in the industrial estates. They A key weakness of Jordan’s investment regime is that employ about 50,000 people and account for one-quar- it has five overlapping schemes (Investment Promotion ter of Jordan’s merchandize exports.76 The investment Promotion Law does not differenti- 75 For details see “Jordan Trade Policy Review” World Trade Orga- ate between domestic and foreign investors. Under the nization 2008. 76 Law, foreign investors are afforded the same treatment as Jordan provides technical and financial support to SMEs under the Jordan Upgrading and Modernization Program (JUMP). A large the local investors. Also, land ownership for foreigners is part of these companies are located in the industrial estates. generally allowed except in the free zones where land is 77 Passenger and cargo road transportation, quarries for sand and leased. Foreign companies can own 100 percent of any stones, security services, and sports clubs 78 Foreign and domestic trade, transport services, engineering ser- project except for some sectors where foreign equity is ei- vices, construction contracts, advertising, brokerage, and travel ther not allowed77 or may not exceed 49 or 50 percent.78 agencies. TRADE AND INVESTMENT REGIMES 89 Law, industrial estates, development areas, free zones, through tariffication of all agricultural restrictions and and ASEZ), which complicates the incentive system. It prohibitions, reduction of customs duties, privatization is advisable to consolidate them under a single scheme. of some core services, completion of a number of trade agreements (PAFTA, Association Agreement with the EU, FTA with Turkey), modernization of some laws and Jordan: Policy Recommendations regulations to align its trade policies and practices with WTO rules. The new legislation includes the Customs The main policy recommendations are summarized as Law (2000), the Privatization Law (2000), the Invest- follows: ment Promotion Law (2001), the Telecommunication Law (2001), and the Acquisition of Real Estate Rights „ Customs administration. To speed up custom clear- (2001). ances, increase the share of goods going through the While import regime has been improved, the pol- green channel significantly from the current 20 per- icy environment affecting exports is not yet conducive cent. One way to achieve this objective is to increase enough to expand and diversify exports in an import- the number of mutual recognition agreements. ant way beyond a few services (tourism, finance, real „ Standards infrastructure. Amend the Standards and estate, and labor). Export promotion does not appear Metrology Law to incorporate provisions for market to be high on the government’s economic priority list. surveillance. Significantly improve the institutional Lebanon does not have a clear trade policy and export and skill capacity for market surveillance. Enact the development strategy to guide resources to export orient- Accreditation Law and establish an independent Ac- ed activities particularly in the goods sector. Institutional creditation Agency. framework and policy regime is not adequate to place the „ Export incentives. Improve the institutional and Lebanese economy on an export-oriented path and take skill capacity of the Enterprise Development advantage of regional and global opportunities. Corporation. The WTO accession negotiations have been an im- „ Free zones. Separate the operational and regulatory portant catalyst for trade and structural reforms. The ne- roles of the Free Zones Corporation. This could be gotiations need to be completed as soon as possible. The done by transferring the management of public free remaining requirements, particularly the enactment of zones to the private sector and designating the Free the Competition Law, Exclusive Agencies Law, Interna- Zones Corporation as a regulatory authority. Intro- tional Property Law, must be met as quickly as possible duce a single-factory EPZ scheme. to complete the association process in order to lock in „ Investment regime. Consolidate different investment the policy achievements and take advantage of the op- incentive schemes under one single scheme for sim- portunities provided by full participation in the multi- plicity and clarity. lateral trading system. What follows is a broad description of the policies currently in place, however, these are likely to change in Lebanon: Trade and Investment Regimes the process of ongoing accession negotiations.79 Lebanon has a long tradition of adopting an open trade 79 regime compared to other countries in the Middle East In terms of its size, the service sector is very important in the do- mestic economy and in international trade. The focus of this paper and North Africa. Since its application for the WTO is on trade in goods. Trade in services will be taken up in a separate membership in 1999, it has further liberalized its trade paper. 90 Over the Horizon: a New Levant Lebanon’s Trade Regime (cement, electrical cables) under non-automatic licens- ing aimed at protecting some companies connected to Policies Directly Affecting Imports vested interests. The concerned ministries issue licenses, Import duties and other charges. Lebanon uses HS2007 no- which are valid for 6 months and renewable. Under the menclature. Most tariff groups are specified at the 6-digit current regime, each Ministry has the authority to set level. The MFN applied rates range from zero to 75 per- rules for licensing and impose trade measures through cent with a simple average of 6.9 percent and 14 tariff ministerial decisions. Lack of coordination in setting bands (0, 5, 6, 10, 15, 18, 20, 23, 25, 30, 35, 40, 70, trade rules creates significant uncertainty and unpredict- and 75).80 Such a large number of bands increase ineffi- ability in the trade regime. ciency and administrative costs. 87 percent of tariff lines For some products, import licenses are issued only (82 percent of the value of imports) are five percent or to those having a license to practice a specific profession less. About 95 percent of the rates are ad valorem. Aver- (pharmacist to import medical drugs and vaccines, agri- age rates in manufacturing and agriculture are about five cultural engineers to import insecticides and pesticides, and 18 percent, respectively. veterinarians or pharmacists for veterinary medicines). The With an average of 6.9 percent, tariff protection is government is in the process of enacting a Law on Interna- one of the lowest in the region. However, it is advisable tional Trade and Licensing to address the licensing issues. to reduce the number of non-zero bands to three to four Prohibition on a large number of products has al- and the maximum rate to a more moderate level to im- ready been eliminated. However, there are still some prove efficiency in customs administration. 154 products at the 4- and 6-digit level on the import Lebanon introduced a VAT of 10 percent in 2002. prohibition list—mainly for health, safety, and environ- Excise taxes are also levied on a number of products in mental reasons including veterinary drugs and vaccines, Lebanon including alcohol, alcoholic beverages, tobacco, pesticides, and animal feed. The conformity of this list tobacco products, oil, and vehicles. The VAT and excise with the international norms and recommendations is taxes are applied equally to imports and domestically being discussed with the WTO in the accession process. produced goods (with the exception of domestic finished Customs administration. Cumbersome customs ad- tobacco products, which are exempt from excise tax). In ministration in Lebanon is an important barrier to trade. addition, Lebanon maintains a large number of small Lebanon ranks 124 out of the 155 countries in the World fees and charges that does not correspond to the services Bank’s Logistics Performance Index, compared to Tur- rendered. Some of them have already been removed. It is key, which ranks 32 (Annex Table 27). The main prob- expected that the remaining fees and charges will be con- lems include: outdated procedures, excessive checks and solidated, and brought into conformity with the WTO long delays, lack of resources, limited ICT capacity, and rules in the accession process. poor integrity and governance. The government intends Non-tariff measures. Lebanon issues both automatic to launch a reform program under the EU’s Twinning and non-automatic licenses for imports. Companies en- Initiative. The program includes streamlining and auto- gaged in imports and exports are also required to register mation of the procedures, introducing risk management, at the National Social Security Fund (NSSF) and submit strengthening ICT capabilities, and capacity building to the customs a confirmation of payment of their obliga- and training. The program needs to be implemented tion to the NSSF for customs clearance. Non-automatic licensing applies to a small share of imports (reported- 80 Lebanon submitted its initial and revised offers on goods to the ly, two percent) largely for safety, health, environmen- WTO in 2003 and 2004, respectively. These rates are not available tal, and security reasons. There are subsectors/products to the mission. TRADE AND INVESTMENT REGIMES 91 effectively and as soon as possible to modernize Leba- Technical, health, and safety standards certification non’s customs administration in order to improve effi- is needed for importation of a number of products in- ciency, reduce delays, and ensure good governance. cluding a range of foodstuff, water, soft drinks, alcoholic Standards and quality infrastructure and conformi- beverages, oil and gas, some chemicals, pharmaceuticals, ty assessment. Under a EU technical assistance program fertilizer, insecticide, paper products, and metal waste (2004–09), the Government initiated steps to improve and scrap. This certification is called “visa,” an official Lebanon’s standards and quality infrastructure and con- stamping of customs documents. Visas certify the con- formity assessment procedures.81 Significant preparatory formity of the imported products to ensure compliance work was completed under this program, but implemen- with Lebanese technical and health standards and label- tation has been stalled because of political difficulties. In ing requirements (TBT and SPS requirements). Repre- particular, a National Quality Policy was prepared but has sentatives of the concerned ministries, such as Economy not yet approved. Also, important new laws and decrees and Trade, Public Health, Interior, Defense, Telecom- (related to quality infrastructure, technical regulations, munications, Agriculture, and Environment, stamp visas metrology, product safety, standardization, food safety, at the customs entry points. Visas are given automatically and accreditation) were drafted but have not yet been if importers’ documents include a certificate from inter- enacted. Therefore, the Lebanese standards and quality nationally accredited inspection body and a country with system is not adequate to enhance the competitiveness of which Lebanon has signed a mutual recognition agree- the Lebanese products in international markets through ment. Otherwise, the imported products are sent to the better conformance to international rules and norms and local laboratories recognized by the government. to higher level of protection of the health and safety of Lebanon will need to complete the reform efforts, the Lebanese consumers. preferably under a follow-up technical assistance pro- The progress under the EU technical assistance in- gram, to bring its standards infrastructure up to a level cludes strengthening the capacity of the Lebanese Stan- fully compatible with international norms. This is an es- dards Institution (LIBNOR)—the authority responsible sential requirement for promoting the level and diversifi- for issuing standards, which is also the WTO enquiry cation of Lebanese exports both by products and trading point for standards, technical regulations, measurement, partners. Meeting TBT and SPS requirements is essential and conformity assessment procedures. LIBNOR is now to be able to export to the developed country markets a member of the international standards organizations. including the EU, Turkey, and the Gulf States. The capacity of a number of private and public labora- Policies Directly Affecting Exports tories has also been improved under the program to per- Export restrictions. Lebanon does not apply any export form proficiency testing. In addition, the Government tax. Licensing also applies to exports, a large proportion has successfully introduced the Lebanese Excellence of which is automatic. Prohibition or quota on the ex- Award (LEA) to encourage companies to improve quality port of a number of products has already been eliminat- and competitiveness. ed. The remaining products on the prohibition list are Also, Qualeb, the national quality agency was set up medicinal and aromatic plants and forests products (pro- under the Ministry of Economy and Trade (MoET), and hibition is aimed at conserving these rare plants from the preparatory work for establishing COLIBAC (the extinction), live sheep and goats, and some chemicals. national accreditation body) including its organization- al structure, rules and procedures, and quality manage- ment system, was completed. Neither agency has been 81 For details see the website of the Ministry of Economy and Trade operationalized. (MoET), www.economy.gov.lb. 92 Over the Horizon: a New Levant Export incentives. Lebanon does not provide export from customs duties and taxes. Duties are paid if the subsidies with the exception of a transport subsidy grant- processed product is sold in the domestic market—the ed to agricultural exports under the Export Plus Pro- importer can choose to pay either the duties on the man- gram, which was introduced in 2001 and implemented ufactured goods or on the value of imported inputs used by the Investment and Development Agency of Leba- in the manufacturing process. Both types of warehouses non (IDAL). IDAL also implements the Agro Market operate under the supervision of the Customs Admin- Access Program (AGROMAP) under which it provides istration. The Industrial Warehouses are associated with assistance to exporters to participate in international private companies. There are over 100 of them in the fairs. Assistance for improving packaging, and labeling is country. Multiple companies can use the Public Ware- also granted by other institutions including Chambers of houses to import and store their inputs. Compared to Commerce, and Ministry of Agriculture. Technical assis- the free zones, more manufacturing is undertaken under tance is provided under a United Nations Industrial De- the warehousing scheme. The warehouses are established velopment Organization (UNIDO) project to promote through the decision of the Higher Customs Council af- export of meat and milk and improve packaging of a few ter consultation with the General Customs Director. agricultural goods. The Customs Law of 2000 includes Lebanon will need to establish industrial parks and the duty drawback scheme for exporters, but it has not form industrial clusters to be able expand and diversi- yet been implemented—the institutional structure for its fy its economy’s industrial base and export orientation. implementation has not yet been put in place. This, combined with a factory-level EPZ scheme for ex- Free zones and warehouses. Lebanon has two free port promotion, is preferable to the free zones system. zones at the seaports of Beirut and Tripoli. Little man- Export finance. Lebanon does not have a dedicated ufacturing is undertaken in the zones. Companies are trade credit program. However, it benefits from the Arab engaged largely in re-export after minor processing. Val- Trade Financing Program (ATFP) established by the ue addition, employment creation, and foreign exchange Arab Monetary Fund. The ATFP extends line of credit earning by the activities in the free zones are negligible. to national banks to finance inter-Arab trade. It also pro- Close to half of the products that go through the free vides other services such as training, trade promotion, zones are sold in the domestic market. Products import- and information gathering and dissemination. ed into the free zones are exempt from import duties, Lebanon has a financial company (Kafalat) set up VAT, and excise taxes. These duties and taxes are paid if under joint ownership of the banks and the government the products are sold in the domestic market. to provide loan guarantees to SMEs.82 It guarantees up Free zones are established under the Customs Law to 90 percent of the loan value for SMEs operating in in- with the decision of the Higher Customs Council and dustry, agriculture, tourism, traditional crafts, and high approved by the Council of Ministers. The current free technology sectors. The guaranteed loans benefit from zones are built and managed by the Customs Administra- interest subsidies financed by the government. In 2006, tion. The government owns the land and the buildings in Kafalat signed a partnership with the EU and the MoET the zones. The companies operating within the zones rent to increase the size of Kafalat’s resources. The banks that the premises. The Customs Law permits the management of the free zones by private companies. The government 82 This scheme was created under the Integrated Small and Medium plans to establish a new larger Special Zone in Tripoli. Enterprise Support Program implemented by the SME Support Lebanon also has industrial and public warehous- Unit at the MoET. Also, under this program, three Business Devel- opment Centers (Berytech, BIAT, and SouthBIC) were established es. Goods admitted to the warehouses are subject to the to provide a variety of services including incubation to start ups temporary admission regime—temporarily exempted and existing SMEs. TRADE AND INVESTMENT REGIMES 93 lend SMEs under Kafalat guarantee do not impose any Board. The Board reviews the application in light of the collateral requirement on top of the guarantee from Kaf- applicable incentives. According to the Investment Law, alat. Kafalat supports both domestic and export activities. the application is then sent to the Prime Minister for In the absence of a dedicated credit system for ex- approval. After the approval, the chairman of IDAL and porters, it is advisable to increase Kafalat’s resources and the investor sign a contract and the license is issued by institutional capacity to provide technical assistance to the Council of Ministers. The process may be simplified potential exporters in areas such as loan application, by removal of Prime Minister’s approval and issuance of project preparation, and financial management. licenses by the Council of Ministers. There are two incentive schemes available to inves- tors of both local and foreign origin:83 Lebanon’s Investment Regime „ Investment projects by zones (IPZ). Under this Lebanon’s main legislation defining its investment regime scheme, incentives are granted on the basis of proj- is the Investment Law (Law 360), which was enacted in ects’ geographic location, sector in which they are 2001. The Law provides a framework regulating invest- made, and the size of investment. Incentives include ment activities and providing local and foreign investors exemption from the income tax for a certain period alike with a range of incentives and business support of time and the fees for the provision of work permit. services. In particular it identifies a number of priority This scheme divides Lebanon into three geographical sectors including: industry, agriculture, agro-industry, zones according to the level of development—Zone tourism, information technology, technology, telecom- A (most developed), Zone B, and Zone C. munication, and media. The implementing agency of the „ The Package Deal Contract. Under this scheme, in- investment policy is largely with the Investment Devel- centives are based on the size of investment and the opment Authority of Lebanon (IDAL), which was estab- employment to be created by the project. Incentive lished in 1994. IDAL has financial and administrative au- package is larger in this scheme and includes: ex- tonomy and reports to the Prime Minister. It is managed emption from income tax and dividend tax for a cer- by a Chairman and a Board of Directors of six members. tain period, and exemption from (or reduction in) a In addition to its role as an investment promotion agency, number of fees such as land legislation, construction IDAL is also engaged in promotion of exports particular- permit, and residence permit. To benefit from these ly of agriculture and agri-processing products. incentives, the investor signs a contract with the Leb- The Investment Law redefined the role of IDAL anese Government represented by IDAL. as a one-stop-shop promotion agency to eliminate the administrative barriers to promotion of domestic and As noted earlier, investment in free zones benefit foreign investment. This role of IDAL has not yet been from similar benefits plus exemption from import du- materialized. However, the one-stop-shop directorate of ties and taxes. Also, Kafalat supports investment by the IDAL guides the investors to complete the formalities to SMEs through incentives that include loan guarantees, receive a license. As a result, the licenses are provided in a and favorable interest rates and maturity periods. complex administrative process, which includes the fol- There are no restrictions on FDI in terms of the lowing steps: Investor submits application to IDAL with sub-sectors in which investment is made and the share required documents. The One-Stop-Shop Directorate of of foreign ownership. However, for reasons of national IDAL assesses the application and submits a report to the Chairman, who then takes the application to the IDAL’s 83 For details see IDAL’s website, www.idal.com.lb. 94 Over the Horizon: a New Levant and social security FDI in some services (media, postal, Investment Guarantee Agency (MIGA) and ratified In- legal, veterinarian, customs brokerage, and nursing) is ternational Convention on the Settlement of Investment restricted. Foreign investors are entitled to the incentives Disputes (ICSID). granted to domestic investors including the preferential A key weakness of the Lebanese investment regime is interest and tariff rates, tax exemptions, and loan guaran- that it’s heavy reliance on fiscal and financial incentives. tees available to investors in some priority sectors. Only Good quality infrastructure services at affordable prices, in the case of air and transport sectors, tax exemption for and well-managed industrial parks and sector-specific foreign investors is conditional on reciprocity. clusters, which are effective tools to stimulate invest- The FDI inflows have been increasing at a rate of ment, do not play a notable role in the incentive system. about 15 percent since 2006 and these inflows play a very Also, the capacity of IDAL is particularly limited in important role in Lebanese economy. FDI inflows reached gathering and dissemination of information, investors US$4.5 billion in 2010—about 13 percent of GDP and business matching services to establish partnership with 42 percent of gross fixed investment (Table 26). Almost all foreign investors, conducting investor surveys and research FDI goes to services sub-sectors. In 2009, about 70 per- to identify the problems investors face, and communicating cent of FDI was realized in the real estate and residential these problems to the government. To be an effective invest- sub-sectors originating mainly from Lebanese expatriates ment promotion agency, the capacity of IDAL should be and Gulf investors, followed by tourism (22.2 percent), substantially improved and its one-stop-shop role be made trade (2.3 percent), and finance (1.5 percent). FDI in- operational. Under UNDP assistance, IDAL is setting up flows in industry and agriculture are negligible. a data and information center, and upgrading its website. Lebanon has ratified bilateral investment agreements with 32 countries for the promotion and protection of investment. They contain provisions ensuring contrac- Lebanon: Policy Recommendations tual security to investors of the contracting parties and access to international arbitration for investment-re- The main policy recommendations are summarized as lated disputes. Lebanon is a member of Multilateral follows: Table 26 Lebanon Foreign Direct Investment 2000 2005 2006 2007 2008 2009 2010 Flow, US$ million Inflow 964 3,321 3,132 3,376 4,333 4,804 4,955 Outflow 108 715 875 848 987 1,126 574 Stock, US$ million Inflow 4,988 16,441 19,573 22,949 27,282 32,085 n.a. Outflow 586 2,741 3,616 4,464 5,451 6,576 7,150 FDI/Gross Fixed Investment, percent 27.6 68.8 61.0 50.3 48.9 41.4 42.4 FDI/GDP, percent 5.8 15.3 14.0 13.5 14.5 13.9 12.6 Inward FDI ranking (out of 141) Performance 34 9 16 13 11 8 16 Potential 62 76 81 76 76 74 n.a. Source: UNCTAD WIR 2011. TRADE AND INVESTMENT REGIMES 95 „ Tariffs and other charges. Reduce the number of „ Investment regime. Improve the capacity of IDAL to bands to three to four and the maximum rate to a provide a wider set of services to the investors. Oper- more moderate level. Consolidate the remaining fees ationalize its one-stop shop function. and charges and bring them conformity into WTO rules. „ Non-tariff measures. Enact the Law on International Iraq: Trade and Investment Regimes Trade and Licensing to eliminate ministerial discre- tion in non-automatic licensing to avoid its use of In the past 30 years, wars, economic embargo, civil con- vested interest and exclusive agency licensing. En- flict, military occupation, and the following resistance sure conformity with the WTO rules. have critically disrupted Iraqi economy—its private sec- „ Customs administration. Implement the EU Twin- tor activities, in particular. Scores of private businesses ning program as soon as possible to modernize were closed and entrepreneurs and professionals left the Lebanon’s customs administration in order to im- country, creating capital and skill shortages. Infrastruc- prove efficiency, reduce delays, and ensure good ture was destroyed, and the capacity of the government governance. to formulate and implement policies was severely weak- „ Standards infrastructure. Seek further technical as- ened, aggravating the instability and uncertainty created sistance to continue reforming the standards infra- by the security situation. As a result, unemployment has structure. Specifically, adopt the National Quality reached about 30 percent, a large proportion of which is Policy, and operationalize Qualeb and COLIBAC. younger people. „ Export incentives. Prepare an Export Growth and This process has led to severe dependency in the Diversification Strategy as a policy guide, set up Iraqi economy in three areas. an Export Promotion Agency, establish an effective duty and tax drawback system as permitted by the „ Dependence on the public sector. As the private sector Customs Law. stayed on a declining trajectory for a long time, the „ Free zones. Transfer the management of the free zones share of public sector (The budget/GDP ratio) has to the private sector. Establish industrial parks and increased from 77 percent in 2004 to 86 percent in clusters, and introduce a single-factory EPZ scheme 2011.84 The public sector is now the main employer. to expand the industrial base and exports. Sixty-two percent of employment is created in the „ Trade finance. Increase the size of Kafalat’s financial services sector, a large proportion of which is public resources and capacity to provide technical assistance services. This situation is not sustainable. to SMEs in areas such as financial management, „ Dependence on the oil sector. Protracted insecurity, project preparation, and loan application. destruction of infrastructure, and the flight of capital „ Institutional framework and policy coordination. Set and professionals affected the non-oil sector most. up a high level Export Council chaired by the Prime The share of the oil sector in GDP amounted to Minister and composed of concerned ministries and 63 percent in 2010,85 but the oil sector constitutes representatives of the private sector to effectively co- only two percent of employment. Ninety percent of ordinate and guide export policies. government revenue comes from oil receipts.86 The „ Trade agreements. Meet the remaining requirements (mainly enactment of various laws and regulations) 84 CSIS 2011 p. 4. to conclude WTO accession process, and ratify the 85 CSIS 2011 p. 4. FTA with Turkey as soon as possible. 86 CSIS 2011 p. 19. 96 Over the Horizon: a New Levant structural change from labor-intensive to capital-in- Policy) introduced in 2003 and 2004, respectively. Order tensive sub-sectors has significantly weakened the 54 kept parts of the 1984 Customs Law but suspended capacity of the economy to create employment for all customs tariffs, duties, import taxes, and similar sur- the growing younger population. charges for goods entering and or leaving Iraq. Some ad- „ Dependence on imports. Disruption of domestic non- ministrative changes were also made by Order 16 (Tem- oil activities lead to the replacement of domestic porary Control of Iraqi Borders, Ports and Airports) and production with imports in many labor-intensive Order 26 (Creation of the Department of Border En- sub-sectors in which Iraq has comparative advan- forcement) in 2003. The Customs Law of 1984 remains tage, adversely affecting the employment and pov- in force except as amended by CPA Orders. erty situation. These sub-sectors include agriculture, Policies Directly Affecting Imports agro-processing and light manufacturing. Import duties and other charges. Order 38 established a uniform 5 percent Reconstruction Levy on all imported The main economic objective is to reduce these de- goods except food, medicine, medical equipment, cloth- pendences, and restore production in the sub-sectors ing, books, and goods delivered as humanitarian aid. where Iraq holds a comparative advantage in order to Certain entities are also exempted including coalition re-balance the Iraqi economy. This would require stim- forces, coalition contractors and sub-contractors, gov- ulating private-sector activities in non-oil sub-sectors. ernment departments, international organizations, and Foreign trade and FDI would play an important role in other agencies providing assistance. There are currently achieving this objective. Replacement of imports with no internal taxes on imports. domestic production in a number of non-oil sub-sectors The uniform five percent Reconstruction Levy as an where Iraq has latent comparative advantage is an im- import tariff is inappropriate to address the pressing issue portant initial objective. Once the process of revival of of import dependence and the need to replace imports in these sub-sectors starts, exporting of their products, par- areas where Iraq has comparative advantage. The govern- ticularly to the neighboring countries, should be encour- ment has recently prepared a new tariff schedule to re- aged. Complementing domestic investment with FDI place the Reconstruction Levy, but implementation has from capital exporting countries in the region will also be not yet started. The new tariff schedule, which is based necessary. Taking advantage of regional complementari- on an 8-digit HS system, has 11 non-zero bands (1, 3, ties and strengthening integration with the neighboring 5, 10, 15, 20, 25, 30, 40, 50, and 80). The top band at countries is therefore an important component of Iraq’s 80 percent applies to alcoholic and non-alcoholic bever- economic program. ages including mineral water and vinegar. The 50 percent is levied on preparation of meat such as sausages, ham, sugar confectionary (halvah), cigarettes, and artwork. Oil Iraq’s Trade Regime and grain seeds, minerals, ores, organic chemicals, tan- ning and dying materials, pulp of wood, books, iron and In 2003, the UN Security Council lifted civilian trade steel are either duty free or carry a five percent tariff. Ag- sanctions on Iraq, under which it was allowed only to ricultural and agro-processing products carry tariff rates export limited amounts of oil and import food and hu- generally in the range of 10–30 percent, much higher manitarian supplies under close supervision. The trade than manufactured products.87 regime currently in place in Iraq is determined mainly by the Coalition Provisional Authority’s (CPA) Orders 87 A detailed analysis of the tariff schedule has not yet been conduct- 38 (Reconstruction Levy) and 54 (Trade Liberalization ed because an electronic copy of the schedule is not yet available. TRADE AND INVESTMENT REGIMES 97 Preparation of a new tariff schedule is a step in the Standards and conformity assessment infrastructure. right direction. It needs to be adopted and put in place Product standards in Iraq are under the responsibility as soon as possible to encourage domestic production. of the Central Organization for Standardization and It is preferable to implement the new schedule after the Quality Control (COSQC). The COSQC is responsible customs administration is improved (see below). It is for developing and adopting Iraqi standards, issuing the also advisable to reduce the number of non-zero bands Standards Conformity Certificate, which is a document to three to four for efficiency reasons. required by all production companies, accreditation of Import restrictions. Companies must be registered laboratories, and setting and monitoring measurement with Customs, which is immediate when all required and calibration norms. The capacity of the COSQC and documents are submitted. CPA Order 54 suspended the the laboratories are very limited in their ability to fulfill complicated import and export licensing system that ex- these responsibilities. isted before 2003. Therefore, currently there are no formal Sanitary and phytosanitary services are provided licensing requirements in effect.88 However, certain items and certification given by the Ministry of Agriculture, cannot be imported without a license from the Ministry the Veterinary Authority, and the Ministry of Health. of Trade. They include: fertilizer, industrial explosives, Importation of plants, animals, and foodstuff must poultry products from countries with avian influenza, and have certification from these institutions. Certification missile technology. Order 54 bans importation of some of TBT and SPS from accredited foreign companies is items including: magazines, CDs, and films contrary to accepted. If there is doubt, products are inspected in lab- public norms, arms, nuclear material, and non-medical oratories of the Ministry of Trade. narcotics. Crude oil and all other oil products can only A comprehensive program will need to be prepared be imported and exported with the authorization of the and implemented to modernize the Iraqi standards in- State Oil Marketing Organization except for products for frastructure. The program would include: separation of use by coalition forces and parties working with them. standards setting, conformity assessment and certifica- Iraq does not require pre-shipment inspections. tion, and measurement and calibration functions; invest- Customs administration. Customs administration in ment in infrastructure and capacity building; encourage- Iraq is a serious barrier to trade. It was ranked 148th out ment of private laboratories; and arrangement of mutual of the 155 countries in 2010 in the World Bank’s Lo- recognition programs. Substantial technical assistance gistics Performance Index. The problems Iraqi Customs will be needed to prepare and implement this program. Administration faces include: weak leadership, uncoor- dinated customs units, outdated procedures, excessive 88 The Ministry of Trade issued new regulations on import and ex- physical checks and long delays, lack of resources (hu- port licensing in 2011. The Economic Committee of the Council man, financial, physical), limited ICT capability, and of Ministers, acting at the request of the Central Bank of Iraq, poor integrity and governance. It is necessary to put in ordered that full enforcement of the import and export-licensing requirements should resume on June 30, 2012. Under these regu- place a comprehensive reform and modernization pro- lations traders must obtain a license permit for every shipment and gram focused on adoption of international standards as any particular item to be imported and exported. Import and ex- well as investment in much needed infrastructure. Par- port licenses, which will be issued by the State Company for Fairs and Commercial Services (a SOE under the Ministry of Trade), ticular attention should be given to implementation of must describe the goods in particular and specify the amount to be an automated customs system and capacity building in shipped or received. It is not clear whether the new regulations will all aspects of a modern customs administration.89 Sub- be implemented. For details, see “Import and Export Licensing in Iraq,” USAID-Tijara, May 2012. stantial technical assistance will be needed to prepare and 89 For details see “Iraq Customs Administration Report: Diagnostic implement such program. Mission Aide Memoire,” June 2012. 98 Over the Horizon: a New Levant Policies Directly Affecting Exports exempted from all taxes for the life of the business with Export restrictions. Exporters must be registered with the exception of the Reconstruction Levy. The activities Customs, as is the case for imports. In general, there is in the free zones are limited because of security reasons. no licensing requirement for exports. However, there are It is advisable to transfer the management of the free a number of products whose export requires a license zones to the private sector to separate the regulatory and from the Ministry of Trade. They include: fertilizer, some operational role of the Free Zones Authority, set up in- food items, animals, wood, iron and steel plates, mineral dustrial parks with good infrastructure facilities to en- water pipes, ceramics, glass, and metals. The prohibited courage formation of clusters, and introduce single-fac- items are the same as for imports noted earlier. tory export processing zones scheme. Iraq does not apply export tax, but a fee of US$35 per Export finance. Iraq does not have any facility for fi- ton is charged for export of scrap metal for administra- nancing export activities. The Trade Bank of Iraq was set tion cost and compensation to the government in recog- up as a specialized trade bank, but now operates as a gen- nition of the fact that most scrap material was formerly eral commercial bank. Iraq’s financial system is underde- owned by the government. There is no export subsidy. veloped and underperforming. This is a clear impediment Export incentives. Iraq does not have a system in place to overall development of the Iraqi economy in general, to provide incentives and promote exports. There was an and expansion and diversification of its exports in partic- export Promotion Fund before the invasion, but it is not ular. Financing trade should be considered in the context operational now. Under the previous law, exporters are of ongoing reform program that aims to strengthen fi- entitled to drawback 85 percent of imported inputs that nancial sector infrastructure, including supervision, cred- go into production of exported goods. This is not appli- it registry, loan guarantee, collateral framework, contract cable now because Order 54 suspended all import duties. enforcement, and accounting and auditing systems.90 In Drawback does not apply to the Reconstruction Levy. that context, it is essential to introduce dedicated credit While the immediate priority is to replace imports in for exporters or loan guarantee schemes and trade insur- areas where Iraq has latent comparative advantage, Iraq ance system to ease access to credit and reduce risks. should also prepare an Export Development Strategy, develop an export assistance and incentive system, and set up an Export Promotion Agency to get the economy Iraq’s Investment Regime ready in time for export diversification away from the oil sector. Incentives would include a duty/tax drawback and Private Sector Development and investment promotion credit guarantee schemes. An institutional assistance pro- is a key component of Iraq’s National Development gram, implemented by the Export Promotion Agency, Strategy (2005–07 and 2008–10). Significant progress would have collection and dissemination of information, has been made to remove some of the barriers to the organization of buyer-seller meetings and trade fairs, development of an investment-friendly environment in preparation of manuals, and provision of services such as Iraq. The new Foreign Direct Investment Law, enacted business incubation, market research, and consultation. by the Coalition Provisional Authority in September Free zones. Iraq has three free zones: Basra/Khor Al- 2003 (CPA Order 39) and amended in December 2003 Zubair, Al-Quayem, and Ninevch Flaifil. They operate (CPA Order 46), the Company Law amended in 2004 under the Free Zones Authority. The main relevant legisla- tion is the Free Zones Law (1998) and the Instructions for 90 In February 2009 the government embarked on a comprehensive Free Zones Management and the Regulation of Investors’ two-phase Banking Sector Reform supported by the World Bank. Business (1999). Companies operating in the zones are For details of the financial sector issues, see World Bank 2011. TRADE AND INVESTMENT REGIMES 99 (CPA Order 64), the Investment Law enacted in 2006 ownership and provides national treatment for foreign (Law No. 13),91 Industrial Investment Law for Private firms, and ensures the protection of rights, ownership, and Mixed Sectors amended in 1998, and the Law on and transfer of funds. Purchase of real estate by foreigners Private Investment in Crude Oil Refining passed in 2007 is not allowed but an initial leasing license for 40 years is (Law No 64) constitute much of the legal structure of the permitted, which is renewable. investment environment in Iraq. Iraq is a signatory of over 50 agreements on Invest- As stipulated in the Investment Law, two types of ment Promotion and Protection and 13 agreements on investment commissions were established in Iraq. The avoidance of double taxation. It is a member of MIGA, National Investment Commission (NIC) was set up in but has not yet signed or adopted the United Nations 2009 to formulate the national policy for investment, New York Convention on Recognition and Enforce- develop national plans, and monitor implementation. It ment of Foreign Arbitral Awards and the United Nations is exclusively responsible for strategic investment projects Commission on International Trade Law. of federal nature. The chairman of the NIC has the rank FDI inflows in Iraq have been increasing as the se- of minister. The board includes, in addition to the chair- curity situation improves, reaching about US$1.5 billion man, his deputy, four public sector officials, and three or 20 percent of total fixed investment in 2010 (Table representatives from the private sector chosen by the 27). However, the investment is mainly in oil and gas Prime Minister. With a one-stop-shop facility the NIC related areas. aims to promote and assist investment particularly in ag- Iraq has made a good start to improve its invest- riculture and industry, create a business environment to ment climate, but much needs to be done to create an attract migrated Iraqi and FDI, and support the housing investment-friendly environment to stimulate both do- sector. The Investment Law also provides for establish- mestic and foreign investment in order to diversify its ment of commissions at the regional and governorate economy led by the private sector. Iraq ranks 174 among level. All 15 governorates have already established their 183 countries on Doing Business Indicators (2011). The investment commissions. They encourage investment in Investment Climate Assessment for Iraq identifies the their governorates and issue licenses. main problem areas and suggests reforms in all nine areas There is also the Industrial Development Authori- of Doing Business Indicators.94 With technical assistance ty under the Ministry of Industry and Minerals (MIM). from the World Bank, U.S. Agency for International Its objective is to assist the development of industrial Development (USAID), Swedish International Develop- SMEs under the Law of Industrial Investment of 1998 ment Agency (SIDA), and Department for International (as amended). Development (DFID) the Government has initiated a Under technical assistance, the Industrial Inves- process of gradually implementing these reforms. tor Guide of Iraq and Investment Guides for Baghdad, Kirkuk, and Anbar were prepared in 2011 to define the 91 This Law covers investments over US$250,000. Kurdish Region fiscal incentives available, the institutional and regulatory Investment Law (Law No 3) was also enacted in 2006. framework for implementation of these incentives, and the 92 “Industrial Investor Guide of Iraq,” USAID-Tijara July 2011; process of receiving the necessary permits and licenses.92 “Investor Guide of Baghdad,” USAID-Tijara November 2011; “Investor Guide of Kirkuk,” USAID-Tijara November 2011; and Fiscal incentives include exemption from taxes and fees for “Investor Guide of Anbar,” USAID-Tijara July 2011. a certain period depending on the type of investment. 93 Banking Law No 94 of 2004 governs FDI in financial services, The FDI Law allows ownership in most sectors of while branches of foreign insurance companies are established un- der the Insurance Regulatory Law No 10 of 2005. A draft Oil and the economy (except natural resources, real estate, and Gas Law is under consideration. financial services and insurance)93 without restrictions in 94 World Bank 2012b. 100 Over the Horizon: a New Levant Table 27 Iraq Foreign Direct Investment 2000 2005 2006 2007 2008 2009 2010 Flow, US$ million Inflow –3 515 383 972 1,856 1,452 1,426 Outflow 0 89 305 8 34 116 52 Stock, US$ million Inflow n.a. 779 1,162 2,134 3,990 5,060 n.a. Outflow n.a. n.a. n.a. n.a. n.a. n.a. n.a. FDI/Gross Fixed Investment, percent 0.5 14.9 9.2 54.5 44.1 21.8 20.8 FDI/GDP, percent 0.0 2.8 1.9 4.5 7.9 5.6 5.1 Source: UNCTAD WIR 2011. Iraq: Policy Recommendations programs. Technical assistance will be needed to pre- pare and implement this program. The main policy recommendations are summarized as „ Export incentives. Prepare an Export Development follows: Strategy, develop an export assistance and incentive system, and set up an Export Promotion Agency to „ Tariffs and other charges. Implement the new tariff implement the strategy. Incentives would include a schedule as soon as possible to support domestic duty/tax drawback and credit guarantee schemes. production after reducing the number of non-zero An institutional assistance program would include bands to three to four and after improving customs collection and dissemination of information, or- administration. ganization of buyer-seller meetings and trade fairs, „ Non-tariff measures. Rescind the new Ministry of preparation of manuals, and provision of services Trade Directive on resumption of import and export such as business incubation, market research, and licensing. consultation. „ Customs administration. Prepare and implement a „ Free zones. Transfer the management of the free comprehensive reform and modernization program zones to the private sector to separate the regulatory focused on adoption of international standards and and operational role of the Free Zones Authority, set investment in infrastructure with particular atten- up industrial parks with good infrastructure facilities tion to selection of an automated customs system to encourage formation of clusters, and a introduce and capacity building in all aspects of a modern single-factory export processing zones scheme. customs administration. Technical assistance will be „ Trade finance. In the context of broader financial sec- needed to prepare and implement this program. tor reforms introduce dedicated credit for exporters „ Standards infrastructure. Prepare and implement a or loan guarantee schemes and trade insurance sys- comprehensive modernization program that would tem to ease access to credit and reduce risks. include: separation of standards setting, conformity „ Trade agreements. Finalize Iraq’s Goods Offer and assessment and certification, and measurement and Services Offer and submit to the WTO in order to calibration functions; investment in infrastructure accelerate accession negotiations. and capacity building; encouragement of private „ Institutional framework and policy coordination. laboratories; and arrangement of mutual recognition Set up an Export Sub-Committee in the Econom- TRADE AND INVESTMENT REGIMES 101 ic Committee of the Council of Minister to guide applied MFN rate of 17.0 percent. On one hand, this trade policies, monitor implementation, and better difference leaves ample policy space for the government coordinate policy formulation and implementation. to raise import tariffs in response to political-economic Ensure participation of representatives of the private shocks without being in violation of its WTO commit- sector in the Export Sub-Committee. Encourage ex- ments. As the next section details, it is curious that Egypt porters to form an Exporters Association as an advo- is such a frequent user of policies such as antidumping cacy body. and safeguards given that for many of the products it re- „ Investment regime. Continue implementing the re- tains sufficient flexibility to increase levels of import pro- forms recommended by the “Iraq Investment Cli- tection by simply raising applied MFN rates up to their mate Assessment.” WTO binding levels. On the other hand, because there is a significant difference between tariff binding rates and applied tariffs so that applied MFN tariffs could be in- Egypt: Trade and Investment Regimes creased considerably, exporters in other countries may feel less secure about their market access in Egypt. Egypt is involved in a number of international trade Egypt’s average tariffs in agricultural products are agreements. Egypt and Turkey signed a bilateral FTA in quite high. The highest tariffs of 3000 percent are in 2005, which entered into force on March 1, 2007. Tur- foodstuffs, where the average binding rate is 276.9 per- key’s market was fully liberalized in industrial product cent, with high average applied rates of 219.5 percent. toward imports from Egypt immediately upon the agree- Within agriculture, applied MFN tariffs are somewhat ment’s entry into force, whereas Egypt’s bilateral liberal- lower in the animal and vegetable sectors. ization is being phased in gradually and is only scheduled Egypt’s tariffs in non-agricultural products are much for completion on January 1, 2020. Egypt is also a mem- lower, on average, though there is substantial variation ber of GAFTA and the Agadir Agreement (with Jordan, across different categories of industrial products. Average Morocco, and Tunisia). It also has trade preferences with tariffs are lowest for imports of minerals, mineral fuels, Ethiopia, Eritrea, and Uganda under the Common Mar- machinery, and chemicals. Average tariffs are highest in ket for Eastern and Southern Africa (COMESA). sectors such as footwear, textiles and clothing, and hides Egypt has been a member of the WTO since 1995, and skins. and Table 28 provides additional detail on its tariff com- In a number of instances, Egypt’s government pol- mitments and applied MFN tariffs. The applied MFN icymakers’ use of import-restricting TTBs has direct tariffs are those that must be paid by exporters in coun- implications for partners in the MENA region. Table tries that do not have an FTA with Egypt. The level of 29 provides information on three case studies that the the MFN tariff also represents the size of the tariff mar- subsequent analysis examines in more detail.95 gin preference that exporters in FTA countries will enjoy The first example for Egypt involves its imports of steel in Egypt’s market, relative to exporters to Egypt from rebar, primarily from Turkey, a product with a fractious non-FTA countries, once the FTA with Egypt is fully implemented. 95 Egypt is a relatively frequent user of safeguards and antidumping Egypt has made WTO-legal commitments on up- in particular, these are merely examples of recent use particularly per limit tariff bindings for over 99 percent of its import impactful to MENA countries. Other recent examples include a products. The simple average rate across all products is safeguard investigation on nearly US$1 billion in imports of white sugar, most of which was imported from Brazil, as well as a smaller 36.8 percent for these binding commitments, which is safeguard investigation on polypropylene that included imports much higher than the Egyptian government’s average from Saudi Arabia, Kuwait, and United Arab Emirates. 102 Over the Horizon: a New Levant Table 28 Egypt’s WTO Tariff Commitments and Applied MFN Import Tariffs Simple Simple Simple average Share of WTO tariff average WTO average applied Simple Share of HS-06 lines Share of binding tariff binding applied rate, rate, WTO average HS-06 lines with non HS-06 lines product rate, bound WTO bound unbound applied rate, with ad valorem with duties coverage products products products all products duty-free duties > 15% (in %) (%) (%) (%) (%) (in %) Max (%) (in %) (in %) Product (1) (2) (3) (4) (5) (6) (7) (8) (9) Overall 99.1 36.8 17.0 3.7 16.8 9.4 3000.0 0.2 19.0 Agriculture 99.7 100.0 67.3 0.0 67.1 13.1 3000.0 0.0 25.5 Non-Agriculture 99.0 27.4 9.6 3.9 9.4 8.9 3000.0 0.2 18.1 By sector 01–05 Animal 99.1 30.9 8.3 0.0 8.2 26.8 30.0 0.0 21.1 06–15 Vegetable 100.0 27.5 5.1 — 5.1 14.0 30.0 0.0 5.3 16–24 Foodstuffs 95.9 276.9 219.5 0.0 220.6 2.1 3000.0 4.7 60.1 25–26 Minerals 100.0 21.9 2.6 — 2.6 0.9 10.0 0.0 0.0 27 Mineral fuels 97.7 21.8 3.6 0.0 3.4 9.5 10.0 0.0 0.0 28–38 Chemicals 100.0 17.2 6.2 — 6.0 10.0 3000.0 0.0 5.7 39–40 Plastic / Rubber 93.4 33.9 7.5 2.0 7.1 8.1 30.0 0.0 10.9 41–43 Hides, Skins 100.0 45.0 12.4 — 12.4 0.0 30.0 0.0 27.5 44–49 Wood 100.0 34.9 10.9 — 10.6 6.3 30.0 0.0 21.5 50–63 Textiles, Clothing 100.0 29.5 15.2 — 15.2 4.9 30.0 0.0 36.1 64–67 Footwear 100.0 59.2 26.7 — 26.7 0.0 30.0 0.0 87.8 68–71 Stone / Glass 98.5 44.2 11.9 4.7 11.7 2.6 30.0 0.0 21.9 72–83 Metals 100.0 29.3 8.5 — 8.4 3.3 30.0 0.0 14.1 84–85 Machinery/ Electrical 98.8 20.7 6.0 4.6 5.7 20.7 30.0 0.0 8.5 86–89 Trans. Equipment 94.7 34.0 11.9 11.4 11.4 3.8 135.0 0.0 18.3 90–97 Misc. 100.0 31.1 12.3 — 12.0 7.2 30.0 0.0 27.3 Notes: Compiled by the author with data from WTO-IDB and TRAINS (UNCTAD) at the tariff line level. history of bilateral trade relations.96 As Figure 39 illus- deriving from Turkey fell dramatically, leveling off at trates, the most recent episode began in 2009 with a mas- roughly a third of their 2009 level (between US$280 mil- sive surge in Egypt’s bilateral imports of steel rebar from lion to US$400 million per year) over 2010 through Turkey. Total imports of steel reinforcing bar increased to 2012. Nevertheless, in November 2012 Egypt initiated more than US$1.2 billion, more than 80 percent of these imports derived from Turkey alone. Under pressure from 96 Egypt had imposed antidumping import restrictions on steel rebar its domestic industry, the Egyptian government initiated from Turkey beginning in 1999. Turkey challenged those import restrictions under a formal WTO trade dispute in 2002; it was one an antidumping investigation against imports of steel re- of the relatively few instances in which the respondent country bar from Turkey in October 2010. By July 2011 it had de- was not found to have violated significant provisions of the WTO cided against imposing antidumping import restrictions. Agreement on Antidumping when it applied such import restric- tions. Turkey and Egypt eventually came to a mutually agreed upon Despite Egypt not imposing any new TTB import re- solution in the WTO dispute and Egypt removed the antidumping strictions at that stage, both total rebar imports and those import restrictions after their five year period expired in 2004. TRADE AND INVESTMENT REGIMES 103 Table 29 Examples of Egypt’s Trade Frictions Impacting Turkey/MENA Partners Examples of MENA Trading Year of TTB Affected bilateral Product: trade policy Partner(s) Affected† policy action trade (estimate)* 1. Steel rebar: antidumping investigation on imports from Turkey; Turkey (-) 2010, 2012 $1b safeguard investigation on imports Libya (+) $340k Palestinian Territories (+) $190k 2. Cotton yarn, and cotton textile and mixed cotton textile Turkey (?) 2011, 2012 $133m products: safeguard investigations Israel (?) $26m Jordan (?) $3m Tunisia (?) $3m Lebanon (?) $700k Morocco (?) $390k Palestinian Territories (?) $170k Iraq (?) $150k 3. Blankets: safeguard on imports Jordan (?) 2008 $2.4m Syria (?) $1.1m Turkey (?) $1.3m Lebanon (?) $300k Notes: Compiled by the author from the Temporary Trade Barriers Database matched to trade data available from UN COMTRADE Database via WITS. †Expected positive (+), negative (-) or uncertain (?) outcome for the listed exporter, given the likely way that the new TTB import restriction would be applied and whether the exporter would be excluded or exempted. *Estimates of bilateral imports of the affected products taken at the 6-digit HS level. a safeguard investigation on imports of steel rebar and Figure 39 Egypt’s Imports of Steel Rebar from in December 2012 the government imposed preliminary Selected Source Countries safeguards import restrictions. While data on the final (US$ millions) outcome of the investigation is unavailable (at the time 1.4 of this writing), an outcome of new import restrictions 1.2 could result in additional barriers on Turkey’s steel rebar 1.0 exports. Depending on how any potential safeguard were 0.8 to be structured, it could also provide implicit prefer- 0.6 ential access to the Egyptian market to other potential 0.4 steel rebar exporters in the MENA region if they were 0.2 exempted–—i.e., in recent years, MENA economies such as Syria, Libya, and Palestinian Territories each had 0 2008 2009 2010 2011 2012 greater than US$100,000 in annual steel rebar exports Total From Turkey to Egypt. Egypt’s second example is a set of safeguard inves- Source: UN COMTRADE Database. tigations on cotton yarn and cotton textile products in 2011–2012. While both investigations resulted in the imposition of preliminary import restrictions, the tex- The outcomes of these investigations are important tile investigation terminated without the imposition given that these are products for which a substantial of final measures and thus the preliminary measures share of Egypt’s imports derives from other MENA were revoked. As of the time of this writing, data on countries. First, as Figure 40 indicates, the safeguards the final outcome of the cotton yarn investigation was investigated products cover Egyptian imports of unavailable. roughly US$1 billion per year, including more than 104 Over the Horizon: a New Levant US$100 million from Turkey and US$20 million from Figure 40 Egypt’s Imports of Cotton Yarn and Textile Israel97 Products from Selected Source Countries (US$ millions) There are a number of other MENA countries with significant exports to Egypt in these affected cotton yarn 140.0 and cotton textile products. For example, Figure 40 also 120.0 indicates that Jordan exported US$2–3 million annually 100.0 to Egypt in these products; Lebanon, Morocco, Iraq, and 80.0 60.0 Palestinian Territories also had exports to Egypt in these 40.0 products in recent years worth hundreds of thousands of 20.0 dollars. The outcome of these investigations is quite im- 0.0 portant for MENA’s exporters; especially important would 2008 2009 2010 2011 2012 be whether small MENA exporters would be exempted From Turkey From Israel From Jordan from any imposed safeguard, thus providing them addi- Source: UN COMTRADE Database. tional preferential access to the Egyptian market. The third example from Egypt is a safeguard that the government imposed on imports of blankets in 2008 and Relations that was signed in 1994. In principle, a cus- which remained in place until 2011. Most Egyptian im- toms union acts as both a free trade area—so that the two ports of blankets derive from China—i.e., by the time entities apply zero tariffs on imports from and exports to the safeguard was removed in 2011, annual Egyptian each other—and each entity applies a common external imports of blankets were US$33 million, US$27 million tariff on imports deriving from third countries. In prac- of which were sourced from China. Nevertheless, Egypt tice, conflict in the region has not allowed for free trade also purchased significant imports of blankets from Jor- between the Palestinian Territories and Israel (World dan, Syria (with annual exports sometimes exceeding Bank 2012). US$1 million), Turkey, and Lebanon. Israel and Turkey signed a bilateral FTA in 1996 that In the blanket safeguard example, the manner through entered into force on May 1, 1997. Both Turkey’s and Is- which Egypt applied the safeguard was unclear, i.e., rael’s market was liberalized in industrial product toward Egypt’s notification to the WTO indicated that its poli- imports on January 1, 2000. Furthermore, the Turkish cymakers exempted developing country WTO members government indicates that it signed an interim FTA with “subject to certain conditions,” but the exact conditions Palestine in June 2004 that went into force on June 1, were not articulated as to which countries made the ex- 2005. Palestine is also listed as a member of GAFTA. emption list. Nevertheless, much of the competition that Israel is involved in a number of other internation- both Egyptian producers of blankets and other MENA al trade agreements. It signed an FTA with the United exporters to Egypt of blankets face is deriving from China States in 1985 that was fully implemented on January and not regional or any other FTA integration. 1, 1995, and it signed an FTA with European Union in 1995 that entered into force in 2000. Israel has also signed FTAs with EFTA countries, Canada, Mexico, The Palestinian Territories and Israel: Trade and Investment Regimes 97 Egypt’s largest foreign source of imports in these product catego- The Palestinian Territories have a customs union ar- ries is China, which peaked at US$400 million in 2011 before rangement with Israel under the Protocol of Economic dropping to US$264 million in 2012. TRADE AND INVESTMENT REGIMES 105 Table 30 Israel’s WTO Tariff Commitments and Applied MFN Import Tariffs Simple Simple Simple average Share of WTO tariff average WTO average applied Simple HS-06 lines Share of binding tariff binding applied rate, rate, WTO average Share of HS- with non HS-06 lines product rate, bound WTO bound unbound applied rate, 06 lines with ad valorem with duties coverage products products products all products duty-free duties > 15% Product (in %) (%) (%) (%) (%) (in %) Max (%) (in %) (in %) (1) (2) (3) (4) (5) (6) (7) (8) (9) Overall 71.1 21.7 4.4 6.3 4.9 48.7 212.0 7.5 1.9 Agriculture 98.6 75.8 10.6 44.2 12.0 31.2 212.0 27.9 12.2 Non-Agriculture 67.1 10.1 3.1 6.1 4.1 51.3 100.0 4.5 0.3 By sector 01–05 Animal 51.3 103.5 25.8 4.9 35.6 15.4 212.0 58.8 21.5 06–15 Vegetable 99.3 71.3 8.7 36.0 7.2 26.9 105.0 28.6 7.6 16–24 Foodstuffs 92.2 81.5 6.2 8.2 6.7 24.9 45.0 33.2 4.7 25–26 Minerals 86.8 5.0 0.0 0.9 0.1 99.1 12.0 0.0 0.0 27 Mineral fuels 76.2 6.7 1.2 0.8 1.1 82.9 8.0 0.0 0.0 28–38 Chemicals 85.8 9.2 1.0 5.6 1.7 79.2 100.0 0.4 0.1 39–40 Plastic / Rubber 86.7 12.8 3.8 4.9 3.9 47.4 12.0 0.0 0.0 41–43 Hides, Skins 72.5 16.5 1.9 7.4 3.1 68.1 12.0 2.9 0.0 44–49 Wood 74.3 11.9 2.8 6.8 3.8 60.3 12.0 0.4 0.0 50–63 Textiles, Clothing 26.7 11.3 3.4 8.8 7.3 30.3 12.0 6.0 0.0 64–67 Footwear 53.1 6.9 2.0 11.0 6.2 42.9 12.0 0.0 0.0 68–71 Stone / Glass 79.6 9.5 4.3 5.9 4.6 44.4 16.9 0.0 0.0 72–83 Metals 84.3 8.7 3.2 4.8 3.5 53.0 12.0 4.0 0.0 84–85 Machinery/ Electrical 76.7 8.6 4.1 2.6 3.7 45.4 12.0 1.8 0.0 86–89 Trans. Equipment 38.9 14.5 3.2 3.2 3.2 53.4 100.0 0.0 0.8 90–97 Misc. 75.4 14.4 5.7 3.6 5.4 47.0 100.0 1.1 3.0 Notes: Compiled by the author with data from WTO-IDB and TRAINS (UNCTAD) at the tariff line level. MERCORSUR countries (Argentina, Brazil, Paraguay Israel has made WTO-legal commitments on upper and Uruguay), Egypt and Jordan. limit tariff bindings for only 71.1 percent of its import prod- Israel has been a member of the WTO since 1995, ucts. Therefore, almost a third of Israel’s manufacturing im- and Table 30 provides additional detail on its tariff com- port product lines have not been legally bound at the WTO. mitments and applied MFN tariffs.98 The applied MFN For the products for which Israel has legally bound the tar- tariffs are those that must be paid by exporters in coun- iffs, the simple average rate for the bindings is 21.7 percent, tries with which Israel does not have an FTA. The level which is much higher than the Israeli government’s average of the MFN tariff also represents the size of the tariff applied MFN rate of 4.4 percent for the bound products. margin preference that exporters in FTA countries will enjoy in Israel’s market, relative to exporters to Israel 98 The Palestinian Authority has reportedly requested WTO Observ- from non-FTA countries, once the FTA with Israel is er status on multiple occasions; nevertheless, as of the time of writ- fully implemented. ing this has not been granted by the WTO membership. 106 Over the Horizon: a New Levant Products that are not bound under the WTO have slight- antidumping policy instrument. In a number of instanc- ly higher applied average MFN rates of 6.3 percent. es, Israel’s government policymakers’ TTB use has had Israel’s average tariffs in agricultural products are direct implications for partners in the MENA region. significantly higher than in non-agricultural products. Table 31 provides information on four case studies that The highest tariffs of 212 percent are in animal products; the subsequent analysis examines in more detail. Israel also has a significant share of its tariff lines with The steel rebar market is one important Israeli ex- duties that are not imposed in ad valorem terms. Within ample, similar to the case studies already described for agriculture, applied MFN tariffs are somewhat lower in Egypt, Jordan, and Morocco. Israel initiated an anti- the animal and vegetable sectors. dumping investigation in 2009 on steel rebar imports Israel’s tariffs in non-agricultural products are rel- from Turkey, the European Union, Taiwan, Mexico, and atively low, on average, with MFN applied rates at Ukraine. However, the investigation resulted in a nega- 4.1 percent. Average applied MFN tariffs are lowest for tive final determination so Israel did not impose any new imports of minerals, mineral fuels, and chemicals. Aver- import restrictions. Nevertheless, in 2009, Israel also ini- age tariffs are highest in sectors such as textiles and cloth- tiated a safeguard investigation on steel rebar imports. ing, footwear, and stone and glass—but even these sec- While the government did impose preliminary import tors have average applied MFN import tariffs of less than restrictions, the safeguard investigation was also termi- 7.5 percent. Israel’s low applied MFN import tariffs on nated in August 2009 without the imposition of final manufacturing products helps to minimize the amount import restrictions. of trade diversion that might otherwise arise with its sub- As Figure 41 illustrates, Israel’s total steel rebar im- stantial network of FTAs. ports nearly doubled between 2005 and 2008, from It is also worth noting that a few of the case studies US$109 million to US$217 million. Israel’s imports described thus far affect Palestinian exporters, typically of steel rebar fell by nearly 50 percent in 2009 (corre- by providing them additional preferential access to the sponding with the global trade collapse), which likely policy-imposing country’s markets. Examples include contributed to the government’s decisions not to impose Palestinian exports of steel rebar to Egypt and Jordan, as new import restrictions at the conclusions of the anti- well as textile products to Egypt. dumping and safeguard investigations. Nevertheless, at Israel has also been a relatively frequent user of tem- the conclusion of these investigations, Israel’s imports of porary trade barrier policies, though with only two safe- steel rebar subsequently rebounded in 2010 and acceler- guard investigations, most of this has been through the ated to over US$335 million in 2011. Table 31 Examples of Israel’s Trade Frictions Impacting Turkey/MENA Partners Examples of MENA Trading Year of TTB policy Affected bilateral trade Product: trade policy Partner(s) Affected† action (estimate)* 1. Steel rebar: antidumping investigation on imports from Turkey, EU, Taiwan, Turkey (-) 2009, $238m Mexico and Ukraine; safeguard investigation 2009 2. Stretch film rolls: antidumping investigation on imports from Turkey and EU Turkey (-) 2009 $12m 3. Glass wool and rock wool: safeguard investigation Turkey (-) 2010 $7m 4. Grey Portland cement: antidumping on imports from Turkey and Jordan Turkey (-) 2001 $40m Jordan (-) <$100k Notes: Compiled by the author from the Temporary Trade Barriers Database matched to trade data available from UN COMTRADE Database via WITS. †Expected positive (+), negative (–) or uncertain (?) outcome for the listed exporter, given the likely way that the new TTB import restriction would be applied and whether the exporter would be excluded or exempted. *Estimates of bilateral imports of the affected products taken at the 6-digit HS level. TRADE AND INVESTMENT REGIMES 107 Figure 41 Israel’s Imports of Steel Rebar from Figure 42 Israel’s Imports of Stretch Film Rolls from Selected Source Countries Selected Source Countries (US$ millions) (US$ millions) 400.0 60.0 350.0 50.0 300.0 40.0 250.0 200.0 30.0 150.0 20.0 100.0 10.0 50.0 0.0 0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total From Turkey Total From Turkey Source: UN COMTRADE Database. Source: UN COMTRADE Database. Figure 41 also indicates that Turkey is a major source at 25 percent of Israeli imports. Nevertheless, the price of these imports; Turkey’s exports alone increased from undertakings outcome—which is a negotiated solution US$107 million in 2005 to US$238 million in 2011. whereby exporters “voluntarily” agree to raise prices in However, despite the large increase in volume, Turkey’s the Israeli market in lieu of having higher antidumping share of Israel’s import market has declined from near- import duties imposed on them—has allowed Turkish ly 100 percent in 2005 to 55 percent in 2009, at the firms to retain a presence in the Israeli market, despite the time of the initiation of the TTB investigations, before use of antidumping. Nevertheless, Turkey’s market share rebounding to roughly 70 percent in 2010–2011. Given has fallen to 22 percent of Israeli stretch film roll imports the relatively recent surge in steel rebar imports, and the as other emerging economies like Brazil, China, and frequency with which the product is targeted by TTB in- Mexico—countries that were not subject to Israeli anti- vestigations across countries, it would not be surprising dumping price undertakings—entered the Israeli market to see this issue arise again in the context of Israeli-Tur- and increased their exports during 2010–2011 especially. key trade frictions. Israel’s third example involves a safeguard investi- The second example from Israel involves imports of gation on glass wool and rock wool. The investigation stretch film rolls. Figure 42 illustrates that Israel’s im- was initiated in 2010; the final conclusion to the inves- ports of this product had increased from US$34 million tigation is unknown. Nevertheless, the initiation of the in 2005 to US$42 million by 2008; in 2009, the gov- investigation signals an adjustment of Israeli industry to ernment initiated an antidumping investigation against new competitive pressure from abroad. Figure 43 indi- imports from Turkey and the European Union. This re- cates that imports of these wool products had increased sulted in the negotiated outcome of price undertakings from US$14 million in 2005 to US$22 million in taking effect in 2010 that are still ongoing. 2008, before dropping off substantially in 2009, along- Turkey’s exporters are a major supplier of stretch side the global trade collapse. Imports had resumed by film roll to the Israeli market. Their exports reached 2010 and were almost back to peak levels by 2011 at US$10 million in 2008, when their market share peaked US$21.7 million. 108 Over the Horizon: a New Levant Figure 43 Israel’s Imports of Glass Wool and Rock Figure 44 Israel’s Imports of Cement from Selected Wool from Selected Source Countries Source Countries (US$ millions) (US$ millions) 25.0 50.0 45.0 20.0 40.0 35.0 15.0 30.0 25.0 10.0 20.0 15.0 5.0 10.0 5.0 0.0 0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total From Turkey Total From Turkey Source: UN COMTRADE Database. Source: UN COMTRADE Database. Turkey is the largest foreign source of these Israe- to decide to impose antidumping duties against imports li wool imports, enjoying 28–40 percent of the Israeli from Turkey; the duties ranged from 10–32 percent de- import market for these products in recent years. In pending on the exporting firm. While the price under- 2010, Figure 43 indicates that Turkey’s bilateral exports takings remained in effect only until 2005, both Jordan of these wool products peaked at US$7.5 million. Even and Romania had exited the Israeli import market by though the increase in imports by 2010–2011 may have 2003. While the imposed duties on Turkey remained stemmed more from countries such as China and Slo- in place until 2007, as Figure 44 indicates, despite the venia than Turkey, given that Turkey is a major supplier application of antidumping measures, Turkey continued and the investigation is taking place under the safeguard to dominate the Israel import market for cement, with policy, if Israel were to impose any new import restric- 98–100 percent of the Israeli import market each year. tions they would almost certainly be targeted at imports Jordan’s exporters were not able to re-enter this par- from Turkey as well as any other major suppliers. ticular export market in any significant fashion, even af- The fourth example from Israel is an antidumping ter the Israeli price undertakings ended in 2005.99 Thus investigation on imports of cement from Turkey, Jor- this is an example in which the price undertaking agree- dan, and Romania in 2001. In 2001, Israel’s imports ment was enough to force the exporter out of the market from Turkey were US$18.8 million, from Romania were entirely. US$8.6 million, and from Jordan were US$2.7 million. Israel quickly negotiated price undertakings with ex- porters from Jordan and Romania that agreed to raise 99 The trade data indicates that Jordan had re-entered the Israeli mar- prices by 34 percent and 106 percent, respectively. On ket but with only a negligible amount (US$21,000) of cement the other hand, it took much longer (2004) for Israel exports to Israel in 2009. TRADE IN SERVICES 4 T here is high potential in the sub-region to integrate further through trade in services. The centrality of services to the economic structure of the Levant region offers a compelling narrative for devising a cooperation agenda aimed at facilitating expanded services trade and the adoption of competi- tion-enhancing regulatory regimes. Current trends and revealed comparative advantages show that there is untapped potential in the Levant to benefit further from integration in services trade. There is a clear pre- ponderance of the service sector in the Levant in both aggregate output and employment terms. During the last decade, services exports exhibited the fastest growth in Syria, Jordan, and Lebanon. Services trade in the Levant has been dominated by travel, transport, and other services, but exports of communication, financial, and insurance services witnessed more rapid change over the last decade. Prospects of competitiveness are also favorable. The Levant countries have revealed comparative advantages in services exports. Egypt, Iraq, Jordan, Lebanon, Syria, Turkey, and the Palestinian Territories have a comparative advantage in the export of travel services. In addition, transport services stand out as a sector where Egypt, Jordan, and Turkey possess a revealed comparative advantage in exporting. Besides travel services, Lebanon has comparative advantages in financial sector, construction and computer services exports. However, Levant countries are not benefiting from of natural persons. When compared globally in services regional opportunities because of restrictiveness of ser- regulation, the sub-region ranks among the world’s most vices trade policies. Egypt stands out for the high lev- restricted in services trade, with an aggregate level of re- el of restrictiveness of its applied regulatory regimes in strictiveness across all sectors and modes of supply. There services. Lebanon has the highest level of restrictiveness are significant barriers to services trade across the Levant, in cross-border supply. All Levant countries have highly such that a substantial coverage of services in any coop- restrictive regulatory regimes governing the temporary eration, negotiation or regulatory convergence initiative mobility of services providers. The sub-region is charac- could lead to more rapid liberalization of services than terized by the paucity of mutual recognition initiatives can arguably be accomplished unilaterally. aimed at facilitating the mobility of skilled professionals. A major issue emerging from the restrictiveness of Egypt and Turkey stand out for the high level of restric- services regimes in the Levant concerns the preference tiveness of their applied regulatory regimes in movement of governmental authorities to retain a considerable 109 110 Over the Horizon: a New Levant degree of policy autonomy and regulatory discretion. strive to improve the quality of regulatory institutions Even in areas that are free of explicit restrictions, de and endow them with adequate resources and requisite jure openness may not always imply or translate into a competencies. commensurate degree of de facto openness. Across dif- This chapter reviews the services sectors and levels ferent sectors, the allocation of new operating licenses of regulatory restrictiveness in the context of efforts at remains unduly discretionary in many countries. A key regional and global integration of Levant economies. reform issue is therefore how regulatory discretion can The chapter identifies existing and potential barriers to be reconciled with the need to have clear rules for service integrating services markets of the sample countries, providers. both within and beyond the Levant region, and advances There is a clear need for greater multilateral ef- a number of policy recommendations centered on the forts towards services liberalization in the region. For promotion of closer regulatory ties in services markets a deeper regional integration in the services trade, the Le- and expanded trade in services. Followed by an overview vant countries should make significant cooperation and for trade in services in the sub-region, this study focuses liberalization efforts. As discussed in another chapter of on five sectors for an in-depth analysis (financial services, this report, intra-regional integration of services markets energy, ICT, air transport, and tourism) discussing how will be (net) welfare improving for all Levant countries. liberalization of services trade under the framework of While services liberalization offers direct benefits much deeper regional economic integration would help coun- like it does for goods trade, the policy literature suggests tries take advantage of the regional opportunities. that more pervasive systemic benefits are likely to stem from the positive impact of services liberalization on manufacturing productivity. The benefits from services Overall Trends liberalization for the Levant countries will certainly be larger than those deriving from goods trade liberaliza- The economic structure of the Levant countries suggests tion. These issues need to command greater attention a clear preponderance of the service sector in both ag- among regional policy makers. gregate output and employment terms. Services con- Throughout the MENA region, policy makers con- tributed nearly half of GDP in Egypt and Syria (more front a number of common challenges calling for collec- than the MENA average of 42.3 percent) and at least tive action initiatives and the supply of regional public 60 percent in Jordan, Lebanon, and Turkey (slightly goods able to tackle the region’s most pressing needs. lower than world average of 69.5 percent) in 2007 (Fig- Several such challenges appear amenable to service-cen- ure 45). The share of services in GDP was significantly tric responses and policy reforms including the need to lower in Iraq where it stood at 21 percent, a level well promote greater market integration across a range of ser- below the MENA and world averages, and attesting to vice industries through efforts aimed at enhancing in- the distortions typically associated with economies that vestment climates and initiating the progressive disman- are centrally dependent on hydrocarbon extraction. Evi- tling of key obstacles to trade and investment in services. dence shows that there is a negative correlation between In the services realm, cooperation in the Levant entails the restrictiveness of policy regimes in services and their the possibility of preferential negotiations with the GCC share in GDP for all Levant countries. countries and an intensification of efforts under exist- The services sector is an important generator of em- ing regional agreements. Expanded service exports are ployment in the Levant. A country’s performance in the most likely to arise from higher quality regulatory envi- service sector as an employer can be assessed by comparing ronments. For this to occur, Levant governments must it to its respective income group. As shown in Figure 46, TRADE IN SERVICES 111 countries such as Egypt and Syria have a similar division Figure 45 Share of Services in GDP (%, 2007) of sectoral employment distribution as the average up- 100 per-middle income country. Jordan reflects high-income 80 countries, where services take on much of their employ- ment, especially relative to their agricultural sector. Ser- 60 vices accounted for nearly half of total employment in 40 Egypt, Iran and Turkey in 2008 and close to 60 percent 20 or above in Iraq, Jordan and Palestinian Territories. At 0 Egypt Iran Iraq Jordan Libya Lebanon Syria Tunisisa Turkey Algeria Morocco Yemen Mashreq+ World MENA 52.9 percent, the share of services in employment in Syria 2008 was broadly in line with the average share for the MENA region (52 percent), though slightly lower than Agriculture Industry Services the MENA average (53.9 percent). In all Levant coun- Source: World Bank, World Development Indicators. tries, the share of services in total employment exceeds the world average (42.9 percent) by a significant margin. The Levant countries are a net exporter of labor Figure 46 Share of Services in Total Employment services. The significance of workers remittances in the (%, 2008 Levant economies’ balance of payments suggests a po- 100 tential for greater flows of work-related migration, in- 80 cluding such of a temporary nature that is amenable to 60 negotiation under regional trade and bilateral migration management agreements (Table 32). 40 Levant countries have high shares of services in 20 total trade. Over the 2000–10 period, Egypt (41.3 per- 0 Egypt Iran Iraq Jordan Syria Turkey WB/Gaza Algeria Morocco Mashreq+ World MENA cent), Jordan (28.6 percent), and Lebanon (59 percent) all had average shares of services in total trade well in excess of the average shares in the MENA region (20 per- Agriculture Industry Services cent), and the world (19.5 percent) (see Table 33). This Source: World Bank, World Development Indicators. suggests a likely lead role for these three Levant countries Note: The GDP share of services in Iraq is for the year 2003. The employment share of services for the World is for the year 2005. from any process directed at integrating services markets on a regional basis. Meanwhile, Syria (23 percent) and Turkey (17.6 percent) report shares in line with MENA respectively, in 2010. Figure 47 further reveals that and world averages but lower than the MENA average. Egypt, Jordan, Lebanon, Syria, and Turkey reported a The lower salience of services exports in Iraq once more surplus in services trade, while Iraq, and Palestinian Ter- reveals the distortive impact of high oil dependency on ritories reported deficits. Although the combined share trade structures. of services trade is high for the Levant countries, they are However, on a global scale, the combined services still not competitive globally. These trends appear sug- trade of the Levant is not high. A comparative snapshot gestive of a greater potential for the growth of services of services trade across these economies reveals that Tur- exports directed towards the region as opposed to the key and Egypt are the sub-region’s leading services trad- rest of the world. ers, with services exports of US$35 and US$23.8 billion During the last decade, services exports exhibit- and services imports of US$19.5 and US$14.7 billion, ed the fastest growth in Syria, Jordan, and Lebanon. 112 Over the Horizon: a New Levant Table 32 Net Remittance Flows 2000–2011 (US$ millions) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Egypt 2,820.0 2,876.7 2,878.7 2,881.8 3,327.9 4,960.1 5,194.5 7,476.2 8,452.7 6,894.8 12,148.3 14,031.4 Iran 536.0 682.0 851.0 1,178.0 1,032.0 1,032.0 1,032.0 1,115.0 1,115.0 1,071.8 1,181.1 1,329.8 Iraq na na na na na 628.6 –392.4 –14.2 39.5 125.3 128.3 133.4 Jordan 1,647.7 1,818.1 1,949.1 1,974.2 2,058.3 2,150.5 2,481.8 2,954.9 3,322.2 3,094.8 3,145.8 3,013.4 Libya –454.0 –673.0 –779.0 –668.0 –965.0 –899.0 –929.0 –762.2 –964.2 –1,361.0 –1,609.0 –650.0 Lebanon na na 23.8 661.9 1,358.7 912.6 1,757.1 2,807.3 2,814.6 1,809.0 2,674.6 2,578.9 Syria 151.0 140.0 100.0 849.0 813.0 783.0 560.0 780.9 1,115.0 1,138.6 1,092.4 1,329.4 Tunisia 769.0 906.2 1,057.4 1,233.1 1,418.4 1,377.0 1,493.6 1,700.5 1,961.2 1,951.6 2,050.0 1,985.5 Turkey 4,560.0 2,786.0 1,936.0 729.0 804.0 791.0 1,039.0 1,142.0 1,365.0 885.0 818.0 882.0 Algeria 790.0 670.0 1,070.0 1,750.0 2,460.0 143.0 154.0 50.0 77.0 104.0 168.0 131.5 Morocco 2,131.8 3,225.4 2,840.8 3,569.7 4,179.3 4,554.2 5,413.5 6,681.6 6,839.9 6,209.0 6,360.5 7,185.4 Yemen 1,227.5 1,231.0 1,229.7 1,209.9 1,174.3 1,173.1 1,162.2 1,002.8 1,073.7 823.2 1,187.7 1,070.5 Palestinian Territories 1,003.8 1,060.9 1,029.9 549.9 625.3 635.3 916.5 1,064.2 1,204.4 1,189.4 1,490.8 1,526.7 Source: World Bank, World Development Indicators. Note: Data on remittances paid were not available for Iran over this period and for Turkey, Algeria, Morocco and Yemen during 2000–04. Data on remittances received were not available for Libya over 2007–2011. Tracking the growth of Levant services trade over time, the last decade, Lebanon, Jordan, Egypt, Syria, and Tur- between 2000 and 2010, services exports grew by key have recorded positive trade balances in services. 16.3 percent in Syria, 14.8 percent in Jordan, and Services trade in the Levant has been dominated 14.7 percent in Lebanon. The other Levant economies by travel, transport and other services, but exports also experienced a rapid growth of their services exports, of communication, financial, and insurance services not far from the world average of 11.5 percent. During witnessed more rapid change over the last decade. Table 34 describes the composition of services trade in the MENA economies. Egypt’s services trade changed Figure 47 Comparative Snapshot of Trade in dramatically over the 2005–2011 period, both in terms Services (US$ billion, 2010) of value (from US$14.6 to US$19.1 billion worth of 40 exports and US$10.5 to US$14.1 billion worth of im- 35.0 35 ports) and structure. Significant changes in export struc- 30 ture occurred in the relative share of transport services 25 23.8 19.5 (up from 32.4 percent in 2005 to 42.8 percent in 2011); 20 14.7 16.0 computer-related services (CRS, down from 10.6 to 15 13.4 10 9.9 2.4 percent) and other commercial services (down from 6.1 7.3 5.8 5.6 5 2.8 4.4 3.5 3.3 20.8 to 11.7 percent). In 2011, Egypt’s services trade was 0.4 0.8 1.1 0 dominated by travel, transport and other services. Egypt Iraq Jordan Libya Lebanon Syria Tunisia Turkey WB/Gaza Lebanon’s services trade, dominated by travel, CRS, and other services, also changed significantly over Svs_X (2010, $bn) Svs_M (2010, $bn) the 2005–2011 period, both in terms of value (from Source: World Bank, World Development Indicators. US$10.9 to US$19.8 billion worth of exports and from TRADE IN SERVICES 113 Table 33 Share of Services in Total Trade (%, 2000–2010) Country/Region 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Average Egypt 46.6 46.9 46.5 46.3 46.5 41.6 38.6 37.8 36.3 34.3 32.7 41.3 Iraq n.a. n.a. n.a. n.a. n.a. 12.0 10.4 8.4 8.8 12.0 11.6 10.5 Jordan 34.1 31.0 31.8 29.2 25.9 24.8 26.0 26.7 25.7 28.9 30.7 28.6 Libya 5.9 7.3 12.0 9.7 8.1 7.2 6.2 4.9 6.0 10.4 9.9 8.0 Lebanon n.a. n.a. 50.0 63.6 60.3 61.0 62.0 59.0 59.4 59.8 55.6 59.0 Syria 28.5 25.8 23.8 22.4 23.5 21.2 19.5 20.8 18.4 22.3 26.3 23.0 Tunisia 21.7 21.2 20.1 19.4 20.0 20.8 20.2 18.4 17.6 20.2 19.1 19.9 Turkey 25.2 22.7 18.7 18.0 17.1 16.9 14.3 13.9 13.9 17.3 15.4 17.6 Algeria n.a. n.a. n.a. n.a. n.a. 9.9 8.9 9.9 11.0 14.8 13.8 11.4 Morocco n.a. n.a. n.a. n.a. n.a. 29.1 30.1 29.1 26.0 31.6 29.4 29.2 Yemen n.a. n.a. n.a. n.a. n.a. 12.8 15.9 14.9 16.4 17.9 18.4 16.0 MENA 22.4 21.9 21.5 21.2 19.8 18.4 18.7 18.7 17.2 20.8 18.8 20.0 Mashreq+ 27.0 25.8 29.0 29.8 28.8 23.4 22.9 22.2 21.8 24.5 23.9 24.0 World 19.0 19.7 20.0 19.7 19.5 19.1 18.7 19.2 18.9 21.3 19.7 19.5 Source: World Development Indicators; author’s calculations. Note: Data were not available for Iran and Palestinian Territories. US$7.9 to US$13 billion worth of imports) and struc- the share of travel (down from 67.8 to 55.4 percent) and ture. Significant changes in export structure occurred transport services (up from 19 to 31.6 percent). In terms in the share of travel services (down from 50.9 percent of growth rates, exports of transport, insurance and gov- in 2005 to 34.7 percent in 2011); construction (up ernment services more than doubled. Turkey’s services from 0.0 to 2.7 percent); insurance (down from 1.9 to imports witnessed a rise in the share of CRS (from 4.6 to 0.3 percent); financial (up from 0.5 to 6.2 percent) and 9.3 percent), construction (from 0.1 to 1.7 percent), fi- other commercial services (up from 45 to 58.1 percent). nancial (from 3.3 to 5.7 percent) and other commercial The structure of Lebanese services imports was more services (from 31.6 to 38.3 percent) and a decline in the stable during the period, though it witnessed a notice- share of travel services (from 24.5 to 19.8 percent). In able change in the share of both construction (up from terms of growth rates, the rise of CRS, construction, fi- 0.0 to 3.8 percent) and financial services (up from 0.1 to nancial and PCR and the fall in other commercial ser- 2.4 percent). Individual service sectors such as construc- vices imports was most significant. tion, financial and personal, cultural, and recreational However, composition of Levant’s services ex- (PCR) services also showed sustained growth rates in ports is losing global foreign demand and in addition both imports and exports over this period. services are being exported to destinations with low The services trade of Turkey was dominated by growth. To understand the demand-side dynamics, two travel, transport and other services in 2012. Turkey’s questions are tested by exploring how a country’s current services trade also experienced far-reaching changes over export basket may be shaped in the future in relation the 2005–2012 period, both in terms of value (from to the rest of the world: Is a country exporting those US$26.8 to US$42.3 billion worth of exports and from services that are growing in demand by the rest of the US$11.7 to US$20.5 billion worth of imports) and struc- world? Is a country exporting to those countries where ture. Significant changes in export structure occurred in services demand is expanding at a fast rate? To address 114 Over the Horizon: a New Levant Table 34 Composition of Services Trade in Selected MENA Economies 2005–2011 EGYPT Exports Imports 2005 2011 Share Share 2005 2011 Share Share Services ($ mn) ($ mn) (%, 2005) (%, 2011) ($ mn) ($ mn) (%, 2005) (%, 2011) Travel 6,850.6 8,707.1 46.8 45.5 1,628.7 2,202.5 15.5 15.7 Transport 4,745.6 8,199.4 32.4 42.8 3,731.3 6,474.1 35.5 46.0 Communications 386.9 893.6 2.6 4.7 432.8 442.8 4.1 3.1 Computer and Information 1,548.7 454.6 10.6 2.4 2,300.5 1,964.6 21.9 14.0 Construction 502.9 395.0 3.4 2.1 231.0 266.8 2.2 1.9 Insurance Services 58.2 150.6 0.4 0.8 781.4 1,475.8 7.4 10.5 Financial 137.0 122.7 0.9 0.6 197.6 36.5 1.9 0.3 Royalties and License Fees 136.0 n.a. 0.9 na 182.0 231.6 1.7 1.6 Personal, Cultural and 82.8 107.5 0.6 0.6 22.1 34.3 0.2 0.2 Recreational Government 193.9 109.1 1.3 0.6 1,000.7 940.6 9.5 6.7 Other Services 3,046.4 2,233.1 20.8 11.7 5,148.1 5,393.0 49.0 38.3 Total 14,642.6 19,139.6 100.0 100.0 10,508.1 14,069.6 100.0 100.0 IRAQ Exports Imports 2005 2011 Share Share 2005 2011 Share Share Services ($ mn) ($ mn) (%, 2005) (%, 2011) ($ mn) ($ mn) (%, 2005) (%, 2011) Travel 167.7 1,543.7 47.2 54.7 438.6 1,796.0 7.2 16.2 Transport 176.5 444.0 49.7 15.7 2,811.2 5,358.6 46.1 48.4 Communications 0.5 20.3 0.1 0.7 441.7 77.7 7.2 0.7 Computer and Information n.a. 102.9 n.a. 3.6 179.8 556.6 3.0 5.0 Construction n.a. n.a. n.a. n.a. 394.2 n.a. 6.5 n.a. Insurance Services 0.1 5.8 0.0 0.2 941.4 1,934.8 15.4 17.5 Financial 2.7 39.3 0.8 1.4 39.5 1,096.4 0.6 9.9 Royalties and License Fees n.a. n.a. n.a. n.a. 28.6 n.a. 0.5 n.a. Personal, Cultural and n.a. 3.1 n.a. 0.1 151.1 6.7 2.5 0.1 Recreational Government 7.7 663.4 2.2 23.5 668.4 253.2 11.0 2.3 Other Services 11.0 834.8 3.1 29.6 2,844.7 3,925.4 46.7 35.4 Total 355.2 2,822.5 100.0 100.0 6,094.5 11,080.0 100.0 100.0 JORDAN Exports Imports 2005 2011 Share Share 2005 2011 Share Share Services ($ mn) ($ mn) (%, 2005) (%, 2011) ($ mn) ($ mn) (%, 2005) (%, 2011) Travel 1,440.6 2,999.7 61.7 58.4 585.2 1,160.6 23.0 25.9 Transport 469.8 1,188.2 20.1 23.1 1,341.6 2,500.3 52.8 55.9 Communications n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Computer and Information 328.6 547.9 14.1 10.7 328.6 317.7 12.9 7.1 Construction n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Insurance Services n.a. n.a. n.a. n.a. 209.4 378.2 8.2 8.4 Financial n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Royalties and License Fees n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Personal, Cultural and n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Recreational Government 94.5 402.7 4.0 7.8 77.2 118.7 3.0 2.7 Other Services 423.1 950.6 18.1 18.5 615.2 814.6 24.2 18.2 Total 2,333.6 5,138.5 100.0 100.0 2,542.0 4,475.5 100.0 100.0 (continued on next page) TRADE IN SERVICES 115 Table 34 Composition of Services Trade in Selected MENA Economies 2005–2011 (continued) LEBANON Exports Imports 2005 2011 Share Share 2005 2011 Share Share Services ($ mn) ($ mn) (%, 2005) (%, 2011) ($ mn) ($ mn) (%, 2005) (%, 2011) Travel 5,531.7 6,870.7 50.9 34.7 2,908.1 4,215.1 36.9 32.4 Transport 437.7 1,353.0 4.0 6.8 1,332.2 2,071.0 16.9 15.9 Communications 240.6 491.0 2.2 2.5 138.5 397.2 1.8 3.1 Computer and Information 4,362.0 8,974.2 40.2 45.3 3,242.2 5,058.3 41.1 38.9 Construction 0.3 535.0 0.0 2.7 0.3 497.8 0.0 3.8 Insurance Services 209.3 61.1 1.9 0.3 248.0 250.4 3.1 1.9 Financial 58.1 1,227.1 0.5 6.2 9.9 308.6 0.1 2.4 Royalties and License Fees n.a. 7.4 n.a. 0.0 n.a. 25.1 n.a. 0.2 Personal, Cultural and 0.0 166.1 0.0 0.8 0.0 113.2 0.0 0.9 Recreational Government 18.7 50.7 0.2 0.3 15.7 19.0 0.2 0.1 Other Services 4,888.9 11,512.6 45.0 58.1 3,654.6 6,669.5 46.3 51.3 Total 10,864.1 19,808.2 100.0 100.0 7,890.2 13,005.7 100.0 100.0 LIBYA Exports Imports 2005 2011 Share Share 2005 2011 Share Share Services ($ mn) ($ mn) (%, 2005) (%, 2011) ($ mn) ($ mn) (%, 2005) (%, 2011) Travel 250.0 n.a. 46.8 n.a. 680.0 2,269.1 28.9 51.2 Transport 116.0 27.4 21.7 90.1 1,016.0 1,034.0 43.3 23.3 Communications 10.0 3.0 1.9 9.9 43.0 10.2 1.8 0.2 Computer and Information n.a. n.a. n.a. n.a. 50.0 n.a. 2.1 n.a. Construction n.a. n.a. n.a. n.a. 149.0 41.2 6.3 0.9 Insurance Services 43.0 n.a. 8.1 n.a. 160.0 248.9 6.8 5.6 Financial n.a. n.a. n.a. n.a. 20.0 n.a. 0.9 n.a. Royalties and License Fees n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Personal, Cultural and n.a. n.a. n.a. n.a. 10.0 n.a. 0.4 n.a. Recreational Government 115.0 n.a. 21.5 n.a. 221.0 831.6 9.4 18.8 Other Services 168.0 3.0 31.5 9.9 653.0 1,131.9 27.8 25.5 Total 534.0 30.4 100.0 100.0 2,349.0 4,435.0 100.0 100.0 SYRIA Exports Imports 2005 2010 Share Share 2005 2010 Share (%, Share Services ($ mn) ($ mn) (%, 2005) (%, 2010) ($ mn) ($ mn) 2005) (%, 2010) Travel 1,944.0 6,190.1 66.8 84.4 550.0 1,509.8 23.3 42.7 Transport 218.0 529.2 7.5 7.2 1,401.0 1,595.0 59.4 45.1 Communications 185.0 140.7 6.4 1.9 117.0 34.5 5.0 1.0 Computer and Information 86.0 39.4 3.0 0.5 100.0 35.0 4.2 1.0 Construction 14.0 8.1 0.5 0.1 n.a. 12.5 n.a. 0.4 Insurance Services n.a. 12.3 n.a. 0.2 35.0 121.4 1.5 3.4 Financial 28.0 67.2 1.0 0.9 38.0 13.5 1.6 0.4 Royalties and License Fees n.a. 1.4 n.a. 0.0 12.0 36.6 0.5 1.0 Personal, Cultural and 85.0 52.0 2.9 0.7 21.0 18.6 0.9 0.5 Recreational Government 350.0 292.7 12.0 4.0 85.0 96.3 3.6 2.7 Other Services 748.0 613.8 25.7 8.4 408.0 368.4 17.3 10.4 Total 2,910.0 7,333.0 100.0 100.0 2,359.0 3,533.1 100.0 100.0 (continued on next page) 116 Over the Horizon: a New Levant Table 34 Composition of Services Trade in Selected MENA Economies 2005–2011 (continued) TUNISIA Exports Imports 2005 2011 Share Share 2005 2011 Share Share Services ($ mn) ($ mn) (%, 2005) (%, 2011) ($ mn) ($ mn) (%, 2005) (%, 2011) Travel 2,142.7 1,914.3 55.3 41.4 373.8 606.6 17.7 19.1 Transport 1,135.9 1,355.1 29.3 29.3 1,106.8 1,618.8 52.5 50.9 Communications 64.4 380.4 1.7 8.2 37.8 95.4 1.8 3.0 Computer and Information 134.4 116.4 3.5 2.5 82.5 80.6 3.9 2.5 Construction 151.0 358.2 3.9 7.8 196.5 307.5 9.3 9.7 Insurance Services 40.8 61.0 1.1 1.3 128.7 217.6 6.1 6.8 Financial 57.7 65.7 1.5 1.4 50.1 58.2 2.4 1.8 Royalties and License Fees 25.7 26.4 0.7 0.6 7.7 12.1 0.4 0.4 Personal, Cultural and 3.7 9.0 0.1 0.2 6.2 5.1 0.3 0.2 Recreational Government 120.5 331.9 3.1 7.2 116.4 176.0 5.5 5.5 Other Services 598.2 1,348.9 15.4 29.2 625.9 952.5 29.7 30.0 Total 3,876.8 4,618.3 100.0 100.0 2,106.5 3,177.8 100.0 100.0 TURKEY Exports Imports 2005 2012 Share Share 2005 2012 Share Share Services ($ mn) ($ mn) (%, 2005) (%, 2012) ($ mn) ($ mn) (%, 2005) (%, 2012) Travel 18,152.0 23,441.0 67.8 55.4 2,872.0 4,052.0 24.5 19.8 Transport 5,076.0 13,381.0 19.0 31.6 5,146.0 8,605.0 43.9 42.0 Communications 412.0 428.0 1.5 1.0 154.0 299.0 1.3 1.5 Computer and Information 194.0 302.0 0.7 0.7 538.0 1,915.0 4.6 9.3 Construction 882.0 1,343.0 3.3 3.2 8.0 342.0 0.1 1.7 Insurance Services 323.0 947.0 1.2 2.2 891.0 1,321.0 7.6 6.4 Financial 345.0 532.0 1.3 1.3 386.0 1,177.0 3.3 5.7 Royalties and License Fees n.a. n.a. n.a. n.a. 439.0 740.0 3.7 3.6 Personal, Cultural and 1,079.0 1,218.0 4.0 2.9 90.0 336.0 0.8 1.6 Recreational Government 320.0 752.0 1.2 1.8 1,194.0 1,717.0 10.2 8.4 Other Services 3,555.0 5,522.0 13.3 13.0 3,700.0 7,847.0 31.6 38.3 Total 26,783.0 42,344.0 100.0 100.0 11,718.0 20,504.0 100.0 100.0 (continued on next page) these questions, a regression analysis was done: plotting, Levant countries, the correlation is negative. For exam- for each country of interest, the growth of the coun- ple, the sectors “other business services” and “computer try’s export share of each service sector, and the world and information services” are experiencing high world growth rate of each service sector.100 Ideally the correla- tion between the two indicators would be positive, as 100 To capture as many observations as possible, the growth rate of this would suggest potential for the rest of the world to each service sector in the average levels of the years 2000 to 2002 “pull” these countries’ export sectors. However, for all and 2005 to 2008 was considered. TRADE IN SERVICES 117 Table 34 Composition of Services Trade in Selected MENA Economies 2005–2011 (continued) PALESTINIAN TERRITORIES Exports Imports 2005 2010 Share Share 2005 2010 Share Share Services ($ mn) ($ mn) (%, 2005) (%, 2010) ($ mn) ($ mn) (%, 2005) (%, 2010) Travel 118.7 667.0 38.7 80.1 254.1 577.5 50.4 50.5 Transport 6.8 22.6 2.2 2.7 72.4 91.9 14.4 8.0 Communications 25.4 39.0 8.3 4.7 62.2 36.3 12.3 3.2 Computer and Information 59.4 11.1 19.4 1.3 56.9 70.6 11.3 6.2 Construction 38.8 25.5 12.6 3.1 2.9 4.7 0.6 0.4 Insurance Services 0.0 5.5 0.0 0.7 6.5 14.9 1.3 1.3 Financial n.a. n.a. n.a. n.a. 0.5 1.2 0.1 0.1 Royalties and License Fees 0.0 5.5 0.0 0.7 2.7 0.3 0.5 0.0 Personal, Cultural and 4.9 5.5 1.6 0.7 11.5 84.4 2.3 7.4 Recreational Government 28.4 49.2 9.3 5.9 33.9 261.1 6.7 22.8 Other Services 157.0 141.2 51.2 17.0 177.1 473.3 35.1 41.4 Total 306.5 832.6 100.0 100.0 504.1 1,142.8 100.0 100.0 Source: IMF BOP Statistics; author’s calculations. growth rates. Yet for most of the Levant countries, the countries (Egypt, Iraq, Jordan, Lebanon, Syria, Turkey, export shares in these sectors are low. In contrast, the and the Palestinian Territories) have a comparative ad- sectors in which these countries have large export shares vantage in the export of travel services. In addition, trans- are the sectors experiencing low world growth, including port services stand out as a sector where Egypt, Jordan, travel and transport services. Furthermore, for each Le- and Turkey possess a revealed comparative advantage in vant country, plotting the growth in the country’s export exporting. Besides travel services, Lebanon has compar- share of each trading partner against the world import ative advantages in financial sector, construction, and growth rate of each trade partner shows that the correla- computer services exports. Comparative advantage is a tion between the two proxies is negative, suggesting that for each country, services are exported to destinations 101 with low growth in services demand. The Levant coun- The RCA index measures the share of a sector’s exports in a coun- try’s total services exports relative to the share of that sector’s ex- tries’ positive balance is driven by traditional services, ports in the comparator’s (here ROW) total services exports. particularly travel, while the trade balance in modern RCA = [Xik/Xit]/[Xnk/Xnt] services is negative. where X represents exports, i is an exporting country, k is a services Despite demand side issues, the Levant countries sector, t is the sum of all sectors and n is a set of other countries have revealed comparative advantages in services ex- usually the rest of the world (ROW). 102 ports. To assess the Mashreq countries’ competitiveness The RCA compares the share of exports of a country in world ex- ports with the average share of exports of all countries in the world in services vis-à-vis the rest of the world (ROW), Table exports for a particular services sector. An RCA index above one 35 reports their Revealed Comparative Advantages101 therefore indicates that a country has a share of services exports (RCAs). An RCA value in excess of one suggests a com- in a particular services sector that is higher than the global share of exports in that same service sector, and is considered to have a parative advantage in exporting the service concerned.102 revealed comparative advantage in that sector. The higher the ratio, The results presented in Table 35 suggest that the Levant the more competitive is the country in the given sector. 118 Over the Horizon: a New Levant Table 35 Revealed Comparative Advantages in Service Exports (2010) Sector/Country Egypt Iraq Jordan Lebanon Libya Syria Tunisia Turkey Palestinian Territories Algeria Morocco Communication 0.6 0.1 0.0 0.4 0.4 0.3 0.8 0.2 0.6 0.6 0.9 Computer 0.3 0.2 0.5 1.3 0.0 0.0 0.1 0.0 0.1 2.9 0.7 Construction 1.4 0.0 0.0 1.7 0.0 0.1 4.0 1.5 1.4 2.4 0.2 Financial 0.1 0.1 0.0 2.0 0.0 0.1 0.2 0.2 0.0 1.0 0.0 Insurance 0.2 0.1 0.0 0.2 10.1 0.1 0.6 1.1 0.4 1.2 0.6 Royalties and 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.0 0.0 license fees Transport 2.0 0.8 1.2 0.2 3.8 0.4 1.6 1.6 0.2 1.3 0.9 Travel 2.7 3.0 3.3 2.5 0.7 4.3 2.4 3.1 4.1 0.3 2.3 Source: IMF BOP Statistics; author’s calculations. dynamic process. The determinants that shape compar- the purposes of this study to evaluate Levant countries’ ative advantage, and therefore productivity, are founded bilateral trade relative to their services trade potential.104 in countrywide variables in which firms in specific ser- Gravity services trade model estimates indicate that the vices sector can capitalize. Yet it is important to note that estimated potential export volumes predicted by struc- policy regulations could also play a role in determining tural trade determinants in the Levant region are close comparative advantage for services. to or lower than the realized intra-regional trade values One setback is that the Levant economies are between 2005 and 2009. The results (Table 36) show not strongly linked in bilateral services trade. For ex- that Egypt is under-exporting with Turkey, and Turkey ample, although Turkey’s imports from Syria reached is under-exporting with Egypt. At the same time, trade US$153 million in 2007, this represented only 0.5 per- cent of Turkey’s total services imports for the year. Simi- 103 larly, Turkey’s services imports from Egypt was minimal Trade Intensity Indexes (TII) is used to measure a country’s relative share of exports to a particular country compared to the rest of the over the last decade, representing 0.2 percent of Turkey’s world’s share of exports to this country. A large index number sug- services imports in 2011. The analysis suggests that link- gests the trade between a country and its partner is more intense ages through services trade between Turkey and the oth- than trade with the country and the rest of the world. Specifically, the TII between exporter i and importer j is calculated as: er countries of interest are not that strong considering x i,j Turkey’s bilateral imports from outside the region. On TIIi , j = xi x w ,j the other hand, Turkey’s services exports to Egypt was xw US$5.8 million 2011 (0.01 percent of Turkey’s total ser- where x i , j is exports from i to j, x i is total exports of i, x w , j is exports vices exports and 0.04 percent of Egypt’s total services from the world to j, and x w is total world exports. 104 The regression model used is as follows: Bilateral exports were re- imports). Services trade intensity for these two countries gressed for 2005–2009, in average, on the following country-spe- confirms that trade between Egypt and Turkey has an cific and bilateral characteristics: log of distance, dummy variables extremely low intensity compared to trade with the rest for contiguity, common language, common colonial power, and log of GDP of exporter and importer to proxy for economic mass. of the world.103 The structural determinants for each pair of countries together In fact, Turkey and Egypt are under-exporting with the estimated regression coefficients are used to compute the with each other in trade services, which may suggest the bilateral trade potentials. The empirical framework makes it possi- ble to categorize bilateral exports as over-traded or under-traded, existence of untapped potential between these coun- depending on the comparison between realized bilateral export tries. A cross-country gravity model was estimated for values and the model’s predictions. TRADE IN SERVICES 119 Table 36 | Gravity Model of Trade in Services Figure 48 Overall Services Trade Restrictiveness Index Dependent variable: Dyadic coefficient log(export value) Coefficient estimates estimates Iran, Islamic Rep. 62.2 log(distance) –0.659*** –0.874*** (0.022) (0.024) Egypt, Arab Rep. 51.8 Contiguity 0.776*** 0.758*** Tunisia 43.7 (0.122) (0.093) Lebanon 41.1 common language 1.081*** 0.533*** (0.065) (0.053) Jordan 40.5 common colonial power –0.122 0.516*** Algeria 37.4 (0.094) (0.077) Yemen, Rep. 30.6 log(importer GDP) 0.727*** (0.009) Turkey 24.5 log(exporter GDP) 0.738*** Morocco 20.7 (0.009) W Observations 7,817 8,583 Overall STRI Adjusted R-squared 0.609 0.791 Source: World Bank WDI, World Bank Trade in Services Database, and CEPII. Source: World Bank Services Trade Restrictions Database. Note: Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. Note: Services Trade Restrictions Index (STRI) ranges from 0 (fully open) to 100 (closed). between Israel and three Levant countries is lower than ‘global’ STRI average encompassing all 102 countries, predicted. Israel is under trading in services with Jordan, Turkey exceeds the world average, in several instances by Egypt, and Lebanon. a considerable margin. Turkey stands out as more open There are services trade complementarities suggest- than other Levant countries. This is largely as a result of ing that some countries’ export structure matches the im- its overall greater level of development and integration port structure of another country. Computing a services into world markets. Meanwhile, Egypt stands out for the trade complementarity index105 can help identify markets high level of restrictiveness of its applied regulatory re- with which a country has an export potential. The index gimes in services. looks at whether a potential importer buys services that Jordan has the lowest level of restrictiveness in a country exports abroad by measuring how well the ex- cross-border supply. Figure 49 shows the policy stance port structure of one country matches the import structure taken by sample countries in regard to cross-border trade of another country.106 The results suggest that, between 2008 and 2010, Turkey’s trade complementarity with Leb- 105 The index is based on bilateral exports and imports at the disaggre- anon, Syria and Iraq increased. Also Jordan’s trade com- gated services sectoral level that are then aggregated into a single index for each country pair. The index number varies between 0 plementarity with Syria increased during the same period. and 100. The higher the index number, the higher is the potential for that country to export to the other market. 106 Specifically, the TCI between exporter i and importer j is calcu- Services Trade Policy lated as: ⎛ xi , p mj,p ⎞ ⎜ xi − Mj ⎟ Egypt, Lebanon, and Jordan have high level of restric- TCI i , j = ⎜ 1 − ∑ p ⎟ ∗ 100 ⎜ 2 ⎟ tiveness in services trade compared with world averag- ⎜ ⎝ ⎟ ⎠ es. Figure 48 provides a comparison of the overall restric- where xi , p is exports from i in product p, xi is total exports of i, tiveness of services trade policies. As measured against the m j , p is imports of j in p, and M j is total imports of j. 120 Over the Horizon: a New Levant Figure 49 Services Trade Restrictiveness Index Figure 50 Services Trade Restrictiveness Index (Mode 1: Cross-Border Supply) (Mode 3: Commercial Presence) All Sectors All Sectors Jordan 13.98 Morocco 16.67 Yemen 19.11 Turkey 26.68 Egypt 24.04 Yemen 29.52 Turkey 30.73 Algeria 33.03 Lebanon 33.61 Tunisia 45.4 Iran 41.03 45.74 Lebanon (Islamic Republic of) Morocco 44.83 Jordan 47.89 Algeria 52.52 Egypt 54.85 Tunisia 59.05 Iran 65.49 (Islamic Republic of) 0 10 20 30 40 50 60 70 0 10 20 30 40 50 60 70 Source: World Bank Services Trade Restrictions Database. Source: World Bank Services Trade Restrictions Database. Note: STRI ranges from 0 (fully open) to 100 (closed). Note: STRI ranges from 0 (fully open) to 100 (closed). in services (GATS Mode 1).107 The data reveal wide vari- states typically enjoy over foreign established firms. Such ance across the sample set, with Tunisia, a country that a stance attests in all likelihood to political economy de- has paradoxically devoted considerable attention in pro- mands for continued protection in sectors subject either moting itself as a destination for FDI in computer and to high degrees of market concentration in the presence other IT-related services, maintaining a highly restrictive of weak competition regimes or to the dominant pres- regime on cross-border supply. The significantly lower ence of state-owned actors in key service sectors. level of restrictiveness observable in Jordan and Egypt is more in line with both countries’ emergence as increas- ingly competitive regional and global suppliers of higher Promoting labor mobility within the value-added IT and telecommunications services. Levant and beyond Services trade restrictiveness is high for GATS The Levant countries have highly restrictive regulatory Mode 3—commercial presence. Figure 50 reveals poli- regimes governing the temporary mobility of services cy regimes affecting commercial presence (Mode 3 trade in services). The data shows that, apart from Turkey (an OECD member), most Levant countries for which 107 Services have unique characteristics that greatly affect their trad- data is available direct medium to high levels of restric- ability, including intangibility and non-storability, but typically they also require differentiation and joint production. In order to tions towards what is arguably the most important and capture these aspects, the World Trade Organization defines trade developmentally value-adding mode of contesting ser- in services to span four modes of supply. Mode 1, or cross-border vices markets. What’s more, several MENA countries trade, is services supplied from the territory of one country into the territory of another. Mode 2, or consumption abroad, is services stand out in maintaining policy regimes that are more supplied in the territory of a nation to the consumers of another. restrictive towards services supplied through FDI than Mode 3, or commercial presence, is services supplied through any on a cross-border basis. This is somewhat paradoxical type of business or professional establishment of one country in the territory of another, for example, foreign direct investment. and not in sync with general trends observed elsewhere And finally, Mode 4, or presence of natural persons, is services given the greater policy and regulatory leverage that host supplied by nationals of a country in the territory of another. TRADE IN SERVICES 121 providers. There is strong evidence showing that labor Figure 51 Services Trade Restrictiveness Index market restrictions are imposing a much greater burden on (Mode 4: Movement of Natural Persons) All Sectors the global economy than the remaining trade restrictions. The gains from integration—in goods, capital and peo- Morocco 60 ple—are based on harnessing economic advantage from Jordan 60 differences in endowments. While GATS Mode 4 suppli- Algeria 65 ers are typically subjected worldwide to the most acute Lebanon 80 regulatory hurdles, the level of restrictiveness in the sam- Iran 80 (Islamic Republic of) ple countries attests to a region of highly fragmented labor Tunisia 85 markets, weak employment performance, high unemploy- Turkey 95 ment, particularly among skilled youth, reflecting in turn Egypt 95 a structural mismatch between labor market needs and the Yemen 100 supply of skills emanating from tertiary educational insti- 0 20 40 60 80 100 120 tutions throughout much of the region. The Levant, like Source: World Bank Services Trade Restrictions Database. MENA more broadly, is characterized by the paucity of Note: STRI ranges from 0 (fully open) to 100 (closed). mutual recognition initiatives aimed at facilitating the mo- bility of skilled professionals. Egypt and Turkey stand out for the high level of restrictiveness of their applied regula- Given the geographic proximity and historical migration tory regimes in movement of natural persons (see Figure trends, there are potential demographic benefits of in- 51). For a deeper regional integration in the services trade, creased mobility between Europe and within the Levant. the Levant countries should make significant cooperation There is a narrow window of opportunity to design and liberalization efforts on labor mobility issues. and implement the necessary regional labor mobility Demographic forces provide “arbitrage” oppor- and integration policies. Given the experiences of other tunities for the Levant where skilled labor can move developing regions (such as Latin America or Eastern Eu- as part of services trade or FDI skills-transfer to fa- rope), it will not be too long before the MENA countries cilitate economic integration. The Mediterranean area complete their demographic transitions. From around is in a critical stage in terms of regional integration of 2040, the fertility and population growth are projected labor markets. Many countries in Europe are facing rap- to decline. It is important to act now and implement idly aging populations, which will be accompanied by mechanisms that would allow the movement of work- shrinking labor forces in the next decade. The projected ing-age people within the Levant and to the European changes in the population structures of Western Europe countries within the next two decades. suggest that the region will be facing labor shortages There are several relatively demographic and mi- as early as 2025. Even though most of them have en- gration patterns that are influencing the current labor tered their own demographic transitions with declining market patterns in regional labor force flows. The larg- fertility rates, most countries of Southern and Eastern est countries in the region in terms of populations are Mediterranean still have relatively young and educated Egypt and Turkey. Their current populations are estimat- populations who are facing bleak labor market prospects. ed to be around 82 and 74 million respectively. Turkey has These current diverging patterns are creating unique wel- entered the demographic transition of declining fertility fare enhancing “arbitrage” opportunities for the region rates much earlier where the current rate is at 2.05. As of where skilled labor can move as part of services trade or 2050, the gaps will increase and their populations are pro- FDI skills-transfer to facilitate economic integration. jected to be 122 and 94 million respectively. The decline 122 Over the Horizon: a New Levant in the Egyptian rate is more gradual and is currently at MENA are not conducive to the critical skills requested 2.8. It is projected to reach 2.1 in 2050. Although Egypt’s for innovation in the knowledge economy (World Bank migration rate to the EU is low compared to its Maghreb 2009). MENA countries should call for an urgent ad- neighbors (around nine percent of Egyptian migrants justment of training programs. Lebanon has the highest are in EU countries), it is high in absolute terms, with skilled migration ratio in the Levant with over 35 per- about 200,000 migrants in the EU in 2000. The major- cent of tertiary educated workers abroad. ity of Egyptian migrants (55 percent) are low skilled but Regional cooperation helps create opportunities almost 30 percent have higher education. Turkey sends for better-managed cross-border labor movement over 95 percent of their migrants to Europe whereas the (in the context of high unemployment, in particular rate is around 60 percent for other Levant countries. The among the youth) and for sharing the cost of educa- second most important destination is the United States tion. It is necessary to perform a detailed labor market attracting 38 percent of migrants from Jordan. Australia analysis for every country to clearly identify where the and New Zealand are the destinations for a large share of shortages, surpluses, and bottleneck are in terms of pro- migrants from Lebanon (23 percent), Egypt (15 percent), fessions, skills, or vocations so that immediate policies and Iraq and Syria (10 percent). In terms of specific desti- can be implemented when the right opportunities arise. nations, colonial and other historical bonds play a critical In the case of a deeper regional integration, temporary role. Germany is home to the largest number of Turk- migration schemes could be adopted that have built-in ish migrants due to special agreements from the 1960s. mechanisms that guarantee return migration. Netherlands is another important destination for Turkish Labor mobility must be managed within a regional migrants. Great Britain receives migrants from Lebanon, framework where the sending and receiving countries co- Egypt, and Iraq. Of course, large numbers of migrants ordinate their policies and actions so that efficiency gains from the region also work as temporary migrants in the are maximized for all parties involved while the potential oil-rich Persian Gulf countries. This is important for Le- distortions and disruptions are minimized. Coordination vant countries, especially Egypt, Jordan and Lebanon. is crucial to construct a viable legal framework which will Levant countries will need to strengthen skills to achieve multiple objectives: (i) help to prevent concerns benefit from regional integration opportunities. Trade about undocumented migration which is one of the main in services and FDI follow require high-skilled migration. sources of political opposition in Europe to any relaxation However, piecemeal evidence suggests that young Arab of migration restrictions; (ii) lead to stronger protection to workers don’t seem competitive in business services and the migrants’ rights, including social protection and pen- high-value added industries. Despite impressive achieve- sions; and (iii) lower all transactions and implementation ments in access to education at all levels of instruction costs required to establish and maintain labor mobility over the last 40 years, MENA countries’ educational at- agreements which can be significant if done unilaterally. tainment remains low compared to East Asian and Latin Despite the technical and conceptual limitations American countries at similar levels of economic devel- of the GATS Mode IV, it remains the only collective ac- opment (World Bank 2009b). Most MENA countries tion response to the area of labor migration governance have not yet reached the level and quality of human capi- that tries to trans-nationalize some elements of national tal of the more dynamic emerging economies. Education migration regimes. It is therefore worth preserving and systems in MENA countries are biased towards human- empowering this mechanism. One way to do so would be ities and social sciences at the expense of technical, scien- to move the focus towards “contract based” movement of tific, or business training. Beyond the choice of curricula, service suppliers rather than employment based movement there is also evidence that higher education systems in (which tends to raise sensitivities about foreign workers TRADE IN SERVICES 123 having access to domestic labor markets and ultimate- Figure 52 Situating “Mashreq+” in the World: STRI ly residence and citizenship). The advantage of contract by Regional Groupings All Sectors and Modes of Supply based movement is that it would help make temporari- ness more credible as contracts would be time bound and GCC 50.52 between firms; it would allow workers to be hired based SAPTA 43.86 ASEAN 43.8 on competence and performance. An impressive benefit Mashreq+ 42.46 of contract-based movements would also be the reduced COMESA 38.02 SADC 34.04 incentives to under employed workers. If pursued on a sec- EAC 27.98 tor-by-sector basis they even offer the opportunity to im- TPP 25.05 ECOWAS-5 23.9 prove education policies in source countries so as to align MERCOSUR 23.76 with the labor market needs of the labor receiving markets. NAFTA 22.93 CAFTA 20.23 OECD 19.44 EU 17.57 Situating the MENA Region Globally in ANDEAN Community 13.68 Services Regulation 0 10 20 30 40 50 60 Source: World Bank Services Trade Restrictions Database. The sub-region’s overall performance is contrasted to Note: STRI ranges from 0 (fully open) to 100 (closed). that of leading regional integration zones. Figure 52 sit- uates the Levant (Egypt, Iraq, Jordan, Lebanon, Syria, cross-sectoral uniformity, with the “Mashreq+” ranking Turkey, and the Palestinian Territories) combined with across all 9 sectors108 covered by the World Bank’s STRI outer circle countries (Libya and Tunisia), as “Mashreq+ data set among the most restrictive groupings. In all sec- countries,” against the world’s leading economic integra- tors but banking, where it ranks fourth, the Mashreq+ tion zones, comparing prevailing levels of services sector constitute the world’s third most restrictive regional restrictiveness across them. Figure 52 depicts a sub-re- grouping, with restrictiveness levels highest in air trans- gion that ranks among the world’s most restricted in port (international passenger services) and professional services trade, with an aggregate level of restrictiveness services (accounting, auditing and legal services) and across all sectors and modes of supply roughly in line arguably too high in the telecommunications sector, with those found in South- (South Asian Association for both fixed and (especially) mobile, given the sector’s im- Regional Cooperation—SAPTA) and South-East (As- pact on economy wide performance and its critical role sociation of South-East Asian Nations—ASEAN) Asia. both to supply chain management and product innova- The fact that the Gulf Cooperation Council, a regionally tion in IT-related services. proximate grouping to which the bulk of labor migra- A useful point of departure in determining the op- tion emanating from MENA countries is directed, ranks timal stance of domestic policy regimes is to perform as the world’s most restrictive services market is clearly a trade-related audit of Levant regulatory regimes in problematic, as greater openness in the high-income and services. One primary purpose for an audit is to help service-hungry GCC could offer significant new export governments benchmark domestic practices against best opportunities for service providers from the MENA re- gion. There is a clear need for greater efforts towards ser- 108 vices liberalization in the region. Cross-regional STRIs are analyzed: banking, insurance, fixed tele- communications, mobile telecommunications, retail distribution, Sectoral performances tell a similar story. STRIs international air passenger services, international maritime trans- by sectors and regional groupings tell a story of significant port services, accounting and auditing, and legal services. 124 Over the Horizon: a New Levant regional or global standards and identify gaps in regula- are relatively more important, backward linkages in ser- tion potentially associated with sectoral bottlenecks. An vices sectors are not negligible for the countries of in- important derivate benefit of such audits, particularly if terest. If enhanced integration in services will increase they are conducted across the region within a common services exports for the countries in the region, then this methodological framework, lies in their ability to iden- will have spillover effects to other sectors of the economy tify trade and investment restrictions in services markets for which these services sectors demand. whose sectoral incidence, level, or nature may be com- Thus having a vibrant services sector is important mon to many countries, thus paving the way to formu- for regional trade and integration, above and beyond la-based approaches to market opening, for instance in purely services trade. The direct and indirect value add- air transport or auxiliary maritime services, or in regard ed contributions (forward linkages) of the services sectors to entry-inhibiting quantitative restrictions such as eco- to the economy are analyzed for the Levant. The linkages nomic needs tests, nationality requirements, or foreign of the services sector with the rest of the economy reveal equity limitations. Annex 29 provides details of perform- that the largest services contributions are from trade and ing trade-related regulatory audits in services. transport services. Examining the role of services inputs for manufacturing in terms of value added reveals that forward linkages of services accounted for between one Services trade is crucial to further quarter and two fifths of the total forward linkages in integrate the region manufacturing in 2007. The exception is Egypt, which is closer to 10 percent. Not only are services an important component of the Looking ahead, it will be rewarding for the Levant economy and can directly enhance regional integration economies to invest in the service economy. A priority through bilateral trade, they also constitute an import- for policy makers should be the diversification of the ser- ant input for other export sectors. Services contribute vices sector, in particular towards modern and more so- to each country’s export competiveness in other sectors phisticated services. Eliminating domestic impediments of the economy through forward linkages. If enhanced that may be holding back the development of modern regional integration will increase exports of manufac- and sophisticated services may benefit growth and region- turing or agricultural goods, then a competitive services al integration, not only in services but also in the down- sector is necessary for any country wanting to reach this stream manufacturing sector, owing to the strong forward export potential. In addition, although forward linkages linkages of services in most countries in the region. THE ROLE OF THE 5 FINANCIAL SECTOR IN ECONOMIC INTEGRATION OF THE LEVANT A n analysis of financial services trade in the sub-region reveals that Lebanese and Jordanian finan- cial institutions have the potential to grow further. Development of cross-border financial services activities exhibits a rather more asymmetric picture than that of merchandise trade activities be- tween Turkey and MENA region. There are eight fully licensed MENA-origin banks now operating in Turkey. These banks are headquartered in Lebanon, Jordan, Libya, and the GCC region. It is especially noteworthy that Lebanese and Jordanian financial institutions are the most active in regional activities. The activities of these banks demonstrate trade-in-services opportunities from increased regional economic activity for those economies of the region that have relatively less natural resource endowment. These banks also play an important intermediary role between the large capital pool in the Gulf area and the biggest economy of the region, which has a considerable current account deficit. All of these observations reveal substantial and multi-dimensional benefits accruing to all sides from enhanced economic linkages between Turkey and MENA region. Proceeding with necessary financial sector reforms trade volumes. However, financial sectors lack depth and as well as maintaining of macro-financial frameworks breadth virtually all across the region. The systems main- which are conducive to support the reform process is es- ly consist of commercial banks, since non-bank finan- sential. Financial institutions of the region provide fairly cial services are underdeveloped. Consequently, financial adequate payment related services such as foreign ex- backing of trade transactions is weak. Financial markets change and fund transfers services to support the current in the region have not yet reached to maturity. The lack 125 126 Over the Horizon: a New Levant of cross-border financial intelligence services and effec- The Level of Financial Liberalization in tive contract enforcement mechanisms also render prop- the Sub-Region er risk assessment very difficult, if not impossible. Thus, provisioning of cross-border trade credit becomes scarce The level of financial systems liberalization is uneven as well. It should also be noted that financial prices in in the region. For purposes of this work, fully liberal- many countries are hardly market determined. Although ized financial systems are defined as those systems that the mechanisms employed to set these prices provide allow markets determine all financial prices and there some sort of stability, the possibility and/or probabili- are no obstacles to financial flows of any kind.109 Giv- ty of relatively large discrete movements in key financial en the level of financial sector development, especially prices brings about another element of risk for financial the dominance of the banking sector, it would be prac- market participants. tical to examine the level of liberalization in the region This chapter focuses on financial sectors in MENA with respect to the level of liberalization in the following countries (except the countries in the Gulf and Arabi- markets and transactions: (i) interest rates; (ii) exchange an peninsula) plus Turkey with an objective of finding rates; (iii) current account transactions; and (iv) capital out how financial institutions of these countries can account transactions. Table 37 provides a comparative help to establish deeper economic ties in the region, picture of the level of liberalization in each of the coun- using current trade relations as a starting point. Un- tries of the region. derstanding the dynamics of how current trade relations Interest rates and exchange rates are subject to may influence the behavior of financial institutions given some control mechanisms in virtually all the countries the level of financial sector development in the region of the region except Turkey. Central banks have been us- is essential. There is a considerable degree of experience ing rather straightforward and traditional tools to set up in the expansion of financial services in the region. Es- these key prices. Given the high level of dollarization in pecially, Lebanese and Jordanian banks are actively pur- many of the economies of the region, these policies have suing opportunities beyond the borders of their home provided significant stability.110 However, simultaneous countries. There are different types of complementarities pegs to the same currency create significant arbitrage op- between the countries of the region from the financial portunities. These opportunities ultimately create some sector point of view. For example, countries like Turkey, sort of convergence in interest rates in an environment Egypt, Syria, and Iraq have large markets and thus big- that is free of capital controls. Consequently, monetary ger volumes of business and are trying to attract capital. authorities and prudential regulators must resort to vari- Countries like Jordan and Lebanon have more estab- ous measures to influence lending rates as well as to con- lished linkages, experience in regional activities, and hu- trol macroeconomic conditions. man resources, but also have small economies. Countries Lending spreads exhibit a significantly different like Libya, Algeria and Iraq have important carbon reve- picture. The difference in lending spreads in Lebanon, nues and can have large liquidity that need to be invest- Jordan, Syria and Egypt where effectively a dollar peg ed abroad. Regionalized financial institutions with good is used is quite striking. In fact, the spread in Jordan is oversight can bring together all these complementarities for the benefit of the region as a whole. Therefore, coor- 109 Financial flows that need to be intercepted due to legitimate dination with regulatory authorities, harmonization of AML–CFT considerations are not included. 110 regulatory practices, and linking of financial sector in- Some may argue that these policies also perpetuate dollarization. However, these issues are not within the scope of this document. frastructures seem to be sensible policy choices for the These are merely mentioned to give an accurate picture of the mac- regional authorities. roeconomic environment in which financial institutions operate. THE ROLE OF THE FINANCIAL SECTOR IN ECONOMIC INTEGRATION OF THE LEVANT 127 Table 37 Comparative Picture of Financial Liberalization in the Region Interest Rates Exchange Rates Current Account Capital Account Turkey 9 9 9 9 Iraq 9 9(with few rest.) Syria 9(managed) No No Jordan 9(managed) dollar pegged 9 9 Lebanon 9(managed) dollar pegged 9 9 Egypt 9(managed) managed float 9(with few rest.) 9(with few rest.) Libya Tunisia 9(managed) managed float 9 9(with few rest.) Algeria basket pegged 9 9(with few rest.) Morocco basket pegged 9 9(with few rest.) Note: The above table is constructed based on the latest published IMF Article IV consultation reports. Check mark indicates liberal state. almost three times that of Lebanon (Figure 53).111 Sim- Figure 53 Lending Spreads (in percentage points) ilarly, there are significant differences in lending spreads 8 in Maghreb countries where, for all practical purposes, a 7 euro peg is implemented. 6 While it cannot be said with certainty that dis- 5 cretionary authority over key financial prices in the 4 region has so far presented itself as a constraining 3 factor for financial flows, it is nonetheless a factor of 2 concern to decision makers. The predictability (and 1 0 therefore credibility) of monetary authorities, especially Algeria Egypt Iraq Jordan Lebanon Libya Morocco Syria Tunisia Turkey in countries where serious current and capital account deficits occur, becomes crucial to ensure the smooth flow of funds in and out of the region Source: Compiled from the reports of national regulators. region. However, this would not be an accurate conclu- Financial Depth sion as there are significant macroeconomic differences, both in terms of macro balances and monetary policy The level of monetization in the region is not much stand, which give rise to a significantly different level of except the relatively highly monetized economies of broad money supply levels. In fact, the picture is quite Lebanon and Jordan. In fact, as shown in Figure 54, different than a simple M2/GDP ratio indicates, even if GDP weighted M2/GDP ratio for the region is about macroeconomic differences are set aside. 70 percent. It is interesting to note that the M2/GDP ratio in Turkey is well below the regional average. In fact, 111 it is the lowest in the region. Based on this measure, one The difference in lending spreads cannot be attributed solely to monetary authorities’ actions to influence lending rates. Given the may be tempted to conclude that Turkish financial depth efforts of these authorities to influence interest rates, the resulting is considerably less compared to other countries of the differences in lending spreads are however, noteworthy. 128 Over the Horizon: a New Levant Figure 54 Situating “Mashreq+” in the World: STRI compared with Lebanon Jordan and Libya. While Tur- by Regional Groupings key’s economy represents about 47 percent of total GDP All Sectors and Modes of Supply of the region, its banking system holds about 36 percent 300% of total banking assets of the region, 41 percent of total 250% deposits and about 47 percent of total credit. Therefore, 200% Turkey’s banking system has relatively less assets and de- 150% posits compared to its share in regional GDP but the 100% total credits in the country’s banking system is about the 50% same as its share of the regional GDP. 0% Private sector credit is extremely low in many Turkey Iraq Syria Jordan Lebanon Egypt Libya Tunisia Algeria Morocco countries of the region. In fact, private sector credit in half of the countries of the region is less than thirty per- M2/GDP cent of their GDP (Figure 56). It should also be noted Source: World Bank World Development Indicators. private sector credit in Turkey,112 despite its relatively high share in total domestic credit, is considerably lower than that of Lebanon, Jordan, Tunisia and Morocco. Lebanon, Jordan and Libyan systems hold more total assets than their total share in the region’s GDP, almost four times for Lebanon and about twice as Regulatory Architecture much for Jordan. An examination of key financial ag- gregates reveals a comparative picture. Figure 55 shows Financial systems of the region are primarily regulated the regional share of each country in key financial ag- by central banks. All banking regulators in the region gregates as well as each country’s share in total regional are central banks except in Turkey where an autonomous GDP. The figures for Turkey show a rather mixed picture agency, Banking Regulatory and Supervisory Agency (BRSA), is responsible for regulating and supervising the banking system. Lebanon also diverges from the rest Figure 55 Comparative Financial Sector Aggregates of the region as it separates regulation and supervision (in terms of regional share) agencies—Banque du Liban is responsible for regula- 50% tions and the Banking Control Commission carries out 45% supervisory functions in Lebanon. Central banks have 40% the ultimate licensing authority in all the studied coun- 35% 30% tries except in Turkey, where BRSA has the ultimate au- 25% thority to license banks. 20% While regulation of banking in the region exhib- 15% its by-and-large uniform structures across the region, 10% regulation and supervision of the insurance sector is 5% 0% quite varied and nearly every country takes a different Turkey Lebanon Syria Jordan Egypt Iraq Algeria Morocco Libya Tunisia 112 GDP Total Assets Total Deposits Total Credit There is considerable amount of borrowing from abroad by Turk- ish companies. The focus here is on provisioning of credit by do- Source: World Bank World Development Indicators; Banks Association of Turkey. mestic financial systems. THE ROLE OF THE FINANCIAL SECTOR IN ECONOMIC INTEGRATION OF THE LEVANT 129 approach. Some countries have designated autonomous Figure 56 Total Domestic Credit vs. Total Private agencies/commissions organized under the auspices of Sector Credit either ministries of trade or finance with varying degree 200% of authority. For example, Lebanon and Jordan have in- 180% 160% surance control commissions under ministries of trade 140% but the Lebanese Minister of Economy and Trade has 120% the ultimate authority to issue licenses. Some countries 100% 80% regulate and supervise the sector by way of a department 60% within a ministry. Algeria and Morocco are examples of 40% this approach. Regulation of the insurance sector in Tur- 20% 0% key falls under a department within the Undersecreteriat –20% Turkey Iraq Syria Jordan Lebanon Egypt Libya Tunisia Algeria Morocco of Treasury; however, an autonomous commission linked to the Undersecretariat of Treasury carries out supervi- sion of the sector. Egypt has the most distinct approach Private Sector Credit/GDP Total Domestic Credit/GDP to insurance regulation— an autonomous agency, Egyp- Source: World Bank World Development Indicators; Banks Association of Turkey. tian Financial Sector Authority (EFSA), is designated to regulate the sector. None of these structures are uncom- mon structures that could be considered unusual since over key non-bank financial activities such as leasing similar structures exist in many other countries. and factoring. It could be said that these institutions are The regulatory framework for securities and cap- viewed as “bank-like” institutions. The same approach is ital markets are very similar in the region. Almost ev- also visible in Lebanon where Banque du Liban, which ery country in the region has established an autonomous regulates banks, also issues regulations for non-bank fi- commission to regulate and supervise securities and nancial activities. capital market activities. Although these commissions/ agencies were established by way of a special law in all of the studied countries, there are some subtle differenc- Financial Market Structures es. For example, the governor of the central bank chairs the Lebanese Capital Market Authority. EFSA in Egypt Financial sectors in the region contain wide range of is responsible for regulation and supervision of all non- financial institutions. Distribution of various types of bank financial institutions. The Securities and Exchange financial institutions exhibits significant variation across Commission in Turkey is an autonomous and indepen- the region. Figures 57 and 58 provide a picture of these dent agency in contrast to insurance regulation in Tur- institutions in terms of type of financial activities (i.e., key where the Undersecretariat of Treasury is basically banking, insurance, and non-bank financial institu- responsible for regulation. tions—NBFI) as well as their ownership nature (state, Regulation and supervision of other non-bank domestic private, foreign). The number of banking insti- financial institutions in the region is not clear, with tutions is usually the highest in every country except in a few exceptions. Egypt and Syria’s regulatory agencies Morocco and Turkey. that are tasked to regulate securities and capital markets Lebanon and Jordan, which together generate have blanket authority over the non-bank segment of the about four percent of regional GDP and hold about financial sector. BRSA of Turkey, which regulates and 13 percent of total banking assets, have about one- supervises the banking sector, has also legal jurisdiction third of total banks in the region. Conversely, Turkey, 130 Over the Horizon: a New Levant Figure 57 Numbers of Financial Institutions (end of Figure 58 Numbers of Commercial Banks (end of 2011) 2011) 400 60 350 50 300 250 40 200 30 150 100 20 50 10 0 Turkey Lebanon Jordan Syria Egypt Iraq Algeria Morocco Libya Tunisia 0 Turkey Lebanon Jordan Syria Egypt Iraq Algeria Morocco Libya Tunisia Banks Insurance NBFIs Source: Compiled from the reports of national regulators and industry associations. Source: Compiled from the reports of national regulators and industry associations. which generates about half of the region’s GDP and about liberal financial markets with a large number of finan- 41 percent of total assets of the regional banking system, cial institutions of their own. The situation in Lebanon has only about 12 percent of banks. In fact, Turkey has and Jordan shows us that foreign presence cannot be at- one of the fewest numbers of banks in the region. These tributed solely on the economic regime. The nature of figures signal the fact that the nature of Turkish banking ownership of financial institutions, especially those of system and the banking systems in the rest of the region is deposit-taking commercial banks, also provides import- fundamentally different. While Turkey’s financial system ant information with respect to the state’s presence in has one of the fewest numbers of banks in the region, it financial markets. As seen in Figure 59, there is some has the largest numbers of insurance and NBFIs. About degree of state ownership in commercial banking, except thirty percent of insurance companies and about sixty Lebanon, which has state-owned specialized banks. It is percent of NBFIs of the region are located in Turkey. interesting to note that Egypt has the highest number of Commercial banks hold the bulk of the banking state-owned deposit taking institutions. assets. Comparison of numbers of total banks and de- Every country is unique and generalizations pro- posit-taking commercial banks indicates that there are vide insufficient explanations as to why specific coun- many specialized banks in the region. In some cases (i.e., tries would have a particular combination of foreign Jordan and Lebanon), the number of specialized banks or state-owned banks. For example, Iraq and Libya, both equals or even exceeds the number of deposit-taking of which are emerging from serious political problems, commercial banks (Figure 58). have relatively more foreign banks and less state-owned All countries of the region are at least legally open banks. However, Tunisia, which is also coming out of sig- to foreign ownership. However, actual penetration of nificant political turmoil, presents differently, as do Al- foreign banks is widely different across the region. Turkey geria and Morocco, two Maghreb countries with strong stands out in this respect; more than half of the depos- links to Southern Europe. This information, pinpoints it-taking commercial banks in Turkey are foreign-owned. the need to look at factors beyond economic regime or It is especially interesting to note the presence of foreign recent political developments to explain the ownership ownership in Lebanon and Jordan is quite small despite structures of financial systems. These factors include the fact that these countries are relatively open and have profit opportunities, credit culture, and macroeconomic THE ROLE OF THE FINANCIAL SECTOR IN ECONOMIC INTEGRATION OF THE LEVANT 131 Figure 59 Ownership Structures of Banking Systems Figure 60 Market Shares of Top Banks (end of 2011) (end of 2011) 120% 120% 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% Turkey Iraq Syria Jordan Lebanon Egypt Tunisia Libya Algeria Morocco Turkey Lebanon Jordan Syria Egypt Iraq Algeria Morocco Libya Tunisia State-owned Private domestic Foreign-owned Top 3 banks Top 5 banks Top 10 banks Source: Compiled from the reports of national regulators and industry associations. Source: Compiled from the reports of national regulators. balances, and are important determinants of the evolu- 20 percent in Libya. Lebanon, Morocco and Syria, where tion of financial institutions in these countries. NPLs are relatively low compared to other countries also An oligopolistic market structure appears in the have high NPL ratios by prudential standards, as these region’s financial sectors. Figure 60 shows that the top ratios are 3.5 percent, 4.8 percent, and 4.8 percent, re- three banks (in terms of shares in total assets in each spectively. The NPL ratio in Jordan is about 8.5 percent country) controls at least sixty percent of the market, and in Egypt is about 11 percent, which are very high except in Turkey and Tunisia where the top three banks ratios. The existence of a high NPL ratio draws attention control about forty percent of the market. The top three to capital adequacy levels in the banking system. Fortu- banks are dominant in almost every country, since there nately, the studied banking systems are sufficiently capi- is little difference in market shares between the top three talized, with capital adequacy ratios ranging from about banks and the top five banks. Turkey is again different 17 percent in Turkey to about 11.5 percent in Tunisia. It in that the top five banks control about sixty percent. In is especially good to note that banks are well capitalized this case, two additional banks increase the market share in Jordan and Egypt, where NPL ratios are high, as cap- of the top tier by fifty percent. Market shares of the top ital adequacy levels are 19.3 percent and 15.6 percent, ten banks are more than eighty percent except Lebanon. respectively. As for profitability, the banking systems In Maghreb countries the top ten banks control virtu- look reasonably profitable. Return on assets (ROA) is ally the entirety of banking assets. Figure 60 indicates a the lowest in Tunisia with ROA of less than one percent. strong cluster of three to five lead banks in each country ROAs on Jordan, Lebanon, and Egypt are also relatively and implies rather strong competition among the low- low with all around one percent level. Algerian system re- er-tier banks. Such competition should be more pro- cords the highest ROA with about 2.1 percent, followed nounced in Egypt than most places as its top three banks by Turkish banking system with an ROA of 1.6 percent. control about fifty percent of the market, but the market There are significant differences in terms of ac- shares its top ten banks is the lowest in the region. cess to financial services in the region. Utilization of The portfolio performance of regional banks is not deposit services is highest in Lebanon and Turkey with very good. Non-performing loan (NPL) ratios (NPL to 922 and 949 per 1000 adults (Table 38). Iraq has the total loans) range from 2.7 percent in Turkey to about lowest number of depositors with five per 1000 adults. 132 Over the Horizon: a New Levant Table 38 Some Measures of Access to Financial Services Turkey Iraq Syria Jordan Lebanon Egypt Libya Tunisia Point-of-sale terminals (per 100,000 adults) 3045 n.a. n.a. n.a. 1293 58.3 n.a. 172 Depositors with commercial banks (per 1,000 adults) 922 5 233 n.a. 949 n.a. n.a. 757 Commercial bank branches (per 100,000 adults) 18.3 n.a. 4 21 31.5 4.5 11 17 Borrowers from commercial banks (per 1,000 adults) 841 n.a. 71 n.a. 335 78 171 Automated teller machines (ATMs) (per 100,000 adults) 59 n.a. 8 32 42 9 4 22 Source: World Bank World Development Indicators. POS Figure for Egypt is from Central Bank of Egypt. POS figures are for 2009. Other figures are for 2011. The figures for credit services are quite low and indicate companies listed in regional markets. The difference in significant problems with access to financial services daily trading volume is even more striking. Daily trading across the region. Turkey has by far the highest figure, volume of equities in BIST is equivalent to about one with about 841 borrowers per 1000 adults, which is very month of total volume in the rest of the region. It should close to the number of depositors. Lebanon has the next be noted that Turkish capital markets have various other highest number of borrowers with 335 borrowers per segments including derivatives. Daily volumes on these 1000 adults. This corresponds only about 35 percent of markets are quite substantial. For example, trading of debt depositors in the system. Egypt, which is the most pop- securities has a daily volume of more than US$10 billion. ulous country in the region, has a very low number of The insurance sector is very similar to that of cap- borrowers, with only 78 borrowers per 1000 adult which ital markets. Turkey’s insurance sector collects about is less than one tenth of number of borrowers in Tur- US$12 billion in premiums. This is about fifty percent key which is the second most populous country in the more that the total premium collected in the rest of the region. The numbers of borrowers in Algeria and Syria region. However, the Turkish insurance sector is not well are also very low. As for service points, Lebanon has the developed compared to its GDP, nor to the rest of its highest number of bank branches with 31.5 branches per financial sector. Total premiums generated by the sector 100,000 adults. Algeria, Egypt and Syria have consider- are less than 1.5 percent of Turkish GDP. Thus, insur- ably small number of branches compared to the other ance sector in the entire region has a huge potential. countries. Table 38 also points the fact that Turkey and the rest of the region has considerably different levels of penetration of technology, especially with respect to Regional Financial Sector Linkages POS usage, which is about three times that of Lebanon which has the second highest POS usage. The numbers The financial sector of each of the countries of the re- of ATMs in Lebanon, Jordan, Tunisia and Morocco is gion is unique and very difficult to categorize. Howev- relatively better than the other countries. ATM numbers er, there are certain similarities and differences between are especially low in Syria, Algeria and Libya. these systems that can provide a basis to explore the link- The biggest difference between Turkey’s financial ages between the regional financial sectors. Table 39 pro- sector and the rest of the region is in the magnitude of vides some measures of linkages between the regional capital market activities. Turkey’s capital markets dwarf other markets in the region in every respect. Total mar- 113 BIST is the only exchange entity of Turkey, and combines the for- ket capitalization of companies listed in Borsa Istanbul mer Istanbul Stock Exchange, the Istanbul Gold Exchange, and (BIST)113 is about twice as much as the total of all the the Derivatives Exchange of Turkey. THE ROLE OF THE FINANCIAL SECTOR IN ECONOMIC INTEGRATION OF THE LEVANT 133 Table 39 Cross-Border Presence of Regional Financial Institutions Have regional and foreign Regional and Foreign Banks Have home-grown institutions Regional operations of home-grown banks operate locally have significant operations operate in the region institutions are significant Lebanon + + + + Jordan + + + + Turkey + + – – Iraq + + – – Egypt + – + – Syria + – – – Libya + – + – Tunisia + + – – Algeria + – – – Morocco + + – – systems. The first measure is about openness of the sys- situation is especially interesting as there is a consider- tems (i.e., whether the systems allow foreign financial in- able number of Moroccan banks that operate outside stitutions operate); the second measure is about whether but these operations are mainly in Francophone Africa. openness has yielded an effective local presence of region- Third-tier institutions are those that do not fall in either al and foreign financial institutions; the third measure is of the above categories. Consequently, there are few sim- whether there is an interest on the part of local financial ilarities between these countries. Egypt, Syria, Algeria, institutions to go abroad, particularly to the region; and and Libya fall into this category. While all of these coun- the fourth measure is about the success of the local insti- tries have foreign and regional institutions operating, tutions in regional endeavors. these institutions do not have much significance. Both The financial sector of the region could be classi- Egypt and Libya have financial institutions that operate fied in three tiers. First tier systems are those that have in the region but these operations have not reached any foreign operators with significant presence and, at the significance in the markets in which they operate or for same time, domestic institutions that have significant the institutions themselves. regional operations. Hence these systems have strong re- Cross-border activities of regional financial insti- gional linkages. Lebanon and Jordan are the two coun- tutions are especially significant for first-tier and sec- tries that fall in this category. Second-tier systems are ond-tier countries. Lebanon and Jordan’s (i.e., first-tier those systems that have foreign and regional institutions countries) financial institutions draw substantial econom- that operate with some significance, but these systems do ic benefits from their regional activities. Therefore, these not have domestic institutions that operate in the region. countries’ economies benefit from these activities through Turkey, Iraq, Tunisia, and Morocco fall in this category. their financial institutions. On the other hand, second-ti- These systems have not only made a choice to attract for- er countries (Turkey, Iraq, Morocco, and Tunisia) directly eign institutions but they have also provided an environ- benefit from the activities of these financial institutions ment for these institutions to become significant players. in various forms such as additional volume of financial However, asymmetry between local presence of foreign intermediation, linking of domestic real sector with their institutions in these markets and the presence of domes- counterparts in other countries, additional employment, tic institutions in the region raises curiosity. Morocco’s and additional volume of foreign direct investment. 134 Over the Horizon: a New Levant Lebanese banks are the most active financial insti- and they primarily seek opportunities in Africa. There are tutions outside Lebanon. Lebanese banks have presence currently about 20 subsidiaries of Moroccan banks oper- in 31 countries, and out of 44 Lebanese banks 17 have a ating outside the country. The profile of banks from Mo- presence abroad. Moreover, this presence is especially sig- rocco is similar to those of Lebanon and Jordan, especially nificant for some of the banks; substantial portions of total in Francophone Africa. Turkey is interesting, since it has assets and income of some leading banks in Lebanon are re- eight banks owned by banking groups headquartered in lated to their operations abroad. At least 20 percent of total the region and the Gulf, including banks from Lebanon, net incomes of these banks are generated from operations Jordan, and Libya, but activities from banks from Turkey outside of Lebanon. It is noteworthy that credit extended are mainly limited to representative offices and there is no outside is even more than the relative level of assets of for- Turkish-owned bank operating with a full banking license eign operations. Furthermore, the relative level of credit of in the region. Regional banks in Turkey have not gained outside of Lebanon is higher than relative level of deposits much market share because these banks have not had a in these countries. The Lebanese banks provide substantial strategy to become large retail banks in Turkey. However, intermediary services by mobilizing funds to their foreign these banks have now started to pursue business in retail operations. Given the limits of Lebanese economy, most of markets. For example, Bank Audi, which just started its these funds are also generated from outside. operations this year, will have 32 branches by the end of Although Jordanian banks activities in the region this year and will reach 100 branches within five years. are not as large as Lebanese banks, they also demon- Turkland Bank, which is now a joint venture between strate how small economies of the region can develop BankMed of Lebanon and Arab Bank of Jordan, is also institutions that operate within the most sophisticated implementing growth strategy and has branches in all ma- segment of the services sector that demands significant jor cities in Turkey. Although these operations are still less human resources. There are some interesting examples than ten percent of total foreign banks operating in Turkey, of Jordanian banks that operate outside of Jordan. First the rate of increase is very large as the assets of these banks example is Arab Bank, which is the oldest Jordanian have grown more than four times over the last five years. bank and one of the pioneers of regional banks. It has The Egyptian system has large public sector banks operations in 30 countries and about half of its total as- which are mainly focused on the local markets. Given sets, deposits, and credit belong to its activities outside the dominance of these banks and the size of the country it Jordan. Moreover, about 86 percent of its net income is was very difficult for regional banks with limited resources generated outside Jordan. Another interesting example to hold a significant position within the Egyptian finan- is Capital Bank, which is one of the newer and smaller cial system. In addition, the presence of large international banks in Jordan that realized the limitations of the Jor- banks such as CitiBank, large French Banks, and banks danian markets for a small new entrant and subsequently owned by large Gulf-based companies made it even more looked for opportunities outside. It made an entry into difficult for the regional banks to become significant players Iraq about four years ago and now Iraqi operations earn in Egypt. The situation in Algeria is more or less the same more than the bank’s operations in Jordan. with an added problem of more difficult market access. Among the second-tier countries, Morocco and Tur- key are interesting to examine. Foreign banks have sig- nificant operations in Morocco, but the majority of these Dynamics of Regionalization banks are mainly French banks and the Arab Bank of Jor- dan is the only bank from the region to operate in Moroc- Financial markets linkages in the region are estab- co. Moroccan banks appear rather oblivious to the region, lished by way of some banks that chose to operate THE ROLE OF THE FINANCIAL SECTOR IN ECONOMIC INTEGRATION OF THE LEVANT 135 beyond their national markets. However, the nature shareholding, the minimum capital requirement was of these linkages varies from one country to another. pushed to very high levels. Some countries have produced regionally active banks, Lebanon, Jordan, and Iraq do not have major some are hosting them, and yet some countries have problems with respect to market access. Turkey, after both types. Understanding the forces that create these about a decade, has started issuing new licenses. In fact, dynamics is important not only for clues for the future Turkey issued the first new license to Bank Audi, a Leba- evolution of regional financial markets, but also to iden- nese bank with a strong regional presence. Thus, Turkey tify underlying forces that can play an important role signaled strongly that an end to a process that started in the broader regional integration process. This raises after the banking crisis of 2000, in which many Turkish two questions: (i) is there a market access problem in banks failed. Turkey had very relaxed licensing environ- the region so that regional financial institutions are hav- ment prior to 2000, and many local and foreign banks ing problems setting up operations in certain countries? had been established. However, after the banking crisis, and/or (ii) are regional financial markets not attractive Turkey’s regulatory authorities implemented a policy of enough so that there is not much interest in operating in consolidation by implementing restrictive licensing poli- certain countries? cy. Easy access to Turkish capital markets and other non- Market access issue is crucial because it is a first bank financial institutions such as the insurance sector level constraint to establishing financial sector link- allowed foreign institutions to enter Turkey’s financial ages in the region. Although there are no legal impedi- system and become very important players. For example, ments for any financial institution to apply for a license a majority of trading in BIST originates abroad. None- in all the countries of the region, there are some practices theless, the recent change in bank licensing policy is that effectively limit market access in some countries. For consistent with Turkey’s aspirations to make Istanbul an example, Egypt does not issue new commercial banking international financial center. The government has made licenses but allows the purchase of existing institutions. sizable investments in this regard. Lebanon and Jordan This practice essentially raises the franchise value of ex- have very open policies to attract foreign institutions as isting institutions and makes entry more expensive in the the financial sector is viewed as an important service sec- Egyptian market. Rather restrictive licensing policies in tor and source of income in these countries. In fact, both Egypt have similar characteristics of the recently aban- of these countries have a policy of issuing licenses only doned Turkish practices following the banking crisis of to foreign institutions and not to domestic institutions. 2000 in Turkey. Egyptian authorities believe that there Morocco and Tunisia have been implementing pol- are too many small and weak banks and the system needs icies to privatize the economy. The financial sector was to go through some consolidation. also included in this general policy of liberalization Algeria has very a restrictive licensing policy. In and privatization. These efforts undoubtedly paused fact, there are some applications from very strong region- during the recent political events in Tunisia but the in- al institutions that have been pending for years. Syria is dications are such that privatization policies will contin- another country with highly restrictive licensing practic- ue. Morocco’s liberalization and privatization efforts also es. When Syria made it possible for foreign banks to reg- yielded an increased private and foreign presence in the ister and operate in the country, it required tough con- financial sector. ditions that would be very difficult to accept, especially Attractiveness of financial markets in terms of po- by reputable large foreign banks. Among these require- tential growth and income generation is an important ments were reserving a controlling share for local share- criteria for regional financial institutions to expand in holders. Although later this was reduced to minority the region. Growth and profit opportunities in the region’s 136 Over the Horizon: a New Levant financial markets should be the focus when a financial in- qualitative appraisal of financial institutions with respect stitution decides on whether or not to regionally expand. to these key conditions for regional expansion. It is rela- However, an evaluation of opportunities abroad cannot tively easy for Turkish, Lebanese and Jordanian banks to be made without regard to local conditions and the state move into other countries in the region. Expansion for of financial institutions there. This is a three-step process. Syrian, Tunisian and Iraqi institutions appear to be very The first step is to establish the geographical footprint difficult at this point in time. It should be noted that of the institution’s overall growth strategy—determining Iraq and Libya will have considerable financial resourc- whether to grow locally or expand regionally or both. This es once stability and security is permanently established. involves an evaluation of whether a financial institution Thus, these countries together with Algeria can establish has the capability to expand regionally. The second step partnerships with other countries in the region that have is to evaluate the attractiveness of markets in any given technology and larger human resource pool. Thus, there country in the region relative to market conditions at are significant complementarities in the region to build home. The third decision process is about determining more integrated and deeper financial markets. the destination given the decision on regional expansion. Turkish financial markets appear to be the most attractive followed by Lebanese, Algerian and Moroccan markets. Trade and Financial Sector Linkages Egyptian, Tunisian and Libyan markets come after these markets. It must, however, be emphasized that none of Financing trade flows are usually the primary motiva- these markets have reached maturity, and there are sig- tion while financial institutions move into other coun- nificant growth potentials in all markets. It is a rational tries. It is also the most practical entry point to foreign choice for financial institutions from other countries to markets for several reasons. First, trade finance allows move into Turkish markets. It is also rational for Turkish banks to focus on corporate finance and taking relatively financial institutions try to gain more ground and solidify well-defined risks for a limited time without committing their market shares in their own local markets. In other large amounts of capital. Thus, banks would have time words, inward looking strategy for Turkish financial in- to further assess options such as retail banking as they stitutions also makes sense. This strategy is especially rel- try to understand local conditions and their comparative evant given the fact that Turkish markets are attracting global interest and market access for foreign institutions are relatively easy. However, market attractiveness is sim- Table 40 Capacity to Expand Regionally ply not sufficient to determine a strategic move to regional markets. This is because there are second order conditions Financial Experience in Human Resource Capacity foreign markets Capacity that would ultimately determine feasibility of regional Lebanon +++ +++ +++ expansion. These conditions are basically concerned with Jordan ++ +++ +++ necessary ingredients of expanding regionally. Iraq + + ++ Financial institutions must have the capacity in Turkey +++ +++ +++ order to be able to seek cross-border opportunities. Fi- Syria + + + nancial and human resource capacities are certainly bind- Egypt + ++ ++ ing constraints in this regard. And although it may not Libya ++ ++ + be essential, experience in foreign markets is a tremen- Tunisia + + ++ dous asset that would at least facilitate the decision-mak- Algeria +++ ++ ++ Morocco ++ ++ ++ ing process prior to expansion. Table 40 provides some THE ROLE OF THE FINANCIAL SECTOR IN ECONOMIC INTEGRATION OF THE LEVANT 137 advantages. Second, small and compact units can carry of credit needs on both sides of trade relations could be out trade finance-focused operations. Thus, human re- different depending on the products involved. For exam- source needs can be managed better while monitoring ple, products such as agricultural commodities (i.e., lint from headquarters is easier. Third, operations can start cotton) would take about nine months to produce but a rather quickly by capitalizing on comparative advantag- fairly standard industrial product (i.e., shirts) depending es and avoiding tough competitive responses from the on the size of the order could be manufactured rather beginning. In fact, partnerships and mutually beneficial quickly. As for letters of credit and similar other trade cooperative arrangements can be sought. Consequently, facilitation services, there are several difficulties in assess- taking hold in the markets would be easier. Given these ing the volume of banking revenue from these services. considerations, the question of whether trade flows offer Therefore, any attempt to estimate banking income from substantial income prospects becomes highly relevant. trade finance could only be an indication if some rather Expansion into Turkey, Iraq and Egypt markets basic assumptions could be made. For these purposes, would give a financial institution possibility to compete the following assumptions are used: in trade finance services for about 60 percent of intra-re- gional trade volume. These countries basically have strong „ Production of exports require three month work- “pull” factor emanating from their intra-regional trade po- ing capital, 85 percent of which could be borrowed sition to attract financial institutions from other countries against purchase orders; in the region. Regional trade carries relatively high share in „ Purchase of imports require six months of credit of total trade of Jordan and Lebanon. Therefore, financial in- about 85 percent of import values to allow sufficient stitutions of these countries may want to use this relatively time to recover at least; and intense trading relationship as a comparative advantage „ About 20 percent of imports are done by irrevocable and competitive edge by moving into countries, especial- letters of credit, which requires 25 basis points fees. ly to their major regional trading partners. These moves would also help them to solidify their domestic market Significant opportunities exist around trade flows conditions should other financial institutions expand into in the region for financial institutions. Using the above their local markets. Therefore, it could be said that these conservative assumptions provide a baseline indication countries have relatively strong “push” factor that encour- of the magnitude of revenue that could be raised by fi- ages local financial institutions expand in the region. nancial institutions from regional trade related transac- tions. Based on these assumptions, revenue estimations are presented in Table 41. Potential revenue from re- Potential Financial Sector Income from gional trade transactions is about 17 percent of total net Trade Finance income of regional banking sector.114 This corresponds roughly about seven percent of total net income.115 The It is a challenge to estimate financial sector income from potential regional trade finance. Trade finance 114 This is a conservative estimate based on the reported Return on As- related financial services can be grouped in three catego- sets (ROAs). A one percent ROA was assumed considering the fact that the bulk of banking assets are in Turkey, Lebanon, Jordan and ries: (i) financing of production of exports; (ii) financing Egypt. All these countries have ROAs around one percent except purchase of imports; and (iii) provision of letters of cred- in Turkey where ROA is 1.6 percent. 115 it and similar services. It is difficult to come up with pre- Assuming a 2.5 percent lending spread, given the prevailing lend- ing spreads in the region, and excluding administrative and op- cise estimates of income that could be earned by finan- erational expenses that could be partly recovered by additional cial institutions from these three categories. The nature charges and fees during normal banking relations. 138 Over the Horizon: a New Levant Table 41 Estimated Potential Revenue of Banking figure for global trade is even more striking and nearly Services for Trade Flows in the Region 1.75 times the total net income of the regional banking (US$ millions) sector. This is about 80 percent of total net income of the Revenue and Income from Regional Trade Revenue Income regional banking sector. It should be noted that these es- Interest from credit for production of exports 796.29 284.39 timates do not take into account externalities associated Interest from credit for purchases of imports 1,592.57 568.78 with trade related engagement by banking sector. These Fees for Letter of Credit for imports 113.76 113.76 relations will undoubtedly bring other opportunities for Total 2,502.61 966.92 the banks involved. These estimates are simply carried Revenue from Global Trade out to have some sense of the magnitude of the potential Interest from credit for production of exports 7,032.57 2,511.63 business volume, and at least to have an idea about the Interest from credit for purchases of imports 18,298.95 6,535.34 range of revenue and income trade relations imply for Fees for Letter of Credit for imports 1,307.07 1,307.07 Total 26,638.58 10,354.04 regional financial institutions. They are not by any means intended to be point estimates. Note: Figures are estimated by authors. A seven percent interest rate was applied for credit. Interest income figure is calculated by using 2.5 percent lending spread. REGIONAL INTEGRATION 6 OF ENERGY SYSTEMS IN THE LEVANT T he demand for energy, especially in the electricity sector, is high in the region, and there is a clear need to expand the electricity generating capacity to stimulate private sector growth and to benefit more from regional economic opportunities. A range of electricity interconnection infrastructure exists among the grids of Mashreq countries (Iraq, Syria, Lebanon, Jordan, Egypt, and the Palestinian Territo- ries), Maghreb countries (Libya and Tunisia) and outlying countries (Turkey and Iran). Tunisia (along with Al- geria and Morocco) is interconnected to the European grid and operates synchronously with them. Mashreq countries and Turkey have been trading electricity for over a decade and a half, though the volume of trade is far below the potential. The main bottleneck is a shortage of power in most of the Mashreq countries and the inability to add capacities based on gas, which over the past decade has become scarce and much higher priced than before. Rapidly rising electricity and gas demand in Egypt has rendered the only two existing regional gas pipelines (the Arab gas pipeline and Arish-Ashkelon gas pipeline), practically unutilized. The Mashreq countries need to compete in the growth of LNG trade. The Mashreq region has large international market place for gas. The sub-region gas reserves, and 94 percent of these reserves are in two needs additional transmission lines to relieve local bot- countries, Iraq and Egypt. However, both Egypt and tlenecks for cross-border flows and also needs to sharply Iraq face significant constraints in expanding their gas improve its ability to operate the grids synchronously in production capacity to meet the demand. For Egypt the a sustained fashion through upgrades of grid codes and constraint is the size of its gas reserves, and for Iraq the regulatory arrangements. Gas trade infrastructure, by constraint is its implementation capacity. Iraq has the way of LNG import terminals, exists (in Turkey) or is potential to develop as a major supplier of pipeline gas. being constructed/pursued (in Jordan, Egypt, Lebanon, A positive development is the offshore gas discoveries of and Syria) or planned (in Iraq). These will support the Lebanon. It is estimated that the technically recoverable 139 140 Over the Horizon: a New Levant hydrocarbon reserves in the Levant basin region cover- 46 percent in 2010) as gas became a desirable substitute ing 83,000 km2 in the Eastern Mediterranean (Lebanon, owing to its economic and environmental attributes. The Israel, Cyprus, Turkey, Egypt and Syria have territorial share of gas in power generation increased significantly stakes in this region) at around 1,689 million barrels of from 26 percent to 45 percent from 1990 to 2010. How- oil and 122.4 tcf (3.5tcm) of gas. Significant natural gas ever, in recent years gas availability has turned into a se- discoveries have been made in the offshore areas of Israel rious issue in countries such as Syria, Jordan, and Egypt, (especially in the Leviathan field), and in 2010 a U.S. which have realized that their domestic gas production hydrocarbon exploring company confirmed the com- is not sufficient to meet the needs of their power sectors. mercial viability of the gas deposits. Lebanon planned Lebanon and Palestinian Territories have no domestic to divide its offshore area into blocks and carry out in- production of gas and Iraq’s gas sector was in great disar- ternational rounds of biddings to award exploration and ray on account of the war. This has triggered a search for production contracts. sources of imported gas and/or electricity. This chapter draws upon the results of previous Gas and electricity trade require construction of World Bank studies to provide an understanding of the cross-border or dedicated infrastructure facilities that, prospects, challenges, and barriers of regional energy in turn, require well-structured regional integration integration especially in relation to the gas and elec- schemes. Regional integration of gas and electricity tricity sub-sectors. The countries in the region are classi- systems enables the connected countries to trade ener- fied as five core countries: Iraq, Jordan, Syria, Lebanon and gy. However, the interconnected networks, particular- Turkey, and five adjoining outer-circle countries: Egypt, ly power grids, impart other benefits such as increased Libya, Tunisia, Palestinian Territories, and Iran. For the reliability, reduced reserves, and economies of scale in purpose of discussions relating to electricity and gas sec- construction of larger generation plants. Cross-border tors, the countries are grouped into Mashreq countries projects face numerous technical, institutional and im- (Egypt, Iraq, Jordan, Syria, Lebanon, and Palestinian Ter- plementation challenges. A distinct feature of regional ritories), relevant Maghreb countries (Libya and Tunisia) integration projects is the length of preparation time. and relevant outlying countries (Turkey and Iran). Most of these projects have taken many years (or sever- al decades) to prepare. Each project has been structured and restructured a number of times. It is sometimes the Power Sector Background deficiency in the initial formulation that results in fur- ther revisions. It is also the difficulty of working out the Sustained high economic growth and consequent cross-border issues, and coordinating solutions among changes in lifestyles in the Mashreq countries have the participating countries. This is indeed an area that triggered a rapid increase in energy demand, especial- the World Bank and its partners have tried to help the ly in the electricity sector. Although part of this growing countries foresee and resolve before such issues paralyze demand may be curbed through more effective energy the progress of the projects. conservation policies and technologies, there is a clear Electricity demand has grown significantly in the need to expand the electricity generating capacity in all Mashreq countries in recent years. Peak electricity de- countries of the region. One of the most significant bot- mand increased at an annual rate of 5.4 percent from tlenecks in developing new power generating capacity 1990 to 2010, growing from 17,446 MW in 1990 to is the supply of the required fuel. The region depend- 49,974 MW in 2010. During 2010–2030, peak demand ed in the older days on oil for power generation. This is forecast to more than double, growing at of about dependence was reduced (from 55 percent in 1990 to 3.8 percent per year (Table 42). REGIONAL INTEGRATION OF ENERGY SYSTEMS IN THE LEVANT 141 Table 42 Historical and Forecast Electricity Demand in Mashreq Countries 1990 2000 2010 2020 2030 Peak Demand (MW) Egypt 6,902 11,736 22,750 42,263 56,716 Iraq 5,162 4,865 13,381 16,006 21,510 Jordan 624 1,206 2,670 4,547 6110 Syria 3,258 5,990 7,843 10,448 14,041 Lebanon 1,220 1,681 2,510 3059 3875 Palestinian Territories 280 495 820 1393 2401 Mashreq Total 17,446 25,973 49,974 77,716 104,653 Source: Compiled from the reports of national regulators. Note: The Mashreq total peak demand is a simple sum of the individual country demands. It does not take in account load diversity among the countries, which is not currently known. The total investment that will be needed for the ex- rest being based on liquid fuels. Power sector details of pansion of generation, transmission, and distribution Tunisia and Libya are summarized in Table 44. of electricity in the Mashreq is estimated at US$131 bil- Turkey and Iran are the outlying countries and are lion by 2020, and an additional US$108 billion by significant from the point of the view of the region’s en- 2030.116 Mobilizing such levels of investment will require ergy trade. Turkey is interconnected to Syria, Iraq, and substantial changes in energy policy to increase elec- Iran; Iran is interconnected to Turkey and Iraq. Turkey is tricity prices, improve the financial performance of the a gateway to EU power systems as it has connections to power sector, and attract private sector investors.117 Fig- Bulgaria and Greece and is operating synchronously with ure 61 shows Mashreq electricity generation by fuel type. the EU grid. Both operate large power systems, the basic Total gas use in power generation is projected to increase details of which are summarized in Table 45. from 32.9 bcm in 2008 to 102 bcm in 2030. An adequate Turkey’s installed capacity includes about 15.9 GW supply of natural gas may prove most challenging in all of hydropower and 1.32 GW of wind power, the outputs Mashreq countries (including in Egypt, currently a major of which vary as a function of hydrology and wind. Such exporter of gas and LNG). The installed generating ca- variable output from about a third of the installed capacity pacities, electricity generation, and imports and exports is the basic rationale for Turkey’s electricity trade, enabling of electricity in these countries (as of 2010) are summa- it to export during periods of surplus and import during pe- rized in Table 43. The power grids of these six countries riods of deficit. Turkey’s plans to fully construct all available are interconnected. Further Syria is interconnected to hydropower sites and add 20,000 MW of wind power capac- Iran and Turkey, and Iraq is interconnected to Turkey and ity by 2023 will further emphasize its need for power trade. Iran and Egypt is interconnected to Libya. Libya has interconnections to Egypt on the east 116 These figures are based on estimates for Egypt’s expansion plan and Tunisia on the west. Tunisia, Algeria and Morocco of approximately US$101 billion to meet 150,000 GWh of de- mand growth, with approximately 82 percent allocated for gener- are well interconnected among themselves and with the ation, 13 percent for transmission, and 5 percent for distribution European network, and operate synchronously with the (World-Bank-sponsored report, Energy Cost of Supply and Pricing EU power grid. More than 98 percent of Tunisian power Report, October 10, 2008). 117 The forecasts and investments estimates made about five years ago generation was based on natural gas, while in Libya only have turned out to be somewhat conservative. The current esti- about 38 percent of the generation was based on gas, the mates for most of these countries are substantially higher. 142 Over the Horizon: a New Levant Table 43 Key Data on the Power Sector in Mashreq (2010) Installed Capacity (MW) Generation (GWh) Exports (GWh) Imports (GWh) Egypt 24,726 138,782 1,118 183 Iraq 15,006 48,906 0 6,153 Jordan 3,243 14,777 58 670 Syria 8,200 46,413 1,043 690 Lebanon 2,313 11,211 0 1,249 Palestinian Territories 140 431 0 1,605 Mashreq Total 53,628 260,520 2,219 12,769 Source: Compiled from the reports of national regulators. Note: Effective and available capacity in Iraq was about 8,000 MW only. Iran has a total nominal installed capacity of (26 percent). It has significant seasonal variations (max- 61.2 GW, but its average available effective capaci- imum loads are in May to August) and daily variations ty is only 54 MW. About 15.6 percent of the effective (daily peaks at 9 PM) in demand. These conditions and capacity is hydro, while the rest is thermal, fired most- the fact that Iran is the world’s second largest gas pro- ly by gas (about 74 percent), and partly by liquid fuels ducer make electricity trade meaningful for Iran. Apart for the interconnections to Turkey and Iraq, it has also interconnections to Turkmenistan, Armenia, Azerbaijan, Figure 61 Mashreq Power Generation by Type of Fuel Afghanistan, and Pakistan. (%) There is a regional electricity network in place in 70 the Mashreq region. The electricity network is part of 60 the Arab power system, which was initiated in 1988 by 50 a five-country agreement between Jordan, Syria, Egypt, 40 Turkey, and Iraq. Each country undertook to upgrade its 30 20 electricity system to a regional standard. The project was 10 extended to eight countries with the addition of Lebanon, 0 Libya, and the Palestinian Territories. There are presently 1990 2000 2008 2010 2020 2030 a number of high-voltage interconnections between the Oil Gas Renewables national power systems of Egypt, Iraq, Jordan, Lebanon, Source: Compiled from the reports of national regulators. Syria, Palestinian Territories, Libya, Turkey, and Iran. Table 44 Basic Details of the Power Sector of Libya and Tunisia 2010–2020 2010 (forecast growth rate) Installed Energy generation Exports Imports Peak Deman capacity MW GWh GWh GWh MW Peak demand Energy Libya 8,349 32,559 152 70 5,759 5.4% 5.4% Tunisia 3,571 14,821 122 141 3,010 3.9% 3.7% Source: Compiled from the reports of national regulators. REGIONAL INTEGRATION OF ENERGY SYSTEMS IN THE LEVANT 143 Table 45 Basic Details of the Power Sector of Turkey and Iran 2010–2020 2010 (forecast growth rate) Installed Energy generation Exports Imports Peak Demand capacity MW GWh GWh GWh MW Peak demand Energy Turkey 49,524 211,208 1,318 1,144 33,392 7.2% 7.2% Iran 61,203 232,994 6,707 3,015 38,891 7.7% 7.7% Source: Compiled from the reports of national regulators. Table 46 Regional Interconnections Countries Circuits/Voltage Capacity Year of Operation Turkey – Syria 1 x 400 kV 1135 MVA 2007 Syria – Jordan 1 x 230 kV 55 MVA 1977 Syria – Jordan 1 x 230 kV 267 MVA 1980 Syria – Jordan 1 x 400 kV 1135 MVA 2000 Syria – Lebanon 2 x 66 kV 110 MVA 1972 Syria – Lebanon 1 x 230 kV 267 MVA 1977 Syria – Lebanon 1 x 400 kV 1135 MVA April 2010 Syria – Iraq 1 x 230 kV 267 MVA 2000 Jordan – Egypt 1 x 400 kV 550 MVA 1997 Jordan – West Bank 2 x 132 kV 20 MW 2007 (operated at 33 kV) Egypt – Libya 1 x 220 kV 120 MVA 1998 Egypt – Gaza 1 x 22 kV 17 MW 2006 Iraq – Turkey 1 x 400 kV 200 MW 2002 (operated at 154 kV) Iraq – Iran 1 x 400 kV 325 MW April 2009 Source: Compiled from the reports of national regulators. A list of interconnections between the Mashreq countries, interconnected systems in the synchronized mode in a and with Turkey, Iran and Libya is provided in Table 46. consistent and sustained fashion. Although the Mashreq countries appear to be Despite the interconnection agreement, trade strongly interconnected, there are numerous trans- among the EIJLLPST countries118 has been modest. mission constraints in the national systems that limit The related regional committees do not appear to be ful- transfers between countries. More generally, the ex- ly functional. Primary obstacles to electricity trade are change of power among these countries has been much tight generation supply, lack of a harmonized regulatory less than the available interconnection capacity. There are a number of structural and institutional reasons for 118 The EIJLLPST interconnection was initiated in 1988 by a the limited electricity trade the most important of which five-country agreement among Egypt, Iraq, Jordan, Syria, and Tur- key, and has since grown to include Libya, Lebanon, and Palestin- are the lack of adequate generating capacity in the in- ian Territories. Through the agreement, each country committed terconnected countries and the inability to operate the to upgrading its electricity system to a minimum standard. 144 Over the Horizon: a New Levant framework, limited access to national transmission net- join the European network has resulted in the need for works, and the fact that trade is generally limited to a connection of Turkey to third countries on the basis of a single government-owned entity in each country. Addi- back-to back HVDC interface. Pending the construction tionally, the interconnected systems are often not syn- such interfaces, third countries can connect to Turkey chronized, meaning that part of a national grid system only on the basis of secure islanded mode to protect the may need to be isolated from the main grid to accept im- Turkish and the European system. They cannot synchro- ports from another country.119 The lack of surplus gener- nize with the Turkish grid. The existing and proposed ating capacity and generation fuel in the interconnected major power interconnections among these countries are countries means they often do not have spare energy to shown in Figure 62. trade. Further, in some areas the transmission system is not synchronized, necessitating isolated generation to fa- cilitate trade. For example, when Syria exports energy to Gas Sector Background Lebanon, part of the grid in Lebanon must be discon- nected from the main national grid. Historically, gas demand in the Mashreq countries Nevertheless, the EIJLLPST interconnection has has been driven by the availability of gas supplies. brought significant benefits. For example, Jordan can Through the 1990s, Jordan, Syria and Egypt utilized rely on its interconnections with Egypt and Syria for all of their gas production for domestic use. Jordan and about 250 MW of capacity during system emergencies. Syria continue to use their gas production domestically In 2007 Jordan’s reserve margin was negative 130 MW. and seek to further expand development of domestic gas In the absence of its interconnections, Jordan’s loss-of- fields and production facilities.120 Egypt began exporting load expectation was 53 hours, more than triple the target gas in the early 2000s both in the form of LNG to vari- level of 15 hours. The interconnections therefore enabled ous parts of the world, and as piped gas to Jordan, Syria, Jordan to avoid considerable load shedding in 2007. In and Lebanon through Arab Gas Pipeline (AGP) and to addition, Jordan, Egypt, and Syria share spinning re- Israel through the Arish-Ashkelan pipeline. Egypt’s total serves. By minimizing spinning reserve requirements in gas exports peaked at 18.32 bcm in 2009 and started this manner, generation is operated closer to its optimum declining thereafter as a function of increasing domestic output level, thus improving efficiency and reducing fuel demand and political and commercial issues. The two and maintenance costs. Opportunities for short-term pipelines were idle with no supplies or highly interrupted trades have also been realized through the diversity of supply from Egypt for nearly two years. Supply for Jor- demand. Syria has a winter peak while Egypt and Jordan dan through AGP was resumed toward the end of 2012. have summer peaks. Syria can make sales to Egypt and Supply to Israel, however, remains cancelled. Since early Jordan during summer when it has surplus generating 2013, Egypt is actually pursuing the option of importing capacity, and Jordan and Egypt can make sales to Syria in LNG for its domestic use. Lebanon had no domestic gas winter when they have surplus generating capacity. These production (though the recent discovery of extensive gas staggered sales are particularly relevant when there are resources in the Levant offshore area have been reported different generation technologies in the countries. Overall, the value of the EIJLLPST interconnec- 119 In EIJLLPST, Libya, Egypt, Jordan, and Syria are synchronized tion is currently suboptimal. It is used primarily for with one another, but not with the other EIJLLPST countries, and ancillary services such as reserve sharing, while energy not with Turkey. 120 Jordan for example signed in October 2009 a deal with BP to ex- transactions to take advantage of differences in produc- plore for natural gas reserves in the Risheh field near the border tion costs are limited. Further, Turkey being allowed to with Iraq, an investment that could reach billions of dollars. REGIONAL INTEGRATION OF ENERGY SYSTEMS IN THE LEVANT 145 Figure 62 The Existing and Proposed Power Interconnections tion O pera EU Electricity Turkey Island Markets Italy EIJLLPST Interconnection Under Consideration Lebanon Syria Iran Spain Jordan Iraq Libya Egypt Morocco Algeria Tunisia Not Op Kuwait Maghreb Interconnection era Bahrain tion al Mauritania Under Consideration Qatar KSA 400 kV Sudan 220 kV 150 kV Yemen UAE 90 kV 66 kV Djibouti Existing Oman Somalia Not operational / Island operation GCC Under-consideration, -study, -construction Comoros Interconnection Source: The World Bank. Note: Medium voltage interconnections between Jordan and West Bank and between Egypt and Gaza exist and operate in island mode. and are being pursued) and after several years of plan- (especially in the Leviathan field), and in 2010 Noble En- ning efforts managed to get small quantity of Egyptian ergy Limited (a U.S. hydrocarbon exploring company) gas through Syria,121 but supplies were discontinued in confirmed the commercial viability of the gas deposits. less than a year. In this context, Lebanon accelerated the passage of A positive development is the offshore gas discover- its Law on Offshore Oil Reserves. It further planned to ies of Lebanon. Two-dimensional and three-dimension- divide its offshore area into blocks and carry out interna- al seismic surveys carried out during recent years seem tional rounds of biddings to award exploration and pro- to indicate 87 hydrocarbon sources along the Lebanese duction contracts. However, though the law was passed in coastal areas in the Mediterranean Sea. U.S. Geological August 2010, issuance of decrees to make the law effective Survey is believed to have estimated in 2010, that the technically recoverable hydrocarbon reserves in the Le- 121 Egypt and Lebanon reached an agreement in September 2009 to vant basin region covering 83,000 km2 in the Eastern supply natural gas to Lebanon’s Beddawi power plant. Partial deliv- Mediterranean122 at around 1,689 million barrels of oil ery of gas started mid October 2009, enough to power operation of one turbine at the Beddawi power plant. and 122.4 tcf (3.5tcm) of gas. Significant natural gas dis- 122 Lebanon, Israel, Cyprus, Turkey, Egypt, and Syria have territorial coveries have been made in the offshore areas of Israel stakes in this region. 146 Over the Horizon: a New Levant has been delayed considerably. Meanwhile Lebanon has bright. However it could consider export of gas in the raised the issue with UN that Israel may be drilling in the form of LNG. The adequacy of gas for such LNG exports exclusive economic zone of Lebanon. Though Israel and is not clear. Cyprus have concluded littoral agreements defining their Lebanon has taken major steps to arrange for exclusive economic zones, other parties such as Lebanon, the import of LNG by initiating the construction of Turkey and Egypt have raised objections. These territorial an LNG import terminal. It is not clear whether it will disputes inject a great deal of uncertainty in exploration proceed to import LNG on the basis of long-term con- and production of gas in these areas. However the dis- tracts and whether there is a conflict between the two pute between Lebanon and Israel relates only to about initiatives in the medium term. The offshore terminal 854 km2 (out of the total area of 83,000 km2). will be privately owned and constructed and on the basis Lebanon engaged a British firm (Spectrum Geo) of a tolling arrangement will receive the LNG imported to carry out the 2-D and 3-D seismic surveys (in its by the government, re-gasify the LNG and send the gas offshore areas), which have resulted in substantial gas to the government owned pipeline system. The tolling finds (about 25 tcf) in areas not covered by the disputes contract will be for a period of 12 or more years to enable between Israel and Lebanon. Gas seems to occur initial- the private owner to recover the costs of investment. The ly at depths of 3.5 km and again at lower depths of 6 to capacity of the terminal would be about 5 bcm per year. 7 km. Cost implications would be clearer after the explo- Palestinian Territories have no gas infrastructure, ration and production wells are drilled. The newly ap- but there is an undeveloped gas field lying off-shore at pointed Petroleum Administration Authority has carried Gaza Marine with a proved reserve of about 35 bcm. out the prequalification step and has prequalified 12 in- Its electricity sector plans include the use of natural gas ternational operators and 37 non-operators for partici- for power generation. Iraq has significant gas reserves, but pation in the licensing rounds. However the regulations owing to the decade-long conflict and limited gas infra- regarding the fiscal regime and legal framework do not structure, has been able to consume only limited quanti- appear to have been passed and announced. Extraction ties of gas. Iraq is flaring most of the associated gas pro- and use of gas by 2015 is envisaged. The schedule is con- duction. Nevertheless, gas consumption in the Mashreq sidered optimistic by many observers. countries has grown at an annual rate of 8.3 percent If Lebanon succeeds in developing its offshore gas during 1990–2010 and is expected to grow at an annual reserves, the first priority will be to meet its own de- rate of 6.75 percent during 2010–2030 (see Table 47). mand for the power sector, which is severely starved for The Mashreq region has large gas reserves, and fuel. However export of gas by pipeline by Lebanon via 94 percent of these reserves are in two countries, Iraq Syria to Turkey and then on to EU seems difficult because and Egypt, accounting for 55 percent and 39 percent, of the conditions in Syria and the lack of completion of respectively (Table 48). Gas production in Mashreq the Arab gas pipeline segment connecting Syrian and countries was only 14 bcm in 1990, but increased to Turkish gas systems. Israel is unlikely to need Lebanese 70.7 bcm by 2010 at an average annual rate of 8.4 per- gas, as it will have plenty of gas of its own. The only other cent. The current plans indicate that production will in- destination for Lebanese gas exports could be Jordan to crease from 70.7 bcm in 2010 to 220.95 bcm in 2030 at which gas pipelines have to pass through Israel or Syria. an annual rate of 5.86 percent. Nearly 91 percent of the Lebanon could connect to the Arab gas pipeline in Syr- production increase will come from Egypt (58.7 bcm) ia and use it to send gas southwards to Jordan, and even and Iraq (79.35 bcm). However, both Egypt and Iraq possibly to Egypt. On the whole however the prospects face significant constraints in expanding their gas pro- for Lebanese gas exports by pipeline do not appear to be duction capacity to the extent envisaged in current plans. REGIONAL INTEGRATION OF ENERGY SYSTEMS IN THE LEVANT 147 Table 47 Historical and Forecast Gas Consumption in Mashreq Countries (bcm) 1990 2000 2010 2020 2030 Egypt 8.24 21.78 45.10 72.80 97.79 Iraq 1.98 3.15 1.30 35.16 61.00 Jordan 0.12 0.26 4.20 5.6 8.1 Syria 1.69 6.10 8.50 20 39 Lebanon 0 0 0.15 7 10 Palestinian Territories 0 0 0 1.8 2.8 Total 12.03 31.29 59.25 142.36 218.69 Source: Compiled from the reports of national regulators. Table 48 Basic Data on the Gas Sector of Mashreq Countries 2010 2010 (data in bcm) Reserves Production Consumption Exports Imports Egypt 2,200 61.30 45.10 15.17 0 Iraq 3,200 1.30 1.30 0 0 Jordan 6.2 0.30 4.20 0 2.1 Syria 300 7.80 8.50 0 0.69 Lebanon 0 0 0.15 0 0.15 Palestinian Territories 35 0 0 0 0 Total 5741.2 70.7 59.25 15.7 2.94 Source: Compiled from the reports of national regulators. For Egypt the constraint is the size of its gas reserves, and with oil production) for domestic use and for export for Iraq the constraint is its implementation capacity. to Kuwait. It would also develop the gas reserves in the However it is not clear whether Egypt will main- north and west for export to Syria and Turkey, and even- tain its 2010 export level or reduce it to meet rising do- tually Europe. The plan aims at producing about 55 bcm mestic demand. If Egypt were to maintain its exports at by 2020 and 81 bcm/year of gas by 2030 of which about the 2010 level of 15.17 bcm, its surplus would be about 20 bcm should be available for exports. However, in the 12 bcm by 2020 and 7 bcm by 2030. The rapidly rising aftermath of the decade-long change of regime, Iraq faces internal and external demand for Egyptian gas has trig- major institutional and governance problems not con- gered political sensitivities to further exports and a tech- ducive to the rapid growth of the gas industry. The lack nical need to revisit gas allocation policies and priorities. of clear agreement on the role of the central government A moratorium on any increase in gas exports, announced and the provincial governments is a constraint adversely in 2008, is still in force. affecting wider competition for exploration and produc- The government of Iraq has prepared a gas uti- tion rights. lization plan (as a part of its comprehensive energy Considering the risks and uncertainties in the strategy) in order to utilize its gas fields in the south long-term supply of gas through pipelines, the gas (which are the largest reserves and mostly associated importing countries of the region are considering the 148 Over the Horizon: a New Levant Table 49 Gas Data for Libya and Tunisia (2010) (bcm) Country Reserves Production Consumption Export Import Tunisia 92.00 3.30 5.30 0.00 1.25 Libya 1,500.00 15.80 6.90 9.75 0.00 Source: Compiled from the reports of national regulators. LNG import option. Several studies have been under- (see Table 51). In 2010, it imported 6.35 bcm of gas taken into the potential for LNG supply to Lebanon in- from Turkmenistan and Azerbaijan and exported gas to dicating the economic viability of such an option to Leb- Turkey (7.77 bcm), Armenia (0.4 bcm) and Azerbaijan anon. Jordan and Syria are also pursuing similar LNG (0.25 bcm). Except in 2010, Iran had been a margin- import option. al net importer of gas despite having the second largest Libya’s gas exports declined due to the political tur- reserves and the third largest production in the world. moil. In 2010 Libya had reserves exceeding 1,500 bcm, Its consumption of gas has increased from 62.9 bcm in produced 15.8 bcm and exported 9.75 bcm. The country 2000 to 144.6 bcm in 2010 at an annual rate of 8.7 per- exported 9.41 bcm of gas in 2010 by pipeline to Italy and cent and it is expected to grow at about seven percent per 0.34 bcm of LNG to Spain. But exports declined steeply year in the coming decade.123 In view of the high growth in 2011 to 2.4 bcm (2.3 bcm by pipeline and 0.1 bcm of domestic demand and the steeply growing gas reinjec- as LNG). Tunisia has a modest reserve of 92 bcm of gas tion needs of the oil wells, Iran’s ability to dramatically but is believed to have 510 bcm of shale gas, which it is increase its volume of gas exports by pipeline in the near making a major effort to develop. In 2010 it had a mar- future is considered doubtful by many. This conclusion keted production of 3.30 bcm and imported 1.25 bcm of is particularly likely given the international sanctions, gas (see Table 49). Tunisia is a transit country for the gas domestic policy stance, and organizational complexity pipeline from Algeria to Italy and thus its gas needs are of the country, which are unlikely to attract the foreign met by domestic production, imports from Algeria and investment needed to increase production. royalty gas as transit fees, which it may draw in cash or in Turkey, on the other hand, has modest gas re- kind. See Table 49. serves and a small gas production, but has a high If Tunisia’s development of its shale gas resources and growing demand gas met by imports from sev- proves successful, it would become a notable exporter. eral sources. Its gas demand grew from 14.6 bcm in Projected production levels, domestic demand and export 2000 to 39 bcm in 2010 at an annual rate of 10.3 per- surpluses for Tunisia and Libya through 2030 are sum- cent. However, Turkish authorities estimated conserva- marized in Table 50. Libya is projected to have addition- tively in 2009 that the domestic demand will grow to al annual export surplus of 5.25 bcm in 2020 and 5.75 65.9 bcm by 2020, and 76.4 bcm by 2030 at a much bcm in 2030, while Tunisia’s import needs would grow to slower rate of about 3 percent per year. In 2010 Tur- 5.20 bcm by 2020 and to 6.70 bcm by 2030. It is plan- key imported by pipeline 28.76 bcm of gas from ning to export gas to EU using the Algeria-Italy pipeline Russia (16.64 bcm), Azerbaijan (4.35 bcm) and Iran (Enrico-Mattei pipeline), after meeting its own demand. (7.77 bcm). It also imported 7.92 bcm of gas as LNG Iran is world’s third largest producer of gas af- from various parts of the world. It has extensive gas ter the U.S. and Russia. Its reserves were reported at 33.1 trillion cubic meters; its production in 2010 was 123 Sources for data on Iran include: BP Energy Statistical Review 2010 146.2 bcm, most of which was consumed domestically and 2011, Natural Gas Exports from Iran, USEIA, 2012 REGIONAL INTEGRATION OF ENERGY SYSTEMS IN THE LEVANT 149 Table 50 Gas Sector Projections for Tunisia and Libya (bcm) Projected domestic demand Projected production level Current exports Projected surplus or deficit Country 2020 2030 2020 2030 2010 2020 2030 Tunisia 8.50 10.00 3.30 3.30 0.00 –5.20 –6.70 Libya 20.00 40.00 35.00 55.50 9.75 5.25 5.75 Source: Compiled from the reports of national regulators. Table 51 Gas Sector Data for Iran and Turkey (2010) (bcm) Reserves Production Consumption Export Import Iran 33,100 146.2 144.6 8.42 6.85 Turkey 6.2 0.7 39 0 36.68 Source: Compiled from the reports of national regulators. transmission, storage, and distribution facilities and a Trade on the AGP has been limited. Trade volume sophisticated competitive gas market and is emerging is far below its annual design capacity of 10 bcm and as a major gas hub for transit of pipeline gas from the even lower than the contracted quantities. The only firm East and the South to EU. sales on the AGP have been made between Egypt and Existing cross-border gas networks are operation- al in the region. As illustrated in Figure 63 the Arab Gas Pipeline (AGP), intended to supply Egyptian gas Figure 63 Existing Pipelines in the Region to Jordan, Syria and Lebanon, and eventually to the EU through Turkey and the Arish-Ashkelon pipelines, in- tended to supply Egyptian gas to Israel, are the two ex- isting cross border pipelines in the Mashreq region. Sec- tions of the AGP up to Homs in Syria as well as the spur from AGP to Tripoli have been constructed and became operational in phases. Jordan started getting supplies in July 2003, Syria in July 2008, and Lebanon in October 2009. The construction of the section from Homs to Ki- lis (in Turkey) and then on to the Turkish gas network has not yet been undertaken in view of the emerging concerns about the adequacy and availability of Egyp- tian gas. Syria therefore sought agreement with Turkey to construct the pipeline from the Turkish end up to Alep- po in Syria to import gas from Azerbaijan via Turkey. The plan was to link Homs to Aleppo when Egyptian gas supply became certain or if Iraq’s export plans material- ized. At that point the gas flow could be reversed in the Aleppo-Kilis section. 150 Over the Horizon: a New Levant Jordan. Egypt had been slow in ramping supply up to its Libya has an under-sea gas pipeline. Greenstream, export commitment to Syria and Lebanon due to infra- a 520 km long 39-inch diameter gas pipeline, from Mel- structure constraints. Egypt exported 3.3 bcm to Jordan, itah to Gela in Sicily, is operational since 2004. Libya has 0.9 bcm to Syria and 0.3 bcm to Lebanon, represent- also a LNG facility at Marsa el-Brega, built in 1971 with ing about 45 percent of the AGP design capacity. It was an annual capacity of 2.3 million tons. But owing to expected that by 2013, Egypt’s gas exports through the historic developments in Libya, the facility’s annual pro- AGP would increase to 4.2 bcm to Jordan, 2.2 bcm to duction capacity has declined to 0.7 million tons and it Syria and 0.6 bcm to Lebanon, representing 70 percent is being operated by a subsidiary of the Libyan national of the AGP design capacity. However, in the context of oil company. Royal Dutch Shell and the subsidiary have regime change, the resentment of the Egyptian people had agreements since 2005 to rehabilitate and upgrade against gas exports resulted in serious damages to the the annual capacity to 3.2 million tons (possibly by con- pipeline infrastructure and prolonged interruptions of structing a new plant and prospecting for additional gas supply in 2010 and 2011. In the course of 2011 the supplies). Plans to construct new LNG facilities at Mel- supply through AGP ceased fully, causing major prob- itah and Ras Lanuf are also being pursued. A map of the lems to Jordan, which is almost entirely dependent on region indicating the existing and possible key cross bor- imported energy. Except for about a year Lebanon did der gas pipelines, as well as existing and planned LNG not get any supply.124 Supply to Jordan through AGP terminals is given in Figure 64. was resumed in late 2012 and has reached the level of about 2.48 bcm by early 2013. Supply to Israel faced resentment from the beginning and supply disruptions Potential for Increased Electricity and through pipeline damages became commonplace. Later Gas Trade in 2012 Egypt formally cancelled the contract claiming that the Israeli importing company had defaulted in Potential electricity trade in the region will reduce payments. the cost and increase the reliability of power supply. Another pipeline worth mentioning is the short Power trade is, by and large, in the form of opportu- pipeline from southern Iraq to Kuwait, extensively nistic electricity exchanges among the interconnected damaged during the war and in need of rehabilitation or systems based on the hourly variations during each day replacement, which has not happened despite the decla- and seasonal variations during the year in each system. rations of the two governments. To the extent the interconnected countries are in differ- Egypt has two natural gas liquefaction plants. ent time zones (function of latitude) or have different One plant is at Damietta (called the SEGAS plant) seasons (function of longitude and elevation) or differing with a single train and a design capacity of 4.8 mil- working days and holidays, there will be diversity in the lion tons/year, and the other plant is at Idku (called demand variations in each country resulting at any given ELNG) with two trains and a capacity of 3.6 million time some country having surplus capacity/energy while tons/year. It has also has provision for constructing an the others have capacity/energy deficits enabling trade. additional six trains in the future. In 2010 LNG from In addition, differing short-term marginal costs among Egypt was exported to Spain (2.62 bcm), the United the interconnected systems also create the arbitrage in- States (2.07 bcm), and 14 other countries all over the ducing trade. world (5.02 bcm) The LNG exports had declined from 14.97 bcm in 2006 to 9.71 bcm in 2010 and further 124 There are also reports of suspension of supply for nonpayment of declined to 8.6 bcm in 2011. dues by Lebanon. REGIONAL INTEGRATION OF ENERGY SYSTEMS IN THE LEVANT 151 Figure 64 Existing and Proposed Gas Pipelines and LNG Terminals Regional trade helps the electricity systems to interconnect the grids through a back-to-back HV AC/ lower their reserve margin, increase reliability, and DC interface. enable investments in generation projects with econ- When power trade among the member systems of omies of scale. The full benefits of trade are achieved the regional grid become stable and reliable, investors only when the interconnected systems operate synchro- could consider establishing generating capacities much nously observing a common grid code, and adhering to larger in size. Such a decision would be based on the the technical standards relating voltage and frequency comparative advantage of the host country such as ac- regulation, quality standards of supply, communication, cess to lower cost fuel, site facilities, distance to poten- and protection systems. For sustained synchronous op- tial markets, and business friendly approach of the host eration, each country should have enough capacity of governments. Often the establishment of such genera- its own to meet its forecast demand reliably.125 In daily tion facilities leads initially to bilateral trades and later operations, when demand exceeds available capacity, the to the evolution of regional markets. The ultimate goal system should have in place an orderly shedding of excess of an integrated power market is to optimize the sup- loads to protect the system stability and quality of sup- ply of electricity within a broad, regional (rather than ply. Otherwise the unbalanced system will draw power confined, national) framework. Often this is thought to from the interconnected systems more than the planned be achievable in a market environment where every par- volumes, thus jeopardizing the interconnected systems. ty has equal access to all networks (domestic, regional, When systems cannot be thus synchronized, limited and international); where market data and information power exchange can take place in an island mode, when (pricing, market operation, and capacity allocation) are the source is islanded from the supplying grid and syn- chronized with the receiving part of the recipient grid. 125 Such capacity could also include firm power purchase agreements Another, though somewhat more expensive, option is to with other countries, with guaranteed transmission rights. 152 Over the Horizon: a New Levant transparent; and where electricity tariffs cover the cost Iraq has substantial associated and non-associ- of supply, power-grid codes are harmonized, systems are ated gas and the rapid development of its oil export synchronized, and markets liberalized. business is expected produce a large volume of gas. Iraq The international experience indicates that the needs to look for opportunities to gather the associated above conditions can be met only over time as the par- gas and export it through pipeline to its neighbors on the ticipating countries reform their electricity sectors. basis of flexible supply contracts which allow the volume The sector is reformed through unbundling the gener- to rise in line with increases in production and transpor- ation, transmission and distribution functions, evolu- tation of gas in Iraq. Turkey, Jordan, Lebanon and Jor- tion of transparent transmission and distribution (wire dan could benefit by this development, since the pipeline services) tariffs, evolution of transparent, fair, and stable distances are relatively short. Thus the list of new possi- regulatory arrangements, and price reform at all points ble pipelines includes several from Iraq to these coun- reflecting cost of supply. However, at the initial stages tries often making use of the AGP system. Iraq has also electricity trade is promoted through the construction of the ambition to supply large volumes such as 30 bcm the additional transmission links to enable free flow of to EU through Turkey. However Iraq governance must power within and across the countries (operating syn- improve the differences of opinion between the central chronously) and additional generating capacity (or that government and the Kurdish region authorities on their acquisition of firm PPAs with guaranteed transmission roles and responsibilities in the hydrocarbon sector must rights) to properly balance the demand and supply in be reconciled to enable the country to attract the much each country. Institutional arrangements at this stage needed investment for the development of the sector. should include a regional coordinating body with full Libya has also the potential for increasing its gas and empowered functionality and regional settlement exports. Libya’s incremental exports are more likely to go arrangements. The institutional arrangement would to the EU’s attractive, dependable and solvent market, then evolve over time into the structure that is needed to based on its several years of trade association and expe- plan and operate an integrated network of participating rience, rather through long and difficult pipelines to the countries. AGP system. It is also expanding its capacity for LNG Export surplus in natural gas trade appears to ex- exports for which Mashreq countries could compete in ist, prima facie, in Iran, Iraq, Libya, and Egypt. De- the international market. spite having the world’s second largest reserves, and third Egypt’s gas export potential cannot be taken for largest annual production of gas, Iran has been a net im- granted. Rapid increases in domestic demand caused porter of gas in recent years, except in 2010. It has ma- substantially by the country’s energy pricing and subsidy jor institutional, organizational, and policy constraints policy, makes it politically difficult to maintain even the inhibiting the sound and economic growth of the sector existing level of exports, while the domestic power gas and attracting the needed investments. The political situ- shortages create great public ire. Exports through AGP ation and the international sanctions regime are also not and the Arish-Ashkelon pipeline aced the risk of sup- conducive to enable any optimism in this regard. As of ply disruption and contract cancellation, highlighting now, one can only envisage Iran maintaining the level the political risks of gas trade by cross-border pipelines. of pipeline exports to Turkey on the basis of getting gas Egypt still has a moratorium against incremental exports imports from Turkmenistan, and the volume increasing and is pursuing the proposal to import LNG to meet only in the context of Turkmenistan agreeing to supply its rising domestic demand for gas. The best that can be large volumes to EU through Turkey and Iran through hoped for under these circumstances is the possibility of the Nabucco or other planned alternative lines. Egypt maintaining about 3 bcm supply to Jordan, far REGIONAL INTEGRATION OF ENERGY SYSTEMS IN THE LEVANT 153 below the AGP design capacity of 10 bcm. The spare the buyer’s benefit from using gas, potentially exceeding capacity will have to be made use of by Iraq when its US$11–12/MMBTU. This wide range creates a prob- exports develop. lem of differing expectations between sellers and buyers. Levant countries should be prepared to compete The LNG market is helping to narrow the range of price with the EU for LNG supplies in terms of prices, ad- negotiation. Global demand for gas has grown rapidly, herence to contracts, and payment terms. All countries pushing up gas prices; nevertheless, there is a need for have access to seacoast and several countries (Jordan, much stronger economic incentives if suppliers of gas Lebanon, Syria, and Egypt) are pursuing the construc- and electricity are to invest in capacity expansion aimed tion of LNG import terminals. Turkey already has these at energy exports. Table 52 includes the main bench- facilities. As long as the countries needing gas imports marks to consider in the discussion of gas prices. The can afford to import LNG in the internationally trad- estimated values are assumed based on Egyptian gas in- ed or long term contract market, by suitably adjusting formation. The framework follows Egypt’s decision chain the domestic gas user prices, gas trade can expand in the in determining: (i) the amount of gas to be produced at form of LNG. each given time; (ii) the amount to be allocated for do- mestic use; (iii) the amount to be allocated to exports in the form of LNG; and (iv) the amount to be allocated to Main Bottlenecks to Regional Integration exports in the form of piped gas to Mashreq countries. of Energy Systems Domestic gas use imparts the highest economic ben- efit to Egypt even though the financial return may be There are a number of institutional, regulatory, and low due to the prevailing energy price subsidies. Egypt technical constraints to the expansion of electricity therefore is likely to assign the highest priority to meeting and gas trade in the Levant. However, the overarching the gas requirements of its own economy. Should there be bottleneck is the unavailability of gas or electricity to sell, additional gas to allocate to exports Egypt is likely to give which is in turn influenced by the lack of economic in- priority to LNG exports to Europe or Asia rather than centive to develop export capacity. Gas/electricity trades to piped gas exports to other Mashreq countries unless impart significant benefit to the importing countries. For the importing Mashreq countries are willing to pay com- example for most countries in the region the import of parable prices. The essence of the recommendation here gas yields a benefit of more than US$11/MMBTU, yet is that Jordan, Syria, and Lebanon should be prepared their expectation is to pay a substantially lower price for to provide a commercial incentive to encourage Egypt the imported gas. The reason is that electricity and gas to supply the Mashreq market via the AGP prior to any trade have traditionally been viewed as a means of utiliz- further allocation to LNG. While the relevant price lev- ing idle capacity or idle resources. However, the nature els are subject to research and negotiation, the emerging of the business has changed; sellers need to develop ad- gas price is likely to be much higher than the underlying ditional capacity for export purposes and will not under- prices of previous contracts between Egypt, Jordan, and take the required investments unless they are confident Syria. Higher gas prices would provide a strong commer- of an attractive return on their investment. cial incentive for exploration and development of Egypt’s Unlike oil, there is not yet a generally accepted in- large estimated yet-to-be-found gas reserves. ternational price for gas. Cross-border gas transactions Short-term power exchanges are often based on are thus mostly based on negotiated prices. There is often idle capacity and are feasible as long as the price covers a wide range for price negotiation from the seller’s cost of supply, typically ranging from US$1-3/MMBTU,126 to 126 This excludes depletion premium. 154 Over the Horizon: a New Levant Table 52 Estimated Price for Egyptian Gas (US$ /MMBTU in 2009 Prices) Estimated Price Explanation Benchmarked on Egypt’s Cost of Gas Supply Long-run marginal cost (LRMC) — US$1.5–2.6 Cost of gas development and production in Egypt’s new gas fields is expected to be much higher than in the past. Depletion premium — US$1.4–3.6 Based on the projected gas production profile and current reserves Egypt would need to switch to alternative fuels Economic cost — US$2.90–6.2 as gas supply becomes a constraint, resulting in a depletion premium of US$1.4 in 2010, increasing to US$3.6 by 2020. Benchmarked on Egypt’s Opportunity Cost Benefit from Domestic Use: The power sector serves as the first vehicle for shifting in and out of gas consumption. The avoided cost (or Avoided cost in power — US$7.5–12.5 netback value) in power constitutes an important measure of gas use in the domestic market estimated on the Avoided cost in residential and commercial sectors - basis of a steam plant fired with heavy fuel oil compared with gas use in a steam plant (lower netback), or a US$11 combined cycle plant (higher netback). The avoided cost in the residential/commercial sector is based on the alternative of using diesel oil and LPG. Benefit from LNG Export LNG prices are normally linked to a basket of energy products but are also correlated with gas prices in major European gas price (average 2011): US$10.61 (-) markets (North America, Europe and Asia). The sharp decline in gas prices in North America resulted in a drop Re-gasification cost — US$0.45 (-) in LNG prices in 2010. However, LNG prices in other major markets (Asia, EU, and Far East) have substantially Shipping cost — US$1.00 (-) recovered to previous levels and have even increased. The European price is considered an appropriate Liquefaction cost — US$3.8 (-) benchmark for exports of LNG from North African countries. Pipeline cost — US$0.25 (=) US$5.11 Benchmarked on the Benefit of Gas Use in Receiving Countries Netback value (avoided cost) estimated for: The alternative plant built in the absence of gas is steam plant fired with heavy fuel oil. Jordan, Lebanon and Jordan — US$8.00 Turkey import fuel oil while Syria uses mostly domestic oil. Netback values are reduced by the cost of transmission Syria — US$7.60 to the destination country. Lebanon - US$8.30 to US$10.00 Turkey — US$8.00 Expected Price for Egyptian Gas At the Egyptian border: Estimating a fair price is not an exact science; however, Egypt should receive a price that would encourage gas US$4.00–6.00 exploration and development, and allocation of gas to pipeline exports rather than LNG. Transport to Jordan — US$0.50 Based on an average levelized cost of transportation from Egypt to each of destination countries. Transport to Syria — US$0.65 Transport to Lebanon — US$0.70 Note: LRMC is estimated at US$1.5 to US$2.6. Financially, Egypt buys gas from producers at about US$3 while receiving some of the gas in return according to a production-sharing contract. The average cost is about US$1.6. variable costs including fuel and operation and main- peak period when it has oil plants on the margin would tenance. For example, there may be an economic basis be US$0.10/kWh. However, the cost of electricity gener- for short-term exchanges of electricity between Egypt and ation could be much lower (US$0.041–0.061/kWh) in Syria because their peak demand occurs at different times the future if Egypt has gas plants on the margin. Similar- of the day. Longer-term trades generally occur when a ly, the longer-term electricity trade could be based on a country has a cost comparative advantage over another cost of generation ranging from US$0.039–0.051/kWh. country, or has excess generating capacity forecast for an Short-term exchanges and longer-term trades of Egyptian extended period of time. Currently, the more likely sce- electricity would only make sense if the importing coun- nario is for Egypt to export electricity to other Mashreq tries were willing to pay prices in excess of these levels countries. The indicative costs for short and long-term ex- plus the cost of transmission. A further implication is port of electricity from Egypt are summarized in Table 53. that Egypt may want to weigh the potential returns from Under the current conditions the cost of electricity gener- the export of electricity versus the export of gas. It ap- ated in Egypt for short-term power exchanges during the pears that electricity export to a market like Turkey where REGIONAL INTEGRATION OF ENERGY SYSTEMS IN THE LEVANT 155 Table 53 Estimated Price for Egyptian Power its gas and electricity sectors in line with the EU prac- (US cents/kWh in 2009 Prices) tices and according to the EU standards that facilitate Expected Price cross-border energy trade. Turkey is an excellent destina- (US cents/kWh) Explanation tion for electricity exports with attractive prices, market Short-term Exchange-Oil In Egypt’s present configuration peaking and some Fuel cost: 9.3 intermediate units run on HFO. The fuel cost is structures and market players. Additionally, Turkey has Variable O&M cost: 0.7 calculated as the levelized value of HFO based on been rather successful in establishing a market structure Generation cost: 10.0 World Bank forecasts of international oil prices. and regulations that are conducive to energy trade. The Short-term Exchange-Gas Egypt may have gas-fired open-cycle turbine Electricity Market Law of 2001 obliges the transmission Fuel cost: 3.9 to 5.9 generation available for sale at certain times of Variable O&M cost: 0.2 the day and year. The fuel cost is calculated as the and distribution companies to allow open, guaranteed, Generation cost: 4.1 to 6.1 levelized value of gas at US$ 4 to 6/MMBTU. and non-discriminatory access to the network by third Long-term Trade The long-term trade is based on a large volume parties to facilitate competition in the electricity mar- Capital cost: 1.0 electricity export over an extended period of time Fuel cost: 2.5 to 3.7 in which case Egypt would invest in gas-based ket. The arrangements to facilitate cross-border gas trade O&M cost: 0.4 combined cycle generation. Fuel cost is based on have been concrete. Until 2001 the state owned Oil and Generation cost: 3.9 to 5.1 a natural gas price of US$4.00–6.00 per MMBTU. Gas Pipeline Corporation (BOTAS) was the monopoly Market Price in Turkey Average wholesale price in Turkey’s balancing Wholesale: 10.8 market from August 2006 to April 2009 (73.88 responsible for imports, transmission, wholesale opera- Euros/MWh converted at exchange rate of 1 US$ tions, storage, and distribution of natural gas. The Nat- Transmission Costs = 0.6822 Euros) To Jordan: 0.03 ural Gas Market Law of 2001 reorganized the structure To Palestinian Territories: 0.03 of the market to enable private sector entry and competi- To Syria: 0.21 To Lebanon: 0.26 tion on the lines of the EU gas directives. Under this law To Turkey: 0.36 BOTAS was not allowed to sign new import contracts till its market share fell to 20 percent, was obliged to transfer 80 percent of the existing contracts or the volumes of wholesale prices are quite high, close to US$0.11/kWh supply under them to new entrants by 2009, was not average in recent years, may prove more profitable than allowed to carry on further distribution activity, and was gas exports to the same market. obliged to privatize its distribution subsidiaries. Private sector investments were allowed in imports, exports, gas trading, storage, and distribution. Only transmission was The Relevance of the Neighboring envisaged to be in the public sector. Countries Lessons emerge from studying the EU energy sys- tems. The liberalization of the European electricity mar- The linkages to the outlying countries Turkey and Iran kets has encouraged more integrated dispatch based on as well as the European Union (EU) need to be taken economic grounds across regions. Several reform mea- note of in the context of the energy integration of the sures have been undertaken in the EU through various countries under discussion. Libya plans to connect to the directives with the objective of promoting competition EU grid through a submarine cable as well as intercon- in the internal electricity market and enabling cross-bor- nection to Tunisia, which is already connected to the EU der transactions. The first package of directives, issued in systems through Algeria and Morocco. Mashreq coun- 1996, enabled the largest consumers to choose their sup- tries have had an aspiration to connect their power grids pliers and also provided for open access. A second package to the EU system. This is often envisaged to take place of directives were issued in 2003 that required a step-wise through Turkey. At the same time Turkey has pursued a opening of the retail market with the target of full open- vision of becoming an energy hub and has restructured ing by July 2007. Still, there was a view that electricity 156 Over the Horizon: a New Levant markets largely remained national in scope and had high (as opposed to the continuous and dispatchable power levels of market concentration. This led to issue of the supply from conventional power stations). The supply third package of directives in June 2009 which aimed from such RE sources is difficult to absorb in smaller at full retail market liberalization and a level of effective grids. Regional integration of power networks results in unbundling that would promote development of cross larger and more diversified power generation capacity border transfer capacity and cross-border competition. than in isolated national markets, and thereby provides Iran complements the Mashreq energy networks, a better opportunity for the development of RE and the while at the same time can potentially compete in ex- absorption of power from them. Development of region- porting electricity and gas to some common destina- al grids could possibly provide stronger commercial in- tions particularly Turkey and Europe. Iran’s substantial centives for the development of a local industry in the gas reserves give it a comparative advantage in electricity manufacturing of the RE equipment. Fourth, there is a exports to Turkey and also possibly via Turkey to the Eu- substantial international financial support for RE devel- ropean systems. Iran can also be a key transit country for opment which could be tapped into by the public and electricity exports from Turkmenistan to Turkey and be- private entities in order to expand RE generating capac- yond. However, in view of the high growth in domestic ity while strengthening cross-border interconnections electricity and gas demand and also the steeply growing that offer synergy between RE and regional integration. gas reinjection needs of the country’s oil wells, the ability The impact of renewable energy on the regional of Iran to dramatically increase its volume of gas or elec- integration agenda has been explicitly addressed in tricity exports in the near future is considered doubtful various solar initiatives. In particular, the MENA Con- by many, especially in the context of international sanc- centrated Solar Power Initiative is formulated to promote tions and a limited ability to attract foreign investment the application of CSP in the MENA region, which re- needed to increase gas production. ceives some of the most intensive solar radiation in the world and has some of the best markets for solar energy within the region. The Initiative has received approval The Impact of Renewable Energy from the Clean Technology Fund for US$750 million Development on the Regional Integration concessional financing in support of a proposed invest- Agenda ment plan with a total cost of US$6 billion. It is also worth noting that the development of RE in Mashreq Regional integration efforts are becoming somewhat (and more broadly MENA) will be further strengthened intertwined with the development of renewable ener- by the financial incentives for export of clean energy gy. The impact of renewable energy (RE) development to Europe. These exports will in turn require capacity is four fold. First, most RE sites (wind farms and solar reinforcement of major transmission corridors within fields) are far from the power grids and would require Mashreq countries (i.e., the Egypt-Jordan-Syria trans- dedicated transmission lines to evacuate power to the mission corridor) as well as expansion of the transmis- grid; this affects the overall transmission capacity and the sion interconnection between Syria and Turkey. There- possibility of electricity trade. Second, RE power supply fore, the completion of the synchronization of Turkey’s is expected to grow substantially and provide a source of transmission network with the EU grid and the prospect electricity export. For example, Egypt alone is planning of long term integration of the electricity networks of to add more than 7000 MW of wind energy over the Turkey and the Mashreq will provide a massive transfor- next 10 years. Third, wind energy and solar energy instal- mation opportunity to the entire Mediterranean Basin lations provide intermittent or interrupted power supply for enhancing the security of the energy supply, and in REGIONAL INTEGRATION OF ENERGY SYSTEMS IN THE LEVANT 157 development of solar power in the MENA region and open access and consistent and fair pricing of transport; green electricity exports to Europe. (iv) energy pricing and taxation; and (v) identifying an independent process and procedure for resolving dis- putes relating to regional energy transactions. The sec- Potential Projects for Regional Integration ond track relates to help in cross-border transactions. This is an area with significant gaps in terms of realistic Recent studies by the World Bank have identified a set information, preparatory steps for, and structuring of of potential projects in electricity and gas sectors. A such transactions. summary list of the proposed projects in the electricity The World Bank provides technical support in sector is given in Table 54 and a similar list for the gas energy sector. In the area of harmonization, the Arab sector is given in Table 55. League and the World Bank carried out a joint study on the institutional and regulatory framework for electricity The Role of the World Bank and other trade. The results of the study are now being used by the Development Partners Arab League and Arab countries to develop and set up a harmonized legislative structure and the electricity cross To move the preparation and implementation of gas border codes necessary for promoting electricity trade and electricity integration forward in the Mashreq re- among Arab countries and with targeted neighbouring gion two parallel tracks need to be pursued. The first regions including the EU market. The World Bank car- track relates to the harmonization of: (i) technical codes ried out a study of gas integration and trade among Arab and standards for the national energy systems; (ii) regu- countries. This study has also identified the potential gas lation in the national energy sectors; (iii) goals and mile- trade projects for implementation within a short-, medi- stones for energy sector reform relating to, in particular, um-, and long-term framework. In relation to the second Table 54 Proposed List of Power Sector Investments to Support Increased Regional Trade No. Project Remarks 1 Second 400 kV Line between Egypt and Jordan To enable larger flow from Egypt to Jordan, Syria, Lebanon, and Turkey 2 A second 400 kV Interconnection between Syria and Lebanon To enable increased flow of Egyptian power to Lebanon 3 Upgrading Iraq to Syria Interconnection from 220 kV to 400 kV To enable initially Iraq to import from and later export to Syria larger volumes of power generated based on Iraqi gas (Akas Gas field) 4 A 400 kV 800 km long line from Iraq to Jordan Jordan can facilitate independent power producers (IPPs) to set up large Iraqi gas based generation and Iraq can import power from Jordan initially and later use the line to sell its own power to Jordan and the connected networks. 5 A new 400 kV line 101 km long from Jordan to West Bank To enable adequate flows to West Bank 6 A 50 km long double circuit 220 kV line from El Arish in Egypt to Gaza To provide adequate and reliable supply to Gaza 7 Second 400 kV line from Iraq to Turkey This will enable flow of an additional 400 MW of power through the interconnection 8 A second 400 kV line between Iraq and Iran To increase at a later date the capacity beyond the present capacity of 325 MW for exchange. 9 Upgrading of the Egypt to Libya interconnection to 500 kV AC line or To enable Egypt to be a part of the Mediterranean Power Ring through a back to back HVDC line 10 A regional coordination center To coordinate the interconnected operations of the regional grid and also to facilitate regional optimization of generation and transmission planning. 11 IPP owned New Generation capacity of 500 MW or more in Jordan To supply Lebanon, Iraq, Syria, and Palestinian Territories, besides Jordan using Iraqi/Egyptian gas 158 Over the Horizon: a New Levant Table 55 Proposed List of Gas Sector Investments to Support Increased Regional Trade No. Project Remarks 1 Expansion of trade through AGP to Jordan, Syria, and Egypt to increase yearly supply volume to 10 bcm (full capacity). In 2010 the supply was only 3.36 bcm Lebanon. and it declined in 2011. Supply resumed at the end of 2012. 2 Gas pipeline from Homs to Aleppo in Syria to complete 240-km-long, 36-inch-diameter. the last phase of the AGP. Capital cost US$395.5 million. Capacity 10 bcm/yr. Removes constraints in Syrian system for gas flow. 3 Iraq-Syria pipeline. 93-km-long, 22-inch-diameter pipeline from Akas field (Iraq) to Syrian gas network near border. Capacity 4 bcm/yr. Capital cost US$116 million. Annual sales initially 2 bcm rising to 4 bcm in 10 years. 4 Kirkuk (Iraq)-Akas-Homs (Syria). 780-km-long, 48-inch-diameter pipeline. Capacity 15 bcm/yr. Capital cost US$1,711.80 million. This can supply Syria, as well as Jordan and Lebanon and Turkey (via AGP). 5 Kirkuk (Iraq)-Amman (Jordan). 984-km-long, 42-inch-diameter pipeline. Capacity 10 bcm/yr. Capital cost US$1,889.76 million. This can supply Jordan and other countries on the AGP. May not be needed (or undersized) if line 4 is built. 6 Kirkuk (Iraq)-Erzurum (Turkey). 589-km-long, 48 inch-diameter pipeline. Capacity 20 bcm/yr. Capital cost US$1,292.49 million. This will supply gas from northern Iraq to the Nabucco pipeline. 7 Basra (southern Iraq)–Kirkuk-Erzurum (Turkey). 1,390-km-long, 48-inch-diameter pipeline. Capacity 20 bcm/yr. Capital cost US$3,049.65 million. This will supply gas from the whole of Iraq to the Nabucco pipeline. This could also be sized to accommodate 30 bcm exports if production in Iraq develops. 8 Western gas fields of Libya to Arish in Egypt. 2,800-km-long, 48-inch-diameter pipeline. Capacity 25 bcm/yr. Capital cost US$6,142.5 million. This will feed into the AGP and could also supply Egypt. The transit fee payable on the AGP segments should enable the expansion of their capacity. 9 Marsa El Brega (eastern Libya) to Obeyed (western desert 571-km-long, 40-inch-diameter pipeline. Capacity 8 to 12 bcm/year. Capital cost US$1,041.30 million. of Egypt). Yearly O&M cost US$10.68 million. This will supply to the western Egyptian system. 10 LNG import facilities for Jordan at Aqaba. Capacity 4 bcm/year (FSRU). Capital cost US$300 million. 11 LNG import terminal in Lebanon. Capacity 5 bcm/year (FSRU). Capital cost US$350 million. 12 LNG import terminal in Syria. Onshore facility. 5 bcm/year capacity. Capital cost US$500 million. track, i.e., formulating transactions, the World Bank „ Proposing specific schemes to the relevant sub-sets pursues, through its operational activity, support for of stakeholders; implementing cross-border energy projects. The World „ Supporting project implementation by providing fi- Bank and its partners can assist Mashreq countries in this nance from its own funds, and mobilizing resources particular area by: from other donors and the private sector; and „ Coordinating project implementation, which is „ Playing the role of convener and facilitator by bring- often the biggest challenge in regional integration ing together the stakeholders: governments, regional projects. entities, private sector, financiers and donors, and (non-government organizations (NGOs); IMPROVING CONNECTIVITY: 7 THE ROLE OF ICT AND TRANSPORT SERVICES C onnectivity is a major issue in the Levant. There are complementarities to be realized from trade in IT services in addition to the benefits of enhanced information and communication technologies (ICT) services as an enabling platform for trade in other sectors. ICT can help increase the overall enabling environment for enhanced economic cooperation and trade integration in the Levant. There is a large opportunity for telecommunications services trade. In some of the Levant countries, FDI in telecom- munications has represented up to 40 to 50 percent of all FDI in the past few years. Also, there is a strong opportunity for the mobile app and software markets to grow beyond national borders and create greater value added at a regional level, benefiting from larger economy of scales. However, the region is lagging behind the world in crowdsourcing, which could otherwise have a great potential for job creation through ICT-enabled trade of professional services. There is limited scope for trade in hardware, or to develop a hardware industry for export purposes. Furthermore, air transport patterns in recent years than those countries have with each other. Turkey is not in selected regional markets suggest that fast growth is a member of the plurilateral arrangement that governs possible. Turkey, which aspires to serve the region as a air passenger traffic among most of the Arab states—the hub, has seen rapid growth in air passenger traffic, within Inter-Arab Freedom of the Air Programme of the Arab the region and with the rest of the world. Turkey is in Civil Aviation Commission (ACAC). Instead, WTO fact already emerging as a de facto hub with strikingly in- measures suggest that Turkey’s bilateral passenger traf- creased in traffic in recent years with all countries in the fic arrangements with these countries are quite restric- region, including Iran. This growth has occurred despite tive. Moreover, the ACAC agreement itself seems not to the fact that Turkey still has more restrictive bilateral air have lived up to its potential and has been less liberal in services agreements with many countries of the region practice than its formal terms would suggest. There are 159 160 Over the Horizon: a New Levant significant gains, in terms of higher likelihood of direct found that Internet access stimulates export activities by flights and the magnitude of passenger traffic, from es- industrial and service enterprises. Clarke and Wallsten tablishing and fully implementing a regional open skies (2006), in a study of 27 developed and 66 developing agreement. The chapter discusses the role that improved countries, found that one percentage point increase in connectivity through better ICT and transport services the number of Internet users is correlated with a boost in can play in trade integration in the Levant. exports of 4.3 percentage points. There is growing consensus that high-speed broad- band Internet is a driver of competitiveness and pro- The Role of ICTs for Enhanced Economic ductivity. The impact of ICT services on economic Cooperation growth has been well documented. A number of studies have found a positive contribution of broadband and ICT services help connect, innovate, and transform lo- mobile penetration to economic growth. A World Bank cal trade regimes; they create the necessary enabling study, using a panel of 120 countries concluded that an environment for trade to flourish. Connectivity en- increase of 10 percent in broadband Internet penetra- hances virtual platforms for outsourcing and offshoring tion in developing countries could result in 1.38 percent activities. Innovation lends itself to the development GDP growth; in addition, a 10 percent increase in mo- of new hybrid goods and services across industries by bile penetration could result in a 0.81 percent increase in harnessing the power of communication technologies. GDP growth.127 Transformation happens through the development of digital platforms that can facilitate the administration of trade processes for businesses and governments. ICT Trade Flows in the Levant: Identifying ICT services have become an important foun- Key Complementarities dation for trade competitiveness in an increasingly connected world. “By disrupting traditional econom- Despite considerable variation in the size of ICT sec- ic production, copyright law and established com- tors in the Levant region, comparative advantages in petition, ICT services pave the way for a new set of ICT trade can still be identified. In Turkey, the gross ex- economic laws, where empowered individuals are put penditure on ICT goods and services (at US$403.5 per on a level playing field with industry giants” (TED- capita) including computer hardware, computer soft- Blog 2008). Coupled with advances in transportation ware, and communication services is around double the technologies, improved ICT services have led to the MENA regional average (US$178 per capita). Countries creation of new organizational innovations in which such as Lebanon and Tunisia have large shares of ICT industry supply chains can now span countries and services exports (47.8 percent and 10.8 percent respec- borders, increasing global trade both within industries tively) relative to the overall amount of ICT exports, and between them. which places them at a comparative advantage in terms Communications costs and Internet access have of ICT exports (Table 57). an impact on trade patterns. Using a model of bilater- Comparative advantages do exist in the trade of al trade, Fink et al. (2005) found that communications ICT goods and services in the Levant that could be costs affect trade patterns significantly. Clarke (2008) in- better exploited with respective government policies vestigated the question whether Internet access affects the and trade agreements. Despite the fragmented data, the export performance of enterprises in low- and middle-in- come economies in Eastern Europe and Central Asia. He 127 Qiang and Rossotto 2009. IMPROVING CONNECTIVITY: THE ROLE OF ICT AND TRANSPORT SERVICES 161 Box 1: International Communications Costs in the Levant The cost of international communications is an important obstacle to enhanced trade cooperation in the region. As presented in Table 56, there is large difference between Turkey and neighboring countries. Turkey’s skype-out rate stands at 3.7 cents compared to higher rates in the region, such as 15.9 cents in Egypt, 20.8 cents in Jordan, and 39.5 cents in Tunisia. Fixed broadband penetration in Turkey (39.3 percent) is almost double the weighted average penetration in neighboring countries (21.2 percent). This indicates the need to reduce international telecom connectivity cost among the Levant countries as an important foundation for enhanced trade integration and economic cooperation. Table 56 Key Telecommunication Statistics, Eastern Mediterranean Region 2013 Skype-out Rate Fixed Broadband Mobile Broadband Population 2011 (US c/min.) Penetration (%) Penetration (3G+4G) (%) (million) Turkey 3.7 39.3 58.5 73.6 Tunisia 39.5 23.4 5.09 10.7 Libya 30.2 8.6 23.08 6.4 Egypt 15.9 14.1 58.6 82.5 Lebanon 12.6 29.6 28.4 4.3 Syria 39 3.6 4.2 20.8 The Palestinian 25 25.1 0 4.3 Territories Jordan 20.8 25.4 51.7 6.2 Iraq 39 6.7 0.5 32.96 Source: TeleGeography’s GlobalComms Database (http://www.telegeography.com), 2013. Table 57 ICT Goods and Services Exports (% of goods/services exports, BoP) 2008–2011a ICT Expenditure per capita (US$) ICT Services Exports (% of service exports) ICT Goods Exports (% of goods exports) Egypt 113.5 7 0.2 Iraq — 4.4 n.a. Lebanon — 47.8 0.9 Libya — n.a. n.a. Jordan 261.7 n.a. 1.5 Syria — 2.5 0 Tunisia 212.7 10.8 7.4 Turkey 403.4 1.7 1.7 MENA 178 30.3 2.3 World 620.1 31 10.1 Source: IMF BoP database and World Bank Private Participation in Infrastructure Project Database, latest available data. a Most recent data shown. 162 Over the Horizon: a New Levant Table 58 Revealed Comparative Advantage in ICT closely at second place with around US$2 billion in tele- Goods and Services Exports com sector infrastructure investment between 2005 and ICT Services ICT Goods 2011. Despite significant telecom sector demand and Egypt 0.57 0.1 potential, other countries in the region are only at a frac- Iraq 0.35 — tion of that Turkey and Egypt’s levels (Table 59). Lebanon 3.86 0.46 Libya — — Jordan — 0.77 Opportunities for Enhanced Trade in ICT Syria 0.2 — Goods and Services Tunisia 0.87 3.79 Turkey 0.14 0.87 Business Process Outsourcing The Levant region offers the same appeal as other out- sourcing destinations in the world. The global Busi- ness Process Outsourcing (BPO) market is expected to Revealed Comparative Advantage (RCA) Index128 cap- grow at an average of 6.5 percent until 2015 (Nelson- tured in Table 58 below indicates a clear comparative Hall 2013). With a growing pool of young, low-cost, advantage for Lebanon in the export of ICT services and and highly skilled workers, businesses in the region have for Tunisia in the export of ICT goods. Tunisia also ex- found it increasingly easy to compete in the global out- hibits some inclination to have comparative advantage in sourcing market. Apart from this, companies are find- the export of ICT services, as does Turkey for the export ing other unique advantages, including a time zone that of ICT goods. Turkey and Egypt are leaders in terms of telecom sector investments. This can be attributed to the large 128 The Revealed Comparative Advantage (RCA) Index shows wheth- domestic telecom sector markets in both countries in ad- er ICT exports perform better or worse for a given country than dition to their geographic position that allows these two the average throughout the Eastern Mediterranean region. RCA is calculated as the ratio of ICT exports per total service exports in a countries to act as an important telecom sector connec- given country to the average share of ICT exports per total service tivity hub in their neighborhoods. Turkey boasts the larg- exports in Eastern Mediterranean region. A value greater than 1 est telecom sector in the region by size of infrastructure indicates a comparative advantage in ICTs, whereas a value less than 1 indicates a comparative disadvantage. This methodology is investments with an average yearly investment of around adopted by OECD Working Party on Information Economy in its US$3.5 billion between 2005 and 2011. Egypt trails in 2006 Information Technology Outlook. Table 59 Investment in Telecom Sector Infrastructure with Private Participation US$ Millions 2005 2006 2007 2008 2009 2010 2011 Egypt 1,827 3,751 1,908 1,414 1,791 2,113 980 Iraq 475 90 3,700 284 447 456 386 Lebanon 0 0 0 0 0 0 0 Jordan 141 364 30.7 90 164 301 295 Syria 170 45 59 95 108 65 75 Tunisia 106 2343 76 99 287 966 181 Turkey 7,329 1,992 2,215 3,954 3,908 2,381 3,055 Source: World Bank Private Participation in Infrastructure (PPI) Database, 2013. IMPROVING CONNECTIVITY: THE ROLE OF ICT AND TRANSPORT SERVICES 163 roughly overlaps with the world’s three biggest econo- on labor, capital, and profits. Turkey also maintains over mies of North America, Europe, and Asia in addition to 250 Organized Industrial Zones (OIZs) that provide ex- the region’s geographic proximity to Europe. Currently, isting infrastructure, tax exemptions, and lower water, the outsourcing industry in the Levant is still at an early natural gas, and telecommunication costs. These zones, development stage and includes IT support, call centers, like the TDZs, aim to increase foreign investment and and software services. In parallel, countries in the region ultimately provide an ideal ground for BPO initiatives. have established special industrial zones in which foreign Jordan’s strengths in outsourcing are in financial companies are allowed to offshore their production pro- services, healthcare, pharmaceuticals, energy and re- cess benefiting from lower labor and capital investment newable energy, information and communications costs. Coordinating between various outsourcing services technology, and engineering services. IT has been one and these industrial zones can lead to new horizons in of the fastest growing sectors in Jordan over the past which manufacturing business process are better inte- 10 years. There are over 82,000 engineers in Jordan, but grated boosting regional trade and enhancing the com- only 8,000 who work in their specialty. The government petitive advantage of these countries in global markets. of Jordan is playing a major supportive role in strength- BPO is already common practice in countries such ening the country’s outsourcing service as a key sector as Egypt, Tunisia, Jordan, and Turkey, which benefit for job creation. It has recently launched a new Develop- from key competitive advantages especially related to ment Zone Strategy, encompassing multiple specialized lower labor costs. Cities such as Istanbul, Cairo, and Al- zones targeted at specific industries. These development exandria are ranked in the top 100 global outsourcing zones offer financial incentives to complement existing destinations in 2013 (Tholons 2013). These cities have economic advantages for outsourcing activities to Jordan. suffered from bouts of political unrest in recent years, BPO services in manufacturing industries have the which has adversely affected their rankings. For exam- potential to increase production efficiency and reduce ple, in 2011, Egypt ranked number four worldwide as export costs. In recent years, Turkey’s main textile manu- a prime outsourcing destination according to AT Kear- facturers have invested in special industrial zones in Egypt ney’s Global Services Location Index (Gott 2011). Jor- benefiting from the overall lower cost production in the dan has made serious efforts in recent years to develop country, but more needs to be done on the policy level their domestic outsourcing sector. This includes call in order to fully realize the potential of such cooperation. centers, BPO parks, knowledge process outsourcing, Providing the necessary policy incentives would allow tex- shared services, and IT consulting services. Egypt formed tile manufacturers to boost their production capabilities by a 600 seat global resource center for IBM; a global ap- outsourcing their manufacturing supply chain at various plication support center for Oracle with approximately production stages. Turkey’s textile industry is composed 500 engineers; 1,736 call center agents for Vodafone who of a large number of SMEs that are losing their competi- serve the Middle East, Australia, UK, and New Zealand; tive advantage on global markets due to increasing wages and both a global innovation center (one of only two in and higher production costs. Enabling such enterprises to the world) and call center for Microsoft. expand their manufacturing processes towards lower cost The most notable advantage of IT outsourcing in countries such as Egypt, Tunisia, and Jordan can create Turkey can be seen through the Technology Develop- positive spillovers for all participating countries. ment Zones. Turkey maintains roughly 20 Technology Development Zones (TDZs) and is in the process of con- Crowdsourcing structing more. These TDZs allow businesses to enjoy The ability to contract work online is a newly emerg- a number of commercial advantages such as tax breaks ing field in today’s globally connected world. The 164 Over the Horizon: a New Levant proliferation of ICTs worldwide has made it possible almost US$200 million. Egypt ranked in 18th place to distribute tasks among workers across the world, en- with 12,292 registered elancers, mostly in IT and cre- abling greater cost efficiencies and job creation opportu- ative sectors, who earned US$1.6 million. To compare, nities across geographic borders. Crowdsourcing is the 7,699 elancers in Turkey earned US$1.4 million. By practice of obtaining needed services, ideas, or content earnings, the countries are in 23rd and 25th place cor- by soliciting contributions from a large group of peo- respondingly among the 25 top countries in the world. ple and especially from the online community.129 This It’s interesting to note that the percentage of individuals consists of elancing and microwork—the definition of using the Internet is almost the same in both Egypt and both terms might vary across the existing literature, Turkey, around 45 percent. In Egypt, young women’s but the key difference is that elancing tasks are more share of temporary jobs in IT clubs and Internet cafés is advanced and typically represent themselves complete respectively at 43 and 58 percent and increasing at twice projects which are offered in the virtual marketplace the rate as men. to professionals or elancers, while microwork tasks are small and are parts of projects.130 Examples of elancing IT services: Software, Mobile Apps, and include market research, data input, data verification, Gaming copywriting, graphic design, and software development. Complementarities in the development of mobile apps, Typical microwork tasks include answering survey ques- software and gaming are strong in the Levant region tions, tagging images, and translating lines of text with especially amongst Lebanese and Jordanian exporters; workers earning on average only a few cents to a couple and Egypt and Turkey as importers. Lebanon exhibits of dollars per task. a high RCA in the export of ICT services and Jordan is Crowdsourcing is a particularly promising area home to a vibrant IT software industry while Egypt and for digital earning opportunities for developing coun- Turkey have large domestic IT software markets. In addi- tries and especially marginalized strata of the society tion, countries of the region have good opportunities to or remote areas. There has been rapid growth in the integrate their mobile apps, software and gaming indus- number of crowdsourcing platforms. TxtEagle claims tries if the necessary policy frameworks and incentives to have reached 2.1 billion people in emerging markets are in place. There are good opportunities for enhanced using readily available mobile technology platforms for engagement between Lebanon and Jordan in the area of data collection and airtime compensation. According to software development, mobile apps and gaming. This one of the market studies, over one million workers have could further enhance these countries’ exporting capa- earned US$1–2 billion via crowdsourcing work alloca- bilities to the Levant region to further economic cooper- tion in the past ten years worldwide (Frei 2009). In the ation between countries of the region. Palestinian Territories, with the population close to four Jordan has established itself as one of the leading million people, microwork is expected to create up to countries in the region in terms of ICT services. With a 55,000 part-time jobs within the next five years. highly educated work force, the country is enjoying rap- As crowdsourcing, and microwork in particular, id development in IT education, computerization, and is still at a nascent stage in its development, Levant e-government, in addition to the rapid spread of knowl- countries can take the lead in terms of promoting a edge centers in remote areas, accompanied by the estab- virtual work culture in order to enhance the export lishment of a legal environment sustaining this progress. of knowledge products across industries. Egypt and Turkey are regional leaders in crowdsourcing. In 2012, 129 Merriam Webster Dictionary. there were 2,072,203 registered elancers who earned 130 Virtual Economy: Paid Crowdsourcing Technologies. IMPROVING CONNECTIVITY: THE ROLE OF ICT AND TRANSPORT SERVICES 165 Jordan boasts a growing pool of 19,000 IT related work- can be enhanced with further competition from regional ers and a steadily inflow of 6,000 graduates yearly. In markets such as those in Jordan and Lebanon. 2012, the ICT industry accounted for more than 14 per- cent of the country’s GDP and is growing at an annual ICT Goods rate of 25 percent.131 In addition, more than 50 percent In the Levant, the export of electronic devices and of IT services exports in 2011 were to the Arab Gulf re- technology products is weak and prospects for compet- gion (mainly Saudi Arabia); very little trade activity takes itiveness are not favorable. Given the region’s uneven place in the Levant. accession standards to the World Trade Organization in Jordan is also home to one of the region’s largest terms of the ICT goods trade agreement and fierce com- mobile apps and gaming services sectors. In 2011, Jor- petition at the international level, countries have little danian companies developed around 70 percent of the prospects for enhanced trade in electronics and tech- Arab world’s online and mobile games.132 According to nology products. The growth in the ICT trade in goods the Ovum Research, digital games sales in the Middle has been driven by Asia with China, which accounts for East and Africa in 2011 accounted for an estimated US$508 billion, being a locomotive.136 Overall, global US$900 million out of the US$24 billion global mar- exports of information and communication technology ket: but that figure is set to rise at a compound annu- (ICT) goods—products such as mobile phones, smart- al growth rate of 29 percent to reach US$3.2 billion in phones, laptops, tablets, integrated circuits, and various 2016, compared with global growth of 17 percent for the other parts and components—climbed by four percent same period. to US$1.8 trillion in 2011, and now account for 11 per- Lebanon is another country with a great potential cent of total merchandise exports.137 Globally, the top to become the regional IT services hub. In Lebanon, ten exporters of ICT goods have made up four fifths of the size of the domestic IT sector was at US$336.7 mil- total ICT trade with Asia representing US$1.2 trillion lion in 2012, constituting an increase of 6.8 percent or 64 percent of the world total. Compared to Asia, Tu- from US$315.4 million in 2011 and is projected to grow nisia’s electronic products share of total manufactured to US$363.8 million in 2013.133 Lebanon’s IT market goods is only at six percent. Jordan’s high technology ex- is benefiting from new investments in telecommunica- ports current share is at three percent. Lebanon’s share tions infrastructure, which will significantly enhance of high tech exports shrank significantly down to two the sector production capabilities. Forecasts estimate the percent in 2011.138 Although Turkey has a large share IT market to grow in Lebanon at a compound annual of manufactured goods in its exports structure (about rate of 12 percent during the 2013–2017 period and to 78 percent), trade specialization remains in low-to-me- reach US$571 million in 2017.134 Lebanon’s IT sector dium-tech products—these products accounted to al- also benefits from a highly skilled, IT-literate, and mul- most 38 percent of the country’s manufactured exports tilingual workforce and is well positioned to become a regional hub in IT services with potential for fast growth. 131 Information and Communications Technology Association of Jor- Turkey’s ICT sector is much larger compared to dan, 2012. 132 other Levant countries. The Turkish IT market is pro- Jordan Times 2011. 133 Business Monitor International, 2013. jected to achieve a compound annual growth rate of 134 ibid. 16 percent during 2012–2016. Turkey’s software market 135 ibid. 136 was valued at US$933 million in 2012 and is forecast- ibid.http://unctad.org/en/pages/InformationNoteDetails. aspx?OriginalVersionID=37 ed to reach US$1.5 billion in 2016.135 Turkish software 137 UNCTAD 2013. manufacturers benefit from a large domestic market that 138 WBI 2012. 166 Over the Horizon: a New Levant to Europe in 2011. In addition, 58 percent of Turkish does not have private participation in the sector. All net- overall exports are low-technology goods, and new ex- works are owned by the state, with two management port production is increasingly done in low technology contracts for the operations of the mobile networks. products. The country is highly dependent on imported Competition in mobile communications has been intro- intermediary goods, and the aggregate contribution of duced in the remaining countries. However, considerable high technology goods to the competitiveness effect is differences remain. Tunisia and Syria have only recent- negative (Gors and Selçki 2013). ly enabled mobile operators to offer 3G services, hence a low level of penetration of mobile broadband. Egypt and Libya, however, have introduced both competition Constraints to Enhanced Connectivity and in mobile communications and introduced 3G services Trade a few years ago. As a result the penetration of mobile broadband in Egypt is close to Turkey’s. Finally, mobile The Levant region suffers from various hurdles af- broadband is only present in the Kurdish region of Iraq, fecting connectivity for improved trade. For example, and most Iraqis do not have access to 3G services. The limited competition in all countries, except Turkey and Palestinian Territories does not have 3G mobile services, Jordan, causes international communication prices to due to the fact that the necessary frequencies were not be high, thereby creating a competitive disadvantage to allocated by the Israeli authorities. trade. Furthermore, lack of regulatory harmonization, arising from different policy and regulatory frameworks Limited competition at international in the sector, requires that investors devote a considerable connectivity level amount of time learning the “rules of the game” in each Considerable entry barriers, or monopolies, at the country in the region. international communications level are present in the Levant, except Turkey and Jordan. As a result, in Limited competition at broadband access level spite of multiple submarine cables crossing the Eastern Turkey and Jordan have opened up their telecommu- Mediterranean region, there is limited competition. Na- nications markets to full competition. In 2008, Turkey tional incumbent operators are usually the shareholders implemented a policy of full liberalization, making its of these submarine cables, limiting the amount of effec- market structure and regulatory framework aligned with tive competition. The market structure for international that of European Union member countries. As a result, communications in the Eastern Mediterranean countries Turkey has a high number of licensed operators, the low- is summarized in Table 60. est international communications costs, and a well-de- veloped broadband market. Jordan has also eliminated Limited redundancy most barriers to entry in the telecommunications sector, The physical layout of the international submarine ca- has licensed multiple operators, and enabled utilities to bles poses a redundancy issue. All submarine cables in provide broadband backbone infrastructure. This has the region go through Alexandria, Egypt, and the Suez created a vibrant market for international communica- Canal. This makes the regional Internet infrastructure tions in Jordan (even though the incoming international particularly vulnerable to disruptions, natural disasters, call prices remain higher than in Turkey), and mobile and act of terrorism. To increase the network redundan- broadband has witnessed considerable growth. cy and resilience, several fiber optic terrestrial backbone By contrast, the rest of the countries in the region networks are emerging, transiting through countries of present serious entry barriers. In particular, Lebanon the Eastern Mediterranean region. These include: IMPROVING CONNECTIVITY: THE ROLE OF ICT AND TRANSPORT SERVICES 167 Table 60 Competition for International Submarine Lack of regulatory harmonization Cable Connectivity The region has an incoherent framework of telecom Market Structure Countries regulations, except Turkey and Jordan. Turkey and Monopoly Iraq, Lebanon, Syria, Libya, Tunisia Jordan have evolved their regulatory framework to be Competition Jordan, Turkey able to support a fully liberalized telecommunications Monopsony* The Palestinian Territories market. As a result, these two countries tend to be more Source: World Bank MENA Broadband Report 2013. advanced than the other countries in the region. Both * Monopsony in the case of the Palestinian Territories: the only buyer of international connectivity is Paltel. countries regulatory framework includes: (i) intercon- nection (which is the rate charged by competing oper- ators for sharing their telecom infrastructure, which can help drive down prices); (ii) unbundling of the Local „ Gulf Bridge International, going through Iraq Loop, including bitstream (which allows competition in to Turkey and Europe, and proving a full loop broadband at a local access level); (iii) a licensing regime with submarine connectivity around the Gulf and able to support a fully liberalized market; (iv) colocation; through the Suez Canal into the Mediterranean and (v) rules to allow the use of fiber networks devel- (Figure 65). oped by network utilities (transport and energy utilities „ JADI link emerging from Saudi Arabia through having developed fiber backbone networks for their own Jordan, Syria and linking to Turkey then Europe. corporate use). Providing an alternative terrestrial link to Europe Most of the other countries have a patchwork of than the underwater cable links in the Suez Canal regulations and are at different stages of development (Figure 66). of their sector regulatory framework. Egypt and Tunisia Figure 65 GBI Terrestrial Fiber Optic Cable Link 168 Over the Horizon: a New Levant Figure 66 JADI Terrestrial Fiber Optic Cable Link are following the path of Turkey and Jordan, introduc- developed in Turkey, where a substantial amount of ing, albeit with delay, the key regulations listed above growth in “fiber to the x” (FTTx) has been witnessed in as enabling competition. Iraq has a more restrictive reg- the last few years. FTTx represents technologies used to ulatory framework, with the exception of the Kurdish increase fiber penetration to end-users and enhance their region. In addition, peculiar regulatory issues exist in the connectivity speeds and experiences. Palestinian Territories (due to the regulatory implication of the implementation of the Oslo agreement). Syria has Regulatory barriers embarked in a serious program of regulatory reform, but Most trade regimes in the region have no specific regu- this process is being affected by the current political situ- lations for trade in ICT goods and service unless they ation. Libya is just now reassessing its regulatory strategy are related to services falling within regulated markets in light of recent political changes. (such as banking). For example, in Turkey there are no regulations specifically applicable to business process Limited Development of Ultra-Fast Broadband outsourcing, IT outsourcing, or telecommunications The Levant region lags behind other regions of the outsourcing. In the Levant, services such as software de- world, including emerging markets, in the develop- velopment, mobile apps, gaming, microwork, and e-con- ment of Ultra-Fast Broadband, which is a substantial tracting are subject to conventional trade regulations enabler of competitiveness in goods and services trade. which impedes their development. Enhanced regulato- The ultra-fast broadband is non-existent in Tunisia, Lib- ry frameworks and harmonization in these areas could ya, Syria, the Palestinian Territories, Lebanon, and Iraq help the region benefit from great complementarities in (with the exception of KRG). It is limited in Egypt (fi- the area of ICT services and greater levels of economic ber in new compounds) and Jordan. It is definitely more cooperation. IMPROVING CONNECTIVITY: THE ROLE OF ICT AND TRANSPORT SERVICES 169 Regulatory barriers to market entry, licensing, the price of international communications, a key and business conduct remain significant in the Levant enabler of cross border trade for all goods and ser- compared to other regions. This situation is further vices sectors. In addition, strengthening regulatory complicated by the fact that countries have taken very measures and the removal of entry barriers will likely different approaches to international services liberaliza- stimulate additional investment in local broadband tion in the past, as illustrated by the diverse extent of access. Lebanon could take the opportunity to move GATS liberalization commitments among the region’s to 3G and 4G services. The migration to broadband WTO members. In many instances, the extent of com- in a liberalized environment will be an essential pri- mitments reflects the status quo or even less than the pre- ority for countries of the Eastern Mediterranean re- vailing situation, especially for members of the WTO’s gion, but will involve the management of a political precursor, the General Agreement on Tariffs and Trade and economic transition. (GATT). These commitments have been assessed to be 2. Increase high capacity broadband network redun- relatively modest and include several restrictions on the dancy by stimulating investment in sub-regional participation of foreigners. While regional ICT service infrastructure. Encouragement of the development liberalization has begun in some countries (especially of terrestrial high capacity backbone networks, such Jordan), the process lags behind in the region as a whole. as GBI and JADI, should continue. Additionally ef- forts to link the grids of other utilities (for example the project of integrated electric grid management, Recommendations to Improve Connectivity involving Turkey and the neighboring countries) and Promote ICT Services Trade could have a fiber development component, increas- ing competition and network redundancy. Increased Based on findings of this report, the following section competition and increased network redundancy go lists a number of recommendations that can help guide hand in hand. If the region implements a policy of the region towards improved economic cooperation and increased competition in international communi- trade relations both by enhancing physical connectivity cations, this is likely to encourage increased invest- and by exploiting trade complementarities in ICT goods ment in submarine and terrestrial connectivity and and services. enhance the trade profile of the region in general. 3. Promote regulatory harmonization efforts. The Connectivity: creating a better enabling promotion of a harmonized regulatory environment environment for trade in the area of telecom services should be pursued as The key recommendations to develop the connectivity a top-level priority. This may involve the approval infrastructure needed to support enhanced economic co- of common regulatory frameworks for the key regu- operation, trade relations in general and trade in ICT latory measures enabling competition (interconnec- services in specific in the Levant region are the following: tion and local loop unbundling), and the provision of enhanced technical assistance to countries in the 1. Introduce a model of full competition in telecom- region, especially for the Palestinian Territories, Iraq, munications, following the examples of Jordan and Libya. and Turkey. The removal of existing entry barriers 4. Invest in ultra-fast broadband. The development would create a favorable environment for regional of ultra-fast broadband will involve: (i) exploring and sub-regional investment in broadband infra- new models of infrastructure supply using passive/ structure. This would translate in a rapid decline of active infrastructure models; (ii) experimenting with 170 Over the Horizon: a New Levant models involving real estate and telecom developers; ness development in the area of IT services in which (iii) allowing ISPs to have their own fiber connec- IT developers can better pool together their knowl- tions and relax aerial regulations; (iv) awarding li- edge and technical skills to create the necessary soft- censes and right to use of spectrum to support LTE; ware solutions, mobile apps, and gaming platforms. and (v) developing and implementing FTTx models. However, given the current regulatory environment in the Eastern Mediterranean such virtual cooper- Non-Connectivity: Promoting direct trade in ation is not possible, which forces local developers ICT services to be more confined and focused solely on meeting The key recommendations to help better realize and ben- the demand of their domestic markets; for Jordan efit from existing complementarities in the area of trade and Lebanon, this demand is not sufficient to justify in ICT services are the following: large investments in the IT services industry. 3. Facilitating the exchange of skilled labor in the 1. Integrate special industrial zones with domestic area of ICT. One of the key obstacles to enhancing industries through IT platforms. Countries in the trade in ICT services in the Levant region is the free Levant boast a significant amount of special industri- flow of skilled human capital. ICT industries are hu- al zones created to enhance foreign investment and man-capital intensive, as they require highly special- offshoring activities, especially in the areas of textile ized workers in various ICT fields. In this respect, and automobile parts manufacturing. By pursuing promoting the free movement of skilled human cap- clear government policies to encourage the integra- ital is a prerequisite to the enhancement of trade in tion of manufacturing activities in these industrial ICT services in as much as it allows the industry to zones with other domestic manufacturers outside exchange know-how, technical skills, and experience these zones, clear cost reduction opportunities can in various cutting-edge and rapidly developing ICT be realized. By better integrating industrial supply areas. chains in countries’ industrial zones with domestic 4. Enhancing cooperation between academic institu- supply chains through the use of IT solutions, gov- tions and industry. Countries of the region boast a ernments in the region can enhance trade in various highly skilled workforce that usually emigrates to the manufacturing areas. Outsourcing business activities Gulf countries, Europe and the U.S. to find jobs in from industrial zones can serve as a first step in de- the ICT sector with decent conditions and pay. Local veloping an independent and vibrant BPO sector in ICT industries in the region usually rely on the stu- domestic manufacturing industries and help increase dents graduating from second-tier universities, creat- the integration of manufacturing supply chains in ing a large loss for enhanced business development the region. and innovation on global markets. By increasing the 2. Developing virtual hubs for software development, integration of various technical ICT disciplines in mobile apps, and gaming. By pooling together local universities with the domestic ICT industry, busi- knowledge from IT service-exporting countries such nesses can further develop their ICT products. as Jordan and Lebanon, economies of scale can be realized in the development of various IT solutions, mobile apps, and gaming. Such hubs can benefit Air Transport from the nature of ICT services that can break geo- graphic barriers and enable cooperation beyond bor- Current air passenger traffic levels in the region are ders. Creating virtual hubs can help stimulate busi- low, however higher growth rates have been observed IMPROVING CONNECTIVITY: THE ROLE OF ICT AND TRANSPORT SERVICES 171 in recent years in selected regional markets, suggest- policies are being driven by changes in air passenger traf- ing that fast growth is possible. Indeed, air passenger fic patterns, an issue for a future work. markets in the Middle East are changing rapidly. Tur- key, which aspires to serve the region as a hub, has seen rapid growth in air passenger traffic, within the region Open Skies over the Middle East: and with the rest of the world. Turkey is in fact already Integrating Aviation in Turkey and the emerging as a de facto hub with strikingly increased in Arab World traffic in recent years with all countries in the region, Turkey, for long a fulcrum between the West and the including Iran. This growth has occurred despite the fact East, has deepened its economic links with the Euro- that Turkey still has more restrictive bilateral air services pean Union and is now turning to the Middle East. In agreements with many countries of the region than those this sometimes-turbulent neighborhood, it is beginning countries have with each other. Turkey is not a member to create new dynamic trade links that echo past relation- of the plurilateral arrangement that governs air passenger ships and reflect a new international order. Even in the traffic among most of the Arab states—the Inter-Arab age of the Internet, where geography seems passé, physi- Freedom of the Air Programme of the Arab Civil Avi- cal connectivity matters. Goods must be delivered, busi- ation Commission (ACAC). Instead, WTO measures nesspersons must meet, and people must travel to create suggest that Turkey’s bilateral passenger traffic arrange- the texture of relationships that forge bonds and catalyze ments with these countries are quite restrictive. More- trade. In facilitating each of these links, air transport is over, the ACAC agreement itself seems not to have lived critical, especially in a region where terrestrial travel is up to its potential and has been less liberal in practice fraught with difficulty. than its formal terms would suggest. However, air transport is tied up by restrictive A gravity model was estimated for the purposes of air service agreements between countries anxious to this work analyzing the links between bilateral traffic protect their national airlines from international and policy while controlling for other determinants of competition. This section explores the nature of these traffic. A set of empirical models of air passenger traffic agreements in the region, studies the impact that they was used in order to better understand the relationship have on bilateral traffic, and estimate the gains from their between air transport policy and international traffic. liberalization. Specifically, a new open skies agreement in WTO index measures of policy commitments in both bi- the Middle East is proposed, which would deepen the ex- lateral and plurilateral air services agreements were used, isting Intra-Arab Freedom of the Air Programme of the and measures were related to ICAO data on air passenger Arab Civil Aviation Commission (henceforth referred traffic. The findings show that more liberal policies are to as the “ACAC”) and include Turkey as a full-fledged associated with more passenger traffic, but this relation- member.139 ship is substantially weaker in plurilateral arrangements The ACAC agreement on air services that links the like the ACAC. The results suggest that there are signifi- Arab countries in the region is in principle quite liber- cant gains, in terms of higher likelihood of direct flights al by world standards. However, the agreement has not and the magnitude of passenger traffic, from establishing been ratified by all of its members, and its implementa- and fully implementing a regional open skies agreement. tion may not have lived up to the policy commitments The results should nonetheless be understood as in the agreement. Importantly for this study, Turkey is preliminary work that scopes out the possibilities asso- ciated with further reform in the region. Furthermore, 139 there has been no investigation into the possibility that ACAC 2004 172 Over the Horizon: a New Levant not included in the ACAC agreement, even though it is Table 61 International Scheduled Air Passenger a major participant in regional air passenger travel mar- Traffic (in millions of passenger-km) kets. This study first attempts to quantify the impact of 2003 2010 Percent change deepening the ACAC agreement by calculating the pas- Turkey 13,343 51,475 285.8 senger flows that would occur among existing members Egypt 7,517 17,123 127.8 if the agreement were as effective as the typical bilateral Jordan 4,498 7,789 73.2 Iran 3,761 7,770 106.6 agreement. This study then estimates the implications of Tunisia 2,459 3,510 42.7 Turkey’s inclusion in this more effective agreement. Lebanon 1,905 3,182 67.0 Findings indicate that plurilateral agreements are, Libya n.a. 3,111 — in general, not as effective as bilateral agreements in Syria 1,727 1,437 –16.8 translating formally liberal policy commitments into World 1,738,510 2,873,806 65.3 increased air traffic. In order to quantify this gap a deter- Source: ICAO World Total Revenue Traffic 2003–2010. Scheduled services of airlines of mination was made of how much more traffic there would ICAO Contracting States. Note: “World” figures are for all ICAO contracting states (188 in 2003, 190 in 2010). be among ACAC members if the gap between plurilateral and bilateral agreements were eliminated. Using country level data, it was calculated that traffic flows would dou- passenger traffic for select countries, and the world.141 ble—and possibly triple. The city-pair estimate suggest Figures are reported in millions of passenger-kilometers, that traffic along existing routes would nearly double, but a measure of activity that combines passenger numbers that there would also be a significant increase in the num- with distance travelled.142 Airlines based in Turkey near- ber of city pairs served by direct international flights. ly quadrupled the level of international flight activity There are quantitative implications of Turkey’s during the period 2003–2010. Turkish Airlines flies to potential accession to a fully functional ACAC agree- 99 countries, apparently more than any other carrier ment. This implies very large changes in the openness of in the world, and is reported to be one of the biggest the policy commitments, because Turkey’s existing agree- purchasers of commercial aircraft over recent years (Bo- ments with countries in the region are quite restrictive, land 2013). Airlines based in Egypt and Iran more than when such agreements exist at all. The country level anal- doubled their activity. This compares with a 65 percent ysis suggests that passenger traffic in the region would increase in activity across the globe. double and possibly triple. City level analysis suggests Turkey has seen rapid growth, both inbound and that the increase in traffic would occur both through the outbound, within the region and with the rest-of the growth of traffic on existing routes and substantial in- world. Table 62 reports passenger traffic for origin and creases in the number of city pairs served. These large in- destination countries using the on-flight origin and des- creases reflect both the significant changes in policy that tination data purchased from the ICAO. These figures are suggested herein and the low number of city pairs that are currently served by direct flights. 140 This growth is especially notable, given that the time period under consideration included the global financial crisis, which affected demand for air travel. Trends in international air passenger travel 141 2010 is the most recent year for which the ICAO data is available. 142 Much of the data that follows will indicate figures for passenger There is a dramatic growth in the activity of carriers numbers alone. But the publicly available figures only report pas- senger-kilometer statistics, and those are presented in Table 61. registered in several countries in the region during One advantage of the publicly available data is that it allows the the period 2003–2010.140 Table 61 summarizes total documentation of changes over a somewhat longer time span. IMPROVING CONNECTIVITY: THE ROLE OF ICT AND TRANSPORT SERVICES 173 Table 62 Origin Destination Traffic 2005 and 2010 2005 2010 Percent change Origin Destination Passengers Flights Passengers Flights Passengers Flights Mashreq Mashreq 865.8 49 1647.6 53 90.3 8.2 Turkey 220.4 7 710.8 19 222.5 171.4 Iran 92.1 13 49.3 3 –46.5 –76.9 RoW 5269.9 287 9861.6 376 87.1 31.0 Turkey Mashreq 222.4 9 709.0 15 218.8 66.7 Iran 83.4 4 228.3 4 173.8 0.0 RoW 4656.9 167 9124.6 277 95.9 65.9 Iran Mashreq 93.8 13 52.0 3 –44.6 –76.9 Turkey 85.3 4 231.8 5 171.8 25.0 RoW 1489.1 97 1349.7 62 –9.4 –36.1 RoW Mashreq 5163.6 288 9939.1 374 92.5 29.9 Turkey 4646.3 190 9184.8 290 97.7 52.6 Iran 1506.2 94 1322.2 61 –12.2 –35.1 RoW 483472.6 13673 563833.7 15181 16.6 11.0 Source: ICAO OFOD dataset. Note: Passenger numbers reported in thousands. “Flights” are a count of the number of city-pairs with the existence of a scheduled (i.e., recurring) direct flight on an ICAO registered airline at some time during the year. “Mashreq” includes Egypt, Jordan, Lebanon, Libya, Syria, and Tunisia. report total scheduled air passenger traffic, regardless of growth involving Turkey was much higher than traffic not the nationality of the carrier. There has been particularly involving Turkey, and in one case (Iran) traffic fell overall fast growth in air passenger travel between Turkey and the even as traffic with Turkey was growing rapidly. Further Arab countries that are included in this study (labeled here exploration of this pattern is shown in country-level de- with the imperfect signifier, “Mashreq”). This traffic has tail for traffic involving Turkey; Table 63 reports Turkey’s tripled, in each direction, over a five-year period. Official outbound traffic and Table 64 Turkey’s inbound traffic. decisions to lift visa requirements for many Arab countries The figures show that, while traffic growth was not uni- and sign free trade agreements with Morocco, Tunisia, form, it was rapid in virtually every case. Growth in traffic Libya, and Jordan have increased the flow of people and with Lebanon and Syria was extremely rapid, while traffic goods between Turkey and the Middle East and North involving Iran, Egypt and Jordan grew less rapidly, but Africa (Daragahi 2013). Growth within the Mashreq has nonetheless more than doubled in five years. The data also been rapid, nearly doubling over the same period. also highlights the regional nature of the traffic growth, This growth seems to have been roughly in line with travel with all countries except Libya and Tunisia seeing more to and from the rest of the world (RoW). Iran’s travel pat- traffic growth with Turkey than did the rest of the world. tern is interesting, in that it saw decreasing travel to and from the Mashreq countries, and the rest of the world, even as traffic to and from Turkey grew substantially. Note Patterns of Policy Governing Air that traffic growth within RoW was considerably less rap- Passenger Traffic id than in many of the pairs that are specific to this study. Turkey is becoming a regional hub for interna- Most air traffic is governed by bilateral air service tional air travel, linking this region with others. Traffic agreements between pairs of countries, and some by 174 Over the Horizon: a New Levant Table 63 Outbound Passenger Traffic from Turkey 2005 2010 Percent change Destination Passengers Flights Passengers Flights Passengers Flights Egypt 76.8 2 190.7 4 148.2 100.0 Iran 83.4 4 228.2 4 173.8 0.0 Iraq n.a. n.a. 35.5 1 n.a. n.a. Jordan 47.9 2 108.7 1 127.2 –50.0 Lebanon 14.4 1 140.3 3 872.5 200.0 Libya 13.7 1 23.7 1 72.5 0.0 Syria 23.3 2 133.4 4 471.2 100.0 Tunisia 46.2 1 76.7 1 65.9 0.0 RoW 4656.9 167 9124.6 277 95.9 65.9 Source: ICAO OFOD dataset. Note: Passenger numbers reported in thousands. “Flights” are a count of the number of city-pairs with the existence of a scheduled (i.e., recurring) direct flight on an ICAO registered airline at some time during the year Table 64 Inbound Traffic to Turkey 2005 2010 Percent change Origin Passengers Flights Passengers Flights Passengers Flights Egypt 73.7 1 188.3 5 155.6 400.0 Iran 85.3 4 231.8 5 171.8 25.0 Iraq n.a. n.a. 34.8 2 n.a. n.a. Jordan 50.0 2 112.2 2 124.4 0.0 Lebanon 13.4 1 140.2 3 950.1 200.0 Libya 14.5 1 20.6 1 42.3 0.0 Syria 22.0 1 131.1 4 496.4 300.0 Tunisia 46.9 1 83.5 2 78.0 100.0 RoW 4646.3 190 9184.8 290 97.7 52.6 Source: ICAO OFOD dataset. Note: Passenger numbers reported in thousands. “Flights” are a count of the number of city-pairs with the existence of a scheduled (i.e., recurring) direct flight on an ICAO registered airline at some time during the year. plurilateral agreements between groups of countries. states. In December 2004, several Arab League mem- The focus here is primarily on two sets of agreements: one bers—Bahrain, Egypt, Iraq, Jordan, Lebanon, Oman, relating to traffic between the Arab countries, and the oth- Palestinian Territories, Somalia, Sudan, Syria, Tunisia and er to traffic between Turkey and each of the Arab countries. the Republic of Yemen—signed a plurilateral agreement The Arab Civil Aviation Commission (ACAC) was creat- referred to as the Arab League Open Skies Agreement. ed in 1999 as part of an agreement to liberalize intra-Arab The agreement clearly covers the first four freedoms of the air services by gradually reducing restrictions for carriers of member states.143 This resulted first in the signing of 143 The discussion of the Arab League Open Skies Agreement draws 17 bilateral open skies agreements among Commission upon Schlumberger (2010). IMPROVING CONNECTIVITY: THE ROLE OF ICT AND TRANSPORT SERVICES 175 air.144 The agreement also seems to go beyond these free- empirical model was developed for the purposes of this doms because it includes traffic “to and from any of the study to better understand the relationship between air territories of the State parties.” As Schlumberger (2010, transport policy and international traffic and to investi- p 69) argues, “Clearly, fifth freedom rights are included, gate the likely impact of two policy changes. First, the because any destination within state parties beyond the impact of making the ACAC implementation consider- initial destination is included. The agreement even seems ably more robust is considered—in the model, this im- to grant seventh freedom rights, as it does not specify that plies eliminating the negative impacts of plurilateral ar- traffic needs to route back over the departure point in the rangements. Second, Turkey is added to this hypothetical initial state party. The only freedom that is clearly exclud- robust agreement, assigning the same liberal measures to ed is cabotage, the eighth freedom.” Turkey-ACAC passenger flows that apply to intra-ACAC The open skies agreement has so far been ratified flows, and assuming they are fully implemented. by Syria, Jordan, the Palestinian Territories, Republic A gravity model of trade was developed for the of Yemen, the United Arab Emirates, and Lebanon, empirical analysis. An aviation market is considered as and been in force since February 18, 2007, when the an origin-destination pair, and the analysis is conducted necessary quorum of five countries was reached. In addi- at two levels of data aggregation: country-pair as well as tion, Bahrain, Egypt, Oman, and Qatar have announced city-pair levels. The baseline empirical specification can that their ratification processes was under way. Interest- be written as follows: ingly, none of the African Arab states have so far ratified the open skies agreement. log Paxij = β0 + β1ALIij + β2ALIij * ASAPluriij + The bilateral agreements between Turkey and β3ASAPluriij + β4ASAageij + β5logDistij + β6logDist ij 2 + ACAC members have been assessed by the WTO to be β7logPopij + β8logPcGDPi + β9logPopj + comparatively restrictive. The agreements between Tur- β10logPcGDPj + β11logTradeij + β12Borderij + key with Jordan, Lebanon, and Syria each have scores of β13Colonyij + β14Langij + γXi + δXj + θZij + εij 11; the agreements with Iraq and Tunisia have scores of 10; and the agreement with Egypt has a score of only 4.145 where log denotes the natural logarithm; i and j index Interestingly, direct air transportation services with sev- the origin, respectively the destination locations (i.e., eral key countries are not covered by bilateral air services agreements as recorded by ICAO in 2005. These include 144 The freedoms of the air are described in ICAO (2004) as the fol- the United Arab Emirates, Iran, Saudi Arabia, Algeria, lowing: 1) The right to fly over a foreign country, without landing Libya, Bahrain, Kuwait, Qatar, and Yemen. There is, there; 2) The right to refuel or carry out maintenance in a foreign country on the way to another country; 3) The right to fly from therefore, no information available on the restrictiveness one’s own country to another; 4) The right to fly from another of these bilateral agreements. Nevertheless, the scores country to one’s own; 5) The right to fly between two foreign suggest that liberalization of Turkey’s relations with the countries during flights while the flight originates or ends in one’s own country; 6) The right to fly from a foreign country to another ACAC could have a significant impact on traffic. one while stopping in one’s own country for non-technical rea- sons; 7) The right to fly between two foreign countries while not offering flights to one’s own country; 8) The right to fly between two or more airports in a foreign country while continuing service Implications for a Deeper Sub-regional to one’s own country; and 9) The right to fly inside a foreign coun- Integration try without continuing service to one’s own country. 145 The primary indicator of policy is the Air Liberalization Index (ALI) produced by the WTO. The standard measure of ALI Are there potential impacts of air services liberaliza- runs from 0 to 50; agreements that score 50 are the most liberal tion on international air passenger transport? An agreements. 176 Over the Horizon: a New Levant countries or cities); Xi, Xj and Zij represent vectors of ad- substitutes to air travel in the form of fast rail tracks or ditional control variables that are specific to origin i, to well-developed network of highways. destination j, or to the bilateral pair ij. The dependent To understand how liberalization affects air ser- variable Pax denotes the number of passengers traveling vices between two countries, the regression equation from i to j during the year 2005. The aviation liberaliza- is estimated by using country-pair aggregate data on tion index ALI characterizing the bilateral pair ij is the air passenger traffic flows. Total bilateral air traffic vol- variable of interest. It is expected that the liberalization umes were examined, and conditional on finding posi- of air passenger services would have a positive effect on tive effects, the channel through which this outcome is international passenger flows, such that β1 >0. To cap- achieved is further investigated, focusing on the aviation ture any differential effects, an indicator variable ASAP- routes extensive margin. Ordinary least squares (OLS) luri is constructed to identify the plurilateral air service method was used to estimate country-level regressions. agreements, and interact it with the ALI index. The age The results are reported in Annex 30. of the air service agreement signed between countries i Air services liberalization has a positive and signifi- and j are included in the regression model as a control cant effect on bilateral air traffic. The findings show that variable. The remaining variables included in the estima- a 10-unit increase in ALI leads to a 15 percent increase in tion equation are standard gravity variables that control air passengers. The coefficient on plurilateral agreements for demand side characteristics—economic size, income is negative and significant indicating that, all else equal, levels, and air travel costs—affecting traffic within an ori- countries that are part of plurilateral aviation agreements gin-destination ij pair. Distance and distance squared are have 53 percent less passenger traffic on average than sim- used as proxies for route-specific operation costs (e.g., ilar countries that are part of bilateral aviation agreements related to fuel), which affect airfare and thus the demand (Annex 30). This result is quite large, possibly due to the for travel. The variables population (Pop) and per-capita difficulty in implementing the freedoms granted by pluri- income (PcGDP), which are measured both at origin and lateral agreements in a coordinated fashion. destination, account for the level of aggregate demand. Larger distances between the two countries in- The remaining gravity variables—border, common col- crease the demand for air traffic reflecting fewer al- ony and common language—are intended to capture ternative modes of transport. However the effect is proximity, socio-cultural and historical links between the increasing at a decreasing rate, with too large distances origin and destination locations. Other control variables discouraging air travel because of the increasing travel considered in the estimation, and summarized by the costs. The economic size of each of the two countries, three variable vectors, are: geographic area of countries, captured by their population and GDP levels, has a pos- membership in free trade agreements and in the World itive effect on air passenger travel, as does the volume of Trade Organization, differences in average annual tem- bilateral trade. Sharing a national border, having a com- peratures, differences in time zones, and trade share in mon official language and common colonial ties also af- differentiated goods. Finally, a dummy is included for fect positively air travel between countries. This indicates whether countries are democracies in year 2005—these that cultural, social and institutional similarities reduce countries are more likely to consider signing a liber- travel costs, encouraging the cross-border mobility of al agreement, but also more likely to take advantage of people. Furthermore, the regression results suggest that the benefits the Air Service Agreement (ASA) offers. In a country’s area has negative effect on travel conditional some specifications, a dummy variable is included for on population and income, which is consistent with the passenger flows inside Europe to capture the high degree fact that population density matters for the efficiency of of market integration as well as the availability of close an aviation network. IMPROVING CONNECTIVITY: THE ROLE OF ICT AND TRANSPORT SERVICES 177 Aviation liberalization has a direct and positive Air Programme (i.e., ALI = 39) were fully implement- effect on air traffic, however such a policy change is ed within the ACAC. The figures are calculated by re- most effective in bilateral settings. An important find- moving the estimated dragging effects of plurilaterals. In ing is that bilateral ALIs have positive and significant ef- the second scenario, it is assumed that Turkey negotiates fects on international air travel across all income groups. arrangements with the ACAC that are identical to the However these effects do not transfer to plurilateral arrangements negotiated within the ACAC. It is also as- agreements. While the interaction terms between ALI sumed that these arrangements are robust, meaning that and plurilateral ASA tend to be statistically insignificant, they operate as effectively as commitments made in bi- their magnitude is large enough to wash out the main lateral arrangements. In this counterfactual exercise, the ALI effects. The findings show that the positive effects of ALI score between Turkey and each ACAC member state liberalization are only achieved in the context of bilateral is raised to 39 (to test a scenario of substantial change aviation agreements. In fact, countries that enter liber- in policy commitments), and trade flows are predicted al plurilateral ASAs with ALI = 39 are characterized by under the new policy regime scenario. The results show 64 percent fewer aviation routes than identical country that plurilateral agreements with a liberalization index of pairs signing bilateral aviation agreements. This pattern 39 are associated with 51 percent lower levels of air pas- of results does not change when control variables are senger traffic than the average country pair in the sam- added to the model. ple. Air traffic should be expected to grow significantly The counterfactual calculations point to one main had the plurilateral ASAs operated at the same level of policy implication: liberal plurilateral agreements are effectiveness as bilateral ones. All the estimates suggest yet to realize their full potential. The first scenario tests that the international aviation markets in the region fall what would intra-ACAC traffic look like if the liberal below the expected level of operations given their degree policy commitments of the Intra-Arab Freedom of the of market liberalization. RECOVERING AND 8 REFORMING THE TOURISM SECTOR IN THE LEVANT T he Levant countries have major assets for success in the tourism sector, including a favorable cli- mate and attractive coastline, a large pool of human resources, a variety of historical and cultural sites, and geographical proximity to Europe. Tourism is a major source of income and economic growth, bringing significant value-added employment, foreign currency earnings, and investment to the region. Egypt, Lebanon, Jordan, Turkey, and the Palestinian Territories counted 49.6 million tourist arrivals in 2011. Egypt, followed by Turkey, remains the