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Abstract Thoughts
UNDERSTANDING THE TRADE DIVIDE
“Constraints on Trade in the MENA Region”
Published by the International Monetary Fund, February 2010
Analysis by Tamer Hafez
Rina Bhattacharya and Hirut Wolde, authors of the IMF working paper titled “Constraints on Trade in the MENA Region,” analyze patterns of commerce in the Middle East and North Africa using the well-known gravity model to predict trade levels based on countries’ macroeconomic indicators and other factors.
“The gravity model has been found to be a particularly good predictor of trade flows. Moreover, despite criticism for its lack of theoretical foundations in its initial years of application, more recent work has shown that the gravity model is consistent with standard theoretical models that explain the pattern of trade based on factor proportions, patterns of demand, and product differentiation.”
Applying the gravity model to the MENA region, the authors considered four variables: the percentage of companies that identified transportation as an operational constraint; the percentage of firms that identified customs and trade regulations as obstacles; the average number of days to clear exports through customs; and the average time to clear imports through customs.
“In our models, we follow the recent literature by also including variables for the size of the populations, common language, trade restrictions, existence of a border between the trading partners, direct access to a seaport, and membership of regional trade arrangements.”
The report divides the MENA region into three main sub-regions: Gulf Cooperation Council countries (Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the United Arab Emirates) and Maghreb countries (Algeria, Libya, Mauritania, Morocco and Tunisia) – that trade at levels lower than predicted by their estimated gravity models – and Mashreq countries (Egypt, Jordan, Lebanon, Syria and Sudan), which trade more with the outside world than predicted by their models. The results also suggest that intra-GCC and intra-Maghreb trade is relatively low, while Mashreq countries exhibit higher levels of intra-trading.
“Most of the empirical literature in the MENA region suggests that the region trades significantly less than would be expected on the basis of its economic, cultural and geographical characteristics. Indeed [...] non-oil exports in particular are significantly lower as a share of GDP compared to all other non-advanced regions of the world. MENA imports are also lower as a share of GDP compared to the same regions, with the exception of sub-Saharan Africa.”
The report argues that non-oil exports of MENA countries are one-third of what the gravity models predict. Jordan and Morocco are exceptions, with non-oil export levels close to what the models predict. The authors found that per capita manufacturing imports in the MENA region are about half of what might be expected on the basis of countries’ per capita incomes and populations.
Trade regulations and restrictions often have been cited as the primary policy-induced barrier to intra-Arab trade, according to the report, which describes such policies as being among the most protective in the world, with high and dispersed tariff rates. Algeria, Morocco and Jordan had unweighted tariffs averaging more than 10 percent in 2005-06, with Tunisia’s being almost 23 percent. By contrast, in several Gulf states tariff rates are low and few other trade barriers exist.
The report also cites non-tariff barriers, such as lengthy processes to comply with customs and quality-control standards. The report argues that the trade-impeding effect of these barriers can be traced to persistent overvaluation of exchange rates.
“Our results suggest that enhancing the speed with which exports and imports are cleared through customs could also have a large impact on trade [...] It can be calculated that reducing the number of days it takes to clear exports through customs from the average for the MENA region to the world average could raise exports by 11 percent, ceteris paribus [all things being equal]. Similarly, reducing the number of days it takes to clear imports through customs from the average for the MENA region to the world average could raise imports by 30.5 percent, ceteris paribus.”
Logistics and insufficient infrastructure are also barriers that limit trade between MENA region countries.
“The lack of adequate infrastructure is [one of] two areas of investor concern that stand out in the MENA region with respect to institutional failure to provide crucial public goods and services, an important exception being the Gulf countries. Page and Van Gelder (2001) argue that the problem here is both with an institutional framework that does not align prices with cost and with the lack of an enabling environment that would permit and entice private provision. Nabli (2007) further argues that the adverse impact on trade is usually compounded by an investment climate that discourages the start-up of small and medium firms, which is often critical to success in trading.”
An inadequate supply of qualified workers is becoming another major concern for investors considering MENA countries. In Mashreq and Maghreb countries, the abundant supply of low-cost labor – often cited as a selling point – has increasingly been seen as indicative of an unskilled labor force.
“In addition to the standard trade liberalization policies, it is also imperative for MENA countries to develop specific strategies to address the serious human skill gap in the region and to develop an adequate physical infrastructure in order to exploit their trade potential and integrate more fully in the global economy.”
The report says that presented results support the widely held hypothesis that trade volumes in the MENA region are significantly lower than what might be expected, taking into account economic, cultural and geographical characteristics. More specifically, the report results suggest that MENA exports are more than 86 percent below gravity model predictions. On the other hand, the report says, the standard gravity model variables adequately explain MENA import volumes.
“It is interesting to note that our results suggest that reducing the transport constraint, and increasing the efficiency of customs clearance procedures, will have a stronger impact on imports than on exports. Yet our empirical results from the standard gravity model showed the MENA dummy to be statistically significant in the export equation but not in the import equation. One possible interpretation of these results is that relaxing the transport constraint and increasing the efficiency of customs clearance procedures would have particularly strong effects on exports of the MENA region relative to other regions of the world. However, the impact on MENA imports would not be quantitatively much different from the impact it would have in other regions of the world.”
The report asks why export volumes of the MENA region are significantly below potential, and accordingly presents two viable answers: policy-induced impediments and more fundamental structural reasons.
“Our empirical results using the survey data should be interpreted with caution. Apart from the usual caveats with survey data, an additional complication in using cross-country survey data is that the openness of survey respondents may vary considerably from country to country, depending on culture and the nature of the political regime in which they operate. Nevertheless, our results strongly suggest that reducing transport constraints and improving the efficiency of customs clearance processes could significantly raise the volume of both exports and imports in the MENA region.
This report is available online at www.imf.com
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