Financial Market Integration and Macroeconomic Volatility - Case Study Example

? Regional Economic Integration MENA Regional Economic Integration MENA Introduction Regional economic integration envisages the removal or reduction of duties and other taxes imposed on goods and services trade between countries. This allows the free movement of goods and services between member states which provide benefits for all the members or in some cases for the entire region. Regional economic integration is feasible among countries that have many things in common, such as short distances, better communications and rapid mobility. This was further strengthened because of the development of contemporary technologies in construction, telecommunication, heavy machinery, overland, sea and air transportation, and the development of the Internet (Ludema & Wootonb, 2000). The MENA region can be divided in various different segments. Two major resources of the region are the abundance of oil and the availability of human resources. MENA countries can be divided into three groups: a) Countries with enormous mineral resources and with large populations such as Algeria, Iraq, Syria and Yemen. b) States/countries that have small indigenous populations and huge mineral resources and they need to import manpower, such as This group of countries comprises the Gulf Cooperation Council (GCC) members (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) and Libya. c) Countries which have minimal resources and need to import oil and gas such as Egypt, Djibouti, Jordan, Lebanon, Mauritania, Morocco, Tunisia and the Palestinian Authority. National integration was necessary in this region because the countries have the same status that is they have the lease natural resources and need to import gas and oil. The countries are neighbours and linked via land routes. They all same share the same religion and culture, and the products produced are compatible with their living standards and life styles. By removing tariff barriers, they can obtain goods from each other at very competitive prices than if they had to import the same product from some distant country. Cost of freight could double the product’s market price. When neighbouring countries increase trade with each other, they develop infrastructure such as roads, railways etc. including communication networks. Increased trade brings prosperity to all countries involved which boosts employment (Booz & Company, 2012). MENA COUNTRIES These countries were selected because the data available can be analyzed properly. The countries have the same characteristic such as the implemented economic reforms and the type of economic integration so that they can be amply compared with each other in particular and the world in general. The economies of these countries are more service oriented. The major countries participating in bilateral trade agreements are Egypt, Jordan, Tunisia and Morocco. Jordan has bilateral free trade agreements with Tunisia, Syria, Lebanon, Egypt. The UAE, Bahrain and Kuwait, all signed since 1998. The country also has similar agreements with Libya, Algeria and Yemen. Egypt has agreements with Syria, Morocco, Tunisia, Libya, Jordan and Iraq, and Tunisia has agreements Algeria, Egypt, and Libya. MENA states have increased their participation in the WTO, and during the last ten years the area has witnessed an increase in bilateral between the Arab States in the region. The rise in trade agreements are because these countries are seriously interested in encouraging cooperation for the export of jointly produced goods. Another good reason is that countries all over the world are gaining enormous through intraregional trade agreements, and the countries comprising MENA also need to take advantage of such agreements. The Arab world has a history of failed agreements concluded in their region. Bilateralism is necessary as a response to the increasing numbers of European and American free trade agreements, and also as a means to maintain some semblance of equilibrium in trade with the western countries. The free trade agreement between Jordan, Egypt, Tunisia and Morocco was signed in 2004 in the Moroccan tourist resort of Agadir. The advantage of intraregional trade agreements is that the countries produce and trade in items which they can produce cost effectively and efficiently in comparison to its trading partners. A state cannot trade in goods over which it does not enjoy a competitive advantage. Because all states manufacture and trade in goods in which they are competitive, trade is mutually beneficial. Exports have shown an increase at an annual average of around 6 percent, compared with 8.4 percent for developing countries. Imports were lower than exports which amounted to 2.8 percent. The regional integration between has not resulted in any overall growth for the four countries being analysed in the paper. Since these countries are resource poor and labour abundant, they seek employment in GCC countries which are rich, oil exporting countries (Broude, 2010) Countries in MENA have not been able to integrate creation of jobs with growth. After taking all factors into consideration, the intraregional trade agreements have contributed very little to employment in the manufacturing sector. This is due to the reason that most exports from MENA are of low worth, and consist of products that do not move fast in trade markets. Another major reason is that MENA is not adequately linked to global production networks and FDI outcomes. FDIs have not been encouraging because employment is linked to high volumes of manufacturing of high quality and high value goods. To increase prospects of employment, exports from MENA need to be high value, labour intensive products which need to be connected with international production networks. This will in essence close the gap between trading associates and FDIs. This would envisage policies that encourage investors and relax tariffs and border impositions. This would reduce the cost doing business in the region and increase the attractiveness of MENA for investors to place their investments (Ianchovichina, 2012) During the last fifteen years, growth in MENA has been below than the rest of the developing countries. The growth rate of GDP in the regions had decreased from 3.45 to 0.1 during the 1980’s and 1990’s. The declining growth rate has resulted in high employment rates which are around 15 percent. The rate of unemployment varies between oil exporting and non oil exporting countries, in fact oil exporting do not have the same levels of employment. Studies on the sources of growth in the MENA indicates that trade has not been used as a drive for growth. This is because their exports have not had diversity. Excluding oil exports, MENA is the least integrated region in terms of trade and FDI (Dogruel & Tekcet, 2011). The two countries that have benefitted from this intraregional integration are Egypt and Jordan. Both countries signed an agreement in December 1998 agreeing to a reduction in tariffs. After signing the agreement, the volume between Egypt and Jordan reach $404 million in 2005, which is up by 22% as compared to the previous year’s figures. Mutual trade relations between the two countries progresses immensely, bringing the trade volume to $436 million by 2007 with Egypt dominating the trade balance. Egyptian investment in Jordan rose to $282.2 million with the natural gas projects being the project which received the most investment. (Egypt State Information Service, 2012). Limited assimilation between MENA countries has stunted the creation of jobs and has also damaged the region’s potential for economic growth. This is due its lack of competitiveness and the imposition of trade barriers. The need of the hour is to improve the infrastructure and strengthen communication and other facilities which encourage trade. Although progress has been made for removal of trade barriers, MENA still has higher tariffs than any other intraregional region in the world. Most regions when they enact trade agreements with their neighbours lower or in the case of the EU virtually remove tariffs to facilitate the free movement of goods and services (Rouis & Tabor, 2012). There is great potential for cooperation and intraregional trade agreements in the agricultural sector because of the food crisis all over the world. This has increased food prices, and raised worries about improving food security. More than 50% of the food consumed in the MENA region is imported Thee is a difference in the amount of desert in each country. Other issues such as degradation, water and wind erosion, salinity and water-logging all render land useless for irrigation. A table showing irrigated land is given below which indicates the different types of land and what is now being used to produce food for exports and for the region. Estimated land use in the MENA region 62% of the land mass of MENA is desert and nothing can be grown there. Five North African countries (Egypt, Libya, Tunisia, Algeria, and Morocco) and twelve countries of the Middle East (Bahrain, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, the United Arab Emirates, and Yemen) lie entirely in arid areas. Over half of Saudi Arabia is covered by desert (Nasr, 1999). Very high food prices present the chance for food products in MENA’s countryside. Forty three percent of the population in MENA, where there is more poverty than urban areas which also have no semblance of any services or infrastructure. The World Bank agricultural and rural development program for MENA is to help them in becoming self reliant in the food sector. The plan is to improve strategy and produce more to earn more money and better their standard of living. The approach is to support the rural population and provide them the opportunity the make the maximum use of their resources. Both purposes are possible by creating an environment for economical farming and at the same time giving the rural population basic facilities such as health, education and access to information(Al Masah Capital Management Limited, 2011). Financial and Monetary Integration in MENA is examined to assess the impression on macroeconomics in the up and coming economies for the period from 1980 to 2002. The results indicate that monetary freedom brings in increased unpredictable consumption which is not the same as the idea of shared international risk taking. Pragmatic observations stress the importance of sound monetary policies in the study and predictability of large-scale economic systems. Regarding structural improvement, developing the national financial sector is absolutely essential because it is connected with reduced macroeconomic instability. The possibility of enhancing regional financial integration might open up chances of getting around the weaknesses of the small exposed MENA economies to outside upsetting surprises and resources to improve consumption difficulties including international monetary incorporation (Neaime, 2010) Financial freedom and macroeconomic instability can also be affected by the unique features of the oil producing countries which make them defenceless against problems that originate from other countries. Restricted expansion of imports and exports make most MENA countries specifically vulnerable to abrupt fluctuations in trade and foreign influences. By using small businesses as models it has been observed that trade a variation shows the importance played by foreign interventions. The size of the country and its population are also an important factor in MENA economies which are much smaller than industrialized countries. Fluctuations cause losses to large business indebted MENA countries such as Egypt, Turkey and Jordan and to some extent Saudi Arabia which prove that business upheavals in large industrialized send shock waves in smaller countries MENA countries. Bearing the impact of trade upheavals and foreign aid flows in industrialized countries are specifically essential for small countries such as the oil producing countries which show more financial flexibility than do other developing countries (Soofi, 2008). Studies have shown that financial markets in the MENA countries are dissimilar with markets in the developed countries. These shows there are no long term effects of developed stock and financial markets into these markets. But, markets in Egypt are integrated with markets in the USA and the UK. Considering this, conditions are favourable for investors from all over the world to profit through international portfolios in the stocks markets of MENA countries. Similarly, investors from MENA countries can invest profitably in developed countries. Besides the US and UK, conditions are quite favourable for investors to invest in other European markets. In the short terms, simultaneous buying and selling is also possible from diversification. Several studies have been carried for the prospects of sustainable energy in the Middle East and North African countries. It shows that it is possible for these countries to start using natural resources, such as solar energy to meet their requirements for power and to secure freshwater supplies by desalination. The entire transition period will take around two decades to implement, but eventually these countries will rely less on fossil fuels. The system for storage of solar energy has not been perfected. Some energy can be stored for a reasonable time but other sources must be taken as provided by nature. The foremost challenge is to secure power on demand, but must meet all other requirements for sustainability. The major driving force for electricity and water consumption is population and economic growth. The need for the development and integration of the infrastructure is the most urgent need of MENA countries. The inauguration of Dubai’s metro system has been declared a success by the Roads and Traffic authority in Dubai. This is the first step towards connecting all members of GCC members. The rail network will be two thousand kilometres and should be completed by 2017. Transport and logistics are essential for economic development. This includes road, rail, airport, and seaport. This basic infrastructure is the major facilitator for trade, investment and development. However, less than 30% of the highways in Egypt, Tunisia, Morocco and Jordan are paved. This increases the cost of road transportation such as maintenance, fuel costs are very high. The railways need investment to run efficiently. In most MENA countries the management of transportation is not sufficiently organized to move across borders. Most of the trucks are outdated, and usually overloaded. Goods are mostly shipped via sea routes as the other modes of transport are too costly and not satisfactory. All the countries are now making efforts and plans to link their countries by rail, and to improve and upgrade the existing road network. MENA countries are also improving their shipping facilities and air transport, and efforts are being made to reduce costs by buying transport with latest technologies which are both more durable and fuel efficient. However, Egypt, Jordan, Tunisia and Morocco’s infrastructure are better than that of some other Arab and African countries. Overall, with the EU looking to boost the economies of these countries with imports, they are investing to make the infrastructure better, so that these countries are facilitated in the manufacturing of products needed by European countries. In the last decade, the countries realising the importance of exports and interregional integration have started investing in this vital sector, and have also reduced tariffs among themselves to be competitive in manufacturing. With the overthrow of the existing regimes in two countries, plans for developing the infrastructure have been delayed, but when the situation stabilises and there are stable governments in place, intraregional cooperation and the infrastructure will be resumed as before. However, MENA was the region where tariffs were reduced the most during the recent global crises. But compared to the rest of the world, tariffs are still higher in this region than in other parts of the world (Hoekman & Sekkat, 2010). List of References Al Masah Capital Management Limited, 2011. MENA Food Security are we doing enough to feed the population. [Online] Available at: http://almasahcapital.com/uploads/report/pdf/report_20.pdf [Accessed 5 April 2013]. Booz & Company, 2012. MENA Needs Better Integration of ICT into National Competitiveness Plans. [Online] Available at: http://www.booz.com/me/home/press_media/management_consulting_press_releases/article/50390919 [Accessed 4 April 2013]. Broude, T., 2010. Regional economic integration in the Middle East and North Africa: a primer, s.l.: Springer. Dogruel, S. & Tekcet, M., 2011. Trade Liberalization and Export Diversification in Selected MENA Countries. Topics in Middle Eastern and African Economies, Volume 13, pp. 1-24. Egypt State Information Service, 2012. Relations between Jordan and Egypt, Amman: s.n. Hoekman, B. & Sekkat, K., 2010. Arab Economic Integration:, Brussels: s.n. Ianchovichina, E., 2012. Is MENA’s job problem about economic growth or employment creation?, New York: The World Bank Group. Ludema, R. D. & Wootonb, I., 2000. Economic geography and the fiscal effects of regional integration. Journal of International Economics, 52(2), p. 331–357. Nasr, M., 1999. Assessing Desertification in the Middle East and North Africa, Bonn: Zentrum fur Entwicklungsforschung (ZEF). Neaime, S., 2010. Financial Market Integration and Macroeconomic Volatility in the MENA region, Beirut: Department of f Economics/Institute of Financial Economics. Rouis, M. & Tabor, S. R., 2012. Regional Economic Integration in the Middle East and North Africa: Beyond. Washington: World Bank Publications . Soofi, A. S., 2008. Global Financial Integration and the MENA Evidence from Equity and Money. Review of Middle East Economics and Finance, 4(2), pp. 1-26. Read More