The Middle East and North Africa Market Development - Case Study Example

Introduction: Middle East and North Africa regions (MENA) have different kinds of economies which vary dramatically, the MENA region includes countries that are enrich with black diamond (oil) (gulf region) and countries that have scarcity of resources with reference to their population such as Morocco, Egypt and Yemen. Mena region in many ways is dependent upon two core factors; these are prices of oil and policies of the states. About 23% (out of 300 million) population of MENA region has daily earnings of less than 2 dollars. Therefore regional integration is integral for this region (The World Bank, 2011a). Figure 1: MENA region: Different states that are under the umbrella of MENA REGION. (Source: Aisby, 2012) Some main characteristics (strengths and weaknesses) are; total surface area consists of more than 15 million square km, MENA region accounts for largest oil production in the world, Iran member state holds world’s largest natural gas reservoirs, rich mineral resources, rich culture and Islam being the major religion practiced in the region binds them together. However in terms of weaknesses high unemployment rate in many states of, lack of agricultural resources, scarcity of water resources, food shortages in major parts of the region. Role of women is confined in many (ARABIAN) states of MENA region, poor political conditions, monarchy and various others (El-Erian, Eken, Fennell, and Chauffour, 1996). This study is of great importance in order to analyze the strengths and weaknesses of the region, plus some insights will be given regarding the potential of the region, with it barriers or hurdles that have resulted in restricting the growth of the region will also be discussed. Integration through Commodity Trade and Service Trade: According to the World Bank from 1995 to 2007, the trade output shares of MENA have shown significant increase from 54% to 79%. Moreover the region today is in a better shape in terms of welcoming global economies in comparison with 1990s. Likewise MENA region shares in terms of global economy participation have also shown increases (The World Bank, 2011b). It is believed that MENA region since early 1980s showed inclination towards diversification of export products mainly from fossil fuels and to various other sectors. This idea also reflects their policy as the region considers this theme to be the integral part of economic growth (Dogruel, A., and Tekce, 2010). However in the context of integration of commodity and service trade MENA region is less aggressive as compared to other regions of the globe. As Middle Eastern countries market share in the global exports (non fuels based) is less than 1%, meanwhile 4% of market share is possessed by Latin America comparatively. However, MEENA’s interregional trade is accountable for less than 10% albeit slightly over the trade in 1960 (Cashin, Mohaddes, and Raissi, 2012). There are various important factors that are collectively responsible for the poor performance of MENA region in the context of commodities and service trade. For instance the first and foremost reason is their too much dependence upon fossil fuels export, likewise another important reason is that since many of the countries one way or other almost export same things (fossil fuels) therefore the trade carried out amongst themselves is very much restricted or confined because of having same genre of resources. Figure 2: Mena Trade Weighs. (Source: Cashin, Mohaddes, and Raissi, 2012) Upon considering figure 2 one can clearly identify that Europe region is cynosure as a trading region for Libya, Algeria, Mauritania, Tunisia and Morocco (Maghreb countries). For instance more than 48% of the trade is directed or imported mainly from Europe. Likewise China and U.S. are the other two main contributors for the above mentioned countries. However trade amongst Maghreb countries and Gulf cooperation council (GCC) countries according to the figure holds less than 1% share except Morocco which has the value of 6%. Meanwhile eastern countries of MENA region Egypt, Syria and Jordan (Mashreq countries) are amongst those countries that have significant amount of trade with the GCC countries having share ranges between 13-28% (Mohaddes and Raissi, 2011). At present economies of the countries that are under the umbrella of MENA region are showing significant growth rapidly. Almost 5.3% of MENA economy is expected to grow in the current year (2012) and this trend will further increase by 3.6% in 2013. Moreover at present the world is going through financial crisis and many countries are finding it hard to cope up with this crisis, MENA region on the other hand (especially GCC) are looking good in terms of economic growth. The main reason behind this growth is considered to be rebound activity (economically) and mass level of production of crude oil (AMCML, 2012). However given below is a figure which shows projection of economic growth for MENA in 2012-13. Figure 3: GDP Growth Projections (Source: AMCML, 2012) . However in terms of major exports to other regions MENA enjoys close knots with Europe, Asia and North America. MENA’s major exports in terms of share can be analyzed from the figure 4 given below. Figure 4: Mena’s Major Export Flows 2011 (Source: AMCML, 2012) According to HSBC cooperation report MENA region is expected to achieve higher growth rate with respect to trade and in 2026 its growth rate will increase by 131% (see figure 5). Figure 5: (Source: AMCML, 2012) Financial and Monetary Integration: The economies of MENA region have many similarities in terms of culture, religion, socio-political conditions, economies, perceptions. At present this region is well balanced and possesses ideal opportunities for the integration in the intra regional financial sectors. As some economies are the main exporters of the capital while others are importers of the capital. Likewise countries also vary in terms of having population, economic growth, and skilled labors. For instance oil producing countries have small population and therefore they require help from other countries in skill labor regards. Whereas large population countries are non oil exporters usually and have to deal with unemployment issues (Naceur and Labidi, 2009). Conventionally rich economies followed a specific pattern and made investments of their superfluous in global financial centers, this pattern however later changed up to some extent as these superfluous economies are now looking to diversify their investments and are now investing in the region. Consequence rise of foreign direct investments (FDI) (intra-regional) have reported in the MENA economies, with its various portfolio investments also shown rise in the economies of MENA region as well. US 60 billion dollars came within the spam of 2002-2006, or in simple words 11% (out of total) capital outflows of GCC region was invested in different economies of MENA region (Naceur and Labidi, 2009). Some MENA economies have boosted in direct foreign investments because of the enhanced business environment therefore consequences leads towards more GCC investments as the investors are keen on targeting and investing in variety of sectors for instance real state, telecommunication, banking and finance and tourism. These GCC investors have primarily targeted Tunisia, Egypt, Syria and Lebanon (Naceur and Labidi, 2009). Foreign investments and stock markets are the core activities upon which intraregional transfers of funds are dependent. Meanwhile economies of oil producing MENA countries are eying for stocks of non oil producing MENA countries. However many countries at present have too many restrictions or impediments for foreign investments investing in their local assets, as a result confining (deeper) too much market integration. One fine example in this regard is of AMMAN stock exchange, which restricts foreign ownership of companies for some sectors. This restriction is of 50% by default. However in UAE foreign investors are not allowed to own more than 49% of the businesses, likewise in Omani companies ownership value is limited till 70% in general (Naceur and Labidi, 2009). Integration through Infrastructure: It is a well known fact that countries that are looking for economic development should have proper infrastructure investments. MENA member countries in this regard over the past decade have allotted around 3-5% of their total GDP to the infrastructure development (investments). Moreover MENA region public investments accounts for almost 20-25 % of the GDP. This total public investment of MENA region is below South-East Asia but is more than central Asia, Latin America and Europe. However regardless of these enormous funding, still MENA’s overall growth impacts are not that much fruitful and vigorous in comparison with other regions. The main reason for this lagging can be weak institutional reforms and poor planning or policies, for instance subsidiaries for user’s tariffs (World Bank, 2009). However at present almost all countries under the banner of MENA have attained universal access to services related with infrastructure. Still these countries are suffering in order to muddle with augmented burdens, therefore lagging in quality gap. Meanwhile telecommunication sector is amongst the soundest and well established infrastructure (sector) of the MENA region. Use of internet and mobile phones has shown significant increase in this region, albeit growth rate of countries in this regard may vary. Likewise shortage of electricity up to 20 % in terms of the demands of the region is a hurdle. Moreover fresh water resources are not abundantly present in the MENA region. Albeit shortage of water is severe still treatment of water is poorer. As water wastage is very high in some countries, similarly possibilities of polluting water sources are also visible in some countries. Furthermore contamination of underground resources is also at stake in some member countries (World Bank, 2009). Albeit in the context of transportation sector which is mainly served by roads and are spread over distant areas through a network, but these roads are worn-out because of the massive use. Consequences gaps in infrastructure growth are for sure provided if necessary measure and precautions are not taken on time. However large amount of investments is required for the stability and growth of the economy of various MENA countries. Moreover role of private sector in terms of investment would be of great help as it is need of an hour for the many countries of the MENA region (World Bank, 2009). Various governments of MENA region have highlighted the need of new broader policies and enhancements in infrastructure. But these countries are unsure how to adopt these policies and align them in a way so that greater benefits could be achieved. Likewise consultation or feedback from the public is confined and goals and objective are not well aligned. On the other hands speed of adopting and implementing reforms is slow in many countries because of the fact that governments are not inclined towards relinquishing their controls. Therefore contract regulation is frequently practiced in the region (World Bank, 2009). Meanwhile completion in the market is only located in telecommunication sector, while other sectors do not have very much competition. The main reason behind this is lack of involvement and investments by private sector (World Bank, 2009). However figure 6 given below illustrates infrastructure projects financed in the MENA region, whereas figure 7 illustrates infrastructure projects financed with reference to GCC and non GCC countries. Figure 6: (Source: World Bank, 2009). Figure 7: (Source: World Bank, 2009) Integration with Arab Countries and Other Regional Groups and Countries: Non oil producing Countries under the umbrella of MENA region often are caught in a situation where their scores of exports are less competitive in comparison with other regions. Garnering evidence in this regard is very easy as the region scores low in terms of exporting non oil products to other parts of the world. Moreover their market shares in terms of exports are very low from 1990s. Figure 8: (Source: Ahmed, 2010) Because of the slow and steady motion of exports, the rate of real per capita GDP in MENA is lower than ASIA (emerging economies of Asia) over the past few decades as can be seen from the figure 9. Figure 9: (Source: Ahmed, 2010) Before the financial crisis of 2008-2009 MENA countries were unable to cope up with the unemployment issue. As majority of the economies of MENA region were in a situation where they were unable to meet the demands of their growing population in terms of providing them with opportunities or jobs. Therefore this has resulted in muzzling MENA regions growth and is the reason why MENA was unable to gain benefit from globalization (Ahmed, 2010). In terms of integration with the Arab countries and the other regions of the world MENA GDP growth was not affected by the financial crisis that have resulted in decreasing shares of imports and exports for many countries of the world. As can be seen from figure 10 that GDP for MENA region in 2008-9 further strengthened and is showed growth while other regions were affected by this recession as a result their GDP decreased Figure 10: (Source: Havlik, 2011). Meanwhile in terms of exports to different regions MENA countries amongst themselves exports are not very much significant. However Europe being their supreme market accounts for holding major shares of exports from this region. Likewise USA is amongst the second major business provider in terms of exports for MEENA region. China and Turkey are amongst other prominent markets for MENA region as highlighted figure 11. Figure 11: (Source: Havlik, 2011). Similarly same pattern is for imports as well, as the region imports mainly from Europe region, USA, China and Turkey are the other main contributors as well. While remaining imports are from other regions of the world. Figure 12: (Source: Havlik, 2011). However MENA region because of exporting too much to Europe with reference to a specific commodities have resulted in restraining the region from getting overall better growth. Since Europe has been the cynosure of the major exports of MENA, therefore 60% of the total exports are directed towards Europe region. While exports to other regions are very much limited, this further takes to the understanding that MENA is not capitalizing growth of China, India and Brazil (Ahmed, 2010). Figure 13: (Source: Ahmed, 2010). Likewise in terms of providing opportunities for trade openness MENA’s average GDP for the years 1990 to 2007 remained very low as can be seen from figure 14 given below Figure 14: (Source: Ahmed, 2010) Issues and Challenges Related with Integration: According to El-Erian and Fischer (1996); Al-Atrash and Yousef (2000) restrictiveness in the MENA regions trade regime is amongst prime issue that has resulted in underperforming of the region. Moreover trade policies of the MENA regions are too shielding and usually tariffs rate are so high in comparison with other regions. Furthermore business procedures are too dragging reasons are quality control policies (Bhattacharya and Wolde, 2010). Another issue that is also creating constraints on trade in the region is high cost of transportation and logistics industry. Meanwhile lack of skilled labor, same kinds of commodities in some regions is other barriers that are impeding the process of integration amongst the regions and that are also in many ways responsible for this region to underperform. Similarly poor education, unemployment are the other main reasons. Conclusion: MENA region promises great potential and can grow rapidly provided policies should be altered and effective leadership should be implanted. However there are various diversifications in terms of economies of the MENA region. As the oil producing or exporting countries under the region are showing tremendous growth whereas countries that are not blessed with crude oil reservoirs are facing the music. Similarly this region has to deal with scarcity of fresh water which results in lack of agricultural production, moreover unemployment, poor leadership, education problems, lack of skilled labor are the other constraints that are muzzling the growth of economies of MENA region. In terms of integration since majority of countries share same kind of product therefore their exports within themselves are not up to great margins or extents. However share of exports are relatively higher for oil producing countries because of oil whereas non oil producers shares are relatively below power. However in terms of population factor MENA region is ideally posed because some countries have more population and lack of resources while other countries have lack of labor resources. If mutual collaboration in this regard is achieved, this region can very much ripe the fruits of development in perpetuity. List of References Ahmed, M. (2010). Trade competitiveness and growth MENA. World Economic Forum’s Arab World Competitiveness Review. Available from http://www.imf.org/external/np/vc/2010/103010.htm [Accessed 4 December 2012] Aisby. (2012). MENA market development support service. Available from http://aisby.com/mena/mena_welcome.htm [Accessed 3 December 2012] Al-Atrash, H., and Yousef, T. (2000). Intra-Arab Trade: Is It Too Little? IMF Working Paper 00/10. Washington: International Monetary Fund. AMCML. (2012). MENA Trade Finance. Available from http://almasahcapital.com/uploads/report/pdf/report_68.pdf [Accessed 3 December 2012] Bhattacharya, R., and Wolde, H. (2010). Constraints on trade in MENA region. IMF Working Paper WP/10/31. Washington: International Monetary Fund. Available from http://cid.bcrp.gob.pe/biblio/Papers/IMF/2010/febrero/wp1031.pdf [Accessed 4 December 2012] Cashin, P., Mohaddes, K., and Raissi, M. (2012). The global impact of the systemic economies and MENA business cycles. IMF Working Pape WP/12/255. Washington: International Monetary Fund. Available from http://www.imf.org/external/pubs/ft/wp/2012/wp12255.pdf [Accessed 3 December 2012] Dogruel, A., and Tekce, M. (2010). Trade liberalization and export diversification in selected MENA countries. Topics in Middle Eastern and African Economies, vol. 13. Available from http://www.luc.edu/orgs/meea/volume13/PDFS/Dogruel_Tekce_R2.pdf [Accessed 3 December 2012] El-Erian, M., and Fischer, S. (1996). Is MENA a Region? The Scope for Regional Integration. IMF Working Paper 96/30. Washington: International Monetary Fund El-Erian, M., Eken, S., Fennell, S., and Chauffour, J. (1996). Growth and stability in the Middle East and North Africa. Washington: International Monetary Fund. Available from http://www.imf.org/external/pubs/ft/mena/mena.pdf [Accessed 3 December 2012] Havlik, P. (2011). CESEE and MENA transitions: economic challenges and prospects. International Workshop: MENA Transition and International Response. Available from http://www.wiiw.ac.at/modPubl/download.php?publ=OS20111202_4 [Accessed 4 December 2012] Mohaddes, K. and M. Raissi (2011). Oil Prices, External Income, and Growth: Lessons from Jordan. IMF Working Paper WP/11/291. Washington: International Monetary Fund. Naceur, S., and Labidi, C. (2009). Middle East and North Africa region: financial sector and integration. Chapter in Qfinance: The Ultimate Resource. Bloomsbury. Available from http://www.qfinance.com/contentFiles/QF02/g1xtn5q6/12/4/middle-east-and-north-africa-region-financial-sector-and-integration.pdf [Accessed 4 December 2012] The World Bank. (2011a). Middle East and North Africa. Available from http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/0,,menuPK:247619~pagePK:146748~piPK:146812~theSitePK:256299,00.html [Accessed 3 December 2012] The World Bank. (2011b). Trade integration in the Middle East and North Africa. Available from http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/EXTMNAREGTOPPOVRED/0,,contentMDK:22492441~pagePK:34004173~piPK:34003707~theSitePK:497110,00.html [Accessed 3 December 2012] World Bank. (2009). Proceedings of MENA regional conference on Infrastructure reform and regulation: taking the infrastructure agenda forward in the Middle East and North Africa. Amman: Ministry of Planning and International Cooperation, Kingdom of Jordan. Available from http://siteresources.worldbank.org/INTMENA/Resources/MENAInfr.Reg.Forum_ConferenceProceedings.pdf [Accessed 4 December 2012] Read More