Making Trade Work for the Poor in Middle East and Africa

July 20, 2015

By Yuwa Hedrick-Wong

Trade diversification has been recognized as a policy priority in the Middle East and Africa region (MENA) for some time: the region needs to diversify away from its dependency on exporting oil and resources, as well as diversifying away from its reliance on high income countries as the region’s primary export markets. Since the steep decline in the price of oil since 2014, the need for diversification is even more urgent.

Some progress has been made; exports to the developed countries have dropped to around 40% of total export in the last few years from as high as two-thirds in the past. But there has been virtually no progress made in diversifying away from oil and resources with the exception of UAE (due largely to Dubai’s extraordinary success in becoming a regional hub of tourism and services, UAE’s oil exports have been shrunk to around 65% of the total).  Hence the decline in commodity prices generally and oil prices in particular have put the region in a tight economic squeeze.

Failure in diversifying trade in MENA is reflected in its very low level of intra-regional trade. Intra-regional trade is about 12% of the total in MENA, and if taking oil out of the equation, it drops to a miniscule 2%.[1]  Apart from making economic growth more resilient and sustainable, intra-regional trade also has the virtue of benefiting the poor.  The experience of Asia/Pacific illustrates this inclusive aspect of intra-regional trade.

During a period when Asia/Pacific made impressive advances in all aspects of development, intra-regional trade also grew rapidly. In 1990, for example, Asia/Pacific’s (ex. Japan) two-way trade with the US came to some US$334 billion, almost the same as its intra-regional of US$384 billion.  By 2003, however, intra-regional trade rose to US$982 billion, dwarfing two-way trade with the US at US$583 billion.  By the late 2000s, intra-regional accounted for around 45% of the total trade in Asia/Pacific, not far behind intra-regional trade’s 55% share of the total in NAFTA (Canada, US and Mexico), even though Asia/Pacific is still without a formal regional free trade agreement.[2]

Intra-regional trade benefits SMEs and small start-ups through the expansion of the supply chain. Global companies source their supply from established and sophisticated suppliers in Asia/Pacific, who in turn source components and parts from smaller companies from up to a dozen countries in the region, seeking the best and the cheapest wherever they can be found. Many of these second and even third tier suppliers/producers in turn out-source parts of their production to even smaller local businesses, counting on their ability to respond quickly and nimbly to meet tight deadlines. As an ever expanding and increasingly sophisticated and efficient pan-regional supply chain evolved in Asia/Pacific, and the benefits of global trade became much more widely shared through such as supply chain.

Low oil and commodity prices may course reverse at some point and the economic squeeze could ease for the MENA region, but the massive youth bulge and the socioeconomic and political challenges associated with it is a fixed feature there for the foreseeable future.  So there will be no let up in the need for trade diversification, especially in increasing intra-regional trade and supply chain to create opportunities for the region’s huge young, restless, and marginalized population.

 

 

[1] UNCTAD data.

[2] Estimates made with data from IMF WEO and Asian Development Bank.

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