Trade, Investment and Competitiveness in the Arab Region

1
Trade, Investment and Competitiveness in the Arab
Region

• Mustapha Nabli
• World Bank
• November 25, 2004

2
An Example Indias Reforms in 1990s

• -Tariff rates cut from 128 to 29 (average)
• -Nontariff barriers (licensing quotas import
  monopolies) reduced
• -FDI permitted in many sectors
• -Restrictions on capital outflow reduced
• -Portfolio investment permitted
• -Exchange rate unified (in 1993)
• -Domestic deregulation also undertaken for
  investment licensing Labor regulations And
  financial sector

3
Indias Experience

• Firm level research suggests that Indias recent
  export growth is due to
• -Existing firms exporting more rather than entry
  of new firms, local or foreign
• -Innovation and higher effort by local firms due
  to increased competitive pressure from FDI entry

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Indias Experience in 1990s Results (1991-2002)

• Trade ratio rose from 17 to 31 of GDP.
• Total exports rose from 23bn to 77bn.
• FDI and portfolio flows tripled to 1 of GDP.
• Exports diversified as services boomed
  (especially in IT sector) at 15 per annum.
• Share in world services exports tripled 1.5.
• Per capita GDP growth rose to 6.3.
• Productivity (growth per unit investment) grew,
  especially in services sector.

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Manufactures have risen to 70 percent of exports
from middle-income countries
Share of exports by sector, 1981-2001 (percent)
Manufacturing exports ()
Resources exports ()
Agricultural exports ()
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Middle East North Africa has lagged behind
Share of exports by sector, Middle East and North
Africa, 1981-2001 (percent)
Resources exports
Manufacturing exports
Agricultural exports
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Main Messages from India

• Trade policy reform seems necessary to ensure
  sustained growth and diversification
• But it is not a magic bullet. Other policy
  reforms eg business climate, infrastructure,
  education, needed to ensure success
• Quick results are possible

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Other General Messages

• There are essentially no cases of sustained
  growth without trade expansion
• Strong link between trade and investment policies
• Intra-regional trade is strongly linked to global
  trade

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Four major areas of action in the Arab region

• ER competitiveness
• Reduction of trade barrierstariffs and
  non-tariffs
• Improvements in investment climate and business
  facilitation
• Better performing banking sectors

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Import Liberalization and Exports

• Liberalization boosts exports by
• Directly reducing input costs
• Indirectly reducing costs through real exchange
  rate effects
• Providing competitive pressure on incumbent firms
  to innovate and cut costs
• Liberalization also contributes to
  diversification of exports
• And helps stimulate Productivity growth

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Liberalization Not just tariffs

• Tariffs are just one part of the trade regime
  need to consider others
• Foreign exchange rate overvaluation another
  major tax on exports was also reduced
  substantially
• Non-tariff barriers were also reduced sharply.
• Clearly, there has been more liberalization than
  indicated just by tariffs

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Direct cost reductions

• Reductions in protection reduce the cost of
  intermediate inputs
• These reductions can be large, and are much more
  important for manufactures than for agriculture
  and resources
• In principle, duty exemptions/free trade
  areas/duty drawbacks can also reduce these costs
• But administration costs high create incentives
  for corruption frequently unsuccessful

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Libn has reduced the burden on exports of
manufactures China
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Real Exchange Rate Overvaluation

• Protection to imports raises the price of
  nontraded goods
• This effect seems to be large
• 10 tariff raises exporters costs by about 7
• Duty exemptions/drawbacks do not overcome these
  costs
• This effect discourages manufactured exports
  increases dependence on commodities

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Trade-Growth Linkages

• There is strong evidence that trade
  liberalization stimulates growth
• Lowers the costs of capital goods, and hence
  increases the countrys desired capital stock
• More importantly, increased trade helps
  facilitate technology transfer, and hence raises
  productivity

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Export diversification is a key effect of growth
liberalization

• Growth helps stimulate investment and
  accumulation of human and physical capital
• This allows expansion of exports of goods that
  are intensive in these inputs
• Liberalization reduces the burden on exports, and
  allows a wider range of exports to succeed

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Dramatic Liberalization in Developing Countries