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Finding the right chord: A look at integration in North Africa

The countries of North Africa trade less with each other, and invest less in each other’s economies than any other region in the world, according to a 2012 African Development Bank report.

From Morocco to Egypt, the region’s economies are still battling high unemployment and stagnant growth, factors that led to the Arab spring rebellions, beginning in 2010. Their non-cooperation is ruinous because they could help each other to prosper. The region is conveniently split between the cash-heavy, non-productive economies of Algeria and Libya and industrious, but cash-poor Tunisia, Morocco and Egypt. The former have too much liquidity; the latter are desperate for investment.

A 2011 study carried out by Harvard and MIT ranked 128 of the world’s economies in terms of the diversity of goods exported, an indication of a country’s productivity. Egypt, Morocco and Tunisia ranked 62nd, 83rd and 47th respectively, with leading exports of machinery, textiles, chemicals, vegetables and petroleum products. These three countries are among the most diverse in the region.

Egypt, Morocco and Tunisia have promising financial infrastructure – such as stock markets and banks – but sometimes lack cash to invest through these channels. Nearly 11% of bank loans in Egypt are not generating returns, compared with the average of 3% for middle-income countries, according to 2012 World Bank figures. Additionally, the total value of the Egyptian stock market amounts to only 22% of GDP, compared with an average of 50% for middle-income countries. This suggests that the banks and the stock market need additional capital.

Algeria and Libya, on the other hand, have less productive economies but money to invest – explained by their oil and natural gas exports. Algeria and Libya ranked lowly, 115th and 119th, on the Harvard/MIT economic diversity ranking. Yet Algeria’s GDP per capita, at US$5,400, is $2,000 higher than that of Egypt. Total savings in Algeria is 48% of GDP, which exceeds the average 31% for middle-income countries and dwarfs Egypt’s 13%. While these countries lack the financial infrastructure of Egypt or Tunisia, they have money to invest elsewhere.

This non-cooperation and division is pricey, costing up to 3% of regional GDP every year, according to a 2012 estimate by the Moroccan ministry of finance.

Potential for collaboration is evident across sectors. These North African countries do not share their energy. For example, Egypt, Morocco and Tunisia import oil and gas mostly from Central Asia while Algeria and Libya have significant reserves. Energy experts such as Anthony Patt, of the Austria-based International Institute for Applied Systems Analysis, have touted the potential for solar power in the Sahara, linking North African solar farms to markets in Europe and beyond. One planned network of solar plants in North Africa, DESERTEC, hopes to generate more than 125 GW of power, or 15% of Europe’s annual consumption, and to send it through high-voltage cables under the Mediterranean Sea.

Likewise, the region lacks a common market for information technology (IT) or transportation infrastructure, despite increasing demand and human capital. IT and transportation capacity vary widely throughout the region’s countries. Egypt’s oranges and fertilisers have a difficult time making it to markets in the Maghreb because of its poor roads. North Africa lacks an area-wide telecom company, which can upgrade cellular phone and data networks.

Pros and cons of regional integration

Regional integration has clear theoretical benefits. Economic unions are able to bargain collectively with other associations: the most important in this case would be the European Union (EU), the region’s largest trading partner. Integrated markets also have a higher tolerance for financial shocks than individual economies. Most importantly, markets expand when economic policies work together and states lower barriers to trade and investment.

Yet regional integration also has potential downsides. First, more expensive products from partner countries may replace lower-cost products once purchased from non-members. Additionally, state revenues are decreased when tariffs are reduced. The flight of capital – financial or human – could disproportionately hurt poorer states. But these downsides are manageable, and acceptable when compared with the benefits.

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