How free trade can help convert the ‘Arab Spring’ into permanent peace and democracy

1. How free trade can help convert the ‘Arab Spring’ into permanent peace and democracy The natural effect of trade is to bring about peace. Montesquieu (1748) ThorvaldurGylfason InmaculadaMartinez-Zarzoso Per Magnus Wijkman

2. Two companion papers • How Free Trade Can Help Convert the ’Arab Spring’ into Permanent Peace and Democracy • With InmaculadaMartínez-Zarzoso (Göttingen) and Per Magnus Wijkman (Gothenburg) • CESifo Working Paper No 3882, July 2012 • Which Conflicts Can the European Neighborhood Policy Help Resolve? • With Per Magnus Wijkman • Presented at a conference on Globalization, Strategies and Effects at Aarhus University in November 2011, forthcoming in conference volume • CESifo Working Paper No. 3861, June 2012 Arab Spring story ENP story

3. Same story, two renditions • ENP story • Old Balkan powder keg and what the EU can do to facilitate peace through free trade agreements (FTAs) and integration • Arab Spring story • How remarkably little the Arab countries trade with one another and how much they could benefit from more trade and integration plus a well-functioning market economy and more • My coauthors • Martínez-Zarzoso: Gravity model econometrics • Wijkman: Trade policy, hands on experience

4. Same story, two renditions • ENP story • Old Balkan powder keg and what the EU can do to facilitate peace through free trade agreements (FTAs) and integration • Arab Spring story • Uses a panel gravity model of trade to estimate potential for increased intra-regional trade among 10 countries of the Southern and Eastern Mediterranean coast of the EU • Two initiatives • Barcelona Process 1995 aimed at South-Med coast • ENP 2004 aimed at Southern and Eastern neighbors

5. Enp story: Main Aim of ENP • Resolve conflicts in EU’s neighborhood • Basic hypothesis (Montesquieu, Monnet): • Closer economic integration helps resolve political conflicts and vice versa, creating a virtuous circle of prosperity and détente • Strong self-interest in resolving conflicts because their consequences spill over into EU • Identify four keys to success • Existence of facilitators of compromise (EU) • Well-functioning market economy • Intra-regional trade plus FTAs • Prospect of accession to EU: Strong incentive

6. Thessaloniki Declaration (2003): “future of the countries of the Western Balkans lies in the EU” Enp story: Main players North African neighbors do not qualify as they are not European • Acknowledged candidates for full EU membership • Croatia: Expected to join 2013 • Turkey and Macedonia: Uncertain time table • Montenegro: Negotiations underway • Serbia: Needs to normalize relations with Kosovo • Potential candidates • Albania and Bosnia-Herzegovina • Unacknowledged potential candidates • Belarus, Moldova, Ukraine: In Europe • Armenia, Azerbaijan, Georgia: Not in Europe At present, EU fatigue

7. Two dimensions of ftas affecting incentives

8. Conflict classification Easy Hard

9. Intraregional and EU Trade shares 2005 (% of total) Limited regional trade

10. balkan countries: Exports to neighbors 2005 (% of total)

11. balkan countries: imports from neighbors 2005 (% of total)

12. South-med countries: Exports to neighbors 2005 (% of total) Limited regional trade

13. GDP per capita 1990-2010 (PPP, constant 2005 international $)

14. eap countries: Exports to neighbors 2005 (% of total) Limited regional trade

15. EU DEEP ? AGREEMENT EEA NEC ? EFTA NEC?? EaP bilaterals CEFTA Agadir+ countries PAFTA Non-Agadir countries EaP CIS agreement Balkan bilaterals SHALLOW AGREEMENT COUNTRIES MANY COUNTRIES FEW Two dimensions of DCFTAs

16. Jump to Arab spring story Key elements of new ENP • European Endowment for Democracy and Civil Society Facility • Deep and comprehensive free trade agreements with EU (cf. EaP) with • Large potential gains from trade and • Incentives to include key partners in the region, including • Extensivefinancial and technical aid • Secureinstitutional anchoring (NEC)

17. Arab spring • Challenge comparable to that following collapse of communism • Systemic changes requires • Change in personnel managing the system • Implementation of basic principles of a market economy • Foreign financial and technical assistance • Sharing common values and adopting common principles, presupposing a strong sense of community solidarity

18. intra-regional and Eu trade shares 2005, again (% of total)

19. Agadir 4 regional Export shares (% of total) Agadir 4 comprises Morocco, Jordan, Egypt, and Tunisia

20. Non-Agadir 4 regional Export shares (% of total)

21. Poor prospects … • History of failed attempts to integrate MENA • Long embedded conflicts • Israel/Palestine • Lebanon/Syria • Western Sahara • Malfunctioning democracies • Prolonged civil strife in Algeria, Egypt, Libya, Syria, Lebanon • Imperfect market economies • Entrenched military industrial complexes

22. … but historic opportunity • Large economic gains from trade if successful • MENA states have high tariffs and extensive non-tariff barriers • Intra-regional trade is exceptionally small, so large gains are possible • Large potential for FDI in MENA to supply EU markets

23. Thus far, limited success • Main reasons for failure • Incomplete barrier coverage • Most FTAs are shallow, not deep, excluding barriers inside border • Incomplete commodity coverage • EU’s FTAs exclude agricultural products • Incomplete country coverage of FTAs • PAFTA excludes Israel

24. Estimating model • lnXijt= β0 +β1FTAijt +ηij+δit +ψjt+εijt • ηij denotes binary fixed effects, specified as dummy variables for each bilateral relation • δitare exporter-and-time fixed effects • ψjtare importer-and-time fixed effects • FTAijt denotes FTAs and varies by origin, destination, and over time

25. Results: Effects of ftas on total exports and imports Imports = MENA total imports from the 64 economies that represent 90% of their total imports Interpreting the results: Intra-Agadir trade is around 46 percent higher after the entry into force of the agreement as e0.376 – 1 = 0.456 Exports = MENA total exports to the 64 economies that represent 90% of their total exports

26. Results: Effects of ftas on total exports and imports • Specific results • Intra-PAFTA exports have increased significantly, by around 67% • EU exports to Turkey have increased by around 67% • Exports from Turkey to EU have increased by 50% • Turkish exports to Mediterranean countries increased on average by 80% • Israel’s imports from Turkey have quadrupled after 1997, controlling for distance, common border, incomes and incomes per capita

27. Further results (not shown) • The effect of the Turkey-Israel agreement has been to • Triple Israel’s imports from Turkey and • Increase Israel’s exports to Turkey by 80% • Significant benefits would emerge from an FTA between Egypt and Israel (Egger and Larch, 2007)

28. To succeed The ENP must … • IncudeNTBs to trade • Include agriculture in bilateral DCFTAs between EU and MENA countries • Initiate a regional DCFTA between Egypt, Israel, Jordan • Expand this to other MENA states by making participation in regional DCFTA a condition for a DCFTA with EU • Clarify the proposed NEC institutions

29. To succeed the ENP must … • Ensure agreement between participating Member States • Respect stronger conditionality • Reward fullfilment of goals • “More for more” • Devote greater resources to: DCFTAs • Reward conflict resolution (for Turkey? For the ME states? For Morocco-Algeria?) The end A tall order requiring strong political leadership!