HOW FREE TRADE CAN HELP CONVERT THE ‘ARAB SPRING’

INTO PERMANENT PEACE

AND DEMOCRACYThorvaldur Gylfason

Inmaculada Martinez-Zarzoso Per Magnus Wijkman

The natural effect of trade is to bring about peace.

Montesquieu (1748)

TWO COMPANION PAPERS How Free Trade Can Help Convert the ’Arab

Spring’ into Permanent Peace and DemocracyWith Inmaculada Martínez-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

ENP story

Arab Spring story

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 storyHow 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

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 storyUses 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

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 successExistence of facilitators of compromise (EU)Well-functioning market economy Intra-regional trade plus FTAsProspect of accession to EU: Strong incentive

ENP STORY: MAIN PLAYERS Acknowledged candidates for full EU

membershipCroatia: Expected to join 2013Turkey and Macedonia: Uncertain time tableMontenegro: Negotiations underwaySerbia: Needs to normalize relations with

Kosovo Potential candidates

Albania and Bosnia-Herzegovina Unacknowledged potential candidates

Belarus, Moldova, Ukraine: In EuropeArmenia, Azerbaijan, Georgia: Not in Europe

Thessaloniki Declaration (2003): “future of the countries of the Western Balkans lies in

the EU”North

African neighbors

do not qualify as

they are not

European

At present,

EU fatigue

TWO DIMENSIONS OF FTAS AFFECTING INCENTIVES

Few Countries

Many Countries

Deep Agreement

DifficultStronger

incentives

Doubly difficult

Extra strong incentives

Shallow Agreement

EasyWeak

incentives

DifficultStronger

incentives

CONFLICT CLASSIFICATION

Conflicts confined to region

Conflicts involving third

countriesPotential candidatecountries

Western Balkans (Kosovo-Serbia, Bosnia-Herzegovina)

Ukraine-Moldova-Transnistria (Russia)Georgia-South Ossetia-Abkhasia (Russia)

Not potential candidatecountries

Western Sahara (Morocco-Algeria)Middle East (Israel, Palestine, and neighbors)

Armenia-Azerbaijan-Nagorno Karabakh (Russia, Turkey)

Easy

Hard

INTRAREGIONAL AND EU TRADE SHARES 2005 (% OF TOTAL)

Balkans EaP S. Mediter0

10

20

30

40

50

60

70

Regional EULimited regional trade

BALKAN COUNTRIES: EXPORTS TO NEIGHBORS 2005 (% OF TOTAL)

to Balkans

to EaP to S E Med

to Other to EU 25 to East EU

to South EU

0

10

20

30

40

50

60

70

BALKAN COUNTRIES: IMPORTS FROM NEIGHBORS 2005 (% OF TOTAL)

from Balkans

from EaP

from S E Med

from Other

from EU 25

from East EU

from South

EU

0

10

20

30

40

50

60

70

SOUTH-MED COUNTRIES: EXPORTS TO NEIGHBORS 2005 (% OF TOTAL)

to Balkans to S E Med to EU 25 to South EU to East EU0

10

20

30

40

50

60Limited regional trade

GDP PER CAPITA 1990-2010 (PPP, CONSTANT 2005 INTERNATIONAL $)

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

ArmeniaAzerbaijanBelarusGeorgiaMoldovaUkraine

EAP COUNTRIES: EXPORTS TO NEIGHBORS 2005 (% OF TOTAL)

to others to EaP to CIS to Balkans

to S and E Mediterr

to EU 250

5

10

15

20

25

30

35

40Limited regional trade

TWO DIMENSIONS OF DCFTAS

DEEP AGREEMENT

SHALLOW

AGREEMENTMANY COUNTRIES

CEFTA

EFTA

EaP bilaterals

NEC

FEW COUNTRIES

EU

?

?EEA

Agadir+ countries

NEC??

Non-Agadir countries

PAFTA

Balkan bilaterals

EaP CIS agreement

KEY ELEMENTS OF NEW ENP European Endowment for

Democracy and Civil Society FacilityDeep and comprehensive free trade agreements with EU (cf. EaP) withLarge potential gains from trade and Incentives to include key partners in

the region, including Extensive financial and technical aidSecure institutional anchoring (NEC)

Jump to Arab spring story

ARAB SPRING Challenge comparable to that following

collapse of communism Systemic changes requires

1. Change in personnel managing the system 2. Implementation of basic principles of a

market economy 3. Foreign financial and technical assistance 4. Sharing common values and adopting

common principles, presupposing a strong sense of community solidarity

INTRA-REGIONAL AND EU TRADE SHARES 2005, AGAIN (% OF TOTAL)

Balkans EaP S. Mediter0

10

20

30

40

50

60

70

RegionalEU

AGADIR 4 REGIONAL EXPORT SHARES (% OF TOTAL)

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0

2

4

6

8

10

12

14Agadir 4 to other PAFTA

Agadir 4 to Agadir 4

Agadir 4 comprises Morocco, Jordan, Egypt, and Tunisia

NON-AGADIR 4 REGIONAL EXPORT SHARES (% OF TOTAL)

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0

1

2

3

4

5

6

7

%nonAgtononag%nonAgto Agadir

POOR PROSPECTS … History of failed attempts to integrate

MENA Long embedded conflicts

Israel/PalestineLebanon/SyriaWestern Sahara

Malfunctioning democraciesProlonged civil strife in Algeria, Egypt, Libya,

Syria, Lebanon Imperfect market economies

Entrenched military industrial complexes

… 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

THUS FAR, LIMITED SUCCESS Main reasons for failure

Incomplete barrier coverage Most FTAs are shallow, not deep,

excluding barriers inside borderIncomplete commodity coverage

EU’s FTAs exclude agricultural productsIncomplete country coverage of FTAs PAFTA excludes Israel

ESTIMATING MODEL lnXijt= β0 +β1FTAijt +ηij+δit +ψjt+εijt

ηij denotes binary fixed effects, specified as dummy variables for each bilateral relation

δit are exporter-and-time fixed effectsψjt are importer-and-time fixed effectsFTAijt denotes FTAs and varies by

origin, destination, and over time

RESULTS: EFFECTS OF FTAS ON TOTAL EXPORTS AND IMPORTS

Imports ExportsEUMED 0.243***

(0.083)-0.128(0.139)

EFTAMED 0.081(0.183)

0.000(0.205)

USAMED -0.223(0.502)

1.363(0.975)

TURMED 0.593***(0.206)

0.407(0.394)

PAFTA 0.551(0.357)

-0.062(0.327)

AGADIR 0.376*(0.216)

0.208(0.225)

TUREU 0.412**(0.173)

0.610***(0.232)

NOBS 11006 10405R2-Adjusted 0.293 0.117RMSE 1.129 0.688LL -16254.2 -10180.34

Imports = MENA total imports from the 64 economies that represent 90% of their total imports

Exports = MENA total exports to the 64 economies that represent 90% of their total exports

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

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

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)

TO SUCCEED THE ENP MUST … Incude NTBs 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

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?)

A tall order requiring strong political leadership!

THE END