Prospects for Economic Integration in Levant/ Levant'ta Ekonomik Butunlesme Beklentileri.

• Author: Habibi, Nader
• Position: Report

Introduction

The shockwaves of the 2011 Arab Spring uprisings are still being felt in many countries in the Middle East. Nowhere have the consequences of these uprisings been more significant than in the Levant region, particularly in Syria and Iraq. While the uprisings, which began in Tunisia and spread quickly to many Arab countries, were contained by state power or, as was the case in several countries, political reform, in Syria, uprisings would morph into a bloody civil war. In that country the uprisings against the Bashar Al-Assad regime that began in late 2011, evolved into a multi-front sectarian civil war and a costly ethnic/sectarian conflict that has been fueled by proxy wars among regional powers and global superpowers alike for more than six years.

Prior to the 2011 uprisings, the six countries that constitute the Levant region (Egypt, Jordan, Lebanon, Iraq, Syria and Turkey) had made visible progress toward expansion of trade and economic cooperation. The volume of bilateral trade among these countries grew steadily between 2000 and 2011 as the entire region benefited from several positive developments. First, the high oil and gas revenues of the Middle Eastern oil producers had a positive effect on Egypt, Jordan and Lebanon, which receive large amounts of remittances from their workers in countries such as Saudi Arabia, the UAE, Kuwait and Qatar. Second, the export and market-oriented economic reforms in most Levant countries contributed to the growth of economic cooperation. The only exception was Iraq, which was adversely affected by the U.S. military invasion of 2003 and the turmoil that followed this invasion for several years. Third, the Justice and Development Party government, which has governed Turkey since 2002, actively promoted closer economic and diplomatic relations with its Middle Eastern neighbors.

Trade and economic cooperation among Levant countries, particularly Turkey, Syria, Lebanon, Jordan and Iraq has deep historical roots that stretch back to the Ottoman Empire. During the 16th to mid-19th centuries, when the entire region was part of the Ottoman Empire, the political barriers to trade were minimal. The local rulers that governed with the approval of the Ottoman Sultans facilitated the free flow of goods and people throughout the Levant region while only occasionally imposing restrictions on food exports during local shortages. (1) European colonization of the Levant and the artificial creation of Lebanon, Jordan, Syria and Iraq after the First World War created significant barriers against trade and economic cooperation in the region. The newly created Arabic speaking states were under the economic and trade domination of the United Kingdom and France until they eventually gained full independence following the Second World War. During the period of European colonial domination, intra-Levant economic relations remained depressed, as each country's economy was reoriented toward its European patron. (2)

On the other hand, after World War II Turkey primarily focused on strengthening its economic and diplomatic links to Europe and showed little interest in its Middle Eastern neighbors. In the meantime, the Levant nations were preoccupied with the Arab-Israeli conflict in the 1950s and 1960s. Political demands for unity were mainly focused on military and political unity and there were several failed attempts for political integration by Syria and Egypt. (3) Like the rest of the Arab world, the Arab countries of Levant were caught in the cold war alliances with the former Soviet Union and the United States, which left little opportunities for regional economic cooperation. As a NATO member and a strategic ally of the U.S. and Israel, Turkey was not a good candidate to invite the Arab countries of Levant into any regional economic cooperation initiatives in those decades. Furthermore, disputes over the flow of Euphrates and Tigris waters from Turkey into Syria also caused diplomatic tensions between the two countries from late the 1960s until the early 2000s. (4)

While war and political instability have led to a setback in prospects for stronger economic integration among Levant countries, there is still a sizable amount of formal and informal trade among them, which reflects the adaptability of both private enterprises and state actors in the face of conflicts and geopolitical uncertainties. The fragmentation of Syria into several warring sub-regions, for example, has created opportunities for neighboring countries to trade with the Syrian regions adjacent to their borders that have been governed by non-hostile factions. (5) As a result of this adaptability and pragmatism, bilateral trade and investment relations among Levant countries will continue under a variety of scenarios regardless of the outcome of the current conflicts and proxy wars in the region. The net effect of violence and conflict is to keep trade levels below their full potential.

In this paper, I will examine the prospects for economic cooperation among the six countries that constitute the Levant region. (6) The analysis will take into account the unique geopolitical environment of the Middle East, which imposes several political and security risks for investment and economic activity. I will also analyze the trade policy and economic structure of the Levant nations, which are relevant for the region's prospects for economic cooperation.

Progress before 2011

The period between 2002 and 2010 should be viewed as the golden era of economic cooperation in the Levant. In this eight-year interval, the countries of the Levant experienced an unprecedented growth in their investment and trade relations (see charts 2 and 3 below). Turkey was the primary driver of this remarkable economic integration initiative. Several political and economic reforms in Turkey encouraged the country to move in this direction. The most important factor was the reorientation of Turkey's economic development strategy from import-substitution to an export- oriented growth strategy, which began in 1980s. (7) Under this new policy the Turkish government incentivized private industry to become more competitive and compete in global markets. The government also engaged in active trade diplomacy to expand Turkey's trade relations.

While this export-orientated transformation was underway, the country experienced a political transformation that was also favorable to Turkey-Middle East relations. The victory of the Justice and Development Party (AKP) in Turkey's 2002 parliamentary elections served as the main driving force for the promotion of Turkey's economic relations with the Levant. The moderate Islamist AKP showed a strong desire for an expansion of Turkey's economic and diplomatic relations with its Arab and Muslim neighbors. (8)

While the economic relations among the Arab countries of Levant (Egypt, Lebanon, Jordan, Syria and Iraq) were overshadowed by diplomatic tensions and the U.S. invasion of Iraq, Turkey pursued proactive bilateral trade diplomacy with each of these countries. Turkey offered a wide range of agricultural and processed food products to its Arab neighbors. At the same time, advances in Turkey's industrial and manufacturing technologies enabled it to offer a wide range of intermediate industrial products and engineering services.

Between 2002-2010, Turkey signed many economic agreements with Arab countries including several in Levant. The first of these trade and investment agreements was signed with Syria (2004), followed by Egypt (2005), Jordan (2009) and Lebanon (2010). (9) They were part of a broader effort by the AKP government to expand its diplomatic and economic linkages to the Middle East. Closer ties with Muslim Middle Eastern countries were in line with the preferences of the more conservative supporters of the AKP in the Asian (Anatolian) regions of Turkey. While no agreement was signed with the Iraqi government, Turkey managed to expand its economic relations with both the Arab and the Kurdish regions of Iraq in this period as well. In these years, Iraq served as the largest market in the Levant for Turkish exports. (10)

Trade Complementarity among Levant Countries

In addition to the diplomatic efforts of Turkey, the trade complementarity of the Levant economies was also high enough to increase trade once policy barriers were reduced. When the export products of one country resemble the imports of a trading partner, they have a high propensity to trade with one another (for example an oil exporter and an oil importer). Using detailed bilateral trade data among nations, the United Nations Conference on Trade and Development (UNCTAD) generates an annual Trade Complementarity Index (TCI), which is useful for assessing the trade potential between nations.

The values of TCI index for Levant countries in 2001, 2010 and 2013 are reported in Table 1. The TCI index ranges from 0 (no complementarity) to 100 (full complementarity) and the figures in Table 1 are high enough to promote and sustain trade among Levant countries. All Levant countries with the exception of Iraq have TCI indexes in the 30% to 60% range in 2010 and 2013. Turkey stands out as an exporter with 50% or higher TCI values with all other Levant countries. The compatibility of Turkey's exports with the import structure of other Levant countries provided the country with a strong...