Global Economic Integration

The Missing Middle East

by Doug Henwood
published in MER184

Conventional definitions imagine world trade as taking places among nations -- international trade, it is called. Convention also holds that everyone is best off when such trade is carried on as freely as possible. Neither the definition nor the polemic of free traders has changed much, except for a pseudo-scientific overlay of mathematics, since David Ricardo laid it out in 1817. But the world has changed some in the last 176 years.

Chips and satellites are part of that change, of course, but so is the spread of a social institution, the multinational corporation. Some figures from a 1992 World Bank report make this point well. After noting that multinationals had shifted “labor-intensive stages of production” to Third World states, the report continued:

By the early 1980s, intrafirm trade within the largest 350 transnational corporations contributed about 40 percent of global trade. More than a third of US trade is between foreign affiliates and their US-based parents. Similarly, East Asian affiliates of Japanese firms ship a quarter of their exports to parent companies in Japan and buy from them more than a third of their imports. In 1982, 47 percent of Singapore’s exports were by US-owned firms. Fifty-two percent of Malaysia’s exports to the US were from US affiliates, and Taiwan’s five leading electronics exporters are US firms. Similarly, exports of electrical goods by Japanese producers in Korea had much to do with the rise of Korea in world electronics. [1]

Clearly, nations are no longer the basic units of international trade. The Transnational Corporations and Management Division (TCMD) of the UN’s Department of Economic and Social Development, formerly the Center on Transnational Corporations, has been arguing that international economic relations are shaped by the investment patterns of multinationals. Three major clusters have formed, each dominated by multinationals based in one of the major powers -- the US, Japan and the EC. Around each pole of this triad are gathered a handful of “developing” countries to serve as sweatshops, mines and plantations. [2] Of course, the TCMD uses other language, but that is the essential point.

Around three quarters of global direct investment flows take place among the triad, and about two thirds of the remainder are accounted for by just ten developing countries, mainly in East Asia and Latin America. The other 100-odd countries of the world -- the Caribbean, the smaller countries of Latin America, South Asia, Africa and much of the Middle East -- are lost in this new arrangement.

Trade patterns reflect these investment clusters. Almost 60 percent of US trade is with developed countries, with a handful of large countries like Mexico, Brazil and South Korea making up most of the balance. Over half of Japan’s trade is with the developed world and another third is with Asia, leaving only 15 percent for the rest of the Third World. Europe trades largely with itself, the US, Japan, Eastern Europe and Africa. Much of this “trade” is the trans-border migration of goods that goes on within multinationals.

So, there are two parallel movements occurring -- regional integration around the poles of the triad, and integration among the triad members themselves. Though the initial impetus to integration may come from government policies, once momentum develops, multinationals often take the lead. European integration was led by politicians and bureaucrats in the 1950s, but the movement toward a single market in the 1980s was pushed by multinationals. North American integration, too, has been led by multinationals; much of the work in joining the Mexican and US economies was accomplished in the 1980s before anyone had heard of a North American Free Trade Agreement (NAFTA).

Trading in Workers

How does the Middle East fit into this picture? Not prominently. In the light of the TCMD’s criteria, the region shows rather small capital inflows, a weak trade performance, and little sign of closer intra-regional economic ties. Since 1980, the Middle East’s share of world exports fell by 2.4 percentage points, and its share of imports by 8.4 points. The Middle East is only a relatively minor trading partner with each pole of the TCMD’s triad; were it not for its oil, the figures would be insignificant. The only one of the bigger countries to gain export share was Israel, and that was by 0.1 percent. The lower price of oil has something to do with this poor performance, but that is hardly a comfort.

Intra-regional trade as a share of this total was roughly flat from 1980 to 1991. In stark contrast, intra-Asian trade -- averaging imports and exports -- increased 13.2 percentage points, intra-EC trade, 24 points. The US, Canada and Mexico all became more important trading partners to each other, though intra-Western hemisphere trade excluding the NAFTA three declined in relative importance. [3]

As Stanley Fischer, the former chief economist of the World Bank, points out, low intra-regional trade figures overlook a different aspect of integration -- the exchange of workers and their remittances. [4] For Jordan and Egypt, remittances accounted for more than a tenth of GDP in 1989. For all the poorer, labor-exporting countries of the region, remittances in 1983 -- the last year for which Fischer could find trustworthy data -- “were far larger than intra-regional exports.” But trade in goods seems a much more promising strategy of economic development than trade in workers and remittances.

If we look at two prominent models of integration, the EC and NAFTA, we see on one hand a combination among relative peers and on the other, that of a colossus, a junior partner and a vassal. The Middle East is neither a region of peers nor a simple hierarchy. The region’s most advanced economy, Israel, is boycotted by many of its neighbors and has formal trade deals with Europe and the US. Workers aside, the region’s rich are not interested in what the region’s poor have to export -- even here the labor importers have turned to workers from outside the region. Only one country, Lebanon, is classified by the World Bank as an exporter of manufactures (though the IMF places it with remittance countries). Whatever you call it, Lebanon’s trade picture is disastrous -- imports are almost eight times exports. [5] Overall, manufacturing averages 13 percent of GDP, roughly the same as Africa, and half the average seen in Latin America and developing Asia -- meaning there is little local merchandise to trade. [6]

External capital is scarce. During the 1980s, Egypt received an average of over $1 billion a year in direct investment, but that inflow fell by over 80 percent in 1991. There is some foreign investment in the oil producing countries, but in 1989 and 1990, just before the Gulf war, the entire region received investment on a scale comparable to Malaysia -- an average of just over $2 billion a year. Only one country from the region shows up on the TCMD’s list of investment clusters -- Saudi Arabia, in the US sphere of influence. In 1990, US direct investments in the region were $9.4 billion, or 0.7 percent of the total US stock worldwide. Almost all of this is accounted for by Israel, Saudi Arabia and the UAE. [7]

Portfolio investments within countries seem fairly miniscule, though data is very thinly reported. [8] Of course, outward portfolio investment from the rentier states is considerable, with little of it staying in the region, but even that fount is running dry. To take one ready-at-hand example, bank deposits by Middle Eastern OPEC members fell by $29.7 billion, while debts rose $6.5 billion between December 1990 and September 1992. [9]

Official institutions have been talking up the return of many so-called developing countries to private credit markets for a couple of years now, and the World Bank has been pushing what it calls “emerging” stock markets as an important route for capital development in the South. But these new relations are enjoyed, if that is the word, mainly by the larger Latin American countries. Only two Middle Eastern stock markets, those of Jordan and Egypt, appear on the International Finance Corporations’s list of emerging markets. They accounted for 0.06 percent of the emerging markets’ total capitalization in 1990; in 1991, the Cairo market disappeared from the IFC database.

Despite little integration both within the region and between the region and the triad, Fischer points to the EC, which began with the Coal and Steel Community and a payments union, as a model. He proposes cooperation on water and power projects, tourist promotion, labor standards for migrants, and a Middle East Bank for Reconstruction and Development. This bank would be partly funded by the oil exporters, in line with his urging that rentier states invest more in the region so that, as he puts it, “capital goes to labor as well as labor coming to capital.” This, Fischer supposes, will decrease population mobility while addressing regional inequalities.

But cross-border capital flows encourage migration, providing the material basis of a transnational circulation of labor and culture as well as money. [10] Development banks elsewhere have done little to alleviate, and much to exacerbate, the global maldistribution of income. And it is hard to see where the driving force for a Middle Eastern Bank would arise; the newest Bank for Reconstruction and Development, the European one, despite its rich and powerful pedigree, is nonetheless off to a fairly rocky start. Even the Middle East’s oil rentiers like to stow their hoard in the First World.

Cross-border exchanges of people, goods and ideas are laudable. But relations should be negotiated among peers, not imposed by the World Bankers and multinationals. Their version of integration has come with declines in Southern incomes relative to the North. In this world, the only thing worse than being part of the evolving economic hierarchy is being excluded from it. So far, the Middle East is largely excluded.

Endnotes

[1] World Bank, Global Economic Prospects and the Developing Countries (Washington, April 1992), p. 33.
[2] United Nations, Transnational Corporations and Management Division, World Investment Report (New York, June 1992), ch. 1.
[3] Trade figures from International Monetary Fund, Direction of Trade Statistics, 1986 and 1992 yearbooks.
[4] Stanley Fischer, “Prospects for Regional Integration in the Middle East,” paper delivered at the World Bank’s Conference on Regional Integration, Washington, DC, April 2-3, 1993, forthcoming in The Economics of Middle East Peace (Cambridge, MA: MIT Press, 1993).
[5] IMF, International Financial Statistics, June 1993.
[6] World Bank, World Tables and World Development Report, 1992 editions.
[7] US Department of Commerce, Survey of Current Business, August 1992.
[8] IMF, Balance of Payments Statistics Yearbook, 1992.
[9] Bank for International Settlements, International Banking and Financial Market Developments, February 1993.
[10] Saskia Sassen, “The Weight of Economic Internationalization: Comparing New Immigration in Japan and the United States,” paper delivered at the Association of Japanese Business Studies, New York, January 8-10, 1993.

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