External challenges frequently offer an impetus for internal unification. The challenges emerging post September 11, the war in Afghanistan and Iraq, and the declared war on terrorism, are strategic opportunities that the Arab countries should grasp to create turning point in the history of the region. This paper calls for an Arab awakening – a renaissance embodied in a strategy of regional economic integration. Witnessing an increase in intra-regional tourism, capital, and direct investment flows, the business sector has already taken up the challenge; while the corporate sector and the new generation of entrepreneurs aspiring to enjoy the benefits of regional economic integration, face barriers. The paper reviews the empirical evidence and analysis relative to trade, investment, labour, and capital market integration. The Arab countries are less integrated than countries with similar levels of development and per capita income. Major impediments to integration and prosperity include economic policy and administrative obstacles that impede trade liberalization and economic integration and lead to relatively high costs of doing business. The institutional legacies of colonialism leading to weak regional integration institutions, poor regional infrastructure leading to high logistics costs, and the “curse of natural resources” are important structural factors retarding integration. The paper concludes with a number of policy recommendations, namely: (1) Renegotiation of the GAFTA to establish an Arab Regional Integration Agreement (ARIA) with a wider scope that encompasses trade in services consistent with GATS, liberalization of capital flows and investment, freedom of labour movement, and freedom of establishment; (2) Finance investment in trans-national and regional infrastructure projects to help regional integration with private sector participation, leading to a pan-Arab integrated network of transport, communications, energy, telecommunications, and a broadband backbone to provide the “info structure” for an entry of Arab economies and societies into the digital age; (3) Assistance and finance for economic and social policies to support the convergence of incomes in the Arab region. (4) Prioritizing the development of the capital markets, setting the basis for their integration, and integrating the payment systems in the Arab countries to create an ‘Arab Target’ system that would establish the infrastructure for an Arab exchange rate system; (5) Establishing a set of institutions to enable and support economic integration and the creation of a regional integration and development financing facility; (6) Setting up a strategy for economic policy reform and public and corporate good governance; and (7) Implementation of a comprehensive regional policy-reform package to enable the emergence of the region’s home-grown common “voice”.
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