How Would Economic Integration Impact the Levant Region?

Methodology

The figures above include our estimates of the impact of regional economic integration on GDP and job creation. Our analytical approach examines three primary mechanisms (1) trade, (2) investment, and (3) tourism and travel – through which increased integration is likely to impact these economies.

Our analysis is necessarily assumptions-­based. It is well-established that reducing tariffs and nontariff barriers enables trade,[1] lowering investment barriers increases domestic and foreign investment,[2] and eliminating visa requirements expands tourism and travel.[3] The extent of these benefits depends on the assumptions about both (1) how economic integration will impact trade, investment, and travel and (2) how changes in trade, investment, and travel will impact GDP. This calculator allows you to vary the first group of assumptions, while the second group of assumptions are derived from the existing literature as described below.

The calculator allows you to vary seven key assumptions about how integration will impact trade, investment, and travel. For our analysis we provide estimates for both “cautious” and “optimistic” versions of each assumption, drawing on existing literature. The details of those seven assumptions, as well as all other assumptions we made, are described here and in the notes section below.

We estimate the change in GDP from integration by aggregating the separate benefit from each primary mechanism (described below). Our analysis of job creation relies on existing estimates of the relationship between changes in GDP and employment (described below).[4] All reported estimates assume that the benefits of integration are fully realized, which we assume will occur within 10 years of integration.

Trade Assumptions

A comprehensive free trade agreement (FTA) that eliminates tariffs and aligns regulations to gradually reduce non-tariff barriers would lead to increased trade among signatory countries and higher economic output.[5] The magnitude of this change is dependent on assumptions about the overall change in trade (assumption 1) and the GDP consequences of trade (assumption 2).

Assumption 1: How much will bilateral trade increase after 10 years?

Assumption 2: How much will increased trade affect GDP?

Modify these assumptions in the calculator ⤴

Investment Assumptions

Effective economic integration would lead to expanded investment from both domestic and foreign investors seeking to take advantage of the larger market, increasing incomes and wealth in the countries of the Levant.[10] If economic integration is accompanied by reduced political instability, investment could expand further. Increased investment would expand GDP by enlarging the capital stock, with the magnitude dependent on the assumed benefits from the expanded market (assumption 3) and increased stability (assumption 4).[11]

Assumption 3: How much will new trade agreements increase investment?

Assumption 4: How much will political instability be reduced?

Modify these assumptions in the calculator ⤴

Tourism and Travel Assumptions

Tourism and travel are a critical component of the economies of the Levant.[16] Our cautious estimates for the impact of integration on tourism and travel rely on a simple observation: Visa restrictions reduce the amount of tourism (assumption 5). In addition, economic integration could create new opportunities for collaboration in tourism, spurring enhanced growth in this sector (assumption 6).

Assumption 5: How much will eliminating visa requirements impact tourism?

Assumption 6: How much will regional coordination in tourism promotion increase tourism?

Modify these assumptions in the calculator ⤴

Job Creation Assumptions

Assumption 7: How much will changes in GDP affect employment?

Modify these assumptions in the calculator ⤴

Notes

1. Reducing these barriers makes it cheaper for countries to trade, making it profitable for a greater number of firms to export. This expanded trade reduces the cost of goods and services available to consumers in both countries, as the more efficient producers of a good now determines the market price. This trade is typically disruptive, as we describe below, as new imports resulting from an FTA compete against either domestic firms or imports from other trading partners. For a review of how tariff and nontariff barriers affect trade, see Hoekman and Nicita (2008). ⤴
2. The primary relevant barrier to foreign investment is uncertainty about whether and how investments will be protected. Investment treaties typically “provide clear, enforceable rules to protect foreign investment and reduce the risk faced by investors,” providing foreign investors “either parity with or advantages over domestic investors” (Tobin and Rose-Ackerman, 2005, p. 2 & 5). ⤴
3. Simply put, visa restrictions of any kind decrease the total quantity of tourists and other visitors (Lawson and Roychoudhury, 2016). ⤴
4. This employment-growth relationship depends on “amount of surplus labor and labor force growth rate, the unemployment and labor force participation rates, the level and growth rate of labor productivity, and the structure of production” (World Bank, 2011, p. 35). ⤴
5. Trade barriers in the Levant are among the highest in the world (Hoeckman and Zarrouk 2009). ⤴
6. Baier and Bergstrand (2007) estimate—in an analysis of all FTAs signed between 1970 and 2000—that an FTA between two states roughly doubles bilateral trade after ten years. ⤴
7. The 1997 Pan-Arab Free Trade Agreement increased trade among these countries by only 20 percent (Harb and Shady, 2016). We assume that bilateral trade between the four countries that are signatories to this agreement—Iraq, Jordan, Lebanon, and Syria—expands to the point where it has doubled, reflecting the results of Baier and Bergstrand (2007. In our default case, this is equivalent to assuming a two-third expansion in bilateral trade for these countries, as this increase on top of the 20 percent historical increase would lead to a net doubling (167%×120%=200%). For other existing bilateral trade agreements, we assume that bilateral trade increases by one-fourth of the assumed benefit (25 percent in our default case). This assumption is based on the observation that regional FTAs increase trade more than bilateral FTAs (e.g., Kiyota Kovo, “An Analysis of the Potential Economic Effects of Bilateral, Regional, and Multilateral Free Trade,” The Research Institute of Economy, Trade and Industry, 2006), though the assumed value is relatively arbitrary as we are not aware of any analyses that systematically compare regional versus bilateral FTAs. ⤴
8. Frankel and Romer (1999, p. 394) conclude that “a rise of one percentage point in the ratio of trade-to-GDP increases income per person by at least one-half percent.” ⤴
9. Frankel and Romer (1999) estimate that the trade-to-GDP multiplier is in the range of 0.85 to 1.97. ⤴
10. For decades, a lack of high-quality investment—namely investment in productive sectors—has been a key constraint on growth and job creation in the region (IMF, 2016). ⤴
11. We estimate the GDP impacts of expanded investment using a standardized Cobb-Douglas function, which approximates how GDP responds to changes in physical and human capital (Mitra et al., 2015 use an analogous approach). For the Cobb-Douglas function, we assume constant returns to scale and an alpha of one-third, which is equivalent to assuming that a three percent increase in total physical capital increases output by one percent and that a three percent increase in human capital increases output by two percent. ⤴
12. This result is based on Tobin and Rose-Ackerman (2005, p. 29), which finds that bilateral investment treaties increase domestic investment by this amount. It is well-established that regional integration can also increase foreign investment—for example, Büthe and Milner (2008, p. 750) finds that bilateral FTAs increase foreign investment as a share of GDP by 0.22 percentage points. However, in the spirit of being cautious, we rely on only the results from Tobin and Rose-Ackerman (2005) in calculating net changes to the capital stock. ⤴
13. We mirror our assumption for the analysis of trade in assuming that the benefit for country pairs with existing treaty relationships is somewhat less. Specifically, we assume that the signatories to the Pan-Arab Free Trade Agreement receive two-thirds of this benefit and that country pairs with other existing trade agreements receive one-fourth of this benefit, which is the value under the default assumptions. ⤴
14. Estimates in Büthe and Milner (2008, p. 750) demonstrate a negative relationship between instability and foreign investment, with each one-point increase in instability (see footnote [15]) associated with a 0.0153 percentage point decrease in foreign investment as a share of GDP. ⤴
15. We assume that each $1 change in foreign investment is associated with a comparable $1 increase in the capital stock, which likely understates the total effect as each $1 increase in foreign investment is typically associated with a $0.60 increase in domestic investment (Farla et al., 2016; Omri and Kahouli, 2014). Estimates rely on the measure of instability used in Büthe and Milner (2008), which includes the number of assassinations, general strikes, guerilla warfare (insurgency) events, government crises, purges, riots, revolutions, and anti-government demonstrations (from the Cross-National Time-Series Data Archive). For our analysis, we use the average measure of instability for 2011-2016, with the data for each country as follows: Egypt (60.7), Iraq (112.8), Israel (10.2), Jordan (8.2), Lebanon (9.7), Palestine (2.3), Syria (58.3), and Turkey (43.2). ⤴
16. Tourism and travel account for 11 percent of regional GDP (authors’ estimates). ⤴
17. This estimate is based on Lawson and Roychoudhury (2016, Table 2), which finds that a one-point increase in the authors’ “Ease of Travel for Foreigners” measure increases tourism by 1.5 percent. Because there are 187 countries in the authors’ linear index, each additional visa restriction would correspond to a 1.5 * (100/187) = 0.8 percent change in tourism. Note that this estimate is modest, with each of the countries experiencing a 6-percent (on average) increase in tourism. Other estimates suggest that FTAs may have much larger effects (see, for example, Saayman, Figini, and Cassella, 2016). ⤴
18. Coordination among countries in the Association of Southeast Asian Nations likely contributed to the rapid growth rate in tourism in those countries. Their tourism growth rates have outperformed the rest of the world by 2.5 percentage points (Wong, Mistilis, and Dwyer, 2011, p. 883). ⤴
19. Its value depends on “amount of surplus labor and labor force growth rate, the unemployment and labor force participation rates, the level and growth rate of labor productivity, and the structure of production” (World Bank, 2011, p. 35). ⤴
20. This is based on publicly available estimates that the authors were able to discover. The values per country are Egypt, 0.58 (similar estimates are provided by El-Ehwany and El-Megharbel, 2012 & International Monetary Fund, 2017); Iraq, 0.27 (World Bank 2014, p. 127); Israel, 0.36 Nathanson, 2011); Jordan, 0.55 (International Monetary Fund, 2014), Lebanon, 0.20 (World Bank, 2012); Palestine, 0.52 (International Monetary Fund, 2013); Syria, 0.58 (Slimane, 2015); and Turkey, 0.20 (Akçoraoğlu, 2010). ⤴

References

• Anthony, C. Ross, Daniel Egel, Charles P. Ries et al., The Costs of the Israeli-Palestinian Conflict, RAND Corporation, 2016.
• Baier, Scott L. and Jeffrey H. Bergstrand, “Do Free Trade Agreements Actually Increase Members’ International Trade?” Journal of International Economics, 71 (1), 72-95, 2007.
• Büthe, Tim and Helen V. Milner, “The Politics of Foreign Direct Investment into Developing Countries: Increasing FDI through International Trade Agreements?” American Journal of Political Science, 2008.
• Egel, Daniel, Eric Robinson, Joel Kline, Deanna Lee, Chara Williams, Calculating the Economic Impacts of the Syrian Conflict: Operationalizing the World Bank's Damage and Needs Assessment, RAND Corporation, TL-255-WB, 2017.
• Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer, "The Next Generation of the Penn World Table," The American Economic Review, 2015.
• Frankel, Jeffrey A. and David Romer, “Does Trade Cause Growth?” The American Economic Review, Vol. 89, No. 3, June 1999.
• Harb, Georges and Nora Abou Shady, “Arab Trade Dynamics after the Implementation of the Pan Arab Free Trade Area (1998–2012),” Review of Middle East Economics and Finance, 2016.
• Hoekman, Bernard and Jamel Zarrouk, Changes in Cross-Border Trade Costs in the Pan-Arab Free Trade Area, 2001-2008, World Bank Policy Research Working Paper No. 5031, 2009.
• Lawson, Robert A. and Jayme S. Lempke, “Travel visas,” Public Choice 153:17-36, 2012.
• Lawson, Robert A. and Saurav Roychoudhury, “Do Travel Visa Requirements impede Tourist Travel?” Journal of Economics and Finance, 2016.
• Mitra, Pritha, Amr Hosny, Gohar Abajyan, and Mark Fischer, Estimating Potential Growth in the Middle East and Central Asia, Washington, D.C.: International Monetary Fund, Working Paper 15/62, 2015. As of June 7, 2019: https://www.imf.org/external/pubs/ft/wp/2015/wp1562.pdf.
• Tobin, Jennifer and Susan Rose-Ackerman, “Foreign Direct Investment and the Business Environment in Developing Countries: The Impact of Bilateral Investment Treaties,” Yale Center for Law, Economics, and Public Policy, 2005.
• World Bank, Investing for Jobs and Growth, 2011.
• World Bank, The Toll of War: The Economic and Social Consequences of the Conflict in Syria, 2017.
• Wong, Emma P.Y., Nina Mistilis, and Larry Dwyer, “A Model of ASEAN Collaboration in Tourism.” Annals of Tourism Research, 38:882-899, 2011.

Project Credits

Daniel Egel and Brian Phillips (Research), Alyson Youngblood and Chara Williams (Design), Lee Floyd (Development), and James Gazis (Production)