Economic Research Forum (ERF)

Economic interdependence and conflict management in MENA

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Do preferential trade agreements and regional integration help to promote peace between neighbouring countries? This column looks at some of the research evidence on the interactions between economic interdependence and conflict management and prevention in the Middle East and North Africa.

In a nutshell

Whereas some preferential trade agreements, such as the European Union, have been successful in preventing and managing conflict, others have failed to do so, especially those involving developing countries including MENA.

Intraregional institutions seem to be of paramount importance in the MENA context; and this is further elaborated by the absence of efficient dispute settlement mechanisms as well as the shallow nature of existing preferential trade agreements.

MENA countries with a higher level of democracy trade more, a finding that could be taken as support for the liberal view, which suggests that peace can be achieved through more economic interdependence.

Economic interdependence among Arab countries has intensified since the mid-1990s. This period coincided with the establishment of the World Trade Organization (WTO), and a proliferation of preferential trade agreements (PTAs) worldwide in a second wave (after the first wave in the 1950s and 1960s). MENA countries have embarked on joining the WTO as well as several PTAs among themselves and as with other countries.

The move towards increased economic interdependence has been part of the globalisation move. Research at that time pointed to the positive spillover effects of such increased economic interdependence and its potential effect in curtailing and preventing regional conflicts (Barbieri, 1996).

With the Arab Uprising and its aftermath, which we are still experiencing, and with the move to ‘deglobalisation’ with the election of populist leaders, it is not clear to what extent can economic interdependence and the subsequent PTAs prevent or lessen regional conflict (for a similar argument, see Sekkat, 2014; and for a more general argument on the modest impact of globalisation on preventing armed conflict see Elbadawi and Hegre, 2007).

The political frictions arising among different MENA countries or between MENA countries and non-MENA countries, as well as domestic conflicts, raise questions about the ability of PTAs to prevent or lessen conflicts. This column synthesises four studies of the relationship between economic interdependence and conflict management and prevention in the MENA region.

 

What does the research evidence suggest?

There are two main schools of thought: the liberals and the realists. Liberals argue that the more economic interdependence, the less likelihood of conflict arising, whereas the realists argue the opposite (Sidlo, 2021). Such debate between the two schools of thought was mainly theoretical in the 1980s and the 1990s, and has been followed by empirical investigation since then.

Research differentiates between conflict prevention, management, and solving as well as what is meant by economic interdependence, which is mainly based on merchandise trade flows, but sometimes refers to services trade and capital flows including foreign direct investment (FDI) and portfolio investment as well.

The inclusion of several variables that affect the relationship between the two main variables adds to the complexity of the issue. Among such variables are the type of the political regime, asymmetry in the relationships between economic partners, the nature of the trade scheme adopted (whether multilateral or bilateral), and the presence of and nature of PTAs (whether shallow or deep).

A survey of existing research does not reach a concrete answer to the debate between the liberals and the realists. The adoption of different proxies for both conflict and economic interdependence add to the inconclusiveness of the relationship between the two variables. The inclusion of several control or contingency variables just adds further to the complexity of the relationship.

Research has focused mainly on the impact of economic interdependence on conflict, yet the reversal of the impact of conflict on economic interdependence has also been researched and reached inconclusive results (Sidlo, 2021).

Important aspects that remain under-researched in this context are the so-called regional neighbourhood, where democratic countries have a positive spillover effect on the neighbours, causing both more interdependence and less intra- and inter-state conflicts; the presence or otherwise of hegemonic power, whether from the region or from outside; and the different approaches adopted by such hegemonic power to enhancing economic interdependence and lessening conflicts (Momani, 2007).

Anecdotal evidence on the role of PTAs (as a proxy for economic interdependence) in conflict management and prevention shows that there are different outcomes. Whereas some PTAs, such as the European Union (EU), have been successful in preventing and managing conflict, other PTAs have failed to do so, especially those involving developing countries including MENA – see, for example, recent tension among Gulf Cooperation Council members (Saif and Khouri, 2021).

Saif and Khouri (2021) pinpoint the role of institutions as a main factor affecting the nature of the relationship between economic interdependence and conflict management. They highlight the institutional structure and supranational power existing in the EU as key elements of success for both economic integration and conflict prevention and management. The case of MENA is different due to the intergovernmental nature of the League of Arab States (LAS) and the lack of supranational power.

 

Is MENA special?

MENA as a region has experienced the second-largest number of armed conflicts globally, after sub-Saharan Africa over the last three decades. MENA is among the regions with a low share of intraregional trade and low democracy rates (Sekkat, 2021; Sidlo, 2021). MENA has experienced different types of armed conflicts whether internal, inter-state or internationalised-internal.

The relationship between economic interdependence and conflict prevention and management seem highly contingent on a number of other variables in MENA, including the pivotal role of oil in the region, the high asymmetries between countries, the lack of democracy, the shallow nature of the existing PTAs among MENA countries and between MENA and its main trading partners, and the weak regional institutions governing trade and conflict management in the region (Sidlo, 2021).

The natural intraregional modest trade and capital flows imply that economic interdependence is not high to start with. Moreover, the prevalence of shallow PTAs and weak intraregional institutions exacerbates the fact that economic interdependence has not been intensified, and creates a vacuum where conflict has not been affected by economic interdependence in a positive manner.

As cited by Sekkat (2021), to a large extent, the region supports the liberal view where MENA countries with relatively higher level of trade are less likely to enter into armed conflicts with one another. Among the other characteristics of MENA is that common membership of intergovernmental organisations is associated with less conflict likelihood. Likewise, having similar political regimes is associated with lower conflict probability.

Regarding the role of institutions in cementing a positive outcome between economic interdependence and conflict prevention and management, Saif and Khouri (2021) highlight the inefficiency of regional institutions. This is represented by the lack of supranational power of LAS, as well as the absence of an effective dispute settlement mechanism whether in LAS in general or the Pan Arab Free Trade Area (PAFTA) or Agadir Free Trade Area (FTA) in specific.

Empirically Sekkat, (2021) investigates the impact of different forms of conflict on trade in the region over the period 1971 to 2014. The different forms of conflict included inter-state wars, and different forms of sanctions (commercial, financial, military and diplomatic).

Sekkat (2021) finds that only commercial sanctions (import restrictions) and inter-state wars are significant in terms of having negative impact on trade within MENA countries and between MENA countries and their trading partners on bilateral basis. According to this analysis, the adverse effects of inter-state war on trade appear with a lag of four years, in contrast to the adverse effect of import restrictions, which appears in the first year of imposition and after the third year.

Using the dataset on militarised inter-state disputes between 1960 and 2014, Asik and Marouani (2021) find that trade is not disrupted significantly after a conflict episode in MENA. The existing body of research evidence had supported the view that bilateral trade reduces the probability of conflict, but not the multilateral trade. Contrary to that evidence, the new study finds that both bilateral and multilateral trade induce conflict in MENA, with the exception of the case of rich oil export countries, whose bilateral trade links are associated with lower probability of militarised conflict.

Asik and Maraouni (2021) find that the existing PTAs have minimal impact on deterring conflicts, simply as they are mainly shallow agreements. Asik and Marouani (2021) find no significant statistical relationship between FDI flows and conflict in general, though FDI outflows seem to be more of a deterrent for conflict than inflows.

They conclude that MENA is different from the rest of the world in this regard, where trade is not significantly disrupted after conflict, and that trade increases above the natural level much faster than the time horizon documented in research. They also find that unlike what is found in the existing body of research, increased bilateral links is associated with higher probability of militarised conflict.

To sum up, empirical investigation by Sekkat (2021) finds that only inter-state war might have a significant impact on bilateral trade in MENA, yet with a lag, whereas Asik and Maraouni (2021) find that trade (bilateral and multilateral) induces conflict in the region, with the exception of oil rich countries.

Both studies find an insignificant role for the PTAs in the region whether in terms of enhancing trade or preventing and managing conflict. In this regard, MENA does not seem to be special if compared to the existing body of research, but studying MENA highlights a number of issues that are often blurred, including the following:

  • The definition of conflict and economic interdependence: in MENA, all types of conflict exist including inter-state, militarised conflict, etc, whereas economic interdependence proxies as merchandise trade and capital flows might fail to capture the relatively intensive labour and services trade in the region.
  • The role of control variables: it seems that type of existing political regime (autocracy versus democracy), the pivotal role of oil and symmetry of trade relations all play a determinant role in explaining the relationship between the two main variables in the MENA context.
  • The role of institutions: as explained by Saif and Khouri (2021), the role of intraregional institutions seems to be of paramount importance in the MENA context, and this is further elaborated by the absence of efficient dispute settlement mechanisms as well as the shallow nature of the existing PTAs.
  • The role of hegemonic power or the lack thereof and the relative absence of democracies in the region: this is among the issues that seem evident in the case of MENA and can help in explaining the complex relationship between our two main variables.

 

Lessons

Economic interdependence in MENA cannot be simply measured only by merchandise trade flows, but also by FDI and portfolio investment, as the results are likely to be flawed by the nature of the modest intraregional trade patterns in the region. For more careful analysis, services trade as well as labour movements need to be included.

Controlling for a number of variables, such as the dominant role of oil in the region and the nature of governing regimes, the shallow type of PTAs, as well as asymmetry between nations, do play an extremely important role in trying to explain the relationship between economic interdependence and conflict in MENA.

Extra attention should be given to the role of institutions in general and specifically the regional ones that address conflict prevention and management whether on the general level or when focusing on trade disputes. Sekkat (2021) indicates that MENA countries with a higher level of democracy trade more, which is taken in support of the liberal approach where peace can be achieved through more economic interdependence.

 

Further reading

Asik, Gunes, and Mohamed Ali Marouani (2021) ‘ Economic Interdependence and Conflict in MENA’, ERF Working Paper No. 1481.

Barbieri, Katherine (1996) ‘Economic Interdependence: A Path to Peace or a Source of Interstate Conflict?’, Journal of Peace Research 33(1): 29-49.

Elbadawi, Ibrahim, and Havard Hegre (2007) ‘Globalization, Economic Shocks, and Internal Armed Conflicts’, Defence and Peace Economics 19(1): 37-60.

Saif, Ibrahim, and Rani Khouri (2021) ‘The Relationship between Economic Interdependence and Conflict Prevention: An Institutional Perspective’, ERF Working Paper No. 1479.

Sekkat, Khalid (2014) ‘Inter-state Tensions and Regional Integration: Could the Arab Spring initiate a Virtuous Circle?’, Contemporary Arab Affairs 7(3): 363-79.

Sekkat, Khalid (2021) ‘Sanctions, War, and MENA Trade’, ERF Working Paper No. 1475.

Sidlo, Katarzyna W (2021) ‘What Does the Literature Tell Us on The Relationship between Economic Interdependence and Conflict Management?, ERF Working Paper No. 1483.

Momani, Bessma (2007) ‘A Middle East Free Trade Area: Economic Interdependence and Peace Considered’, The World Economy 30(11): 1682-1700.

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