Private sector business people know only too well the barriers to trade and growth in the Middle East, writes Amity Shlaes.

The modern diplomat tends to place great faith in regional trade agreements, believing they will yield not only greater commerce but also economic liberalisation, growth and even political reform. For their part, national leaders like to think that fresh accords on trade can spare them the nastier work of intruding on nations' internal affairs.

But sometimes the work at "the green table" can take on an ephemeral quality. The trade dance is a beautiful one but does not yield the predicted commerce and growth.

This has certainly been the case in the Middle East. Generations of agreements to promote regional trade have yet to produce the much-hoped-for benefits. Intra-regional trade constitutes less than 3 per cent of the economies of big Middle Eastern countries (Syria is an exception). And when it comes to liberalisation and growth, the region has lagged pitifully behind. Five decades ago, per capita income in Egypt matched that of South Korea; today that figure for Egypt is a fifth of South Korea's. Even petrol powerhouse Saudi Arabia has a gross domestic product only half the size of Taiwan's. This problem of stagnation was long regarded as subordinate to the two others: obtaining Middle East peace and keeping the oil flowing. But it has generated hopelessness on a scale so large that it has brought instability to the region and the globe.

Now a report sponsored by America's Council on Foreign Relations offers a fresh approach, giving voice to a beleaguered Middle East group generally little heard from, let alone visible at, the green table: the private sector.* After collecting opinions in nine countries, the authors conclude that while work "at the borders" is important, a big source of the trouble in the Middle East lies "behind the borders" in the absence of freedoms and presence of an overweening public sector.

The report's respondents did complain about trade, especially "non-tariff barriers" - quotas, licensing, and corruption, so important. The costs of discharging a container at Alexandria can be treble the rate at other Mediterranean ports. As a plaintive businessman in Tunisia said: "If you have no customs connections, you will face troubles and obstacles."

But as problematic to the businesses were a litany of internal barriers: "public sector monopolies, exclusive agency laws, requirements to employ nationals, weak systems of contract enforcement, prohibitions on foreign ownership of real estate, limitations on majority equity ownership by foreigners and corruption and red tape". In four out of five Middle Eastern countries for which questions about start-ups were studied, it took between 11 and 15 procedures to win registration for new firms. This contrasts with an average of five or fewer in the US, Australia, Canada and Finland. In much of the Middle East, "trade agreements are not beneficial", wrote one regretful Jordanian businessman.

Again and again, these companies complained about government bureaucracy. "Registration of pharmaceuticals at the ministries of health is a major obstacle in all Arab countries," wrote a Lebanese. "Sales tax 175 per cent," noted an unhappy Jordanian respondent. "Privatise national airlines and make them function efficiently," suggested an Egyptian. A company in the United Arab Emirates listed a "nationals-only" rule for employment as an obstacle, adding: "Lack of skilled national labour in information technology industry. Therefore cannot deal with government. The government wants to deal only with nationals."

Among the weakest areas are capital markets, which exist on paper but sometimes not beyond it. There are 1,000-odd companies listed on the Cairo and Alexandria stock exchanges but, notes the report, "800 are not traded".

The report's authors recommend applying a carrot-and-stick policy from outside the Middle East via such vehicles as the World Trade Organisation and Euro-Mediterranean partnership agreements. Instead of leaving the Middle East diplomats to negotiate their way to nowhere, the European Union and the WTO must put pressure on national capitals to bring about deep internal reform: high taxes and red tape must go, public services must be genuinely privatised. Simply focusing on the stability of a country as a whole is bad. It too often translates into subsidising the status quo. There is a message here for the nations that this month pledged an additional $10bn in aid to Egypt.

It seems to me the implication here is that economic hope can come to the Middle East only if the regimes there reform wildly, far more than they have hitherto been inclined to do. And if current leaders will not cede ground, new ones have to come.

Sceptics of the carrot/stick tactic may like to note that it has worked in intractable cases in the past. In the 1970s, reform of the Soviet sphere looked like a fantasy, civil liberties a lost cause. Then US Congress passed the Jackson-Vanik amendment, a reversal of Richard Nixon's policy of ignoring what went on behind borders. Jackson-Vanik said that coveted Most Favoured Nation status would be granted to Moscow only when it liberalised emigration policy. Other human rights "sticks" were later implemented. A desperate Moscow gave ground - first on emigration, then in other areas including, eventually, market liberalisation.

The same sort of pressure can bring change in the Middle East. And such work, after all, is why nations take a seat at the green table in the first place.

* Harnessing Trade for Development and Growth in the Middle East, by Bernard Hoekman and Patrick Messerlin, introduction by Peter Sutherland, Council on Foreign Relations Study Group for Middle East Options

© Copyright 2002 Financial Times