Con­nect­ing the Red Sea

Financial Mirror (Cyprus) - - FRONT PAGE -

The Red Sea has played a piv­otal role in global trade for mil­len­nia. In the time of the pharaohs, it was at the heart of the global spice trade. To­day, it is an es­sen­tial global artery, feed­ing Western de­mand for hy­dro­car­bons and fa­cil­i­tat­ing the flow of goods be­tween Europe and boom­ing Asian mar­kets. More than 10% of world trade moves through the Red Sea basin ev­ery year, a fig­ure that is set to in­crease as Egypt dou­bles the ca­pac­ity of the Suez Canal.

And yet, with a few ex­cep­tions, most of the mod­ern wealth gen­er­ated by that trade sails rapidly on­ward, leav­ing lit­tle to show for its pas­sage. There is no rea­son that should con­tinue to be the case. A re­gional ef­fort to fa­cil­i­tate trade and build in­fra­struc­ture has the po­ten­tial to re­po­si­tion the coun­tries sur­round­ing the Red Sea as des­ti­na­tions for global in­vest­ment and in­ter­na­tional trade.

The Red Sea re­gion, com­pris­ing the 20 coun­tries that use the route as their pri­mary trad­ing cor­ri­dor, is the largest, fastest-grow­ing, and least ex­ploited emerg­ing mar­ket in the world. Over the next 35 years, the United Na­tions ex­pects the re­gion’s pop­u­la­tion to rise more than twofold, from 620 mil­lion to­day to 1.3 bil­lion. This pop­u­la­tion growth will be ac­com­pa­nied by one of the world’s high­est ur­ban­iza­tion rates, cre­at­ing a bur­geon­ing middle class, which the Brook­ings In­sti­tu­tion es­ti­mates will grow from 136 mil­lion to­day to 343 mil­lion by 2050.

Over the same pe­riod, ac­cord­ing to cur­rent pro­jec­tions, the re­gion’s GDP will triple, from $1.8 tril­lion to $6.1 tril­lion, while trade will in­crease five­fold, from $881 bil­lion to $4.7 tril­lion. And yet, as en­cour­ag­ing as th­ese num­bers may be, the re­gion has the po­ten­tial to do much bet­ter. Long-term fore­casts for the Red Sea re­gion’s share of global trade are com­par­a­tively flat. Ac­cord­ing to HSBC, for ex­am­ple, trade within the Middle East and Africa will ac­count for 10% of the global to­tal in 2050, up only slightly from 9% to­day.

There are good rea­sons for this con­ser­va­tive out­look. Many of the coun­tries in the Middle East and Africa have com­par­a­tively lim­ited in­fra­struc­ture; there are few world­class deep-wa­ter ports in the Red Sea or nearby. Lev­els of eco­nomic de­vel­op­ment vary widely, from the wealthy coun­tries of the Gulf Co­op­er­a­tion Coun­cil to the emerg­ing economies of sub-Sa­ha­ran and East Africa. And, un­for­tu­nately, political and cul­tural dif­fer­ences do not al­ways en­cour­age cross-bor­der co­op­er­a­tion. A co­or­di­nated ini­tia­tive to fa­cil­i­tate trade within the Red Sea re­gion would have a sig­nif­i­cant im­pact on fu­ture de­vel­op­ment, boost­ing GDP by about 10% to $6.6 bil­lion and in­creas­ing trade by nearly 35% to $6.3 tril­lion, ac­cord­ing to re­search com­mis­sioned by King Ab­dul­lah Eco­nomic City. By pro­vid­ing greater ac­cess to in­ter­na­tional trade for small and medium-size en­ter­prises, the core driv­ers of growth and job cre­ation, such an ini­tia­tive would di­ver­sify ex­ports and sig­nif­i­cantly en­hance the lo­cal share of the global value chain.

Achiev­ing this would re­quire sig­nif­i­cant im­prove­ment of lo­gis­tics ca­pa­bil­i­ties in the re­gion. The World Bank’s Lo­gis­tics Per­for­mance In­dex (LPI) scores most of the coun­tries in the Red Sea eco­nomic re­gion below 2.6 on its five-point scale. The most lo­gis­tics-friendly mar­ket in the re­gion, the United Arab Emi­rates, has a score of 3.54, plac­ing it just within the top 20% of coun­tries in the LPI.

The pri­vate sec­tor should be at the fore­front of the ef­fort to build the in­fra­struc­ture and lo­gis­tics links that form the back­bone of global trade, in­stall the tech­nolo­gies and sys­tems that max­imise ef­fi­ciency, and pro­vide the train­ing and skills to boost per­for­mance. This process alone will cre­ate jobs, open ca­reer paths, and im­prove ac­cess to education across the re­gion.

Na­tional gov­ern­ments will also need to par­tic­i­pate, stream­lin­ing cus­toms con­trols, bor­der man­age­ment poli­cies, and re­gional trade reg­u­la­tions. A good place to start would be the for­ma­tion of a Red Sea Trade Agree­ment, sim­i­lar to the Trans-Pa­cific Part­ner­ship, out­lin­ing spe­cific mea­sures to re­duce the costs of cross-bor­der trade and mech­a­nisms to set­tle dis­putes be­tween in­vestors and gov­ern­ments.

An­other po­ten­tial ini­tia­tive would be the for­ma­tion of a re­gional in­fra­struc­ture bank, mod­eled on China’s Asian In­fra­struc­ture In­vest­ment Bank. Such an in­sti­tu­tion would fa­cil­i­tate the ef­fi­cient dis­tri­bu­tion of cap­i­tal to in­fra­struc­ture de­vel­op­ment around the re­gion, en­hanc­ing na­tional trade ca­pa­bil­i­ties and pro­mot­ing sus­tain­able eco­nomic growth.

The Red Sea re­gion has a unique op­por­tu­nity to de­velop into a global cen­ter of ex­cel­lence in trade fa­cil­i­ta­tion, strength­en­ing eco­nomic ties through­out the re­gion and build­ing a new growth en­gine for the global econ­omy. All that is needed is the will to seize it.

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