To what extent has the Islamic Development Bank fostered economic integration in the MENA region?

The Middle East and North Africa (MENA) region, encompassing the Maghreb, Mashreq, and Gulf subregions, represents a profoundly complex geopolitical entity, characterized by its diversity in socio-economic structures and resource endowments. This heterogeneity, coupled with varying institutional frameworks such as the Gulf Cooperation Council (GCC) and the Arab Maghreb Union (AMU), complicates efforts to define its geographical boundaries and achieve cohesive economic integration.

Despite these challenges, MENA is endowed with substantial potential, stemming from its abundant natural resources, particularly oil and renewable energy, alongside its rapidly expanding human capital. These shared assets, augmented by cultural commonalities, offer a strong foundation for fostering regional cooperation and enhancing MENA’s position in the global economy. Economic integration has been identified as the most pragmatic pathway to achieving these goals, as it necessitates minimal delegation of sovereignty while delivering tangible benefits to participating states (De Melo, 2008; Hill & Menon, 2010; Olarreaga, 2008). However, the success of integration initiatives is inextricably tied to the presence of robust institutional mechanisms that facilitate dialogue, establish regulatory frameworks, and legitimize collective actions. In this context, the Islamic Development Bank (IsDB) has emerged as a pivotal actor, driving economic cohesion through targeted interventions in trade, infrastructure, and institutional capacity building. This essay evaluates the current state of economic integration in MENA and analyses IsDB’s contributions to advancing this agenda.

Indeed, through its strategic initiatives, the IsDB has laid the groundwork for deeper economic integration, positioning MENA to leverage its resources more effectively while addressing structural disparities. Nevertheless, achieving the full potential of regional cooperation will require sustained institutional support, tailored policy frameworks, and a commitment to collective development.

The Economic Integration Status of the Region

Economic integration, defined as agreements among states to eliminate trade barriers and harmonize monetary and fiscal policies, progresses through a series of stages, from preferential trading arrangements to fiscal unions (Prakash & Hart, 2000). This process seeks to enhance interregional trade by removing tariffs, enabling the free flow of goods and services, and coordinating monetary policies under regional institutions. However, although integration offers substantial benefits, including expanded trade and economic cohesion, several obstacles persist. These include the partial loss of sovereignty due to shared regulations, trade diversion favouring member states, and over-reliance on outsourcing, all of which diminish the political willingness of states to pursue integration (Al-Ubaydli & Jones, 2018).

Assessing the economic integration status of the MENA region is inherently complex (IsDB, 2023). The Gulf Cooperation Council (GCC) has achieved notable progress, operating as a single market since 2008, reflective of advanced integration among oil-rich rentier economies (Rouis, 2010). However, the broader MENA region has underperformed relative to its potential, particularly when compared to blocs such as the Association of Southeast Asian Nations (ASEAN) (Hill & Menon, 2010). Structural constraints, including limited economic diversification, low productivity, and weak integration into the global economy, have exacerbated this underperformance. For instance, MENA’s non-oil trade accounts for merely 1.8% of global volumes, rendering it among the least integrated regions globally (Rouis & Tabor, 2012).

Preferential Trade Agreements (PTAs), such as the Pan-Arab Free Trade Area (PAFTA), have attempted to reduce trade barriers but have yielded uneven outcomes. While the GCC successfully implemented a standardised tariff system, other MENA subregions lag behind, with intra-regional trade stagnating at under 9% of total exports between 2010 and 2022, far below ASEAN’s 25% and the EU’s 66% (IsDB, 2023). High trade costs and limited institutional capacity further constrain the transformative potential of PTAs (Freund & Portugal-Perez, 2012). Moreover, although PTAs have improved supply chains and trade infrastructure, their limited impact on policy reforms and Foreign Direct Investment (FDI) flows has hindered deeper integration (World Bank, 2012). Still, nascent projects, such as the North Africa-Middle East-Europe Mediterranean Power Pool, highlight the untapped potential for integration within critical sectors like energy achieving meaningful economic cohesion. To this end, addressing the infrastructural, institutional, and policy deficiencies across MENA remains imperative.

What Are the Challenges to Deeper Integration?

The protracted pace of economic integration within the MENA region can be attributed to a confluence of structural, institutional, and logistical impediments. Foremost among these is the widespread reluctance to relinquish elements of national sovereignty and accept the trade-offs inherent in deeper regional cooperation. This hesitancy, often compounded by limited economic literacy and pervasive mistrust of external actors, stems from concerns that integration may erode perceived national economic advantages through compliance with supranational regulations. Institutional inertia further exacerbates these challenges, as the adaptation of domestic institutions to an integrated regional framework proves both arduous and time-intensive. Compounding this issue are the homogeneities across the region in terms of resource endowments, production capabilities, and export structures, which undermine the establishment of a Ricardian framework for comparative advantage and specialisation. A lack of coordinated domestic economic strategies remains the most significant constraint, yet the inefficiency of the region’s public sector, which stifles the growth of a robust private sector, cannot be overlooked (World Bank, 2009). Additionally, deficiencies in trade logistics and infrastructure represent critical barriers to integration. Indicators such as the Logistics Performance Index (LPI) and Liner Shipping Connectivity Index (LSCI) consistently highlight the inadequacies in transport and logistical services that are vital for competitive exports (Um et al., 2009). Nonetheless, initiatives such as the Mashreq Corridor Program, designed to mitigate cross-border trade constraints, demonstrate incremental progress in addressing these infrastructural deficiencies.

Given these multifaceted obstacles, a comprehensive reform agenda is imperative to advance integration. Priority areas include: (i) strengthening trade in services through regulatory reforms; (ii) establishing a robust competition framework to facilitate market liberalisation; (iii) enhancing private sector capacity and economic contributions; (iv) modernising vocational and traditional education systems to meet labour market demands; (v) optimising essential infrastructure and backbone services; and (vi) fostering economic diversification through targeted development programs. However, the heterogeneity of the region necessitates that these reforms be meticulously tailored to the unique economic, social, and institutional specificities of individual countries and subregions. Without such contextual sensitivity, the effectiveness of reform initiatives may be significantly constrained, thereby undermining the overarching goal of regional economic integration.

How Does the IsDB Promote MENA’s Economic Integration?

The Islamic Development Bank (IsDB), a multilateral development institution operating in accordance with Shari’ah (Islamic law), has played a pivotal role in fostering socio-economic advancement among its member nations. Over time, the IsDB has evolved into a comprehensive group encompassing five entities: the Islamic Development Bank (IDB), the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), the Islamic Research and Training Institute (IRTI), the International Islamic Trade Finance Corporation (ITFC), and the Islamic Corporation for the Development of the Private Sector (ICD). The Bank has supported economic development and intra-regional cooperation through a range of programs, including trade financing initiatives that date back to 1977. Notable examples include the Export Financing Scheme, the Trade Financing Scheme launched in 1987 to promote exports among OIC member countries, and the Import Financing Operation, designed to facilitate trade in developmental goods (IsDBG, 2003). The ITFC, established to address the need for increased intra-regional trade, plays a critical role in streamlining these efforts. In 2008, trade financing operations reached $2.6 billion, supplemented by the Trade Cooperation and Promotion Program, which employs trade fairs, workshops, and training courses to advance economic cooperation and intra-OIC trade (IsDB, 2009). Insurance services offered by the ICIEC further strengthen export capacity and intra-regional trade integration (Lauinger et al., 2021)

Beyond economic interventions, the IsDB has made substantial contributions to social development, particularly in education and healthcare. In line with the Millennium Development Goals (MDGs) and Vision 2020, $3.4 billion—representing 18.5% of overall Ordinary Capital Resources (OCR)—was invested in social sector projects by 2008 (IsDB, 2009). Key initiatives include expanding access to basic education, reducing illiteracy, and enhancing human capital through training programs, to which $1.8 billion was allocated. The Reverse Linkage Mechanism facilitates peer learning and the exchange of best practices among member countries, further augmenting developmental outcomes. Efforts to alleviate poverty have been central to the IsDB’s mission, particularly in Least Developed Member Countries (LDMCs). Between 1975 and 2008, the Bank authorised 1,761 operations, amounting to $12.5 billion, to improve infrastructure for power, water, and social services. Such interventions aim to equalise economic conditions across member states, a critical prerequisite for fostering regional integration. Recognising the necessity of private-sector engagement as a driver of sustainable growth, the IsDB has prioritised investments in this sector. In 2009, $157 million was allocated to infrastructure projects through the ICD, complemented by the establishment of the IDB Infrastructure Fund (IIF), the first private equity instrument dedicated to infrastructure development in member countries. Additional incentives for private-sector participation are provided through initiatives such as the ICIEC and the Unit Investment Fund (UIF), established in 1989 to mobilise foreign investment (IsDB, 2009).

The IsDB also emphasises inter-institutional collaboration, forging partnerships with both regional and international organisations. Memorandums of Understanding (MoUs) have been signed with entities such as the Arab Maghreb Union, the Economic Cooperation Organization, and the Gulf Cooperation Council. At the international level, the Bank actively participates in consultative sessions beyond annual OIC meetings, including those of the Islamic Commission for Economic, Cultural, and Social Affairs. Its longstanding relationship with the Arab Coordination Group (ACG) exemplifies its commitment to collaborative development assistance (IsDB, 2009). In response to the establishment of the World Trade Organization (WTO) in 1995, the IsDB launched its Technical Assistance and Capacity-Building Program in 1997, aimed at enhancing institutional and human capital in member nations. Through this initiative, the Bank empowers member countries to participate more effectively in the global trading system.

Conclusion

The MENA region represents one of the most complex geopolitical and economic realities globally, a complexity rooted not only in its ambiguous geographical delineations but also in the pronounced heterogeneity of its constituent states. The distinctive historical trajectories, resource endowments, and socio-economic structures of the GCC, Maghreb, and Mashreq subregions—ranging from oil-rich to oil-poor economies— significantly shape regional dynamics and complicate assessments of economic performance. These variances render the pursuit of economic integration and the fostering of intraregional cooperation a formidable challenge.

Despite these intricacies, institutions such as the Islamic Development Bank (IsDB) have played a pivotal role in advancing regional coordination since the 1970s. The IsDB Group has supported the region through targeted initiatives in trade financing, social development, infrastructure enhancement, and interinstitutional collaboration. A notable development has been the introduction of the Integration Index, a comprehensive framework comprising 22 indicators across key dimensions such as trade and investment integration, financial markets, production networks, logistics, and human mobility. This tool, exemplified in the inaugural “IsDB Group Integration Report” of 2022, identifies trade and investment integration as a critical domain for advancing MENA’s economic cohesion (IsDB, 2023). Leveraging these insights, the IsDB Group is well-positioned to support initiatives such as the effective implementation of the Greater Arab Free Trade Area (GAFTA) and the development of an enhanced pan-Arab Investment Agreement, both of which are essential to deepening intraArab integration. Additionally, the full operationalisation of the Trade Preferential System among the Member States of the Organisation of Islamic Cooperation (TPS-OIC) could further strengthen regional trade ties. Incorporating environmental provisions into these frameworks holds the potential to bridge the Arab region with other IsDB territories, fostering sustainable trade practices and maximising shared benefits (IsDB, 2020).

In sum, while the MENA region’s heterogeneity presents enduring obstacles to economic integration, the strategic interventions and frameworks advanced by the IsDB offer a viable pathway toward greater regional cohesion and global competitiveness.

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