North Africa - Working paper - Trade Volume and Economic Growth in the MENA Region: Goods or Services?

Key messages • The relatively important trade barriers do not only have a negative impact on service trade, but also on the competitiveness of manufacturing, especially that some services such as transport and telecommunication services as well as financial services are complementary to goods production and exports. • The study underline that trade in services and trade in goods both do increase gross domestic product as trade policy openness and higher ratios of trade volumes to gross domestic product are positively correlated with growth. • However the effect of trade in goods seems to be higher than the effect of trade in services. The reason behind this finding is related to the fact that while the MENA region has significantly liberalized its trade in goods, trade in services is still facing several impediments and constraints making the effect of the latter on growth very limited. • The interaction between trade in goods and trade in services is negative. This result is surprising given the complementarity between trade in goods and trade in services. Inefficient services, provided mostly by the public sector, and the high cost of key backbone services such as transport, telecommunications, storage and distribution are important factors that raise the cost of MENA exports (both services and manufacturing), while also impeding trade expansion in the MENA region. • The fundamental function that many services perform in relation to overall economic growth is that they enhance the value of manufactured products and coordinate global value chains.