REGIONAL INTEGRATION of THE GULF COOPERATION COUNCIL (GCC)COUNTRIES

REGIONAL INTEGRATION of THE GULF
COOPERATION COUNCIL (GCC)COUNTRIES
Presented at: Claremont – KIEP Conference on Political Economy of
Regional Integration
By: Khalfan M. Al Barwani
Claremont Graduate University - CGU
November 18-19, 2005
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Objective:
To
give a general report on the Gulf Cooperation Council – GCC - regional
integration and list its achievements and challenges
The
GCC as an optimum currency area (OCA)
The
GCC in the regional political and security context
Members: Bahrain, Kuwait Oman, Qatar, Saudi Arabia and the United Arab
Emirates (the UAE)
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Combined Population (GRC, 2003): Approx 34 million
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Combined Real GDP (GRC, 2003): Approx 390 billion
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Geographical location: Persian Gulf or Arabian Gulf Peninsula
Combined share of world crude oil reserves (Bank of Scotland): Approx
50%
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GCC REGIONAL MAP
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GCC Regional Profile
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General Economic Profile
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Poorly diversified and mostly centralized economies with marginal private sector
though changing of late - UAE, Bahrain, and Oman
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Heavy reliance on hydrocarbon resources for both domestic and external
economies. On average hydrocarbon as share of GDP is estimated a little over
40%
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Trade among GCC member states is less than 10% of total export and less than
5% of the total GDP
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Governments expenditures fluctuate with world oil prices – May not require
sterilization if some of the windfall from higher oil prices is put aside
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All six currencies are pegged to the US dollar
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FDI is mostly in the hydrocarbon sector and related industries
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Fairly open economies relative to the rest of the Middle East
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Unemployment pressures among nationals are emerging
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General Political Profile
All six member states are absolute and hereditary monarchies with
varying but limited political participations
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All leaders can issue decrees with no institutional constraints
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Their respective Judiciaries are simply extensions of the Executives
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Other GCC Features
All GCC countries have small populations with exception of Saudi
Arabia (25.8 million)
Both public and private sectors rely heavily on expatriate workforce (at
various degrees) with more pronouncement in the private sector
On average 95% of domestic workforce is employed by the public
sector
Similarities in culture and language
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GCC Stated Objectives and Rationales for Integration
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Stated Objectives
In 1981 the members ratified a charter that called for the
establishment for the cooperation council for the Arab States
The overall charter stipulates that the GCC is a political, economic
and regional organization and list four main objectives
Rationales for the GCC regional integration
The question is to what extent these stated objectives are dictated by
economic, political, regional security, or global imperatives
Various rationales and theories have been advanced and include:
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Joint security given the instability of the region
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Collective external threats
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Economic rationale
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Geographical proximity
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Political, institutional, and cultural similarities
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Collective Security Rationales
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The onset of Iranian Islamic Revolution of 1979
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The invasion of Kuwait by Iraq in 1990 with the subsequent first Gulf War
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The US invasion of Iraq in 2003 and the concern for instability to spillover to
the GCC countries
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Offshore Islands dispute between Iran and the UAE
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The massive presence of western military forces in the GCC countries
Economic Rationales
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Endogenous optimum currency area (OCA) argument – increase in trade
following the adoption of fixed exchange rate
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Elimination of transaction costs and risks associated with flexible exchange
rates
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Collective bargaining power on negotiating trade agreements with other
regional integrations and countries as a block
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Allow for easy capital movement and efficient resources allocations
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•
Implemented Steps and Agreed Objectives
1983
1999
2000
Established a free trade zone
2001
2002
Accord reached on a joint custom tariff of 5%
2003
2003
2004
Joint custom tariff of 5% is implemented
2007
Envisages a common market
2010
Projected implementation of a unified currency
Agreement on custom union
Agreement is concluded to adopt a common peg as a step
toward creating a unified currency in 2010
US dollar is selected as intermediate peg to the six
currencies*
Formal adoption of the US dollar as intermediate peg
Agree in “principle” on key convergence criteria: size of
budget deficit, inflation rate, interest rates, foreign reserves
and ratio of public debt to GDP
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EMU vs. GCC Macroeconomic Convergence Criteria
EMU Criteria
GCC Agreed Criteria
Average rate of
inflation over the
previous 12 months
Must not exceed by more than Weighted average of the
1.5 percentage points of the
six countries plus 2%
three best performing member
states
Deficit
Should not exceed 3% of the
GDP
Should not exceed 3% of
the GDP although some
flexibility will be allowed to
account for wild
fluctuations in states
revenues
Gross public debt
Should not exceed 60% of the
GDP
Should not exceed 60% of
the GDP
Interest rates
Average of the lowest six
countries plus 2%
Average of the lowest six
countries plus 2%
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High Oil Prices Effects on the GCC Economies
Massive Trade Surplus
Current Account Surplus
Windfall
Heavy Gov. Investment
Fuel Private Sector Demand
Higher
Oil Prices
Problems
Immediate
Effects
Higher Prices on
Goods & Services
Higher Inflation
Second-Tier
Effects
Wages
Increases in
Pub. Sector
Increase real
income
Generate Extra
Demand
Push Prices higher
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GCC Monetary Policy
Usual Role of Central Banks in Lowering Inflation
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Through monetary policy
 Stabilize growth and prices and minimize their volatility
 Can lead to painful economic adjustments such as unemployment or
inflation
GCC Monetary Policy
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Has been essentially targeted at maintaining the stability of exchange rate as
a nominal anchor for the economy
Given the fairly free mobility of capital, the actual pegging of the national
currencies to the U.S. dollar has also required the GCC interest rates to trail
closely the movements of U.S. dollar interest rates
Consequences for the GCC Countries
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Limited policy tools to deal with or cap inflation
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The fall of the US dollar against the Euro (the currency of the GCC’s main
trading partner) compounds the problem
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Some are proposing Flexible exchange rate and independent monetary policy
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Obstacles and Challenges towards GCC Integration
Economic Challenges
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Low factor mobility within GCC countries
Low economic diversification
Low intra - GCC trade
Mixed macroeconomic convergence
Some members economies are getting more diversified than others
Political and Institutional Challenges
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Political will to abdicate national sovereignty on economic policy
responses to shocks
Harmonization of existing institutions before moving forward with GCC
integration
Agree on the extent of powers of a supra GCC institution
The role, influence, identity and power of the hegemon
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Intra – GCC Disputes
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A number of GCC countries such as Bahrain, Kuwait, Oman, and
Qatar, and the UAE have signed or are in the process of signing
separate trade agreements with the US at the dismay of Saudi Arabia
Other disputes that challenge the GCC regional integration have to
do with border demarcations among the member states over areas
rich in crude oil and natural gas and they include:
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The UAE and Saudi Arabia
Qatar and Saudi Arabia
Kuwait and Saudi Arabia
Oman and the UAE – Resolved
Bahrain and Qatar – Resolved
Oman and Saudi Arabia - Resolved
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Selected Quotes from GCC Regional Papers and Publications
“UAE firm on sovereignty over waters of Al Adeed ” (Khaleej Times July 1,
2005) – Area of dispute with Saudi Arabia
“Riyadh protests Qatar-UAE bridge over Al Adeed waterway (Al – Jazeera,
June 29, 2005)
“GCC integration --- more rhetorical than real (GRC Publication, May 27,
2005)
“ The Gulf Cooperation Council (GCC) was born to tackle political, security
and economic matters----Is it doing what it is supposed to do? No---Qatar
is currently exporting gas to Korea, but not to Kuwait awaiting the
approval from Saudi Arabia to allow the pipe line to cross through its
territory” (Qatari Foreign Minister quoted by GRC Publication, May 27,
2005)
“Saudi Crown Prince Abd Allah bin Abd al-Aziz will not attend the
forthcoming GCC summit in Bahrain amid growing intra-Gulf differences
on free trade” (Al-Jazeera, December 19, 2004)
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Conclusion
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On regional integration as a whole some objectives are achievable and
others may not be
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Security agreements and alignment on foreign policies have been some
what successful
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Some steps towards full integration have been implemented and others
have not
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Lack of institutional convergence and the fear of losing sovereignty on
economic policies have hindered the progress towards the full
integration
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A number of basic OCA criteria have yet to be met and convergence
criteria are yet to be met or implemented
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Regional disputes hinder the progress towards GCC MU
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Neither costs nor benefits are expected to be large for the GCC MU
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