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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)

Combined Population (GRC, 2003): Approx 34 million

Combined Real GDP (GRC, 2003): Approx 390 billion

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 MAPGCC REGIONAL MAP

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GCC Regional Profile

General Economic Profile

Poorly diversified and mostly centralized economies with marginal private sector though changing of late - UAE, Bahrain, and Oman

Heavy reliance on hydrocarbon resources for both domestic and external economies. On average hydrocarbon as share of GDP is estimated a little over 40%

Trade among GCC member states is less than 10% of total export and less than 5% of the total GDP

Governments expenditures fluctuate with world oil prices – May not require sterilization if some of the windfall from higher oil prices is put aside

All six currencies are pegged to the US dollar

FDI is mostly in the hydrocarbon sector and related industries

Fairly open economies relative to the rest of the Middle East

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

All leaders can issue decrees with no institutional constraints

Their respective Judiciaries are simply extensions of the Executives

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

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:

Joint security given the instability of the region Collective external threats Economic rationale Geographical proximity Political, institutional, and cultural similarities

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Collective Security Rationales The onset of Iranian Islamic Revolution of 1979

The invasion of Kuwait by Iraq in 1990 with the subsequent first Gulf War

The US invasion of Iraq in 2003 and the concern for instability to spillover to the GCC countries

Offshore Islands dispute between Iran and the UAE

The massive presence of western military forces in the GCC countries

Economic Rationales Endogenous optimum currency area (OCA) argument – increase in

trade following the adoption of fixed exchange rate

Elimination of transaction costs and risks associated with flexible exchange rates

Collective bargaining power on negotiating trade agreements with other regional integrations and countries as a block

Allow for easy capital movement and efficient resources allocations

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1983 Established a free trade zone

1999 Agreement on custom union

2000 Agreement is concluded to adopt a common peg as a step toward creating a unified currency in 2010

2001 Accord reached on a joint custom tariff of 5%

2002 US dollar is selected as intermediate peg to the six currencies*

2003 Joint custom tariff of 5% is implemented

2003 Formal adoption of the US dollar as intermediate peg

2004 Agree in “principle” on key convergence criteria: size of budget deficit, inflation rate, interest rates, foreign reserves and ratio of public debt to GDP

2007 Envisages a common market

2010 Projected implementation of a unified currency

• Implemented Steps and Agreed Objectives

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EMU Criteria GCC Agreed Criteria

Average rate of inflation over the previous 12 months

Must not exceed by more than 1.5 percentage points of the three best performing member states

Weighted average of the six countries plus 2%

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%

EMU vs. GCC Macroeconomic Convergence EMU vs. GCC Macroeconomic Convergence CriteriaCriteria

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High Oil Prices Effects on the GCC Economies

Higher Oil Prices

Windfall

Massive Trade Surplus

Current Account Surplus

Heavy Gov. Investment

Fuel Private Sector Demand

Problems Higher Inflation

ImmediateEffects

Higher Prices onGoods & Services

Second-TierEffects

WagesIncreases inPub. Sector

Increase real income

Generate ExtraDemand

Push Prices higher

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GCC Monetary Policy

Usual Role of Central Banks in Lowering Inflation Through monetary policy

Stabilize growth and prices and minimize their volatility Can lead to painful economic adjustments such as

unemployment or inflationGCC Monetary Policy

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 Limited policy tools to deal with or cap inflation

The fall of the US dollar against the Euro (the currency of the GCC’s main trading partner) compounds the problem

Some are proposing Flexible exchange rate and independent monetary policy

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Obstacles and Challenges towards GCC Integration

Economic Challenges

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

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

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:

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

On regional integration as a whole some objectives are achievable and others may not be

Security agreements and alignment on foreign policies have been some what successful

Some steps towards full integration have been implemented and others have not

Lack of institutional convergence and the fear of losing sovereignty on economic policies have hindered the progress towards the full integration

A number of basic OCA criteria have yet to be met and convergence criteria are yet to be met or implemented

Regional disputes hinder the progress towards GCC MU

Neither costs nor benefits are expected to be large for the GCC MU