The uncertain future of GCC economic integration

by  — 12 March 2013

The Gulf Cooperation Council (GCC) was formed three decades ago with six member countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. At the formation, the founding charter of the bloc was to effectively realise economic and social integration among its members.

Qatar’s minister of state for foreign affairs Khalid bin Mohamed Al Attiyah attends a GCC meeting in Manama in late 2012. There is wide consensus in the union of states that there needs to be more financial and trade integration, though how this will take place and the future a common currency in the near or even medium terms seems unlikely. (Image Corbis/Reuters)

Theoretically, economic integration of such sorts provides member countries with collective powers. It also promotes cost efficiencies among its members through efficient sharing of resources. Historically, this has particularly served well in the field of research and development, where a few countries have shared tangible and non-tangible resources to create competitive advantage.

Economic integration also encourages cross flow of investments, which brings its own set of advantages and helps in spurring the overall economic activity of its members. But the most pronounced benefit of economic integration is felt in inter-country trade. Introduction of economic integration helps in acquiring goods and services at much lower cost from member countries. Reduced duties or tariffs lower the prices and help countries to save substantial money, which is essentially channelled to other lucrative avenues.

The launch of the GCC Custom Union in 2003 was widely hailed as the turning point in the history of the regional bloc, which aimed to eliminate trade barriers. Over the last several years, the GCC bloc has inched towards unity, especially through unification on various trade fronts. According to official figures, the total volume of intra-GCC trade exchanged stood at US$85 billion (QR309 billion) in 2011. Moving beyond the trade sector, in 2008 another milestone was achieved when the member countries launched the Gulf common market to ensure equality for GCC citizens, specifically free movement. 

US$85 billion (QR 309 billion)

The volume of intra-GCC trade in 2011, in billions.

Under the agreement, citizens also have the same rights in areas such as employment, healthcare, education, social security and residence, as well as in economic activities such as trading in stock markets, setting up companies, and buying and selling properties. Benefits of economic integration have also been realised outside the realm of a formal charter as well. For instance, Dubai government has proactively developed policies that attract regional investments. Its tourism sector continues to be a preferred destination for many MENA residents and its real estate sector, which is open for investments by non-UAE nationals, also garners a great deal of attention. The Emirate has also been very successful in attracting a lot of investments from Western and Asian companies in a variety of different sectors that aim to serve regional consumer demand.

Economic integration among the six Gulf nations has also particularly worked well because all the members share a common heritage and history as well as similar types of political systems. And since oil continues to account a major component of the region’s GDP, economic integration further benefits the member countries, as dependence on oil revenues still leaves the GCC members vulnerable to global economic slowdowns. Economic integration has potential to reduce such vulnerabilities, by increasing intra-GCC trade and investments, which can also support the non-oil side of the respective economies. 

The current state of the euro area has raised further doubts regarding a common currency and has encouraged GCC policymakers to see the idea of integration from a completely new perspective.

However, for the GCC countries a great amount of integration is yet to come. GCC countries have had their fair share of setbacks, especially when it comes to unifying the monetary policies. The bloc has long felt that in order to achieve true economic integrity, a common currency would be required. This goal was earlier envisaged to be achieved by the end of 2010, but withdrawal of UAE and Oman from the agreement raised concerns on the viability.  Efforts to launch a common currency earlier suffered an interim setback in year 2007 when Kuwait chose to de-peg its currency from the dollar, citing inflationary reasons.

The current state of the euro area has also raised concerns and has encouraged GCC policymakers to see the idea of integration from a completely new perspective. The plight of the euro region has rightfully brought into notice that an efficient economic integration will always remain elusive till the time fiscal and monetary policies are formed in isolation and central bank plays a passive role in managing the banking industry. And until a unity is achieved, an economic bloc is only making itself more vulnerable to any severe external economic shocks. 

So as far as the GCC is concerned, it is widely acknowledged that full-fledged economic integration is still years away. A great deal of work is still required to be done to make economic policies run in tandem. Moreover, policymakers would also want to take a cautious approach and build a model that encompasses a true unified stature of its member countries and avoid such pitfalls, which have made Europe so fragile. 

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