The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN 9789814311410

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The Gulf Cooperation Council

The ASEAN Studies Centre of the Institute of Southeast Asian Studies in Singapore is devoted to working on issues that pertain to the Association of Southeast Asian Nations as an institution and a process, as distinct from the broader concerns of the Institute with respect to Southeast Asia. Through research, conferences, consultations, and publications, the Centre seeks to illuminate ways of promoting ASEAN’s purposes — political solidarity, economic integration and regional cooperation — and the obstacles on the path to achieving them. Through its studies, the Centre offers a measure of intellectual support to the ASEAN member-countries and the ASEAN Secretariat in building the ASEAN Community, with its political/security, economic and socio-cultural pillars. The Centre aims to conduct studies and make policy recommendations on issues and events that call for collective ASEAN actions and responses. The Centre seeks to work together with other intellectual centres, institutes, think-tanks, foundations, universities, international and regional organizations, government agencies, and non-governmental organizations that have similar interests and objectives, as well as with individual scholars and the ASEAN Secretariat. The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publishing, an established academic press, has issued more than 2,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publishing works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world.

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Institute of Southeast Asian Studies

Report No. 12

The Gulf Cooperation Council A Rising Power and Lessons for ASEAN

LINDA LOW

I LORRAINE CARLOS SALAZAR

I5EA5 INSTITUTE OF SOUTHEAST ASIAN STUDIES Singapore

First published in Singapore in 2011 by ISEAS Publishing Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Singapore 119614 E-mail: [email protected] Website: bookshop.iseas.edu.sg All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 2011 Institute of Southeast Asian Studies, Singapore The responsibility for facts and opinions in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the publisher or its supporters. ISEAS Library Cataloguing-in-Publication Data Low, Linda. The Gulf Cooperation Council : a rising power and lessons for ASEAN / Linda Low and Lorraine Carlos Salazar. 1. Gulf Cooperation Council. 2. Persian Gulf Region—Economic integration. I. Salazar, Lorraine Carlos. II. Title. HC415.15 L91 2011 ISBN 978-981-4311-40-3 (soft cover) ISBN 978-981-4311-41-0 (e-book PDF) Typeset by Superskill Graphics Pte Ltd Printed in Singapore by

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CONTENTS

Preface

vii

The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN Executive Summary 1. 2. 3. 4. 5. 6. 7.

Introduction The 1981 and 2001 Economic Agreements The GCC Customs Union The GCC Common Market The GCC Monetary Union Challenges in GCC Integration Conclusion and Possible Lessons for ASEAN

1 3 7 19 23 24 28 37

References

53

Appendix 1: Macroeconomic Indicators for GCC Appendix 2: Low Level of Merchandise Trade with Partners in Regional Agreements Appendix 3: Bilateral Trade Complementarity Index, 2006 Appendix 4: GCC Foreign Direct Investment, 1996 to 2007 Appendix 5: Gross Foreign Reserves (including gold), 1996 to 2007

55

About the Authors

61

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Preface

The Gulf Cooperation Council (GCC) has gained importance in recent years, and its efforts towards economic integration could have profound implications for the Middle East and beyond. The GCC countries — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates — represent more than half of the oil reserves of the Organization of Petroleum Exporting Countries (OPEC). The GCC, along with two other Gulf countries, Iran and Iraq, account for more than 30 per cent of the world’s crude oil exports — a figure that is expected to rise to 38 per cent by 2025. The importance of these nations for the wider global economy is only heightened with the current high prices for the commodity. In addition to being an energy superpower, the GCC is also making headway towards greater economic integration. After starting with the limited goal of establishing a free trade area (FTA), the GCC moved towards a unified bloc, including a customs union established in 2003, and a common market established in 2008. It is now aiming for a monetary union by 2010. These targets and time frames have been supported by the region’s steady economic expansion, driven by high oil prices and a booming commercial sector. During 2003–06, the GCC economies grew by 74 per cent (in nominal terms). In 2008, the GCC countries’ combined gross domestic product (GDP) increased by 10 per cent year-on-year to US$1.1 trillion. It is predicted that at this rate the GCC will be the world’s fifth biggest economic bloc by 2020, and its single currency will emerge as a global currency, alongside the euro and the U.S. dollar.

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viii

Preface

In light of the GCC’s high potential, it is logical for the Association of Southeast Asian Nations (ASEAN) to strengthen its ties with the GCC. Hence, the first ASEAN-GCC Ministerial Meeting in June 2009 proposed the negotiation of an ASEAN-GCC FTA. A feasibility study on the proposal is nearing completion, and the two sides will soon start talks on this issue. It is in this light that the ASEAN Studies Centre of the Institute of Southeast Asian Studies in Singapore requested Dr Linda Low, head of Strategic Planning of the Abu Dhabi Government, United Arab Emirates, and Dr Lorraine Carlos Salazar, senior research analyst with a leading global management consulting firm, to write about the experience of GCC integration, and the lessons that this experience may hold for ASEAN. The ASEAN Studies Centre takes pleasure in publishing the study.

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Executive Summary

The greater interconnectedness of the global economy has recast the relationship between nation states. While progress towards free, untrammelled trade on a multilateral basis has stalled, bilateral and, increasingly, regional, economic, and political groupings have become more prevalent as a means to reap the gains of free trade. The Gulf Cooperation Council (GCC) is such a group, and one whose importance extends far beyond the Gulf. Its membership includes some of the world’s fastest growing economies, which together possess a significant share of the globe’s oil and gas reserves. This report looks at the structure and evolution of the GCC from an ASEAN perspective. It sets out the group’s membership, as well as its strategic and economic importance. From there, it traces the organization’s evolution before assessing its progress towards a customs union, common market, and monetary union. It then maps out the key challenges facing the Council’s progress towards economic integration, before concluding with lessons that are applicable to ASEAN and its members. Despite its small population of forty million people, the Council’s six members — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates — have a combined GDP of more than US$1.1 trillion and possess more than half of OPEC’s oil reserves. However, in spite of high levels of per capita income, the member states are quite poorly diversified, relying excessively on hydrocarbon resources. Established in the wake of the 1970s oil crisis, the Iranian Revolution, and various regional conflicts, the GCC aimed to promote economic integration among member

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The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

states and promote several social and political initiatives as a means of contributing to greater stability in the region. Since its inception in 1981, the Council has adopted a steady, albeit gradual, pace towards economic integration. Originally conceived as a free trade area, the GCC has expanded its aims to encompass a common market and monetary union. In its pursuit of these goals, the Council has had to manage a range of issues that are familiar to the ASEAN region. These include: reconciling tensions between complementarity and competition among member states; articulating the group’s collective identity; encouraging member states to engage in free trade negotiations as a collective entity; developing crisis management mechanisms; encouraging job creation and human resources development; and fostering science and innovation. The GCC experience offers lessons learned that are of relevance to policymakers in the ASEAN region. In the political realm, the most salient are that the relative ease of achieving formal consensus belies the difficulty of attaining economic and institutional aims, and that the initial desirability of preserving flexibility and sovereignty may come at the expense of explicit goals and mechanisms for promoting progress. Furthermore, the GCC experience shows that the largest member states may not be the most effective leaders of collective enterprises. Rather, as in ASEAN and in other regional groupings, smaller nations may have solid advantages in certain areas. In the economic realm, this experience underscores the challenges of monetary union and advocates placing this item in the public sphere once low lying fruits have been harvested and momentum achieved. In addition, the region’s formidable reserves can be channelled through sovereign wealth funds as a mechanism to promote integration and stability.

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THE GULF COOPERATION COUNCIL: A RISING POWER AND LESSONS FOR ASEAN

1. Introduction Established on 25 May 1981 on the basis of an agreement concluded in Riyadh, Saudi Arabia, the Gulf Cooperation Council (GCC) is an economic and political group composed of the Gulf States of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE).1 The GCC, which comprises the core of the Middle East and North Africa (MENA) region,2 spans a total area of 2.5 million square kilometres and, in 2008, had a combined population of about 38.6 million and Gross Domestic Product (GDP) of US$1.054 trillion. The GCC controls more than half of the oil reserves of the Organization of Petroleum Exporting Countries (OPEC) and, along with Iran and Iraq, accounts for more than 30 per cent of the world’s crude oil exports.3 Given the key role of oil in the world’s economy, the development of the region and of the GCC, in particular, has global importance. While they experience high growth rates, the economies of the GCC are poorly diversified due to their heavy reliance on hydrocarbon resources. From 2004 to 2008, the GCC had an average real GDP growth rate of 6.9 per cent, derived mainly from oil and gas exports. Oil primacy in national agendas generally affects the overall prosperity of most GCC states. Bahrain and Oman — the only two non-OPEC states in the GCC — need higher break-even oil prices in order to have the balanced budgets that

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The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

Table 1 GCC Basic Indicators

2007

2008

2009 estimate

Saudi Arabia: Population 26.4 million (2008)   Real GDP growth per cent   Nominal GDP US$billion   Inflation per cent

3.4 381.5 4.2

4.9 480.5 10.0

2.4 411.4 6.5

UAE: Population 4.9 million (2008)   Real GDP growth per cent   Nominal GDP US$billion   Inflation per cent

6.1 199.0 11.1

6.8 258.0 14.8

2.7 233.7 8.0

12.0 71.0 13.8

12.6 92.5 16.1

9.5 88.0 8.3

Kuwait: Population 2.9 million (2008)   Real GDP growth per cent   Nominal GDP US$billion   Inflation per cent

4.5 112.0 5.5

5.5 151.5 10.4

2.2 131.5 7.0

Oman: Population 2.7 million (2008)   Real GDP growth per cent   Nominal GDP $billion   Inflation per cent

6.1 40.3 5.1

6.4 51.0 12.6

4.2 48.6 6.4

Bahrain: Population 765,000 (2008)   Real GDP growth per cent   Nominal GDP US$billion   Inflation per cent

7.5 18.0 2.2

6.0 21.2 3.4

3.5 21.1 3.1

Qatar: Population 868,000 (2008)   Real GDP growth per cent   Nominal GDP $billion   Inflation percent

Source: Median estimates of Reuters Poll, Global Investment House, and World Health Organization, reported in Khaleej Times, 21 May 2009. See also Emirates Business, 24 July 2009.

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are necessary to sustain growth.4 Given their relatively similar economic structures, trade among GCC member states is quite limited — at about 10 per cent of total exports or around 5 per cent of total GDP. The development of the GCC has its roots in politico-economic events that took place in the wider Middle East region. The oil crisis in the 1970s and the 1979 Iranian Revolution traumatized GCC member states. In addition, various Middle East conflicts,5 such as the 1980 to 1988 Iran-Iraq War and Saddam Hussein’s invasion of Kuwait in 1990–91, were key factors that shaped GCC efforts towards economic integration. In February 1981, GCC foreign ministers met in Riyadh to discuss how best to respond to the developments in the region and the world. The meeting eventually led to the development of the GCC Charter, which was signed on 25 May 1981. The agreement established the Supreme Council, the Ministerial Council, and the Riyadh-based Secretariat General.6 The secretariat oversees several areas, including: politics, economics, military issues, environment, and security. It also deals with areas associated with information, administration, finance, and audit. Meanwhile, Bahrain hosts the GCC copyright and telecommunication bureaus as well as the GCC Commercial Arbitration Centre (CAC). A delegation is also placed in Brussels. The GCC adopted a gradual, but steady, approach to economic integration. It started with limited goals, such as the establishment of a Free Trade Area (FTA). However, as it looked towards the European Union (EU) as a model, its integration aims gradually expanded into a common market and monetary union. In this light, Section two traces the development of the GCC FTA by looking into

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The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

the 1981 and 2001 Economic Agreements. Section three discusses the concept of the GCC Customs Union (CU) launched in January 2003, while Section four looks at how the CU developed into the concept of a Common Market (CM) (with labour and capital mobility) starting in January 2008. Section five examines the less sure-footed creation of a monetary union with the introduction of a common currency by 2010. Section six analyses the challenges faced during integration, while Section seven concludes the report by highlighting lessons for ASEAN.

2. The 1981 and 2001 Economic Agreements The Unified Economic Convention of GCC Countries (or the 1981 Economic Agreement) signed in November 1981 is the foundational GCC Charter for closer economic relations and stronger links embodying the member states’ desire to develop, extend, and enhance economic ties with one another.7 The agreement encompassed coordination and cooperation in trade, movement of funds, individuals and economic activities, technical cooperation in research, science and technology, transportation and communication, and financial cooperation. The 2001 Economic Agreement expanded the areas where GCC nationals are to be treated equally8 or what the GCC officially terms as “economic nationality”.9 In addition, the 2001 Agreement provided the framework for establishing a customs union, a common market, and a common currency.

2a. 1981 Economic Agreement The 1981 Agreement developed the plan for joint economic action and the phases of economic integration and cooperation among

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the GCC states. This agreement formed the core of the integration programmes. In particular, the agreement included: •

• •

•

•

Achieving freer trade in goods (agricultural, animal, and industrial products as well as natural resources) and the coordination of trade policies and regulations, including a common external tariff. National treatment of all GCC citizens. Convergence and unification of laws, regulations, and strategies in industrial development, technical cooperation, and financial cooperation. Interconnecting infrastructure in member states, particularly in transportation and communications, electricity and gas, and promoting the establishment of joint ventures. Key trade regulations, including one regarding country of origin for industrial products, which stipulated that a national of a member state should own at least 51 per cent of the producing company, and value added should not be less than 40 per cent of its final value for a given item to be considered a product of national origin.

Chapter 1 of the 1981 Agreement outlined the uniform minimum customs tariff applicable to GCC products within five years. It also provided for rules in defining products of national origin. Chapter 2 covered movement of funds, individuals, and economic activity, which ensures freedom of movement for GCC nationals for work, residence, ownership, and inheritance; allows free movement of capital; and encourages joint ventures among countries. Chapter 3 called for the coordination of national

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The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

development plans to achieve economic integration. Article 11 in particular identified the coordination of oil policies in all its stages (mining, refining, marketing, manufacturing, and pricing), as well as the need to develop a common position with regard to oil policies. Chapter 4 covered technical cooperation in applied research, science, and technology. Chapter 5 dealt with the coordination in transportation and communication, while Chapter 6 spoke of financial and monetary cooperation. However, it is noteworthy that there was neither a GCC-wide planning mechanism nor a body to oversee the implementation of this provision. Finally, Chapter 7 provided for “provisional exemptions from the aspirations” set by the agreement in recognition of the differences in levels of development of member states. In implementing the 1981 Economic Agreement, the GCC adopted ad hoc joint projects instead of formal ASEAN-style industrial cooperation, or complementation schemes with government-to-government and private sector participation. Also, economic nationalization for mobility of labour and capital was encouraged through loans made available to GCC citizens.

2b. 2001 Economic Agreement During the Supreme Council’s 20th Session in 1999, the leaders called for a review of the progress of the 1981 Economic Agreement. A technical team composed of experts from member countries’ finance and economic ministries, along with the Secretariat General, held a series of meetings and discussions, which eventually led to the creation of a new framework that recognized the changes in the overall environment. The Supreme Council adopted a new Economic Agreement in its 22nd session in December 2001. The 2001 Economic Agreement boldly spells out steps towards greater economic integration by shifting the

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focus from coordination to economic integration through the establishment of a “customs union, a common gulf market and developmental integration”.10 In particular, the 2001 Economic Agreement was more comprehensive than the 1981 agreement in addressing the following: •

•

•

•

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Customs Union (Chapter 1). The agreement aimed to establish a GCC Customs Union by January 2003, which consists of: a unified external customs tariff; a unified customs system and procedures; free flow of goods among council members; and national treatment for products produced by any GCC member country. The agreement also aimed to create a collective negotiating strategy among GCC members in relation to other trading partners, as well as a unified set of trade policies applicable to other economic groups, as well as international and regional organizations. The GCC Common Market (Chapter 2) expanded from four into ten areas where GCC citizens are to be accorded national treatment, removing differentiation or discrimination in the specified fields. Currency Unification (Chapter 3) discusses the concept of unifying the currencies of member countries within a “specified time schedule”. It also calls for the unification of cash and financial policies, banking legislation, laws on investment, and financial market integration. Developmental Integration (Chapter 4) encourages member states to adopt policies regarding economic development in the GCC, including: improving the investment climate; developing oil and gas and natural resources; promoting agriculture; environmental conservation; and promoting joint projects.

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10

•

•

•

•

The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

Development of Human Resources (Chapter 5) discusses the end goal of “guaranteeing societal harmony” and confirms the GCC’s Arabic and Islamic identity for the sake of “stability and cohesiveness” by making primary education compulsory and eradicating illiteracy; nationalizing and training the labour force; and increasing their contribution in the labour market. Technological and Scientific Research (Chapter 6) covers GCC cooperation in the development of scientific, technological, and informative databases, and the protection of intellectual property rights (IPR). Transport, Communication, and Infrastructure (Chapter 7) contains provisions on: integrating land, sea, and air transportation; basic infrastructure and telecommunications; and the unification of legislation on e-commerce. Finally, Chapter 8 identifies each working committee of the GCC as responsible for the implementation of the agreement in its own sector, while the Secretariat General was responsible for the agreement’s overall implementation and follow-up. The agreement also provides for a mechanism for dispute settlement through a judicial commission to adjudicate disputes arising from the implementation of the agreement and its implementing resolutions. Processes and mechanisms remain at individual national levels augmented by joint committees.

In January 2003, a GCC Customs Federation for commercial exchange was formed within national customs authorities to implement a unified Common External Tariff (CET), as well as unified customs systems and procedures with one entry point for CET collection (Article 1). This was a precondition set by the

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European Union, the GCC’s main trade partner, for the discussion of a GCC-EU FTA, which had been in the process of negotiation since 1998. The GCC collective negotiating strategy vis-à-vis the rest of the world (Article 2) became a bone of contention when Bahrain11 and Oman negotiated bilateral FTA and Trade and Investment Agreements with the United States in 2005 and 2006, respectively, granting priority to a non-GCC country, which was explicitly prohibited in Article 31. The 2001 Agreement contains a more comprehensive provision than the previous agreement on developmental integration covering industry, hydrocarbons, agriculture, environment, transport, communication, electricity, information technology, tourism, education, and health. Priority is given to projects jointly done with the private sector. This is meant to connect GCC citizens and remove procedural obstacles for equality with national projects (Articles 7 to 12). Interestingly, the GCC also discussed eradicating illiteracy (though not poverty) as part of its human resource development and manpower strategy. This was expected to bring about a more balanced demographic composition and guarantee harmony in society (Articles 13 to 17). Individual states agreed to adopt and implement programmes to make primary education compulsory, develop public education curricula and programmes, and promote higher and technical education. GCC countries also aimed to unify standards for professions and crafts and exchange information relating to the labour market, such as unemployment rates, job opportunities, and training programmes. The importance of the private sector’s role in the development of science and technology, especially among multinational companies, and regional and international organizations, was recognized (Articles 18).

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The 2001 Economic Agreement recognized that one of the inadequacies of the 1981 agreement was the lack of a formal body responsible for the goal of a free trade area. To remedy this, the new agreement gave the Secretariat General the specific mandate to ensure compliance with timelines as well as oversee dispute settlement (Article 26 to 27). Nevertheless, the new agreement left much of the actual implementation to the discretion of individual states, although there was a provision for each member to publish the actions that it had undertaken to execute the agreement (Article 28). In the event of a clash with local regulations and laws, provisions of the 2001 Agreement take precedence (Article 32).

2c. Outcomes of the Economic Agreements Country level outcomes vary due to the decentralization of national processes and mechanisms for execution. There is also no way of reporting Key Performance Indicators (KPIs) to judge the impact of the economic agreements directly. The easiest way to examine the impact is the growth of intra-GCC trade.12 Since the agreements, the volume of intra-GCC trade rose from under US$6 billion in 1983 to US$20 billion in 2002, rising at Compound Annual Growth Rates (CAGR) of 6.2 per cent. From 1993 to 2002, intra-GCC trade went up by a CAGR of 5.8 per cent.13 For 1994 to 2005, Table 2 shows double digit CAGR for GCC exports, imports, and total trade, all matched by Saudi Arabia and the UAE as the largest and second largest GCC economies. The latest information available has intra-GCC exports as a share of total GCC exports at 8 per cent in 2005 and 10 per cent in 2007. Despite the rise in intra-GCC trade, there were problems in the flows of trade. Although GCC had a CET, the customs

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The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

Table 2 Compounded Annual Growth Rates of Intra-GCC Trade, 1982–2005 (in percentage)

GCC

Saudi Arabia

UAE

Export Import Total Export Import Total Export Import Total trade trade trade

1982–2005   7.72   5.13   6.59 1994–2005 13.55

–

10.67 14.88 13.96

–

–

–

13.83 13.93 15.84

–

–

10.77 13.59

Source: Computed from statistics, 1982–2005, available at

departments of the member countries demanded certificates for commodities at the borders, resulting in delays and double payment of customs duties. For instance, periodic bottlenecks of trucks at the Saudi Arabia-UAE border are common, as Saudi Arabia fears counterfeited goods via the UAE, its top intra-GCC trading partner. Saudi Arabia still uses manual customs clearance compared with the UAE’s electronic systems. Also, there are suggestions to adopt the use of green lanes for non-GCC transit goods to facilitate trade flows.14 Cooperation in transportation, especially in railways,15 seems complementary rather than central to efficient transportation connectivity. In contrast, national air and sea16 transport projects compete in regional hub and spokes catchments, but cooperate on the procurement of jet fuel, joint insurance policies for national carriers, and unified training and security procedures. Memorandums of Understanding (MOUs) ensure standard port statistics, as well as the inspection and surveillance of vessels for

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safety and environmental protection. Many national state owned enterprises (SOEs) in Telecommunication and Information and Communications Technology (ICT) invest across GCC, MENA, and South Asia. These companies are laying the foundations of the ICT infrastructure and digital network necessary for the GCC to participate actively in the emerging Knowledge-based Economy (KBE). Surveys and statistics are necessary for planning as well as tracking GCC integration and activities. However, GCC statistics are very underdeveloped. Thus, national and regional macroeconomic and econometric models for policy simulation are in dire need of solid statistics. This underdevelopment may also explain why the GCC Long-term Comprehensive Development Strategy 2000–25 adopted in 1998 was a non-event.17 Joining all the dots to integrate national planning processes is also elusive. Instead, foreign consultants, experts, and advisers craft ambitious national plans, such as the Abu Dhabi’s Economic Vision 2030 and Qatar’s National Vision 2030. Without reliable statistics, however, foreign business consultants can only come up with stereotyped economic plans. The involvement of GCC nationals for effective execution, regulation, project management, and supervision is very critical, so there is a need to re-engineer work methods and processes that involve them. Robust academic research for economic policies is also sorely lacking. Thus, these aggregated national level deficiencies become magnified at the GCC level. One tangible project to deal with gaps in knowledge is the ministerial committee’s plan to hold population censuses every five years, beginning in 2010. Other joint surveys for households, the labour force, and foreign investment are being planned. The standardization of methodologies, terminology, and concepts is also timely.

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2d. Outcomes of Sector-specific Arrangements • Agriculture The GCC has agreed to come up with a common agriculture policy that optimizes water utilization and food security from national sources and, in addition, encourages private sector participation. Examples of joint venture projects from Oman to Saudi Arabia include seeds and poultry production, manufacturing of poultry and dairy equipment, research for palm dates, and surveys of fishing grounds.

•

Industry

GCC industrial joint venture projects followed from the agreements’ call for unified industrial legislation and rules, anti dumping, and other safeguard provisions. In theory, a unified GCC industrial strategy optimizes economies of scale and economies of scope18 and balances competition and complementation in diversified restructuring. Without GCC-scale planning in practice, however, quality, standards, time sensitivity, and other non-price competitive advantages vary. This is mainly because GCC member countries are very diverse in terms of sector endowment, infrastructure, and human resources. In some cases, there are complementarities, while some degree of competition exists in others. For instance, the UAE, notably Dubai and Abu Dhabi (with over 90 per cent of UAE oil and gas reserves) are most diversified. Meanwhile, the economy of Bahrain is driven mainly by the services sector, as it serves as an airport and port hub for the Upper Gulf markets of Saudi Arabia, Iraq, Northern Iran, Kuwait, and Qatar. Also, the Bahrain Logistics Zone serves as MENA’s first multi modal logistics hub for re-exports and other value added activities. Bahrain also competes with Dubai and Doha in finance, education, and health

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The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

care. Currently, Saudi Arabia lags behind the UAE and Bahrain, but has launched various mega industrial cities.19 These cities are a main source of employment creation in energy, minerals, integrated aluminium complexes, and downstream industries (competing with those in the UAE, Qatar, and Bahrain).

•

Petroleum

A long-term petroleum strategy was launched in 1988 (as provided for by the 1981 Economic Agreement) to exploit natural hydrocarbon resources. It included a common mining law, a regional emergency plan for oil products, and an oil lending system. Separately, Qatar, which has abundant sweet gas, supplies gas to the UAE and Oman via the UAE cross border Dolphin project.20 The latter, however, is not a GCC project, and Saudi Arabia has complained of pipelines crossing its territory. Saudi Arabia, Bahrain, and Kuwait manage their domestic gas demand.

•

Infrastructure, Utility, and Transport

Both economic agreements identified infrastructure projects, power generating stations, and desalination plants with environmental protection. The GCC Interconnection Authority oversees the US$1.4 billion GCC grid for a commercial power exchange and trading agreement, which allocates capacity on an auction basis, with a secondary market for trading. Phase I links Kuwait, Saudi Arabia, Bahrain, and Qatar by 2009, and with the UAE and Oman (both already linked) by 2010. The GCC grid can also be seen as a preparatory step towards GCC investment in civilian nuclear energy reactors.21 After Phase I is completed, GCC member states have agreed to replace their subsidized utility pricing with policies that underscore energy conservation and change the bases for

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calculating tariffs, common legislation, reference guides, and fifty-three GCC standards for conformity and safety.

2e. Assessment of the Economic Agreements In 1983, GCC finance ministers decided on a common tariff range of 4 to 20 per cent on all foreign imports. Some states such as the UAE and Oman failed to meet the September 1983 deadline, as the levy depressed domestic commercial interests. Thus, for some GCC countries, protecting their domestic markets from foreign competition and coordinating commercial policies became a top priority. Currently, intra-GCC trade remains limited due to similar resource endowments for exports and import dependency (from consumables to labour). Meanwhile, the GCC’s entrepôt characteristic, largely through Dubai, has low value added. Though not explicitly stated in either agreement, equal treatment of nationals was a strategy espoused in attaining integration. However, while both agreements were clear on their targets or end goals, they were less precise with regard to processes and mechanisms to move on to higher stages of integration. Instead, while the Secretariat General was identified as responsible for execution and follow-up (Article 26), in reality, implementation and unification of national legislation were left to the national agencies of member states. This open-ended stance was preferred over creating a supranational institution in order to protect national sovereignty, ensure flexibility, and develop grant ownership and licensing rights to national agencies. Article 30 of the 2001 agreement even allows for temporary exclusions if needed, in recognition of local socio-economic and cultural environments. Indeed, the GCC integration process has taken time to bear fruit because of many practical constraints. The key ones are:

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18

•

•

•

•

The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

Far from being homogenous, traditional Arabic culture and heritage are characterized by a variety of tribal ethnicities.22 Governance is top down and does not permit scrutiny, consultation, or discussions of members’ domestic matters. National bureaucracies are permeated by an attitude that “government knows best”, and target setting by decree is a norm. Rulers take quick decisions in a non-democratic manner without popular or institutional support at the national or GCC levels. Migrant workers dominate many employment fields.

With these limitations, GCC member countries embraced a “learning and doing approach” through technical assistance, mostly from the World Trade Organization (WTO)23 and other international bodies such as the United Nations Economic and Social Commission for West Asia, and the European Union. There are no domestic institutions or home grown approaches for capacity building, human resource development (HRD), or mindset change. For instance, Saudi Arabia, the biggest GCC member (in terms of land size, population, and GDP), is new to the opening up of markets. Its first experience in this was the negotiation of bilateral agreements with the European Union and the United States in 2003 and 2005 respectively, as a prelude to joining the WTO. GCC integration also suffers from a lack of transparency in fiscal, financial, and monetary policies. Progress in unifying customs regulations was tricky and technical and, in general, the national bureaucracies lacked proper tools for moving forward. Political will and commitment have slackened as national

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agendas gain ascendancy, given member countries’ oil-driven affluence. Also, measuring progress is challenging, as GCC statistical collection and reporting systems are underdeveloped. The GCC Common Statistical Law implements the United Nations System of National Accounts (UN SNA, 1993) in two parts — 1998 to 2005, and 2007 to 2009. Conforming to this benchmark, as well as the UN International Standard Industrial Classification, International Labour Organization, and World Customs Organization (WCO), is very laborious.24 Thus, despite the fact that GCC countries’ GDP per capita — boosted by massive oil revenues — surpasses the Organization for Economic Cooperation and Development (OECD) levels, member states are still categorized as developing countries.

3. The GCC Customs Union The GCC Customs Union (CU) was officially launched on 1 January 2003, based on the following principles: • • • • •

a Common External Tariff (CET) for products imported from outside the GCC; a Common Customs Law (effective since 2002) and unified customs regulations and procedures; a single entry point where customs duties are to be collected; elimination of all tariff and non-tariff barriers on intra-GCC movement of goods;25 and National treatment of goods produced in any of the GCC states.

From gradual to full implementation by 2010, the GCC CU has set a CET of 5 per cent applicable to all imported foreign

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goods.26 About 939 commodities (live animals; fresh and chilled meat and fish; fresh vegetables and fruit and cereals; medicine and medical supplies; books; newspapers and magazines; and vessels and commercial aircraft) are exempted from this list. Meanwhile, a 100 per cent duty rate is imposed on tobacco products and special goods whose importation is prohibited in some, but permitted in other member states.27 Individual customs administrations apply a common customs law, implementation rules, and explanatory notes. The customs law unifies customs, financial, and administrative regulations on importation, exportation, and re-exportation, and covers exempted goods and principles to determine the value for customs purposes. In 2008, the 45 th meeting of the GCC Customs Union Committee assessed the obstacles to the full implementation of a Customs Union. A key challenge identified was the lack of proper procedures and mechanisms in customs revenue collection and distribution. The meeting found that current GCC customs inspection procedures were below the level required to move forward to the next stage (i.e. a Common Market).28 A study by the Secretariat General29 put forward a controversial proposal to distribute customs revenue collected by a single entry point according to the final destination of the goods, within a three-year transition time frame.30 However, the GCC Customs Federation asked the Secretariat General to conduct another study. National authorities have neither removed all customs restrictions and barriers nor standardized all legal instruments. Also, they are all equally hampered by weak infrastructure in transportation and communication. Specific actors and institutions which do not fully apply and comply with all of the Supreme Council’s decisions are not identified. Different policies, incentives, costs, and benefits mean that economic nationalism

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persists. Bilateral FTAs have been signed even if they violate GCC collective agreements, and there have been no penalties for doing so.31 Recognizing the Customs Federation Committee as the backbone of the CU and CM, the UAE, on assuming its presidency in 2009, proposed a new committee to tackle customs unification issues. The committee is tasked with hastening the inclusion of nineteen items on its agenda. This includes forging a common vision for rules of origin (ROOs)32 and protection of national products, in coordination with the Committee on Financial and Economic Cooperation of the ministers of finance, the National Protection Committee, and the Food and Medicine Committee. The transition from a free trade area to a customs union also marked a quality shift in the free movement of labour and capital through what the GCC calls “economic nationality”. For instance, under the customs union, GCC nationals were to be treated equally for jobs in government and private sectors. Travel barriers for GCC citizens were eliminated as of 2003, as well as restrictions on owning real estate and stocks or forming corporations to engage in cross border economic activities. In 2005, equal treatment of GCC citizens was extended to government jobs, social insurance, and pensions. In civil service hiring, priority was given to GCC nationals. Meanwhile, non-GCC nationals would be replaced by GCC nationals or have their contracts phased out. The agreement also provided for a mechanism that facilitated the movement of non-GCC nationals categorized as foreign investors, senior executives, marketing managers, and truck drivers. In reality, however, neither economic nationalization nor the Customs Union were fully and evenly implemented across the board, as members operationalized their commitments at varying

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speeds and varying degrees as per their national processes and institutional capacities. With Asians present in both low skilled and skilled professional categories, Arabs and Arabic fluent GCC nationals are squeezed in the labour market.33 One step being undertaken to resolve this imbalance is to facilitate the recognition of degrees and certificates earned by GCC nationals. This includes the accreditation of degrees and certificates issued by official teaching institutions. The first to embrace economic nationalization, the UAE hosts the largest numbers of GCC citizens by real estate ownership and business licences.34 Its privatization of SOEs in 2005 via Initial Public Offering (IPOs) with share prices fixed at one dirham was a method of wealth distribution for Emiratis. GCC citizens were also granted this right. Bahrain was the first to rescind a sponsorship system by private companies so expatriates can change jobs freely. However, others are unlikely to follow this move any time soon.35 To facilitate the movement of GCC nationals, all member states, excluding Saudi Arabia, currently allow the cross border movement of people using an identity card (ID). A study on unifying GCC passports is currently underway, as well as the possible development of a smart card to facilitate intra-GCC movement. At present, Bahrain, Saudi Arabia, and Oman use smart identity cards. These smart cards have the potential of doubling up as GCC travel documents when all member states are ready.36

4. The GCC Common Market The GCC Common Market (CM) was officially launched on January 2008, aimed at creating one market, raising production efficiency, and optimizing the use of available resources. The Common Market was also expected to improve the GCC’s negotiating position

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in international economic forums. Furthermore, it offers equal opportunities for all GCC citizens, including the right to work in all government and private institutions in any member state; buy and sell real estate; invest; move freely between member countries; and receive education and health benefits. The shift from a customs union to a common market was marked by joint duty collection (but not revenue distribution among member states as discussed above) as well as joint importation of food products, medicines, and pharmaceuticals. Industrial inputs were exempted from customs duties, although some tariff protection for certain GCC industrial products was maintained. The GCC Common Market also facilitated factor and product flows. However, it stopped short of a unified GCC law for FDI, given natural resources and landownership issues,37 as well as opaque business practices and customs — including differences in applying Islamic regulations to non-Muslims. Moreover, GCC state-owned oil enclaves do not attract FDI easily. Thus, FDI is really more applicable in the non-oil sectors. Private sector investment as a percentage of total investment is low despite the privatization of independent water and power projects. Direct state funding projects in crisis-hit sectors may reverse privatization and public-private partnerships, but this is not to be confused with xenophobic nationalization. As previously noted, GCC citizens are already permitted to own land and encouraged to build, occupy, and/or lease them to others as homes or investment. The promotion of intra-GCC travel and familiarization has boosted medical tourism and other service sectors. Interestingly, regional conflicts have created safe havens, second homes, and commercial and investment opportunities in the GCC for non-GCC citizens.38 What the Common Market bodes for them is still unexplored.

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The impact of the Common Market is expected to be significant. Intra-GCC trade is predicted to go up three to four times from its current level. International trade may also get a boost, especially since the GCC will have a single point of entry for goods. Another key impact of the CM will be in the movement of factors of production. In the earlier stages, GCC citizens enjoyed labour and capital mobility, but a Common Market will mean higher mobility of all factors. This will help GCC achieve a better skills mix and is likely to result in increased productivity with lower costs. The GCC will most likely also see higher occurrences of mergers and acquisitions (M&As), lower transaction costs, and greater economies of scale among producers and importers.

5. The GCC Monetary Union Both the GCC Charter and the 1981 Economic Agreement envisioned coordination in financial, monetary, and banking policies among GCC member states.39 In 1983, a committee composed of the governors of the monetary agencies and central banks in the GCC states was formed to coordinate financial, monetary, and banking policies. From 1985 to 1987, the committee explored the adoption of the International Monetary Fund’s (IMF) Special Drawing Rights as a common peg for GCC currencies. However, no consensus was reached. Because of the relative stability of the cross sectional exchange rates of the currencies of the GCC member states during the 1980s and 1990s, as well as the fact that economic theory views the formation of a monetary union and the introduction of a single currency as an advanced stage of economic integration, the prevailing opinion up to the mid-1990s was that it was not yet time to adopt a Monetary Union (MU).

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In December 2000, the Supreme Council decided to adopt the U.S. dollar as a common peg for the currencies of the GCC States. At the same time, due to the progress achieved in the GCC Customs Union, as well as the perceived success of the European Union with regard to the adoption of the euro, the Supreme Council instructed the ministers of finance and Central Bank governors to prepare a time frame for establishing the GCC Monetary Union and introducing a single currency. In 2004, the GCC Economic Cooperation Committee and the Committee for Governors of Monetary Establishments and Central Banks set 2010 as the deadline for the establishment of a Monetary Union and a common currency. Three monetary and two financial convergence criteria were identified as preconditions for the Monetary Union: • • • • •

inflation should not exceed two percentage points above the GCC average rate; interest rates should not exceed two percentage points above those of the three GCC states with the lowest rates; foreign exchange reserves should be equal to or more than the value of four months’ imports; the budget deficit should be less than 3 per cent of GDP or 5 per cent, if oil prices are low; and public debt should be less than 60 per cent of GDP.

However, there were unresolved issues, such as the type of exchange rate regimes and the name of the currency. Theoretically, the MU and single currency should synchronize internal and external balances in macroeconomic policies. With the GCC currencies pegged to the U.S. dollar, the GCC monetary and exchange rate policy40 passively mimics U.S. expansionary monetary policy. However, interest rate cuts to counteract the

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recession in the United States are diametrically opposite to what the GCC needs, given the boom it is experiencing and its inflationary pressures. The latter suggests that the GCC needs cooling by raising interest rates instead of being locked into a fixed-dollar peg. Currently, most GCC currencies are undervalued against the U.S. dollar by about 20 to 30 per cent, despite the U.S. dollar weakening against the euro since 2002. In May 2007, Kuwait dropped its dollar peg in favour of a basket of currencies, causing widespread speculation that the other GCC member states would follow suit.41 The 2008 to 2009 great recession, with prices tumbling as economic growth faltered, helped the GCC countries attain the inflation convergence criterion, but not the fiscal criterion. Due to the necessity of introducing financial stimuli to keep economies afloat, Qatar increased its government spending. Meanwhile, Oman and Saudi Arabia are expected to post budget deficits for 2009, thus affecting public debt to GDP ratios. Oman opted out of the MU, pleading that it was not yet ready. Both Oman and Kuwait preferred an independent or discretionary monetary exchange rate policy. The rest formed a monetary council in mid-2008 as an interim central bank to harmonize statistical bases for comparable economic financial data, in order to ensure greater transparency, resolve technical matters, and adjust laws and policies for the unified currency and exchange rate. Only Bahrain ratified the MU at that point, while the other four did so by mid-December 2009. Yet, after five cabinet resignations and three dissolved parliaments between 2006 and 2009, Kuwait succeeding Qatar as head of the GCC technical committee seems an unpromising development. The goal of establishing the GCC MU by 2010 suffered a further setback when the UAE unilaterally withdrew from the

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MU as a matter of principle when Riyadh was selected as the location of the GCC Central Bank.42 Reaffirming that its monetary exchange rate policy remained the same, the UAE’s withdrawal from the MU without blocking it underscores the Emirates’ disappointment regarding its long standing offer to host the GCC Central Bank. Despite the fact that the choice of Riyadh as the location of the GCC Central Bank is purely political, this could temporarily disrupt GCC solidarity. However, the UAE could gain enough flexibility and diversity to seize opportunities outside the MU, similar to Britain in its non-adoption of the euro. Currently, the UAE enjoys the CU’s intraregional trade, and the CM’s labour and capital mobility, in addition to a more stable currency environment. However, Saudi Arabia may steer the single currency for domestic needs and the status quo by confining the monetary council to only carrying out studies instead of implementing policies. It also has to manage its relationships with Qatar, contrarian Bahrain, or Kuwait, without the UAE pushing for the MU. Regardless of its formal parameters by 2010, MU-four or MU-six can, in the fullness of time, become a classical Optimum Currency Area (OCA) incorporating trade, trade invoicing, investment, financial development, and bond issuance. Deeper integration implies intraregional trade, investment and specialization by both SOEs and private equity; labour force mobility and productivity; corporate governance, accountability and transparency; taxation systems for revenue diversification; and fiscal federalism to transfer funds for regional development. The GCC by reputation and image as a large holder of both oil and financial wealth can help global rebalancing, but this will require a good deal of teamwork. How the MU evolves remains to be seen.

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6. Challenges in GCC Integration • Complementation or Competition? Since 1981, the Gulf Cooperation Council has progressed a great deal towards economic integration, despite the gradual process of establishing a free trade area, a customs union, and a common market. Much of the GCC member states’ achievements, while driven by hydrocarbon resources,43 can be attributed to the Council’s success as a group because it provides economic and political stability for the region. However, it remains to be seen if country-driven competition will preclude complementarity. The key challenge for the GCC is to remain true to the original premise of integration. For economies of scale and scope to succeed, a complementary production export platform is necessary. In practice, it is hard to coordinate national plans so they balance with GCC-centric pursuits in cooperative competition for efficiency, productivity, and effectiveness. The GCC has a responsibility, given its hydrocarbon resources and monetized wealth, to finesse and help resolve internal Arab conflicts so as to contribute to regional and global stability. It is in a unique position to play this role as it straddles the EastWest and North-South divides and because of its wealth and Arab Muslim identity.

•

Human Resources Development and Jobs

The GCC’s weakest link is Human Resource Development (HRD), as sustainable economic growth needs sustainable progress in this area. Kuwaiti, Qatari, and Emirati nationals are minorities in their own countries and are reliant on immigrants for their labour. The UAE retains the sponsorship system, categorizing foreigners as temporary migrants. Bahrain removed its sponsorship system

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in 2009, but urges a five-year GCC policy cap. In addition, women compose half of the GCC population. However, only 20 per cent of the region’s female population are in the labour force due to cultural sensitivities, traditions, and values. Other challenges include nationals’ preference for already highly saturated public sector jobs and mismatches in education, skills, and work attitude. This has resulted in GCC nationals’ high, voluntary unemployment rates. GCC employment projections range widely, from McKinsey & Company estimates of 280,000 jobs per year needed for young Arab citizens graduating from schools and universities, to the Secretariat General’s four million jobs in the next twenty years, including 82,000 jobs per year for locals.44 Can a GCC unified industrialization plan encourage regional companies to create high skilled, technology-intensive jobs, and trim non national manual labour? Throwing money at education reforms at best produces quantity, not quality. Blunt quantitative Emiratization or Saudization fails due to a lack of labour market information, career guidance, and quality KPIs. The challenge is to tap services development aggressively, including finance and alternative green energy, to create new industrial clusters that would generate jobs for youth and future leaders.

•

Neither GCC Size nor Wealth Sufficient for Sustainable Growth

Besides gross foreign reserves (see Appendix Table 5), the Institute of International Finance (IIF) estimates combined GCC foreign assets in governments and banking institutions to reach US$1.47 trillion in 2008 — of which US$1.2 trillion are assets under management in Sovereign Wealth Funds (SWFs),45 and

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US$300 billion are from oil revenues. The firm Dialogic estimates are that Gulf SWFs comprised 38 per cent of worldwide SWF deals in 2008 — versus a mere US$83 billion spent in 2007, which accounted for less than 2 per cent of global merger and acquisition (M&A) deals. However, the GCC is mindful of shortfalls in other indices, which money alone cannot guarantee, such as HRD, physical quality of life, corporate governance, transparency and competitiveness. Individual states, such as Qatar and UAE, have tried to monetize their wealth by investing in Science and Technology (S&T) to drive sustainable growth.46 Beyond multibillion-dollar Science and Technology (S&T) and Research and Development (R&D) facilities, the main challenges include creating a culture and lifestyle for a critical mass of talents, patents, and Intellectual Property Rights (IPR) protection such as those found in the Silicon Valley. Also Key Performance Indicators (KPIs), such as gross domestic expenditure on R & D, and research scientists and engineers per 10,000 population, are needed to guide education and manpower plans in general, and S&T manpower plans, in particular. Arabic inventiveness and S&T discoveries need commercialization and branding to drive creative innovations. GCC demographics offer growth opportunities, especially for the young, middle income, and low-cost markets. The next generation of business leaders, companies, and family offices, including those of royal ruling families, ranges from successful giants to entrepreneurial small and medium-sized enterprises (SMEs). As they list through IPOs at home, then on GCC and international stock exchanges, GCC capital markets can diversify and deepen. Arabic MNCs that produce innovative products driven by scientific

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R&D and venture capital, can help GCC financial centres to become niches with product differentiation. Together with SWFs in strategic M&As, GCC states can make their mark beyond their size and wealth in regional and international pursuits. In late 2007, SWFs’ bailouts of Western financial icons aroused attention. Hasty acquisitions and Western corporate bailouts proved painful, with about US$350 billion losses in 2008 or 27 per cent of GCC SWF’s total assets, as estimated by the U.S. Council on Foreign Relations.47 While GCC SWFs rerouted their funds back home to support afflicted banking and corporate sectors, they remained interested in opportunistic M&As worldwide.48 Wounded pride aside, the OECD was wary of SWFs’ lack of transparency, resulting in the creation of the IMF Working Group on SWFs. Whether GCC SWFs and central banks will follow China’s move, which signalled a demand for some form of guarantee for its massive official reserves in dollar-denominated assets, is moot.49 It seems, however, that for all the wealth that the GCC has amassed, it is less ready to challenge the United States.

• Arab Dilemma, GCC Solidarity and Geopolitical Anchor A key Arab dilemma is seen in the Arab world’s self-assertion as reflected in bold national industrial restructuring and diversification plans, but at the same time it relies heavily on foreigners (ranging from skilled professionals to the influence of Western superpowers as residual colonialists). Neither integrated nor cohesive, modern Arabic society is composed of four coexisting silos. These capture the challenges it faces, nationals in traditional, heavily security-focused bureaucracies; a private sector catering to globalized consumers and reliant on foreign labour; tribes asserting traditional identities, religion, and

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values; and assorted youth gangs, radicals, illegal immigrants, and drug networks. Economic nationalization — or the concept of equal treatment of GCC nationals — is a subtle socio-geopolitical precondition for GCC economic growth and wealth distribution. Yet, paper entitlements and ownership without true citizens’ responsibility and contribution merely paper over Middle East conflicts at best. At worst, over investment in real estate undermines investments in export-oriented industrialization that require transfers of technology, skills, and management. For Arabic entrepreneurial SMEs to develop, turnkey build-operate-transfer economic nationalization projects are required, as opposed to merely “build-own” projects, where operations are then outsourced to immigrants. Tribalism amidst GCC solidarity is also an enigma. The GCC “Look East” configuration is implicitly tied to China — a modern silk road linked logistically by air, sea, and pan-GCC railway services — with South Asia as an important stepping stone. South Asians have a strong presence in the GCC as investors (in ICT, ports, utilities, and others) and also as workers. GCC, South Asia, ASEAN, and East Asia have commonalities in cultures, values, and traditions which could turn GCC’s demographic disadvantage into a positive bargaining point. Also, the GCC has strategic leadership in its own right, from having Islam as a common rallying point to petrodollar recycling. These two factors can act as a bridge in deepening GCC-ASEAN linkages.50

•

Bilateral FTAs

The GCC’s clearest signal of increasing interest in Asia and ASEAN is the statement that EU trade is “kind of secondary for now”.51 This implies that Asian FTAs, not the EU-GCC FTA, are the new focus. The proposed EU-GCC FTA covers market access

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in goods and services, investment, and government procurement. The European Union’s November 2005 draft proposed an almost 100 per cent liberalization of trade in goods. However, trade in services will take a positive approach to the General Agreement on Trade in Services and thus needs more time. Outstanding issues include: ROOs; accumulation of origin; no access allowed without compatible ROOs as per E.U. practice; E.U. customs duties levied on GCC products, including petrochemical and aluminium products; and human rights.52 One study using a simple world model found that GCC Customs Union integration has a small positive benefit.53 Greater benefits can be gained from an EU-GCC FTA while open regionalism (trade liberalization on a most favoured nation basis) is best (though only slightly better than the EU-GCC FTA). A weakening of distortions caused by the so-called “Dutch disease”54 would mean: a) non-oil GCC exports will rise in the European Union and the world; b) the European Union’s export share in the GCC is maintained; and c) low to medium technology non-oil export industries (constrained previously by the “Dutch disease”) such as clothing or textiles, will expand in the GCC-given access into the European Union. On the part of the European Union, export gains would come mainly from having access to GCC markets, predominantly in non-oil high-technology sectors. The GCC stands to obtain more trade and welfare gains from an EU-GCC FTA than the European Union because the European Union comprises more internationally competitive countries and industries that already produce at the most effective world price. This ensures that any trade diversion under the EU-GCC FTA would be lower than under the GCC-CU. GCC consumers could enjoy competitively priced imports from the European Union, such as chemicals, machinery, and transport equipment, with

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little trade diversion. Another source of potential welfare gains is bigger increases for GCC exporters due to greater depreciation of the exchange rate. Thus, simulated welfare gains for the EU-GCC FTA closely approximate welfare gains under an open regionalism policy.

•

Global Crisis Management

Every crisis is an opportunity to reinvent. In fact, even the European Union sees the current global financial crisis as a rare chance to introduce reforms.55 The European Union’s centralized supranational structure has made regional crisis management difficult. Thus, member states have resorted to decentralized national fiscal stimulus packages. The GCC has learnt that neither the supranational E.U. integration model nor the GCC’s decentralized national level implementation is crisis-proof. While OPEC handled the oil crises of the 1970s and 1980s, the GCC manages its economic development and newfound wealth. Theoretically, the GCC Secretariat General has the mechanisms for cross country policy coordination and monetary integration. However, it does not have crisis management mechanisms.56 No one state in the GCC was immune. Each member state responded individually to cope with the financial crisis.57 The UAE routinely ignores regulatory edicts limiting excessive or speculative loans relative to bank deposit base, eschewing references to the dangers of a bubble economy. Dubai has a sizeable real estate and fixed physical assets although they may be hard to liquidate.58 Its small, open, and service-oriented economy suffered like city state Singapore, the first in ASEAN to declare a recession. Unlike Singapore’s long-standing homeownership policy, Dubai’s migrant labour and rental market are less stable,

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although safety nets via UAE federalism in general, and Abu Dhabi in particular, exist. Both the UAE and Qatar stopped following the U.S. interest rates after October 2008. With benchmark lending rates lower than in most of the GCC, the UAE Central Bank and Ministry of Finance provided deposit guarantees and emergency funding facilities for banks to convert into Tier-2 regulatory capital. The Abu Dhabi government also directly injected capital into five Abu Dhabi-based banks. The Revamped Qatar Exchange bought up local banks’ portfolios exposed to falling stock and real estate. Meanwhile, Kuwait has cut its benchmark discount rate several times since October 2008, as has Saudi Arabia. Kuwait was a complex case as investment companies accounted for one third of trading and 16 per cent of total market capitalization in the Kuwait Stock Exchange (KSE) in 2007. Thus, KSE buoyancy was linked to the trading activity of funds, whose financial health (and ability to leverage) was in turn linked to KSE buoyancy. The Saudi Government injected US$3 billion into its banking system, and initiated a five-year US$400 billion infrastructure programme to boost liquidity.59 The state-owned Public Investment Fund (PIF) extended credit and gave a five-year grace period for loan maturity to PIF-owned companies. The Saudi state-owned credit savings bank, the Industrial Development Fund (IDF), increased funding for SMEs. Smaller GCC states, such as Oman, without excess funds for fiscal pump priming, needed higher budget break-even oil prices. Both Egypt-based EFG-Hermes Bank and the World Bank are optimistic that oil-based GCC economies are less affected by the crisis and expect them to recover early.60 The GCC-OPEC states have sound macroeconomic fundamentals and, despite volatile oil

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prices and speculation in the real estate and financial markets, have so far responsibly complied with OPEC output cuts. The GCC member states have learnt fast about counter-cyclical government spending and strategic investment, auguring well for their future crisis management.

•

Inflation Shock

For the GCC, inflation was not experienced until rising world prices of commodities and food coincided with demand-driven inflationary GDP growth, and a labour influx was coupled with a housing deficit. The GCC countries’ passive, dollar-pegged exchange rates were tested with the dollar decline, but oil booms masked the effects. However, even a steady dollar cannot guarantee GCC price stability. In reality, what is needed is a functioning price mechanism. No one followed Kuwait’s move to peg its dinar to a currency basket. The rest of the GCC revelled in oil, equity, and real estate booms, but were unable to manage the growthinduced inflation. Procrastination in moving towards a monetary union and a single currency left unresolved solutions to price controls, wage increases, and subsidies for GCC nationals. Yet, as socio-political reactions demonstrated, these moves proved economically counter-productive. Fiscal expansion in infrastructure fuelled by oil wealth led to housing supply-side constraints, further fuelling inflation. The GCC’s immigration policies lack mechanisms for counter-cyclical repatriation. Finding long-term solutions for productive manpower utilization via capital-intensive technology is complicated. Social anachronisms exist in monopolies, local agents, and trade practices. Introducing a competition law or fair price policy may provide short-term solutions until the WTO or FTAs lock in reforms.

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7. Conclusion and Possible Lessons for ASEAN Despite the lack of clarity as to where the Monetary Union project is heading, it is not necessarily a failure. Until the UAE’s withdrawal in May 2009, one could conclude that the GCC’s integration efforts towards a monetary union are part and parcel of a step-by-step process. Despite expected delays, arriving at a minimalist monetary union cum single currency is not an insignificant achievement. Fuller and deeper integration takes time, but already the customs union and the common market have locked in intraregional trade with some levelling up of reforms across the board. Inflation and the global crises are blessings in disguise that can help refine and deepen integration, hone tools for crisis management, and test revamped regulatory processes, including responses to bankruptcies. Finally, the GCC official reserves, including SWFs, may not rival China’s US$2 trillion fund, but they more than suffice to help provide some consensual economic management of Middle East financial conflicts relative to the crisis-hit OECD. Lessons from the GCC’s integration experience have to be taken in the context of its history, politics, economics, society, and technology, which shaped and affected its preparedness. Seven such key lessons can be gleaned: First, the GCC’s integration experience is politically driven and is patterned after the European Union’s Balassa-style integration.61 While establishing the GCC FTA proved simple and easy, the results in terms of intra-GCC trade were desultory. The harder parts of moving the Customs Union towards a Common Market are still incomplete and past their deadlines. Due to a dire lack of preparation, the monetary union project may become dysfunctional, as its declared convergence criteria

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(or preconditions for a monetary union) are difficult to achieve without discipline or recompense. The second lesson is that, while using national execution processes preserves sovereignty and flexibility, the lack of explicit processes and mechanisms has left integration shallow and implementation lax. GCC’s equal treatment for citizens or economic nationalization seems a necessary — but not sufficient — condition. The 1981 Economic Agreement left implementation and follow-up to national bureaucracies, stressing only the legalistic dimensions, but without supranational tools. The 2001 version added safeguards by mandating the Secretariat General to follow up, but still maintained decentralized implementation via the national systems. Processes for deeper integration remain elusive. Third, sovereign wealth funds, which keep excess foreign exchange reserves, have the corporate social responsibility to drive deeper integration as well as economic diversification for future generations. Only lightly leveraged, they have, since the global crisis, refocused on local national investment, but have yet to look at GCC-wide investments to create more regional and global corporate leaders. State-driven SWFs can help strengthen financial stability in the GCC beyond the monetary union. Simultaneously, they should rescale and reprioritize GCC investment projects to reap the benefits of falling costs. A fourth lesson for the GCC — and one that is also applicable to ASEAN — is that the biggest member state is not necessarily the one most capable of leading. Sharing responsibilities and involving smaller members, not just for regional harmony, would be wise in a changing global paradigm. The GCC also needs to revisit many of its assumptions regarding monetary union. A 2010 graduation is heroic, even for the GCC-four. The conservative

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39

Riyadh-based Central Bank, with its lengthy legislation and ratification processes and without sophisticated institutions, processes, knowledge, and skills, needs a quantum leap to become a supranational financial regulator. Fifth, the monetary union project has a long way to go in terms of mindset change. Open macroeconomic stabilization, in reality, is more an art than a science. The GCC, which has experienced excess liquidity since the 2003 oil boom, learned belatedly about growth-induced inflation and financial crises. State banks received capital infusion and crisis-induced recapitalization. The economy at large lacks effective shock absorbers and tools. In fact, the global crisis has created an opportunity for the GCC to pause and rethink its single currency strategy — whether it is appropriate for a developing country grouping, or whether it should aspire to be an alternative international currency, given risks and costs similar to those of the euro or the yen. In any case, the GCC seems to be facing a two-track integration process by default, and not by design like ASEAN, even as the UAE repeatedly says it will not reconsider its position on the monetary union. Sixth, the GCC’s growth, without commensurate development of statistical indicators, is really unfortunate. Quality and timely economic data based on best practice concepts and methodologies and an updated GCC website are important to satisfy domestic and international investors and partners.62 Market guesswork cannot be substitutes for credible and official financial data. A culture of respect for statistical rigour, accompanied by transparency among policymakers and end-users, is long overdue. Investors tolerated tardiness in a boom, when patchy economic data posed few questions. In and of itself, the GCC growth story depicts confidence, with visible projects despite secretive, conservative transactions. In uncertain and riskier downturns, however, the

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The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

diversification story of energy-based models looks suspiciously similar. Finally, a consolidation of GCC’s experiences with a “Look East” and new Asian trade road orientation has culminated in the first GCC-ASEAN Ministerial Meeting on 30 June 2009 in Bahrain outside of the UN General Assembly. The South-South Pact for peace, stability, prosperity, regional integration, sustainable development, and community building pinpointed piracy, private sector development, food security and energy as key areas for discussion and cooperation. Its financial emphasis is appropriate, as the G20 emerges as a New Order forum. A memorandum of understanding for a two-year work plan will be reviewed at the Second GCC-ASEAN Ministerial to be held in an ASEAN country in 2010. Similar full-fledged biannual ministerial meetings and annual open-ended meetings on the occasion of UN General Assembly regular sessions could cement future work. Both secretariats will study and recommend a free trade agreement and cooperation in culture, education, and information. A key policy implication of GCC integration for ASEAN is the launch of a GCC-ASEAN FTA, which is currently being studied. With GCC SWFs prudently monetized in infrastructure and diversified industrialization in Temasek63-like ventures, there is scope for further GCC-ASEAN exchanges to explore economic development and cooperation. Together with private equity and debt investment funds, SWFs spawn new growth poles and champions for economic restructuring and job creation. ASEAN has to learn more about individual GCC states to find the right port of entry literally and figuratively to work with the GCC. The GCC is no different from any other grouping, with spectrums along the continuums of commonality, diversity, proactivity, passivity, or traditional conservative/reformist globalist

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41

actors to offer a range for similarly suited ASEAN states. Islamic religion or Arabic culture as the glue for some processes can act as bridges for GCC-ASEAN cooperation to explore gaps and niches meaningfully and pragmatically. Deficient institutional capacity and human resources are the GCC’s weakest link. This means that quality, standards, benchmarks, and best practices from ASEAN’s experience can start as the basic building blocks for GCC-ASEAN cooperation. Asia may have outgrown pan-Asian groups, from Japan’s post-war Greater East Asia Co-Prosperity Sphere to the AsiaPacific Economic Cooperation (APEC) and APEC-like precedents. However, the GCC is definitive in political and physical space and is independently rich. A more mature GCC and ASEAN are naturally good fits. By leveraging their intrinsic competitiveness, they can create a new growth intersection.

Notes   1. Saudi Arabia was the prime mover in the GCC’s establishment. While it has evolved towards economic union, the GCC was originally established due to a common security threat in response to the outbreak of the Iran-Iraq War (September 1980) and Iranian inspired Islamic activism. Thus, while Iran and Iraq share a coastline on the Persian Gulf, they are currently not members of the GCC. Iraq was once an associate member, but this was suspended when it invaded Kuwait. Available at .   2. There were various agreements and organizations that preceded the GCC. The 1950s and 1960s saw the formation of the Arab League, the Arab Economic Unity Agreement, and the Arab Common Market; and in the 1980s there was the Arab League’s Trade Facilitation and Trade Promotion Accord. Post-GCC, there were the Arab Cooperation Council, the Arab Maghreb Union, and the Greater

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42

  3.

  4.

  5.

  6.

  7.

  8.

01 Gulf CC.indd 42

The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

Arab Free Trade Area (GAFTA) signed in 1997. Outside MENA, bilateral trade agreements include those with the United States, the European Union (EU) and the European Free Trade Association (EFTA). Also, the U.S. Department of Energy estimates that this will rise to 38 per cent by 2025 as other significant sources of oil exports decline (e.g. the North Sea). The GCC is currently home to 40 per cent and 23 per cent of known global oil and gas reserves, respectively. See McKinsey & Company, Perspective on the Middle East, North Africa and South Asia (Dubai: McKinsey & Company, 2008). See also Daniel Hanna, “A New Fiscal Framework for GCC Countries Ahead of Monetary Union”, briefing paper, Chatham House International Economics Program, May 2006. The Institute of International Finance (IIF) estimates break-even, U.S.-dollar-based, oil price per barrel in 2009 for the UAE at US$36, Qatar US$38, Kuwait US$48, Saudi Arabia US$51, Oman US$73, and Bahrain, US$74. See Gulf News, 4 January 2009. Jews and Arabs of Palestine have been fighting since the early twentieth century in the world’s most militarized region — in what is dubbed the 100-year war. The Supreme Council meets annually, and sometimes more as needed. Its presidency rotates by the Arabic alphabet, with four states needed for a quorum. Article 8 of the 1981 Economic Agreement identified four areas where GCC nationals will be treated without discrimination, namely: freedom of movement, work, and residence; right of ownership, inheritance and will; freedom of engagement in economic activity; and freedom of movement of capital. Article 3 of the 2001 Economic Agreement directly applies economic nationalization or fully equal treatment for natural and legal GCC nationals without differentiation or discrimination in ten economic fields, namely: movement and residence; work in private and government jobs; pension and social security; engagement in all professions and crafts; engagement in all economic, investment,

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The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

  9.

10. 11.

12.

13.

14.

01 Gulf CC.indd 43

43

and service activities; real estate ownership; capital movement; tax treatment; stock ownership and formation of corporations; and education, health, and social services. Economic nationalization is the realization of a fully equal treatment among GCC nationals in all economic fields in member states. Economic nationalization promotes the idea of a GCC citizenry and confirms GCC identity as Arabic and Islamic. GCC nationals are empowered to complement and supplement Saudization or Emiratization of nationals in Saudi Arabia and the UAE respectively, with distinct birthrights, similar to the concept of bumiputra in Malaysia. GCC Economic Agreement, 2002, available at . The US-Bahrain FTA eliminates tariffs on all consumer and industrial product trade. Most agricultural tariffs were eliminated immediately; some sensitive farm goods are to be phased out over ten years; markets are to be further opened to U.S. companies in telecommunication, engineering, and other services than any previous trade pacts; available at . It should be noted, however, that the FTA exempted agricultural and industrial goods from customs duties. It also excluded natural resources and trade of national products that are without local agents or procedures except certificates of origin and export manifest, under an immediate release system for goods accompanying persons at the border. An agency law requires a local national with local knowledge and connections (wasta) to sponsor applications for licences or work permits for an arranged fee, not equity participation. This law ensures foreigners abide by local business customs and practices. A GCC Secretariat General pre-customs union study estimated intraGCC trade growth at 6–20 per cent during the first four years using the GCC integration model. Subsequent before and after effects reported US$11.6 billion in 1993, and US$20.3 billion in 2003. See Gulf News, 11 June 2009.

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44

The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

15. Pan-Arabic railway plans have never been consolidated. Individually, Qatar and Kuwait have spent US$10 billion each on their national railways; the UAE, twice that in monorails, bullet trains, and local metro, with the first ten to twenty-nine stations opened in Dubai on 9 September 2009, and Abu Dhabi to start construction. Saudi Arabia has its own US$15-billion-rail network plan to facilitate pilgrimage to Mecca and Medina. Thus, when GCC national lines eventually connect into a regional network costing US$14 billion, variations in grid systems and standards will be a major challenge. 16. Abu Dhabi’s interest in Fujairah port is strategic as it is an alternative to the Hormuz Strait. Fujairah is already the world’s third largest ship refuelling hub. Together with Jebel Ali’s capacity and Dubai’s physical and paper oil trading, they boost the UAE as an emerging major fuel trading hub and swing factor in gasoline and diesel, to join Houston and Amsterdam, Rotterdam, Antwerp, and Singapore. 17. Equally mystifying is the Gulf Organization for Investment, endorsed in 1982 by finance and economic ministers, purportedly with US$2.1 billion in capital in equal shares over five years, and each state entitled to offer 49 per cent of shares to their citizens. With a board of directors formed and paid-up capital of US$420 million by 1985, it had plans to invest in GCC petroleum, industries, livestock, project financing, and securities, but there are no records since this was reportedly launched. See Rouhollah K. Ramazani, The Gulf Cooperation Council: Record and Analysis (Charlottesville: University Press of Virginia, 1988), p. 100. 18. Supply-side economies of scale reduce per unit cost with larger production. Demand-side economies of scope mean less cost in multiple business functions such as marketing two related products. Both are efficient and mutually reinforcing. 19. They include: the Saudi Industrial Development Fund 1974 for low-cost loans; 1979 Saudi Arabia Basic Industry Corporation for non-oil export orientation; 1982 Saudi Industrial Property Authority;

01 Gulf CC.indd 44

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The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

20.

21.

22.

23.

24.

25.

01 Gulf CC.indd 45

45

1985 Royal Commission for Jubail and Yanbu industrial cities (a dozen more to follow); and the 2008 National Industrial Cluster Development Programme. It is moot whether had it been a formal GCC project, it would have smothered outstanding territorial disputes. The UAE, with the fifth and fourth world’s largest reserves of oil and gas, respectively, has sulphurous sour gas largely pumped back into oil wells to maintain pressure. Qatar has the world’s largest gas reserve, but its 2005 gas moratorium until 2011 implies supply constraints, plus disputed gas prices for the Dolphin project. Anticipating an energy shortage, Abu Dhabi launched its Masdar in 2008 for renewable energy, including nuclear energy, with a nuclear safety agreement ratified by 2009 and nuclear pacts signed with the United States and France. It did not rule out further GCC energy cooperation at a later date. In particular, Kuwait’s dual identity and dual loyalties meant the need for tribal parliament representation by less sedentary Adwani, Ajami, Awazim, Bani Ghanim Dhafiri, Dusari, Anaizi, and Shimmari tribes. Also, there are Bedouins in the UAE, as well as nomads in the Arabian Peninsula from Yemen to Syria. All have different dialects. Bahrain, Kuwait, and UAE joined the WTO on 1 January 1995, Qatar on 13 November 1996, Oman on 9 November 2000, and Saudi Arabia on 11 December 2005. A team assigned to assess merits for the GCC has advised signing the Istanbul Convention and Annex A drawn by the WCO, but the Federation of GCC Chambers of Commerce and Industry needs to assess the readiness to provide customs with the necessary guarantees on imported goods that are required to comply with international standards and procedures for global trade movement, Emirates Business, 25 August 2009. The free movement of GCC goods, however, takes into consideration agricultural and veterinarian quarantine, as well as rules on

11/2/10 3:07:17 PM

46

26.

27. 28.

29.

30.

31.

01 Gulf CC.indd 46

The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

prohibited and restricted goods, as provided for in Article 1 of the 2001 Economic Agreement. However, a number of essential commodities were exempted from this treatment. Also, there were customs exemptions provided for in the Common Customs Law and the WTO tariff bindings of some member states. For details, see and . The UAE Federal Customs Authority elaborated on these CU issues in 2009; available at . The first Secretariat General’s study defined a mechanism to collect and distribute customs revenue after the end of the transitional period. This included specific ways to determine the ratios among GCC countries, with the five per cent CET proceed deposited in a common collection fund and the remaining 95 per cent at the disposal of GCC, to be reconsidered later. The suggested distribution by the GCC Customs Federation as of January 2008 is: 25.75 per cent for the UAE, 3.15 per cent for Bahrain, 42.77 per cent for Saudi Arabia, 9.52 per cent for Oman, 7.90 per cent for Qatar, and 10.92 per cent for Kuwait. For GCC goods imported via the UAE in 2003 to 2006, it returned AED537.6 million (41.8 per cent of total customs revenue); to Saudi Arabia, AED285.8 million (22.2 per cent); to Oman, AED280 million (19.5 per cent), AED148.5 million (11.6 per cent) to Kuwait, and AED63 million (4.9 per cent) to Bahrain. Gulf News, 10 June 2008. The U.S. competitive liberalization strategy pried concessions in both FTAs with Bahrain and Oman. GCC FTAs in negotiation include the European Union, China, Turkey, Pakistan, India, EFTA, Japan, Mercosur, Australia, New Zealand, Korea, Canada, and Malaysia. See the inaugural newsletter, Trade Affairs by the UAE Ministry of Foreign Trade, Issue 1, March 2009 available at . The UAE’s Ministry of Economy managed FTA negotiations until the Ministry of Foreign Trade was formed in 2007. Rules of origin define complex specific product criteria, not just value added, change in tariff classification with product transformation, and inclusion or exclusion of transport cost. Arab expatriates in the GCC are currently outnumbered by Asians and are estimated to have fallen from two thirds of the total employed in the 1970s to currently about one third of the total employed. Asians with high technical skills and English fluency are in professional work while low skilled Asians work in services, domestic households, and construction sectors. A UAE federal decree in 2005 endorsed the GCC unified industrial law for local GCC inputs, modern technology, and recruitment and training of local manpower, local consumption and export, environmental conservation, public health, safety, and traditions to conform with the WTO. In addition, Saudi Arabia lifted all restrictions on GCC citizens in 2009. See Gulf News, 20 April 2009. Instead of private companies sponsoring workers, Bahrain’s Labour Market Regulation Authority is the government agency responsible for issuing expatriate employees with two-year work visas. Once job contracts are signed, expatriate employees have the freedom to change jobs by giving a three-month notice period. This provision took effect on 1 August 2009. Saudi Arabia has protested about a map on the UAE identity cards, claiming it does not correspond with the border agreed by both in 1974. Because of this disagreement, they have suspended their use as passports; Khaleej Times, 23 August 2009. All UAE natural resources (land, hydrocarbons, and mineral deposits) belong to individual emirates. Freehold land applies to built structures above state-owned land; Abu Dhabi property ownership involves long leases (99 years, renewable for another 99 years) in designated areas, including free zones; Dubai and other

11/2/10 3:07:17 PM

48

38. 39.

40.

41.

42.

43.

01 Gulf CC.indd 48

The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

emirates have their own decrees. A federal law to unify visas for foreign owners is as complicated. Other non-GCC nationals may have similar means and needs, with many second-generation residents without permanent status. See Article 22 of 1981 Economic Agreement which states: “The member states shall coordinate their financial, cash and banking policies and increase cooperation between the cash institutions and central banks including standardization of currency to integrate and complement the desired economic integration.” This incorporates both a monetary policy and exchange rate policy, as a fixed or floating exchange rate policy constrains or allows flexibility in monetary policy respectively. Kuwait’s exchange rate on a trade-weighted basis allowed its dinar to trade in a 3.5 per cent band as a reference rate to appreciate against the U.S. dollar in May 2006 so as to fight imported inflation. See Gulf News, 25 March, 5 and 7 April 2009 with declarations to postpone the deadline, then to stick to the 2010 deadline after Riyadh won the central bank’s location on 5 May 2009 (Gulf News, 9 May 2009), before the UAE’s withdrawal from the MU fifteen days later (Financial Times, International Herald Tribune and The Economist, 21 May 2009). The Secretariat-General confirmed no delays, Oman also does not preclude joining later, and the MU accord for four signed on 8 June 2009 gave scant procedural details, Khaleej Times, 26 and 27 May 2009, and 6 June 2009. Ironically, both the Dubai International Financial Centre and Riyadh Chamber of Commerce and Industry urged a consolidated approach to deeper integration, as the remaining four signed the MU agreement, Gulf News, 6 May 2009 and 8 June 2009, respectively. It can be argued that GCC member states have so far defied the resource curse. The natural resource curse predicts that countries with finite, natural resources often fail to develop other economic sectors, or squander its natural resource wealth, bringing financial problems to future generations.

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The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

49

44. The International Labour Organization (ILO) estimates the number of MENA job seekers to reach 400 million by the next decade, especially for Arab youth from an education system which is not market oriented for private sector jobs. The World Bank 2008 reported that MENA’s 14 per cent average unemployment rate is the world’s second highest next to Sub-Saharan Africa. The Middle East has an unemployment rate of 15 per cent and needs 80 million jobs in the next five years just to keep apace of regional demographics, which show the fastest growing labour force in the world. Sixty-five million adult Arabs are illiterate, two thirds of them women, over ten million children are not in schools and, increasingly, restive youths are particularly prone to radicalism and acts of hostility against the West; Khaleej Times, 4 June 2009. 45. The world’s largest SWF is the Abu Dhabi Investment Authority with an estimated US$675 billion in assets; second is the Saudi Arabian central bank, Saudi Arabian Monetary Agency with US$375 to US$500 billion in assets. See Saw Swee Hock and Low, Linda. Sovereign Wealth Funds (Singapore: Saw Financial Centre, National University of Singapore, 2009) for more conceptual and statistical details. 46. See Financial Times, 15 March 2009 supplement on the Qatar Foundation-sponsored US$800 million Qatar Science and Technology Park, Education City, Qatar National Convention Center, and Sidra Medical & Research Center. Saudi Arabia’s King Abdullah Economic City has similar well funded ambitions. 47. However, a rise in oil revenues in 2009 offset these losses, adding about US$273 billion of fresh funds to the SWFs; see The Economist, 24 January 2009, and Emirates Business, 24 August 2009. 48. Abu Dhabi’s International Petroleum Investment Corporation took a 9.1 per cent, US$2.65 billion stake in Daimler, and paid Spain’s Banco Santander US$3.8 billion for a 32.5 per cent stake in its oil company Cepsa. Abu Dhabi National Energy Company or Taqa paid US$320 million to acquire a 50 per cent-equity stake in Marubeni

01 Gulf CC.indd 49

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50

49.

50.

51.

52.

53.

01 Gulf CC.indd 50

The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

Corporation’s electric power portfolio in the Caribbean, all between March–April 2009; see Financial Times, 1 April 2009. Qatar Investment Authority and Bahrain Mumtalakat Holding Company sit on cash to look for opportunities. Kuwait Foreign Petroleum Exploration Company, the international investment arm of Kuwait Petroleum Company, hunts globally for corporate acquisitions to expand its oil producing capacity. Premier Wen Jiabao was unusually blunt in a rare concern for the safety of China’s US$1 trillion-investment in U.S. treasuries and government debt (world’s largest holding) to ask the United States for assurances to maintain its good credit, and honour promises, but stopped short of any threat to cut purchases of U.S. bonds, much less sell any; Financial Times, 13 March 2009. See Ben Simpfendorfer, The New Silk Road: How a Rising Arab World is Turning Away from the West and Rediscovering China (London: Palgrave, Macmillan, 2009). Examples include the Saudi National Recruitment Committee and Indonesia Federation of Manpower Agencies to recruit housemaids and workers in a bilateral agreement after employment training and awareness programmes; Singapore’s madrasa schools as models (International Herald Tribune, 23 April 2009); and halal food benchmarking from all ASEAN Muslim affiliations. Noted by the UAE Ministry of Economy: Gulf News, 27 May 2009 and available at . On 22 June 2009, the European Free Trade Association (EFTA) and the GCC signed an FTA, similar to the Singapore-EFTA FTA. The EFTA-GCC FTA was not as torturous in arriving at a consensus, unlike the EU-GCC FTA. The European Union is GCC’s largest trading partner, with EFTA comprising only a quarter of GCC-EU trade. Dean A. DeRosa and David Kernohan. “Measuring the Economic Impact of an EU-GCC Free Trade Agreement”, Centre for European Policy Studies, Working Document, no. 206, July 2004; available

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The Gulf Cooperation Council: A Rising Power and Lessons for ASEAN

54.

55.

56.

57.

58.

59.

01 Gulf CC.indd 51

51

at and . The study also urged the GCC to consider lowering its 5 per cent CET to about 3 per cent for its EU-GCC FTA negotiations. The Dutch disease describes a problem of economic dislocations due to large fluctuations in the real price of oil, mineral, or agricultural export, resulting in labour and capital wastefully shifting production back and forth from sector to sector. The Bundesbank president, Axel Weber, saw E.U. policymakers at a crossroads as E.U. competition authorities tied state aid to banks’ treating their cross border E.U. operations as foreign operations; Financial Times, 22 April 2009. Weber’s call for Germany to end its high export-reliant industrial production resonated Churchill’s wish to see “finance less proud and industry more content”. See Geoffrey Francis Andrew Best, Churchill: A Study in Greatness (London, New York: Hambledon Continuum, imprint of International Publishing Group, 2001, reprint 2006), p. 119. A GCC risk management centre in Kuwait in May 2009 to meet various challenges, any risks or natural disasters, was set up amidst the swine/H1N1 flu outbreak and the launch of the U.N. Global Assessment Report on Disaster Risk Reduction. See Kevin Carey, “Global Financial Crisis: A GCC Perspective”, MNA Knowledge & Learning, no. 13, December 2005, available at . Credit rating agencies downgraded Dubai International Financial Centre Investments LLC, Dubai Port World Ltd, Jebel Ali Free Zone, Dubai Multi Commodities Centre Authority, Emirates Bank International, and National Bank of Dubai with impending mergers for its two largest home mortgage lenders. Dubai’s US$10-billion bonds to the UAE Central Bank to help Dubai SOEs were absorbed by Abu Dhabi, but global confidence broke when Dubai World defaulted on one loan repayment on 25 November 2009; The Economist, 3 December 2009. Two Saudi conglomerates, Saad Group and Ahmad Hamad Al Gosaibi

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52

60.

61.

62.

63.

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and Brothers, owe local banks US$4–7 billion and US$15.7 billion worldwide, but the banking system is safe; Gulf News, 28 August 2009. See Gulf News, 12 January 2009 and 1 April 2009, respectvely, and 23 April 2009 as the IMF raised its estimate of global losses to US$4.054 trillion, with the GCC well-cushioned from accumulated oil wealth. Bela Balassa theorized that economic integration is the result of formal cooperation between states and follows a teleological forward movement, starting from a free trade area, a customs union, a common market, a monetary union, and finally, total economic integration. The European Union’s experience is a classic example that follows this. For more information, see See Bela Balassa, The Theory of Economic Integration, 1961. With the great recession full blown by early 2009, Kuwait, Qatar, and Oman have yet to release their real GDP growth data for 2007. The UAE’s GDP and inflation rates for 2007 were issued in late 2008, and its central bank’s key indicators and credit growth only cover up to June 2007. Temasek Holdings is an investment company owned by the Government of Singapore.

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References

Balassa, Bella. The Theory of Economic Integration. Homewood, Illinois: Richard D. Irwin Inc., 1961. Carey, Kevin. “Global Financial Crisis: A GCC Perspective”. MNA Knowledge & Learning, no. 13, December 2008; available at . Mckinsey & Company. Perspective on the Middle East, North Africa and South Asia. Dubai: McKinsey & Company Inc., 2008. Ramazani, Rouhollah K. The Gulf Cooperation Council: Record and Analysis. Charlottesville: University Press of Virginia, 1988. Saw Swee Hock and Linda Low. Sovereign Wealth Funds. Singapore: Saw Centre for Financial Studies, National University of Singapore, 2009. Simpfendorfer, Ben. The New Silk Road: How a Rising Arab World is Turning Away from the West and Rediscovering China. London: Palgrave, Macmillan, 2009. The GCC Secretariat General. The GCC: Process and Achievements. 4th edition. Riyadh, 2009.

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02 Gulf CC Ref.indd 54

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55

Appendix 1

Appendix 1: Macroeconomic Indicators for GCC

Year Bahrain Kuwait Oman

Area sq km Population, total   (’000) 2009 Population, non  national (’000) 2009 Median age, years 2008 Population growth   percentage 2009 GDP PPP US$ billion 2008 GDP USS$ billion 2008 GDP growth   percentage 2008 GDP/cap PPP US$ 2008 GDP composition   (percentage)   Agriculture 2008   Industry 2008   Service 2008 HDI rank 2005 Labour force (’000) 2008 Labour force non  national percentage   of total 2008 Unemployment rate   percentage 2005 Public debt   (percentage of GDP) 2008 Inflation (percentage) 2008 Industrial production   (percentage) 2008

03 Gulf CC App.indd 55

Qatar Saudi Arabia

UAE

665

17520

212460

11437 2149690 83600

728

2691

3418

833

28686

4798

235 30.1

1291 26.2

557 18.8

na 30.8

5576 21.6

na 30.1

1.3 26.7 19.7

3.5 157.9 159.7

3.1 67.4 56.3

0.9 83.3 116.9

1.8 600.4 467.7

3.7 186.8 270.0

7.0 37200

8.1 60800

6.7 20400

11.8 4.2 101000 21300

8.5 40400

0.3 43.6 56.0 41 463

0.3 52.2 47.5 33 2225

2.1 37.2 60.7 58 920b

0.1 79.4 20.5 35 1124

3.1 61.6 35.4 61 6740

1.6 61.8 36.6 39 3266

44

80

na

na

33

80

15.0

2.2

15.0

0.6

8.8c

2.4

33.2 7.0

7.2 11.7

2.4 12.5

6.0 15.2

13.5 10.3

22.4 14.4

5.1

8.0

3.4

12.6

4.5

7.7

11/2/10 3:04:31 PM

56 Reserves, forex   + gold (US$ billion) 2008 Debt, external   (US$ billion) 2008 FDI stock home   (US$ billion) 2008 FDI stock abroad   (US$ billion) 2008 Oil production million   barrel per day 2008 Oil export million   barrel per day 2008 Oil proven reserve   billion barrel 2008 Gas production   billion cubic metre 2008 Gas export   billion cubic metre 2008 Gas proven reserve   trillion cubic metre 2008 Export ex-oil   US$ billion 2008 Import ex-oil   US$ billion 2008 Current account   balance US$ billion 2008

Appendix 1

4.9

10.6

11.1

16.8

28.5

67.2

10.6

38.8

6.1

48.9

63.2

73.7

15.2

1.2

na

3.6

na

62.7

9.5

28.3

na

9.1

na

28.9

0.048d

2.613

0.758

1.125

9.200

2.940

0.239e

2.356

0.594

1.026

8.200

2.703

124.6 m barrel 104.0

5.5

15.21

266.8

97.8

11.33

12.5

24.1

59.8

75.9

48.79

0

0

13.1

39.3

0

6.848

92.0 1.59 billion cu. m

849.5 billion cu. m

25.6

7.2

6.1

19.2

95.5

33.9

62.4

311.1

207.7

15.6

26.5

13.3

24.9

92.4

114.1

2.3

65.2

5.7

22.7

151.0

36.4

Notes: a HPI-1 vs HPI-2, calculated for selected high-income OECD countries only b 2002 c for Saudi, up to 25 per cent for all d 2007 e 2005 Sources: CIA World Factbook, 2010, available at ; IMF, World Economic Outlook Database. “Global Competitiveness Report”, April 2009, available at ; UNDP Human Development Report, 2008, available at .

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Appendix 2

Appendix 2: Low Level of Merchandise Trade with Partners in Regional Agreements (exports and imports as share of total merchandise)

GCC

GAFTA

Bahrain Kuwait Oman Qatar KSA (Kingdom of Saudi Arabia) UAE (United Arab Emirates)

35.0 4.5 11.0 6.4 4.1 4.8

38.6 7.4 12.2 7.5 9.1 7.4

1997 Greater Arab Free Trade Agreement GAFTA of eighteen comprises GCC6, Agadir, Gaza Iraq, & West Bank, Lebanon, Libya, Morocco, Syria, Sudan, Tunisia, and Yemen Source: MENA Region, “Economic Development and Prospects”, 2008, available at .

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Appendix 3

Appendix 3: Bilateral Trade Complementarity Index, 2006



Bilateral trade complementarity index, 2006

Bilateral trade complementarity index for non-oil trade, 2006



Importer

Importer



Bahrain Oman Qatar KSA Bahrain Oman

Qatar

Bahrain 4.3 6.6 2.7 6.7 9.7 Oman 57.0 6.8 2.3 13.8 14.9 Qatar 48.9 5.0 1.5 13.8 14.9 KSA 57.9 7.4 7.9 19.4 18.9 22.3

KSA 5.0 8.3 8.3

Source: MENA Region. “Economic Development and Prospects”, 2008, available at .

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Appendix 4

Appendix 4: GCC Foreign Direct Investment, 1996–2007 US$ billion

1966–99

2000–04

2005

2006

2007

–0.6 0.4 0.1 1.2 –0.1 0.3

0.0 0.9 0.1 1.3 0.7 2.0

–0.1 –4.9 0.4 2.5 10.9 7.2

1.9 –7.8 0.4 3.5 17.5 6.1

2.0 –6.4 0.4 4.7 14.7 6.1

As share of gross fixed investment, per cent per year Bahrain 75.0 0.6 –2.6 Kuwait 8.6 16.8 –30.5 Oman 2.5 3.0 6.7 Qatar 35.7 24.9 17.8 KSA –0.5 1.8 20.9 UAE 1.9 8.9 25.3

58.5 –34.6 5.2 31.8 29.5 13.7

51.7 –19.3 5.4 34.7 18.7 12.4

12.2 –7.9 0.9 6.6 5.0 4.5

9.9 –5.8 0.9 7.1 3.9 3.8

Bahrain Kuwait Oman Qatar KSA UAE

As share of GDP, per cent per year Bahrain 9.0 Kuwait 2.0 Oman 0.4 Qatar 11.2 KSA 0.0 UAE 0.6

–0.2 2.3 0.4 5.6 0.3 2.0

–0.6 –6.1 1.3 5.9 3.5 6.1

Source: MENA Region, Economic Development and Prospects, 2008, available at .

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Appendix 5

Appendix 5: Gross Foreign Reserves (including gold), 1996–2007 US$ billion

1966–99

2000–04

2005

2006

2007

1.3 4.1 2.2 1.0 15.3 9.2

1.7 8.5 3.0 2.1 21.8 15.4

1.9 9.0 4.4 4.6 26.8 21.0

2.7 12.7 4.9 5.4 27.8 27.6

3.4 16.7 5.3 10.3 34.0 48.5

Reserves as months of goods import coverage Bahrain 4.5 4.2 Kuwait 6.5 12.4 Oman 5.8 6.2 Qatar 3.0 5.8 KSA 7.0 8.2 UAE 3.9 4.6

2.9 7.6 6.5 6.0 5.9 3.1

3.6 10.6 5.6 4.4 5.2 3.3

3.6 13.7 5.4 6.5 5.6 5.4

Bahrain Kuwait Oman Qatar KSA UAE

Source: MENA Region, Economic Development and Prospects, 2008, available at .

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About the Authors

Dr Linda Low is the head of Strategic Planning at the Department of Economic Development in the Abu Dhabi Government, United Arab Emirates (UAE). She is also an adjunct professor at the College of Business and Economics in the University of UAE, and Higher Colleges of Technology, University of UAE. Her academic areas of specialization include public sector economics, health economics, and human resource development. She has also worked in areas such as international trade and regionalism, including free trade agreements, international political economy, development economics, and macroeconomic public policies related to economies in Asia Pacific, ASEAN, and the Middle-East. Dr Lorraine Carlos Salazar is a senior research analyst with a global consulting firm. She has been a visiting research fellow at the Institute of Southeast Asian Studies, Singapore, and an assistant professor of Political Science at the University of the Philippines, Diliman, Quezon City. Her research interests are in comparative political economy issues in Southeast Asia, focusing on the politics of market reform, political dynamics, and contemporary developments in the region. She has done extensive research on telecommunications, e-commerce, and information and communications technology, policies, and issues.

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