Gcc report

The University of Wollongong in Dubai (UOWD)
Regional Economic Integration Of GCC
Prepared By ShehryarRaza 3369456

Executive Summary

The main aim and objective of this report is to highlight the economic and trade related
integration activities of the GCC region within themselves and with the other countries. On
the flip side of the coin this report also tries to highlight some of the issues with respect to
integration the member countries face and some of the possible solutions which can
formulate the foundations to solving these problems. The GCC countries since their
formation have achieved tremendous amounts of achievements in various fields including
trade,education,culture,technology and agriculture. Yet somegrey areas remain untouched,
The goals and targets set by the member countries in terms of integrating with each other
seem to be quiet high yet past experience indicate that the future of the member countries will
be quiet bright as the member countries seem to be striving in the appropriate direction of
development.

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IntroductionTo GCC

The Cooperation Council for the Arab States of the Gulf (CCASG; Arabic:
), also known as the Gulf Cooperation Council (GCC; ), is a
political and economic union of the Arab states bordering the Persian Gulf who are located
on or near the Arabian Peninsula, .The member countries include Bahrain, Kuwait, Oman,
Qatar, Saudi Arabia, and United Arab Emirates. Two new countries Jordan and Morocco
have been invited to join the GCC council.GCC came into existence on 25th May 1981 and
the official agreements by the member countries were signed on 11 November 1981 in Abu
Dhabi. The original Council comprised of 630-million-acre (2,500,000 square km) Persian
Gulf states. The combined GDP of the member countries as of 2011 was estimated to be
$1.386 trillion. There were several reasons and objectives to why these countries decided to
formulate a common integrated union .Some of these reasons and objectives wereas follows.

Development in the field of economics, trade, commerce, finance, customs, tourism,
legislation, education and administration.
Development of cultural, social and brotherly ties between the member countries and
the rest of the Arab region.
Development of scientific and technical know how’s in various fields such as
technology industrial research, mining, agriculture, water and animal resources.
Formation of a unified military system known as the (Peninsula Shield Force).
Formation of joint ventures, business corporations and development in the field of
business related activities.
Formulating a single currency and formation of a single monetary system by the year
2010 (Target still in pipeline).

Though there are certain similarities between the member countries such as common religion,
rich cultural background and heritage yet each member country is unique in its own distinct
way. On the other hand side the development of most of the member countries rely upon rich
mineral resources resulting in a boom in oil and natural gas revenues which is backed with
the development taking place in the real estate and investment sector, the economies of the
member countries also strongly support and promote FDI as the future of the member
countries such as UAE rely upon it. On the flip side of the coin there are some elements
which make it difficult to properly implement a common economic integration system .A

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good example in this regards include the disagreement in implementing a single monitory
system. (See Exhibit 1.1)
Exhibit 1.2

Integration Through Trade

The trade related activities within the GCC countries can be classified into two main broad
categories which can easily be shown in the following diagram.(See Exhibit 1.2)
Exhibit 1.2

I. Integration Through Commodities
The recent development which took place within the GCC countries within the last 3
to 4 decades can all be contributed to two main elements which include the
development in the oil and mineral resource industry and the development in the trade
and commerce sector. On the flip side of the coin the Intraregional GCC trade flow
remain relatively low despite strong growth in recent years. The average nominal
value of intraregional trade has increased by about 30-35 % per annum during a

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timeframe of 2004–2010 while it was only 6 % during 2000–2003.Due to the
formation of GCC and the efforts done by the member countries the non-tariff related
barriers have reduced significantly as a result of this most of the day to day
commodities available within the region have almost somewhat similar prices. Under
the guidelines of WTO major efforts had been made in establishing unified GCC
technical standards (currently these standards cover some 3,000 products) .These
standards also harmonize and reduce customs administrative procedures and clearance
requirements within the member countries. Some of the barriers which do remain are
the subsidies and preferential treatment given by the government to their respective
industrial sector and also the purchase related activities in terms of the public sector.

To further enhance and improve the trade related activities among the member
countries certain key measures and initiatives must be taken .Some of the measures
which could be taken are given as follows.
Development of a rail road system which could interlink the GCC countries.
Reaching on an agreement on the removal of border controls between the
member countries.
Formation of a single currency union which would ease and enhance trade
related activities within the respective region.
Development of infrastructure such as trade corridors would facilitate trade
and business related activities.

II. Integration Through Services
Due to the constant development taking place within the GCC region emphasis on the
development of the services sector was a prime objective of the member countries,
Hence steps were taken in similar direction .The member countries had made progress
in easing and facilitating the intraregional boundaries. One major step in that
particular direction was the implementation of the common market agreement.
Currently the GCC nationals can move easily within the GCC countries and a recent
approval of waiver of visa requirements for expatriates also came into existence. Due
to the implementation of these policies developments in certain trade related activities
took place. The member countries have steadily improved FDI opportunities for the
individuals residing within the respective countries. Key areas includedhuman

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resource management, automotive industry, pharmaceutical industry etc.According to
the World Investment Report 2010 Saudi Arabia was the eighth largest recipient of
foreign direct investment (FDI) as of 2008-2010(See Exhibit 1.3)

Exhibit 1.3

As it is crystal clear from the above mentioned chart FDI within the member countries
does play a pivotal role in the development of these respective economies. In order to
enhance and streamline the services sector within the region following steps and
initiatives must be taken.
Easing entry and licensing restrictions for both domestic and foreign firms.
Promoting competition within the region to increase efficiency and achieve
economies of scale.
Harmonizing and strengthening regulatory practices and standards for the
respective member countries.
Lowering restrictions on the mobility of human capital within the region.
From the above mentioned facts it has become crystal clear for us some of the main elements
with respect to trade related activities taking place within the region. Although some elements
within the region will take some time to develop. Lots of improvements in terms of trade
related policies have taken place since the formation of the union.

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FinancialAnd Monetary Integration
The last three to four decades have witnessed a growing interest in monetary integration and currency
unification. The notion of currency areas can be dated back to Mundell’s Optimum Currency Areas
(OCA) of 1961. Mundell states that “If the world can be divided into regions within each of which
there is factor mobility and between which there is factor immobility, then each of these regions
should have a separate currency that fluctuates relative to all other currencies (Mundell, 1961)”.“A
monetary union implies inside its boundaries the total and irreversible convertibility of currencies,
the elimination of margins of fluctuation in exchange rates, the irrevocable fixing of parity rates and
the complete liberation of movements of capital” (The Werner Report of 1970). Based on the given
statement we can say it with full confidence that a monetary unions could be defined as geographical
area where exchange rates are permanently fixed to each other. In case of the GCC all the member
countries have pegged their currencies with the $ hence their exchange rates with themselves remain
somewhatstable. In the light of the given fact consider the following graphs. (See Exhibit 1.4)
Exhibit 1.4

From the given fact we can clearly see that there is a level of consistency in the currencies of
the GCC countries.

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The adoption of a single currency would bring in benefits to the member countries .On the
flip side of the coin there would be some associated cost attached to it as well the details to
which are given as follows.

I. Benefits

Gaining more credible monetary policy by adopting the strongest exchange rate
commitment (Frankel, 1999).
Monetary union arrangements are less susceptible to speculative attacks (Frankel,
1999).
Creation of a single monetary system makes it a more systematic and transparent
system which enables it to be easily comparable with an international currency.
Due to the formation of a single currency the elimination of transaction and
accounting cost comes into picture which is quiet beneficial for small and open
economies with unsophisticated financial markets. Lowering transaction costs yield
higher output and consumption gains as well.
The formation of a currency union enhances trade related activities and in terms
enhances efficiency of small firm’s .It also increases competition which in terms
means better productivity and maximum utilization of resources.There is a large
positive effect of a common currency on trade and that effect are much larger than
the effect of reducing exchange rate volatility to zero, through an irrevocably fixed
exchange rate arrangement (P.18).

II. Costs
On the flip side of the coin there are certain costs attached to the formation of the
union .Some of them are given as follows.
The initial costs of adopting the currency union are quiet high.
The member countries loose their respective sovereignty in terms of their respective
currencies.
A period of systematic adjustment is required.
From the above mentioned facts it becomes crystal clear for us that the benefits outweigh
the cost and the implementation of a currency union would be better for the member
countries in many ways as not only it wouldcreate more trade opportunities but would also
enhance and improve development in the region.

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IntegrationThrough Infrastructure
Infrastructure formulates the backbone to all aspects of development. In order to enhance and
further improve trade related activities within the region further development in this regards
would be required. One of the most important elements in this regards would be the
development of the unified rail road system which would connect and interlink the entire
GCC region. The rail road system would not only enhance trade but would also help the free
flow of human capital. The second most important element in this regards includes the
development of specialized infrastructure which includes the exchange of natural gas, water,
electricity, and telecommunication systems.(examples include pipelines, power grids, fibre
optic telecommunication lines, telecommunication satellites etc).
One area in which there has been a significant amount of development in this regards is the
air transport industry .All the major airline carriers within the region have tried to capture a
major share of the air transport market .
Exhibit 1.4

The above mentioned. (See Exhibit 1.4) clearly reflects the share of some of the major airline
carriers within the region.
The member countries have also made significant improvements in the field of
interconnecting the electricity grids, which will allow electricity exchange among all six
member states. The simple reason of doing this is to reserve capacity of member countries,
improve the reliability of electricity supply, and reduce the need for investment in new
generation capacity. In the light of the above given fact another area in which development
can take place would be the development of cross-bordergas pipelines. In this regards Qatar

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holds the biggest natural gas resources which is estimated to be25,513 bcm within the
member countries and it would be beneficial for the rest of the member countries to enjoy this
natural resource. Currently the gas is exported by means of liquefaction, through the Dolphin pipeline
which is used to move gas to the UAE and Oman. Thus from the above given facts it becomes
crystal clear for us that in terms of infrastructural developmentthere has been progress to
some extent which is taking place within the region, though some areas remain untouched.
Integration With Other Arab Countries
The tariff barriers within the GCC have always remained low within the respective region.
The main reason behind this is the narrow production base and sizable oil wealth. Due to the
formation of the custom union in the year 2003 the further reduction of external tariffs took
place. There was a 5 percent reduction on most imported merchandise and 0 percent on all
essential goods. On the flip side of the coin the average Most Favored Nation (MFN) applied
tariff rate also dropped from 8.2 percent in 2000–2004 to 5.9 percent in 2006–2009. The
following figure illustrates it accordingly. (See Exhibit 1.5)
Exhibit 1.5

With the steady erosion of customs revenue due to external free trade agreements, GCC
countries are shifting towardsa value added tax based system which will replace customs
revenue, diversify tax bases, and ensure harmonization of trade in the common market.

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The applied tariff rates within the member countries also vary according to the differences in
protective and preferential tariff rates(See Exhibit 1.6)
Exhibit 1.6

In general, trade regimes with third countries could further be divided into three main broad
categories which could easily be shown in the given diagram(See Exhibit 1.7)
Exhibit 1.7

As all the member countries of GCC are also the members of WTO thus the MFN treatment
is also given on a multilateral basis and is thus outside the scope of the organization.

Relationship With Other Arab Countries And The Rest Of The World
The GCC countries arealso active members of PAFTA, which was formulated in the year
1997 under the auspices of the Arab League and went into effect in the year 2005.The main

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aim and object of PAFTA was to remove tariff and non-tariff related barriers within the
member countries yet friction to some extent still remains. Tremendous amounts of efforts
are still being made to improve and enhance the services sector. Continuous efforts are being
made to make Yemen and Jordan as a full time member of the GCC countries .Both of these
countriesenjoy certain privilegeswith respect to GCC. Some of the areas in which this
specialized treatment is provided include health, labor and social affairs, education, sports,
standards, and industrialization.

Trade related activates with the rest of the world are also quiet promising in this regards. (See
Exhibit 1.8) can easily illustrate it accordingly.
Exhibit 1.8

From the above mentioned facts it becomes crystal clear for us that the treatment of GCC
countries with the other Arab countries is quiet friendly and relaxed in terms of their
respective trade related policies .On the flip side of the coin if Jordan and Yemen became a
part of GCC the scope and dimensions of trade related activates within the region will also
change to a great extent.

Issues And Challenges To Further Integration
Through development within the GCC region has taken place there are some key areas which
need attention. The implementation of a standardized customs union based model has been
subverted by the absence of an agreed mechanism to collect and distribute tariff revenues.
Some of the key areas which need attention in this regards are given as follows.

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i. Organizational Structure
Improvement and enhancement is required in the current organizational structure of
the GCC.The current structure is heavily biased upon intergovernmental model. This
current model is weak and thus a stronger more refined system is required. The main
weakness of this system is the absence of an executive body with enforcement powers
and by the presence of a weaker system to handle the disputes. This system also
delays the decision making process in which lots of precious time is spent in
following up the cases. Hence a more efficient and streamlined system is required.
ii. Lack Of Common Policies Laws, And Strategies
In order to improve and enhance trade, commerceand financial activities within the
regain certain common rules and regulations are required. Some of these policies
which should be implemented are given as follows.
Revision and enhancement of labour and immigration laws.
Implementation of taxes and public service charges in areas where cross-
border elasticises are significant.
Development of foreign investment laws which will enhance and improve FDI
related activities within the region.
Implementation of Commercial laws governing ownership of businesses and
properties will improve trade related activities within the region.
Implementation of a unified shipping and movement of cargo system within
the region.
Development of the air transport and aviation industry.
Formation of a unified banking, finance and commercial system.
Formation of unified law’s in the above mentioned sectors would formulate the
foundations of a much stronger customs union.
iii. Political Issues
Though unification of the GCC member countries has taken place there are certain
key political areas which remain unresolved. Good examples in this regards includes
the formation of a single currency area and multilateral accords with the EU. The
simple resolution to these issues includesa regional cooperation across a broad
spectrum of issues which will improve and enhance these political issues of the
member countries.

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iv. Transparency And Public Accountability
The knowledge related to the trade related aspects within the region are to some
extent still not clear in the minds of the people within the region. A more
comprehensive and clearer system is required .This system will improve the
effectiveness of trade related aspects .This system will require greater amount of
resources. The regional think-tanks and chambers of commerce will have to
participate in themonitoring process which will make it a much clearer system for the
people to understand.
v. Structural Inequalities And Promoting A Balanced Development Approach
A more balanced approach is required in order to reduce inequalities within the
member countries .In the past intraregional assistance was provided on a bilateral
basis, most notably to Oman andBahrain. The implementation of a unified regional
policy which deals with establishment of a more governed and refined system is
required .This system will formulate a stepping stone in the right direction.The GCC
needs to adopt explicit policies that deal with the following main elements. These
elements can easily be shown in the given (See Exhibit 1.9)
Exhibit 1.9

From the above mentioned facts it becomes crystal clear for us some of the issues and
challenges to further integration of the member countries. These issues can be resolved with
the efforts done by the member countries.

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ConclusionAnd Recommendations
From the above mentioned facts it becomes crystal clear for us that the GCC member
countries have made significant progress in the past 2 decades. The implementation of the
Economic Agreement in 2001 and the signing of the Customs Union Agreement in 2003, and
the adoption of the Common Market Agreement in 2008 are some of the major achievements
of the member countries in this regards. Since its formation progresses in several fields have
taken place. Some of the major fields include the services sector in which the intraregional
trade barriers have been removed to much extent hence the free flow and the integrative
development of the services sector within the region has become a reality. On the flip side of
the coin the share of intraregional trade among the GCC countries remains relatively low as
compared to the regional trade agreements in the Western hemisphere and in Asia. From the
above mentioned fact it becomes crystal clear for us that there is a sustainedexistence of trade
barriers within the respective region which needs the attention of the member countries.
The simple solution to the removal of these trade related barriers within the region could be
summed up in the given points.
Removal of border control.
Streamlining the transport system and its associated policies.
Streamlining the trade and commerce related policies within the respective region.
Improving and enhancing the FDI related policies within the region.
In the light of the given points it becomes crystal clear for us some of the main key
recommended points in terms of improving trade and commerce related activities within the
region.

To improve the economic competitiveness of the region relevant measures including the
privatization of the public sector would be required. On the flip side of the coin enhancing the
efficiency of government in regulatory functions would be of great importance, Abolishment
of restrictions on FDI (particularly in backbone services), and relaxing rules governing
human capital mobility would formulate the stepping stone in terms of improving the overall
economic structure of the GCC region.

From the above mentioned facts and figures it becomes crystal clear for us some of the high
and lows of this respective region and some of the measures which could be taken in order to
improve the overall situation of the member countries.

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Acronyms AndAbbreviations

NO Abbreviation Details

1 ASEAN Association Of Southeast Asian Nations

2 CU Customs Union

3 FDI Foreign Direct Investment

4 GCC Gulf Cooperation Council

5 GDP Gross Domestic Product

6 IMF International Monetary Fund

7 KSA Kingdom Of Saudi Arabia

8 MENA Middle East And North Africa

9 MU Monetary Union

10 UAE United Arab Emirates

11 WTO World Trade Organization

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Appendix

Exhibit 1

Exhibit 2

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Exhibit 3

Impulse response functions (6 GCC countries): Responses to innovations in world real GDP
growth.

Exhibit 4

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Exhibit 5

Exhibit 6

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Turn-tin Receipt

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