June 9, 2011On the road to economic integration in the Gulf
By aligning common interests, the GCC will be able to negotiate favourable agreements with larger economic counterparts
With the Eurozone running up against new challenges and protectionist tendencies on the rise worldwide, the merits of economic integration, in which several national economies agree to coalesce into a larger single entity, have recently been called into question.
But this context unfairly overshadows the substantial economic and strategic benefits that integration has brought about in many parts of the world — including the EU.
Integration in the EU has seen the creation of 2.75 million new jobs and 2.2 per cent of additional GDP as a direct result of integration efforts that facilitated the movement of goods, services and labour between countries.
As the GCC reaches its 30th birthday, it is a good moment for its six member countries to pause and consider whether they have successfully created a strong, regional bloc that can bolster their individual impacts on the global economy.
A recent Booz & Company study ranked the region's overall integration efforts on a scale of 1 to 5, with a score of 1 indicating a major setback to the goal or stagnation of process and 5 indicating accomplishment or near completion of the goal. Overal, it found the region to have achieved a score of 2.9.
It has certainly made progress in several areas; in January 2008, for instance, the launch of the Gulf Common Market ensured "economic equality" for GCC citizens, specifically employment rights and free movement among member states.
Other less formal benefits are evident as well. The UAE has benefited from tourism, real estate deals, and business investment originating in other GCC countries. Similarly, Bahrain's banking sector has benefited from wider economic activities across the GCC, carving out a niche as the regional center for Islamic finance.
Mixed results
Meanwhile, other efforts have seen mixed results. In particular, a common currency for the region was to have been in place by the end of 2010. That deadline has passed, and there is no clear indication that a single currency will be implemented in the next few years.
Overall, the region's admirable growth in the past decade represents the efforts of six individual states, rather than a coherent and aligned group operating as an integrated economic entity. More comprehensive integration has the potential to boost the region's economy much as it did for the EU. In short, there is an opportunity cost to not integrating further.
Using the same 1 to 5 scale, we have ranked the GCC's integration efforts in five areas, and noted what needs to be done to push these initiatives further.
Monetary union (2.8)
At the GCC summit in December 2001, the six member states voted to establish a unified currency by 2010, as well as create a GCC-level central bank that would manage fiscal policy across the Gulf. However, in both areas the GCC has seen limited progress thus far. To move forward, member states must harmonise their legal and regulatory infrastructures, which will make it easier for the GCC financial sector to establish a robust system of payments and links among their financial markets.
Customs and borders (3.0)
Intra-GCC trade is on the rise, but it has never exceeded 10 per cent of total nominal trade value for the region. By comparison, blocs such as ASEAN and EU-15 generate 23 per cent and 57 per cent, respectively, of their overall trade from within their regions. Removing barriers to trade will be critical to boosting this percentage in the GCC. Member states must simplify and standardize customs processes and exchange information across borders. They should also craft government regulations and policies that can help liberalize targeted economic sectors, and provide incentives for regional investments to bring vitality to untapped sectors of the GCC economies.
Intra-regional investment (3.0)
Mergers and acquisitions activity in the GCC has been strong across all industry sectors, with a total value of $26.4 billion (Dh96.95 billion) from 2000 to 2008. Yet this regional investment has happened despite a lack of formal coordination, and overall financial integration for the region remains inconsistent. The GCC should work to harmonise laws on the investment and ownership of GCC companies in all sectors.
The recent GCC Supreme Council decision in December 2010 to allow regional businesses to establish branches in other member states on an equal footing with national firms is an important first step.
Joint infrastructure (3.6)
Joint infrastructure is the area of integration in which the GCC has made the most progress. The Interconnection Project, a new $1.4 billion electricity grid, will eventually link all six countries. In transportation, Qatar and Bahrain are planning a $4 billion causeway and high-speed rail link that will connect the two countries; Bahrain and Saudi Arabia will expand their shared King Fahd causeway; Oman aims to launch a super-expressway connecting Muscat and the UAE by 2015; and the GCC as a whole is planning a 2,117-kilometre railway network to be built by 2017.
The GCC should build on the success of these projects and consider creating an infrastructure monitoring board to evaluate and spur progress on large-scale regional infrastructure projects.
Knowledge cooperation (2.3)
Individually, GCC countries have invested heavily in research and development (R&D) in recent years. But the GCC has not developed a flagship regional institute for joint R&D spending, despite the common economic and social interests of member states.
Although state-level R&D efforts can spur competition, they can also create the risk of cannibalism and overlapping technologies in the absence of any regional coordination. Moreover, individual member states will face high hurdles from global competition, whereas a unified GCC will be able to compete more effectively. Accordingly, the GCC should establish a regional research institution to promote, fund, and assess collaborative projects that can enhance socioeconomic collaboration between member countries.
Only by aligning their common interests will the members of the GCC be able to negotiate favourable agreements with larger economic counterparts such as the EU and ASEAN. As global economic competition intensifies, GCC countries must strive for broad economic integration, which will enable the six member states to better face future socioeconomic challenges.
The writers are Senior Partner at Booz & Company and Director of the Booz & Company Ideation Center respectively
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