Gulf Cooperation Council’s Regional Integration

Main Features of Gulf Cooperation Council (GCC) Economies

The GCC countries are high income hydrocarbon-based economics. This is because of high economic and current accumulation of surplus account among the Gulf economies countries in the previous years (Miller & Kaia 2006, p. 324).The public expenditure derived primarily and social infrastructure required for private sector development. The Gulf Cooperation Council has several other structural features that include: young and rapidly growing labor force, high reliance on foreign labor and a large public sector.

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The Council of Gulf Cooperation consists of several Arabic countries that share cultural and historical ties and focus on developing a more diversified economic bloc over time. These countries include: Bahrain, Qatar, Saudi Arabia, Kuwait, Oman, and the United Arab Emirates (UAE). They had a high population of above 35 million in 2007, which is about 10% of MENA and a gross domestic product of about 826 billion dollars (Al-Saleh, Yasser, Taleb & Hanan 2010, p. 55). These countries also depend on a universal expatriate labor that poses big challenge. Members of Gulf Council Cooperation share policies of open immigration for temporary work.

The political and social backgrounds of Gulf Council Cooperation countries have many characteristics because most of these countries are ruled by traditional monarch with the government taking a very important position in monetary activities. A progressive political activity within the gulf members has enabled creation of balance between the desire for more vigorous debates on the key areas and customary consensus building approach on decision making (Marashdeh, Hazem, Shrestha & Min 2010, p. 105). Though, the formal structure of the four states is well developed, Bahrain and Kuwait have the highest political systems consisting of an electoral system of parliament, a free press, and a written constitution.

The economic policies among the Gulf Council Cooperation members are common and reflect their circumstances to a large extent. The rate of total imports to total exports reflect the degree of trade openness to gross domestic product (GDP).The common feature among the member countries include an open economy with free and fair trade, an exchange rate based on the United States dollar, and capital movements either indirect or direct (Miller & Kaia 2006, p. 326 ). The state maintains a significant role of economic activity in each of these economies. The table below shows variation in the degree of trade openness among GCC states and ranges between 73% in Kuwait to 158% in United Arab Emirates (UAE).

Country Openness (Totaltrade/GDP)
( percentage )
Hydrocarbon Exports
(as percentage of GDP)
Bahrain 136 72
Kuwait 73 93
Oman 98 65
Qatar 90 90
Saudi Arabia 85 85
UAE 158 35

Source: World Bank, World Development Indicators (2007–09)

The Council of Gulf Cooperation

According to the article of establishment the Gulf Cooperation Council (GCC) consists of three bodies which include: the supreme council, the ministerial council, and the secretariat. The supreme council is composed of the Gulf States that meet twice per year to appoint the secretary general of the GCC and provide policy directions (Al-Saleh, Yasser, Taleb & Hanan 2010, p. 54). The council resolutions are passed with a majority vote for procedural matters and undisputed vote for substantial matters. Classification of agreements signed between the member states is done on the basis of either non-mandatory or mandatory.

The second part of the council is the ministerial council that is made of foreign ministers of Gulf States and holds meeting after every three months in a year to prepare recommendations and make proposal on policy issues. Education, finance, health, labor, social affairs, and economic committees have been established at the ministerial level to submit recommendations and prepare studies to the supreme council (Miller & Kaia 2006, p. 327).

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The secretariat of Gulf Cooperation council is the executive and administrative part of governance that is charged with the duty of scheduling studies, reports, and monitoring implementations of the past decisions. This body is also charged with the duty of organizing ministerial and supreme council meetings and making background materials as well as requested studies. The secretary council is self-governed with all subscribed members having similar financial plan and therefore its responsibility corresponds to that of commission of European Union.

The Gulf Cooperation Council has several agencies that include: the metrology and standardization organization for GCC in Riyadh, Electrical systems and energy local committee has its headquarters located in Qatar, and technical telecommunication bureau in Bahrain (Abdul, Ahmed, Kari & Fatimah 2012, p. 223). These agencies are also in charge of undertaking commercial arbitration, registering patents, and designing, and implementing technical standards.

Commodity and a Service Trade Integration

Barriers on Intraregional non-tariffs are low among the GCC states because they have reduced non-tariff barriers as efforts to show their commitment to World Trade Organization (WTO) and as part of integration efforts. In an effort to establish a unified GCC technical standards and reducing customs administrative procedure an important efforts have been made.

Continued customs boarder controls and preferential practices and policies are related to subsidies on manufacturing industry and requirements on public procurement are some of the remaining non-tariff barriers that have not been cleared. Despite an increasing growth in the previous years, intraregional GCC trade flows remain small because of an increase of 30% per year in the average intraregional value of trade as compared to an increase of 6% in 2001 and 2004.The graph below illustrates the intraregional trade from 2000 to 2003 and 2004 to 2008.

Growth ofgCC Intraregional

Through establishment of a regional railway links and a dedicated trading blocs among the member states, Gulf cooperation council states could gain from intraregional trade through reduced border controls and improved enhancement in regional infrastructure. Trade would be facilitated by reaching an agreement on ratification of tariff revenue sharing methods and removal of border controls.

Service Trade

Through gradual implementation of common market agreement, the Gulf Cooperation Council (GCC) has been able to make progress in easing intraregional restrictions in service sectors. This is evident by the current status whereby the GCC members can move freely within the member countries (Miller & Kaia 2006, p. 324). Very recently, the GCC council and member states extended the list to be able to invest direct and therefore Gulf Cooperation Council states can take part in car rental, wholesale and retail trade, and cultural activities. In 2005, about 13356 citizens of other countries were granted business licenses by GCC and this number was almost two times more than 1998.

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There are several technical and political challenges that are involved in service sector liberalization that include restrictions on those states that are not full members of GCC and purchase both physical and financial resources continues to offer more challenges on liberization of service sectors (Abdul, Ahmed, Kari & Fatimah 2012, p.224 ). According to research conducted by the World Bank, it proved service trade policies were more restricted in both international and regional standards.

Another challenge is diversity of services in their method of entrance, contestability of markets and level of trade. By ensuring market, efficiency and enhancing competition GCC trade services would be improved (Abdul, Ahmed, Kari & Fatimah 2012, p.227). For successful liberalization, strong regulation and effective competition would be required to achieve liberization. This is a challenge because a competitive climate for investment requires long time to create because there must be technological advancements and strong human capital to enable development of strong backbone services.

Some of the services have progressive open ownership in some sections, which presents bloc in development of potential trade (Marashdeh, Hazem, Shrestha & Minb 2010, p. 109).Through privatization, the government has retained a high percentage of ownership, which has laid very strict rules on labor quotas and restricted private access to the service sectors. For example, in 2005, the UAE decided to limit the 30-year monopoly of emirates Telecommunication Corporation Other than marketing its telecommunication sector to large and distant operators.

Services Trade Restrictiveness indices
Source: Borchert et al. 2010, p.11

The above graph is based on a preliminary survey that was conducted by World Bank as part of a going project work (Luciani, Giacomo & Felix 2005, p. 110 ).The survey was made to address five important sectors in the economy that include: telecommunication, retail distribution, transport, and financial services. The study was based on foreign in financial, commercial, and transportation sectors of the economy.

Fiscal and Economic Integration

A banking sector with high concentration of domestic players dominates the GCC financial sector. Islamic banks control 24% on average of the regions banking system assets (Kumah & Francis 2011, p.1632).The non-banking financial sector has very low percent of ownership in GCC though, they have been constantly growing in the previous years. There are five domestic banks in the six countries that accounts for 50 to 80% of the total banking sector.

There are several variations in level of openness to foreign participation and regulatory regime in with regard to reserve requirements, payment of dividends, and borrowing by foreign individual banks. Regardless of inflows, many restrictions apply within the GCC financial system therefore hampering global and regional integration (Marashdeh, Hazem, Shrestha & Min 2010, p. 107). Since 2003, the establishment of monetary union has been a significant goal because the GCC member states already possessed the required procedure for foreign exchange sources, size similarities, inflation performance, and the structure of trade.

Debt security markets within the GCC countries are overshadowed by bank credits and equities. The investment in the secondary bond has not developed and bond markets are very shallow because the government system has drawn down the remaining debt in the previous years (Al-Saleh, Yasser, Taleb & Hanan 2010, p. 56). The stock market has an average of 40 to 80 % in other countries but in Oman and Kuwait, it ranges between 12 % of GDP and 106 % respectively. This is because there are few institutional investors in the GCC market whose objective on long-term provides stable background development of market.

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Gulf cooperation council have low movement to coordinate strategies on financial section and various states have opted to improve as local centers of finance (Luciani, Giacomo & Felix 2005, p.108). After the offshore banking flight in Beirut in 1970, Bahrain started as a financial center. From then, Doha and Dubai have continuously attracted regional operations of global financial institutions and banks. Though increase in competition has helped promote and liberate growth, it has delayed coordination efforts, policy harmonization, and Islamic standards for payment and finance.

Infrastructural Integration

Trade volumes can be developed by developing integrated intraregional infrastructure such as, roads, ports, and railways that facilitate movement of people and trade goods. The other important category of infrastructure are pipeline system, fiber optic lines and power lines that should be developed to ease the exchange of electricity, telecommunication, and natural gas (Kumah & Francis 2011, p. 1630). In the GCC countries, the transport systems is well developed with modern air facilities, land transport, and road networks. Difference in member states has caused interruption in the land transport system and there are progressive efforts that have been carried currently to develop transport systems in railway and power gas sectors.

During the last eight years, the air transport industry in the GCC countries has been progressively growing and this has been facilitated by Arab carries because they are actively playing a big role in developing this transport system (Marashdeh, Hazem, Shrestha & Min 2010, p. 104). The need by Arab countries to capture large market share in the air transport industry has provided important connectivity between the United States and Europe that previously relied on European assistant for most of its transport needs within the intercontinental service (Kumah & Francis 2011, p. 633). The GCC countries have not yet adopted Railway transport system though railway lines have been established in Saudi Arabia for freight but they have not been interconnected. The GCC states are planning to have an international railway network and countries like Saudi Arabia are progressing with integration of its individual railway network system.

The interconnection of electricity of grids is almost complete among the GCC country that is made to facilitate the exchange of electricity among the six member countries. The main objective of this connection is to advance the reliability on supply of electricity, reduce the investment need in the new generational capacity, and share the reserve capacity of member countries (Luciani, Giacomo & Felix 2005, and p. 105).

Given that the industrial strategy of GCC countries aspire to move on electricity powered generation and energy intensive industry the Gulf cooperation council has potential for cross border gas pipeline to facilitate exportation of oil (Abdul, Ahmed, Kari & Fatimah 2012, p. 228). There have been continuous efforts of constructing a larger pipeline system that includes Kuwait and Bahrain though all countries are cautious in promoting regional market for gas. Although the highest percentage of export from Qatar is moved through liquid form and the Dolphins pipe company facilitates movement of gaseous products to Oman and the United Arab Emirates.

Trends on Global Integration

External Policies on Trade

Due to small production base and limited oil returns the GCC economies have maintained low external trade tariffs. The custom union agreement that was signed in 2003 played a big role in reducing the trade tariffs because it called for established for 5% common external tariff on major merchandise imports and zero percentage on major important commodities (Genc, Ismail, Darayseh, Musa, Abual & Bassam 2011, p. 21). This resulted in a big drop from 8.2% to 5.9% and therefore, a GCC country instituted measures of diversifying basis of taxation and ensures trade harmonization in the local market, and shift from customs revenue to value added-tax.

The Gulf Cooperation council states have specialized in several liberization strategies for federal direct investment (FDI) that include creation of discrete enclaves with well established infrastructure and initiating broad reforms of national bureaucracies and laws (Kumah & Francis 2011, p. 635 ). Full application in the UAE was the next approach because it was seen as a more significant factor in diversifying emirates strategies. Energy sector investment drives important FDI flows to GCC and is evidenced as reflecting project specific and bilateral arrangement between domestic partner and foreign investor.

Among the GCC member countries, exterior regimes of trade have got variations in terms of differences in preferential and protective tariffs. Because all the Gulf cooperation Council states are World Trade Organization members, the treatment of Most Favored Nations (MFN) is serviced on basis of bilateral trade and is therefore out of organizational scope (Al-Saleh, Yasser, Taleb & Hanan 2010, p. 52). Undeveloped countires trade regimes fall under several classification that include the MFN status, free trade, and tariff preference.

Common Trade Agreement

After signatory agreement of open trade between Bahrain and Unites States of America in 2005 Gulf Cooperation Council countries made an agreement for coordination of future exterior negotiations on trade through the secretary council (Kumah & Francis 2011, p. 1630 ).Therefore, the GCC efforts to conduct common trade negotiations remains a big challenge. The GCC member countries are presently involved in an open trade discussions with Japan, New Zealand, Korea, European Union, and the United States.

The advance speed in trade agreement collection reflects limited progress in wider arrangements. This is because the Gulf Cooperation Council is managed by an executive of senior bureaucrats drawn from GCC member countries and makes it difficult to bundle common position and interests. Enforcement limitations of common relations on trade decisions which is caused by poor political interest and weak administrative capacity reflects this weakness (Miller & Kaia 2006, p. 324). Differences in development and resource strategies among the member countries and challenges on agreement on strategic economic issues are the reasons for the slow progress.

Arab World and GCC Integration

The membership of PAFTA currently includes 18 out of 22 Arab countries and the GCC countries have subscribed with PAFTA that which was founded by the league of Arab association. It began its operation from 2005 (Maghyereh, Aktham, Awartani & Basel 2012, p. 182 ).PAFTA has achieved a major progress by removing trade tariffs among its member states and trade has improved between the PAFTA members and member countries.

The GCC member states are still discussing the move by Yemen to join GCC because it enjoys special privileges and it is subscribed to full membership (Abdul, Ahmed, Kari & Fatimah 2012, p. 226). Yemen differs with other GCC countries on matters related to political régime, endowment of resources, environmental regulation, and institutional details though they have similarities on religious and cultural issues.

World Trade organization Membership

All the Gulf cooperation council states have subscribed to World Trade Organization. Trade reform commitment varies from one state to another due to difference in time of membership. The presently country being Saudi to subscribe its membership. Both Oman and Saudi Arabia have committed themselves in the service imports under GATS.The GCC states have also made a critical decision toward anti-dumping policy that should be effected by all member countries (Espinoza, Raphael, Prasad, Ananthakrishnan, Williams & Oral 2011, p. 355). The custom union helped in harmonizing policies on trade remedies, tariff, and non-tariff, rules of origin, and custom valuation. The GCC member countries established a technical office that would ensure compliance with WTO agreements on anti-dumping, measures of countervailing, and subsidies.

Not all trading partners of GCC are members of WTO. Some members like Lebanon, Algeria, Libya, Iran, and Yemen though they trading partners in the GCC, they are not members of WTO and this has led to a major complications in trading activities between these countries ( Jean, Rosmy, Balli, Faruk, Osman & Mohamed 2012, p. 319 ). For example, within the PAFTA states it is a major challenge to institute discipline by WTO.

GCC and the European Union Relations

There has been slow progress on efforts to integrate GCC with the European Union. The initial step toward this integration was agreement on corporation in 1989 that advocated for removal of trade tariffs but was never effected (Abdul, Ahmed, Kari & Fatimah 2012, p. 224). Again, between 2003 and 2004, the European Union declared its interest in linking GCC with the European Union Corporation but the pace of implementation has been slow.

The slow progress of free trade agreement between the European Union and GCC is caused by industry and sector policies over political reforms, which include; introduction of foreign labor, human rights, and civil society partnership (Mille & Kaia 2006, p. 324). Negotiations are in progress in a bid to reduce restrictions on telecommunications, banking, and procurement policies of government within the GCC countries.

Integration on Challenges and further Issues

Some issues remains outstanding even after continuous efforts to remove barriers on business tariffs and allow labor and capital to move freely among the countries. This is because the connection between the government’s role and industry competitive advantage in service (Hoekman & Khalid 2010, p.17). Some of the unresolved issues include the continuous progress by the GCC members to carry on custom and border inspection on other GCC members, undermining the implementation of a standard custom union model due to poor agreement on tariff collection and distribution mechanisms. Additionally, efforts by member countries, which continue to apply restrictive standards and procedures to restrain free trade (Luciani, Giacomo & Felix 2005, p. 103). The documentation and procedure requirements for import licensing and clearance of customs also vary.

The GCC faces political challenges in cooperation and coordination, which delays the proposed GCC multilateral accord and monetary union. The GCC faces a major challenge due to lack of transparent and supportive policies to facilitate development of balanced trade (Miller & Kaia 2006, p. 322). This is because the local reinforcement was biased and favored mostly Bahrain and Oman. There are some missing elements such as, social protection mechanisms and environment is important to policy implementation, laws, and strategies though member countries have worked hard to bring their laws and policies together to achieve harmonization.

Conclusion

Following the adoption of common economic agreement in 2001, acceptance of accord on universal trading market in 2003, and the signing of the accord on customs union in 2003 effort on integration have gained a very considerable momentum. Since GCC was established in 1981, it has achieved a lot on regional integration. In Asia and western hemisphere, the share of intraregional trade remains very low due to the continued barriers, narrow economic base, and weak complementariness. Through deeper economic, GCC should address lack of complementarities because they help in enhancing economic competitiveness and boost the trading potential. The GCC has made progress by removing intraregional restrictions in the service sector due to the establishment of common market, which advocated for equity and similar tax payment.

List of References

Abdul, S, Ahmed, S & Fatimah, K 2012, ‘Analysis of Intensity of Intra-Regional Trade in GCC Countries’, International Journal of Trade, Economics & Finance, vol. 3 no. 3, pp.223 -230.

Al-Saleh, Y, Taleb, M & Hanan, M 2010, ‘The Integration of Sustainability within Value Management Practices: A Study of Experienced Value Managers In The GCC Countries’, Project Management Journal, vol. 41 no. 2, pp. 50-59.

Espinoza, R et al. 2011, ‘Regional Financial Integration in the GCC’, Emerging Markets Review, vol. 12, no. 4, pp. 354-368.

Genc, L et al. 2011, ‘The Nature of Trends In The Per Capita Real GDP Of Gulf Cooperation Council (GCC) Countries: Some Evidence And Implications’, Journal of Developing Areas, vol.45, no.1, pp. 19 -33.

Hoekman, L & Khalid, S 2010, ‘Arab Economic Integration: Missing Links’, Centre for Economic Policy Research Discussion Paper No. 7807, pp.16-35.

Jean, L, Rosmy, B, Faruk, O & Mohamed, F 2012, ‘On The Feasibility Of Monetary Union Among Gulf Cooperation Council (GCC) Countries: Does The Symmetry Of Shocks Extend To The Non-Oil Sector?’, Journal Of Economics And Finance, vol. 36, no. 2, pp. 319-334.

Kumah, F 2011, ‘Real Exchange Rate Assessment in the GCC Countries: A Trade Elasticities Approach’, Applied Economics, vol. 43, no.13, pp. 1629-1646.

Luciani, G & Felix, N 2005, ‘The EU and the GCC’, A New Partnersh Bertelsmann Stiftung and Center for Applied Policy Research, in cooperation with the Robert Schuman Centre for Advanced Studies, pp. 100-120.

Maghyereh, A, Awartani, I & Basel 2012, ‘Financial Integration of GCC Banking Markets: A Non-Parametric Bootstrap Dea Estimation Approach’, Research in International Business & Finance, vol. 26, no.2, pp.181-188.

Marashdeh, H, Shrestha, A & Min, B 2010, ‘Stock Market Integration in the GCC Countries’, International Research Journal of Finance & Economics, vol. 13, no. 7, pp.102-114.

Miller, K 2006, ‘Building National and Regional Competitiveness in the GCC and Yemen: Opportunities for Partnership. 2010, Opportunities for Partnership’, Presented at the Yemen Consultative Group Meeting pp. 321-330.

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