Taking the GCC vision forward

18 May 2011

With increasing pressure to shift the focus towards a more formalised union, developing a clearer idea of the GCC’s future direction could help ensure another 30 years of regional stability

The GCC charter is modest in ambition. Rather than focusing on lofty long-term objectives, the GCC’s founding fathers aimed firmly at the practical level – to effect co-ordination, integration and inter-connection between member states in all fields, strengthening ties between peoples and formulating similar regulations.

Thirty years is a good point to maybe call a time out and say, where are we really heading over the next 30 years?

Christian Koch, Gulf Research Centre

The focus over the past 30 years has been on breaking down barriers, rather than charting a long-term policy direction for the six member states. Relatively little effort has been expended in refashioning the member states’ separate political and economic systems into a unified bloc greater than the sum of its parts.

The essentially defensive origins of the GCC – formed in response to the failure of Iraq to achieve a speedy victory in the 1980-88 Iran-Iraq war – played a key role in shaping this conservative outlook.

Building confidence

An emphasis on the practical made sense during the often tricky process of achieving symbiosis between six states with divergent priorities, sizes and backgrounds. It has also helped to build confidence across borders, with step-by-step measures doing much to imbue the GCC concept with credibility and legitimacy.

These efforts have created their own momentum and helped to forge an agenda for more widespread and long-lasting co-ordination. This has shifted the GCC’s goals from co-operation towards a more formalised union – binding the six into a tighter embrace that could eventually erode the power of the nation-states, just as the EU’s member states have been forced to cede political and economic control to the European Commission.

Borders have to be open and there has to be greater impetus given to labour and capital mobility

John Sfakianakis, Banque Saudi Fransi

But the 2011 Arab uprisings have highlighted flaws in existing institutional arrangements across the Middle East and North Africa region. The GCC needs to think strategically about future challenges; the protests are unlikely to prove a temporary phenomenon and the crisis’ social underpinnings will not be erased with brute force and cash.

As the leaders of the six GCC states grapple with the need to devise a new social contract with their people, they will be forced to address the structural challenges of unemployment and economic exclusion that threaten to undermine the stability that has been the GCC’s undoubted achievement.

An early indication of how the GCC might respond was revealed in the announcement of a $20bn fund to assist development, which has an immediate focus on the two Gulf states most affected by the protests: Bahrain and Oman. GCC ministers announced in March they would aim to prevent the causes of the unrest through their own version of the ‘Marshall Plan’, [US-funded European construction programme after the Second World War] under which the wealthiest GCC states would pour resources into addressing key economic and social problems that extend beyond the Arabian peninsula.

Realising the dire threat that social and political discord poses to the Gulf’s security, the GCC has to ensure that its political and economic arrangements are made fit for purpose.  

The positive to be gleaned from the recent unrest is that – as in 1981, when the threat from Iran triggered the formation of the GCC – the body responds best when a crisis is brewing. A renewed sense of purpose may serve the GCC well as it seeks to meet the economic, social and political challenges of the next 30 years.

Now may be as good a time as any to set out a plan for the GCC’s future development. “The GCC has been a very flexible organisation, in the sense that it has served members’ interests, but they do need to think about what the next stage of development could be,” says Christian Koch, director of international studies at the Dubai-based Gulf Research Centre. “Thirty years is a good point to call a time out and say, where are we really heading over the next 30 years?”

GCC integration projects

The GCC has already laid out a series of deadlines on centrepiece projects, designed to deepen integration. After failing to achieve monetary union by its original 2010 target date, efforts are now focused on implementing a single currency by 2015. The GCC railway project, linking the member states via a 2,000-kilometre network, meanwhile, is intended to be completed by 2017.

Despite the failure to hit the 2010 monetary union deadline and the exiting of the UAE and Oman from the project, the focus on creating the unified GCC currency – the khaleeji – reflects the importance placed by leaders on economic integration. The GCC Monetary Council, formed last year as a precursor to a central bank, envisages monetary union as the key pillar of economic integration.

The GCC needs to deepen integration beyond the level of the customs union and this means creating the edifice of a single fiscal and monetary system. A single currency is unlikely to succeed unless a broader fiscal integration is effected. The European experience highlights the need for a unified fiscal policy to support a single monetary policy.  

The GCC states will also need to focus on improving existing arrangements, such as the GCC Common Market, which has been operational since 2008. More progress is needed in bolstering trade and facilitating greater freedom of movement of both capital and labour. Figures from the European Commission show that in 2009, 15.9 per cent of GCC trade was with EU countries. In contrast, the UAE made up only 2.1 per cent of total trade with the GCC.

Removing trade barriers in the GCC

The same rule applies to the customs union that has been in place since 2004. At the GCC summit in Abu Dhabi in December 2010, the Supreme Council encouraged members to speed up work on developing the customs union and the removal of barriers to facilitate trade among member states and with other foreign countries – overcoming the bickering that has hindered the effectiveness of the customs union.

“What’s important is for regulations and laws to be uniform,” says John Sfakianakis, chief economist at Riyadh-based Banque Saudi Fransi. “There has to be cohesion and harmony in terms of the customs union. Borders have to be open and there has to be greater impetus given to labour and capital mobility.”

The emphasis on implementation and clearing up existing blocks to development is as critical as the grand vision of monetary union.

One area of future focus is regulatory harmonisation in financial services. Although there has been progress on this front in recent years – it is now legally possible for a Gulf bank to set up shop in other GCC countries – the practicalities can be prohibitive. “There’s still a lot of red tape,” says Jarmo Kotilaine, chief economist at Jeddah-based National Commercial Bank. “In Saudi Arabia, for example, every bank branch has to be separately authorised. With greater momentum behind it, regulatory harmonisation could deliver something fairly significant in the financial services sector.”

Another area of missed opportunity is cross-border mergers and acquisitions. Turning regional companies into bigger players, able to reap the benefits of economies of scale at home and to expand abroad, should figure prominently in the GCC’s future development trajectory. At present, there is not a single pan-GCC bank operating across all six member states.

Integration of capital markets looms as another challenge. Key to developing capital markets is the harmonisation of regulations, beyond the merger of individual exchanges. Hopes are high that once the Abu Dhabi and Dubai stock markets merge, there will be more momentum in this direction.  

Deepening labour market integration will also figure prominently in the GCC’s future development ambitions. Although a unified labour market exists on paper, in reality movement across borders is minimal. One of the main problems preventing greater harmony is that differences between the GCC states are not large enough to encourage significant movement of workers.

“This is an important area because eventually, once you have economies that act more in cohesion with each other, you will have labour mobility, which is key to the whole project,” says Sfakianakis. “Labour mobility is as important as customs union and capital mobility. You should be able to send capital and labour across borders and it’s an important hallmark for a trading bloc, whether the GCC or EU.”

With Bahrain taking over the leadership of the GCC, Manama will be tasked with steering the integration process.

Future direction for the GCC

The political turmoil across the region in 2011 has created a clamour for more concerted GCC action to support regional economies in distress. This too will raise questions as to where the GCC sees itself in the context of the broader region. With Yemen in crisis, right on the Gulf states’ doorstep, such issues have risen up the agenda. 

Gulf policy makers will come under growing pressure to shift the GCC’s focus away from co-operation and towards a formalised union. “In the GCC, there has never been much emphasis on building a fully fledged union, but in order to see how some of the issues that prevent the GCC from really functioning as a regional unit can be overcome, it might be useful for the leaderships to get together and decide where they are heading,” says Koch.

There is still no overarching vision of the GCC’s future direction and the tendency is to undertake a project on its own merits, rather than imagine what integration would ultimately look like and how individual projects could serve that aim. 

Having a clearer idea of the ultimate objective of currency union – a unified economic bloc supported by the free movement of capital, goods and labour – could help the GCC deliver another 30 years of regional stability.

Formulating a clear-eyed strategy for a more assertive GCC that goes beyond what its critics allege it is – essentially a club protecting the interests of its ruling families – is perhaps the starkest challenge facing Gulf policy makers. “Whether these things can be achieved via grand statements and visions, or one step at a time, is something that could be debated,” says Kotilaine. “Maybe you need a bit of both – you need the goals to aspire to, but at same time, these goals are not enough on their own. You also need to get down to the nitty-gritty.”

The GCC – An expanding club?

In mid-May, GCC secretary-general Abdul Latif bin Rashid al-Zayani reacted positively to requests from Jordan and Morocco to be included in the political and economic bloc. “Leaders of the GCC welcomed the request of the Hashemite Kingdom of Jordan to join the council and instructed the foreign ministers to enter into negotiations to complete the procedures,” Al-Zayani said at the end of the 13th annual GCC Consultative Summit, held in the Saudi capital Riyadh. He added that the same procedure would be followed with Morocco. Also high on the meeting’s agenda was how to resolve the political crisis in Yemen, another country that has long wished to join the GCC.

Despite the positive pronouncement, an enlargement of the GCC is unlikely anytime soon. Yemen made its first formal bid to join the GCC in 1996 and although it has since been admitted to many committees and a tentative 2015 date for accession was set at a council meeting in 2005, full membership remains as distant a prospect as ever.

The GCC has much to learn from the EU’s expansion experiences. The entrance of poorer nations has put immense financial strain on the union, particularly in the wake of the 2008-09 recession, and the most recent expansion resulted in a massive wave of immigration from Eastern Europe westwards. As heavily indebted non-oil economies, the inclusion of Jordan, Morocco and Yemen could have a similar impact. When considering potential new members, the Supreme Council will need to weigh the benefits of a wider Arab political alliance against the disadvantages of greater economic vulnerability.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications