A Scorecard of GCC Economic Integration
Economic integration offers a range of benefits for countries, primarily by streamlining the flow of goods, labor, capital, and ideas within those countries, and by allowing them to negotiate with global markets as a collective whole. The Gulf Cooperation Council (GCC) is in an excellent position to realize these benefits, as it consists of six dynamic yet relatively small economies. However, although the region has made some progress toward economic integration, the process has recently lost momentum. This Ideation Center Insight analyzes integration efforts in the GCC along five core dimensions: a monetary union; customs and borders; intra-regional investment; joint infrastructure; and knowledge cooperation. Despite the efforts undertaken toward economic integration and the progress achieved to date, our analysis shows that the GCC has fallen short of its ambitious targets on some key parameters. To invigorate the region’s commitment to integration, we recommend redoubling efforts toward the monetary union, improving coordination of customs and border policy, promoting greater intra-regional investment, fulfilling joint infrastructure commitments, and increasing collective research and development functions. Despite challenges that integrated regional bodies such as the European Union are now facing, in large part because of the financial crisis, economic integration remains a worthy enterprise for the Gulf states.
The Benefits of Economic Integration for the GCC
With the eurozone running up against new challenges and protectionist tendencies on the rise worldwide, this may seem like an inopportune time to assess and promote the merits of economic integration. Understood as the linking of several national economies into a larger single entity, integration has drawn recent criticism, as regional alliances such as the EU have shown the inevitable strains inherent in grouping countries with disparate agendas. However, this recent history unfairly overshadows the substantial economic, political, and strategic benefits that economic integration has brought about in many parts of the world.In Europe, for example, the EU common market has directly generated 2.75 million new jobs over a 15-year period and 2.2 percent of additional GDP. These gains were due in particular to the standardization of customs and border regulations, which facilitated the movement of goods, services, and labor between nations. Because integration essentially removes the administrative barriers to commerce, it leads to a larger market and more competition among contiguous economies, resulting in better quality goods and services for consumers at lower prices. In addition, the introduction of the euro and a monetary union contributed to a 5 percent to 10 percent increase in trade.
Another benefit comes in the form of R&D efforts. Integrated regional economies can more effectively coordinate R&D ventures in order to spur economic development3 and attract further private-sector investments. In the EU, coordinated transnational efforts such as CERN (European Organization for Nuclear Research); the European Space Agency; and the transnational company EADS, which owns Airbus, have led to substantial gains in the region.
Many of these benefits would directly apply to countries within the GCC, which has been increasing in stature and economic clout recently. Today the GCC is a thriving region with nearly 40 million residents across an area of 2.6 million square kilometers and a nominal GDP of approximately US$1 trillion. Per capita GDP has increased by 45 percent over the past decade, to $42,000 in 2010, and is expected to reach $54,000 by 2015. More important, the GCC controls almost 40 percent of the world’s proven oil reserves, 20 percent of gas reserves, and close to 40 percent of the global financial reserves, making it an important financial and economic bloc on the world stage.
The flow of foreign direct investment (FDI) in recent years also shows the increasing relevance of the region. For the entire Middle East and North Africa (MENA), FDI increased roughly sixfold from 2004 to 2008. GCC trade with the emerging markets such as China, India, and other South Asian developing countries has risen by 48 percent from 2005 to 2008, while public and private GCC companies, especially in the telecom sector, have expanded their economic activities across the MENA region and beyond. Additionally, GCC sovereign wealth funds have become global players, investing billions of dollars in Western corporations.
The region has been rising in global prominence in less quantifiable ways as well. Dubai and Abu Dhabi have become internationally renowned for tourism and business, Saudi Arabia is now a member of the G20, and Qatar won the right to host the 2022 FIFA World Cup. These elements will put a spotlight on the GCC, leading to potential economic gains that can be supercharged through better regional coordination among members.
There are two other arguments in favor of integration throughout the GCC region. First, unlike other groups of countries, the six member states have more socioeconomic similarities than differences, sharing a common heritage and history as well as similar types of political systems. Second, oil continues to account for 50 percent of the region’s GDP and 80 percent of fiscal export revenues, leaving the GCC members vulnerable to global economic slowdowns. Economic integration has the potential to reduce that vulnerability, by increasing intra-GCC trade, investment, and development, especially in new or emerging sectors.
Article Index
- Executive Summary
- The Benefits of Economic Integration for the GCC
- The GCC’S Long Road to Integration
- Paths to Integration
- Exhibit A - GCC Integration Efforts Are Relatively Young
- Monetary Union
- Customs and Borders
- Exhibit 1 - Intra-GCC Trade Is Rising but Small Compared to Total Trade
- Intra-regional Investment
- Exhibit 2 - M&A Activities in GCC Countries
- Joint Infrastructure
- Knowledge Cooperation
- Overall GCC Integration
- Conclusion
Author Profiles
Richard Shediac is a senior partner with Booz & Company in Abu Dhabi. He leads the firm’s public-sector activities in the Middle East region, with a focus on public policy, socioeconomic development, and organizational
effectiveness.
Parag Khanna is a senior research fellow at the New America Foundation in New York and the author of The Second World: How Emerging Powers Are Redefining Global Competition in the 21st Century (Random House, 2009) and How to Run the World: Charting a Course to the Next Renaissance (Random House, 2011).
Taufiq Rahim is a visiting fellow at the Dubai School of Government and a political analyst based in Dubai. He
has worked extensively across the social, public, and private sectors in the region, and focuses his current research on the political economy of the Middle East.
Hatem Samman is the director of the Booz & Company Ideation Center. He is based in Dubai. As a lead economist, he has written extensively on policy issues across diverse economic sectors.
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