Thursday, January 24, 2008
Looks Good on Paper: The advent of the Gulf Common Market(GCM)
Executive magazine February 2008
By Paul Cochrane in Kuwait City and Beirut
There were no celebrations, media coverage was minimal, and border crossings weren’t noticeably busier than any other new year’s day. But there is a flag, there are plans for a common currency, and there is certainly much ambiguity in the air about the launch of the Gulf Cooperation Council Common Market, which, for the lack of an official abbreviation, will be referred to as the Gulf Common Market, the GCM.
The GCM came into affect on January 1, after 27 years in the pipeline, with the lofty aim of becoming the region’s equivalent of the European Union. At the present the common market resembles the European Economic Community (EEC), the forerunner of the EU, or for that matter other regional blocs, such as the Central American Common Market (CACM), the Association of South East Asian Nations (ASEAN), the Union of South American Nations (Unasul), and the North American Free Trade Agreement (NAFTA).
The GCM has a structure, a secretariat, a Supreme Council, and free trade, but like other regional blocs the goal of greater economic and political unification appears to be years away despite this year’s development.
Indeed, since the establishment in 1981 of the Cooperation Council for the Arab Gulf States, to use its official title, the regional body has to a large degree failed in its objectives, which, much like the EEC, were initially not about economic unification but rather to act as a forum for conflict prevention. After all, the body was established following a proposal by Saudi Arabia for an internal security pact among the Gulf monarchies after the armed uprising in Mecca in late 1979, and given further impetus after the Iran-Iraq war erupted in 1980.
The objectives of the council were to coordinate internal security, procurement of arms and national economies of member states, and to settle border disputes under the leadership of the Supreme Council. Yet despite the creation of a Saudi-led Rapid Deployment Force in 1984, the GCC could not broker a ceasefire between Baghdad and Tehran, and failed to present a united front in 1990 when Iraq invaded Kuwait. Even a committee to facilitate talks between Iran and the UAE over Iranian military exercises in the Straits of Hormuz in 1999 came to nothing.
However, this time the GCC’s objectives are to do with economics and the free movement of people, aims the region has been moving towards following a customs union agreement in 2003, a condition set by the EU for a FTA between the two blocs. For the GCM means that GCC citizens are now able to: live in any of the GCC countries as well as work in either the private or public sectors; buy and sell real estate; freely move capital; access preferential taxation details; own stock and form corporations in any member state; and access education, health and social services.
This is all very commendable, and the GCM certainly has a lot going for it, with a population of 35.1 million people, a combined economy of $715 billion, and an estimated 484 billion barrels of oil, more than half of the oil reserves of the Organization of Petroleum Exporting Countries (OPEC). Furthermore, with booming economies on the back of high oil prices, in addition to massive government surpluses, the GCM has real potential to succeed, at least on paper. But as analysts and businessmen point out, there is a great deal of difference between rhetoric and the facts on the ground.
“The GCM is supposed to create more business, more movement, but so many things have to be levelled and if not enough awareness is created, will not leverage the benefits of a common market,” said Dr. Fadi Makki, Senior Associate with Booz Allen Hamilton.
Time to unite
The biggest stumbling block of the GCM was evident at the very meeting that decided on the market’s launch this year. The annual GCC summit, in Doha in December, failed to provide any leadership on the challenges the Gulf is facing, namely a decline in currency values and rising inflation. For the GCC, Qatar and Dubai in particular, these dual issues are of major importance, making the region less competitive in attracting skilled foreign labor. Equally, the depreciation in the dollar has had an impact on unskilled workers, with laborers striking last year in the UAE over the greenback’s slump (two years ago the Indian Rupee was valued at 44 to the dollar, compared to the current 39 Rps).
What the summit did achieve was a controversial proposal, by Bahrain, for a six-year residency cap on unskilled expatriate workers, and a focus on rapprochement with Iran. Indeed, Iran attended the summit for the first time, a significant indicator of the current, and future, importance of solid relations between Tehran and its southern neighbors. Equally, with the Bush administration still keeping pressure on Tehran - the use of force, we are told, is still on the table - Iran’s attendance sent mixed signals from the Gulf, particularly at a time when the region is acquiring $20 billion in arms from the US.
Just as puzzling as the summit’s inability to tackle pressing financial issues were the statements about a common currency for the GCC, the ‘Gulf riyal.’ Although Gulf leaders issued a public communiqué at the summit that reaffirmed commitment to a 2010 deadline for a monetary union, a classified document leaked to UAE daily Emirates Business 24/7 showed that finance ministers had told heads of state that the GCC would not be ready by 2010. No deadline was given in the report, but if an interview given by the governor of the UAE Central Bank late last year is anything to go by, he said the GCC was unlikely to have a single currency by 2015.
This is not overly surprising, given Oman’s decision in 2006 to opt out of the common currency over concerns that spending targets would constrain economic growth, and last year’s decision by Kuwait to de-peg its currency from the greenback, citing inflationary pressure.
Therein lies the crux of the problems the GCM faces: Gulf countries are still acting independently of one another on economic and political policies.
“There is of course a large degree of liberalization, on tariffs (to zero), on services, establishing a business in another GCC country,” said Makki. “But now there is more work to be done, just as when the European market started, through stronger institutions, which have to be put in place. This will be essential to keep the momentum going, otherwise there is a tendency for capital protectionist initiatives. And a lot of things will have to be done differently, such as trade agreements being done separately, that will have to come to an end.”
Indeed, some developments currently underway in the region are at odds with the very aims of the GCM. Bahrain for instance has just proposed a dual price plan where non-nationals will be charged more for basic commodities than Bahrainis. Although aimed at expatriates, the proposal is for nationals only, not GCC citizens, flying in the face of the rights entitled to them under the GCM.
Then there is an issue that goes to the very heart of the GCM – the movement of people and goods, which was supposed to have been fast tracked when a customs union was introduced.
“They implemented GCC customs unification four years ago, and there are still hiccups,” said Ahmad Hammauda, Assistant Managing Director of Global Logistics Services and Warehousing in Kuwait. “If we go to Dubai today, as a Kuwaiti company - a GCC company - we cannot have our own trucks in Dubai, you have to have an Emirati guy with you. The same was true for Saudi Arabia but the law was changed five months ago, now allowing GCC trucks into Saudi. We are building a depot in the Dubai World Center, but that is a free zone, whereas in Dubai we can’t - how free is that?”
Furthermore, the construction of barriers in the Gulf is presenting, quite literally, a physical obstacle for the GCM, with Saudi Arabia to spend between $10-$15 billion to secure its 6,500 kilometer border, which includes three GCC countries, the UAE, Kuwait and Oman, and potential future GCM members Yemen and Iraq.
“I’m pessimistic for security reasons. Saudi Arabia is building a wall with Iraq, Kuwait with Iraq and maybe there will be one between Syria and Lebanon. All this putting up of walls is not good for removing borders,” said Hammauda. “We hope that things will be easier. It would be great if goods can move freely within the GCC, but I don’t think that will happen anytime soon. In my book the common market is similar to the EU or the US - a common market without borders,” he added.
Indeed, the postponement of the EU-GCC FTA is not only over the EU adding new conditions. Notably, the EU have pointed out a lack of coordination and uniformity among GCC countries as well as differences between governments in certain sectors such as labor laws, copyright and property rights.
As Eckart Woertz, program manager in economics at the Gulf Research Center, pointed out: “Legal codes and judicial regulations all need to be amended.”
Boom times ahead?
The need to amend GCM laws is crucial for the common market to flourish, particularly inter-regionally. Currently, trade between GCC states represents about 10% of overall foreign trade, which is expected to surge to 25% in the next two years, according to Bahrain’s chamber of commerce and industry, bolstered by the GCM.
The GCM is also expected to be a boon for neighboring countries.
“It will encourage countries to go in the same direction,” said Makki.
“The GCM is symbolic, the first of its kind in the area, moving towards ever closer coordination and countries giving up some of their sovereign powers - that is very significant.”
But before this happens along the lines of the EU – with the potential for expansion of the bloc on the cards, as the EU has done in the past decade – the GCC will need to liberalize further.
Woertz said that cross-border mergers are likely to improve if capital markets get closer together, or even establish a GCC integrated stock market.
“It would help if there were some inter-linkages, trading platforms and so on. At the moment its pretty much fragmented. If they wanted to develop and attract international investment, the GCC would need to do something there,” said Woertz.
Equally, the free movement of capital needs to be addressed by regulatory authorities, as a true common market would allow banks and financial services to set up in any GCC country.
The aim of giving GCC citizens equal rights in buying and selling property as well as shares also needs to be addressed. Currently, Dubai and Abu Dhabi allows international investors to buy combined stakes of 49% in listed companies, while certain companies are restricted to UAE citizens. Saudi Arabia however, the seat of the GCM, has allowed GCC citizens to buy and sell shares since September last year, and Qatar allows foreign investors up to 25% of a company’s shares. But only four bourses allow cross listing of shares – Bahrain, Dubai, Abu Dhabi and Kuwait.
This will all change though when institutions are created to unify the GCM, such as a central bank, courts of justice and a country chosen to represent, on a rotational basis, leadership of the GCM.
“Imagine how the GCM can negotiate with just one negotiator? They would have a lot of weight in a number of international institutions – the WTO, future trade negotiations with the EU and the US, and elsewhere,” said Makki. “Even in non-trade related institutions, the IMF, World Bank, OPEC. The GCC role in all these financial institutions is likely to grow, and grow significantly, but all depends on how coordinated their stance is vis a vis the issues that are at stake, so really the sky is the limit.”
Ultimately, the GCM has much going for it – a common language, bourgeoning economies and the ability to act as powerful bloc on the world stage. But before the GCM can progress, the political will needs to be there, along with a clear vision for GCC citizens of what the common market is all about.
“What does this common market mean? I’ve not heard much,” admitted Hammauda. “I heard one currency, and moving goods without documentation, but that is not there. We haven‘t heard anything that this might change. I don’t know what the GCM means to be frank.”
Gulf Cooperation Council – quick facts
Established: 26 May 1981
Members : Saudi Arabia, Kuwait, UAE, Oman, Bahrain and Qatar
Possible future members: Yemen, Iraq
Population: 35.1 million (GCC citizens 60%)
Total surface area: 1.04 million square miles
Combined economy: $715 billion
Combined oil reserves: 484 billion barrels (est.)
Current GCC trade: 10% of overall foreign trade
Source: AFP, Executive
GCC Common Market – What it means for GCC citizens
Citizens can move/reside without restrictions in any GCC country
Citizens have employment rights in either private or public organizations in the GCC
Citizens can engaged in all professions, economic, investment and service activities, and can buy and sell real estate in all member countries
Free movement of capital
Citizens are entitled to preferential taxation
Citizens can own stocks and form corporations in any member state
Citizens are entitled to education, health and social services in any member state