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Counting the cost of a closer Union

May 2012

Closer GCC integration could be to the bloc's economic detriment
The six states of the Gulf Co-operation Council (GCC) have emerged as influential regional and international actors over the past decade. Led by Qatar and the United Arab Emirates, they have invested heavily in struggling western economies, built up enormous capital accumulations during the post-2003 oil price boom, and contain some of the world's largest conventional supplies of oil and natural gas. Their relative stability and pro-western orientation has also enhanced their geo-strategic attractiveness as relatively secure places to do business in a volatile region.

Set against this optimistic backdrop, however, is the political upheaval and age of uncertainty affecting the Arab world. Although the uprisings have yet to seriously impact the GCC states, with the exception of Bahrain, they have generated a reassessment of the mechanisms of regional cooperation. Last May's announcement that the GCC would invite membership bids from Jordan and Morocco surprised many observers, while in December Saudi Arabia's King Abdullah suggested a shift towards a 'single entity.'

At first glance, the GCC states would appear to be well positioned to move towards closer union. Unlike the 27 members of the European Union, they share common linguistic and socio-cultural characteristics and underlying structural similarities in their economies. In addition, they declared a customs union in 2003 and launched a common market in 2008, while in 2009 they formed a Monetary Council as a first step towards an eventual shared currency. That was supposed to launch in 2010, but has been delayed as first Oman, and then the UAE, withdrew from the project.

Yet several challenges complicate the move towards greater regional integration, and may even impede the emergence of individual GCC states as world trading hubs. The structural similarities in Gulf economies mean there is at present very little intra-regional trade. Hence, with the partial exception of the transfer of liquefied natural gas (LNG) from Qatar to Oman and the UAE via the Dolphin pipeline, the links binding the GCC states to the global economy are far greater than those binding them to each other. Similarly, cross-border GCC labour flows remain small, in spite of the common market declared in 2008.

By contrast, the importance of the GCC states to the world economy has expanded in the past decade of boom and bust. The large-scale economic diversification programmes that developed in this decade created new links of great value to the global economy. This occurred as the Gulf became a world-leading centre of production for a variety of industries ranging from petrochemicals and aluminium to cement and construction products. By 2008, the GCC accounted for 12 per cent of global petrochemical production, as more complex industrial ties developed with emerging and industrialised economies alike.

Linkages also expanded beyond oil and gas, and with major new partners. Significant new agreements with India, China, and East Asian economies represented a diversification of the Gulf states' interdependencies with energy-importing states. Concerns for food security bound the GCC more closely with agricultural food-exporting Asian partners. This growing energy-food security nexus was encapsulated by the general secretary of the Association of Southeast Asian Nations (ASEAN), Suring Pitsuan, in 2009. Speaking at the inaugural GCC-ASEAN joint meeting in Bahrain, he stated "You have what we don't have, and we have in plenty what you don't have, so we need each other."

These new flows became a microcosm of the rebalancing of global geo-economic power. Both geographically and by virtue of their possession of the fuel of world trade, the GCC states are centrally positioned as a pivot around which the shifts in the global economy are taking place.

With the above in mind, the GCC states have succeeded in managing their integration into the global economy on their own terms. Qatar and the UAE have become regional powers with an international reach. More careful policy choices than those made in the 1970s oil price shock have allowed them to project their leverage through sovereign wealth investments across the world. This story of success is now threatened by the upheavals across the Arab world, and may explain the move toward closer integration, but it would come at the cost of the factors that have propelled the GCC states into the forefront of the global economy.

© The Gulf 2012

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