Eckart Woertz
Program Manager, Economics

With Kuwait’s decision to peg its currency to a currency basket instead of the dollar exclusively and the withdrawal of Oman, the planned GCC currency union saw two major setbacks this year. Still, its scheduled implementation by 2010 was reconfirmed at the GCC summit in December 2007, despite widespread doubts among experts who deem this unrealistic under present circumstances. The planned GCC common market has received less attention in the media, although it is arguably more important than the proposed currency union. A currency union by itself does not increase trade numbers if it cannot build on an already existing common market, and monetary policies of the GCC countries already show some synchronization anyway – provided common currency pegs persist, be it to the US dollar or some kind of currency basket.

The launch of a GCC common market by January 1, 2008 will mark an important step in GCC economic integration. It will move beyond the free movement of goods and services that has been agreed upon in the GCC customs union to include labor and capital flows as well. To this end, various markets have to be opened up and regulations harmonized, ranging from labor laws to pension schemes and social security entitlements. The list in article 3 of the GCC Unified Economic Agreement is long and includes access to universities and other education, as well as the right to buy and sell property, and to invest without restrictions.

On the eve of the start of the GCC customs union in January 2003, a timeline for the GCC common market was agreed upon: By the end of 2007, the GCC should harmonize its legal requirements and legal codes and the member states should enable them on the respective national level. The necessary third step would then be the actual implementation by the respective administrative institutions and their bureaucracies. Although the GCC has already achieved consensus on a vast number of laws, their actual implementation on the national levels still lags behind and detailed specifications and unified regulatory frameworks are absent in many cases. Cars are one of the few examples where such detailed specification has been achieved, but otherwise all too often the free flow of goods is hampered by red tape and confusion about applicable procedures. In this context, an episode that comes to mind is the UAE customs’ refusal to let in Saudi dates in retaliation for an earlier Saudi refusal to allow re-export goods from the UAE. Thus, the GCC customs union as a necessary precondition of a common market has not been fully implemented in 2007 as envisaged, and Saudi Arabia has asked for extra time of one year.

The implementation of the common market will go beyond the realm of goods and services and will complicate things further. It would not be possible to keep laws of workforce nationalization (Saudization, Emiratization etc.) in their current form and labor laws would need to be applied to all GCC nationals equally. The same is true for the sponsorship systems, and the respective stock markets would need to offer equal access for all GCC citizens. But so far considerable restrictions persist. For example, the Haj tourism industry is, and most likely will remain, a closed Saudi market, and all GCC stock markets, except for Bahrain, have limited the percentage of shares that other GCC nationals can hold in a publicly listed company. Despite some liberalization like Saudi Arabia opening up its banking sector to other GCC investors, this state of limbo is going to persist for some time: “As far as we are concerned there is nothing changing as from January 1, 2008,” announced the chairman of Dubai Financial Market, Eisa Al Kazim. No doubt, next year will mark the beginning of a long process, and not the start of a full fledged common market.
 

Provided consensus on the GCC level will have been achieved in respect to laws and regulations and provided the national governments will have implemented these laws in the respective countries, the ultimate litmus test for the common market will come in the real world of institutions and bureaucracies as they need to guarantee the accurate realization of the proposed policies. The requirements for training can be imagined. More importantly, public awareness about the possibilities of the common market would need to increase. Besides specific media campaigns, the website of the GCC and other information outlets could be improved, and cooperation with non-governmental bodies like chambers of commerce strengthened. Only with well-oiled feedback loops, will the GCC be able to monitor the grade of actual implementation. It will, of course, also require the capability to enforce it if need be. Here, a major empowerment of centralized GCC institutions is warranted. It is not enough to meet once or twice a year to decide important issues, the establishment of a common market needs day-to-day decision making by administrations with corresponding institutional capabilities. The EU has the European Commission, the Council of the EU, the European Parliament and the court of justice to deal with such matters; in the GCC, no such institution exists thus far.

Another important caveat has to be given in comparison to the EU, which is often quoted as a role model for the nascent GCC common market. GCC economies are not as diverse as the industrialized countries of Europe, which have had a longer history of development and integration. Before establishing a common market, about two thirds of all EU trade was conducted within the union itself, while GCC countries are still heavily oil dependent, with an overall export share of up to 90 percent depending on the country and intra-GCC trade comprising only about 7 percent of total GCC trade. Thus, besides liberalization, increased trade will require further diversification of the GCC economies in the first place.

The large numbers of expatriate workers in the GCC are an important factor as well. Even in population-rich Saudi Arabia, they constitute 65 percent of the overall labor force with figures in other countries much higher; for example, expatriates constitute over 80 percent of the UAE population. Especially in private sector employment, the dominance of expatriates is nearly absolute while employment of GCC nationals is still concentrated in the public sector, with a tendency towards lifetime adherence to one institution and traditionally low labor mobility. This means that labor mobility in the GCC will not increase very much in the wake of a successful establishment of a common market, simply because its regulation will only apply to a minority of the GCC labor force.

Thus, the issue of expatriates, and possibly a new social contract with them, would need to be part and parcel of the moves for successful establishment of a GCC common market, besides the three steps mentioned above: Once the necessary laws and regulatory frameworks are devised at the GCC level, and once they have been enabled at the national level and their proper implementation supervised, the common market will indeed make more of a difference in the lives of GCC residents than a possible GCC currency. Necessary prerequisites for such successful implementation will include empowered, centralized GCC institutions and increased public awareness about the common market and the entitlements that come with it.

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