Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
Exploring the Potentials of Optimum Currency Area and
the Political Will of the Gulf Cooperation Council
*Aljadani, A., *Mear, F. and *Raimi, L.
Economic integration is a phenomenon that became highly pronounced in the
second half of the twentieth century, as the attention of the global community
shifted towards enhanced cultural, economic and political cooperation and the
formation of regional and continental blocs. The prominent blocs include the North
American free Trade Agreement (NAFTA), the European Union (EU), the
Economic Community of West African States (ECOWAS), the African Union (AU)
and a host of others. The ripple effects of the realignment of economic interests
with the formation of blocs propelled the Gulf States to establish the Gulf
Cooperation Council (GCC). The purpose of this paper is to explore the potential
for an optimum currency area (OCA) and the readiness of the Gulf Cooperation
Council (GCC). The authors adopt qualitative and quantitative research methods,
sourcing the required information and data. The findings from the paper indicates
that the GCC has fulfilled six out of eight prerequisite factors for an OCA, the only
two remaining are policy integration and political factors, which greatly account for
the delay in adopting a single currency union in the region. The implication of the
paper is that the benefits of OCA outweigh its costs; a single currency union is an
effective mechanism for unified central banking, robust monetary policy measures,
stability of the exchange rate system and improved inflow of capital and labour
among members; it is also a formidable political weapon for relating with the
international community.
JEL Codes: F, G, L, O
Keywords: Optimum Currency Area, Gulf Cooperation Council, Political cooperation
1. Introduction
Economic integration, regional cooperation and political integration are issues often
discussed in economics, international relations and political science literature (AlSaud, 1997; Pinfari, 2009; Patrick, 2011; Wu, 2013). It is therefore a topical issue of
discourse among scholars and policymakers in both theory and practice. With
regards to the Gulf Cooperation Council (GCC) comprising of six Gulf States, there
are several studies that analyzed the benefits and progress of the GCC bloc, but
very few studies explored the potentials of an optimal currency area (OCA). Most
empirical and theoretical works on OCA are from other parts of the world especially
Europe, America and parts of Asia (see Ishiyama, 1975; Buiter, 2000; Mckinnon,
2004; De Grauwe and Mongelli, 2005; Dellas and Tavlas, 2009). This paper is
therefore an attempt to fill the gap on GCC‘s economic integration and monetary
cooperation in the Gulf region. Adoption of OCA could offer the region a strategic
economic and political relevance among the developed nations, especially America,
Britain and France (ABF), which could increase stability and peace in the Middle_________________________________________________________________
*Leicester Business School, Accounting and Finance Faculty of Business & Law, De Montfort
University, The Gateway, LE3 0QQ, Leicester, United Kingdom, Email of lead author:
aljad3ani@hotmail.com, T:00441162551551 F: 00441162577186
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
East as it has done within the European Union. Opting for OCA would also allow for
better understanding, information sharing, and policy harmonization on economic
and security issues that increases social and national cohesion as well as increasing
investment among the GCC member states. The research presented in this paper
indicates a single currency and monetary policy among the GCC member states
would enhance financial transactions across the region.
Economic integration could be described as a phenomenon that became
pronounced in the second half of the twentieth century, when the attention of the
global community shifted towards enhanced cultural, economic and political blocs
(Raimi and Mobolaji, 2008). The prominent continental blocs include the North
American Free Trade Agreement (NAFTA), the European Union (EU), the Economic
Community of West African States (ECOWAS), the African Union (AU) and a host of
others (Poldermans and Philippe, 2007; Raimi and Mobolaji, 2008). The ripple
effects of the realignment of economic interests through the formation of blocs led to
the call for the establishment of the Gulf Cooperation Council. This proactive call
culminated in the formal establishment of the GCC in Abu Dhabi on 25 th May 1981
by six Gulf states, which are officially addressed as the Kingdom of Bahrain
(Mamlakat al-Bahrayn), the State of Kuwait (Dawlat al-Kuwayt), the Sultanate of
Oman (Saltanat Umān), the State of Qatar (Dawlat Qatar), the United Arab Emirates
(Al-Imārāt al-‗Arabīyah al-Muttahidah) and the Kingdom of Saudi Arabia (Al-Mamlaka
Al-Arabiyya Al-Saūdiyya). However, these six countries are popularly called Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (Al-Saud, 1997;
Patrick, 2011). At the second meeting of the highest coordination organ of the GCC
held in November 1981, the heads of the member states agreed and endorsed an
‗Economic Agreement (EA)‘ as a prelude to complete economic integration in the
region (Laabas and Limam, 2002).
From a historical viewpoint, Pinfari (2009:4) argues that two critical ideological issues
precipitated the formation of the GCC as a weapon to avert threats and protect their
mutual economic and political interests. The first issue was a geo-political concern
regarding ―the regional ambitions of Iran and Iraq after they settled their dispute on
the Shatt-el-Arab‖ and the second issue was fear of the spread of Iran‘s Islamic
revolution to the region. To counter these political developments, six Gulf States
drafted the GCC integration charter which was ratified by Kuwait, Saudi Arabia,
Bahrain, Qatar, the United Arab Emirates and Oman. Similarly, Patrick (2011) notes
that the GCC is a politically-motivated alliance of six states as a result of growing
security threats in the region.
On the strength of the foregoing, it could be argued that an economic integration
may emerge naturally for mutually beneficial economic gains and may also emerge
as a response to economic and political threats from other blocks or nations. This is
not the normal argument; e.g. NATO has different membership to the EU. In the
case of the GCC, the literature has established two undercurrents: the need for
economic integration and the need for political self-preservation from powerful
nations (Iran and Iraq) seen as threats in the region. The rationale for a genuine
economic integration is encapsulated by Raimi and Mobolaji (2008:130-131) thus:
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
“The second half of the twentieth century witnesses a discernible shift
in the economic and political equation of the world. Aptly speaking the
century can be tagged as an age of integration. Countries are coming
together all over the world in Europe, America, Asia and Africa with
the idea of defending themselves economically and politically, against
the incursions of other blocs into their areas, and to increase their
influence in their own areas as well as outside it. For the last 50 years,
countries in almost all parts of the globe have had one form of
economic integration or the other. All nations in Latin and North
America, Africa, Pacific, South East Asia and most European
countries are members of different integrated organizations”.
Furthermore, the history of the GCC as highlighted above indicates that the social,
economic and political benefits of economic integration underpinned the aim and
objective of the regional bloc. However, the social and economic interests weigh
more than the political. Yet political, social and economic interests are inexorably
linked. Economic integration has a sharp but reconcilable distinction from political
integration. The following definitions from international relations literature provide
clear explanation. According to Haas (1958), political integration connotes ―[the]
process whereby political actors in several distinct national settings are persuaded to
shift their loyalties, expectations, and political activities toward a new centre, whose
institutions possess or demand jurisdiction over the pre-existing national
states‖(Haas, 1958: 16). However, Haokip (2011) states that ―political integration
is…the process of bringing together culturally and socially discrete groups into a
single territorial unit and the establishment of a national identity, the problem of
establishing national central authority over subordinate political units or regions
which may or may not coincide with distinct cultural or social groups, the problem of
linking government with the governed, the process in evolving a minimum value
consensus necessary to maintain a social order‖ (p. 222). The debate has been at
the centre of dicussions in most of the blocs that are developing internationally, for
example the different views on Europe as to whether it is a political or economic
union (Guigue A and Mear F, 2014 p33-34)
From the two definitions, the aims and objectives of the GCC are now primarily
economic; the political undercurrent only supported its formation several years back.
The Economic Agreement Document (2001:1) states that the GCC emerged for the
purpose of ―enhancing and strengthening economic ties among Member States, and
harmonizing their economic, financial and monetary policies, their commercial and
industrial legislation and customs laws.‖ The process of achieving the that aim
entails:
“Seeking to achieve advanced stages of economic integration that
would lead to a Common Market and an Economic and Monetary
Union among Member States according to a specific timetable, while
enhancing market mechanisms and fostering the role of the private
sector; and
Desiring to enhance the economy of the GCC Member States in the
light of recent global economic developments, which require further
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
integration among the Member States to strengthen their negotiating
position and competitive capacity in international markets; and
Responding to the aspirations and expectations of GCC citizens
towards achieving Gulf citizenship, including equality of treatment in
the exercise of their rights to movement, residence, work, investment,
education, health and social services”
(Economic Agreement, 2001:2)
Another point supporting the fact that the GCC‘s bloc is an economic integration is
that the member states already have well developed national identities and the
loyalties of the citizens of these six countries are with their governments. Whereas,
for political integration unification of all members into one entity is expected, the
leaders of states pursuing a political integration must elicit the position of their citizen
by referendum after which they could surrender their political structures and
institutions for the formation of a new powerful nation (Haokip, 2011). This is not the
rationale of the GCC as stated in the Economic Agreement quoted above. There is a
spectrum as in Europe. The disagreements are concerning where the countries in
Europe sit on the spectrum regarding political union.
The objective of this paper is not to join the debates on the underlying political
undercurrents of the GCC, but to examine the literature to explore the potentials of
optimum currency area (OCA) as an economic integration template for strengthening
the GCC. In accomplishing these tasks, the paper adopts qualitative and quantitative
research methods, which relying on documentary sources as a research strategy.
This approach entails sourcing numerical and numeric data from GCC documents,
previous studies in journal articles and online sources. The analysis is done using
content analysis and descriptive statistics.
2. Research questions
The research questions that have arisen from the discourse above are:
RQ1: What are the economic justifications for economic integration of the GCC?
RQ2: What are the potentials for optimum currency area in the GCC?
3. Conceptual Issues
There is need for clarity on the meaning of economic integration and its stages, as
well as the benefits of economic integration in order to appreciate the potentials of
block formation. Economic integration is broadly defined as the removal of all trade
impediments between the participating nations, and establishment of cooperation
and coordination between them (El-Agraa, 2001; AFRODAD, 2003; Patrick, 2011).
Integration, whether economic, political or cultural is a sub-set of globalisation
However, Mutasa (2003:2) defines economic integration as ―the unification of
neighbouring states working within a framework to promote free movement of goods,
services and factors of production and to co-ordinate and harmonize their policies.
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
This might involve convergence of trade, fiscal, debt management and monetary
policies as a prelude to integration.‖
Similarly, Raimi and Mobolaji (2008) define economic integration as the coming
together of countries for mutually beneficial purpose of defending the economic and
political interests of their region from incursion by other regions/blocs thereby
enhancing their region‘s influence relative to others. The working definition, applied
in this paper, of economic integration is unification of economic imperatives by
collaborating nations to allow for free entry of people, goods and services for
mutually beneficial ends.
The process of economic integration takes a very long time and requires caution;
hence policymakers follow systematic stages in getting the intention of integration
cemented. The AFRODAD Report (2003) identified five stages or taxonomies of
economic integration. These are: free trade zone, custom union, common market,
economic union and political union. The free trade zone is often the first and
common stage of economic integration; it entails allowing unhindered trade and free
movement of goods, services and factors among member states by removing trade
barriers like border taxes and levies. The second stage is custom union, which
allows free trade among members and maintains common external tariffs and other
trade measures with non-member states outside the union. The third stage is a
common market, where all member states allow ease of movement of capital and
human resource as well as other factors' input, but each member country retains
power over their monetary and fiscal policies. The fourth stage of economic
integration is economic union, which demands more from member states.
Essentially, economic union entails all the other stages in addition to common
monetary policy, single currency, budgetary and fiscal policies as well as sociocultural policies that would boost the integration process. The peak of integration that
most nations have avoided is political union, which demands from member states the
unification of member nations‘ political institutions, governmental organs and
apparatuses under a common central body, which provides direction to all member
nations and is normally federal systems.
From the viewpoint of the GCC charter economic integration is understood as
meaning an economic relationship among member states built and nurtured on the
principles of coordination, integration and interdependence (Al-Saud, 1997). For the
avoidance of doubt, Article 4 of the Charter states the aims and objectives of the
GCC as follows:
1.
To effect coordination, integration and inter-connection between Member
States in all fields in order to achieve unity between them.
2.
To deepen and strengthen relations, links and areas of cooperation between
their peoples
in various fields.
3.
To formulate similar regulations in various fields including the following:
a. Economic and financial affairs.
b. Commerce, customs and communications.
c. Education and culture.
4.
To stimulate scientific and technological progress in the fields of industry,
mining,
agriculture, water and animal resources.
5.
To establish scientific research.
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
6.
To establish joint ventures and encourage cooperation by the private sector
for the good of their peoples (Cooperation Council for the Arab States of the Gulf,
2012).
Al-Saud (1997:23) summarizes the aims and objectives of the GCC charter as ―the
necessity of coordination between different administrative systems within the GCC
countries and the promotion of cooperation between the member States in different
fields to achieve a comprehensive economic unity through progressive steps that
would unify regulations in economic, financial, custom commercial, cultural,
legislative, information, and social fields.‖
Another review of the GCC charter by Patrick (2011) established that at the
formation stage, the GCC was clearly declared as an alliance among the six Gulf
nations on the basis of economic cooperation and collaboration, hence the highest
decision-making body was named the ‗cooperative council‘ (or Majlis Al-Ta‘wuun).
Also, the charter states that the basis of relationship is premised on three tenets,
namely: (a) coordination (tashseeq), (b) integration (takamal) and (c)
interdependence (tarabit). The three tenets of the charter are applicable only to
―economic and financial affairs; commerce, customs and communications; and
education and culture‖ (p.2). The position of this paper therefore is that the GCC is
primarily an economic union formed for multidimensional benefits of the member
states but which may also include political and military cooperation without prejudice
to the sovereignty and political autonomy of the members.
From the foregoing conceptual discourse, one of the benefits of such economic
integration in theory and practice is the creation of a collaborative mechanism for
enhancing the potentials of member states and capacities for improving wellbeing of
citizens, tackling poverty and indebtedness. Besides, it fosters accelerated
development among member states based on mutual cooperation and support. It
also allows for openness and wider trade relations among member states and their
citizens. The openness often covers traveling visas, transportation and other
immigration-related issues (GCC, 2012). Furthermore, economic integration allows
for effective utilisation of surpluses and deficits among member nations. A labourabundant nation would explore factors of free movement for transfer of its excess
labour to a labour-deficient nation, and the same principle applies to a capitalabundant situation (Raimi and Mobolaji, 2008). Integration allows for common
regulations on economic, industrial and financial matters which would strengthen
economic activities of all the member states. Economic integration accommodates
political issues in the form of informal cooperation on matters of internal security,
defence, peace-keeping and a common voice on global issues at the General
Assembly of the United Nations, the UN Security Council and similar international
summits.
4. Theoretical Framework
Theory provides grounding that shapes the direction of academic enquiry and the
basis for testing tentative propositions. The theory that provides foundation for this
paper is the optimum currency area (OCA). It is appropriate to mention that Milton
Friedman‘s work in the early 1950s articulated the significance of monetary
integration, a view that predates the OCA (Dellas and Tavlas, 2009). However, the
literature gives credit and accolades for developing the OCA theoretical construct to
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
the Nobel Prize winner in Economics, Robert A. Mundell (Coy, 1999). He proposed
the idea in the 1960s for nations that coexist within the same geographical area to
come together and enhance the economic potentials by adopting a single currency,
rather than a proliferation of currencies. Other scholars argue that the credit for
conceptualisation, development and articulation of OCA is to be shared by three
Economists, namely: Mundell (1961), McKinnon (1963) and Kenen (1969) for their
ground-breaking work at different times (Bayoumi and Eichengreen 1997; Dellas and
Tavlas, 2009). With regards to the relevance of the theory to international
economics, there are two conflicting viewpoints. Krugman (1993) asserts that the
OCA is highly beneficial and should serve as the basis for international monetary
economics. In opposition however, Coy (1999) and Buiter (2000) argue that OCA is
one of the defective theories that emerged in the field of monetary economics after
World War II; and that the OCA proponents placed too much emphasis on the supply
side of economics which has had a devastating effect on the European Union as
evidenced by the Greek debt crisis.
The theory of OCA could simply be summarized as an academic debate over the
superiority of a fixed exchange rate and a floating exchange rate within a region with
many countries (Ishiyama, 1975). Mongelli (2008:2) defines an OCA ―as the optimal
geographical area for a single currency, or for several currencies, whose exchange
rates are irrevocably pegged. The single currency, or the pegged currencies,
fluctuate jointly vis-à-vis other currencies.‖ Another definition of an OCA is a region
or continental area which allows usage of a single currency for maximum economic
efficiency and political leverage above other regions outside the OCA (Mundell,
1961; Coy, 1999). Quite similarly, Frankel and Rose (1996:14) define an OCA as ―a
region for which it is optimal to have its own currency and its own monetary policy.‖
Laabas and Limam (2002) while in agreement with previous definitions add that OCA
refers to an area or region that agrees to form a common monetary and currency
union for mutual benefits with several implications for the governance and the
economic structures of the member states. These implications include:
 Monetary integration which presupposes one single currency and a
coordinating central bank with power over monetary policy measures on
liquidity, inflation, foreign exchange reserves and interest rates; or
 Fixed exchange rates meaning convertibility of member states' currencies with
non-members; and
 Financial market integration which entails openness and free inflow of capital
transactions and centralized financial regulations.
The various definitions above align with the view of the proponent Mundell (1961).
According to Coy (1999), Mundell‘s OCA can be adopted only for regions or areas
with similar economies which allow for embedment of a single monetary policy.
There are two forms of currency area: (a) a currency area with several countries with
their respective national currencies (Model A); and (b) a currency area with many
countries with a single currency (Model B) (Mundell, 1961). He justified preference
for the latter (that is, Model B) on the grounds that: ―In a currency area comprising
different countries with national currencies the pace of employment in deficit
countries is set by the willingness of surplus countries to inflate. But in a currency
area comprising many regions and a single currency, the pace of inflation is set by
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
the willingness of central authorities to allow unemployment in deficit regions
(Mundell, 1961:658).
To summarize, a single currency area must have a single central bank (or all central
banks in the region surrender to the monetary policy measures of the coordinating
central bank within the currency area like the EU model). This arrangement allows
for a single body looking at the whole currency area in decision-making,
implementation and evaluation. As laudable as the OCA sounds in theory, there are
costs and benefits associated with it during implementation. The benefits of OCA are
essentially the benefits of economic integration discussed under the conceptual
issues.
On the cost of OCA, Laabas and Limam (2002) note that the main demerit is the loss
of autonomy on monetary policy and regional currency. The first example is the
European Union member state nations that adopted the Euro as a single currency
and implemented the monetary policy measures of the European Central Bank; it
became a cost because of the arrangements to ―create disincentives for individual
governments to properly tackle fiscal and structural policies as well as to safeguard
financial stability‖ in their respective nations (Cour-Thimann and Winkler (2013:2)
whilst the Growth and Stability pact attempted to reduce this disincentive its failures
resulted in the Treaty on Stability, Co-ordination and Governance to be enacted in
2013 which gave power to the European Commission to enforce fiscal rules on
member states. The second classic example of loss of autonomy over currency and
monetary policy is the case of Central Africa, where six nations Cameroon, Gabon,
Congo, Equatorial Guinea, the Central African Republic and Chad under the
Communaute Economique et Monetaire de l'Afrique Centrale (CEMAC) agreed to a
single currency called Franc CFA ―with a fixed exchange rate of FCFA 656: 1 Euro‖
with effect from January 1, 2002 (AFRODAD, 2003:8).
Furthermore on the disadvantages of OCA, Mckinnon (2004) contends: ―The major
cost associated with monetary integration arises from the abandonment of an
independent monetary policy. By fixing its exchange rate to other members of the
monetary union, a country joining a union automatically gives up control over its own
monetary policy. When its economy is subject to an external shock, it has no choice
but to follow the common monetary policy of the monetary union. Countries with
similar economic structures can respond to a common shock with a common
monetary policy, and the costs of giving up an independent monetary policy are
relatively small. In contrast, countries with heterogeneous economic structures
require different policy responses to common shocks, and the costs of sharing a
common monetary policy are relatively large. For example, Japan and Korea, both
oil importers, can respond to a surge in oil prices with the same monetary policy.
This, however, would not apply to Japan and Indonesia, where the latter is an oil
exporter …p.694.
In spite of the ideas contained in OCA, Mckinnon (2004) criticizes the theory on the
ground that the lead proponent Mundell was inconsistent and self-contradictory in
two of his works. For tackling economic shocks, he proposed a smaller and
homogeneous currency area which allows for exchange rate flexibility in his 1961
treatise. However in a later work in 1973, he proposed a larger and heterogeneous
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
currency area which allows for upholding asset-holding for international risk-sharing.
The adoption of OCA by the European Union was described as the bane of its
economic crisis, which rather than fostering economic prosperity became an
economic trap leaving Europe with squabbling nations (Krugman, 2012).
Despite the criticisms launched against the two versions of OCA, the GCC accepted
the conclusion that economic integration through the adoption monetary union is
desirable because its benefits outweigh the few inconvenient costs (Mongelli, 2008).
The GCC Document (2013) states: ―Introducing the GCC single currency and
establishing the GCC Monetary Union… will increase the advantages of the
economic integration and enhance the gains of the Customs Union and the GCC
Common Market… the GCC single currency will have many impacts on the various
economic sectors, particularly Intra-GCC Trade, tourism and investment… financial
services and capital markets [thereby] increasing growth and accelerated
developments…. the GGC single currency eliminates the risks related to the
exchange rates of the GCC currencies, deepens the concept of the common
market…contributes to the development and integration of the GCC capital markets,
particularly the securities market, helps improve the stock market and considerably
influences it in terms of volume, depth and liquidity‖ (Impacts of Introducing the GCC
Single Currency, paragraph 1, 2013).
5. Prerequisite factors for applicability of OCA
The viability of formation of a monetary union and the application of OCA, are based
on critical conditions otherwise called prerequisites, criteria or characteristics in the
literature on exchange rate regimes. These prerequisites are eight in all (Mongelli,
2008). Other studies like Jadresic (2002), Abed, Erbas and Guerami (2003), AlJasser and Al-Hamidy (2003), Maames (2003), Sturm and Siegfried (2005), Krueger
and Kovarich (2006), Hebous (2006) and Hanna (2006) uphold these perquisites in
their various works on OCA. The eight (8) prerequisites of OCA have been identified
by Laabas and Limam (2002) and Mongelli, (2008) as:
(i) openness,(ii) factor mobility, (iii) degree of commodity diversification, (iv)
similarity of production structure, (v) price and wage flexibility, (vi) similarity of
inflation rates, (vii) degree of policy integration and (viii) political factors. Detailed
explanations of these eight factors are given below.
a) Degree of Economic Openness: This factor explains the degree to which an
economy is open to international trade. A large country has greater potential
to survive international trade and exchange rate instability than a small
country. It is therefore desirable for smaller countries to join a monetary union
to enjoy openness and still be protected against trade fluctuations and shocks
(Ishiyama, 1975; Laabas and Limam, 2002).
b) Factor Mobility: This presupposes that a country which allows free
movement of factors of production within and outside its economy will do
better that a rigid counterpart. Factor mobility allows for self-adjustment
between nations within a monetary union; a nation with labour abundance will
offset this with another nation with labour deficiency and ditto for capital inflow
and outflow (Raimi and Mobolaji, 2008).
Proceedings of 4th European Business Research Conference
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c) Degree of Commodity Diversification: The more diversified the economies
within a region, the more effective the result of entering a monetary union
because they would be protected from external shocks. Consequently, the
adjustment of exchange rates to correct the shocks would be unnecessary
(Mongelli, 2008). In other words, diversified countries are those fitted for
monetary and currency union (Laabas and Limam, 2002).
d) Similarity of Production Structure: In OCA theory, it is observed that
economies with homogeneous or similar production structure, when faced
with external shocks from international trade are more likely to share the
same experiences (that is, they are symmetric), which presupposes that these
countries are not likely to adjust their exchange rate to mitigate the shocks.
Economies with these characteristics are suitable for monetary union and a
single currency (Laabas and Limam, 2002; Mongelli, 2008).
e) Price and Wage Flexibility: Countries desiring OCA require flexible nominal
prices and wages within the currency union and respective countries. These
conditions enhance response to market shocks that could likely cause
unemployment in one member nation and inflation in another and would
therefore not require the exchange rate as an adjustment mechanism (Laabas
and Limam, 2002; Mongelli, 2008).
f) Similarity of Inflation Rates: Like symmetric production structures, countries
with similar inflation trends or rates are more likely to utilise similar monetary
and fiscal measures to correct their inflationary challenges. Besides, lower or
similar inflation rates in these economies countries would fairly stabilize the
terms of trade over time. Thus, it would be in their interests to embrace
monetary union with a single currency and centralized economic policies
(Fleming 1971; Laabas and Limam, 2002).
g) Degree of Policy Integration: The willingness of members and positive
attitudes toward unified fiscal policies and other commercial policies is a
precondition for a currency union (Laabas and Limam, 2002). This condition
allows for better risk-sharing among member states in a monetary union when
shocks occur (Mongelli, 2008).
h) Political Factors: In both political and economic literature on integration, the
precondition for its adoption and effectiveness is the political will. For a
monetary union adopting a single currency and economic policies, the
willingness by political actors is crucial and important (Mintz, 1970; Laabas
and Limam, 2002). The political factor cannot be downplayed because
―political will fosters compliance with joint commitments, sustains cooperation
on various economic policies, and encourages more institutional linkages‖
(Mongelli, 2008:3).
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
6. Methods and Materials
As mentioned at the outset, this research is exploratory. It explores the literature on
economic integration with a view to unveiling the potential for OCA in the Gulf
Cooperation Council (GCC) learning from the Crisis of the European Union. The
required data was extracted from secondary data collected from the GCC
headquarters. The data was analysed using content analysis and descriptive
statistics were used to explain the potential for OCA following the approach of
Laabas and Limam (2002). The present study with data covering 2003-2012 fills the
gap by updating previous studies which utilised data from 1989-1998. There has
been remarkable progression of the GCC towards a single currency since 1998. A
new study is desirable. The preferred measurements of the eight (8) OCA
prerequisites as used in the data analysis are:
A. Degree of openness (DOP): This is measured by the ratio of trade to the
Gross Domestic Product (GDP), which is calculated as: Openness = exports +
imports of goods)/GDP}*100 (AlKholifey and Alreshan 2010).
B. Degree of factor mobility (DFM): This is measured by capital inflows and the
movement of labour across GCC member countries. However, we used only
capital inflow within the GCC member countries.
C. Degree of commodity diversification (DCD): This is measured as a ratio of oil
sector to non-oil sector (production/exports) across the member states.
D. Similarity of production structure (SPS): This is measured looking at average
sector-by-sector contributions to GDP across the member states.
E. Price and Wage Flexibility (PWF): This is measured using the average of
prices and wages overtime in the member states.
F. Similarity of inflation rates (SIR): This is measured as the average of inflation
rates overtime in the member states.
G. Degree of policy integration (DPI): This is qualitatively measured as the extent
of commonality in fiscal, economic and social policies among the member
states.
H. Political factors (PFs): This is qualitatively measured as the attitudes of
political actors to compliance with the economic policies of the GCC.
7. Outcomes/Findings and Discussion
A. On the Degree of Openness, the ratio of trade to GDP indicates that GCC
member states are open to one another as well as to the rest of the world as
evidenced by the rising openness ratio in Table 1 below (AlKholifey and
Alreshan 2010).
Table 1: Degree of Openness in GCC (1998 - 2011)Million Dollar
Saudi
Kuwait
Qatar
Bahrain
Arabia
Average 1998 –
2011
81.46
89.15
89.67
150.65
Oman
United Arab
Emirates
85.41
128.83
UNCTAD (2011)
B. On the Degree of Factor Mobility, the average capital inflows across the GCC
member countries measured in terms of Total Trade Exchange in Table 2
confirm a high level of factor mobility, although the degrees of factor mobility
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
differ. Across the GCC member countries For Saudi Arabia the average
capital inflow is $319,756.33 (highest), while Kuwait, Qatar,, Bahrain, Oman
and UAE have $71,128.44m, $35,822.80m, $26.468.23m, $43,867.02m and
$234,294.1m respectively.
Table 2: Degree of factor mobility in GCC: Total Trade Exchange (2005 - 2010) Million
Dollar
Total
Trade
Exchange
2005
2006
2007
2008
2009
2010
Average
Index 2005
- 2010
Saudi
Arabia
Kuwait
Qatar
Bahrain
Oman
United Arab
Emirates
240,034.7
280,731.3
323,330
428,595
287,842
358,005
58,515.2
65,204
89,983
56,614
85,326
35,822.8
50,491.9
67,822
95,131
72,861
98,087
19,632.3
24,165.1
26,910
35,971
23,129
29,002
27,516.3
32,482.8
40,678
60,644
45,505
56,376
153,403
183,336.6
224,394
316,906
247,680
280,045
319,756.33
71,128.44
35,822.80
26,468.23
43,867.02
234,294.1
GCC STATE BULL 2009-12012
C. Regarding the degree of commodity diversification, the findings as shown in
Table 3 indicate that the oil sector dominates and the non-oil sector only
provides marginal contribution. The countries are not diversified; they
therefore suit a currency union for better economic diversification on the basis
of the theory of comparative cost advantage.
Table 3: Degree of commodity diversification in GCC (1998 - 2010)
Ratio of Oil/NonOil=DCD
Saudi
Arabia
Kuwait
Qatar
Bahrain
Oman
United
Arab
Emirates
Average Index
(1998-2010)
5.62
5.54
1.64
2.83
2.89
2.73
GCC STATE BULL 2002-12012
D. On the similarity of production structures, the findings as reflected in Table 4
indicate all the GCC member nations have similar production structures. The
dominant sectors of their economies are agriculture, mining & quarrying
(petroleum), electricity, construction, wholesale/retail/hotels/restaurants,
transportation/communication, finance & insurance services and real estate
services. They functionally have strong oil sectors, while other sectors are
complementary.
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
Table 4: Similarity of Production Structure in GCC (1998 - 2010)
Common
Sectors=SPS
1.
2.
3.
4.
5.
6.
7.
8.
9.
Agriculture &
Fishing
Mining & Quarrying
(Petroleum)
Manufacturing
Electricity, Gas &
Water
Construction
Wholesale & Retail,
Hotels &
Restaurants
Transport,
Commun. &
Storage
Finance &
Insurance Services
Real Estate
Services
Saudi
Arabia
Kuwait
Qatar
Bahrain
Oman
United
Arab
Emirates
9334.34
193.76
80.3708
62.3423
492.567
2771.86
168795.8
36680.96
26299.63
3237.182
14322.37
48182.31
27717.33
2541.5
4581.011
881.52
4494.638
475.4023
1781.932
179.3115
3075.205
357.9292
16213.25
2884.408
14308.23
1421.399
2887.885
560.0008
1305.297
13550.21
16704.04
3686.084
2994.17
1348.583
3379.035
19436.23
10492.81
4757.415
1875.842
871.7515
1937.125
11214.66
11580.27
7517.929
4716.662
2811.605
1254.814
9343.202
12792.83
4392.258
1350.223
1037.576
1507.647
11018.47
GCC STATE BULL 2002-2012
E. With regards to findings on the average price and wage flexibility, Table 5
indicates that the prices and wage rates across the GCC member states show
similarity in terms of trends and rates. This is an indication that prices and
wage rates in the region justify monetary union. Four nations (Saudi Arabia,
Kuwait, Bahrain and Oman) have very close symmetry with regards to price
and wage rates (110%, 119%, 108% and 112% respectively), while the two
others (Qatar and UAE) have higher rates of 136% and 135% respectively.
By-and-large, it could be concluded that there is a justification for monetary
union for effective price and wage flexibility allowing mobility to the higher
inflation areas.
Table 5: Price and Wage Flexibility in GCC (2001 - 2011)
General Consumer
Price Index (Base year
2000 = 100)
Average Index (20012011)
Saudi
Arabia
Kuwait
Qatar
Bahrain
Oman
United
Arab
Emirates
110.65
119.35
136.82
108.52
112.99
135.29
Consumer Price Index in GCC States, 2012
F. Findings on the similarity of inflations rate as shown in Table 6 below, show
that average inflation rates across GCC range 1.28% to 4.34%. On a countryby-country basis, Saudi Arabia has an average inflation rate of 2.32%, Kuwait
3.33%, Qatar 4.34% (highest in the region), Bahrain 1.28% (lowest in the
region), Oman 2.56% and UAE 4.12%. Against the backdrop of the average
inflation rate index, it could be concluded that the GCC nations do not have
similarity in their inflations rates; rather there is divergence, given the UAE
have decided not to pursue currency union, in the rest of the region however
over the past 3 years the economies appear to be have converged with the
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
exception of Qatar and Bahrain. Given their relative economic this would not
be problematic economically.
Table 6: Similarity of inflation rates in GCC (1998 - 2012)
Annual percentages of end of period consumer prices are year-on-year changes
Trade in Inflation Rates
Saudi
Arabia
Kuwait
Qatar
Bahrai
n
Oman
-0.174
1.197
2.481
-0.838
0.47
-1.208
3.746
1.486
-0.997
-0.345
-1.503
0.428
1.679
-0.952
-1.02
-0.814
2.886
1.436
-0.837
-0.588
0.821
-0.254
0.244
0.589
-0.167
0.509
0.874
2.263
1.966
0.335
0.607
2.599
6.797
2.435
1.434
1.107
4.455
8.814
2.326
2.654
2.786
3.638
11.828
1.077
4.272
6.002
7.539
13.764
4.001
8.287
9.498
9.025
15.049
5.122
11.78
4.003
1.18
-4.865
1.554
0.923
5.774
4.496
0.402
0.99
4.192
3.64
4.905
1.923
0.178
3.292
3.738
3.199
1.856
2.58
2.881
Average Index 1998 – 2012
2.32
3.33
4.34
1.28
2.56
International Monetary Fund, World Economic Outlook Database, October 2013
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
United
Arab
Emirate
s
2.048
1.72
2.079
2.86
3.02
4.095
5.633
7.787
10.247
11.719
6.597
1.217
0.876
0.769
1.072
4.12
G. The findings on the degree of policy integration as earlier discussed are a
qualitative factor. Reviews of member states‘ acceptance of recommendations
on fiscal, commercial, security and social policies are relatively positive and
encouraging. The GCC official statement on level of policy integration reads:
“The Ministerial Council perused the report of the Ministerial
Committee concerned with the follow-up on the decisions pertaining to
the joint process, and expressed satisfaction at the progress made
with regard to implementing the decisions of the joint process, and
looked forward to the implementation of the remaining decisions in this
connection…
The Supreme Council examined the progress report in the area
of the Customs Union, the GCC Common Market, the Monetary
Union, and the infrastructure integration projects in the GCC
States, the most important among them being the electricity grid
project, and the feasibility study for the GCC railways. The
Supreme Council expressed satisfaction at the achievements
made and issued directives pertaining to them” (Final
Communiqué of the 30th Session, 2009: paragraph. 18-19).
H. The findings on Political factors like degree of policy integration are largely a
policy issue that cannot be measured quantitatively. The low political will of
the GCC nations explains the reason for delay in the implementation of a
single currency for years. Lack of political will largely explains the prolonged
delay in starting the single currency project despite over 15 years discussion
Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
on the issue. At one stage in 2006, Oman dropped the idea and the UAE
followed in 2009, a decision linked to the relocation of the monetary council to
Saudi Arabia. Kuwait still prefers pegging its currency to the U.S. dollar, in
order to limit the impact of a repeat of crash of dollar from the experience of
the financial crisis. By-and-large, there is mutual suspicion and fear of
domination by some elements especially Saudi Arabia in the GCC (Lohade,
2013). ―Although economic integration in the Gulf has progressed, much still
needs to be done to establish a legal framework and strengthen institutions
that would be needed to manage a single currency across the countries that
remain committed to the idea‖ (paragraph 8).
8. Conclusion/Recommendations
The implication of this paper is that the benefits a single currency union is a viable
option and there is an effective mechanism for a unified central bank, robust
monetary policy measures, stability of the exchange rate system and improved inflow
of capital and labour among the members. It is also a formidable political weapon for
relating with the international community. Based on the present strengths and
observed weaknesses in the implementation of a common currency, the following
recommendations are necessary to forestall a repeat of the European Union crisis in
the GCC monetary union.
i.
As an initial stage in economic integration there is a need for the
implementation of a free trade area agreement for the free movement of
goods and other factors, thereby promoting more intra-regional trade.
ii.
In order to better manage macro-economic fundamentals, the GCC countries
need to create a central organization that could eventually be the basis to
form a central bank like the European Central Bank, which would formulate
and implement monetary policy measures for the region. Other supra-national
institutions for coordination of fiscal policy measures are similarly necessary.
iii.
Several studies identified high structural convergence in production structure,
low factor mobility and lack of price and wage flexibility in the GCC countries.
For a beneficial monetary union, it is suggested that sound policies be
formulated and implemented to promote structural diversification, more factor
mobility and price wage flexibility as part of the GCC move towards greater
integration.
Finally and most importantly, genuine political will is a fundamental precondition for monetary union. This requires that the governments of the
member nations surrender to the supra-national political institutions of the
GCC including a central bank to coordinate their activities.
iv.
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