Proceedings of 11th International Business and Social Science Research Conference 8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2 Is a Single Currency Agenda Still Feasible in the Gulf Cooperation Council? A Qualitative Meta-Analysis Aljadani Abdussalam*, Mear Fead* and Raimi, Lukman* Delay by the GCC countries to finalise the take-off of its single currency agenda has generated a mixed reaction in policy and academic circles. There are optimists and pessimists on different sides of the pendulum. This paper examines the feasibility of a single currency agenda in the Gulf Cooperation Council (GCC) in view of the delay in commencement. In international business literature and mainstream economics, the benefits and costs of a single currency area are well discussed. The GCC countries, namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates agreed to adopt a single currency shortly after GCC’s formation for mutually beneficial interests. Subsequently, the take-off date for the single currency has continued to be postponed for vague economic and political exigencies. The proposition to be drawn from the development could be that a single currency agenda is no more feasible in the light of emerging issues in the Gulf region. To confirm or overrule the proposition, this paper adopts a qualitative research method for investigation relying on documentary sources from 2002 to 2014. The sourced data from 25 previous studies were systematically reviewed and analysed using qualitative meta-analysis. Results indicate that a single currency agenda is still feasible in the GCC region, but the pre-conditions have to be substantially met. The delay of a single currency is a combination of economic and political factors specifically fear of losing autonomy over monetary and fiscal policy measures and fear of surrendering sovereignty to supra-national institutions. The paper concludes with few but far reaching recommendations. JEL Codes: F, G, L, O 1. Introduction Economic integration has become a phenomenal issue in the global scene. Impressed by the benefits of economic integration, the Gulf countries formed several socio-cultural and economic blocs to strengthen their region, namely: (a) Gulf Cooperation Council (GCC), (b) League of Arab States (Arab League), (c) Mediterranean Free Trade Area (MFTA), (d) Arab Maghreb Union (AMU), and (e) Greater Arab Free Trade Area (GAFTA) (Al-Saud, 1997; Lawson, 2012). The economic bloc that is of concern in this paper is the GCC. The GCC economic bloc is the most widely discussed and has prospect of replicating the European Union model in the region. Forced by economic and political exigencies in the Gulf region, six independent countries namely: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates agreed to form the GCC regional bloc (Patrick (2011), but the actual ratification of the charter was made in Dhabi on 25th May 1981 (Al-Saud, 1997). Similarly, Pinfari (2009) explains that at the time of the formation of the GCC there were two political threats that necessitated the establishment of the GCC. ______________________________________________________________________ *Leicester Business School, Accounting and Finance Faculty of Business & Law, De Montfort University, The Gateway, LE3 0QQ, Leicester, United Kingdom, Email of lead author: [email protected] Proceedings of 11th International Business and Social Science Research Conference 8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2 The first was fear of the regional ambitions of Iran and Iraq after their dispute on the Shatt-el-Arab. The second threat was the spread of Iran’s Islamic revolution to the region. To counter these political threats, the GCC integration charter was swiftly drafted and ratified by the GCC countries. Therefore, the formation of GCC was economically and politically motivated, but the economic consideration was much more pronounced (Patrick, 2011). Under the 1981 agreement, the member countries were at liberty to maintain control over their respective national currencies and exchange rates, as well as independent control over fiscal monetary policy measures. The GCC countries decided to embrace the idea of a single currency area with a view to transforming the region in line with contemporary demands for competitiveness and openness. Consequently, at the second meeting of the highest coordinating organ of GCC held in November 1981 (6 months after the ratification of GCC charter), the member states endorsed an Economic Agreement on full economic integration in the region which entails having a single currency (Laabas and Limam, 2002; Aljadani, et al., 2014). As laudable as the goal is, it has suffered several setbacks linked to a number of factors. Although the literature is clear on the process for full economic integration; it is a long and systematic process guided by rules and agreements. There are five stages for full economic integration, namely: free trade zone, custom union, common market, economic union and political union (AFRODAD, 2003). The GCC has reached the fourth stage which stipulates the need for a common monetary policy, single currency, budgetary and fiscal policies as well as harmonisation of socio-cultural policies that would boost the integration process (Laabas and Limam, 2002; Patrick, 2011; AlAljadani, 2014). The adoption of a single currency among the GCC countries would enhance macro-economic and financial stability as well as sustainable economic development in the region (Khaleej Times, 2011). Despite the delay for 33 years, the agenda is desirable and necessary based on economic realities and political exigencies in the Gulf as a whole, the GCC countries need a single currency to enhance social, financial and economic reforms. The World Economic Forum (2007) reports that the Gulf countries were spending in excess of US $1 billion a year (in costs and charges) to support their trade bills. The same report also mentioned that some Gulf countries are lagging behind in terms of economic and financial development because of lack of price transparency and other important rudiments. Even by 2014 GCC countries are still over spending judging by a decrease in their fiscal surpluses because of rising wage bills, falling oil prices/revenues and an increase in subsidies for energy. Consequently, domestic consumption outweighed revenues from exports (IMF, 2014). Therefore, adoption of a single currency with harmonised monetary policy measures is expected to correct the highlighted imbalances and facilitate even development among GCC member countries. A single currency is further expected to promote cooperation and development, especially of small and medium sized enterprises in the Gulf region where factors of production are allowed free movement and intra-trade relations enhanced. Based on the foregoing, this paper examines the feasibility of a single currency agenda in the GCC region using a qualitative meta-analysis. In specific terms, the paper is Proceedings of 11th International Business and Social Science Research Conference 8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2 seeking an answer to the question: Is a single currency agenda still feasible in the Gulf Cooperation Council? Apart from the present introduction, the paper is divided into four sections. Section 1 gives a brief introduction to the GCC and its economic strengths and weaknesses. Section 2 reviews the literature to gain insights on economic integration, its stages, costs and benefits and divergent viewpoints on the GCC’s single currency agenda. Section 3 discusses the methodology and there is a presentation of the findings. Section 4 concludes with practical research implications and recommendations. 2. Conceptual Issues and Literature Review Economic integration is broadly defined as the removal of all obstacles and discriminatory restrictions to free movement of factors of production among countries within the same region premised on cooperative agreement (El-Agraa, 2001; AFRODAD, 2003). However, Patrick (2011) views economic integration as the removal of all trade impediments among participating countries, and the establishment of cooperation and coordination among them. According to Raimi and Mobolaji (2008) economic integration is the coming together of countries for preservation of their economic and political interests from incursion by other regions, thereby enhancing their region’s influence relative to others. Alternatively, Mutasa (2003 p.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.” Patrick (2011) explains that at the formation stage in the 1980s, the GCC was established as an alliance among six Gulf countries on the basis of economic cooperation and collaboration and not political integration; hence the highest decisionmaking body was named the cooperative council or Majlis Al-Ta’wuun. More importantly, the charter stipulates that the basis of the relationship is premised on three tenets, namely: (a) coordination (Tanseeq), (b) integration (Takamal) and (c) interdependence (Tarabot). The three tenets are in line with the charter and are applicable only to economic and financial affairs; commerce, customs and communications, and education and culture. Economic integration was preferred because it fosters accelerated development among member states. It also allows for openness and wider trade relations among member states and their citizens (GCC, 2012). Furthermore, economic integration allows for effective utilisation of surpluses and deficits among member nations. A labour-abundant nation would explore free movement for the transfer of its excess labour to a labour-deficient nation, and the same principle applies to capital-abundant situations (Raimi and Mobolaji, 2008). The process of economic integration takes a very long time and requires caution; 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 the first stage of economic integration; the stage allows unhindered trade and free movement of goods and services among member states by removing trade barriers like taxes and levies. The second stage is custom union, which allows free trade among members and maintains a common external tariff and other trade measures with non-member states outside the union. The third stage is Proceedings of 11th International Business and Social Science Research Conference 8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2 common market, where all member states allow ease of movement of capital inflow and human resource inflow as well as other inputs, but each member country retains power over their monetary and fiscal policies. The fourth stage of economic integration is the economic union, which entails embedment of a common monetary policy, single currency, budgetary and fiscal policies as well as socio-cultural policies required for smooth integration process. The fifth stage is a political union, which demands total unification of member nations’ political institutions, governmental organs and apparatuses under a common central body, which provides direction to all member nations on all matters. 3. Emerging Evidences from Empirical Studies In trying to provide answers to the readiness of the GCC countries for a single currency area several studies have been undertaken with far reaching findings and recommendations. Laabas and Limam (2002) found that the GCC countries do not have in place the essential pre-conditions for sound embedment of a currency union (CU). The two things that appeared to have favoured a common currency area are commitment to a fixed exchange rate and political will to embrace economic integration. Other fundamental pre-requisites have not been met. The production structure across the countries is similar as oil wealth is the mainstay of all the countries. Secondly, there is very little intra-regional trade because they all produce the same commodities. Thirdly, there was no convergence of the macroeconomic fundamentals of the GCC countries and no symmetry in their business cycles as well. For an enduring single currency area or currency union; they recommended immediate lifting of all restrictions to allow for free movement of goods and other factors, thereby promoting more intraregional trade; and for convergence of macro-economic fundamentals, there was the need to create a GCC central bank and a related financial institution (supranational institution) that would formulate and implement fiscal and monetary policy measures for the region. Individual countries must surrender national interests for greater regional interest. Sturm and Siegfried (2005) assess the 2010 single currency time-table and level of preparedness for a single currency, and found three key macroeconomic and institutional issues that required the urgent attention of the GCC. These included (i) need for a supranational GCC monetary institution to coordinate a single monetary and exchange rate policy within the monetary union towards the actualization of economic, monetary and financial stability in the region; (ii) need for fiscal convergence that is well supported by relevant structures to complement the gains of monetary convergence; and (iii) need for sound policy to promote structural diversification in GCC economies as members at present have high structural convergence in terms of products and services. The implication of the not-too-nice development is that countries with similar economic structures and tradable goods/patterns are unlikely to cope with asymmetric shocks, which is the key essence of adopting a single currency area in the first place. In spite of this warning the economies of GCC after 33 years reflects structural convergence as evidenced by reliance by all the member countries on oil and gas. Another study by Abu‐ Qarn and Abu‐ Bader (2008) identified the presence of structural shocks in the GCC countries. The transitory demand shocks are symmetric, Proceedings of 11th International Business and Social Science Research Conference 8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2 while the permanent supply shocks are asymmetric; a strong indication that the prerequisites for a monetary union have not been met in the GCC countries. Reviewing the activities of the GCC countries, Kamar and Naceur (2007) note that GCC countries have progressed substantially within the framework of economic integration by achieving a free trade zone in 1981; the introduction of a custom union in 2005 and official commencement of a single currency had been fixed for 2010. On the strength of the progress, they examine the impact of money supply, budget deficit, government consumption and degree of openness in each country on real exchange rate (RER). The result confirmed that all the factors have a similar impact. In a similar study, Kim et al. (2012) examine the impacts of external shocks from the US, EU, Japan, the international oil market and regional shocks to the GCC countries. Using a quantitative technique, the study found the U.S. dollar and the euro currencies are more impactful on external shocks in the GCC region and should be used more in the common basket of currencies in the region. A situational assessment of the gains of GCC by Khan (2009) revealed that formation of a monetary union had always been the main goal since 1981. At present substantial progress had been made based on unrestricted intraregional mobility of all factors of production (labour and capital included); ongoing harmonisation of financial regulation and the establishment of a common market in 2008. The study noted that all the convergence criteria required for sound monetary integration have been met except an exchange rate regime for a single currency. He cautioned against adoption of US Dollars because of the spill-over effect of inflation and negative business cycles in the US in recent times. Similar, an exploratory study by Hebous (2006) examines the main characteristics of GCC countries in readiness for the introduction of a single currency in 2010. Different aspects of the structures for readiness were examined ranging from pattern of trade, the monetary issues, and the fiscal arrangement. The study found that there exists large similarities among the GCC members, a situation that would help reduce the costs of introducing a single currency; and secondly, small trade relations take place among member countries possibly because of similarity in the production structure, low intraregional trade reduces the economic benefits of a single currency. Using Europe’s criteria of degree of convergence, the GCC has recorded a substantial level of convergence. The benefit of shielding the regional bloc from economic shocks or contagion prevention is a key reason why countries that are closer form economic unions. To investigate the impact of such shock or contagion in the GCC, Suliman (2011) examines contagion and crisis spill overs in the GCC countries from 1960 to 2002. The study found that contagion from the US stock market crash and the Thai devaluation affected Saudi Arabia and later triggered a spillover to smaller GCC countries, an indication that economic integration and single currency would insulate the region from crisis propagation. In view of the debates on the viability or otherwise of GCC countries embracing a single currency area in 2010, Pattanaik (2007) assesses the degree to which the GCC has met the requirements of an optimum currency area. The study found that firstly, GCC countries have similar economic structures due to a high degree of oil dependence and Proceedings of 11th International Business and Social Science Research Conference 8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2 somewhat convergent business cycles, and secondly,; they show a high degree of openness, which is an indication that there is a strong case for a single currency, centralised monetary policy and a common exchange rate. However, monetary convergence criteria shows that there are differences in observed yearly inflation rates across GCC countries, but the inflation differentials converge over time. The conclusion therefore is that there is a strong case for adopting a common currency in the GCC region. The benefits include a larger common market, intense competition, and enhancement of monetary and financial stability in the region which will create a business environment that is favourable to trade and investment promotion. Similar, a study by Alturki (2007) examines the feasibility of GCC as an optimum currency area within the framework of eight OCA perquisites. The study found that the GCC region has satisfactorily met six out of the nine criteria, these include: openness, similarity of production structures, and similarity of inflation rates, financial market integration, fiscal policy coordination, and political power. However, the three yet to be met are factor mobility, diversification of production and price wage flexibility. However, Buiter’s (2006) study questions the desirability of monetary union among the six members of the Gulf Cooperation Council. From the lenses of economics and political economy, the paper found that there are several benefits ranging from unrestricted movement of goods, services, financial capital, and human beings as labour. Apart from mobility, monetary union would forge political integration. The political argument of integration requires supranational political institutions including a central bank in place to coordinate the activities of the GCC countries. Political integration requires surrendering of national sovereignty, which at the moment is elusive in the GCC countries. The empirical study of Pattanaik (2007) investigates the closeness of the six Gulf Cooperation Council countries to the process of full economic integration of a single currency in 2010. The paper found that it is desirable for the GCC countries to collaborate and have a single currency rather than proliferation of national currencies, a pre-condition that has not been met. Further empirical studies like Kandil and Trabelsi (2010) test the desirability and feasibility of the GCC forming a monetary union with a single currency for the region. Applying the multivariate structural Vector Autoregression Model (VAR) from 19802006, the paper found that the six GCC countries are yet to meet the pre-condition for a successful currency union. However, UAE, Saudi Arabia and Qatar show greater potential for setting up a common currency zone. Secondly, the degree of labour mobility, trade openness and intra-regional mobility are still below expectation, there is a need for improved labor mobility, openness, and intra-regional mobility for a sustainable currency union. With regards to adopting the US dollar as a peg currency under the single currency area of the GCC, there has been mixed findings. Jean-Louis et al. (2010) investigate the suitability of the US dollar as a peg for the GCC’s single currency area, the study found that for inflation, the GCC countries show synchronised responses to monetary policy shocks from the US dollar, but for non-oil output growth there is no clear indication that US monetary policy can be as effective in the GCC countries as it is in US. Building on their earlier study described above, Jean-Louis et al. (2012) assess the costs of forming a monetary union among the GCC countries and leveraging on the economic potentials Proceedings of 11th International Business and Social Science Research Conference 8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2 of non-member countries like the US and major European countries such as France, Germany and Italy. Using a quantitative approach, the paper found that Aggregate demand shocks are symmetrical across the GCC countries on the one hand, and with the US alone on the other. Secondly, the Non-oil Aggregate Supply shocks are asymmetric, but oil Aggregate Supply shocks are mostly symmetrical when the real price of oil is included. The implication of the study was that it aligns the presumption of some scholars that GCC countries have common oil shocks; hence they could form a monetary union with single currency. An earlier study by Badr-El-Din (2005) investigates the degree of convergence in the GCC using five tests guiding the United Kingdom’s policy decision on the European Monetary Union. The paper found elements and types of convergence, but for the future the GCC countries need to diversify and specialise on the basis of their factor endowment to wipe out current convergence. Besides, fiscal policy flexibility is absent, there is limited labour market flexibility and foreign direct investment (FDI) is small, but the financial market is likely to benefit from the monetary union agenda. Like the previous empirical studies discussed above, Naser (2008) investigates the effectiveness of GCC economic integration. Using descriptive and comparative analyses, the paper measures progression toward monetary union. The paper found that the progression of the GCC countries towards economic integration is progressive and encouraging, but leaves room for substantial improvement. Considering the controversy surrounding the single currency of the GCC countries, Basher (2013) critiques past efforts in terms of benefits and costs. The paper established that the creation of a fiscal union is desirable for the monetary union to work.. Recently, Aloui et al. (2014) investigated if the GCC countries have fulfilled the basic requirements for creating a monetary union by examining synchronization of real growth in the six GCC countries with other non-member nations in the Gulf. The paper found that the real growth rates in the majority of the GCC countries co-move with one another over the short and medium terms. But in the long-term co-movement of real growth rates took effect in seven out of the 15 countries paired. Besides, two major countries in the GCC region, Saudi Arabia and the United Arab Emirates manifest similar growth cycles compared with other countries. 4. Materials and Methods The qualitative research method was adopted relying on journal articles from 2002 to 2014. From the search engine, a request for articles on GCC’s single currency agenda generated over 100 results for journal articles/books. The generated materials were previewed on the basis of their suitability and relevence to the theme of the research. At the end of the preveiw, a total of 25 relevent papers representing 40% of the accessed materials were finally selected (that is a purposive sampling technique was applied). The method of anlaysis found most appropriate was qualitative meta-analysis. Qualitative meta-analysis is a technique of reviewing the literature to elicit evidences/facts and synthesizing them and bringing out new interpretations which bridges the gap between theory and practice (Denyer and Tranfield, 2006). It is also an interpretative process of integrating results from many but related qualitative studies (Walsh and Downe, 2005). In this study all findings from relevant conceptual, theoretical Proceedings of 11th International Business and Social Science Research Conference 8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2 and empirical studies were integrated and re-interpreted to provide support or otherwise for the present study. 5. Findings from Qualitative Data Analysis The findings from the qualitative meta-analysis are tabulated in Table 3. From 25 scholarly works reviewed, the emerging findings are that in spite of the odds, the single currency agenda is still feasible. SN 1. 2. 3. 4. 5. 5. 7. 8. 9. 10. 11. 12. 13. 14. 15. Table 3: Evidences on feasibility of a single currency agenda Author /Year Findings Laabas and GCC countries are not ready because pre-conditions have not been Limam (2002) met except commitment to fixed exchange rate and political will. Cooper (2003) Full economic integration is delayed because the formation of GCC was to limit the potential pressure from Iran and the Soviet Union. Sturm and Macroeconomic fundamentals do not converge and institutional Siegfried (2005) frameworks and policies are weak and needed to be developed. Badr-El-Din GCC has partially fulfilled the process leading to monetary union. GCC (2005) economies still converge. Hebous (2006). GCC has substantial level of convergence in the quest to adopt a single currency. Buiter (2006) Monetary union is justified based on economic arguments, but suffered on political arguments. Rutledge (2006) The study found that a currency union is appropriate for GCC. The members have not fully implemented the pre-requisites. Kamar and Naceur (2007) Alturki, (2007) Pattanaik (2007) The exchange rate misalignments converge overtime in GCC due to good coordination. Partial success to be improved upon. GCC region has satisfactorily met six out of the criteria. Found that there is a strong case for adopting a common monetary policy under a common currency in the GCC region. Abu‐ Qarn and The pre-conditions for a monetary union have not been met. Abu‐ Bader (2008) Naser (2008) Found that the progression of the GCC countries towards economic integration is progressive and encouraging. Khan (2009) All preconditions for convergence met except exchange rate regime. Jean Louis, Osman and Balli, (2010) Mohanty, et al., (2011) 16. Bley (2011) 17. Patrick (2011) 18. Suliman (2011) Found that for inflation, the GCC countries show synchronised responses to monetary policy shocks from the US dollars, but for nonoil output growth the response was contrary to US. Found that at the country level stock markets in all the GCC countries (except Kuwait) have positive exposures to oil price shocks. But at the industry level, the responses of industry-specific returns to oil shocks are positive for only 12 out of 20 industries. Found evidence of nonlinear dependence for the daily data (which was rejected), but differences were found across markets using weekly and monthly data. Monetary union will be elusive because the ruling families lacks democratic tradition and fear to surrender to supra-national institutions Found that economic integration and single currency would insulate the Proceedings of 11th International Business and Social Science Research Conference 8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2 19. 20. 21. 22. 23. 24. 25 Kandil and Trabelsi (2010) Jean-Louis, Balli and Osman (2012) Arouri and Rault (2012) region from crisis propagation. GCC countries are yet to meet the pre-conditions for a successful currency union. GCC countries have common oil shocks, hence could form a monetary union with single currency. Found that there is co-integration between oil prices and stock markets in GCC countries. As oil price increases, the stock prices increase except in Saudi Arabia. Kim, Found that U.S. dollar and European currencies are more impactful on Hammoudeh external shocks in the GCC region and should be used more in the and Aleisa common basket of currencies in the region. (2012) Al-Ajmi and Found that Random Walk Hypothesis is not applicable to the Kim, J. H. operations of GCC stock markets at both daily and weekly frequencies. (2012) Basher (2013) Aloui et al., (2014) GCC have moved substantially, but required exchange rate regime. The real growth rates in majority of GCC countries co-move with the others over the short and medium terms. Only KSA and UAE co-move in the long-term. Evidence of viability of single currency area. Source: Authors – Qualitative Meta-Analysis of previous studies on GCC 6. Conclusion/Practical Recommendations The paper examined the feasibility of a single currency agenda in the GCC region from the perspectives of previous studies. At the end, the paper found that a single currency agenda is still feasible in the GCC region; however, the pre-conditions which have not been met must be quickly addressed. This paper has therefore, enriched the qualitative meta-analysis by systematically reviewing previous conceptual, empirical and theoretical studies on GCC’s single currency area and brought out common themes on the basis of which new interpretations have emerged on the feasibility of a single currency agenda in the Gulf region. Based on the emerging findings presented above, the following are the practical recommendations of the study for shaping future research direction. i. For sustained progression towards a single currency area, there is a need for implementation of free trade area agreement for the free movement of goods and other factors, thereby promoting more intra-regional trade. ii. In order to have better convergence of macro-economic fundamentals, the GCC countries need to create 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 beneficial monetary union, it is suggested that sound policies be formulated and implemented to promote structural diversification, more factor mobility and price wage flexibility. Proceedings of 11th International Business and Social Science Research Conference 8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE, ISBN: 978-1-922069-70-2 iv. Finally and more importantly, genuine political will is a fundamental pre-condition for monetary union. 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