Arab economic integration - Research Paper Example

?Running Head: ARAB ECONOMIC INTEGRATION Topic: Arab economic integration Executive summary This research paper mainly focuses initiation of the Arab economic integration more specific on Persian Gulf GCC countries. It provides a clear description of the of the market environment in these countries as well as the strategies that the governments of the respective member states have put in place to enhance the efforts of integration. The paper further focuses on both the major challenges that limit the implementation process and the possible approaches that can be adopted so as to achieve optimum economic integration among the GCC member states. Introduction Regional economic integration among the Arab countries especially for the GCC countries has been a notable phenomenon. Efforts of regional economic integration in these countries started earlier than any other developing region in the world at around 1950s, The Arab states resolved on adopting numerous regional economic agreements that aimed at lifting up trade barriers mainly on preferential basis (Hatinger, 2010). These initiatives of economic integration had a significant economic impact on these integrated countries. The economical success derived from this economic integration has been characterized with slow progress and success because of the similar economic and markets nature of these Arab countries. The studies and analysis of this intra Arab integration indicated that the slow accomplishment and realization of the success of this integration is due to the low intra regional trade of goods among the member states which directly imply to the returns and the expected benefits from the regional integration., the general incentives that in achieving the regional economic integration is weak. This are base on the research works of World trade organization (2000) and the international monetary fund (2003) on the basis of the trans-industry and trading activities between the GCC states. These studies can give the conclusion that the intra Arab economic integration resulted into a lower expectations than what it was stipulated to achieve. GCC is a branch of the larger Arab economic union which is composed of other specific regional integration; other integrations include the Association of South-East Asian Nations (ASEAN) and the Arab Maghreb Union (AMU). All of these aimed at enhancing the economic development of its member states (Hakimian & Nugent, 2005). The Gulf cooperation council member states had a notable difference in regard to the economic growth and also difference in the gross domestic product per capital where Kuwait has the lowest figure of US$ 1000 compared to the United Arab Emirates which has over US$25000 (United Nations, 2009). With these disparities in the level of per capita income the Arab economic integration has to engage in an intra-industry trade and economic activities which is guided by the product differentiation. The reason of choosing this market driven by product differentiation is to gather and accommodate the existing income and GDP differences as well as preference. The major characteristic and influence that has been introduced by the Arab economic integration is the reduction and the elimination of the trade barriers that exist in between the member states, the reduction of the standard trade barriers include the non tariff barriers and the general costs of real trade (Hakimian & Nugent, 2005). The economic analysis and the evaluation of the Arab economic integration can be taken into account in two different dimensions where the first dimension is about the focus on the goods and services market, this dimension can be used to evaluate and assess the suitability and the desirability in regards as well as the context of the Arab integration. The second dimension comprises the reasoning in terms of the vicious circle; this provides that the idea of Arab economic integration has not been that effective because of the little intra regional trade due to the lack of organized regional economic integrations in the past (Hatinger, 2010). It is important to note that GCC countries have not only adopted the integration of market goods as the only way of promoting economic integrations, it has adopted other available ways of economic integrations. This is opposed to the success of other economic integration such as the European Union economic integration where emphasis has been made on goods market (Hakimian & Nugent, 2005). This approach has not been that feasible to other economies in the world such as the GCC, this is due to the less diversification of the goods markets compared to Europe. The integration capital markets, labour and service provision can be taken to independently be enhanced with less significant effects to the good market integration. It is evident that the Arab integration of the GCC countries has resulted into a potential welfare advantages and gains in the form of economic integration of these markets (Jovanovic, 2011). This economic integration aims at providing incentives to the policy and regulation makers to promote regional economic integration in their practices; this is expected to result into economic gains as opposed to the specialization. The major area of concern in regard to the GCC countries economic integration is the extent in which they have been able to progress in integrating these different markets and also the tendency of adopting the non- goods market form of economic integration (United Nations, 2009). The political considerations is an important factor in the success and a driving force as well as a constraint towards the achievement of optimum regional integration in the context of GCC countries, In contrast with the European where there is increased predominance of the political objectives within the regional economic integration. The political objectives have given authority these member countries to put in place some specific institutions to oversee the implementation of the treaties that bonds various nations which are the member states.GCC countries have instead decided to adopt an intergovernmental approach in regards to their regional economic integration , this has been attributed by the unwillingness of the Arab leaders to delegate or transfer any of their sovereignty powers and authority to other bodies and institutions (Hatinger, 2010). The opposition and the unwillingness of these Arab countries coexist in accordance with the Pan-Arabism ideologies that tries to defend a country not to be subjected to the public or external policies, this status quo political nature of these countries, it is found to have an insignificant effect on the regional integration while good markets, and factor service markets is found to be a major determinant factor. Goals and progress of Gulf cooperation council (GCC) Gulf Cooperation Council was formed and signed in 1981 as a Unified Economic Agreement between its member states, the major and the primary aim is to establish an economic integration and a common monetary union implying for the adoption of common market for goods and services, labour issues and Investments. This economic integration involved the facilitation of trade cooperation and the free movement of human labour and capital between the member states, as part of the common market chapter 2001 agreement the treaty dealt mainly with the investments as well as goods and services activities. The agreement also articulated for the non-discrimination or differentiation treatment to all the member state nationals in any of the GCC country (Hakimian & Nugent, 2005). The GCC Arab economic integration also in 2003 agreed on a common external tariff which had no exception to also internal free trade in the member countries. The common external tariff comprised a zero rate on imports more importantly on the essential goods and a 5% tariff on any other goods. In regards to the tariff revenues they agreed on redistributing them based on the final consumption among the member countries (Jovanovic, 2011). The implementation and compliance to these economic integration agreements has not been fully achieved, the GCC member states have not fully established a full custom union or a common market. This is evident as some member states still maintain diversified external tariffs, Bahrain, Saudi Arabia and Qatar have continued to have high tariffs of up to 20% on specific products. The flow of goods markets and services is highly affected by the border controls (United Nations, 2009). The international assessment and conformity procedures has continue to affect to a larger extend the adoption of the GCC economic agreements, this is evident in where the member countries have embraced divergence away from the common external tariffs hence making it difficult to harmonize the uniformity of tariff application among the member states. The institutional structure of GCC is considered to be relatively flexible; it is characterized with an inter-government agreement and there is no formation of supranational bodies. This structure consist a supreme council mainly comprising of the heads of state and the ministerial council and the meeting are scheduled at quarterly per year. The ministerial council has a number of committees including education, health, labour, social affairs and financial economic cooperation (Zhu, 2010). These committees carry out research on the various issues and submit the recommendations to the supreme council to be approved for implementation. The role of the GCC secretariat is to plan and organize for meetings and maintaining various reports on the implementation and monitoring decisions (United Nations, 2009). There is also development of specialized agencies in which are aimed at dealing with technical areas such as registration of patents and rights, commercial dispute arbitration and the standardization of the organization. The GCC member states have made a significant progress in establishing uniformity of standards and the assessment procedures. There are a number of standards that have been agreed upon however there is still slow implementation process as this is done on a country to country basis implying that there is no formal protocol binding these agreements. The GCC bodies and committees are headed by representatives from each of the member states and there are also permanent staffs. Deeper integration in goods markets The Gulf Cooperation Council countries faces sorts of difficulty in enabling its market grow due to fewer products in the market. The countries in the region are basically identified by similar culture, political setup and similarity in the products. The exports from this region are similar (mainly oil) with a target of a single market. They are a likely to face external shocks in their economies due to very minimal trade within the member states compared to their international participation (Legrenzi & Momani, 2011). Though the countries in the region have a relatively high income per capita, their industrial growth compared with the countries of the same status is low. The condition is basically caused by low trade between the countries. Trade can only be motivated by the countries taking advantage of each other in terms of their trading capacities. The regional economic status therefore is limited in terms of the profits attained in the market (Legrenzi & Momani, 2011). The growth of trade between the Arab countries is based on the diversity of the GDP of each of the countries in the council. Trade between these countries has been on the increase since 1980s. The concentration has been on the trade on goods which are not traditionally bound as the export but agriculturally based as well as manufacturing. The target for this region has always been the European market. The region however faces a stiff competition from other Arab and Asian countries (Zhu, 2010). The main aim of the council was to increase the financial ties and trade among the member states. The custom money and the monetary union plays an important role in developing the correct policies that could be used in the member states to enhance their exports as well as the trade between the member states. GCC allows the free trade between the member states as way to enhance the trade between the member states. Regulations on imports have been successfully harmonized since the member states share some similarity in the product in the markets. Thus the universal imports fee was set as 5% for all the GCC member states (Legrenzi & Momani, 2011). For trade to be enhanced among the GCC member states, the citizens of member states were granted the necessary moment free for more trade ties too be accomplished. Equal treatment of the traders in the markets was one of the treaties that the member states decided to comply with to accomplish the trade ambition. Some of the benefits that the citizens of the member states would the social security, health education, professional services and craft and all other services that would suite the more trade link in the member states. Taxation and capital movement are some of the challenges that the member states struggle to consolidate in a move to strengthened the ties among the GCC members and rest of the world. The agreement between then member states is basically based on the future relation. It is an investment that the real estates builders as the thriving business within the city. In the GCC economic region has Saudi Arabia as the main player, the products from the Saudi is approximately 70% of the total products sold in the market. However the population of the country is also high accounting to approximately 60% of GCC. The region has less than 10% percent of goods which are non-oil based exported to the global market. Most of the export is usually done by the individual countries mostly on oil exports. The GCC region exports products are mainly oil. The biggest market for GCC’s export is the European Union. The EU accounts to approximately half of all the exports for the region. The trade between the member states is quite minimal. Therefore the region has been keen on diversifying their export markets since 2000. Exports of Manufactured goods however have been gradually reducing since 1990s (Boughanmi, 2008). The European market somehow decline but the trade between other parts of the world has been greatly increased. Service markets The growth in service industry within the region is outstanding. There have more growth of trade within the region mainly featuring the transportation, tourism among other services. It has surpassed the integration in the manufacturing sector. The policy framework within the region has been an important tool in the integration as more of the regions trade laws were harmonized. Basically the quality of policies determines development of regional development. Taxation policy is basically a priority that the GCC made a priority. The 5% custom on imports was a step in ensuring the competiveness of the region for investment (Boughanmi, 2008). GCC also have the task of harmonizing laws on the financial and communication networks as they play an important role in the regional development and advancement. The service sector is paramount towards the regional integration thus the need for expanding the service sector was basically aimed at increasing the trade as well increasing employment opportunities in the region. UAE is basically the major transshipment destination in the region and also an international trade destination, thus the integration of the transportation sector is a major development that would enhance trade between these nations forming the GCC. Import of products such as food products from Singapore is facilitated by the UAE transportation system thus enabling the region to have a better trading power than when a single country import (Boughanmi, 2008). Movements across the border policies causes a major constrain in achieving a more competitive business environment as far as the GCC is concerned. The council of ministers dealing with the growth in the business sector have been actively involved in the creation of policies that allows more avenues for the open business market and having incentives that would support competition within the region. The status quo of the incumbent however has been maintained to avoid unfair competition from occurring. GCC has not taken the foreign and domestic policies on supplies. Therefore the contest in the market is rate at low. Basically it in fact the potential major benefit of the regional integration. Labor movement Labor movement within the GCC fuels the growth in economy to a higher level. The human capital is likely to be reduced thus having a positive impact on the businesses. Either way, the country of destination and the origin; the migration of the skilled labor is basically beneficial in the economic integration. The elasticity of the labor market is important in this development of the region. The oil field in the GCC states require highly skilled labor which have been important from other regions but is more likely to reduce the importation of manpower substantively (Jovanovic, 2011). The poverty level also is likely to be reduced. GCC has been termed as the capital rich but labor poor region. Most of the workers in the region are mainly immigrants from other Arab nations such as Egypt, Tunisia, Syria and other parts of the world. A regional free labor movement would reduce the effect of overdependence on the imported human resource. Flow of investment GCC among other Arab countries have been receiving the lowest capital from the foreigners. Basically the regional GDP was contributed by a merely 1% of the foreign investment according to a survey done in 2000. FDI contributed the highest private capital. While the debt flow and equity flow contributed an approximate value of 80% and 50% (Zhu, 2010). The FDI is still low in the GCC as compared to other regions of the world. FDI flow in the region has been favoring the outwards flows compared to the inflow of the FDI. The market segmentation for services and goods is basically one of the major improvements that can be done to the region in a bid to improve productivity and improve the foreign investment in the region. The imbalance in the demand and supply of labor is high thus the integration in the region is likely to be the bridge towards a more balanced market (Jovanovic, 2011). This would encourage more involvement of the global investors towards the region. A concerted effort towards harmonizing policies regarding market segmentation is likely to ensure the market become more competitive in the global market. The regional policies play an important role in creating a free market. GCC for instance agreed on the taxation of imports. The monopolies in the major sectors of trade such as in the areas regarding the infrastructure frustrate trade between the GCC and other regions. Such service can be also featured in the air and telecommunication services. GCC has however improved in the global market on transportation the main improvement is the airlines and the port which have become the most reliable in the global market. The products standardization within the GCC region has been unified to ensure the same standards are applied in the region. The GCC has adopted standards amounting to over 2700 (Buiter, 2008). The debate on the private investment is basically one of the areas where the GCC has not been active. It more of the public investment and barriers on private investment still plays an important role in investment. Unlike the EU for example, most of the GCC investment are mainly public (Jovanovic, 2011). EU embrace public, private investment but that cannot be taken as the model in the GCC since their trade represents a different business market. Therefore the private investment integration would require more research before the policies on it are enforced. The economic integration in the region is basically intergovernmental which is contrary to the supranational for the EU. There is little possibility that the government would allows such integration embraced in Europe. This is because the leadership setup in the region is basically based on the hereditary thus there is reluctance to transfer power to corporations. The effects of currency in the region The countries forming the council are concerned in development of a stronger coordination and cooperation among the member states. Organizations meant to develop the framework of integration are governed by the supreme council of ministers. After the free market establishment in 1983, the GCC have integrated their custom union. The time framework establishment of the custom union was 2005 while the adoption of a single currency was discussed in the summit held in Bahrain in 2000 (United Nations, 2009). Integration of the currency was considered the greatest towards achieving a more firm integration of economy. Establishment of a common 5% custom duty was established in 2003. Though the timeline for the launch of the currency was to be 2010, the deadline was shifted to 2015. Postponing the launch was mainly fuelled by the crisis on the Euro in 2010 where it was facing a collapse. They cited more legislations and technical requirements were needed in order to achieve a stable currency. The objective of currency integration was mainly to cut the cost of exchange and the challenges facing several currency operations. Currency integration should meet the threshold market requirement; the Optimum Currency Areas is one of the primary reasons why the region is taking extra caution in realizing the goal of a single currency. The theory of Optimum Currency Areas is important in the determination of the suitability of the members in having a single currency without affecting their economic status. Application of the theory however should be in the final stages (Buiter, 2008). For a single currency to be achieved, there are some important steps by the GCC and basically the barriers to the accomplishment of the single currency. Openness is basically one of the reasons for the slow implementation of the agreement. The region is greatly dependent on the international market mainly in exports and also in imports. The main product being exported by the region to other parts of the world is petroleum. GCC hold about 40% of the global reserves of oil. The GCC imports and exports form an important reason for the currency integration in the region. Movement of the citizens of the members within the GCC is highly affected by the monetary exchange. The exchange of rates causes more inconvenience, Thus the need for a single currency. However the fact that the member states of GCC have almost the same products in the market disqualifies them from forming a single currency (Hatinger, 2010). A single currency best suits economies which are more diverse. The agreement among the GCC allowed the member states to have a free market; freedom of movement and employment, ownership of property, business and capital movement (Hatinger, 2010). GCC is likely to face more external shock due to overdependence on the international market in the government budgets. Prices of goods depend on the international markets of oil. Basically the currency factor would not be influential in stabilization of the prices in the market and it will be the government intervention that will play an important role in stabilization (Hatinger, 2010). GCC is prioritizing policies that would ensure sameness in the market and international identification is arrived at. Steps towards the common currency have been advanced by the market stabilization of the exchange rates in the region. The government is actively involved ensuring the exchange rates are harmonized with the developments in the international markets. This is done by harmonizing the interest rates to suit the international market. Integration of market strategies The GCC member country governments have strive to reduce as well as removing domestic policies and regulations for the purpose of compliance with the economic integration agreements, this may sometimes have a market segmentation effects as these policies may not be uniform with the compliance in other member states hence increasing the additional cost on foreign products. The GCC Arab economic integration will ensure that proper ways means and mechanisms are adopted in the harmonization and negotiation on common formalities such as tariff reduction and cost lowering strategies (Legrenzi & Momani, 2011). Most of the Arab countries including the GCC have made little progress on the implementation of them economic integration agreements for many decades; this has been attributed by factors which are associated with national sovereignty of the member countries, the competition and implementation adjustment cost and the distribution of the gains from the integration, these factors has lead to the need to focus on the establishment of institutional mechanism that can provide an amicable solution to the underlying factors in ensuring that deeper integration is achieved (Zhu, 2010). The institutional mechanisms are important in providing a suitable guideline that the governments of member states can be able to follow in compliance with the economic integration agreements hence promoting such integrations. GCC Arab economic integration differs with other international economic integrations such as the European Union on its intergovernmental approach as opposed to the supranational approach. GCC integration as an hub organization of the larger Arab league for the specific countries has played a significant role in integrating further the goods markets and trading activities in conformity with the objectives of Arab league. The establishment of this regional economic integration has further enhanced the implementation progress of the Arab league, this come along because the league lacks formal mechanisms for the implementation process. In contrast with European Union in terms of the implementation of the regional economic integrations, The Arab economic integrations has a slow implementation progress contributed by the organizational structure approach and the lack of will by the government head of states to delegate some powers and sovereignty to the supranational bodies (Legrenzi & Momani, 2011). Most of the GCC Arab governments are autocratic, personalized and to some extend authoritarian hence the implementation of the GCC economic integration agreements will be based on the interest of such regimes. In these governments transfer and delegation of sovereignty is perceived to be detrimental on the interest of the head of states instead of considering the overall benefits which can be derived from the economic integration. In general the implementation of an effective economic integration in Arab countries to some extend has been limited by the justification of the Pan-Arabism strategies largely affecting the integrations foreign policies (Jovanovic, 2011). The Pan-Arabism strategies has incorporated politics and the strong sense of Arab identity, Arab states who did not comply with the Pan-Arabism are pressured, and even discredited. Thus Pan-Arabism has contributed to the challenges facing the economic integration in Arab countries (Boughanmi, 2008). The GCC Arab economic integration has developed alternative mechanisms aiming at encouraging and supporting the regional integration, these mechanisms has addressed and incorporated the elements of the supranational institutions and inter-government approach thus impacting positively on the strategies developed in the implementation of the economic strategy. Focus on cooperation The GCC Arab economic integration has laid a great emphasis on the area of cooperation and placing less concern on the sovereignty issues thus encouraging initiatives of regional integration. There are significant facilitation open trading among the member countries through the initiation of various reforms on important economic integration areas of concern such as tariffs harmonization and reduced cost on trade transactions. This economic integration has also focused on the elimination of barriers and reducing the uncertainties upon the implementation of this integration, these uncertainties surround the disparities and the existing difference among the GCC member countries in terms of capital, resources and labour all these are incorporated in the GCC framework (Legrenzi & Momani, 2011). In further enhancing a integration cooperation GCC has establish the regulatory agencies that will monitor and oversee the progress and the implementation process of the economic integration, there is less competition hence affecting negatively the production levels in the region hence focus has been emphasized on the formation of competition authorities in the respective member countries to oversee this issue (Boughanmi, 2008). Promotion of openness and accountability Most of the economic integrations has not emphasize on the importance of these integrations to its citizens and the major stakeholders of the economy, there is little awareness on part of the implementation process of these regional integrations (Buiter, 2008). There is the need for regular assessment and the monitoring of the implementation process, clear and precise outline on the tariff removal and reduction so as to shade light on the major investors and those carrying out the across the country economic activities. GCC has enhanced several firms through which firms and the major economic stakeholders can more easily access information about the regional integration deals and agreements and its agencies. This will enhance the effectiveness of the economical integration by ensuring that its operations have met the standards of transparency and accountability (Zhu, 2010). Conclusion For Arab countries government to be integrated in the into the international economic policy strategies economic regional integration is important. Gulf cooperation council (GCC) has become a major contributor to the integration of markets in the intra-Arab cooperation, with the aim of removing of tariffs on the intra-trade and enhancing trade and investments among the member countries (Leon, 2008). This economic integration has been used as to enhance economic cooperation and agreement on the reduction of trade barriers, enhance labour and capital mobility with the aim of achieving significant gains in regards to the trading activities (Legrenzi & Momani, 2011). The key major challenge in the pursuance of economic integration by these Arab countries is the efforts to establish a common market or a custom union, this has not been made possible due to its implementation nature where its requires agreement and harmonization of several policies and regulations between the member states. For these countries to achieve these aims and objectives of economic integration there is a need to establish institutional mechanisms that will promote regional economic integration to ensure that economic success is achieved among the regional member states (Jovanovic, 2011). Refereneces Boughanmi, H. (2008). The Trade Potential of the Arab Gulf Cooperation Countries (GCC): A Gravity Model Approach. Journal of Economic Integration , 23:1, pg 42 - 56 . Buiter, W. H. (2008). Economic, Political, and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council. International Macroeconomics . Hakimian, H., & Nugent, J. (2005). Trade Policy and Economic Integration in the Middle East and North Africa Economic Boundaries in Flux. London: Routledge. Hatinger, B. (2010). Multilateral Vs. Regional Economic Integration? - The Middle East and North African Region. Berlin: GRIN Verlag. Jovanovic, M. N. (2011). International Handbook on the Economics of Integration: General Issues and Regional Groups. London : Edward Elgar Publishing. Legrenzi, M., & Momani, B. (2011). Shifting Geo-Economic Power of the Gulf: Oil, Finance and Institutions. Farnham: Ashgate Publishing. Leon, E. Z. (2008). The Future of Globalization: Explorations in Light of Recent Turbulence. London: Taylor & Francis. ?abri, N. R. (2008). Financial Markets and Institutions in the Arab Economy. New York: Nova Publishers. United Nations. (2009). Annual Review of Developments in Globalization and Regional Integration in the Arab Countries, 2007. New York: United Nations Publications. Zhu, L. (2010). The Process and Economic Convergence of the Monetary Integration in the GCC Countries. Asian-Pacific Economic Review . Read More