Globalisation and Regional Integration - Term Paper Example

? Regional Integration: GCC Regional Integration: GCC Introduction Regional integration is a process by which two or more countries or states form a council or a collective and work together closely in order to attain stability, harmony and wealth. This integration is usually done by signing some written agreements that briefly describe which areas need cooperation (EU Learning, n.d.). GCC, Gulf Corporation Council includes the six Gulf countries; Saudi Arabia, Bahrain, Kuwait, Qatar, the United Arab Emirates and Oman. This council was formed in May 1981 in order to promote peace and unity among these countries (Dubai Government Media, n.d.). The major reason for the establishment of regional integration was the resources these countries have in common. These countries are rich in oil and petroleum resources and the industry is successful. Apart from resources these countries have a lot of other characteristics in common such as they have the same Arabic language, they have related histories, they follow the same religion, they have the same rules and regulations and they share same cultural patterns. One of the major strengths of this region is that they have mutual views on world problems and always vote the same on issues. This gives them an opportunity to be a significant and independent force in the United Nation’s decision making. Importance of Study This study is important as it describes the role of regional integration in the development of unity and peace among similar countries and how it helps under-developed countries to cope up with the developing ones. Integration through: Commodity Trade and Service Trade The GCC is an economic, political, social, regional organization but more stress is given to the economic sector. This is because of the reason that economy plays an important role in the development of a country. The members of the GCC have agreed to towards creating a Single Market (SM). In order to achieve this goal, Free Trade Area (FTA) has been established which stated that foreign goods imported from outside shall have a custom tariff of 5 percent (DCCI Govt, n.d.). Further, equality was given in certain important areas such as education, residence, pension schemes, insurance, health, tax treatment etc. This was done in order to strengthen the foundations of GCC Single Market. The free movement of goods, services and labor between the members had significantly improved their GDPs. The new FDI policies adopted by the members have strongly increase FDI flows in and out of GCC states since 2003. The main sector that increased the FDI inflows to the members was the service sector. In 2010, the services sector was responsible for 42 percent of the FDI inflows whereas the oil and gas sector accounted for 16 percent (UNCTAD secretariat, 2012). The following figure shows the share of FDI in Green Field projects according to geographical regions. According to the figure, the FDI projects from developing countries have increased from 2003 to 2005 and then observe a constant increase and decrease during the years later. The share of FDI projects from the Asian region was highest in 2007 and lowest in 2003. Further it decreased in 2011 but still the Asian share among developing countries is larger as compared to GCC countries and other developing countries. During this period, the share of GCC countries was zero. This shows that the FDI inflows during the 2000s came in from different geographical origins which helped the economy grow. The Asian developing countries shifted the FDI stock from developed countries from 80% to 56%. This data basically verifies the escalating significance of Asian countries as sources of FDI in the GCC states. According to a leading economist, the oil prices are not expected to rise which will ultimately slow down the GDP growth rate of GCC. The article compares the growth of oil and non-oil sector in 2011 and 2012. The non-oil sector will remain at the same level as of last year. Qatar has the most swiftly increasing non-oil sector which will keep on growing in the coming years. Saudi Arabia had the highest inflation rate among the member states (Trade Arabia, 2012). Data from 1980-2002 shows that oil potential and oil utilization influence the FDI flows in a negative manner. Oil potential is measured by oil reserves whereas oil utilization is measured by oil production. Further the oil prices also have a negative influence on FDI flows. On one hand the free trade system eggs on FDI flows whereas on the other human capital puts off them (Waseem, 2007). According to analyses of the effectiveness of GCC integration, it has been exposed that the council carries out an analysis of all the problems related to the states and their societies. An increasing trend has been seen in the high-tech manufacturing sector and the exports and imports. After the execution of customs union, the total capital investment per project and the number of joint venture projects have amplified drastically. Also foreign companies have started making joint ventures with the GCC members. Due to all these factors, a quick enhancement in FDIs has been recorded during 2001 to 2004. This increase in FDI has occurred because of the huge local market size of the GCC. Another reason is the constant economic growth after the incorporation. It has been observed that the GCC members have welcomed and adopted new technology more quickly in the early 2000s as compared to the 1990s (Naser, 2008). Financial and Monetary Integration It is a fact that states with similar economic systems can achieve economic integration much rapidly and smoothly. Due to such similarities, the GCC members planned to form a Gulf Monetary Union (GMU). As already mentioned, these countries are rich in oil resources, which also prove to be a great portion of the revenue generated through exports. The following figures show that a gap still exists between the countries despite their entire struggle to line up their economic strategies. Since the existence of GCC, the members have been trying hard to create a monetary union. In order to do so, they have opened intra-regional trade of labor, goods and capital which resulted in the establishment of a common market in 2008. Creation of monetary union requires an exchange rate system for the single currency. Like many other countries, they use US Dollar as the standard. This policy has provided them well up till now. But there has been a sudden increase in inflation in the United States which has led the GCC members to think about the Dollar policy. According to Khan, the Dollar is the best option out of all the alternative exchange rate systems. This option is best applicable if the members wish to establish a monetary union. It has always proved trustworthy. Further he says that it is not important to choose one system and keep it permanent. The GCC members can switch to more elastic systems as their society develops (Khan, 2009). In 2010, the GCC intended to commence a single currency. The six countries agreed to it and discussed the issues and choices they had to make regarding the monetary and fiscal policies. This helped them view the issues that would take place during the monetary integration process (Sturm & Siegfried, 2005). Following are the three main findings from the paper: An international monetary institution must be formed which will perform exchange rate regimes and combined monetary policies depending upon the economic, financial and monetary conditions of the GCC Monetary Union. Secodnly, a proper fiscal policy framework must be established in order to achieve fiscal integration or convergence. Thirdly, it is forecasted that the high structural integration will diminish considering the diversification occurring in the GCC economies, so sufficient policies should be made in order to tackle this problem. The above figure shows that the interest rates in the GCC countries have moved in parallel. The figure shows the data from last two decades. It further exhibits that the interest rate fluctuation also happens to be together with the interest rates of the US. Especially, the interest rates of Bahrain and Saudi Arabia coincide with that of US. This is mainly because of the US Dollar peg. Qatar shows a fixed rate till 1990 but later oscillates in row with the other countries. Resultantly, there is a small difference between the highest and lowest rates of the GCC members, which leads to a single currency. Further, one fact should be kept in mind that the trade activities within the member countries are much lower as compared to foreign trade, so this monetary union will not prove to meet the expected benefits. Integration through Infrastructure: Developing countries are moving towards regional integration for two main reasons. First being the development that takes place as a result of integration and secondly because this integration affects all participating and non-participating developing countries (Schiff & Winters, 2003). Regional integration always requires high investment in infrastructure such as oil, gas, telecommunication, transport facilities etc. The GCC Railway Project is one big example of infrastructure development. This project was approved by the GCC Summit in 2009 and is expected to be working in 2017. The railway links between all the six countries of the GCC Council. The project is considered to be economically and financially feasible. It will further increase the employment opportunities for the locals. And lower the expense on constructing roads. Hence, providing a better and valuable mode of transport for the local people. It is also expected to add to the Common Market and Free Trade policy (The Gulf Cooperation Council for the Arab States - Secretariat General, 2012). Trade The ratio of exports to imports of GCC economies is high which means that these economies are open to international trade. According to the World Trade organization, Saudi Arabia is ranked number 19 in the worlds top exporters 2004 list. After the integration, these countries became the major exporters of oil and natural gas around the world. The following table shows the share of oil exports of all these GCC countries and how open they are for international trade. It also mentions the years in which they joined the World Trade Organization (Hebous, 2006). As listed in the table, the share is smallest for the UAE and the largest for Kuwait. The GCC members focus more on increasing their exports to imports ratio, whereas the trade within these countries is negligible. This is also because of the fact that all these countries have similar resources and industries and are exporting the same products to foreign countries. Issues and Challenges to further Integration: The GCC members face two important challenges that include diversification and expansion. Diversification The members of the Gulf Corporation Council plan to diversify their economies by maintaining a well-built non-oil sector. Proper actions are taken in order to increase FDIs, privatization, transportation development and setting up financial centers. The nations with lower shares of oil exports in the market are implementing huge projects in order to promote the non-oil sector. For example, UAE is investing heavily in the tourism sector and Bahrain is also supporting tourism as well as creating a centre for Islamic banking. The enhancement of non-oil sector and diversification also helps in creating employment opportunities for the local residents. On the other hand, Saudi Arabia is working hard to improve its manufacturing sector. The GCC countries are higly dependant on foreign human capital. They mostly hire people from other Asian countries. Even the public sector relies on the foreign human capital. A need of diversification also exists because the public sector cannot absorb the increasing labour supply, so private sectors have to serve for this purpose. Further, the nationals have similar educational basis which does not help diversification, so a need for foreign capital exists within (Hebous, 2006). Enlargement The second challenge faced by the GCC countries is that of enlargement. The author states that enlargement is not on the list as of right now. Enlargement process can include adding other Arabian countries to the council or the union (Hebous, 2006). However some suggest that enlargement will have a positive impact on the member countries. This is the reason why the GCC countries invited two other Arab countries; Jordan and Morocco to join the council. The main reason was to reinforce their association by taking on countries ruled by similar monarchies. Further the enlargement would bring positive economic impacts. The integration of two oil companies in Jordan will bring significant economic changes by increasing the nominal GDP above $1 trillion. Further, these two countries won’t cost much because their infrastructure requirements are lower as compared to the standards of GCC. Also this integration will prove beneficial for Jordan because of their political instabilities, which would improve after the integration. Whereas on the other hand, Morocco is well established and has closer relationships with the European countries. Joining with the GCC will not prove to be very fruitful to them because it already is a member of the Arab Maghreb Union; consisting of five countries (Sfakianakis, 2011). If we look from a long term perspective the concerns regarding monetary union have still not been decided. These problems are not expected to be resolved in the near future. So, before thinking about enlargement, the GCC needs to address the current issues going on between the members. These issues majorly include the free labour and investment opportunities, the customs union and the free trade agreement (Sfakianakis, 2011). Though there exists a possibility that Jordan might join the GCC, but even if it does one can not expect everything to go right and the problems such as unemployment to be resolved. Conclusion: According to a study, the most important and valuable feature of current international relations is globalization, but recently this trend has been shifting towards regional integration. It shows that regional integration can be dangerous to a country’s security by supporting movements and increasing the risks of national disagreements. These disagreements further lead to poor relations between those countries (Sideri, 1997). Further, these states have open economies i.e. freedom of investment and they are highly dependant on their oil resources. The member states have tried hard to intensify the integration or association by a number of factors that are already mentioned such as creation of free trade area, customs union, common market and monetary union. The monetary union is considered the easiest, most efficient, ad most cost effective task as the economies of all these states somewhat resemble one another. And it was not regarded as a substantial change because of the existing fixed exchange rate system. Further the expected benefits from monetary union will not be accomplished because of lesser trade within the member countries. The main challenge faced by the council is to increase the non-oil revenues in order to strengthen their economies. A large investment is needed in the private sector in order to achieve diversified benefits. Some of the members are already working on their private sectors such as tourism and banking. In this way, their economies can be strengthened and the members can enjoy the advantages of a much deeper integration. Works Cited DCCI Govt, n.d. GCC Economic Integration. [Online] Available at: http://www.dcci.gov.ae/content/Bulletin/Issue7/CurrentEn_ISSUE7 [Accessed 6 April 2013]. Dubai Government Media, n.d. His Highness Sheikh Muhammed bin Rashid Maktoum. [Online] Available at: http://www.sheikhmohammed.co.ae/vgn-ext-templating/v/index.jsp?vgnextoid=b10a4c8631cb4110VgnVCM100000b0140a0aRCRD [Accessed 6 April 2013]. EU Learning, n.d. Extension: What is Regional Integration? [Online] Available at: http://www6.carleton.ca/ces/eulearning/introduction/what-is-the-eu/extension-what-is-regional-integration/ [Accessed 6 April 2013]. Hebous, S., 2006. On the Monetary Union of the Gulf States. Working Paper. The Kiel Institute for the World Economy. Khan, M.S., 2009. The GCC Monetary Union: Choice of Exchange Rate Regime. [Online] Available at: http://ssrn.com/abstract=1392426 or http://dx.doi.org/10.2139/ssrn.1392426 [Accessed 6 April 2013]. Naser, A.H.K., 2008. Trade and regional integration: analysis of the effectiveness in the GCC. International Journal of Islamic and Middle Eastern Finance and Management, 1(2), pp.95-112. Schiff, M. & Winters, L.A., 2003. Regional integration and development. World Bank Publications. Sfakianakis, J., 2011. Who would benefit from an enlarged GCC union? Middle East News, 5 June. Sideri, S., 1997. Globalisation and regional integration. The European Journal of Development Research, 9(1), pp.38-82. Sturm, M. & Siegfried, N., 2005. Regional Monetary Integration in the Member States of the Gulf Cooperation Council. [Online] Social Science Electronic Publishing, Inc Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=752091 [Accessed 6 April 2013]. The Gulf Cooperation Council for the Arab States - Secretariat General, 2012. GCC Railway Project. Project report. Abu Dhabi: Railway Industry Forum. Trade Arabia, 2012. GDP growth in GCC seen slowing down. [Online] Abu Dhabi Available at: http://www.tradearabia.com/news/eco_211066.html [Accessed 6 April 2013]. UNCTAD secretariat, 2012. Regional integration and foreign direct investment. Agenda. Geneva. Waseem, M., 2007. The location determinants of FDI in the GCC countries. Journal of Multinational Financial Management, pp.336-48. Read More