Estimation of the Gulf Currency Union - Research Proposal Example

?Running head: GULF CURRENCY UNION Gulf Currency Union: A Research Proposal 09 July Gulf Currency Union is a popular topic of professional discussion. However, the effects of GCU on Saudi Arabia are yet to be defined. This paper is a research proposal, whose goal is to estimate the effects of GCU on Saudi Arabia. A brief discussion of the research goal and objectives is included. A brief literature review is provided. The research proposal offers a brief discussion of methodology, concepts and terms. Keywords: Gulf Currency Union, GCU, Middle East, Saudi Arabia. Gulf Currency Union: A Research Proposal Gulf Currency Union is a popular object of professional discussion. Much has been written and said about its benefits and potential costs for the Gulf countries. GCU exemplifies a complex product of multiple influences and reflects the growing role of globalization and integration in economic relations between Middle Eastern countries. However, how GCU will affect these countries remains unclear. Clearly, there is a need for a study of GCU and its effects on Saudi Arabia. The choice of this research topic is justified by the growing importance of GCU ideas in the Middle East and the lack of information about the benefits and costs of GCU for Saudi Arabia. It is imperative that the effects of the currency union on Saudi Arabia be understood in their entirety, to ensure that the country uses the potential of GCU membership to the fullest and can easily avoid its drawbacks. Literature Review The growing body of literature indicates sustained popularity of GCU and related subjects in literature. The history of economic cooperation between GCC states dates back to 1981, when the Free Trade Area in the GCC region was established and a unified Economic Agreement was ratified (MacDonald & Al Faris, 2010). Since 1981, economic cooperation in among the six GCC states had been rapidly expanding (MacDonald & Al Faris, 2010). Unfortunately, because of numerous political tensions in the Middle East, the GCC states failed to implement the vision of economic integration; it was not before the beginning of the 21st century that the idea of a common trade and currency area was revitalized (MacDonald & Al Faris, 2010). During the 1990s, the GCC countries also attempted to establish a customs union (MacDonald & Al Faris, 2010). Today, the existing relationships between Gulf countries lay a solid foundation for implementing the Gulf Currency Union idea into practice. It should be noted, that more and more researchers are interested in analyzing the effects of GCU on the Middle Eastern world. The topic of monetary union in the Gulf region remains one of the popular objects of public and political debate. Previous literature “has concentrated on three main themes, namely, the costs and benefits of a single currency in the short and long term; the degree of macroeconomic policy coordination and the extent to which the Gulf States meet the theoretical criteria of an optimal monetary union; and finally the best exchange rate regime for the single currency.” (MacDonald & Al Faris, 2010, p.9) There is no agreement on the pros and cons of GCU for Middle Eastern countries. According to Buiter (2007), the union can benefit the GCC countries in that it promotes economic openness and financial security, as well as greater integration followed by the development of a common goods/ services/ capital/ labor markets. However, the lack of supranational government bodies and institutions makes such outcomes extremely unlikely; moreover, countries joining GCU will have to sacrifice their political independence for the sake of economic integration (Buiter, 2007). Al-Bassam (2008) explored the benefits of GCU for Bahrain and developed a list of factors supporting GCU, including the elimination of currency transaction costs, considerable economic and financial savings, minimization of exchange rate risks, better pricing transparency and improved competition in business, greater fiscal discipline, and new investment opportunities. By contrast, El Hag (2007) does not vote for GCU, since GCC countries lack well-developed intra-regional trade networks, demonstrate low levels of commodity diversification, and heavily rely on oil. Despite these controversies, numerous authors tried to predict the effects of GCU on the countries of the Gulf Region. In 2002, Laabas and Limam wrote that, despite the lack of commodity diversification and heavy reliance of oil in the Middle East, the GCC countries would certainly benefit from GCU, through increased intra-industry trade, industry specialization, and greater convergence of their economic policy principles. Generally, currency unions do have a tendency to affect intra-industry and intra-region trade of their members: Nitsch (2004) found that economic stronger countries have better opportunities to benefit from a common currency. Furthermore, the introduction of GCU will foster international integration of trade and asset markets, promoting greater exchange rate flexibility, to be able to respond to the changeable needs of economic policy (Khan, 2009). However, all these findings warrant further analysis. In the meantime, researchers and financial specialists cannot reach a consensus on whether the GCC countries are prepared to form and enter a currency union. Hebous (2006) suggests that the GCC states have generally succeeded in achieving a degree of convergence needed to make GCU successful. By contrast, Abu-Bader and Abu-Qarn (2006) are convinced that even the basic conditions for creating a currency union are not met – there is still much to do, to align the political, financial, and fiscal systems among the GCC states. Razzak (2011) even suggests that the effects of GCU on the Gulf Region will depend upon the effectiveness of the currency chosen and its effects on asymmetric shocks. Not a single research provides information about predicted effects of GCU on Saudi Arabia. Motivation This research is motivated by the lack of knowledge about GCU and its potential effects on Saudi Arabia. The effects of GCU on Saudi Arabia are the main problem of this research. The main research questions include: The current state of GCU development; The current economic conditions and complexities in Saudi Arabia; The main economic and trade benefits of GCU for Saudi Arabia; Possible drawbacks of entering GCU for Saudi Arabia. Research problem Common currency unions are becoming a popular means of fiscal and economic integration. However, their effects on union members are poorly understood. The current state of research lacks information about the effects of GCU on Saudi Arabia. The main problem is to understand whether or not GCU membership can benefit the country. Hypotheses The research will check two hypotheses: (a) GCU will expand Saudi Arabia’s trade opportunities with other Gulf Countries; (b) Saudi Arabia is unprepared to enter GCU. Research Methodology The proposed research will combine qualitative and quantitative methods. The choice of mixed methods is justified by the need to create a complete and specific picture of GCU’s effects on Saudi Arabia. Quantitative methods will be used to perform a small macroeconomic simulation. Multivariate statistics will serve the main instrument of data analysis for the results of simulation. First, the economic conditions for the simulation will be defined. Second, statistics will be used to analyze its results. The simulation will create an objective, unbiased picture of GCU and its influence on Saudi Arabia. Qualitative questionnaires will be used to assess the country’s preparedness for entering GCU, based on the beliefs and opinions of financial and economic professionals from Saudi Arabia. Here, a questionnaire will be developed to be distributed among financial and economic professionals who agree to participate in the study. E-mail will be used to administer questionnaires to the research participants. All participants will have one week to complete the questionnaire, after they sign an informed consent form. Preliminary results will be provided, to make sure that the respondents agree with how they are interpreted. Concepts and Terms Gulf Currency Union – a to-be union of Gulf countries, in which they share a common currency. Gulf Cooperation Council (GCC) – a council founded in 1981 to promote cooperation of all types between its member states; currently includes Saudi Arabia, Bahrain, Kuwait, the United Arab Emirates, Qatar, and Oman. Kingdom of Saudi Arabia – the largest country of the Arabian Peninsula, and the future-to-be member of GCU. Research Frameworks The research will include an introductory paragraph. The introduction will provide a brief insight into GCU, its relevance and the need for further research. An extensive literature review will be performed. A review of literature is needed, to justify the relevance of the proposed research and create a foundation for interpreting research results. One chapter will be devoted to the detailed discussion of methodology. All research procedures will be described in detail; the methodology section will also be divided into two subsections – one for qualitative and one for quantitative methods. A results section will be followed by discussion. Implications for the future of monetary cooperation in the Gulf region will be provided. References Abu-Bader S. & Abu-Qarn, A. (2006). On the optimality of a GCC monetary union: Structural VAR, common trends, and common cycles evidence. Monaster Center for Economic Research. Al-Bassam, K. (2003). The Gulf Cooperation Council monetary union: A Bahraini perspective. Bank for International Settlements BIS Papers. Buiter, W.H. (2007). Economic, political, and institutional prerequisites for monetary union among the members of the Gulf Cooperation Council. Originally presented at Preparing for GCC Currency Union: Institutional Framework, 20-21 November, Dubai. El Hag. (2007). GCC countries’ common currency and its relationship to the optimum currency area. European Journal of Scientific Research, 17(3), 329-337. Hebous, S. (2006). On the monetary union of the gulf states. The Kiel institute for the world economy. Khan, M.S. (2009). The GCC monetary union: Choice of exchange rate regime. Peterson Institute for International Economics Working Paper Series, WP-09-1. Laabas, B. & Limam, I. (2002). Are GCC countries ready for currency union? Arab Planning Institute. MacDonald, R. & Al Faris, A. (2010). Currency union and exchange rate issues: Lessons for the gulf states. Edward Elgar Publishing. Nitsch, V. (2004). Comparing apples and oranges: The effect of multilateral currency unions on trade is small. In V. Alexander and J. Mulitz, Monetary unions and hard pegs: Effects on trade, financial development and stability, Oxford: Oxford University Press. Razzak, W. (2011). On the GCC currency union. The Arab planning institute. Read More