Economic, Political, and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council

Abstract

The paper reviews the arguments for and against monetary union among the six members of the Gulf Cooperation Council -the United Arab Emirates, the State of Bahrain, the Kingdom of Saudi Arabia, the Sultanate of Oman, the State of Qatar and the State of Kuwait. Both technical economic arguments and political economy considerations are discussed I conclude that there is an economic case for GCC monetary union, but that it is not overwhelming. The lack of economic integration among the GCC members is striking. Without anything approaching the free movement of goods, services, capital and persons among the six GCC member countries, the case for monetary union is mainly based on the small size of all GCC members other than Saudi Arabia, and their high degree of openness. Indeed, even without the creation of a monetary union, there could be significant advantages to all GCC members, from both an economic and a security perspective, from greater economic integration, through the creation of a true common market for goods, services, capital and labour, and from deeper political integration.The political arguments against monetary union at this juncture appear overwhelming, however. The absence of effective supranational political institutions encompassing the six GCC members means that there could be no effective political accountability of the GCC central bank. The surrender of political sovereignty inherent in joining a monetary union would therefore not be perceived as legitimate by an increasingly politically sophisticated citizenry. I believe that monetary union among the GCC members will occur only as part of a broad and broadly-based movement towards far-reaching political integration. And there is little evidence of that as yet.JEL Classification: E42, E52, E63, F33, F42

The GCC’s Fixed Exchange Rate: A Major Anomaly for OCA Analysis

“…Our argument for the limited relevance of traditional OCA analysis for the GCC countries is quite different from the analysis by Willem Buiter (2007) 9 . He argues the much stronger proposition that ‘the theory of optimal currency areas … is almost entirely useless as a guide to the choice of currency regime in modern economies’ (p. 15).…”

“…Although there is not enough data available to do a formal analysis, it is generally judged that levels of factor mobility by GCC citizens are low, as is the degree of wage flexibility 7 . However, GCC labour markets are ‘highly unusual’ to use Willem Buiter’s (2007) phrase. They have more flexibility than these conditions suggest because of the heavy use of expatriate workers.…”

“…This combination of high levels of protected jobs for the locals and large movements of foreign workers cushion the domestic effects of macroeconomic fluctuations despite the domestic rigidities. Although this process has provided considerable adjustment in the past, Willem Buiter (2007) questions whether it will continue to operate as well in the future. The labour mobility among the expatriates…”

The feasibility of currency union in Gulf Cooperation Council countries: A business cycle synchronisation view

“…However, the authors suggest that the private sector can drive the process of regionalism among these economies. Indeed, Buiter () argues that the viability of such a “monetary union is not just a technical economic, financial or monetary issue. It represents a very significant constitutional and political change” (Buiter, , p. 606).…”

“…Indeed, Buiter () argues that the viability of such a “monetary union is not just a technical economic, financial or monetary issue. It represents a very significant constitutional and political change” (Buiter, , p. 606). The region needs to improve local institutions and create supranational institutions that drive regional integration.…”