Towards monetary integration in the Gulf Cooperation Council (GCC)

The development of a strong and viable economic structure has long been an essential objective of the Gulf Cooperation Council (GCC) states--Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. For these states, industrial development policies is the basic key to a successful diversified economic structure and the main assurance of a continuance of self-sustaining growth. The achievement of such ambitions objectives as these requires some minimal form of cooperation, coordination, and arrangement among these states. Monetary integration which has been growing slowly in the past three decades or so, might be the primary step toward a complete economic integration. This study is aimed toward analyzing and evaluating the economic structure of the six separate GCC states, to determine whether or not the formation of an optimum currency area among them is feasible at this stage. Two different but related approaches, the economic characteristics approach, and the cost-benefit approach, were used in this study to examine such a feasibility. The examination of a set of suggested economic criteria may determine whether or not the GCC states individually, are good or bad candidates for participating in an optimum currency area collectively. The criteria that were examined and evaluated are: the degree of factor mobility, the openness and size of the economy, the degree of economic diversification, financial market integration, similarity of inflation rates, and extraneous political factors. The outcome of this study indicates that the GCC states currently are not good candidates to form an optimum currency area at this stage. This outcome is a result of some weaknesses in the economic structure of these different states, which includes: a low degree of factor mobility, small economic size, small volume, and slow growth of intra-GCC trade, limited role of the private sector in economic development, lack of cooperation and coordination in terms of industrial policies, and a low degree of economic diversification. In the evaluation process, several suggestions were made to improve the economic activities of the GCC states, that need to be considered in order to make the movement towards monetary integration smooth. Currently, there are certain primary steps that need to be achieved by these states, such as: exchange rates coordination, customs tariffs, and capital and financial market integration. Moreover, the feasibility of the possibility of formation of an optimum currency area, will increase once the various political and economic environments, in each state, become more favorable.