It may be instructive in this regard to look back to the founding principles of the GCC itself, and reconsider the key conditions in which the Gulf economies collectively operate.
Scholars have doubtless done that on numerous occasions. At the Middle East Centre of the London School of Economics, Dr Duha Al Kuwari, also assistant professor at Qatar University, is updating that exercise in forthcoming research, testing the state of play in 2012.
For those whose knowledge is partial, she may provide some useful reminders and historical insights to back awareness. It’s certainly a help to have all the main elements assembled in documentary fashion.
For instance, when the GCC was formed in 1981 it did so recognizing that the oil-producing states of the Arab peninsula are not only part of the Arab world, but have particular similarities in history, social roots, circumstances, and demography — not to mention geography.
The strategic goals pronounced and adopted by the GCC Secretariat General and submitted to the council of the Planning Ministries at the time envisaged a list of common objectives, which are worth recalling in their general terms, as follows.
First, gradually to decrease dependency on oil revenue. Second, to reduce the number of non-citizens and so modify population structure. Third, to reform public expenditure and the budget. Fourth, to reform and develop public administration. Fifth, to create an alternative economic model. Sixth, to advance technical development. Seventh, to reform education and relate it to development needs. Eighth, to provide a suitable environment for cultural and social progress.
However, says Dr Al Kuwari, in the subsequent three decades, whereas that charter called for gradual movement from co-operation towards integration and indeed federation, an absence of political will and differing policies between the six GCC nations have left that ambition unfulfilled.
From the economic perspective, during that extended period the critical drivers of growth – viz population trends and oil — have very substantially defined where the region has reached today, and incidentally the former has responded functionally to the latter.
The combined population of the GCC countries grew from nearly 10 million in 1975 to around 43 million by year-end 2011.
Crucial within this statistic has been the phenomenon of labour immigration, a process actually originally instigated in the Arabian Gulf in the late 1930s upon the discovery of oil in the region, and which has been a resilient and powerful influence in recent decades.
What Dr Al Kuwari calls the “dilemma of imbalances” in the population structure only began to take real effect in the mid-70s, when a discrete succession of oil booms prompted its escalation. Expatriates constituted 26 per cent of total population in 1975 and 45 per cent of the workforce.
Leaping forward in time, notwithstanding the intervention of intermittent oil shocks, those figures had reached 40 and 70 per cent respectively by 2008, at which level any observer might detect a certain criticality in mass for national society as well as the economy.
Besides any political dimension to that changing demographic, the financial economy has been significantly impacted, in the “drain on national income” from the large-scale repatriation of wages and salaries overseas. Dr Al Kuwari’s research cites IMF numbers for remittances from the GCC region standing at as much as $75 billion in 2011.
That has technical consequences for operational control of the economy, she expounds. By way of such outflows, the demand for foreign currencies increases, reducing the value of the local currency. If the central bank wishes to maintain the value of that local currency, it finds itself required to hold extraordinary foreign reserves to preserve the pegged exchange rate.
“Then again, such transactions would cause a problem in the high supply of the local currency … [to be] minimized by using treasury bonds.” Yet, since in fact “there are inadequate government securities in GCC for the central banks to utilize, the effect of remittances will continue, hence reducing the money multiplier in the economy.”
Thus, population growth has both serviced and qualified the oil bonanza.
As for oil’s direct relevance to the economic and financial data, that tale is much recounted, and often translated into breakeven prices for budgets and balance of payments on current account.
Two charts here tell enough of that familiar story. Chart one displays the very close correlation of oil prices with GDP. Chart two shows that this relationship, while connected in a directional sense, is subject to separation by degrees as non-oil incomes accrue to complement the economic mainstay.
All in all, a distinct case of plus ca change.
