The GCC members aim at coordinating policies related to investment in order to reach a common investment policy that would liberalize capital movement among member countries and attract foreign direct investments (FDI) that are needed as a source of capital. In this matter, the council has promoted free capital movement through different agreements, regulations and laws since the UEA in 1981. From a legal perspective, the Gulfs capital enjoys a high degree of mobility. In practice, there is no indication of substantial capital movement across the Gulf States.
Low capital mobility can be attributed to the fact that most of the Gulf states are capital exporting countries, due to their similar production factors, small populations, limited investment opportunities, and high income levels (Mellahi et al. , 2003). One of the problems of financial integration among the GCC members is the fact that each member has virtually the same resource—oil—with limitations in other resources. Most of their investment has been primarily in their own country mainly because of the development and modernization plans.
Throughout the six members there continues to be a lack of diversification, which is reflected in the member states’ need for foreign investment rather than intra-region investments. As a result, there are limited opportunities within the industrial sector, while integration within the financial sector, stock markets, and banking have been the main roads to integration (Badr 2007). Cooperation is being expressed through direct investment of one GCC member into another GCC member’s state.
At the present time, investment is pouring into new projects in the Gulf at an astonishing rate. The boom in the GCC area is said to be just starting, and is expected to be unstoppable. The investments include projects in each member country as well as in the other member countries. According to the Inter-Arab Investment Guarantee Corporation (IAIGC), Saudi Arabia has been the biggest player in the inter-Arab investment movement, pumping around $2. 26 billion and receiving around $12. 7 billion between 1985 and 2001 (Inter-Arab Investment Guarantee Corporation 2009).
A large portion of Saudi capital flowed to Arab non-GCC countries, while more than 50 percent of received capital came from the GCC states (Mellahi et al. , 2003). Kuwait was the second largest recipient of Arab capital, standing at around $3. 5 billion, with GCC members pumping in $807 million. It lagged behind all other GCC countries as an investor in other Arab states, pumping only $78 million. Kuwait has attracted more Arab capital than it has invested in other Arab states, mainly because of the improvement in investment laws and the introduction of more incentives (IAIGC 2009).
The UAE attracted more than $2 billion in direct Arab capital and pumped over $7 billion into fellow Arab League members since 1985, to become one of the biggest contributors to regional investment activity. By the end of 2002, total direct Arab investment in the UAE stood at $2. 39 billion and covered industry, farming, tourism, banking and other services. Only 14 percent of capital flow came from the GCC countries with Saudi Arabia pumping nearly $157 million, while Qatar invested $78 million. The UAE’s investment in other Arab markets totaled around $7.
38 billion, with almost 98 percent to GCC members. Approximately 90 percent of the capital was pumped into Saudi Arabia, which received $6. 53 billion; with Kuwait being second, around $362 million; followed by Qatar, which received $254 million; and Oman, which got around $66. 8 million (IAIGC 2009). Bahrain, Oman and Qatar invest primarily in the Gulf region rather than investing in other Arab countries. Their accumulated investments in the GCC countries for the period from 1985 to 2002 reached $620 million, $97 million, and $253 million, respectively.
On the other hand, these countries received relatively lower amounts of Arab capital (IAIGC 2009). Foreign Direct Investment The GCC region is well integrated with the rest of the world in terms of trade flows, but poorly integrated globally in terms of FDI flows. The GCC countries receive very small amounts of FDI. Net FDI inflows to the region in 1993 amounted to about $2 billion. By the end of 1999, this had more than doubled to $5. 4 billion, but it represents less than 1 percent of world FDI. This was relatively insignificant compared to other developing countries.
With respect to approximating and unifying procedural systems and laws regarding FDI, GCC member states endorsed the Model Regulation for the Promotion of Foreign Investment in the GCC (Mellahi et al. , 2003). FDI in the GCC countries is greatly affected by political unrest in the region as well as developments in the oil and oil-related sectors. Political conditions, especially after September 11, 2001, and the continual Israel and Palestinian War and the Iraq War, have had and continue to have a negative impact on encouraging FDI in GCC countries.
In 2002, FDI to Arab countries recorded a 33 percent drop from $6. 7 billion in 2001 to $4. 5 billion in 2002. Another requirement is acceleration of the implementation of economic reforms, which leads to the liberalization of trade and capital flow to attract higher FDI inflows (IAIGC 2009). Another aspect of the problem is the existence of laws and legislation that support private sector activities and FDI inflows. The most important of such laws are competition laws, private property and intellectual property rights laws, modernization of judiciary systems, and commercial courts.
In addition, commitment to privatization, together with a reduction of bureaucracy and red tape, would greatly enhance FDI inflows. The adoption of laws that encourage FDI is necessary, but it is insufficient in the absence of a campaign against mismanagement and corruption, factors that obstruct the application of those laws. The integration of Arab countries into world markets is also crucial to attract more FDI (Mellahi et al. , 2003). In order to attract FDI, the GCC countries have liberalized their FDI policies since the late 1990s.
There have been some reforms in laws, including regulations governing the status of foreign firms, commercial laws, and laws to protect intellectual property rights. The new legal environment has become favorable to foreign investors, as only a few restrictions remain. Favorable changes include more liberal entry, fewer performance requirements, more incentives, and more guarantees and protections for investors (Badr 2007). The GCC countries face other problems relative to FDI, some of which are directed to the country itself, others to the region, and other factors beyond their control.
Arab countries face difficulties in attracting high quality, non-oil-driven FDI for several reasons. This is expected to continue to be the trend until the manufacturing sector in these counties is accorded greater importance—GCC countries need to focus on greater diversification, some of which can be achieved through privatization. However, massive infusion of technology, training, and know-how and management and market skills are especially needed to achieve such economic diversification (Mellahi et al. , 2003). Conclusion The analysis of patterns of intra-regional trade shows that border trade is very important for intra-GCC trade flows.
Analysis of GCC extra-regional trade shows that the major trading partners remain unchanged. Almost all fluctuations in its trade with those partners are attributed to fluctuations in oil prices. This analysis also shows that, due to the dominance of oil, GCC trade with the rest of the world seems to continue with the same patterns and can be considered of more importance for both exports and imports in comparison to its intra-regional trade. Direct investment across member countries is still below expected levels. GCC countries are poorly integrated globally in terms of FDI flows, as these countries receive very small amounts of FDI.
The common characteristics of the GCC economies which limited the success of its diversification efforts and in turn slowed the long-term growth of the region. Many experts share the same diagnosis which includes: dependence on export of crude oil, limitation of other natural resources other than hydrocarbons, a low-degree of self sufficiency in most inputs including dependence on imported technology and know-how, limited labor force, small private sector, and limited entrepreneurship and enterprise tradition. Despite a strong commitment to integration, the GCC members’ pace has been slower than planned.
Due to political unrest in the region since creation of the council, most GCC cooperation was focused on defense and military cooperation rather than economic cooperation. Other factors such as similarity in economic structure, bureaucratic processes of implementing rules and regulations, and lack of coordination of economic policies led to a slow path of economic integration. As a result, capital mobility among member countries has been low, and far below expectations. These factors have had a negative effect on financial integration among member countries.
These factors also have played a major role in lack of integration and FDI. References Frankel JA, 1997, Regional Trading Blocs in the World Economic System. Washington, DC: Institute for International Economics, Gulf Cooperation Council, 2009, Overview, Available at http://www. gcc-sg. org Badr I, 2007, Economic Co-Operation in the Arab Gulf: Issues in the Economies of the Arab Gulf Co-Operation Council States, Routledge Studies in Middle Eastern Economies, Routledge Inter-Arab Investment Guarantee Corporation, 2009, Investment Climate in Arab Countries, Available at http://www.
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