International Journal of Islamic and Middle Eastern Finance and

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Trade and regional integration: analysis of the effectiveness in the GCC
Amzad Hossain Kamal Naser

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Trade and regional integration:

analysis of the effectiveness
in the GCC
Amzad Hossain and Kamal Naser

Trade and
regional
integration
95

College of Business Administration, Al Ain University of Science & Technology,

Al Ain, UAE
Downloaded by Universiti Malaysia Sabah At 21:45 29 November 2016 (PT)

Abstract
Purpose The purpose of this paper is to analyze the effectiveness of the GCC integration.
Design/methodology/approach Both descriptive and comparative analyses are used. In order to
measure the effectiveness, indicators like trends of trade, FDI inflows, joint venture project activities
and technology diffusion are considered.
Findings The analyses revealed that the Gulf Cooperation Council (GCC) regularly reviews the
collective process of all the proposals to be executed. It also conducts an in-depth analysis of all issues
concerning the GCC states and their societies. The analyses also showed increasing trends in exports and
imports, and high-tech manufacturing after implementing customs union. In the same fashion, the number
of joint venture projects, total capital investment and capital investment per project increase dramatically
after executing customs union. The analysis further shows that the investment in large-scale joint venture
projects increases during the same period. The paper finds a sharp increase in FDI during the period
between 2001 and 2004; within this period, the customs union has been implemented. This increased FDI
is mainly due to the fact that the GCC attains enlarged domestic market size and stable economic growth
after the GCC integration. The GCC integration also contributes to improve the push and pull factors of
FDI that have further attracted increased FDI. The paper shows that the GCC countries have adapted
and deployed new technology considerably quickly during the period 1999 to 2005 compared with
the 1990s.
Practical implications The study noticed improvements in all indicators as well as the push and
pull factors that enhance effectiveness of the GCC integration. To attain more effective regional
integration, a periodic review of all the issues concerning the GCC states and their societies in light of
the advancement taking place in the Arab world and international arenas is vital.
Originality/value The study finds that the effectiveness of the GCC integration is progressive.
The integrators that measure effectiveness such as trends of trade, FDI inflows, joint venture project
activities and technology diffusion show increasing trends.
Keywords International investment, Integration, Arabian Peninsula, Regional development
Paper type Research paper

Introduction
As a result of the revolution in information technology and globalization, the world
market is getting increasingly competitive and complex. Globalization contributes
significantly to the homogenization of consumers tastes, preferences and attitudes as
well as the production process. It also eliminates political, economic, and technological
barriers contributing to innovation and renovation. With the aim of attaining
comparative advantages in ever changing competitive world market, several strategies,
policies and initiatives have been implemented around the globe. Regional economic
integration is viewed as one of the effective approaches that can be employed to achieve
advantages over globalization. Under regional economic integration, economic unity

International Journal of Islamic and

Middle Eastern Finance and
Management
Vol. 1 No. 2, 2008
pp. 95-112
q Emerald Group Publishing Limited
1753-8394
DOI 10.1108/17538390810880964

IMEFM
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96

and cooperation are formed to achieve economic benefits. Regional economic integration
can also increase the influence of the member countries in their own areas as well as
outside it (Mosad, 1998). Furthermore, economic integration can substantially
enlarge domestic markets by attracting foreign direct investment. Thus, the revival
of interest in economic integration and cooperation is a worldwide phenomenon
(Lavergne, 1997).
Currently almost 170 regional integration and trading agreements are in force
around the world, with a significant number of these arrangements mainly involving
less developed countries (Crawford and Fiorentino, 2005, quoted by Angeles
M. Villarreal, 2005). However, many regional economic integration groups are not in
progress or only have occasional meeting or are name oriented. The failure of such
regional integration lays on the lack of planning at the governments doorstep,
cost-benefits of the integration, and the politically motivated allocation of investment
(UNCTAD, 1973; quoted by Mytelka, 1997). Contrary to the above, the European Union
(EU) and the North American Free Trade Agreement (NAFTA) among Canada,
Mexico, and the USA are the most prominent and successful regional integration
arrangements (IMF, 1994). The GCC and ASEAN or AFTA are in progress of a
successful regional economic cooperation.
The Gulf Cooperation Council (GCC) countries predominantly have a small domestic
market with huge amounts of petroleum reserve. Such a situation, on the one hand,
attracts investment in the petroleum sector from developed countries, and on the other
hand, it discourages them to invest in non-oil-based manufacturing or other related
sectors. The GCC historic manpower shortage is one of the most important reasons of
expatriates involvement in the workforce of these countries. According to Ugo and
Zubair (2003), expatriates account for almost three-fourths of the total workforce of the
GCC countries. In 1981, GCC integration came into force with the aim of enlarging
domestic market, diversifying the oil-based production to the horizons of service and
manufacturing-based production, increasing competitiveness of domestic resources,
developing intra and extra trade, and attracting foreign direct investment (FDI) in
non-oil-based production.
It has long been recognized that economic integration is a key to long-run trade
development, and economic development at large. However, the effectiveness of the
economic integration is measured by the improvements of intra and extra trade, inflow
of FDI, joint venture project activities and technology diffusion. The improvement of
such indicators, in turn, brings their long-term development of trade and the economy
as a whole. Thus, it is of paramount importance to analyze indicators like trends of
trade, FDI inflows, multilateral project activities and technology diffusion. This paper
assesses the current GCC integration status, development of trade, FDI inflows, joint
venture project activities, and diffusion of technology. Some policies and issues related
to continuous improvements of GCC ties for attaining their goals are also explored.
Literature review
It is very difficult to come up with a single straight definition of economic integration.
Wikipedia (2006), however, viewed economic integration as a term used to describe how
different aspects between economies are integrated. The basics of this theory were written
by the Hungarian Economist Bela in the 1960s. As economic integration increases, the
barriers of trade between markets diminish. Steven (1997-2004) demonstrated that any

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type of arrangement in which countries agree to coordinate their trade, fiscal, and/or
monetary policies is referred to as economic integration. While many others explain that
economic integration is a process whereby boundaries between nation-states become less
discontinuous (Viner, 1950; Marchal, 1965; Bourenane, 1997; Haile, 2000), thus leading to
the formation of more comprehensive systems. In this respect, Viner (1950) pointed out
that regional economic integration could lead to either trade creation or trade diversion
by reducing trade barriers between neighboring countries to the gradual strengthening of
international trade. According to Marchal (1965), integration as a result of development is
distinct from integration as an instrument or precondition of development. Economic
integration can be perceived as the historical product of evolving technical, economic, and
social structures; or it can be the product of conscious efforts on the part of human
societies, acting collectively to improve their economic condition as a matter of policy
choice (quoted by Bourenane, 1997). Bourenane (1997) believes that regional integration is
often perceived as a prelude to unification, understood to represent the existence of
homogeneous rules and principles governing behavior in a given spatial area. Haile (2000)
noted regional integration as a process involves the merging of industrial structures,
economic, and administrative policies of member countries. Such a process is motivated by
the recognition that national economic welfare could be enhanced in a more efficient way
through such partnership than by adopting unilateral policy at each country level.
Economic integration can be, therefore, defined as the association of two or more
countries to enhance their mutual economic ties, leading to the growth of economy by
coordinating fiscal policies and resource allocation, spanning regional boundaries to
achieve mutual benefits. It also enhances cost-effectiveness and overall trade. The World
Trade Organizations (WTO) efforts towards globalization tolerate custom unions and
free trade agreements in regional integration because they are seen to represent
movements towards free trade, as one of the fundamental goals of the WTO. However,
there is a disagreement among economists on this ground (Steven, 1997-2004).
Ousmane (1997) showed that trade policy has figured prominently in the development
and industrialization strategies of developing countries. Trade policy has also conditioned
the macroeconomic and sector policies adopted in those countries. The choice of overall
development strategy has shaped trading relations between domestic economies and the
rest of the world, while having a specific bearing on these countries propensity to trade
on regional markets. A significant amount of empirical work has demonstrated close
relationships between country-level macroeconomic and trade policies, as well as the effect
of those policies on the overall trade and growth performance (Oyejide, 1986; Avillez et al.,
1988; Krueger et al., 1988; Mundlak et al., 1989; Stryker, 1990; Dollar, 1992, quoted by
Ousmane, 1997). The pursuit of regional integration implies recognition of the importance
of international trade in the development process (Ousmane, 1997). However, much of the
conventional literature lays the failure of traditional regional integration schemes squarely
at a governments doorstep (UNCTAD, 1973; Robson, 1983; Berg, 1988; quoted by
Mytelka, 1997). Two variants of this approach can be found. The first emphasizes conflicts
over the costs and benefits of integration that bedevil these organizations and the lack of
political will to resolve them. The second stresses the economic inefficiencies generated by
government policy, particularly those associated with attempts at regional industrial
planning and the politically motivated allocation of investment (quoted by Mytelka,
1997). There are also some other adverse effects which impede regional integration and
trade such as culture, economic dimension and stage of development of the member states.

Trade and
regional
integration
97

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98

Steven (1997-2004) referred to different degrees of integration (Figure 1). Obviously,

the degree of integration relationship depends on mutual trust, respect, shared interest,
and responsibility. As such, Mosad (1998) made the point that a strategic economic
integration relationship is a relation between people. They are ideally based on shared
interest, mutual trustworthiness, and commitment to continue the relationship.
Figure 1 illustrates that there are six stages (types) of economic integration: Preferential
Trade Agreement (PTA), Free Trade Area (FTA), Customs Union, Common Market,
Economic Union, and Monetary Union. The first three types of integration (PTA, FTA,
and Customs Union) are the tariff agreement among the member countries that only
promotes trade. The other three types of integration are the agreement that endorses trade
along with other responsibilities to further enhance trade. For example, Common
Market allows for free mobility of capital and labor across member countries to ensure
efficient use of resources and capital for attaining cost effectiveness. This, in turn, upholds
trade enhancement of the member countries. In addition to the free mobility of capital and
labor across countries and tariff agreement, an Economic Union pays special attention for
the protection and/or development of selected sectors. The European Unions Common
Agriculture Policy (CAP) is an example of this type of fiscal coordination. Monetary Union
establishes a common currency among the member countries in order to reduce the risk
involved in currency exchange. It also facilitates achieving comparative and absolute
advantages in trading goods and services among member countries and the rest of the
world. The common currency (EURO) of the EU is an example of effective Monetary
Union. Thus, it can be argued that all types of economic integration are formed mainly for
the development of trade along with other activities that also further enhance trade.
It can also be observed from Figure 1 that economic integration is a gradual process
that continuously increases ties and coordination among the member states. Under this
process, the member countries successfully complete one stage in achieving the next stage
of the integration. During the on going stage of integration, an economic integration group
continuously rethinks, and evaluates the progress taking into consideration their related
factors. It is indispensable as the world business environment, terms of trade, rules, and
overall societys needs change rapidly. However, their main goal is to enhance trade along
with other related issues in order to reach the final stage of integration, which is Monetary
Union. Economic integration substantially requires the appropriate macro and
microeconomic policies: government policies, the liberalization of trade, FDI rules,
behavioral, and firm level aspects. It also needs the deregulation of financial markets, the
promotion of domestic competition, a well-matched developmental stage as well as the
developments of infrastructure, remarkably transportation and communications. In order
to achieve the effectiveness of economic integration all these requirements must be
fulfilled. However, for measuring the effectiveness of the economic integration, intra and
extra trade, FDI inflows, joint venture project activities and technology diffusion might be
considered. The OECD considers international trade, FDI, the activity of multinational
firms, and international diffusion of technology as economic globalization indicators
(OECD, 2005).
Methodology
Drawing from the OECDs globalization performance indicators, this study employs
four variables as measurement indicators of the effectiveness of the regional economic
integration:

Weak

Weakest

Degree of
integration
Enhances current
trade & more future
coordination to
form CM

Strong

Enhances current
trade & more future
coordination to
form EU

Fairly strong

Difficult in policy
coordination

Own monetary
policy; not affected
by CM

Null

Allows free
mobility of capital
and labor across
members

Free trade in goods

and services, sets
common external
tariffs among
members

CM

Enhances current trade

& sectoral protection
& more future
coordination to form
MU

Very strong

Difficult in policy
coordination

Own monetarypolicy;
not affected by EU

Maintain status with

high efficiency and
expansion ofmembers

Highest

Complicated policy
coordination

Establishes a common
central bank &
currency

Fiscal spending
responsibilities to a
supra-national agency

Allows free mobility

of capital and labor
across members

Allows free mobility

of capital and labor
across members

Fiscal spending
responsibilities to a
supra-national agency

Free trade in goods

and services, sets
common external
tariffs among members

MU

Free trade in goods

and services, sets
common external
tariffs among members

EU

Notes: PTA Preferential Trade Agreement; FTA Free Trade Area; CU Customs Union; CM Common Market; EU Economic Union; MU Monetary Union
Source: The Idea of European Union and Steven (1997-2004)

Aim

Enhances current
trade & more future
coordination to
form CU

Problem of policy
coordination

"Rules of origin"
makes fairly difficult

Easy

Policy
coordination

Enhances current
trade & more future
coordination to
form FTA

Own monetary
policy; not affected
by CU

Own monetary policy;

not affected by FTA

Null

Own monetary
policy; not affected
by PTA

Monetary
policy

Special
attention

Null

Null

Eliminate tariffs
between
themselves;
common external
tariffs on imports
from the rest of the
world

CU

Null

Eliminate tariffs
between themselves;
own external tariffs on
imports from the rest
of the world. Between
members tariffs may
zero

FTA

Null

Tariffs reductions, not

eliminations for
selected products
categories; nondiscriminatory tariffs
remain in all
remainingproducts

PTA

Null

Mobility of
resources &
capital

Tariffs
rules

Feature
& aim

Level of Integration

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Trade and
regional
integration
99

Figure 1.
Levels/stages of economic
integration, its feature
and aim

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100

(1)
(2)
(3)
(4)

trade (intra and extra);

FDI inflows;
joint venture project activities, and
technology diffusion.

In a study of regional integration, Haile (2000) employed intra and extra trade, FDI and
capital intensive project cooperation together with many other performance indicators.
While the trade related indicators identify the flow of goods and services across a
defined economic space, the FDI indicator measures the extent to which the GCC
economies are integrated at inter-country and inter-region levels, and with the rest of
the world. On the other hand, the capital investment in joint projects indicator explains
the resource exploration and/or utilization in a collective manner across integrated
countries. The development of ICT as indicator measures the extent to which the GCC
economies communicate and share information at inter-country and inter-region levels,
and with the rest of the world. All these indicators contribute to attain the goals of
regional integration. However, irrespective of the type of the established economic
integration (as noted in Figure 1), they all have common ultimate objectives such as:
seeking to benefit from trade creation, economies of scale, product differentiation, and
efficiency gains through policy coordination that follow implementation of regional
integration agreements (Haile, 2000).
To get statistical data on the above mentioned measurement indicators of the
effectiveness of the regional economic integration employed in the current study,
secondary data were gathered from publications, existing reports and web sites on related
areas. This includes annual and technical reports from government agencies, data
provided by the GCC secretariat, international organizations, published, unpublished
articles as well as any other relevant information to this area of study. The obtained data
have been reviewed and analyzed by using comparative and descriptive analysis to assess
the effectiveness of the GCC integration.
The Gulf Cooperation Council (GCC)
Saudi Arabia was a prime mover in setting up the GCC in 1981. As such, on 25th May
1981, the leaders of the six states reached a cooperative framework joining the six states
to effect coordination, integration, and inter-connection among the member states in all
fields in order to achieve unity (Article 4, GCC Charter)[1]. Such unity enhances their
deeper ties as the six member countries historically having common religious, social,
and cultural identities. The GCC also is a political and economic policy-coordinating
forum for its member countries. An efficient work is underway to form a free trade area
between the GCC and the European Union. The United States favors strengthening
regional integration efforts among GCC members, as well as enhancing USA-GCC
economic and commercial ties. The USA Government engages in high-level economic
policy talks with GCC members through the USA-GCC economic dialogue.
At the 23rd session in 2002, the Supreme Council of the GCC states endorsed the
establishment of the customs union in order to enhance economic cooperation with effect
from 1st January 2003. The session also highlighted the difficulties and obstacles that
might arise from the implementation of the customs union. The goals of implementing
customs union are: the facilitation of the flow of movement of goods; increasing
inter-trade; and removal of customs and non-customs barriers that limit trade.

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The council takes measures to meet the prerequisites of the Common Gulf Market as soon
as possible, not exceeding the year 2007. This meeting also discussed the possibility of
forming a monetary union. GCC states are also trying to formulate a homogenous
petroleum policy, and taking common stands on developments in energy and related
matters (GCC-SG, 2002).
Several studies have pointed to a number of reasons behind the failure of regional
integration:
(1) lack of planning at governments doorstep;
(2) cost-benefits of the integration; and
(3) the politically motivated allocation of investment (UNCTAD, 1973; quoted by
Mytelka, 1997).
Contrary to these findings, GCC states regularly monitor the progress of the GCC
integration. For instance, the 24th council meeting in 2003 reviewed the collective
process of the proposals endorsed in the Councils 23rd meeting in 2002. An in-depth
analysis of all the issues concerning the GCC States and its peoples in light of the
developments taking place in the Arab and international arenas (GCC-SG, 2003).
Effectiveness of the GCC integration
Development Measures of the GCC Integration
Generally speaking, the impact of integration policies in economic theory is dependent
on the circumstances surrounding individual integration arrangements and the
member countries. In addition, integration policies can be affected by the member
countries needs and developmental stage for a potential cooperation (DeRosa, 1998).
Thus, the development status of the member states is an important factor in
determining the success of a regional integration.
Based on the UNDPs development measures, Tables I-III depict that all GCC
countries are passing through almost the same development stage. For example,
Table I illustrates that, in the period between 1990 and 2002, the adult literacy rate,
tertiary education, and public education expenditure together with research and
development expenditures and number of researchers in research and development are
almost the same. The table also showed that no one lives under poverty in any of the
member states of the GCC.
Table II demonstrates that the real GDP growth rate has increased substantially in
2005 compared to 2000 and shows almost the same status of growth as reflected by the
reported standard deviations of 2.3 and 0.8, respectively. The shares of industry and
services sectors in the GDP also appeared to be identical among the member states as
mirrored in the reported standard deviations of 16.7 and 16.8, respectively.
In the same token, Table III shows that all the GCC member countries are
experiencing smooth exchange rates. This implies that there was no vulnerability in
exchange rates during 2000-2005 contributing to attract FDI and increase trade as well.
Inflation rate was stable or smooth falls and raises can be observed during 2000-2004,
however, there was sharp increase in inflation in 2005 only in the UAE and Qatar[2].
The stable or smooth growth of all the aforesaid indicators results in astounding
human development index (HDI) values ranging from 0.772 to 0.849 as measured by
the UNDP in the year 2005. The HDI values of all the GCC also appeared to be almost
identical across the countries with 0.03 standard deviation. The results also show that

Trade and
regional
integration
101

2.5

Oman

NA

17

NA
NA
16
21

NA

NA

NA
NA
NA
NA

0.699

0.708

0.812
NA
NA
0.809
0.772
0.781
(0.03)

0.849
0.844
0.849
0.846

3.1

5.8

1.8
4.8
3.5
4.1

4.6

NA

1.6
NA
NA
NA

NA

NA

NA
0.2
NA
NA

NA

NA

NA
73
NA
NA

38

46

42
49
40
41

PEEf
Participation in
1990 2002 RNEg NRh international organizationsi

Notes: Parenthesis shows standard deviation; ALR15 Adult literacy rate (per cent age 15 and above), 2003; TSSME Tertiary students in science,
math, and engineering (per cent of all tertiary students), 1998-2003; Population below poverty line (per cent), 2005; 1 2001, 2 1998, 3 2004; HDI
Human development index; PEE Public expenditure on educations as per cent of GDP (1990-2000/2002); RNE R&D expenditure as per cent of GDP
(1997-2002); NR Number of researchers in R&D (per million population)
Sources: CIA world fact book, 2005 for d and i; United Nations Human Development Report, 2005 for a, b, c, e, f, g, h

74.4

79.4

23.3

(e)

77.3
82.9
89.2
87.7

4.0
2.5
0.7
0.7

UAE
Kuwait
Qatar
Bahrain
Saudi
Arabia

Table I.
Socio-economic indicators
of the GCC

Population
(millions) 2003a

102

GCC
countries

ALR15
Population below poverty
HDIe
b
c
d
(per cent) TSSME
line (per cent)
1990 2003

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IMEFM
1,2

22,800
15,000
20,000
15,900
10,500
7,700
5649.5

Country and
standard deviation

UAE
Kuwait
Qatar
Bahrain
Saudi Arabia
Oman
Standard deviation

4.0
6.0
4.0
5.0
4.0
4.6
0.8

6.7
4.5
8.8
5.9
6.4
1.9
2.3

Real GDP
growth rate
(per cent)b
2000
2005
4
0.5
0.2
0.6
3.3
2.8
1.6

58.5
52.1
81
42.5
74.7
40
16.7

37.5 (2002)
47.4
18.8
56.9
21.9
57.1
16.8

Share of GDP by
sector (per cent), 2005c
Agriculture
Industry
Services
46.0
6.0
16.0
9.0
7.0
5.0
15.7

4.0
7.0
10.0
9.0
10.0
14.0
3.3

Manufactured
exports (1)d
1990
2003
NA
3.0
NA
NA
NA
2.0

2.0
1.0
NA
NA
NA
2.0

THE (2)e
1990
2003

2.4 (2001)
2.2 (2004)
2.7 (2001)
15.0 (1998)
13.0 (2004)
15.0 (2004)

UR (3)g
2005

Notes: (1) Manufactured export as per cent of merchandise export; (2) High-technology export as per cent of merchandise export; (3) Unemployment rate,
2005 other wise mentioned in the parenthesis
Sources: CIA World fact book, 2001 and 2005 for a, b, c, f, g; United Nations Human Development Report, 2005 for d and e

29,100
22,100
26,000
20,500
12,900
13,400
6553.9

GDP per capita

(PPP), US$a
2000
2005

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Trade and
regional
integration
103

Table II.
Economic indicators of
the GCC countries

4.71
0.39
4.67
0.48
4.80
0.49

UAE
Kuwait
Qatar
Bahrain
Saudi Arabia
Oman

4.5
1.5
2.5
2.0
0.98
0.8

4.56
0.38
4.61
0.47
4.75
0.48

4.5
2.5
2.0
1.5
1.9
1.0

4.84
0.39
4.80
0.49
4.94
0.5

2.8
2.0
1.9
0.5
1.0
-0.5

5.32
0.42
5.28
0.54
5.44
0.55

3.2
1.2
2.0
0.4
1.0
0.3

5.64
0.45
5.59
0.57
5.76
0.57

3.2
2.3
3.0
2.1
0.8
0.2

5.22
0.41
5.18
0.53
5.33
0.54

10.5
4.1
8.8
2.7
0.4
1.2

Notes: Exchange rate is calculated by currency unit per SDR (Special Drawing Rights; 1 SDR 1.46 USD). This rate is not used in fund transaction, is a
reciprocal of SDR per currency. ExR Exchange rate; IR Inflation rate
Sources: Exchange rate archives, IMF, 2006a; World Fact book, 2001-2006b

ExRa

Table III.
Exchange rate and
inflation rate (consumer
prices) in 2000-2005

Country

104

Year
2000
2001
2002
2003
2004
2005
IR (per cent)b ExRa IR (per cent)b ExRa IR (per cent)b ExRa IR (per cent)b ExRa IR (per cent)b ExRa IR (per cent)b

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the HDI has increased in 2003 compared to 1990. The outcome of the analysis indicates
that the GCC countries are benefiting from the regional integration as reflected in the
upholding development measures.
Trade and joint venture projects in the GCC
The regional integration substantially eliminates tariff and non-tariff barriers and
results in liberalizing trade restrictions. Trade liberalizations have positive impact on
trade, output and unemployment (Dabee and Milner, 1995). In addition, operating joint
venture projects between or among countries impact the macroeconomic factors (trade,
outputs, and unemployment) in the participating countries. Thus, one of the vital
objectives of regional integration is the improvements in extra and intra trade, and
enhancing joint venture projects among member countries. Table IV shows that intra
exports and imports in the GCC were not smooth during the period between 1990 and
2000. However, from the year 2001 it shows increasing trends and dramatic increase in
the period between 2002 and 2004. The amounts of manufacturing and high technology
exports also demonstrate increasing trends during the period of 1990-2003. One of the
underlying causes of such increasing exports might be the implementation of the
custom union in the year 2003.
Joint venture project activities integrate capital, resources and expertise from the
member states. This, in turn, enhances mobility of factors of production, products and
sharing of ideas and knowledge. Such a unique phenomenon contributes to the
innovation and renovation of production techniques and products as well. All such
factors have positive impact on the trade development. Table IV demonstrates that
there was high number of joint venture projects with high capital investment in large
projects as capital investment per project reached 13.77 million USD in 1999. However,
the number of projects, total capital investment and investment per project showed
decline in the period between 2000 and 2002. During the same period, the capital
investment was limited to small scale projects and investment has not been increased
as capital investment per project was 3.19, 1.08, and 0.72 million USD, respectively.
The underlying cause of this lower investment in joint venture projects might be the
fact that the 11th Septembers incident in the USA has changed the world business
environment especially in the Middle East. However, number of projects and total
capital investment started to increase from the year 2002, and became dramatically
high in terms of number, total capital investment, and capital investment per project in
2004. The capital investment mostly was in large-scale projects as the capital
investment per project reached 7.76 million USD in 2004. The increase in the joint
venture project activities might be the outcome of the implementation of custom union
in the GCC in 2003. In addition, the 24th supreme council meeting has conducted an
in-depth analysis of all the issues concerning the GCC States and its peoples in light of
the developments taking place in the Arab and internationals arenas (GCC-SG, 2003).
Thus, it can be argued that the implementation of custom union and the initiatives of
the 24th supreme council meeting have increased motivations of the investors and
reduced the risks associated with joint venture projects that boost this sector.
Foreign direct investment (FDI) in the GCC
The increase in the size of the market combined with regional integration initiatives attract
more FDI. However, only the countries in the regional integration agreement that offers

Trade and
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integration
105

Note: JVP Joint venture project

Source: GCC Achievements (2004)

4928.6
3735.6

4834.5
2703.8

1991

Exports
Imports
JVP
Number
Capital
Capital per project

Table IV.
Intra-GCC trade (exports
and imports) and joint
venture projects during
1990-2004 ($US millions)

1990

5557.1
3478.8

1992

6210.6
3891.7

1993

5343.6
4036.7

1994

6255.0
4457.2

1995

7553.0
4709.9

1996

8110.6
5158.5

1997

6603.5
5612.0

1998

150
2066.2
13.77

7982.2
5531.7

1999

91
290.79
3.19

7776.9
5700.7

2000

206
222.96
1.08

6394.7
3651.6

2001

1013
737.45
0.72

7734.4
7402.7

2002

106

Years

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9649.9
8025.6

2003

583
4529.25
7.76

11934.9
11760.0

2004

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a more attractive overall environment for FDI are likely to be winners in this game
(Levy Yeyati et al., 2003). FDI promotes economic development by helping to improve
productivity, growth, and exports in the multinationals host countries (Blomstrom and
Kokko, 1997). In this section, the impact of the GCC integration on the FDI inflows is
considered. Table IV illustrates that FDI inflow has increased remarkably in almost all the
GCC member countries during 1980-2000. A sharp increase in FDI can be observed from
the year 2001-2004 except Kuwait and Oman in 2004. The result of the analysis points to
the fact that after GCC integration, the GCC region becomes one of the large market sizes in
the middle east (population 33.7 million; Table I). This attracts an increased FDI from the
high-tech developed and developing countries. In addition, this provides two significant
opportunities for GCC in the areas of labor-intensive and high-tech production process,
respectively. Such sustained well-documented phenomenon results in stable economic
growth in the GCC countries (Tables II and III). In addition, the enlarged domestic
consumer market of the GCC enables it to be self-sufficient in economic activities
contributing to a continuous economic progress and further attracts high FDI as it was the
case during the period between 1980 and 2004. In addition, the sustained push and pull
factors of FDI that was improved under the GCC integration has played an active role in
increasing FDI during the same period. Push factors such as investors confidence, which
determines the willingness to invest, and the pull factors are objective and subjective
determinants that are coordinated at the government level Table V.

Trade and
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integration
107

Technology diffusion in the GCC

So as to obtain the competitive advantages of the regional integration, it is crucial to
receive and share quality information. There are various mediums that transmit
information at a very high speed and create a bridge to share information for maintaining a
sustained development within the integrated countries. ICT is the medium that transmits
information at a very high speed and establish a network of information sharing. ICT
creates value, which originates from the sharing of information to enhance the speed of
transmitting and sharing of quality information. Sharing information improves ties
among integrated member countries contributing to enhance mobility of resources,
products as well as joint venture projects activities. However, large amounts of valued
information are exchanged and shared worldwide via ICT services. A countrys or a group
of countries ICT services mostly depend on the availability of telephone lines, cellular
phone, and internet facilities.

Country
Bahrain
Kuwait
Oman
Qatar
Saudi Arabia
UAE
World

1980

1990

2000

Year
2001

2002

2003

2004

2 418
1
98
11
2 3192
98
55108

2 183
6
125
5
312
2 116
207878

364
16
83
252
183
2 515
13396539

80
2147
390
296
504
1184
825925

217
7
26
624
453
1307
716128

517
267
528
625
778
30
632599

865
2 20
2 18
679
1867
840
648146

Source: UNCTAD (2006)

Table V.
FDI inflows in the GCC
countries (1980-2004)

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108

According to Table VI, the number of telephone main line users and cellular
subscribers in the GCC countries has increased during the period between 1990 and
2003. However, the ratio increase in cellular subscribers is much higher than telephone
main line users. This indicates that the usage of cellular phone is more popular than
that of telephone main line usage. The user friendly features of cellular phone may
explain its fast growing popularity.
Table VI also illustrates that the number of PC users are increasing rapidly during the
period of 1999-2005. However, Saudi Arabia shows remarkably higher number of PC
users compared to other GCC countries. There is hardly any internet user in the GCC in
1990 as the technology was not really available in the developing world at the same year.
The history of computers explains that the internet was initially developed in 1969 by
the USA Department of Defense, with the intention of creating a computer network that
could withstand any type of disaster. The first commercial internet dial-up access
provider came online in 1990 (computerhope.com, 2006). Therefore, in the 1980s and in
1990s, this new technology was in the initial stage of development. A small number of
users was available only in the industrialized countries. For instance, the USA and UK
has only 8 and 1 internet users per thousand people, respectively, in 1990 (Table V).
Thus, it can be argued that hardly any IT facilities were developed in the GCC countries
in 1990. However, the data in Table V illustrates that the number of internet users are
increasing rapidly in the GCC countries in the years 1999, 2004, and 2005. The number of
internet hosts per 10,000 people has increased in the year 2004 or 2005 compared to
1999 in Bahrain, Saudi Arabia, and Oman. At the same period it shows decreasing rate in
the UAE, Qatar, and Kuwait. This might be due to the respective countrys internal
policy for internet host usage. However, the result shows that there is no impact of
number of host on internet users as the internet users remarkably increase during the
period 1999 to 2005 in the UAE, Qatar and Kuwait including all other GCC countries.
The cellular subscribers, internet users or PC users in the GCC shows that they have
adapted the new technology much faster in 1999-2005 compared to the 1990 s. This
might be the outcome of the GCC countrys programs for ICT development that was
launched at an earlier stage. The GCC countries also have launched unified industrial
development strategies where R&D in applied science has been given priority.
However, the results of this technology diffusion section clearly indicate that the
continuous improvement in ICT in the GCC countries enhancing information sharing
among the members strengthening GCC ties. Inversely, it also can be argued that the
continuous upgrading GCC ties contributing to the improvement of ICT.
Conclusion
Continuous reviewing and analyzing the progress of the regional integration process at
the states level is the key element of a successful integration. This study finds out that
the GCC council reviews regularly the collective process of all the proposals to be
executed. It also conducts an in-depth analysis of all the issues concerning the GCC
states and their societies. The outcome of the analysis indicates that all six members of
the GCC have almost identical development. This provides them with a strong position
to achieve successful regional economic integration.
The findings of this study suggests that the intra exports and imports, and
high-tech manufacturing exports shows increasing trends after implementing customs
union. In the same fashion, the number of joint venture projects, total capital
investment and capital investment per project increases dramatically after executing

736
572
533
638
321
228
546
912
679

19
12
9
10
1
2
21
19
7

26
48
97

38.74
47.66
59.22
63.8
321.0
114.0

Cellular subscribers
per 1000 people b
Ratio of
1990 2003 increase

1905.6
292.2
208.1

78.64
19.31
18.51
17.0
1.99
2.82
6645.1
697.9
1286.8

61.11
10.93
4.20
25.03
6.69
5.94
6645.1
697.9
1286.8

62.02
10.93
4.23
25.84
6.96
5.94
8
1
NA

0
0
0
0
0
0

and

365.5
210.1
213.7

150.1
47.75
40.16
140.1
4.80
20.08

630.0
628.8
502.0

310.08
260.05
280.16
210.34
60.62
90.67

2004
119.9
176.3
177.3
163.7
340.1
40.6
762.2
600.2
541.5

1999
90.89
100.9
130.8
140.1
50.74
20.71
505.0
302.5
286.6

762.2
600.2
541.5

190.8
220.3
170.8
160.9
350.3
40.66

2005

Number of PCs per

1000 people d

adapted and calculated from World

555.8
628.8
502.0

280.9
235.0
220.0
210.8
60.62
90.67

Internet c
Hosts per 10,000 people
Internet users per 1000 people
1999
2004
2005 1990c1 1999 2004
2005

Source: a, b and c1 adapted and calculated from united nations Human Development Report (2005) c,
Telecommunication Development Report (2005) (ITU)

UAE
224
281
1.25
Kuwait
188
196
1.04
Qatar
220
261
1.18
Bahrain
191
268
1.40
Saudi Arabia
77
155
2.01
Oman
60
88
1.46
Selected industrialized countries
USA
547
624
1.15
UK
441 563.9
1.28
Japan
441
472
1.07

GCC Country

Telephone main lines

per 1000 people a
Ratio of
1990 2003 increase

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Trade and
regional
integration
109

Table VI.
Technology diffusion
indicators in the GCC
countries

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110

customs union. The result also shows that the investment in large-scale joint venture
projects increases at the same period.
Another point observed in this study is the sharp increase in FDI during the period
between 2001 and 2004; within this period, the customs union has been implemented. This
increased FDI mainly due to the fact that the GCC attains enlarged domestic market size and
stable economic growth after the GCC integration. The GCC integration also contributes to
improve push and pull factors of FDI that has further attracted increased FDI.
The cellular subscribers, internet users or PC users in the GCC shows that they have
adapted and deployed new technology much faster during the period 1999-2005 compared
to 1990 s. This might be the outcome of the GCC countrys launched programs for ICT
development. The GCC countries also have launched unified industrial development
strategy where R&D in applied science has been given priority. The results clearly
indicate that the continuous improvement in ICT in the GCC countries enhancing
information sharing among the members and strengthening the ties among the GCC
countries. Inversely, it also can be argued that the continuous upgrading GCC ties
contributing to the improvement of ICT.
In sum, this study noticed improvements in all the indicators as well as the push
and pull factors that enhance effectiveness of the GCC integration. To attain more
effective regional integration, a periodic review of the all the issues concerning the GCC
states and their societies in light of the advancement taking place in the Arab world
and international arena is vital.
Notes
1. The member countries include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United
Arab Emirates (UAE).
2. This is due to sharp increase in accommodation rent in Qatar, Abu Dhabi and Dubai.
Governments in the Qatar and the UAE are taking measures to stop the dramatic increase in
accommodation rent and to curb inflation.
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Corresponding author
Amzad Hossain can be contacted at: amzad4@yahoo.com

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