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Mr. Ugo Fasano-Filho

Abstract

The Heads of States of the Cooperation Council for the Arab States of the Gulf (GCC) decided at the end of 2001 to deepen economic integration by establishing a common currency—pegged to the U.S. dollar—by 2010. This decision represents a practical evolution to the integration efforts that started with the establishment of the GCC in the early 1980s. As an initial step, all GCC countries officially pegged their currencies to the U.S. dollar during 2002 and early 2003 (until then, most currencies of GCC countries had been formally pegged to the SDR). Moreover, a unified regional customs tariff at a single rate of 5 percent became effective in January 2003, while macroeconomic performance criteria will be established by 2005 for the needed policy convergence to support the monetary union. The establishment of an economic and monetary union will create an important regional entity: in 2002 GCC countries had an estimated combined GDP of close to $340 billion, an average weighted per capita nominal GDP of about $12,000, and held some 45 percent and 17 percent, respectively, of the world’s proven oil and natural gas reserves (1).

Mr. Ugo Fasano-Filho

Abstract

Over the past two decades, the GCC countries have taken important steps to achieve economic and financial integration among them. They have lifted formal impediments to the free movement of national goods, labor, and capital across these countries, and have similar policy preferences in a number of areas. In particular, these countries have been successful in maintaining price and nominal exchange rate stability, as well as an open trade regime and liberal capital flows. In addition, they have in place an open-border foreign labor policy to ensure sufficient supply of labor at internationally competitive wages, with expatriate workers accounting for the largest share of the labor force in non-oil activities. The GCC countries’ success in maintaining for several decades a de facto fixed exchange rate in the face of significant global crude oil volatility owes much to this policy framework.1 Furthermore, since the early 1990s, these countries have devoted increased attention to structural and institutional reforms to encourage diversification, enhance non-oil growth, and develop human capital.2 However, some differences in economic performance and policy preference have emerged over the past decade (Figure 2.1). Some GCC countries have also been more successful than others in promoting non-oil activities and diversifying exports and government revenue (Figures 2.2 and 2.3).

Mr. Ugo Fasano-Filho

Abstract

In a “full” monetary union, independent nation states adopt a single monetary policy and a common currency. This is characterized by a single external exchange rate policy, as well as the permanent absence of all exchange controls, whether for current or capital transactions. By contrast, a “pseudo”-monetary union—in some aspects currently the case among GCC countries—is an agreement to maintain fixed exchange rates among the member states, but without explicit integration of economic policy, a common pool of foreign exchange reserves, and a single monetary policy. Moreover, the institutional framework and the tools to maintain exchange rates permanently fixed do not exist in a pseudo-monetary union. Thus, there is always the possibility that one or more member countries could have a strong incentive to allow its exchange rate to depreciate or appreciate against the others if under pressure. The expectation that this may happen will likely prevent complete monetary integration.

Mr. Oral Williams and Mr. Kamiar Mohaddes
This paper uses a pairwise approach to investigate the main factors that have been driving inflation differentials in the Gulf Cooperation Council (GCC) region for the past two decades. The results suggest that inflation differentials in the GCC are largely influenced by the oil cycle, mainly through the credit and fiscal channels. This implies that closer coordination of fiscal policies will be key for facilitating the closer integration of the GCC economies and ahead of the move to a monetary union. The results also indicate that after controlling for cyclical factors, convergence increased even during the recent oil boom.
Abdulrahman K Al-Mansouri and Ms. Claudia H Dziobek
The six member states of the Gulf Cooperation Council (GCC)-Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates (UAE)-have laid out a path to a common market by 2007 and monetary union by 2010, based on economic convergence. To monitor convergence and support economic and monetary policy, comparable economic data for member countries and data for the region as a whole will be essential. What is the most efficient way to produce these data? The authors survey the statistical institutions in the GCC countries and present the case for creating "Gulfstat"-a regional statistical agency to operate within a "Gulf States System of Statistics." Valuable lessons can be learned from regional statistical organization in Africa and the European Union-Afristat and Eurostat.
Mr. Serhan Cevik
This paper investigates the empirical characteristics of business cycles and the extent of cyclical comovement in the Gulf Cooperation Council (GCC) countries, using various measures of synchronization for non-hydrocarbon GDP and constituents of aggregate demand during the period 1990-2010. By applying the Christiano-Fitzgerald asymmetric band-pass filter and a mean corrected concordance index, the paper identifies the degree of non-hydrocarbon business cycle synchronization?one of the main prerequisites for countries considering to establish a monetary union. The empirical results show low and heterogeneous synchronization in non-hydrocarbon business cycles across the GCC economies, and a decline in the degree of synchronicity in the 2000s, if Kuwait is excluded from the sample, partly because of divergent fiscal policies.
Ms. Andrea Schaechter

Abstract

Why do countries decide to join or form a monetary union? The literature on optimum currency areas, initiated by Mundell’s seminal paper (1961), has extensively discussed the potential benefits and costs of monetary unions.1 Countries can gain from a monetary union through lower transaction costs and the elimination of exchange rate variability, spurring investment, intraregional trade, and economic growth. Other benefits are access to bigger financial markets—lowering borrowing costs—and the potential enforcement of monetary and fiscal discipline. The main costs are the loss of national monetary and exchange rate policies. The magnitude of those costs depends on how symmetrical the economies are in terms of business cycles and vulnerability to shocks and the ease with which the economies can adjust to disturbances. These costs are likely to be lower the higher the degree of labor market flexibility across the member countries. In addition, political objectives can also be the driving force behind joining or forming a monetary union. Establishing a regional economic and political power bloc can result in a bigger role in world financial markets for the region as a whole. Other political incentives may include delegating to an institution outside the domestic political process the enforcement of monetary and fiscal discipline (Mundell, 1997).

Mr. Ugo Fasano-Filho and Ms. Andrea Schaechter

Abstract

The six member countries of the Gulf Cooperation Council (GCC)--Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates--have made important progress toward economic and financial integration, with the aim of establishing an economic and monetary union. This paper provides a detailed analysis of the economic performance and policies of the GCC countries during 1990-2002. Drawing on the lessons from the experience of selected currency and monetary unions in Africa, Europe, and the Caribbean, it assesses the potential costs and benefits of a common currency for GCC countries and also reviews the options for implementing a monetary union among these countries.

International Monetary Fund
Diversification of the GCC economies, supported by greater openness to trade and higher foreign investment, can have a large impact on growth. Such measures can support higher, sustained, and more inclusive growth by improving the allocation of resources across sectors and producers, creating jobs, triggering technology spillovers, promoting knowledge, creating a more competitive business environment, and enhancing productivity. The GCC countries are open to trade, but much less so to foreign direct investment (FDI). GCC foreign trade has been expanding robustly, but FDI inflows have stalled in recent years despite policy efforts taken to reduce administrative barriers and provide incentives to attract FDI. Tariffs are relatively low; however, a number of non-tariff barriers to trade persist and there are substantial restrictions on foreign ownership of businesses and real estate. The growth impact of closing export and FDI gaps could be significant. In most countries, the biggest boost to growth would come from closing the FDI gap—up to one percentage point increase in real non-oil per capita GDP growth. Closing export gaps could provide an additional growth dividend in the range of 0.2-0.5 percentage point. Boosting non-oil exports and attracting more FDI requires a supportive policy environment. Policy priorities are to upgrade human capital, increase productivity and competitiveness, improve the business climate, and reduce remaining barriers to foreign trade and investment. Specifically, continued reforms in the following areas will be important: • Human capital development: continue with investments made to raise educational quality to provide knowledge and skills upgrade. • Labor market reforms: aim to improve productivity and boost competitiveness of the non-oil economy. • Legal frameworks: ensure predictability and protection; efforts should include enhancing minority investor protection and dispute resolution; implementing anti-bribery and integrity measures. • Business climate reforms: focus on further liberalizing foreign ownership regulations and strengthening corporate governance; and on further reducing non-tariff trade barriers by streamlining and automating border procedures and streamlining administrative processes for issuing permits.
Mr. Ugo Fasano-Filho and Ms. Andrea Schaechter

Abstract

As discussed earlier, the GCC countries already have in place important elements to become a successful monetary union. These include labor flexibility owing to unhindered access to expatriate workers at market-determined wages and current and capital account convertibility. In addition, these countries have had for several decades stable nominal bilateral exchange rates and similar nominal interest rates. However, they still must make fundamental choices and take important steps to design and implement an effective monetary union. These steps include the following.