Development is in essence a series of changes in the socioeconomic structure, namely, in areas of manufacturing, agriculture, infrastructure, and services, such as education and health. The investment process itself generates these sectors’ output, whether direct (industry and agriculture) or indirect (infrastructure and services).
At the outset it may be appropriate to point out that years before the establishment of the Gulf Cooperation Council (GCC), joint work was undertaken officially and privately on both bilateral and multilateral levels. Thus the establishment of the Council has served to institutionalize joint work and to organize it within the framework of endorsed agreements and documents. In other words, rather than being haphazard and seasonal, work is now being carried out within a collective institutionalized framework that provides a suitable environment for conceptualization and development.
With this perspective in view, the first part of this paper briefly addresses the investment dimension of the work objectives delineated in the Council’s documents, whereas the second part investigates aspects inherent in their implementation, and the third part deals with the investment factors dictated by the economies of the GCC states. The final part presents recommendations for augmenting the effectiveness of the joint investment activity in the Council.
The Investment Dimension of the Council’s Objectives
Article 4 of the GCC Charter summarizes the institutional aspect as finding an appropriate and balanced environment for investment in the GCC states through establishment of identical regulations in the areas of:
economic and financial affairs;
commercial, customs, and communications affairs; and
legislative and administrative affairs.
The article also calls for “enhancing scientific and technological advancement in areas of industry, mining, agriculture, animal and marine resources, establishment of scientific research centers, joint projects and encouragement of private sector cooperation …,” within the framework of “realizing coordination, integration and interdependence among the member states in all fields.”
The Consolidated Economic Agreement was concluded to determine and detail those objectives, as it urges the member states to agree upon a number of arrangements to achieve coordination and integration among their economies. By reviewing the Agreement’s articles, we find that the most significant of the arrangements that are directly related to investment are the following:
Freedom to import and export products of national origin without imposing tariff or nontariff barriers thereon;
Establishment of a uniform customs tariff with the objective of protecting national products;
Granting all facilities to transit trade and exempting it from duties;
Coordination of export and import policies and regulations;
Creating a collective negotiating power to support the negotiating status of the GCC states in the area of importing their basic needs and exporting their major products;
Freedom of movement of individuals and capital and freedom to own and operate businesses and real estate;
Encouraging the private sector in member states to establish joint projects;
Coordinating industrial activity and setting up policies and procedures for realizing industrial development, consolidating industrial legislation and regulations, locating industries according to their relative characteristics, and encouraging the establishment of basic and complementary industries among member states;
Stressing the establishment of joint projects in industry, agriculture, and services with public, private, or mixed capital to achieve economic integration;
Cooperation in areas of applied and technological research and sciences, including the conclusion of consolidated agreements for technology transfer;
According the same treatment to transportation owned by other member states’ nationals when passing through or toward each other’s territories as to its own;
Cooperation in areas of transportation and communication and in coordinating construction of infrastructure;
Unification of investment laws and regulations; and
Coordination of financial, monetary, and banking policies.
The document on the objectives and policies of development plans adopted by the GCC states included a number of comprehensive objectives relating to human development by upgrading the citizens’ social, health, academic, and cultural levels, as well as developing and diversifying the production base and completing the required applied and technological infrastructure among member states. The objectives gave special significance to the private sector by encouraging it to interact positively with government policies by
Using the opportunity to operate, manage, and maintain some of the utilities run by the state;
Participating in appropriating and managing some industries established by the state;
Encouraging the establishment of joint stock companies;
Finding means of trading company shares with the objective of encouraging investment;
Contributing to the development and execution of training programs;
Conducting further studies on investment opportunities and on the economic feasibility of projects in production sectors;
Giving the private sector priority in implementing contracting activities; and
Encouraging the establishment of national companies to invest funds locally.
The document on a consolidated strategy for industrial development was in line with the document on the objectives and policies of development plans. It concentrated on expanding the production base and its influence on the role of industry in realizing balanced development in all the GCC states and in increasing its contribution to the gross national product (GNP).
Investment Process in the GCC
The initiative for encouraging investment focuses on the institutional structure and on creating legal and administrative conditions appropriate for carrying out investment activities. It is therefore consistent with the prevailing economic philosophy in the GCC states and represents the implementation of the objectives discussed in the previous section. From this standpoint the most prominent landmarks in GCC history with a direct bearing on investment can be summed up as follows:
To cancel customs duties on natural resources and industrial, animal, and agricultural products of national origin. Among the objectives such an action can accomplish is that national products will be better able to compete with foreign ones.
To allow producers (whether persons or corporate bodies) to export their products direct to any of the member states without the need for a local agent. This action will free national products from any extra costs such as an agent’s commission and hence they will become better able to compete.
To give priority to local products and products of national origin in government projects. This will be an extra incentive in the area of marketing that was not applicable in most of the GCC states before establishment of the GCC.
To treat the means of transportation owned by GCC nationals on an equal basis with national ones when passing through any of the member states’ territories and to endorse consolidated transit regulations. This action will increase competition and decrease transportation fares among the GCC states.
To grant the required facilities to ships and vessels owned by any of the member states or their citizens and treat them the same as national ones. This action will enable shipping companies to compete and will therefore encourage investment.
To allow GCC nationals to engage in retail trade. Practice in the wholesale trade will be allowed as of March 1, 1990, and it is to be hoped that this action will expand the marketing outlets for national products and increase competition, with the aim of creating suitable bases for investment.
To give GCC nationals the right to obtain loans from industrial banks and funds. The objective behind such a procedure is to provide investment opportunities to all GCC nationals and not to confine them to nationals of certain states. This will augment competition and provide investors with more flexible options.
To allow GCC nationals to appropriate shares of joint stock companies and to transfer them in conformity with the relevant controls, with the objective of encouraging investors to invest in all GCC states without the need for any arrangement except a project feasibility study.
To accomplish equality of taxation among GCC nationals. This action is intended to fulfill the rights of citizenship in the area of investment and to encourage investors to invest locally.
Studies on joint projects. The GCC Secretariat-General has studied a number of projects; some proved to be economically feasible and are now being carried out (a company to produce pure breeds of fowl, a company for the production and marketing of seeds and seedlings, and a reinsurance company). Moreover, national airline companies established a mutual company for supplying aircraft from their companies at London’s Heathrow Airport. The shareholders’ base has been expanded in a number of joint stock companies in the GCC states (such as Saudi Cables and a telephone manufacturing project) to which a number of the Council’s nationals have subscribed. Arrangements for establishing a company for manufacturing poultry and dairy equipment in the United Arab Emirates are now under way.
The Secretariat-General in collaboration with the Gulf Investment Corporation has completed preliminary feasibility studies for 20 projects; the Corporation will promote a number of them and establish them in cooperation with private sector companies in member states.
The Secretariat-General also completed a study on the institutional and organizational aspects of the joint projects and the policies adopted by the GCC states to encourage such projects. This study deals with issues relating to financing and the incentives required for activating investment in these projects. It proposed specific policies, and the possibility of their being adopted by member states will be discussed.
Joint corporations. At its third session the Council agreed on establishing the Gulf Investment Corporation (GIC) with a capital of $2.1 billion. Among its objectives are the promotion and incorporation of industrial, agricultural, mining, and other projects. The GIC is currently taking part in four production projects while studying investment opportunities in a number of other projects, some in collaboration with the Secretariat-General.
The GCC standards and specifications authority was established to contribute to standardizing the specifications for national industries and imported commodities, with the intention of expanding the market to make it more attractive to investors as well as to satisfy standards of excellence, quality, consumer protection issues, and environment preservation requirements.
To protect industrial patents, the GCC states are currently studying the establishment of a patent office. They are also investigating the possibility of establishing an arbitration center to handle, among other issues, any disputes that may arise from investment activities. This action will further enhance investors’ confidence.
Consolidation of procedures and regulations. To improve the legal atmosphere for investment, to provide more confidence, and to bring the legal systems in the GCC states closer to each other in legal provisions, it was agreed to consolidate a number of systems with a direct relationship to investment and economic activities in general, such as guidelines for commercial agencies and trademarks; the system for investment of foreign capital; the system to protect industrial products of national origin; rules for coordinating and encouraging the establishment of industrial projects; and general principles of a consolidated industrial system.
The Secretariat-General has also completed the draft of the commercial law and the model insurance law for GCC states. Owing to the circumstances of the administrative systems in member states and their desire to complete suitable frameworks to guarantee the successful application of these systems, most of the arrangements are in the form of guidelines.
Monetary and banking areas. Most developing countries are suffering a shortage in their foreign currency assets and a weakness in their banking system, which in most cases is either a branch of a foreign bank or state owned, which curbs their ability to contribute effectively to encouraging investment for administrative or technical reasons. But in GCC states it is different, owing to the abundance of their foreign currency assets, the fact that money transfers among them are not subject to restrictions, and the relative stability of the exchange rates of their currencies. This solves a major problem normally faced by interstate investment, as the exchange rate risks become less acute and the presence of a modern net of commercial and specialized banks with connections to international markets makes the investor’s task easier.
Infrastructure. The GCC states enjoy modern infrastructure, including roads, ports, communications, and power stations. The GCC programs are directed toward continuous development and interconnection of this infrastructure to encourage communication, provide low-cost energy, and cut down transportation expenses between production and distribution areas locally or abroad.
Investment incentives. In past years the GCC states have established a number of incentives with the aim of expanding the production base by offering loans and industrial estates and providing the necessary services at subsidized rates, as well as exempting from customs duties industrial inputs (such as equipment and raw materials) while increasing the customs tariff on similar imports, provided that certain conditions are satisfied by local products.
The GCC states are currently taking the action necessary to consolidate these incentives, by permitting loans and government purchasing policies and by consolidating services and fuel prices.
Investment Factors in the GCC States
The preceding parts of this paper have reviewed the investment aspect of GCC objectives based on the documents issued and on the objectives accomplished so far that have a direct impact on the activation of investment and the creation of a suitable environment for it.
Nevertheless, the institutional and legal aspects are only a part of the components that should be available for the establishment of effective service and production investments. A review of the structure of the GCC states’ economies brings out a number of adverse factors that hinder the positive aspects in these economies (that is, the availability of purchasing power, financing, and low-cost energy sources, in addition to the availability of infrastructure, a variety of incentives, and market expansion that has occurred since establishment of the GCC). The presence of such factors prevents these positive aspects being utilized in the short and medium term. In other words, the expansion of the market and the accomplishment of the institutional and legal frameworks will take longer to achieve at national and regional levels.
In my estimation the major negative factors are the following:
The structural composition of the GCC economies is characterized by the fact that they have a single source of income—oil—which forms about 90 percent of export revenue. Moreover, GNP growth is significantly dependent on demand for oil and on prices that are subject to international market conditions.
Besides the availability of economic, environmental, legal, and institutional requirements, the success of any investment activity is attributed to the presence of a successful business organizer who is capable of selecting investment opportunities and is willing to bear the risk. While we appreciate the efforts exerted by businessmen who are first of all merchants, and while we appreciate their attempts in the fields of services and industrialization, the movement in this direction is still limited. In the field of natural resources, the national labor force is scarce, and there is a marked dependence on foreign labor. On the other hand, the nonhydrocarbon raw materials needed for industrial purposes are limited, the absence of a well-established technological base, and the limited size of the market do not justify the establishment of a large number of industries.
Despite the unanimity that in the long run collective economic action serves the best interests of the community, the situation is different in the short run. There is tension between the pole of collective action as laid down in the Charter of the Council and the pole of local national interests. This is not unusual under circumstances of weak collective organizations and inadequate joint action.
There is no doubt that in recent years we are beginning to face this phenomenon and its ramifications. Member countries are jealous of their sovereignty and national interests. At the same time the process of restructuring at the national level still lags behind the institutional and legal requirements of integration.
The slowdown of economic growth following the decline in the demand for oil as well as in its price and the value of the dollar checks the progress toward integration and puts an additional responsibility on the private sector not only as the leader in development but also as a driving force for joint action.
To enhance the joint work within the GCC framework requires employing all approaches and possibilities to break the deadlock of the factors mentioned above. However, investment and development in general are considered the means of realizing such a goal, as the only alternative to expansion of the production base is to submit to external conditions that are beyond the control of the GCC states and therefore serious work in this direction does not depend only on a single component. For example, the legal and institutional circumstances provided by the establishment of the Council have not resulted in essential changes in the problems facing its members’ economies.
Even if we are aware that solving some of these problems falls within a long-term perspective, we should not yield to this justification. Many contemporary serious development experiences have proved that a strong will is capable of combating hardships or at least of mitigating them.
Academic and field studies have proved that, from the perspective of appropriate and pragmatic solutions, joint work in the long term will result in a net increase in the aggregate income of the parties without it being necessarily at the expense of any of them.
The importance of seriously considering the development issue in the GCC states from a comprehensive perspective that mobilizes all possibilities stems from this belief. The following is an attempt to explore such possibilities.
Expansion and Diversification of the Production Base
This goal can be achieved through conventional or modern methods. For instance, joint projects are an instrument in several selected industries to realize positive interconnection with established industries or to establish new ones. This method, in addition to contributing to the expansion of the production base, contributes to accomplishing an interconnection between the economies of the GCC states, particularly if we take into consideration the similarity of their production structures, which do not conform with the classical approach to integration that is based on an exchange of commodities.
There is also the economic balance approach, where the foreign supplier counterbalances his contracts with projects in which the private sector takes part. This approach will achieve the transfer of foreign technology as well as contributing to the expansion of the production base. We believe that the collective adoption of this approach is a positive contribution toward the realization of development and integration.
A free trade zone was established in Dubai, United Arab Emirates, and attracted many foreign companies. The GCC states have to evaluate the positive aspects of this experiment in terms of its impact on the production base.
Support for the Role of the GIC and the National Lending Institutions
The GIC is the investment arm of the GCC. The establishment of or participation in production projects in the GCC states is one of its objectives. Any step in this direction requires a more objective evaluation of the GIC business outlook on investment opportunities in the GCC states at present. With regard to national lending institutions, GCC nationals have been allowed to borrow for industrial projects on an equal basis with nationals of the state concerned. Intensification of meetings between these institutions may result in increasing lending opportunities.
Suitable Mechanism for Effective Government Contribution in Joint Work
There is an apparent hesitation concerning the contribution of government to joint projects based on a belief in the free economy principle and the major role the private sector should play, but, in practice, concerns about economic development and national security may contradict this principle even in countries where it originated. National security is often closely related to development. It should not be taken as an invitation to establish a bureaucracy of public enterprises. But if matters are left to a free economy, it could have only negative consequences in an area that lacks a diversified national resources base (including the private sector) and depends on a single depleting source of income.
Linking Lending and Development Aid with Trade Policy
The GCC states are still playing a major role in granting loans and development aid. It is obvious that lending relations are connected with trade relations by stimulating the response of the borrowing countries to their imports from GCC states or by paying part of the loans in the form of manufactured or intermediate goods (an agreement on trade policy is assumed here).
Relations with Neighboring Countries
Relations with neighboring countries should be regulated through agreements and a number of joint projects should be established that can be individually executed and that can contribute to solving the problem of the limits of the market in the GCC states.
Consolidating the Customs Tariff
Among the incomplete steps in GCC joint work is the consolidation of the customs tariff in conformity with Article 4 of the economic agreement. Since one of the objectives of tariff consolidation is to protect national products against competing foreign products, the construction of a customs wall through tariff consolidation becomes an important requirement of joint work.
Mechanism to Solve Disputes
As a result of canceling tariffs on interstate trade, increasing the exchange of trade, and allowing the practice of economic and professional activities, it is inevitable that some disputes will arise in the beginning. The containment of such disputes entails the establishment of an effective mechanism to solve them, which will then be followed by an increase in joint work.
We have indicated above the numerous incentives provided by the GCC states with the intention of expanding the production base, and because such incentives differ from one state to another within the GCC, the provision of a balanced environment requires the consolidation of these incentives.
Before presenting my comments I should like to thank Mr. Abdullah Al-Kuwaiz, the Assistant Secretary General for Economic Affairs in the Gulf Cooperation Council (GCC), for undertaking this study on the investment process in the GCC states. I am sure all of you agree that he is perhaps the best qualified to discuss the subject of the joint effort, given his familiarity with, and active involvement in, this initiative.
Mr. Al-Kuwaiz subdivided his research paper into four main parts. In the first he addressed the institutional, legal, and organizational aspects of the Council, which are mainly, if not entirely, guidelines gleaned from the cooperative experience of the Council states. Many of the agreements reached by the Council owe their success to the provisions and aspirations of these guidelines; prime examples are the Consolidated Economic Agreement and the Articles of Association of the GCC. If anything is to be said of this, it is that we fully agree that applying these clauses or agreements would definitely promote the progress of the joint economic effort within GCC states generally.
As the author pointed out in his paper, while these organizational, legal, and institutional aspects are important, they remain an aid or a guideline, without the power to implement or enforce provisions (which, of course, is only natural). Thus, to strengthen cooperative ties or the joint effort, individuals, institutions, and society at large must acknowledge the need to translate aspirations and agreements into concrete and practical action.
The similarity between the regulations and laws governing investment and economic transactions in general is certainly an important factor influencing the progress of cooperation and coordination. However, there is an insufficiency or even absence of these laws—as well as mechanisms for their enforcement—in certain GCC states, which therefore requires intensified efforts in this field.
The second part of the paper sheds light on the investment process within the GCC, most of which is regulated by the documents and agreements of the Council, and there are indications of some achievements in this area. If these achievements seem modest, the reasons are understandable: GCC cooperation is a relatively recent development and the economies of its countries are very similar. As the paper indicates, an intensive joint effort is lacking. This similarity, and the lack of integration, in many ways augments the difficulty of coordinating the joint effort and achieving a common collective interest. But it also provides opportunities for coordination, particularly in dealings with the outside world and in avoiding duplication of domestic investments.
When discussing joint project studies or the establishment of joint institutions, the author notes that pre-feasibility studies have been completed for 20 projects; also, the Gulf Investment Corporation was established as the “investment arm” of the GCC, and this Corporation has participated in 4 productive projects since its establishment. That is, of course, a modest achievement, particularly when compared with the thousands of active productive projects in the Council states, or with the hopes attached to such joint GCC institutions and the means available.
In general, despite the recentness of this experience, one may legitimately ask about the extent of social welfare achieved in the course of the GCC’s joint effort. Would it have been possible to achieve what was achieved by employing or merging available resources if they had been disposed of differently? In other words, what is the “alternative opportunity cost”? These questions are difficult, and their answers are elusive; nevertheless, they are legitimate.
In the third part of his paper the author addresses the limits to investment in GCC countries. A close examination of these limits leaves no doubt as to their reality, and one must acknowledge that they are formidable challenges that cannot be made easier except through serious concerted effort. These challenges include
Structural imbalances in the economies of the GCC;
The lack of intensity in the joint effort, which may be described as weak linkages in the integration of GCC economies owing to their similarity;
The dichotomy between national sovereignty and joint effort.
To overcome these and other challenges, the author proposed some valuable scientific recommendations. I would like to add the following:
The need to avoid duplicating active economic projects in the various GCC countries, which only serves to provoke more intense competition in markets that are already narrow and limited, in spite of the considerable purchasing power enjoyed. The introduction of a coordinating body may be required.
A number of industrial projects that emerged during the boom period later faltered and now suffer from the problems of the post-boom phase. As these projects contain national resources, I would suggest that a “GCC shareholding company” be formed to manage and assume ownership of companies and projects in default. Joint companies can play their part in salvaging the situation by adopting a long-term development perspective—precisely the reverse of the commercial perspective, which calls for rapid and immediate profits.
The paper drew attention to the need to unify incentive schemes for industrial development in GCC countries in a bid to achieve equal investment opportunities. Prominent among these incentives are development loans provided by financial lending institutions. It may be appropriate to call for the reappraisal of the lending policies of these funds and to request that they refinance active projects in default with additional or medium-term loans, thus helping to revive these projects.
Such an initiative provides an opportunity to preserve public funds previously lent and to preserve private resources invested with them, in addition to playing a part in redressing the structural imbalances discussed in the paper.
In confirming the contents of the paper, and to contribute to resolving the structural imbalances in GCC economies, projects need to be established in other productive sectors. An intensification of joint efforts to identify additional investment opportunities will be required, and joint GCC institutions could play a prominent part in this effort.
It is imperative that investment opportunities in attractive projects be opened for the GCC countries’ private sectors, without limiting their choices by making promising projects the monopoly of joint GCC companies. Such monopolization would create unjustifiable delays in implementation and cause the private sector to compete for less feasible projects.
Abundant financial and energy resources (including their basic outputs) are the most important comparative advantages enjoyed by the GCC region, and it is natural for these advantages to be reflected in investment opportunities in the region. Therefore, there is no apparent reason why basic materials and energy should not be provided to local industries, with subsidization, especially where higher value added is achieved than can be obtained from the sale of these materials in external markets.
Finally, it is noteworthy that the establishment of the GCC was followed by the formation of other Arab associations. We hope that the precedent thus set will lead to greater and wider Arab economic integration and coordination, an objective that has unfortunately met with failure over the past three decades. It is also hoped that this experience will expand and unify the Arab market as a whole and increase the volume of inter-Arab visible trade and not split into small economic blocs or coalitions within the Arab world that could be swept away by the rapid globalization of the world’s major economic blocs. The importance of Arab economic cooperation and coordination rests on (1) national security considerations, (2) the presence of opportunities for integration, and (3) the need to expand markets.