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Qatar standoff an opportunity to rethink GCC’s basic economic model

The ongoing standoff between the members of the Anti-Terror Quartet (ATQ) and Qatar over Doha’s alleged financing of terror groups has already called into question the future of the Gulf Cooperation Council (GCC) as it is currently constituted — but that debate looks set to intensify as the economic, financial and commercial repercussions of the dispute sink in.

Whatever the ultimate outcome of the current confrontation, regional policymakers should take a long, hard look at the GCC in any case, because it is clear that the organization has fallen short of the ambitious targets it set itself in 1981 when it was first set up, and which have been restated by various measures in the period since. 

Most notably, these included the establishment of a free-trade agreement between the member states in 1983, a customs union in 2003, and a declaration of commitment to freedom of movement for people and goods in 2008.

The model, never officially stated but always at the back of people’s minds, was the EU, which 10 years ago looked to be sailing serenely toward full economic and even political integration. What a different a decade makes.

Maybe it was unrealistic to expect the GCC states, with economic and business models very different to the Europeans, to advance quickly toward a coherent, integrated bloc, but the strains in the Gulf began to show almost immediately.

Proposals for a GCC central bank and a common currency fell apart in 2010 following disagreements over where the institution should be located, amid other issues. Although there are occasional ritual calls for talks on the common financial structure to be re-established, no real progress has been made. The Qatar situation means this is likely to be on the back burner for the foreseeable future.

However, the obstacles to unity were always there, and were more profound than squabbles over the bank location or the name of the currency. A recent policy paper by Karen Young, a distinguished economist at the Arab Gulf States Institute in Washington, points out that intra-GCC trade, which has increased significantly in recent years, still only stands at 8 percent of total trade. This is in sharp contrast with the EU, where intra-union trade accounts for as much as 60 percent of the total.

The ‘agent’ system might have made sense when the Gulf countries were at an early stage of development, when nearly all produce was imported, but makes little sense in an era of economic diversification.

Frank Kane

The reason, Young concluded, are “self-imposed barriers” to GCC economic integration, of which a prime one is the “protection of local agents in the framework of the GCC customs union.” The system of only allowing foreign companies to operate in the region via a local agent, who must be a national of the country where the outsider hopes to do business, is one of the hallmarks of regional business culture. It goes back to the days of a “rentier” economic structure in which local business leaders farmed income from renting out their consumer markets.

So, a Japanese car manufacturer might see a very profitable potential market in a Gulf country, but could only access that via a partnership with a national citizen, for which the Japanese would have to pay handsomely.

The agent system might have made sense when the GCC countries were at an early stage of development, when nearly all produce was imported, but makes little sense in an era of economic diversification when GCC economies are being reset for participation in the modern global economy.

“The problem now is that the commercial agency restrictions are in conflict with the 2008 GCC efforts to encourage nationals to invest, work, and buy property in neighboring member states. These restrictions continue to privilege nationals over citizens of other GCC states, while also encouraging monopoly practices in the importation and distribution of goods and services,” said Young.

Going back to the Qatar dispute, one of the early measures enacted by the ATQ was restriction on the rights of some citizens to live, work and own property in other GCC countries.

Measures against financial freedom of movement have not yet been imposed, but surely some form of sanctions against Qatar must be a future option. Withdrawal of deposits from Qatari banks, and maybe even seizure of assets held by Qataris in other GCC countries, are distinct possibilities if the confrontation escalates.

There has already been some quite significant capital flight from Qatar institutions, Young notes, with official data from the Qatar central bank showing $30 billion worth of capital outflows from the country’s banks in June alone.

The other potential stumbling block is in the proposal to introduce value-added tax (VAT) in the region by the beginning of next year. This has been intended as a GCC-wide measure, but in the current climate it is difficult to see how this plan can go ahead. Some member states may have to go it alone in the VAT initiative, or at best act in conjunction with a limited number of partners.

It is probably best viewed as an opportunity for a strategic rethink of the GCC strategy. The original model was actually not doing a very good job of encouraging region-wide economic diversification anyway. 

Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai