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Ahmed Saddam

University of MalayaFaculty of Economics and Administration

Kuala Lumpur

Analysis of intensity of intra-regional trade in GCC Countries

Contents

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Introduction: Review of literature:Methodology:Reality of intra-regional trade of GCCMain findings Concluding remarks:Recommendations: Contribution of the study:References:

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Introduction::

Gulf Cooperation Council (GCC) Since 1981, GCC countries, namely the UAE, Bahrain, Saudi Arabia, Oman, Qatar, and Kuwait, have agreed to unify their economic policies in order to increase the level of Intra-regional trade and reducing share of oil in GDP. However, exploiting the oil revenues was a significant way for achieving these goals. During the period 1998-2008, these economies have gained a high level of revenues due to the rising oil prices. Accordingly, the main notion of this study comes to investigate whether the unified economic policy of GCC has achieved its goals in practice or not ?

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The level of intra-regional trade is still modest, where the GCC countries tend to trade more with other non-GCC countries over the period 1998-2008.

Rising level of economic growth in GCC countries is highly accompanied with an increase in the growth of oil sectors.

Problem statement:

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Analysing the size of intra-regional trade, and the direction of foreign trade. As well as, focusing on the role of oil export in GCC economies.

Objectives of the study:

Questions of the study:

What is the role of the unified economic policy of the GCC countries in improving the level of intra- regional trade over the period 1998-2008 ?

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The increase of intra trade, and reducing share of oil export to GDP reflects a success of the unified economic policy of the GCC countries in achieving a sustained economic growth.

Enhancing share of non-oil export to GDP is a significant indicator for improving the economic capacity of GCC economies.

Hypotheses of the study:

Review of literature:

Authors Main finding (Fischer, 2003 )(Rodrik, 1999)(Sohn, 2001),(Carrillo & Li, 2002)

confirmed the role of economic policy and trade agreements in promoting export levels and enhancing the rate of growth . They report that a greater degree of economic openness will promote growth and income level. (Trade Growth)

(Alcala & Ciiccone, 2003), (Spanue, 2003), (Falvey &et al, 2001)

They affirmed that the growth of local markets were the major determinants for enhancing level of foreign trade. These studies are based on endogenous growth theory. (Growth Trade)

However, most studies are conducted in respect of most diversified economies. In our study, we target to find out whether the unified economic policy has achieved its main target in increasing level of non-oil trade between GCC countries over the period 1998-2008 which witnessed a high increase in oil revenues.

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• A mathematical formulation is used to measure the intensity of intra – trade of GCC, in order to identify the leading market of these countries.

Where: Ci: Intensity of regional trade of the country (i) with other GCC countries in the net total export as average of the period 1998-2008.

XGCC : Intra- export from country ( i) to other GCC countries.MGCC: Intra-import from country (i) to other GCC countries.

X total: Total export of the country (i) to other countries (except GCC). M total: Total import of the country (i) from other countries (except GCC).

Ci= {[XGCC – MGCC] / [X total +M total]} – {[XGCC + M GCC] / [X total + M total] * [X total – M total] / [X total + M total]}

Methodology :

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Intra-regional trade of GCC.

The average of intra-regional trade on GCC countries is only 8.6% over the period of study. Saudi Arabia and UAE have the biggest share of the average of total intra-export which estimated to be 52% and 30% respectively.

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1000

2000

3000

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5000

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7000

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UAE Bahrain KSA Om an Qatar Kuwait

Intra ExportIntra Im port

Figure (1): Intra-Export and Import , 1998-2008 (Million USD)

Source.GCC, Secretariat general (2001-2008), Statistical bulletin. & League of Arab states, et.al (2001-2003,2009), (In Arabic) Joint Arab economic report, Abu Dhabi. United Nations, ESCWA (2009) External trade bulletin of the ESCWA region, eighteen issue, New York, pp44-46.

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Foreign trade of GCC.

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20000

40000

60000

80000

100000

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160000

UAE Bahrain KSA Om an Qatar Kuwait

Foreign tradeIntra trade

Source: .GCC, Secretariat general (2001-2008), Statistical bulletin.League of Arab states, et.al (2001-2003,2009), (In Arabic) Joint Arab economic report, Abu Dhabi. United Nations, ESCWA (2009) External trade bulletin of the ESCWA region, eighteen issue, New York, pp44-46.

Figure (2): foreign and Intra-trade commodity of GCC, on average 1998-2008 (Million USD)

Figure (2) clearly shows the high level of foreign trade compared to their intra-regional trade. This result is due to the big role of oil export, as well as the similarity of production pattern of these economies. This fact confirms that GCC economies are not integrated.

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Country % of total foreign trade

Oman 14.6%Bahrain 13%Saudi Arabia 11.6%Qatar 11%UAE 6%Kuwait 4%

Table (1): Intra-regional trade as a percentage of total foreign trade

Source: Calculated based on the data of statistical bulletin of GCC countries (2001-2008).

Foreign trade & Intra-trade of GCC.

The level of intra-regional trade has increased relatively over the period of study, but this increase does not consider as a significant progress, where the level of trade between GCC countries is still a modest. The following table shows this fact.

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Intensity of intra-regional trade:

KSA

O m an Bahrain Q atarKuwait

UAE

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

Series1 0.0742 0.0129 -0.0533 -0.0508 -0.0485 -0.0409KSA UAE O m an Bahrain Q atar Kuwait

Figure (3): Intensity of Intra trade in GCC – on average

1998-2008 (%)

Source: Formed by researcher based on the result of trade intensity.

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Intensity of intra-regional trade:

Figure (3) illustrates that Saudi Arabia is a major economy in terms of intensity of intra-regional trade. The rest of GCC countries, except the UAE, have obtained negative signals which confirm their intra- import intensity with Saudi Arabia.

However, Oman comes in the first level, then Bahrain, Qatar and Kuwait, which indicates that the negative group is reliant on Saudi Arabia as a main partner in terms of intra-regional trade.

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Concluding remarks:

Saudi Arabia and the UAE have a competitive position compared to the rest of the GCC countries.

Bahrain, Oman, Qatar and Kuwait have not achieved a competitive advantage in their non-oil sectors. In other words, the efforts of economic diversification in these countries are not reaching their objectives in this respect.

Accordingly, the continued weakness of intra-regional trade in the GCC countries and the high level of economic openness prove that the unified economic policy is not successful policy, where it did not achieve an increase in the level of intra-regional trade over the period of study.

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Recommendations:

The economic policy of GCC must focus on importing capital goods that have advanced technologies for improving the level of productivity and reducing the level of air pollution.

Kuwait, Oman, and Qatar need to follow comprehensive economic reformation programmes in order to diversify their non oil production structures. The main goal for that is to reduce share of oil sector in GDP.

Adopting a strict environmental policy, and stimulating the investment in industries that have a low level of emissions in order to achieve a sustainable economic growth.

There is a necessity for creating a suitable investment climate and expansion the industrial and agriculture sectors of GCC countries.

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This study deals with an important bloc in the Arab countries and Middle East in general. However, it provides an evidences for the role of economic policy, and its impact on economic growth over the period 1998-2008, which witnessed an increased growth rates due to the rising level of oil export prices. Accordingly, this study could be considered an assessment for the unified economic policy of GCC countries and their economic reformation programs, which have been adopted since 1981.

Contribution of study:

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References of study: 1. Alcala, Francisco and Ciccone, Antonio (2003) Trade, extent of the market, and economic growth 1960-1996, University Murcia press, p17. 2. Arab monetary fund (AMF), (2009), Statistics of foreign trade, AMF, Kuwait. (www.amf.org.ae.3. Carrillo, Carlos and Li, Carmen A., (2002), trade blocks and the gravity model: evidence from Latin American countries, University of Essex press, UK, pp18-19. 4. Falvey, Rod; Foster, Neil and Greenway, David, (2001), North – South Trade: Openness and Growth, University of Nottingham, United Kingdom, pp.1-11.  5. Fischer, Stanley (2003), Globalization and its Challenges, American Economic Review, Vol.93, No.2, May, p.12. 6. GCC, Secretariat general, (2003), Statistical bulletin, volume 12, p18.7. GCC, Secretariat general,(2004) Statistical bulletin, volume 13, p3.8. GCC, Secretariat general,(2007) Statistical bulletin, volume 16, p6.9. Rodrik, Dani, (1999), The New Global Economy and Developing Countries: Making Openness work, essay No.24, Overseas Development Council, and John Hopkins University Press, p.28. 10. Sohn, Chan-Hyun (2001), A gravity model analysis of Korea's trade patterns and the effects of a regional trading arrangement, Korea institute for international economic policy, working paper series, vol.2001-09.11. SESRIC, (2009), Annual economic report on the OIC countries, Ankara, pp71-72.12. Spanue, Vlad (2003), Liberalization of the International Trade and economic Growth: Implications for both developed and developing countries, Harvard University Press, pp 20-21. 13. United Nations, ESCWA (2009) External trade bulletin of the ESCWA region, eighteen issue, New York, pp41-43.

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