GCC common market: boon or bust for Gulf?

The impact of the common market will be significant in many respects, according to Dr. Nasser Al Saidi, Chief Economist of the Dubai International Financial Centre Authority (DIFC).

He said trade in the GCC could expand up to three to four times above current levels, based on the example that was set by the creation of the EU. 'If you look at the EU countries now, up to 70 per cent of their trade is internal,' Saidi noted.

International trade is also likely to get a boost, as it will be easier to trade with the GCC because there will be only one entry point for trading. The GCC is also likely to see a major increase in foreign direct investment.

Boon to service industries

Opening up the services industry to competition could also be 'enormous,' especially in the banking and financial sectors because they offer great opportunity for growth in terms of access and participation, Saidi noted. He said the mortgage market and insurance sectors are particularly underdeveloped, and cited the region's telecom sector as a great example of the kind of growth that can take place when competition is introduced.

Another key aspect of the common market will be its impact on labour movements. 'So far most of the labor movements in the GCC have largely been limited to expatriates. If you facilitate labour movements for GCC citizens, you will achieve a better skill mix, which will result in increased productivity at lower costs,' Saidi said.

Another outcome we are likely to see over the next five years are major restructurings and cross border mergers and acquisitions as companies learn how to take advantage of the benefits of the common market. The common market should also help to limit transaction costs, which in turn will lead to a lower cost of goods. Further, the common market should help both producers and importers achieve greater economies of scale. 'All of this should help to lower the cost of living,' Saidi noted.

Looking ahead

When will we begin to see the impact of the common market? 'In general, the benefits of the common market will not be immediate. There will be a learning curve. In the manufacturing sector, it will take companies 3-5 years to adjust their operations,' Saidi said. However, changes in the banking and financial services sectors can happen more quickly, so we are likely to see benefits in these areas sooner.

In terms of financial markets, the next big step will be to integrate the GCC's markets. 'We would like to link the DIFC to all of the markets of the region, allowing investors to trade on all of the exchanges freely. The result would be less volatility, deeper markets, and the increased likelihood that institutional investors would be more attracted to the market,' he noted.

What are the prospects of establishing a single GCC currency by 2010? Saidi believes a single currency is integral to the success of the common market, as it will lower accounting fees and transaction costs. A common GCC currency would also create the world's third largest currency behind the euro and the dollar, in which case other countries in the region might be persuaded to use it as their reserve currency.

Saidi said adopting a common currency will require significant development time and cooperation among the member countries, but he hopes the roll out will not be delayed. 'Any delay in the implementation of the single currency will be viewed negatively by the markets,' he said.

What are the potential downsides of the common market? 'The lessons of the past are, you can become overregulated, as is the case in Brussels,' Saidi said. Overregulation can be very costly and counter-productive. 'You also need to make sure that you do not become too protective. It is easy to believe that you are self sufficient,' he warned.

See also:
Making a success of the common market