mr. taj 2007

Roll# 207& 245-BH-ECON-11

Table of Contents Abstract: ........................................................................................................................................................ 2

Introduction: ................................................................................................................................................. 3

Background of the study: .............................................................................................................................. 4

Literature Review or Findings: ...................................................................................................................... 5

GCC adopting the latest standards in IT: .......................................................................................... 5

Yemen aims to Assimilate Laborers in to GCC: ................................................................................. 6

GCC Financial Markets: ..................................................................................................................... 6

The Banking Sector: .......................................................................................................................... 7

Tabulated Form: .................................................................................................................................... 8

Graphical Analysis: ................................................................................................................................ 9

Capital Markets: ................................................................................................................................ 9

Stock Market: .................................................................................................................................. 10

GCC Petrochemical Industries must unite to Compete: ................................................................. 11

Kuwait as an emerging economy in the GCC States: ...................................................................... 12

Methodology and Data Sources: ................................................................................................................. 13

Saudi Arabia (Regression Analysis): ...................................................................................................... 13

Kuwait regression Analysis: .................................................................................................................... 14

Regression analysis of UAE: .................................................................................................................. 15

Regression Analysis of Bahrain: ............................................................................................................. 16

Regression Analysis of Qatar: ................................................................................................................. 17

Regression Analysis of Oman: ................................................................................................................ 17

Conclusion: .................................................................................................................................................. 18

Work Cited .................................................................................................................................................. 19


Abstract:

Today in a world of globalization, every nation wants to be part of a regional cooperation

in order to promote economic welfare, free trade and interest at every aspect of life. Like

NAFTA, SAFTA, EU and SAARC, Gulf Countries that are comprises of six nations also

cooperate among each other as GCC. Their ultimate objective is the promotion of free trade,

social, political and economic welfares. Beside this these countries are using the latest techniques

in their way to progress and much dependence on the oil sector. GCC was founded in 1981. This

cooperation has so far resulted in the establishment of well-organized banking, financial and

stock markets that are now in a position to compete with the world largest and powerful markets.

It is also said that such cooperation had resulted in rapid economic growth in the form of an

increase in GDP per capita income and improvement in social indicators like health, education,

reduction in poverty and economic development as a whole. A survey that was held by the IMF

has recommended that these countries should diversify in the field( dependence only on oil

sector that is affected a lot by external factors ) and must unite to go for alternatives.


Introduction:

GCC is basically a trade bloc between the Arab States. By “Trade Bloc”, we mean that it is

an agreement between states, regions, and countries to reduce trade barriers, and promote free

trade areas. Their basic purpose is the promotion of the trade and welfare among the nations.

Nowadays the major trade blocs in the world are European Union (EU), North American Free

Trade Agreement (NAFTA), Singapore- American Free Trade Agreement (SAFTA),

Organization of Petroleum Exporting Countries (OPEC), Association of South East Asian

(ASEA), and South Asian Association of Regional Cooperation (SAARC)…. The main

objectives of these trade blocs are the promotion of free trade, integration in the field of

economy, and regional and cultural cooperation.

On 25th May 1981, the leaders of the United Arab Emirates, State of Bahrain, Kingdom of

Saudi Arabia, Sultanate of Oman, State of Qatar and State of Kuwait met in Abu Dhabi, United

Arab Emirates, where they met to form a cooperation to promote common integration, trade,

unity and welfare among them. They say in the introduction of the charter of GCC that this

cooperation will be based on the true Islamic values, and besides this these nations also has the

same language, culture, religion, same history and economy which will benefit this trade bloc.

They also declared that this is the only way to protect their common interest and to protect the

economic objectives that they want to achieve because these nations combined have the world

largest resources of natural oil and ga Every trade blocs have some objectives to accomplish;

same is the case with Gulf Cooperation Council of Arab States. They wanted to achieve the

following objectives:


Firstly, they want an integration, coordination and unity in every field of life. Secondly,

with the help of this free trade agreement, they want to stabilize their relations in every economic

institution and among the people. Thirdly, they also want to strengthen their relations in the

various fields like economics and financial affairs, commerce, customs, communications,

education, social and health affairs, tourism and administrative affairs. Fourthly, they want to

cooperate in the field of industries, mining, agriculture, and technical supports for their labors.

Finally, they also want to promote the true Islamic values.

Background of the study:

Free Trade gains much importance during 1970,s when capitalism was at peak at that time. Many

trade blocks had been formed like NAFTA, SAFTA, SAARC and EU whose ultimate objective

is the promotion of free trade and welfare of their own nation. Gulf countries Cooperation was

formed in 1981 when six countries Saudi Arabia, Oman, Qatar, Bahrain, Kuwait and UAE met

and give a shape to such regional integration. The Reasons behind the creation and formation of

this cooperative unit were as follows:

Firstly, the world was hit by a shock in the form of oil crises 1973,s that adversely affected the

exports of gulf countries because they were much dependent on oil sector. During this era their

exports fell by a great amount.

Secondly, these nations mostly depend on foreign laborers due to skill deficiency. They integrate

in order to overcome the problem of illegal immigrants and assimilating their own labors in the

market through efficient policies.

Finally, the foundation of GCC was also formulated on the basis to overcome the problems of

over dependence on oil exports and incorporate diversification in the export industries.


Literature Review or Findings:

These countries are rich in oil and export most of the world oils. At first their market was

not extensive but slowly it starts expanding at a very high rate due to the fluctuations in the oil

prices in the world market. According to World Bank report in 1999, they praised Kuwait and

the other Arab states for their strong financial markets and decrease in the inflation rate in the

following states. Their GDPs and per capita income increases to a great extent. The only problem

that these countries have is the presence of foreign labors. As the income of these countries

became a part of their specific countries. So far this issue is under great consideration in the GCC

headquarter.

GCC adopting the latest standards in IT:

According to a recent report given by the Gartner, Inc., it says that the Arab states of the Gulf

Cooperation are using the latest technology and techniques in their information technology. The

GCC is now cost conscious and are now doing their best to have a great control on their costs.

Some of the standards, they are using are like ISO 2700 (it is an information and security

management system, which they use for the purpose of information and security techniques),

ISO 20000 (A service management system, which helps them in planning, establishment,

implementation, operation in order to fulfill the requirements in information technology), ITIL (it

is the most adopted approach in IT in the world, helps in planning, delivering, and supporting IT

services in a business), COBIT ( framework for IT which allows the managers to bridge the gap

between control requirement, technical issues and business risks) will help them a lot in the

future to estimate costs and Return on Investment which will benefit the cooperation in a long

run. The GGC is also involved in outsourcing in which they are want to look for the new


standards and technology systems in which Cloud is a better option for them, according to

Gartner, Inc.

Yemen aims to Assimilate Laborers in to GCC:

According to a newspaper source, Yemen wanted to integrate with the GCC by providing them

with 50,000 labors annually, which they considered a good move from the Yemen side because

firstly, Yemen is an Arab state and secondly, they have a lot of foreigners who work in these

Arab states. These people are not only a threat for the local people as they got easily employment

opportunities in the GCC as compared to locals but also they took a large sum of money annually

to their respective countries. For this purpose, Yemen wanted to give their laborers a technical

and vocational language to make them able to do work in the GCC financial or labor markets. In

a recent meeting it was declared that GCC will provide the Yemeni labors with financial and

technical supports. This will help the Yemen to create a good relation with GCC and will benefit

a lot from assimilating their labors in to it. This will also strengthened the friendly relations

among the two Arab counterparts and will promote unity and welfare among the two nations.

GCC Financial Markets:

According to the study made by Jaber Muhammad, it says that in the economic development of

the GCC, financial markets have played an important role. The development in those areas has

changed the standard of living of the Arab nations to a great extent. The study was conducted in

2000, and according to the author, the per capita income of these nation has increased from

$2366 in 1970 to $ 12,500 in the early 1996. These states are oil rich, and most of their export is

dependent on the international market price of oil. An increase in the oil price in the 1970,s and

1998 has greatly affected the financial markets. As, I mentioned before that GCC has six states


and each of them played their role in the annual GDP of the GCC in percent of which Qatar has

the greatest percentage of 10.5%, Saudi Arabia has 3.8%, UAE has 3.7%, Bahrain has 8.5%,

Kuwait has 4% and Oman has 1% role in the total GDP of the GCC. This is less as compared to

the developed nations of the world like United States alone has GDP percentage of about 18.2%.

The following sectors are playing their combined role in the economic development of the GCC

in an impressive way:

The Banking Sector:

The banking sector in these regions is not that much old. The first bank was established in the

early 1950,s. The banking sector vested in the private sector; however, in GCC it has a strong

hold in the public sector. The size and scope of the banking sector in the GCC countries is not

that much strong as compared to the other developed regions of the world. It is because Saudi

Arabia which has the largest commercial bank in the region is only 2% of that of the United

States of America.

Economic size of banking sector of the GCC Countries: As far as the economic size in case of

total asset in terms of GDP is considered, the GCC countries has far greater asset than that of

USA. For example: Aggregate assets of Kuwait = 221.8% of total GDP, i.e. 3.8 times greater

than those of USA, which is 61.8% only. Similarly, Aggregate asset of UAE (127.1%) and Saudi

Arabia (69.7%) is 2.1 and 1.1 times greater than that of USA. (Statistical data diagrams, Jaber

Muhammad). It is also said that some of GCC countries has over banking, and it has reduced the


lending margin of these institutions. This is why when it was compared with of United States, the

banking in these states were having less credit due to overcrowded, but on the other hand the

result was totally different in other states like Saudi Arabia, Kuwait, Oman, and UAE. That is

why, nowadays all the states in the GCC are against the idea of expansion in the banking sector,

i.e. increase in the number of the banks. As noted that these regions are totally dependent on the

international oil price, when the oil price was increased in the early 1996-1997 has affected those

sectors to a great extent. These changes due to change in the oil price have affected the return on

asset and equity in the following ways:

Tabulated Form:

Country %Return on Assets % Return on Equity

Omani Banks 2.37 26.61

UAE Banks 1.9 15

Saudi Banks 1.7 17

Kuwaiti Banks 1.5 14

Bahrain Banks 1.5 12.5

Qatar Banks 1.6 12


Graphical Analysis:

However, the general price decrease in the next year causes a great loss in the profitability of the

GCC countries. So, from here we can conclude that these countries are mostly dependent on the

price of the oil in the international market. One of important measure of the GCC countries is the

credit provided for the domestic use. Among them, Kuwait is the leading provider of the

domestic credit of 103% which is usually greater than that of the developed countries such as

Korea and Chile. Bank credit to the public sector in the GCC countries is the highest among the

world economies like 3 times of the USA. So, one must say that it is a good sign of economic

growth because the loan provided to the public and private sector will be used for investment and

as we know more investment means that you are saving more, and that will also result in

employment opportunities and the increase in productivity of the following sectors.

Capital Markets:

Capital markets play an important role in the financial markets of the economy. Capitals markets

are those markets in which financial assets like bonds and shares of the companies are traded.

0

5

10

15

20

25

30

% Returns on Equity

% returns on Assets


Basically there are two types of markets. One is primary in which the new bonds and shares are

traded while secondary market is a market in which the existing shares and bonds are traded

from one company to other and from an individual to other. The basic functions of these markets

are the encouragement of savings, investment, capital formation, and increasing economic

growth in an institution. Debt markets are a part of these markets and the scope and size of these

markets are limited in case of the GCC countries. For example, in Saudi Arabia the bonds are

traded in such a market and are returned to the issuing authority without making a big difference.

Stock Market:

Stock markets are those markets that are involved in the selling and purchasing of stocks, bonds

and shares of a company. The basic purpose of these markets are expansion of industries,

encouraging savings, job opportunities, promotion of economic growth in the region, and

encouragement of improvement in the life standard of the people. GCC stock markets are quite

young as compared to that of the western world. The stock market in Kuwait is the oldest and it

was formed in the early 1960,s. According to the data, the aggregate sum of these markets was $

129 billion and that when it was compared to that of the Mexico or Korea was less. Nowadays,

the Saudi Arabia stock market is considered as the largest in the Middle East having shares of

60% in the GCC. Beside this Kuwait has 30%, UAE has 22%, Oman has 8%, Bahrain has 7%,

and Qatar has the lowest in the region of about 3% only.The GCC countries still has a long way

to go to compete in the international markets. For this purpose they to encourage union among

the banking sectors, lowers the barriers to the foreign investment, and remove any restrictions on

loan for the public and private sector etc. Without improving these sectors of the economy, they

will experience their effect on the economic growth of these institutions, and their boundaries

will be limited only within the region, and it will also cause a fall in the welfare of the nation.


GCC Petrochemical Industries must unite to Compete:

This article written by Abdul, Wahab Al is about the Petrochemical producers in the GCC

countries. They are the world largest producers of the petrochemical products. In order to

compete effectively in the World market, these regions have to work together in the

petrochemical industries on small as well as on large scales. Beside this they should have to

work together in the production, marketing and R&D areas to boost the economic growth. The

concept of petrochemical industries came in the year 1981, and that was in Qatar. Saudi Arabia

has the same industry by the name of SABIC which is government owned and has played a vital

role so far in the region, and is considered as the world largest producer of Ethylene, Butane-I,

and Propylene. The other states in the GCC also start producing it in the early 1985. Nowadays,

these regions have the following capacity of producing petrochemical products: The annual total

growth will be 18 %. According to the 1999 survey there were only seven producers and in 2004

the number will doubled. The increase in number will reduce their dependency on the oil revenue

that is totally based on the oil prices in the world market. For this purpose their cooperation in

this field is very important. The famous petrochemical industries are SABIC, QAPCO, and GPIC

etc. Saudi SABIC has a capacity of producing 750,000 tons per year as compared to USA,

520,000 tones, Japan, 410,000 and Western Europe 380,000 tones per year. In order to have

economies of scale the regional coordination of the petrochemical industries is very necessary.

As far as, the export is concerned, the GCC petrochemical industries have the world largest

capacity and access to the world market. The export is likely to be increased in the coming years

due to the development in cooperation and research. However, the coordination status among the

world and the GCC is now established due the reduction in trade barriers, and the coordination

among the GCC countries is still in progress. This is because mostly of these industries are in the


hand of government which make the decision cumbersome. As far as production unity is

concerned, it is weak and the only and some other coordination is among the Kuwait and Saudi

Arabia who represent the SABIC comb inly. In case of marketing, the GCC has established some

firms for that purpose who sold their products inside and outside of the region. It is estimated

that 80% of the products is exported outside the country, while among them 50% goes to the

Asia. The two obstacles in the cooperation among the GCC countries are the raw material used

in the production i.e. Natural Gas, and the other obstacles is the Technology which is provided to

them by the outer world.

In a nutshell, these regions required integration in every field like marketing, decision making,

production and all the policies related to it, if they want to have a strong grip on the world

market. They should also promote the integration among the regional industries, and joint

research and development projects.

Kuwait as an emerging economy in the GCC States:

Kuwait, one of the states of the Arab Gulf has an economy that is growing at a rapid rate since

1990,s. The country is very rich in oil and has the world 10% of total oil. Most of the oil fields

are concentrated in the area of Greater Burgan Field (world second largest reserves). The

economy is also dependent on the oil price as other GCC states. According to the economic

report given by Siddiqi, Moin in 2000; it says that the economic growth in Kuwait is 3.5 percent,

as well as the process of diversification (being not want to totally dependent on the oil sector)

facing some challenges is also growing at a higher pace. The encouragement of foreign

investment has also led the economy growth well above the expectations. According to the

National Bank of Kuwait the budget surplus was $3 billion in 2000, which indicates welfare

among the nations. This is why, the country’s people is enjoying free access to telephone service,


electricity, water, and employment opportunities in the public sector. About 95% of the labor

force is paid $30,000 per head. The annual price increase is about 1.3 %, which is also a good

sign of economic development, according to the 1999 report of IMF. Kuwait also decided the

investment in the oil sector and so far USA, UK and many other countries have shown there

interest in that area. This will allow the country to have an impressive use of E&D in the oil

sector, and it will also results in the expansion of the oil reserves in the northern part.

Methodology and Data Sources:

As mentioned above that such cooperation among the Gulf States had resulted in economic

development in the form of an increase in exports, GDP per capita income, social sector

improvements and diversification in oil sector. Data has been collected from World Bank and

Polity4 in order to show the increase in GDP per capita due to (independent variables like

exports as % of GDP, Political Stability and violence and Foreign Direct Investment inflow in to

the country). There effects have been shown with the help of Regression Analysis (Least

Square Method).

Saudi Arabia (Regression Analysis):

Following functions had been drawn for every country:

Gdp= f (Political stability, FDI, exports)

RESULTS:

Dependent Variable: GDP_PER_CAPITA

Method: Least Squares

Date: 02/03/15 Time: 10:52

Sample: 1996 2013

Included observations: 18 Variable Coefficient Std. Error t-Statistic Prob. POLITICAL_STABILLIT

Y -5689.034 7559.963 -0.752521 0.4642

FDI_INFLOW 137.5085 483.1639 0.284600 0.7801

EXPORTS___OF_GDP 347.9325 210.7320 1.651066 0.1210

C -4387.873 8473.374 -0.517843 0.6127 R-squared 0.498616 Mean dependent var 14170.57

Adjusted R-squared 0.391177 S.D. dependent var 6427.752

S.E. of regression 5015.388 Akaike info criterion 20.07154


Sum squared resid 3.52E+08 Schwarz criterion 20.26940

Log likelihood -176.6439 Hannan-Quinn criter. 20.09882

F-statistic 4.640912 Durbin-Watson stat 0.249535

Prob(F-statistic) 0.018729

EXPLANATION:

Though the results are insignificant in terms of exports and FDI according to the data

statistically, however, the coefficient value of political stability is negative showing us that

according to the Polity4 a state is politically stable if the estimate( is near to +2.5 and unstable if

its value is closer to -2.5). Here one must note these variables are bringing a change of 50% in

dependent variable, i.e. GDP per capita income. In addition the p-value is greater then 2%. It

should be noted that from data, we can easily conclude the negativity in political stability and

less contribution FDI in their economy.

Kuwait regression Analysis:

RESULTS:



Date: 02/03/15 Time: 22:47

Sample: 1996 2013

Included observations: 18 Variable Coefficient Std. Error t-Statistic Prob. POLITICAL_STABILITY 18910.78 12133.77 1.558525 0.1414

FDI_INFLOW -464.9878 3436.210 -0.135320 0.8943

EXPORTS___OF_GDP 1440.843 245.6132 5.866310 0.0000








Explanation:

Here the coefficient value of all two variables is positively linked with per capita income though

statistically it is not significant. Here one can note that from the data the positive value of

political stability indicates that such environment has been created in Kuwait that could lead the


nation to a prosper future. In other words such stability will also result in inflow of FDI that will

benefit the youth by providing them with job opportunity. R-value is significant in a sense that it

shows that how much changes is being brought by independent variables in dependent variables.

The p-value in terms of exports indicates that exports during the last two decades had contributed

a lot to economic growth and GDP growth. It is also statistically significant.

Regression analysis of UAE:

Results:



Date: 02/03/15 Time: 11:57

Sample: 1996 2013


FDI_INFLOW 1669.364 333.5526 5.004799 0.0002

EXPORTS___OF_GDP 97.33322 42.06382 2.313942 0.0364

C 25321.35 8623.981 2.936156 0.0108 R-squared 0.808440 Mean dependent var 36924.02







Explanation:

The above results indicate that UAE is stable politically. Secondly the significant results in terms

of FDI and Exports indicate that UAE being a business hub for the world is the best place to

invest. R-square value indicates that 80% of changes in dependent are due to independent

variables. F-statistic along with durbin Watson is also significant. Political stability is statistically

in significant though the values are positive in terms of range defined by polity4.


Regression Analysis of Bahrain:

RESULTS:



Date: 02/03/15 Time: 12:04

Sample: 1996 2013

Included observations: 18 Variable Coefficient Std. Error t-Statistic Prob. POLITICAL_STABILITY -5889.657 2056.494 -2.863932 0.0125

FDI_INFLLOW -347.9154 172.3350 -2.018831 0.0631

EXPORTS___OF_GDP 341.8401 218.4172 1.565078 0.1399








Explanation:

The data for Bahrain had fluctuation in per capita income by which we mean that during the last

two decades, we have seen a positive trend in GDP per capita. In addition it has shown some

sorts of downward fluctuation. During the downturn period FDI declines which ultimately will

become the cause of decline in per capita. Political stability is somehow showing a very negative

trend over the last two decades which can also be seen from the negative value of that particular

coefficient which in other words is statistically significant. Exports coefficient though is

positively linked with of per capita income though statistically insignificant.


Regression Analysis of Qatar:

RESULTS:



Date: 02/03/15 Time: 12:12

Sample: 1996 2013


FDI_INFLOW___OF_GDP 3821.476 2754.827 1.387193 0.1871

EXPORTS___OF_GDP 2094.887 943.9783 2.219210 0.0435








Explanation:

Here one can for sure says that East Asian financial crises had badly affected the financial,

capital and FDI inflow in the GCC world which resulted in a slight decrease in per capita income

during 1998. However the nation is politically strong and stable which has encouraged Fdi at a

very large scale. All of three variables are positively linked to increase in Per capita income

theoretically.

Regression Analysis of Oman:

Results:

Dependent Variable: GDP_PER_CAPIA


Date: 02/03/15 Time: 12:39

Sample: 1996 2013

Included observations: 18 Variable Coefficient Std. Error t-Statistic Prob. POLITICAL_STABILITY -10203.95 5411.700 -1.885536 0.0803

FDI_INFLOW 863.7073 378.1298 2.284156 0.0385

EXPORTS___OF_GDP 522.7811 169.2865 3.088143 0.0080









Explanation: All of the above three variables are statistically significant showing by the value

.at the mean time value of R-square indicates that how much changes in dependent due to

independent can be seen from the results.

Conclusion: The GCC is proving to be good trade integration among the Arab States. The expansion in the

economic growth along with the encouragement of the foreign investors will lead the economies

to flourish. As well as, this will also encourage them to improve the standard life, education

sector, health, and all other fields of life. The diversification and the integration in the small

industries will also encourage economic growth in the area. Beside this, the objectives that they

have in the GCC charter could easily be achieved. According to the IMF survey, it says that

GCC current growth model is based on the notion and dependence on oil exports which had

diverted their attention from brought in the diversification process in the sector. Secondly, the

increase in number of youth among the Arab states is an alarming situation for them to cope with

the unemployment situation and provide the youth with ample job opportunities only through

diversification. Thirdly, Kuwait and UAE are among the states that had contributed a lot to the

diversification process and HDI along with building World largest airports, seaports, hotels, and

most importantly creating an environment for the business and private class to invest in there.

Fourthly, education and economic growth and development are very interrelated. This is because

skill labor can only be created with the help of educating them which is very disappointing in

those nations though they are having high per capita income. They can also acquire such skills

and improvement in the sector though “Brain-Drain” which is a positive stance by these

countries. Lastly, if these nations want to accelerate growth, competition, productivity, skills

development, diversifying products, educating people, eradicating poverty they have to revise

policies and should be committed to bring about changes in the lives of the people.


Work Cited

i. http://en.wikipedia.org/wiki/Cooperation_Council_for_the_Arab_States_of_the_Gulf &

. http://www.gcc-sg.org/eng/index895b.html

ii. UNITED ARAB EMIRATES: Gartner says gulf cooperation council (GCC) countries

adopting the latest standards and technologies in infrastructure and operations. (2012).

MENA Report, Retrieved from

http://search.proquest.com/docview/923106294?accountid=27020

iii. Siddiqi, Moin A. "Economic Report: Kuwait." Middle East 2000: 36-9. ProQuest. Web. 2

January. 2015

iv. IMF survey, “Gulf Countries should diversify to sustain strong future growth”, june3,

2014.

v. Consult few Arab Students, January 5, 2015

vi. data.worldbank.org/ Web.3january,2015

http://en.wikipedia.org/wiki/Cooperation_Council_for_the_Arab_States_of_the_Gulf

http://www.gcc-sg.org/eng/index895b.html

http://search.proquest.com/docview/923106294?accountid=27020


Mini Research

Title:

GULF COUNTRIES COOPERATION

Submitted to:

MR. TAJ MUHAMMAD

Submitted by:

ABDUL NASIR & ZAHOOR AHMED

Roll Numbers#

207 & 245-BH-ECON-11

DEPARTMENT OF ECONOMICS

GOVERNMENT COLLEGE UNIVERSITY LAHORE

mr. taj 2007

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