This essay will seek to argue that if and when the member states of the “Gulf Cooperation Council” (GCC) form a single currency any advantages may seem to exceed any disadvantages but that the actual overall impact of the currency’s creation for wider international relations with the Middle East will prove to be somewhat limited.
In order to see why we must first of all say something about the history of the founding states of the GCC: Saudi Arabia, Kuwait, Bahrain the United Arab Emirates (UAE), Oman and Qatar and the factors that lead to the GCC’s creation.
Saudi Arabia as a modern state can be considered to be a relatively new construct, whose origin lies (as with the other Gulf States) with the break up of the Ottoman Empire at the end of the First World War.
The political system to this day might be said to be based on a feudal structure in which it is the strength of alliances based around regions, tribalism and family connections that which provide the key instruments for the governance of the country.
At the apex of this system from the state’s beginnings to this day is the royal family descended from Ibn Su-ud who founded the kingdom. Saudi Arabia obviously also has a spiritual significance to the Arab and wider Islamic world because of its status as the keeper of the holy temples of Mecca and Medina. Its adopted currency is the Saudi riyal (SAR).
Kuwait as a state differs from Saudi Arabia in the sense that while there is still a monarchical system of government controlled by the Al Sabah family there is nonetheless some limited form of popular participation in the political process through a directly elected National Assembly (women and resident aliens such as foreign workers being forbidden to vote or stand as candidates) that is not based on a party political system which acts to provide some limited accountability to otherwise unimpeded rule within a written constitution. Its adopted currency is the Kuwaiti dinar (KWD).
Bahrain emerged from a period of instability that began in the 1920’s to undergo, from the 1960’s, under the direction of Shaykh Isab Salma Al Khalifa (like Kuwait) a process limited political reform aimed at greater “openness and transparency” which even included some limited experimentation with western style democracy which was nonetheless disbanded. The currency is the Bahraini dinar (BHD
The United Arab Emirates (UAE) was formed in 1971 from a “Trucial Council” out of the seven sheikdoms of Abu Dhabi, Ajman, Dubai, Fujariah, Ras al Khaimah, Sharajah and Umm al Qawain in which the Emirate is controlled by a Supreme Council of the rulers of the seven sheikdoms. Its currency is the UAE dirham (AED}
Oman when it emerged from the break-up of the Ottoman Empire under its first Sultan Sa’aid was ruled directly by him; albeit with some reference to a consultative council before making all final decisions. (Netton pg 147). The country then underwent major upheaval when his son Sultan Qubus instigated a successful coup in 1970 and stated that the country was to break with the austere rule of it’s past and now pursue a policy of “greater openness” and engagement with the rest of the world while at the same time being cautious in its foreign policy stances whenever tensions rose in the Middle East.
The currency is the Omani riyal (OMR)
In the case of Qatar, having been rescued from the brink of economic collapse, it has used its elevated economic status whilst still being run on similar lines to the other Gulf States to pursue in the past an independent foreign policy from the rest of the states. The currency is the Qatari riyal (QAR)
Whatever nuances might exist between these states the single most important factor in their development since gaining statehood has been of course their transformation into nothing less than the economic lifeblood of the world economy because of their status as the world’s largest producers of crude oil and gas. (As well as possessing the largest known remaining reserves.)
Their relatively rapid development compared to other already industrialised countries
Since the oil came on stream has meant that the region (historically and today) has acquired in over half a century an immense strategic importance; not only in terms of the security of supply of oil at a stable price but because the Gulf States are also large investors of their oil revenues in the worlds largest financial centres and an important trading partner as a consumer of predominantly western goods and services.
Not only are 45% of the worlds known oil reserves and 15% of its gas reserves to be found there but Gulf States trade with the rest of the world has been put at at least $340 billion. (Fasno pg 1) Gulf investments in the United States alone are worth more than the combined investments in the United States of African and other Middle Eastern countries. Conversely of all US exports to Africa and the Middle East at least 60% of it is bound for the Gulf.
Such is the importance of the Gulf States not only as a key energy supplier but as an investor and trading partner, whatever the ideological and cultural differences that exist between the Gulf States and the West; they are inextricably linked to the global capitalist based economic system.
The Gulf States have nonetheless been acutely aware that despite their considerable oil based wealth what they have in economic strength is minuscule compared to what they have in terms of an effective defensive capability when part of a region that is one of the most potentially unstable ones in the world ; surrounded as they are by more powerful and historically aggressive or unstable states: whether , from as far back as the days of the Shah, Iranian claims to Bahrain because of it’s sizeable Shia minority and the subsequent Islamic Republic’s challenging of the legitimate place in the Islamic world of Saudi Arabia or Baathist Iraq’s eventual invasion of Kuwait which lead to the first Gulf War in the 1990’s.
(And now concerns about the possible break up of post Baathist Iraq and the possible assertion of Iranian power in the region and a continued stand off with the international community over a suspected nuclear weapons programme.)
The Gulf Cooperation Council (GCC) was thus formed with such threats in mind in Riyadh in May 25th 1981 against the backdrop of the then raging Iran- Iraq war and concern that the former Soviet Union was encroaching in its invasion of Afghanistan.
While some significant progress has been made in this direction (outwith principally American security guarantees) it remains the case that it is still somewhat limited but in the period since another issue has developed after the GCC’s inception which has acquired a momentum of it s own; enhancing the Council’s member’s economic security.
Whilst the GCC retains an economic importance based on oil the GCC it has sought to reduce its long term dependence on oil production by the stimulation of non oil trade amongst themselves and the rest of the world; beginning with the creation of a free trade zone in 1983 as part of the “Unified Economic Agreement”. The Unified Economic Agreement committed the GCC to allow for the uninterrupted migration of labour within the GCC area, the removal of restrictions on property ownership, mobility of capital and taxes/ duties on goods and services.
This process has been complemented with the pursuit of similar policies regarding personal and corporate taxation, the same fiscal (government spending) and monetary policies and a Customs Union consolidating the gains made with the free trade area was agreed in 2005. In the case of monetary policy inflation and interest rates have been at similar levels and member countries currencies have been (with the exception of Kuwait) pegged against the Dollar so as to maximise the gains from trade.
The GCC ( at the instigation of Saudi Arabia) has thus come to the conclusion that the next logical step in the process of economic integration which has gathered pace in the last 24 years should be greater political integration culminating in the creation of the GCC’s own single currency by 2010 : the “Kahleej Dinar”.
This process of economic integration can of course be seen to emulate the processes of economic and political integration of the European Union underwent beginning with the creation of the Single European Market programme which was completed in 1992 and the creation of the Union’s own single currency, The Euro, in 1999.
Prior to the creation of the Euro (although there were attempts to manage EU exchange rates as the GCC has since done in pegging five of its members currencies to the Dollar) it was possible (It still is in the case of non members of the Euro such as Britain and Sweden) for EU member states to exert complete control over their fiscal and monetary policies, particularly the exchange rate, while still being part of the single market.
Full monetary union is of a different order since if the Kahleej Dinar ever becomes a reality then (like the Euro) for of those of the GCC that join they are committed to an irrevocable locking of their exchange rate by replacing their own currencies with one which will be supervised by a credible monetary authority (such as an independent central bank; with regards to the Euro the European Central Bank (ECB) whose remit is to pursue a policy of price stability as one of it’s key objectives. (Bordo pg149 and Fasano pgs 13-15) They have (at least as far as monetary policy is concerned) committed themselves to surrendering a key aspect of their states sovereignty in the framing of economic policy.
It was claimed at the time of the completion of the European single market that in order to maximise the supposed economic benefits of a single market – economies of scale and unrestricted access to all markets to boost overall EU competitiveness/ efficiency, gains of trade, minimum transaction and information costs- that it would be necessary to have full monetary union or what has been called “one market one money”.
It must however be borne in mind that the Euro is a “multinational” and not a national monetary union in which independent states have agreed to either merge or except at an agreed fix rate each others currencies which is also the same characteristic which was shared by the Latin Monetary Union (LMU; which consisted of France, Belgium and Italy) created in 1865 and the Scandinavian Monetary Union (SMU; which consisted of Sweden Norway and Denmark) created in 1872.
One of the main advantages that any Kahleej Dinar area would have to support it is that with the above process of economic integration having been well undertaken, the fact that the structure and economic cycles of the GCC economies are identical, (they are obviously currently strongly correlated to oil demand) that there is a common history, language (Arabic) and culture means that it would appear to fit well with what the economists call an “optimum currency area”.
Optimum currency areas have labour markets where labour that is able to move to where there is work without restrictions, no linguistic barriers to labour mobility and fiscal policies for parts of the area that are affected by “asymmetric shocks” by which is meant if the negative economic effects of external events to a region of the area are worse than elsewhere there is compensating government spending too offset this.
A key weakness of the Euro-area is that it does not have these advantages where labour mobility is concerned and the ability to adequately compensate the regions of Europe in the event of such shocks. This is partly due to restrictions in the EU budget but it is also because, learning lessons of previous monetary unions, there has been an insistence that in order for the Euro to be credible as a currency there must be a commitment to price stability and agreed restrictions on the extent to which members can use their fiscal powers to borrow to offset these effects.
(One of the factors that ultimately helped to bring about the demise of the LMU was, in contrast to the SMU, that the there was no real commitment to price stability so that weaker members such as Italy were allowed by the Banque de France, which was given overall responsibility for LMU, to issue more currency to bail itself out of it’s economic problems.
Whilst there has been a lot of personal investment (or at least by the elites of Europe) in the process of political and economic integration the fact remains that Europe is culturally far more heterogeneous than the GCC, its economies have different economic cycles and with a major economic shock could be vulnerable to collapse which could undermine cohesion and political will to continue to support the Euro.
Any potential “Kahleej Dinar Zone” could arguably more closely resemble the SMU than the Euro-zone because the GCC has similar characteristics to the countries that formed the SMU in that they had a similar social/political/economic structure, a coherent and consensus driven approach to the framing of policies (all backed by the biggest member: Sweden) and a more credible monetary policy which, while not being as arguably rigorous as the formal creation of something like the ECB today, was more credible than that of the LMU.
The LMU was also undermined among other things by the fact that its creation was more motivated by French rivalry with Prussia than the actual good it did for members and the Banque de France was not anywhere near as competent or authoritative as the ECB.
Saudi Arabia as the largest state in the GCC would be probably, going by recent precedent, behave like Sweden did in the SMU in being interested in a more overall consensual approach.
While the SMU was more economically successful than the LMU despite having a shorter life span both unions ultimately collapsed when faced with a major external shock in the form of the First World War and, as we have established, the Euro-area is not totally immune to such a shock even if it seems unlikely.
That cannot be said of the GCC which lives in one of the most volatile regions in the world even though it has effectively become an American protectorate.
Nonetheless there would appear, in narrow economic terms, to be a sufficient case for the creation of the Kahleej Dinar provided there is a convincing monetary policy, with or without an actual Central bank, and that the fiscal arrangements for all states that join to deal with any shocks can be lived with.
Assuming that the above rationale is a correct one then it would appear to follow that the creation of a Kahleej Dinar zone would hold out the prospect of fulfilling ambitions for the economic development of non oil trade that could grow and in the fullness of time possibly supplant oil revenues. Combined with no exchange controls foreign investors could indeed invest in a economic area which has pro free trade policies and generally considered satisfactory economic management with confidence and view the GCC as not just six different countries whose risks have to be individually assessed but one.
This could then act as a stimulus to domestic non oil investment, the development of a non oil professional class and induce inward investment from foreign companies.
The last possibility would be a major economic turning point as traditionally the only such investment has been by oil companies and the GCC states have done most of their own investment abroad.
Any such enhancement of the GCC beyond oil would enable the GCC to exercise more influence as a regional trading block to match other regional trading blocks such as the EU itself as well as increasing its importance in financial markets and monetary institutions such as the World Bank and IMF.
With a credible Kahleej Dinar it becomes possible because of the economic benefits of a single currency area for trade deals and negotiations to be carried as a single entity so as to fully so as to prevent other states or the groupings that they belong to using divide and rule strategies in which each of the gulf states may be played off against each other. To that end the GCC acting as a combined group has negotiated its own trade agreements recently with the EU and China .
As things stand because of it’s oil wealth Saudi Arabia alone already acts as a major player in international relations not only in terms of it’s importance in the shaping of the wider Middle East political process but also because it (regardless of the other GCC states) is able to wield influence in the shaping of global monetary policy in their investment decisions and the need for cooperation with them recycling their petro- dollars so as to stop (as happened in the 1970’s) those decisions being potentially destabilising in global financial markets. (Cordesman 16 & pg 27)
Any successful Kahleej Dinar area would seem to hold out the prospect of consolidating a process that has long before been built on oil in any case and enable the GCC not to be limited to being seen as a mere oil producing backwater and fully part of wider global economic integration in embracing the forces of globalisation.
Embracing the forces of globalisation is not, however, something that can be viewed in just narrow economic terms. It has been established that whatever cultural and ideological differences exist between the GCC and the rest of their mainly western partners trading partners the GCC are nonetheless integral to the working of the global capitalist system; they are to all intents and purposes capitalist states themselves.
(This contrasts to most of the rest of the Arab/ Islamic world, where the use of free markets has been very controlled and limited.)
Yet as capitalist states they are anomalies because they are what have been called “authoritarian states” whose tribal and feudal based traditions have scarcely changed since the states were founded despite the outward appearance of embracing modernity associated with oil development (Price pgs 141-147 and Civil society in the Muslim world pg 141)
In his “The Wealth of Nations” the economist and philosopher Adam Smith argued that the development of capitalist based economic systems should normally also have the effects of stimulating the development of free societies (Skinner pgs 2-3)
As well as the “invisible hand” of the market place sending out signals, via the price mechanism, to encourage entrepreneurial activity and a division of labour that would act as a spur to economic efficiency and growth and gains to trade between similar countries it would also have the effect of causing a gradual shift of wealth and power away from feudal power and (before manufacturing) agrarian based societies. (Skinner pg 16)
It should lead to the development of a “commercial class” that would increasingly wish to have more of say in how the political process was conducted. In the context of the United Kingdom “free governments” of the kind that had taken root “inevitably operate in a particularly sensitive political and economic environment” (Skinner pg 16)
In Marxist terms it should also be said that when technological development is supposed to change the “mode of production” it also is supposed to change the “relations of production” so that new classes and power structures should emerge as the shift to a capitalist economic system takes place. There is also a change in consciousness as a formally exploited class becomes the new dominant class: in the case of capitalism the bourgeois.
No such phenomenon has ever appeared as yet in the territory of the GCC although it is part of global capitalism and the GCC countries remain renowned for being among the most conservative in terms of political and social development in the world despite their considerable oil based wealth.
An explanation as to how this is so in terms of the GCC’s political relationship with their citizens and with the rest of the world is that their oil wealth has turned them into what has been called “rentier “states in which there is no economic dependence on the natural endowments of the population leading to any significant extent to a bourgeois class who will agitate for political reform. In the case of the GCC much of the labour that is employed either directly in the oil industry or in the provision of goods and services (whether in the public or the private sector) isn’t even indigenous as they have become dependent on the skills and abilities of foreign labour. (Civil society in the Muslim world pg 43)
Any indigenous professional/ bourgeois class is small and inconsequential in terms of its economic impact and has generally been turned into a vested interest that supports retention of the existing power structures. (Civil society in the Muslim world pg 43)
The paradox in the experience not only in the case of the GCC but to some extent other oil producers such as with formerly Baathist Iraq, Theocratic Iran and Libya is that the oil wealth has enabled such states to maintain power structures that might otherwise be unsustainable. Oil wealth that enables the rentier state to be detached from the society that it governs forces it only to be concerned with the pressing material needs of the population and to be indifferent (if not hostile and repressive) to any pressures to deliver anything else. It is arguably the case that but for the oil states such as Bahrain and the UAE would have collapsed (at least in their current form) long ago and that oil wealth has retarded the development of what in western terms would be considered a civil society with rights for all citizens (including women) with a more internationally acknowledged open, accountable and representative system of government (Netton pgs 164-5&177-178 & Civil society in the Muslim world pgs 43-44 & Price pgs 144 & 147)
How does this relate to the creation of any Kahleej Dinar area?
Because the GCC states realise, wisely, that they cannot rely on oil for their economic base for ever, even if projections for when oil will run out are still relatively far into the future. (Or totally rely on any long term investment income.) There is also the possibility that even before reserves decline that as technology advances (spurred on by other countries strategic concerns about relying on oil from an unstable part of the world and concerns about global climate change) there will be a longer term decline in oil demand. As the former Saudi oil minister Sheik Yamani put it: “The stone age did not end from a lack of stones. The oil age will not end from a lack of oil”.
The GCC countries (although when oil prices plummeted in the 1980’s they had a narrow escape) in their current economic status as rentier states have not had an economic crisis of the kind from declining oil revenues which has obliged them to pursue a radical departure from their existing political and social structures. (Price pg s 143-147 and Civil Society in the Muslim World pg 44)
Yet the supposed economic rationale for the creation of the Kahleej Dinar is that it will augment the process of non oil based economic development that has already taken place in the GCC and assist future development both within and without by making the GCC a place the rest of the world doesn’t just want to do oil and oil related business with.
The implication of a successful diversification strategy from over dependence on oil, even if it were successful, implies that if non oil based growth acquires in the long to very long term a greater economic importance then the GCC could area could become more like any other open market based economic system (such as the UK or Japan) that has to be more competitive in it’s development of goods and services using the natural talents of the local population without much else in the way of natural resources.
That the GCC and it population are much more directly integrated into the world by the forces of globalisation
In the context of the GCC this would mean that the days of the rentier state will one day be over, more emphasis will have to be put on the development of the education/ skills base of the local population and that there could then be the emergence of a larger indigenous independent bourgeois class that is economically more powerful in its own right (because of greater fiscal dependence on them) who are in a position to press for greater political and social reforms.
In Liberal international relations theory (especially in relation to globalisation) increasing economic interdependence with the rest of the world doesn’t just stop at the exchange of goods and services; it also generates cross cutting flows in the exchange of ideas (Especially in an internet age) that work below just formal diplomatic and trading relations between states (Doyle Pg 211)
That is why neo- liberal theorists from Adam Smith onwards have supported capitalist economic development because it is believed that it fosters the spread of liberal ideas and values which, it is believed, helps to bring about systems of government that are more open, accountable and representative and tolerant in the acceptance of social diversity. This is viewed as being not only something that is desirable for its own sake but also conducive to the creation of global stability: what has been called “commercial pacifism”. (Doyle pg 211)
(Although this theory is still to be fully put to the test in the case of a now effectively capitalist country such as China, an increasingly important consumer of GCC produced oil, whose domestic politics are also viewed from a western perspective as being authoritarian.)
It has been claimed that Liberal Democracy and Islamic faith based societies are in incompatible because it is the nature of nature of such societies that there is a tension between western ideas of a secular civil society and Islamic concepts of “Umma” (or community) in which politics, society and economics are all seen as being inseparable from each other which creates problems in allowing rights for minorities and the tolerance of other beliefs and values. What Liberals would call the individual’s freedom to find what is for them is “the good life” instead of being told by an authoritarian state/ holistic belief system (religious or otherwise) what it already is.
Certainly it is the case that Liberal ideas of representative government have not had much of a track record in the Arab and Islamic world which has helped to reinforce the view that there is a “clash of civilisations”.
Yet it can be argued that this is a superficial reading of what has actually happened as in much of the Arab the world which lacks a valued commodity such as oil they were former colonies of imperial powers whose view of western originated ideas such as Liberalism (as well as being considered hypocritical when applied to themselves) were coloured by what was thought to be a repressive colonial experience. (Price pg 138)
The secular post colonial government turned to other ideologies which failed to meet with the expectations of post colonial development which then lead to popular disenchantment with the regimes the result of which was that they resorted to policies of repression to crack down on any popular or intellectual lead dissent. (Price pg 140)
The irony has been that it is in much of the Middle East historically that it is the much maligned in popular perception Islamic groups who have done much of the actual running in countries such as Tunisia ,Syria and Algeria (Price pg 140)
Indeed part of the tragedy in terms of relations of, particularly the United States, with this part of the world is that many of these groups have become radicalised and developed a vehemently anti western stance because they did not get any real western support for their (originally moderate) agendas. (Price pg 141-142)
In the case of Algeria there was an aborted experiment in democracy when the secular military relinquished control and allowed free elections which brought to power for a brief time The Islamic Salvation Front (FIS) which included in its platform a commitment to free markets and democratic principles. (Price pgs 141-142)
If this had been allowed to continue it may well have acted as a catalyst for wider political and economic reform throughout the Middle East which would change the basis for international relations with the Middle East and perhaps (if liberal theory is correct) also have implications for such things as the Middle East peace process.
To summarise the GCC’s apparent desire to reduce its oil dependence in the creation of a Kahleej Dinar area , the fact that this implies greater integration with the global economy as part of globalisation, that this could also lead in time to pressures for internal political reform by its changing the structure of the GCC economies and that there is nothing inevitable about continued authoritarian systems of government in countries that adhere to an Islamic faith would seem to suggest that the creation of a Kahleej Dinar area could have consequences beyond the narrow concerns of economic well being.
It may have the effect of brining about an agenda for reform in the GCC that acts as a catalyst for wider political reform throughout the Middle East in its relationship to the rest of the world and each other that the GCC rulers neither intended nor wished.
(An example perhaps of what the Liberal thinker FA Hayek called “the law of unintended consequences”)
Or so it would seem as the whole analysis works on the assumption that there is a convincing economic case for the currency but if we look further we will find that it is not as simple as that and that and that other more political than economic calculations that have inspired it’s suggested creation.
Firstly it is all very well in economic theory seeking to create a free trade area and customs area so that there are gains to trade within the states but trade within the GCC is only in the region of 7% compared to 55% for the EU and the extent of trade within the GCC doesn’t amount to much when even compared to similar free trade organisations in Africa (Momani pg 8-9)
Secondly the supposed economies of scale that could achieved by what is in comparison to other trading blocks a small area are comparatively limited which means the efficency gain (and thus profitability) for attracting non oil based investment are somewhat limited. In the absence of domestic political and social reforms of a kind that the GCC states might be reluctant to introduce, such as improving the skills base of the population and reducing dependence on foreign labour, inward investors may actually prove reluctant to invest. There is also the fact that in a world of globalisation in which capital is more mobile corporate investors and their personnel do not have to invest in an area that they find austere and unwelcoming (Momani pg 10)
Thirdly all the GCC states bar Kuwait are tied to the Dollar anyway which means that in effect they already have an effective single currency. (Momani pg 10)
If the economic benefits of existing economic integration are somewhat limited as it is then the fact is that in narrow economic terms there is nothing particularly for or against the creation of the currency: its economic and political effects seen in its own terms will prove somewhat muted.
This is all known by the government of Saudi Arabia but it is Saudi Arabia that has done most of the pushing for the currency. Why?
Part of the explanation is that how global politics has changed since the events of September 11.The United States was prepared to overlook any deficiencies it saw in the domestic practices of states in the Gulf and elsewhere because as well as being a strategic energy supplier the GCC was an important Cold War ally. (Momani pg13)
Because of concern about how a lack of the above discussed political and economic reforms has allowed organisations such as Al Qaeda (with recruits from Saudi Arabia) to gain support in the region the United States has taken the view that it must be more involved in stimulating that process as part of its own and western security. (Momani pg12)
To that end the United States has taken it upon itself to stimulate the creation of a Middle East Free Trade Area (META) in which it has sought also to negotiate its own trade deals with Gulf States which (as the biggest State in the GCC) the Saudi Government has taken exception to (Momani pg 11)
In what has been called the “new regionalism” the behaviour of the Saudi’s in seeking the currency can be explained because they believe that it will act as a counterweight ,by entrenching political integration, to what they consider to be an otherwise excessive American involvement in the area beyond common security interests.( Momani pg 2)
The new regionalism theory seeks to explain how states by engaging in political and economic integration as trading blocks and regional organisations seek to manage in an increasingly interconnected world the forces of globalisation on their terms.
In the longer term the GCC still faces the problem of how to deal with the inevitable very longer term decline in oil based wealth: the end of the rentier state. Either a fiscal crisis or a growth in non oil trade amongst themselves and the rest of the world (or some combination) may bring about slow incremental political and economic change. The creation of the Kahleej Dinar will not by itself particularly amount to much.
This essay will seek to argue that if and when the member states of the “Gulf Cooperation Council” (GCC) form a single currency any advantages may seem to exceed any disadvantages but that the actual overall impact of the currency’s creation for wider international relations with the Middle East will prove to be somewhat limited.