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Working Paper Series - Are GCC Countries Ready for Currency Union ?



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Are GCC Countries Ready for Currency Union ?


Volume : 0

No : 0

ISSN : WPS0203

Publisher : Arab Planning Institute - Kuwait

Author (s) : Belkacem Laabas Imed Limam

Published Date : 1/1/2002


Contents :
Using formal and informalcriteria, we test whether GCC is an optimum currency area (OCA). Based on thetraditional OCA criteria, we find that GCC countries are yet to fulfill thenecessary pre-conditions for the establishment of Currency Union (CU). Thestructure of their economies remains dominated by the oil sector,intra-regional trade is very limited and, unlike what many believe, there doesnot seem to be evidence of convergence in their main macroeconomic fundamentalsnor synchronization of their business cycles. The more formal test based on theGeneralized Purchasing Power Parity Theory (G-PPP), shows that real exchangerates in GCC are closely related and share the same stochastic trend and hencepoints to the readiness, although to different degrees, of the countries of theregion for CU. We argue that the main factors that are favorable for theestablishment of CU are the commitment by all GCC countries to fixed exchangerate arrangements and a strong political resolve to achieve economicintegration. Despite the lack of diversification and actual weakness of intra-GCCinter-industry trade, CU, once established, can expand intra-industry tradeamong GCC if the proper steps are taken toward more specialization andsophistication of their respective industries. On the other hand, CU may resultin more synchronized business cycles provided that GCC countries achieveconvergence in their economic structure, policies and regulations. In order toachieve these potential benefits of CU, GCC countries need to accelerateeconomic integration and fulfill the requirements of the GCC common marketthrough the lifting of all restrictions on the free movement of goods andfactors, and the creation of supranational institutions that would subordinatenational interest for the regional one. This would be possible only if individualcountries are willing to surrender some of their national prerogatives in favorof the interest of the region as a whole. 

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