The Gulf Cooperation Council Economic Challenges Research Paper

Abstract

Overreliance on oil and natural gas in economic development has not been stable and sustainable since GCC countries are vulnerable to global economic crises. The prices of oil and natural gas vary with time depending on prevailing market conditions. During inflation, GCC countries gain substantial gross domestic product, which provide an opportunity for enhancing economic development.

Through the proceeds obtained from oil and natural gas, GCC countries have established physical and social infrastructure, which is central to economic development. Since economic diversification is imperative in enhancing economic stability and sustainability, GCC countries have embarked on economic reforms towards it.

Diversification in labor markets enables subjects in GCC countries to gain employment in the public sector and prompts investors to expand private sector due to cheap labor from expatriates. As human resources are insufficient, reforms in the education system and provision of vocational trainings to workers enhances capacity of workforce in GCC countries, thus meeting the increasing demands of labor.

Ultimately, economic integration and development of strategies towards a single monetary union have scaled up stability of fiscal markets. Hence, economic diversification in aspects of labor markets, human resources, and fiscal markets have proved as effective elements in promoting economic stability and sustainability in GCC states.

Introduction

Countries belonging to the Gulf Cooperation Council (GCC) have been facing great economic challenges in the recent decades. The economic challenges that these countries face emanate from their nature of economic activities, since they heavily rely on oil and natural gas.

Overreliance on oil and natural gas as sources of foreign exchange has increased the vulnerability of GCC countries to economic crises, which are becoming a commonplace in the contemporary world economy.

Dependence on one sector for economic growth and development is quite unstable and unsustainable because it is prone to volatile market conditions that change in response to global markets. “In a bid to reduce their dependency on oil and natural gas, GCC governments have recently invested considerable resources to diversify their economies” (Coury and Dave 1).

Hence, diversification of economic activities in non-oil sectors has allowed the GCC countries to overcome the challenges associated with overreliance on oil and natural gas. Moreover, economic diversification has enabled GCC countries to cushion themselves against intermittent economic crises.

GCC countries have made varied economic reforms in areas such as labor markets, financial markets, human capital, agricultural development, and industrial development. In this view, this research paper seeks to assess the impact of diversification on economic stability and sustainability in GCC countries.

Literature Review

GCC countries have undergone marked economic transformation since the 1970s due to series of oil booms, which have earned them immense gross domestic product. The resources obtained from exportation of oil and natural gas form the basis for modern economy and infrastructure.

GCC countries that comprise Kuwait, Oman, Bahrain, Saudi Arabia, Qatar, and the United Arab Emirates pride in overt 45 percent of oil reserves in the world. This aspect implies that the GCC countries heavily rely on oil and natural gas as products of exports. In 1980s and 1990s, GCC countries made significant economic transformation that saw them emerge as leading countries in the world economy.

“However, reliance on oil export proceeds translated into increased vulnerability as oil prices proved to be extremely volatile” (Hag and Shazly 397). Since oil and natural gas are export products, they are susceptible to world markets, which make the GCC countries vulnerable to world economic crises.

Hence, despite the huge profits gained from exportation of oil and natural gas, the instability and short-term sustainability of oil economies compelled the GCC countries to embark on massive economic diversification reforms.

Following the realization that oil and natural gas economies are not only unstable but also unsustainable, GCC states decided to diversify their economy. The aim of this diversification is to reduce overreliance on oil and natural gas as major products that earn gross domestic product.

“From the mid-1970s to the early 1980s, the six GCC member states embarked upon a project of developing their physical and social infrastructure, allocating a large proportion of government expenditures to that end” (Schochat 8).

The physical and social infrastructure formed the basis of diversification as it included programs that led to development in various aspects such as housing, transport networks, water, electricity, hospitals, and learning institutions amongst others.

Development of physical and social infrastructure attracted investors and created massive employment opportunities. Due to the growth of physical and social infrastructure, the economy of the GCC states become vibrant, since it was on the path to economic growth and stability.

Before the establishment of physical and social infrastructure, investors were very few, while employment opportunities were minimal. Oil booms that have occurred in the past three decades have enabled the GCC countries to make significant strides in economic development. The development of infrastructure created massive employment opportunities because investors flooded in the oil and gas industry.

Consequently, economic development in the GCC states attracted a great number of expatriates from various countries across the world. The GCC governments faced challenges of meeting the demands of labor because national human resources could not satisfy the existing demands.

“To overcome these limitations, large numbers of expatriates were brought to the GCC to undertake jobs in the public and private sectors” (Schochat 8). The expatriates flooded both private and public sectors, thus making them a dominant labor force, which steered the economy of the GCC states. Currently, the GCC countries are struggling to promote human resources by establishing learning institutions.

Although the GCC states have huge resources, their financial markets are quite volatile and vulnerable to the global economy. Since GCC states heavily depend on oil and natural gas in running their respective economies, they have realized that lack of economic integration and single currency have contributed to economic instability.

In 2001, GCC leaders laid down foundation for the establishment of economic integration and set up critical fiscal steps that are essential in forming a single monetary union. The economic agreement that GCC countries made partly stated, “for the purpose of achieving a monetary and economic union between Member States, including currency of unification, Member States shall undertake … requirements of this union” (Rutledge 123).

Thus, economic integration and establishment of a single currency is one of the ways that the GCC countries adopted in enhancing diversification of economy and reducing overreliance on volatile oil and natural gas.

Literature review on the issue shows that the GCC countries have come a long way in reforming their economies. The economic diversification has proved as an effective avenue through which the GCC states can reduce their overreliance on oil and natural gas.

Economic diversification in aspects of labor markets, fiscal markets, human resource development, and reduction in expatriate labor have proved as effective elements in enhancing economic stability and sustainability amongst GCC states.

According to Srinivas and Modh, “the contribution of the non-oil sector has been more vigorous and more stable and has been the engine of the current boom (22). Thus, GCC countries are relying on the economic diversification as a way of overcoming challenges that are inherent in oil and natural gas economy.

Methodology

In a bid to examine and assess the impact of economic diversification on economic stability and sustainability in GCC countries, the study will derive data from secondary sources. Use of secondary sources in this research is reliable because analysis of wide information will enhance retrieval of pertinent information.

Moreover, secondary sources are convenient and cheap because researchers will just analyze the available data to arrive at a meaningful conclusion. There is sufficient data in journals, books, as well as corporate and government websites that show the extent of economic diversifications that each of the GCC countries has conducted.

Since the GCC countries have implemented economic reforms aimed at diversifying economic activities, analysis of the secondary data to assess the impact of the diversification is feasible. Therefore, the study will employ the methodology of analyzing secondary information and come up with synthesized data about economic diversification in GCC countries.

In a bid to obtain relevant information, the researchers will examine economic reforms in each of the GCC countries in different areas such as labor markets, financial markets, human resource development, and reduction in the number of expatriates. Examination of labor markets in terms of privatization will provide trends in private investment during the past decades and their possible impact on economic stability.

The fiscal markets will assess how the establishment of a single currency will enhance economic stability and growth. Since learning institutions are responsible for human development, examination of the human resource development in various learning institutions will provide an overview of how GCC countries have the capacity to serve its labor markets.

Lastly, examination of the level of expatriates in the GCC labor markets will give an insight on how the countries still rely on expatriates as a source of labor. Comparative analysis of each of these aspects of economic diversifications in various GCC countries will indicate their impact in economic development.

The major parameter that indicates economic development is the variation in the gross domestic product in light of economic diversification reforms, which GCC states have undertaken.

Results and Discussion

Examination of secondary sources pointed to a variation in the extent of economic diversification in each of the GCC states. All the GCC countries experienced economic instability due to their over-reliance on oil and natural gas as a major source of economic development.

Schochat asserts that during the past three decades, GCC countries focused on economic diversification, which aimed at modernizing physical and social infrastructure and promoting development in non-oil sectors (23).

Economic diversification in non-oil sectors has significant importance because it enhances economic stability and sustainability, which oil economy does not promote. Therefore, analysis of economic diversification results in labor markets, human resource development, and fiscal markets provides their effectiveness in promoting economic stability and sustainability in GCC countries.

Labor Markets

From the secondary data used, it is evident that GCC countries made significant progress in physical and social infrastructure, which formed the basis of economic development. The infrastructure attracted investors who made remarkable investments in the oil industry. The investments created massive employment opportunities that the national labor could not satisfy.

Due to the inability of the national labor to satisfy demands of the increasing job opportunities, the GCC governments opted to bring in expatriates. In the oil industry, expatriates formed about 75 percent of the labor force (Fasano and Iqbal 5).

Hence, in economic diversification reform policy, the GCC countries decided to reduce the number of expatriates and increase the number of the national labor. This strategy is very effective, as huge numbers of citizens in each of the GCC states have accessed employment in the oil industry and other vital sectors such as agriculture and fishing industry.

In different GCC states, the population of expatriates has been decreasing gradually due to the economic diversification reform, which aims at reducing reliance on expatriates. In 1970s, GCC population was about 8 million, but it had grown to about 39 million by the years 2006 plus the expatriates. From the growth rate of 3 percent, it is evident that the expatriates have contributed to the growth of population in this region.

Owing to the increased population amongst GCC member states and presence of a significant number of expatriates, unemployment rate increased among the nationals, thus prompting the governments to regulate expatriate labor force. The GCC governments formed strategies of increasing national labor force in public and private sectors.

Schochat notes, “By absorbing nationals into the public sector, governments were able to relieve unemployment pressures and distribute the wealth generated by oil among their citizens” (37). Hence, the nationals were in a position to venture into public sectors, thus promoting economic diversification in GCC countries.

Contrastingly, as GCC citizens flooded into the public sectors, the expatriates preferred working in private sectors. The nationals did not want to work in private sectors due to lower wages when compared to the public sectors. Hence, investors in the private industry capitalized on hiring expatriates, thus creating balance between private and public sectors.

Coury and Dave state that labor flow in the GCC countries has contributed to economic development and diversification because it promoted the emergence of private sector (2). Therefore, the GCC states’ reforms in reducing overreliance of expatriate labor have given not only the nationals employment opportunities, but have also stirred the emergence of the private sector.

Although GCC countries started privatization simultaneously, different states have made varied developments in the privatization process. Two features characterize the privatization process in GCC countries. Firstly, the GCC countries privatized their companies by selling them to potential investors.

This process of privatization was fast because investors took over the companies and started running them privately. The second feature involved gradual takeover of companies through the sale of shares in the local markets. In Oman, Saudi Arabia, and Qatar, the process of privatization was slow due to poor performance of local stock markets. Ultimately, the privatization process contributed to diversification in the labor markets.

Human Resource Development

During the growth of oil and natural gas industry, GCC countries experienced challenges in satisfying the high demand of labor force. One of the factors that contributed to insufficient labor force was a lack of strategies and institutions for human resource development.

“Currently, the six nations of the GCC all share an overreliance on migrant labor, high rates of citizen unemployment, education systems that are still undergoing fundamental development, and an inadequate gender balance in the workforce” (Randeree 2).

In this view, poor education systems have contributed to the insufficient human resources in the GCC. Analysis of data suggests that insufficient workforce in private and public sector is due to lack of effective training institutions in the GCC.

According to the World Bank, effective education system is central in building a skilled workforce necessary for the development of economies (34). Thus, the GCC economic reforms focused on improving educational infrastructure to increase the number of a skilled workforce in a competitive labor market.

Although human resource development is central in economic development, many countries, including the GCC states overlooked its significance. However, after the GCC states experienced a shortage of human resources among its nationals, they started re-examining their education system. Al-Lamki clarifies, “economic success is achieved through an educated, trained, and skilled human resource” (58).

Hence, the GCC embarked on economic diversification by reforming its education systems. For instance, in Saudi Arabia, the United Arab Emirates, and Kuwait, governments have invested in vocational trainings, which have enabled their workforce to gain the necessary skills for their respective employment positions.

Such trainings are effective because a significant number of workforces in the GCC have updated their skills, thus becoming competitive in the labor markets.

As the nationals gain advanced skills in their vocational trainings, they secure employment opportunities in the private sector, which previously depended largely on expatriates. This move indicates that vocational trainings have helped the GCC to improve its human resources and promote nationalization policies that aim at increasing the national workforce in labor markets.

Oman, one of the GCC countries, has made significant progress in human resource development. Faced by the same problem of insufficient human resources, the government of Oman established comprehensive reforms in the education system, which focused on generating human resources to meet national labor demands.

Al-Lamki states, “A number of vocational training programs for Omanis have been set up by the Ministry of Social Affairs, Labor, and Vocational Training” (66). These programs have boosted the national workforce for Oman, which is now capable of meeting labor demands in various economic sectors. Currently, more than 70 percent of the workforce comprises Oman nationals.

The Omanization process (reduction of expatriate labor) has been effective due to the three-tier approach that Oman government employed in training its workforce. The three-tier approach targeted concerted efforts of the national government, employers, and employees in the Omanization process, and has proved as an effective strategy in reducing reliance on expatriate workforce while empowering the national workforce.

Development of human resources in other GCC countries followed a similar process. Eventually, economic diversification by improving training process of the workforce has empowered the GCC to train enough workforces to meet high demands of labor in the markets.

Fiscal Markets

Since the GCC is prone to intermittent global economic crises, it developed strategies of overcoming external economic shocks. One of strategy is to integrate economic activities and stabilize fiscal markets. The GCC envisioned that having common fiscal markets would enable economic sustainability and stability in spite of instability in global fiscal markets.

“Developing institutions, such as a common central bank, to support the monetary union, as well as a common set of instruments to ensure that monetary policy operations have a similar effect throughout the GCC monetary area” (Hag and Shazly 399).

The United Arab Emirates, one of the GCC countries, has demonstrated the importance of common fiscal markets in its emirates. The economic stability of the United Arab Emirates emanates from its diversification in aspects of labor markets, industrial development, and fiscal markets, thus making it a favorable international trade hub in the Middle East.

Intermittent changes of oil prices have serious implications for fiscal markets and external trade since inflation rates are unfavorable to the GCC. Therefore, to overcome fiscal challenges, the GCC is seeking to establish a single currency to unite various states and thus strengthen their currency against major currencies such as dollar and euro.

Reforms in fiscal markets aim at revamping banking policies and regulations, strengthening market securities, and curbing money laundering. These reforms have led to marked changes in fiscal markets that have resulted into stabilization of the economy in the GCC.

Fasano and Iqbal note, “All GCC countries share sound and well-supervised banking systems…banks are well-capitalized and profitable” (5). Common banking system has enhanced economic stability and sustainability amongst the GCC states.

Economic integration through fiscal markets has enabled the GCC to establish common trade. The GCC block has made a series of trade agreements, which have encouraged the establishment of foreign direct investments (FDI). For example, through economic integration and regulation of fiscal markets, foreign direct investments have significantly improved Bahrain’s economic growth.

“FDI improved Bahrain’s GDP and supplemented domestic investment, enhanced job creation and decreased unemployment rate, increased technology use, and enhanced social welfare in Bahrain” (Debab and Mansoor 26). Hence, economic integration is an effective way of building economically stable fiscal markets and promoting trade among GCC states.

Conclusion and Recommendation

Economic diversification is a strategy that GCC countries have employed in overcoming economic challenges associated with overreliance on oil and natural gas resources, as the only means of economic development. During the last three decades, GCC countries have experienced intermittent booms in oil prices and have utilized the proceeds in developing physical and social infrastructure.

However, due to the volatility of the oil economy, the global economic crises experienced in the early part of the 21st century have proved that the GCC economy is very vulnerable. Due to the realization of the economic volatility, the GCC formulated economic reforms that aimed at diversifying economic activities. The reforms focused on labor markets, human resource development, and fiscal markets.

Promotion of economic diversification in each of the sectors has enabled the GCC members to stabilize their economies and promote sustainability. Therefore, economic diversification reforms have proved as effective aspects in enhancing economic stability and sustainability amongst the GCC states.

Therefore, to strengthen and scale up economic diversification, the GCC members should improve regulations to be in tandem with the global economy. Reforms in labor markets should not focus on promoting employment of locals and restricting expatriates only.

Expatriates have a noble role to play in promoting the private sector, as well as the public sector. In the aspect of human resource development, the GCC members should reform their education systems in a bid to produce competitive human resources. Moreover, in the aspect of fiscal markets, the GCC countries should speed up the process of establishing a common currency.

Common currency will help the states in not only stabilizing financial markets but also improving trade among the GCC member states. Implementation of these recommendations will enhance economic stability and sustainability among the GCC members, thus creating a strong economic block in the Middle East.

Works Cited

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Debab, Nassima, and Ali Mansoor. “Determinants and impact of FDI on Bahrain’s economy.” Research Journal of International Studies 21.2 (2011): 27-39. Print.

Fasano, Ugo, and Zubair Iqbal. GCC countries: From oil dependence to diversification. New York: International Monetary Fund, 2003. Print.

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